How much to allow for depreciation ?
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"N this series two weeks ago comment was made on aspects affecting the replacement of commercial vehicles.
• Mechanical fitness to perform the job on hand is commonly ed as the yardstick to judge when the time for renewal is e.
The requirements necessary to perform the job on hand, waver, can vary as much as the job itself. Basically, these nations would be largely met at the time the appropriate Incle was selected Yet even when similar vehicles are gaged, the standards essential in the provision of one road insport service can be substantially more exacting than for other
To some extent these higher standards may be met by rrespondingly higher standards of maintenance to ensure MIMI= availability for service and freedom from breakwns when a higher level of service is demanded. But there a practical limit to which such a policy can be pursued. 'ten more frequent replacement of vehicles than would rmally be considered reasonable can prove a more workable lution, with the qualification that in the larger companies
" replacement " might, in practice, be demotion of vehicles less exacting duties.
Depreciation and "wear and tear" are commonly associated. It for the purpose of costing the operation of commercial hides the term " depreciation " can also include some owance in respect of obsolescence. Exceptional conditions, wever. necessitate additional adjustment on this account. ssenger vehicles engaged on extended coach tours or staff rs used by executives could provide such conditions.
Whatever the variations in types of vehicle or operating nditions, the method of calculating depreciation can be justed to meet the requirements of individual sets of cumstances. This, in fact, is the procedure when vehicles are ing provided on contract exclusively for a particular job.
In the movement of goods by road, however, a substantial oportion of the traffic falls into the category of general ulage. with a variety of operating conditions. Then, as with ler items of operating costs, some averaging of depreciation s to be accepted.
IMPLE CALCULATIONS As emphasized last week, depreciation calculations must be Pt as simple as possible. Thus, theoretically, it can be ntended that the cost of depreciation varies with the increas; age of a vehicle, as in the case of depreciation allowances r taxation purposes. But for the purpose of calculating arges to be submitted to customers it would be impractical vary these according to the age of the vehicles supplied on y particular occasion.
There is, therefore, a need for a relatively simple method of lculating depreciation which will provide results of reasonable curacy when applied to a wide range of vehicle types and lerating conditions.
For the purpose of compiling The Commercial Motor Tables Operating Costs and this series of articles, depreciation is lculated on a mileage basis, for both .commercial goods and issenger vehicles, with some allowance for obsolescence when
• erage mileage is unusually low. However, because it is immon practice to replace staff cars on a yearly basis, or at some other relatively short period, the cost of depreciation for these vehicles is calculated on a time basis. The reason for this exception is that the mileage covered is low relative to the time element.
It is recognized, however, that some operators prefer to calculate depreciation on a time basis for general usage also. In comparing the merits of the two methods, it should be borne in mind that commercial vehicles, by definition, are operated for a specific purpose as distinct from the spasmodic use of some private cars. Moreover, this specific purpose normally implies regular usage, at least when standard type vehicles are involved.
Thus, when standard commercial vehicles are fully operative, the average weekly, and subsequently annual, mileage tends to be similar, one week—or year—with another. In such circumstances if a vehicle averages 500 miles a week it is immaterial whether an operator claims to depreciate on a mileage basis with a stipulated vehicle life of 150,000 miles or replaces units of his fleet on a time basis every six years, since both methods provide the same result.
TYPE OF VEHICLE Experienced operators may, on occasion, refer to the life of particular vehicles in terms of years. But, at the same time, there will be an implied mileage relative to the type of vehicle under discussion. Thus, there would be no misunderstanding of the mileage run as between a year's operation of a trunk vehicle or one engaged on collection and delivery. Regular users would recognize immediately that relatively high mileages would be run by the trunk vehicle and correspondingly low by the other.
Because the two items of operating costs—maintenance and depreciation—are both inter-related with the effect of obsolescence, it is seldom possible to be dogmatic as to the ideal time to replace a vehicle. Many inquiries are, in fact, received requesting a recommended formula to provide just such an answer.
But because road transport operation is essentially a practical job the ultimate decision in each individual case as to whether a vehicle is still fit to do a particular job is largely a personal opinion by the engineer as to its roadworthiness and possibly the sales or traffic manager as to its appearance in comparison with competitors' vehicles.
Important though the availability of adequate costings is, when determining whether or not the time has arrived to dispose of a vehicle, such results must be acted upon with discretion. Whilst it is necessary to have an overall plan of fleet replacement, so that adequate financial provision can be made, in the actual event theory must give way to practice.
