Wear and Tear Allowance
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DCIE allowance for wear and tear is a necessary provision which every business has to make if it is to remain in being. But whilst this is generally understood and ractised in most trades and industries, for one reason or nother many road transport operators either have scant knowAge of the subject or, alternatively, evolve too complicated
procedure for calculating depreciation.
Accuracy is obviously of major importance when calculating asts and 'charges, and every endeavour should be made to keep te standard as high as possible, but with due regard to the 'tactical aspect of the 'exercise as a whole. Because the • ansport industry is primarily concerned with the movement I goods arid passengersan essential and practical service: is important to retain that same practical concert when eating with all items of operating costs, including depreciation.
Whilst some private motorists may blissfully delude them:Ives as to the real cost of depreciation—if they admit to its xistence at all—such ignorance will at worst result in a cessa on of his private motoring. But similar circumstances for he commercial vehicle operator could mean a cessation of velihood. For this reason alone the subject of depreciation lust be clearly understood and provided for by every operator.
There is, unfortunately, an allied factor resulting from ;nortince as to the full effect of depreciation, which can perist for a while before the day of reckoning arrives for the .nfortunate operator. Rightly used credit finance facilities .ave provided, and continue to provide, valuable assistance to iperators. particularly in their early stages of development.
But, as with any other facility, credit finance can be missed. An imprudent newcomer can, by this means, provide iimself with a new vehicle which in its earls' stages of operaion incurs little expenditure beyond fuel and driver's wages. :..ven maintenance, other than minor servicing, will not require ttention. Still less will there be any direct need to meet xpenditure on account of depreciation. But obviously with very mile run the ultimate cost of major repairs and replacenent of the vehicle is accumulating.
In the meantime this operator may be genuinely unaware if the real cost of running his vehicle and is accordingly !noting uneconomic rates to customers to the detriment of is local competitors. Moreover, he will find it difficult to etract from such uneconomic rates and negotiate realistic .harges when he becomes aware of the true cost of operation.
Illethods of Calculation
At the other end of the scale, where the need for adequate irovision for vehicle replacement is both understood and acted tpon. there can be differences of opinion as to the manner rf calculating depreciation. The basic difference is between line or mileage as the chosen yardstick. Additionally, there an he variations on these two basic methods of calculation.
Allied to these admitted differences there can be a misleading ipproach to the whole subject in a tacit assumption that tbsolute finality in calculating depreciation can be arrived at f only the correct formula could be evolved.
Obviously, in just such a frame of mind, many readers nquire as to what is the most economic point in the life if a vehicle to dispose of it. It is my contention that no particular period of time can be recommended, for general application, after which it is most economic to exchange a vehicle. As stressed in this series of articles, there are many matters which could affect such a decision which are entirely peculiar to individual operators. Taking two at random, there could be the urgency of traffic carried or the extent of maintenance facilities available.
Nevertheless, as with other items of operating costs, some estimate has to be made of the probable life of a vehicle in order to arrive at the cost of operation as accurately as possible, always bearing in mind the purpose for which this particular item of expenditure is required.
As an individual item of operating costs, the recognition and provision for the ultimate cost of vehicle replacement does, in fact, assume the operator's continuity in • busineSs. Additionally, as one of the 10 items of operating costs, proper-estimation of likely expenditure on this score similarly ensures
that the operator is fully acquainted as to all costs and. if need be, can thus formulate realistic charges for quotation to customers.
It is at this point that the distinction should be noted between this objective, i.e. a basis for charging, and other possible objectives such as income tax returns and company accounts. Whilst for the latter purposes due note may be taken of initial and annual allowances permitted by the Board of Inland Revenue, it would be impracticable and a largely useless exercise to arrive at differing operating costs (and correspondingly charges) according to the age of a vehicle.
General Application
Dealing now with the alternative claims for calculating depreciation on either a time or mileage basis, for general application as distinct from individual examples, some measure of averaging must be accepted. Whilst an unnecessary lower. ing of the standard of accuracy cannot be accepted, at the same time extra work involved in dealing with more elaborate . methods of calculation cannot be justified becausethey add little, if anything, to the accuracy of the total operating cost.
