Right and Wrong in Costing Methods
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"The Commer al Motor " Expert Continues his Argument to Show that Haulier who has no Methodical System of Recording xpenses can Easily Obtain Misleading Fi u res for his Operating Costs
IN my first article on comparing operat in the July 13 issue, 1 dealt with a nuni and showed that great differences are li assessing the standing charges, particularly insurance and interest. All these may differently, or even omitted altogether, accor of the individual. Turning to running costs, expenditure from the discussion, as any d. item is not likely to be substantial. I poin consumption might be omitted entirely front the records of one operator, but entered in full on those of another.
1 come now to tyres. I have often indicated that if the record of tyre costs is to be correct, the operator must debit the vehicle with the cost of a new set as soon as it is put into commission. That is only logical because when depreciation is assessed, the first step is to take away the cost of a set of tyres from the price of the vehicle and calculate depreciation on the cost of the vehicle without tyres. In "The Commercial Motor" Tables of Operating Costs there is a distinction between the two kinds of maintenance. The first, maintenance (d), relates to those operations which are spaced on the basis of time and not mileage. • Such operations as washing and polishing, greasing and 'chassis lubrication come under that heading. In this category 1 also include the occasional cost of varnishing and a periodic repaint. There is often a marked difference of attitude between operators on this point. One will provide for a revarnish every year and repaint every other year, whilst another, to put it mildly, may not be quite so methodical. The other kind of maintenance, maintenanee (e), refers to the expenditure on repairs and overhauls arid is strictly to be debited as a running cost because it is the outcome of wear and tear. The actuai amount which may have been spent on maintenance (e) during the early part of the life of a vehicle is not necessarily an indication of what is likely to be the ultimate cost per mile on that acipouht. This is a figure which is ascertainable-only when the ,Ivehicle has run its full life. This is one of the reasons why So many operators go astray and why there is so often a great difference between the figures recorded by one operatef and another. g cost figures, er of expenses ely to arise in s regards rent, be interpreted ng to the views dismissed fuel erence in that ed out that oil Varying Figures
Depreciation, the tenth item in the sched e of operating costs, really deserves an article to itself, and I propose to deal with it separately. In the meantime, it is sufficient to say that there is ample room for different tr atment giving widely varying figures for depreciation per mile. It is of interest to see how wide these differences can be, and the difficulty in assessing the total of running cOsts. To show what may happen, I propose to give some fiviires relating to the operation of a 6-ton oil-engined goods vehicle.
I will take first the case of the operator who proceeds on the lines I recommend, dealing with the items in the way in which they are enumerated and assessed in the Tables.
First, the standing charges: tax is £35 per annum and on a 50-week basis that is 14s. per week. For wages, assuming a grade I area, the operator will pay £5 13s. for a 44-hr. week, which 1 am going to assume is what the vehicle is working. An item which is apt to be overlooked is provision for the employer's share of the National Insurance payments, also the employer's provision against claims larder the Workmen's Compensation Act and for holidays with pay. These items amount to about 10s. per week, and this careful A36 operator of mine adds that amount to the £5 13s. for wages, and makes an entry of £6 3s. per week.
For garage rent he makes an estimate, for his vehicle is housed in the same building as his offices, etc. He takes 10s. per week as being a fair allotment on that account. He takes out a fully comprehensive policy for insurance in connection with his vehicle and that costs him El 5s. per week: Interest at 3 per cent. on the initial outlay of £1,640 for his vehicle is approximately £1 per week. On the foregoing basis, his total weekly standing charges amount to £9 12s.
Turning now to running costs, he pays 3s. per gallon for his oil fuel and his vehicle maintains an average of 18 m.p.g. His cost per mile for fuel is therefore 2d.
He finds that he is using lubricating oil at the rate of rather less than one quart per •week for 400 miles, but taking only topping-up into account, the consumption works out at a gallon for every 2,000 miles. As he is operating an oil engine he is careful to empty and replenish the crankcase at the recommended period of 2,000 miles, and that involves refilling with 3 gals, of oil. His consumption total is, therefore, 4 gals. every 2,000 miles. He pays 7s. 6d. per gallon for oil, so that the cost per mile is 0.18d.
Two New Sets
Regarding tyres, he probably debited the price of a full set at £150 in his cost sheet as soon as he put the vehicle into service. That happened 21 years ago, during which period the vehicle covered 50,000 miles, which is approximately 400 miles per week. In that time he has bought two sets of new tyres, the second when the vehicle had covered 48,000 miles.
Taking the figure for the cost of tyres to be as at the time of fitting the last set, his cost works out almost exactly to 1.5d. per mile. He has been examining the third set of tyres recently, however, and is not quite happy about the way they are wearing. In his figures for the estimate of tyre costs, therefore, he has added to the ascertained figure of 1.5d. and is taking 1.75d. as the basis for cost estimates.
So far as maintenance (d) is concerned, he finds that his average expenditure per week on materials and labour for washing, polishing, greasing and oiling, and those occasional additions which every efficient operator likes to have carried out, amounts to 10s., and he calculates that as 0.30d. per mile.
He is among those who like to give the vehicle a coat Of varnish every year and have it repainted every other year. His experience, up to now, has been that it costs £15 for the coat of varnish and from £35 for the repaint. That is £50 in two years, during which period the vehicle covers 40,000 miles. The cost per mile on that basis is 0.30d. The total for maintenance (d) is thus 0.60d. per mile.