Thus, a fleet user may be committed to a five-year replacement policy necessitating the purchase of a new vehicle every three months. But at the end of a particular five-year period there may well be occasions—not so exceptional as to be discounted—when the vehicle is due for replacement according "to the book ", but is actually in better condition than one purchased more recently. Moreover, where the replacement period is longer, the likelihood of such occasions arising is proportionally greater. There can be several reasons for these apparent inconsistencies. Where a policy of " one-vehicle-one-driver " applies, then obviously the individual driving abilities will be reflected in the condition of a vehicle over a relatively long period, even though the overall standard is good.
Maintenance engineers with long experience of particular makes and models of vehicle relative to their operating conditions will be able to forecast, within a comparatively narrow margin, when major repairs and replacements will be due. But, even se, some unscheduled variations will arise. During the earlier part of, say, a five-year period such variations may not be of more than passing significance. Towards the end of the period, however, such variations can fall inconveniently. Difficult decisions may then have to be made as to whether an otherwise premature replacement would be more economic than a major overhaul in anticipation of an extension to the normal span of five years.
In these circumstances either decision may be somewhat of a compromise involving deviation from the original five-year plan. But in daily operation such occasions do arise and have to be dealt with, however far removed the practical decision may be from the notion of some ideal formula of vehicle replacement which, in theory, should eliminate the possibility of such problems arising.
SIZE OF BUSINES An advantage of the relatively small or medium-sized transport organization is that the operator can be, and usually is, in touch with all aspects of the business, including both engineering and costing. With larger fleets, however, staff engaged on engineering and costing can be so remote that common problems are not discussed. Thus, costings may undoubtedly show that the cost of operating a particular vehicle has risen substantially above average in recent months, due to high maintenance expenditure and should, therefore, be disposed of because it is no longer economic to run.
The engineer, however, in such an instance, may have recently decided in favour of extended, rather than early, replacement and accordingly have committed himself to extra expenditure on this vehicle. Having done so, the actual condition of the vehicle would bear little relation as to what might reasonably be supposed from an examination only of vehicle costings, however accurately they may have been compiled.
Here, as in other aspects of transport operation, castings should be recognized as 'an aid to, rather than a substitute for, practical experience. Decisions made on the basis of costs alone, as in this instance—and ostensibly in pursuit of higher efficiency—could actually be most uneconomic. But precisely because a vehicle has been disposed of, albeit injudiciously, the cost of that wrong decision is seldom likely to be revealed.
Similarly, obsolescence is another factor which in many instances is determined largely as a matter of personal opinion as to appearance, rather than proved fitness to perform the job on hand. This especially applies to ancillary vehicles used on retail delivery and which are consequently very much in the public eye. More frequent attention to repainting of the bc win provide a partial solution, in such circumstances, to problem of maintaining an attractive appearance.
But eventually replacement, sooner than is otherwise justifi will often be necessary, particularly if competition in f. particular trade is intense. Also, apart from the competit element, there are luxury trades which traditionally maint an exceptionally high standard of shop sites and fittings display their exclusive products. It would obviously incongruous to deliver these in any but the most modern va In both instances, personal assessment of appearance wol largely determine the cost of depreciation.
In contrast to the exceptional conditions of luxury trades, well-established general haulier whose fleet consists chiefly, not wholly, of standard platform vehicles can normally cap to be able to depreciate his vehicles over their maxim economic life and consequently at relatively low cost. But el in these regularized conditions circumstances can arise wh justify a change of plans and the acceptance of a hig depreciation cost due to obsolescence.
Two such circumstances are technical developments 1 changed operational conditions. Thus, in the immediate pc war years when oil engines became available for fitment a conversion to standard petrol-engined commercial vehic some operators could justify the conversion cost because high average mileages. But it would obviously not be practical proposition to effect such a conversion on a vehi approaching the end of the planned replacement period. 1 potential savings in fuel, however, might justify earlier repla ment in such circumstances.
Another example of obsolescence can occur with changes the type and volume of traffic or the function of the operal Apart from possible changes in demand for vans or tank■ instead of platform vehicles, growth of traffic may justify lar vehicles. Still further growth might involve the acquisition depots and the inauguration of trunk services with all collection and delivery at the terminal points. Again, differ vehicles would be required.
However, it would seldom be possible to await in every c for the completion of the planned life of the existing vehii before effecting such changes. Comparative castings can rem be drawn up to show the savings ,which could, for example, made by the employment of larger vehicles to carry a partict flow of traffic, and so possibly justify an otherwise premat replacement. Less easy, however, would be the task to prov on paper—that standardization of vehicles as soon as possi following such a change would be advantageous. Yet the va of flexibility in scheduling vehicles for duty is very real •1 obvious to a traffic department. Equally real, though often hidden expense, is the cost of getting the right vehicle to right place when some measure of standardization does exist.
Therefore, whilst the calculation of depreciation is primal an exercise in costings, considerable practical experience in aspects of transport operation is necessary if the calculatil are to be realistic. The right answer on paper may be wrong one in practice. S.B