For the purpose of The Coinmercial Motor Tables of Operating Costs arid this series of articles, it is considered, on balance, that calculation on a mileage basis is most generally applicable, if one method only is used for the wide range of vehicles dealt with, i.e. 5-cwt. vans to 70:seater doubledeckers.
Wear and tear. i.e. physical depreciation, is usually directly related to the amount, of use to which a vehicle is put, Which again is basically dependent on the. Mileage run. AS said' earlier, when dealing with the general application of operating costs, some averaging has to be accepted and this must include " average ", if admittedly notional, conditions of operation. Where exceptional operating conditions do apply—for example. in the more arduous types of tipper work—snecial allowance must be made in those cases when calculating depreciation. and indeed other items of operating costs. But such exceptions do not invalidate the chosen basis—namely, mileage.
By definition a commercial vehicle is purchased and operated for a specific purpose for which continuity of use is a reasonable assumption. That being so, mileage provides a reasonable yardstick for a calculation of depreciation.
Another aspect to this problem which is becoming of increasing importance is the greater employment of doubleshift working and its immediate effect on annual vehicle mileage. This trend has been accelerated by the acquisition and grouping of transport operators with newly created opportunities for night trunking.
When vehicles are depreciated on a yearly basis it can seldom be the case that the operator has no idea whatever beforehand of the mileage the vehicle is likely to run during the year. Indeed, in many types of operations the yearly mileage run by vehicles is relatively consistent so that in the context of calculating depreciation a " year " or, say, "30,000 miles" denotes virtually the same yardstick.
Obsolescence
But irrespective of whether or not depreciation is calculated on a time or mileage basis, there is a group of "exceptions" sufficiently large to merit appropriate adjustment in average costing such as The Commercial Motor Tables of Operating Costs. The cause of this is obsolescence, whereby a vehicle becomes out of date through its appearance or :because of the arrival on the market of a much better vehicle, rather than because of its mechanical condition through normal process of wear and tear.
In contrast with general goods haulage, certain types of operations are particularly prone to the effects of obsolescence. These include luxury coach operation, chauffeur-driven car hire and retail delivery in luxury or highly competitive trades. Additionally, there can be situations whert.a vehicle must be provided for emergency service although it is well known beforehand that the average mileage will be extremely low. That being so, and due to the continuing improvements being incorporated in successive new models by a virile motor manufacturing industry, it is likely that a more economical vehicle will be available on the market long before the original vehicle is worn out and normally due for replacement In all these cases, to be realistic, the operator must accept th, effect of such obsolescence as an additional item of expendituri necessitated by that particular type of operation' which MRS be incorporated in the total cost of depreciation.
Calculation of depreciation, and associated obsolescence when applied to a car hire fleet, can involve stealing witi opposite extremes in types of operations. In' the case o the chauffeur-driven car just mentioned it is likely that tht average mileage could be quite low, but because it was user for ceremonial or prestige purposes it must retain a modern appearance. At the other end of the scale, however, thi regulation taxi is fitted with -anoil engine primarily to achievi economy over a relatively long life, throughout which a smart but nof necessarily ultra-Modern, appearance is essential. IA third type of car hire service is based on standard productior vehicles in which the weekly mileage is high because of doublt or even treble shift working at, say, airports or other teridini In all these cases depreciation calculated on the mileag( basis (with appropriate adjustment for obsolescence in the firs instance) can provide a practical basis.
Passenger Vehicles
A passenger vehicle operator whose fleet includes both lukrury coaches and stage carriage buses. might be tempted to adop two methods of calculating depreciation—namely, on a tinu basis for the coaches and on a mileage basis for the busei because of their totally differing, types of operation. But iI the common practice of " demotion " of _vehicles takes place in this fleet then such duplication of calculation could introduc( unnecessary complications. Despite ,the contrast in types o: operation and assuming this particular \ operator was wel established, then lie would have• prior knowledge of the likel3 mileage the vehicle would Jun in its two types of usage, pos sibly on extended tours when new and on p.s.v. service at later stage; accordingly,‘ he could make a fair estimate of sod a vehicle's likely mileage life.
Next 'week-the effect Of alternative depreciation calculation: by four different. methods, as applied to a 7-ton goods vehicit fitted with oil engine, will be considered.