As for 'maintenance (e)—repairs, overhauls and so on— the expense is as follows:—running repairs throughout a period of 24 years have cost £90. He reckons his maintenance costs up in this way. At 36,000 miles he had to spend £140 on a reconditioned engine. That is equivalent to 0.93d. per mile. Then, during the whole 50,000 miles of .running, he spent £90 on a variety of repairs equivalent to 0.43d. per mile. The total up to date is thus 1.36d. per mile. He can see, however, that by the time he needs a second reconditioned engine, in about another 20,000 miles, the chassis itself will want a thorough overhaul and, therefore, to cover these substantial expenses he puts down 1.75d. as an average figure for maintenance.
He has his own ideas about depreciation. He reckons on t six-year life and originally gave £1,640 for the vehicle. From that sum he deducts £150, the initial cost of the tyres. plus £170, which he thinks will be what he will get for the Did vehicle in part exchange when he buys a new one. That gives him a net figure of £1.320, which is equivalent to £220 per annum. On the basis of 20,000 miles a year. that is Z.64d. per mile.
His running costs per mile are therefore as follows:— fuel, 2d.; lubricating oil, 0.18d.: tyres. 1.75d.; maintenance Id). 0.60d.; maintenance te), 1.75de depreciation, 2.64d.— a total of 8.92d.
He recalls that his standing charges total £9 I2s. per week and, dividing that amount by the weekly mileage of 400, he gets 5.51d. as the cost per mile. Together with the running cost, 8.92d., that gives him I4.43d. per mile. He prefers to keep Is. 21d. per mile in his mind as being the operating cost of his vehicle, and he frequently uses that figure in his calculations for rates and charges, always bearing in mind. I hope, that there are establishment costs and profits to be added to that before a fair rate can be assessed.
Now take the figures of another man relating to the same type of vehicle. Conditions are not quite the same, as he has had the vehicle for only 18 months, but his weekly mileage is 600 instead of 400.
Begin with the standing charges. The tax is something he cannot influence, and like the first man he puts that down at 14s. per week. Wages for a 44-hr. week he enters at £5 13s He makes no provision for insurance or for holidays with pay. That is not to say that he overlooks them: quite possibly he makes provision for them elsewhere as. for example, in his establishment costs, but the effect on his total of vehicle operating costs we have to hear in mind.
Rent and Rates
His attitude towards garage rent and rates is the same. These are also entered as part of the establishment costs. under which the total account for his building is entered. He does not think it worthwhile to debit a due proportion or. indeed, any amount directly against each of his vehicles.
He insures his vehicles against third-party risk only. He thinks he is capable of looking after in his own workshop any damage that may be sustained by his vehicles in the course of accidents. He is, in my opinion, making a mistake, but that is his own business. His insurance premium is equivalent to 15s. per week.
For the final item, interest, he makes no provision whatever. He does not regard it as an operating cost. His total for standing charges is £7 2s. per week. Now take the running costs. His cost per mile we will assume is the same as that of the other fellow, namely, 2d. Under "lubricating oil" he makes no entry. The driver draws oil when required, and the full amount is debited as an overhead cost,
He entirely ignores the need to enter the price of the initial set of tyres against the tyre cost of his vehicle; that has probably never occurred to him. He has fitted one new set during the 45,000 miles of running at a cost of £150. According to his calculations, the tyres have cost only £150 in 45,000 miles, and as he appreciates that he will soon have to fit another set, he takes those figures as a basis for assessing his cost per mile for tyres and gets 0.80d.
Coming now to maintenance (d), he leaves greasing and oiling of the chassis and cleaning of the vehicle to the driver. The work is haphazard, as this particular operator is not outstandingly vehicle-proud. So long as the machine does its job, he is not fussy about what it looks like. In this connection, the matter of painting and revarnishing occurs. In the 18 months since he bought the vehicle, there has been nothing spent on these items. The consequence is that under the heading of maintenance (d), there is no entry.
Putting Oft Overhaul
So far as maintenance (e) is concerned, he looks at it this way. The engine needs an overhaul. He knows it, and every now and again he says he will put the vehicle in dock and have the work done. He is, however, still putting it off. His expenditure in other directions during the 18 months has been. £75, and for 45,000 miles that is 0.40d. per mile. which is all that he will enter under maintenance He paid the same amount for his vehicle as the other fellow, that is £1,640. In calculating depreciation, he subtracts first the cost of a set of tyres, notwithstanding that !te has omitted to debit that sum against the item " tyres " in his running-cost amounts. He is optimistic as regards what he will get for the vehicle in part exchange, and sets down £290 as the residual value.
Altogether, therefore, he takes £440 from the initial £1,640 and thus gets the net amount of £1,200, which is going to be the figure upon which he bases his calculations for depreciation. Finally, he gives the vehicle a life of eight years. so that depreciation is at the rate of £150 per annum.
In one year it covers 30,000 miles, and his figure for depreciation is I.20d., compared with the other -fellow's 2.64d.
For the cost per mile on account of standing charges he has to divide £7 2s. by 600, which gives him 2.84d. His total operating cost per mile is thus 7.24d. This, it is noted, is almost exactly half the running cost which the other man sets down.
If the two hauliers' costs were reckoned similarly in the proper manner, the difference would be negligible and certainly if the comparative merits of the vehicles alone weie
assessed, the variation would be non-existent. S.T.R.