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A second look at overhead costs

23rd February 1968
Page 61
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Page 61, 23rd February 1968 — A second look at overhead costs
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Which of the following most accurately describes the problem?

THE COST of operating a commercial vehicle can usefully be divided into 10 items to make detailed analysis easier. Five of these items, termed standing costs, are: Licences, wages, rent and rates, insurance and interest. All of these costs have to be met whether or not the vehicle is in use, and it is convenient to calculate them on a time basis.

The other five items, termed running costs, are: Fuel, lubricants, tyres, maintenance and depreciation. In contrast to standing costs, running costs are calculated on a mileage basis.

All these 10 items can be directly attributed to the operation of specific vehicles. In the running of a transport organization, as distinct from the running of a vehicle, there is other expenditure which cannot be directly attributed to individual vehicles and these are commonly termed establishment or overhead costs.

In contrast to operating costs which arise at regular intervals, some of the overhead costs arise spasmodically. This peculiarity is all the more reason lwhy overhead costs should be recorded on an organized basis so as to avoid possible omission.

Unlike the 10 items of operating costs which will arise whether a small or large fleet is involved, the number of overhead costs will vary between one fleet and another in relation to both size and type of traffic carried.

Worthwhile

Nevertheless it is a worthwhile exercise to group overhead costs even though, on occasion, expenditure may not be incurred in respect of one or more items during a particular accounting period. The object of the grouping is both to provide a check against omission and to facilitate comparison leading to possible economies.

Therefore in this series last week I started to consider overhead costs for the 10 groups headed management, office, garage and stores, warehouse(s), branch depot(s), office equipment and communication, sales, professional services, auxiliary fleets and miscellaneous items. I dealt with the first three groups last week.

Dealing now with overhead costs arising from running a warehouse, there could be seven basic items—salaries, equipment, rent and rates, lighting and power, heating, water and sundries. Obviously, according to the comprehensiveness of the warehousing service provided, this list could be considerably expanded. But even in limited form it is an auxiliary service which hauliers are increasingly providing in response to customers' demands.

The fifth group is headed branch depot(s) and the seven basic items listed in connection with the warehouse would also apply here. In the past it has been a common development in the haulage industry for expansion to reach a stage where a branch depot is justified once traffic flows have become sufficiently established.

But although such development may be geographically desirable the level of efficiency which applies at headquarters might well not be achieved at the new depot if adequate steps are not taken to put into operation a costing system showing the depot's own profitability.

There could, however, be a further development in the size of depots which justifies a more elaborate depot costing system including its own management and office expenditure.

For the sake of convenience office equipment and communications form the sixth group, although in some organizations it might well be considered worth while to separate these. It would also be an individual's choice whether smaller items of office equipment, such as postage and stationery, were classed together for the organization as a whole rather than divided between headquarters, depots and warehouses where applicable.

With so many urgent decisions to be made in every busy transport office, the resulting phone bills are heavier than those of other industries. Therefore, and particularly with the advent of STD, there is all the more need in a transport office for ready means of identifying and comparing phone costs both as between one period and another and as between depots.

Small units

Some organizations find it worth while to employ radio-telephone systems and teleprinters to supplement the use of the phone and improve operational efficiency. But here again the costs must be recorded and though not directly or conveniently attributable to a particular vehicle, such costs must ultimately be included in the charge submitted to customers or to user-departments where own-account transport is involved.

Because the road transport industry consists mainly of small units it is inevitable that the proprietor or manager combines several functions. Indeed this is one of the underlying factors which contribute to the flexibility for which road transport is noted. For example, where vehicles have to be re-deployed because of changes in customers' requirements there are no long lines of communication to be negotiated.

But the ready acceptance of this cornbined role can have the effect of his not recognizing the importance of each function.

Particularly does this apply to the sales side of professional haulage. If a small haulier is fortunate enough to commence his business serving the needs of a few customers whose own businesses expand then the need for salesmanship might well seem of secondary importance.

But as applies to management itself, if no provision is made for the function of sales there must come a time where further expansion is impossible. It is unfortunately a common fault that while the sale of a commodity receives adequate and often prior attention over manufacture itself, the sale of a service is not always recognized as a separate function vital to the continuing prosperity of a business.

Expenditure incurred in the sales side of a transport business cannot normally be directly attributable to particular vehicles and therefore must be classed as an overhead cost. As with other items of overhead costs some of the five suggested here might not arise with some operators. With others a more extensive list might be necessary but these named here would provide a useful check. They are advertising, representatives' salaries and commissions, their car expenses, entertaining and gratuities.

Although the term "sales" for this group of overhead costs implies a specific negotiation for traffic to be moved, this function must also include the general maintaining of personal contacts. Obviously where there are regular flows of freight being carried by a haulier for particular customers there will be daily contacts between the two traffic departments.

But this must be supplemented by personal contact at a higher level between the operator and the customer if good relations are to be maintained and any future development in a customer's production ascertained as soon as possible. Such development could, of course, have direct effect on the operator's vehicle replacement policy.

Difficulty

As compared with the advertising of a commodity, publicity given to a transport service can give rise to considerable difficulty if wasted effort is to be avoided. Nevertheless what may seem self-evident to a transport operator, as to the range and particular advantages of the services he can provide, may not seem so to a potential customer• or even his existing customers regarding services or types of vehicles they have not previously employed. Accordingly brochures containing pictorial representation of the range of vehicles an operator provides would quickly convey to customers unfamiliar with modern transport development the advantages to be gained from the use of such vehicles. How these were distributed or whether they were kept for use by the sales representative would be a matter for individual decision but obviously the cost of providing them and any other advertising material needs to be recorded. The other two "sales" items—entertaining and gratuities—are virtually self-explanatory.,

Yardstick

Whether the operator's fleet is large or small, some professional services will be needed and lead to costs such as bank charges, auditors' fees and legal expenses. In the case of an own-account operator these services might be provided by the central organization but if at the year's end some proportion of the firm's total overhead costs were to be allocated to the transport department this list of items would provide a useful yardstick as to the validity of that allocation.

The group of overhead costs termed "auxiliary fleet" provides a convenient way of dealing with an otherwise difficult costing problem. Although operators have been compelled by technical developments and competitive pressure to reduce "off-theroad" time of vehicles to a minimum, some reserve of vehicles is necessary if a preventive maintenance scheme is to be operated, assuming that such a scheme cannot be provided overnight or at weekends. Therefore the cost of operating whatever additional vehicles are used for this purpose must be spread over the fleet as a whole since each service vehicle will be regularly replaced in turn and it is convenient to do this through the medium of overhead costs.

Also included in the auxiliary fleet would be that-maid-of-all-work the garage service van and, in some cases, a breakdown recovery vehicle.

Finally among the several miscellaneous items will be subscriptions to trade associations and trade journals which alone will enable the operator to keep in touch with the many developments which are daily taking place in the transport industry.

Largely as a matter of convenience it might be found easier to include as overhead costs sundry dues incurred in parking, tollbridge, ferry and weighbridge charges rather than directly charge these small items to individual vehicles.

Finally, as regards the ultimate allocation of overhead costs to vehicles, where a fleet is made up of similar vehicles the allocation will be in direct proportion to the number of vehicles. But where a variety of types is included in a fleet the job becomes more complex. Allocation directly relative to carrying capacity is not satisfactory. Thus a 32-tonner on trunk work may need less administrative control than a 4-ton parcel van. On balance a percentage addition in the ratio of the respective total operating cost is considered a fair compromise and this is the method employed in compiling the COMMERCIAL MOTOR Tables of Operating Costs.

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