Education & Training... a CM seminar
Page 74
Page 75
If you've noticed an error in this article please click here to report it so we can fix it.
ficalunting I e small haulier.... 3
These points illustrate the need for a thorough and continuing check on costs; vehicle costing is one way of achieving this.
What costs are there?
The total costs can be easily broken down into two categories:
1. Fixed costs, e.g. depreciation, motor insurance 2. Running costs, e.g. fuel, oil, tyres Fixed costs
For costing purposes, we shall split fixed costs into two components; (a) Standing costs and (b) Administration costs. The distinction between the two will become clearer later, but basically, it is this: standing costs are those costs, such as depreciation, which are attributable to particular vehicles; administration costs are those such as rent, rates and so on, which are very much a part of the fixed overhead costs but which cannot be allocated to any one vehicle.
In any business activity, certain costs have to be met regardless of the level of production even before the doors are opened to commence business. Within the transport industry these are referred to as standing costs, probably derived from the notion that a standing vehicle still attracts fixed costs. In fact these costs still have to be met even if the vehicle is off the road for repair or idle due to lack of work. Standing costs go on 24 hours a day, therefore this emphasises the need to control fleet productivity so as to minimise the cost per hour.
Running costs Once a business goes into production, running miles in the case of road haulage. additional costs are incurred in order to run the activity; hence running costs.
To summarise, therefore, the costs we shall discuss consist of three components: standing costs; administration costs.; running costs.
Where to start
Let us first consider what we want from a costing system. Perhaps the best place to start is by looking at a proposed format for the end product.
Standing costs
The five individual elements of Standing costs are: Road fund licence; Motor vehicle insurance; Operator's licence; Depreciation; Trailer charges (artics).
Road fund licence
Confirming the amount of duty paid is quite straightforward. It can be found either in the registration book or on the face of the licence disc. Duty is normally payable once a year, in full, for a 12-month licence. On the other hand, a licence may be obtained to cover a four-month period. This method incurs a slightly higher rate but may have certain operational benefits (e.g. seasonal demands) and short-term cash flow advantages.
Motor vehicle insurance
The only insurance costs to be included are those for the annual premium for third party, fire and theft, or full comprehensive. In circumstances where the premium is paid on a blanket cover basis, it will be necessary to obtain a schedule from the insurance company giving a breakdown of the total premium for each individual vehicle.
Operator's licence
It is a simple matter to obtain this figure which can be found on the actual licence. It is a relatively small amount but should not be overlooked.
Depreciation
There is a school of thought which prefers to regard depreciation as a running cost on the basis that, until a vehicle is used, it is not depreciating. The general consensus in road haulage, however, is that it is a standing cost, because, irrespective of the mileage covered during its life, the market value falls year by year. Since depreciation is an attempt tc provide for the eventual re placement of a vehicle, treatint it as a standing cost is r reasonable approach.
The important thing to ge. right for costing purposes is thc amount charged. The dangel here is that depreciation may tx computed on an historical cos. basis. When you consider tha five-year-old vehicles are no costing three to four times theil original cost to replace, it can b( understood that to continu( charging for their replacement based on that historical cost would leave us short of fund! with which to buy new vehicles It is advisable, therefore, tr regularly up-date costing figure! to take account of increaser vehicle replacement costs arK charge depreciation according ly.
Trailer charges (artics)
Where articulated vehicles o drawbar outfits are operated, i will be necessary to includi trailer costs. What has been saic of vehicle depreciation applie: equally to trailers. Where insur ance is separately charged fo trailers, it should be included.
Administration charges
In the main, these costs are largely fixed. In most roar haulage operations, they tend tc fluctuate very little over long periods except, that, in commor with most other costs, they increase with inflation.
For costing purposes they cannot be overlooked.
The controversial aspect o' these costs is their allocation tc individual vehicles when one o. them can be said to belong tc any particular one_ In my view whatever method of allocating i$. used, at best, it's arbitrary. Despite this, a serious attempi should be made to devise ar equitable and realistic appor tionment system. The methoc suggested is that 50 per cent 01 total costs be divided equally between all vehicles and 50 eel cent of total costs to individua vehicles, according to theil carrying capacity.
Individual companies arc usually aware of circumstance which may influence their overhead charges and are best placed to devise an appropriate method of apportionment. The important thing is that these costs are carefully monitored, revised where necessary and the system is consistently applied.
Drivers' wages
Before we discuss running costs let us look at drivers' wages — a major cost element. Business costs cannot always be classified as being either fixed or running. In practice, they are so categorised for convenience sake. Some costs, however, have a foot in both camps; drivers wages comprise one of these. Some people take the view that they are very much a fixed cost, because, in the short term, the driver has to be paid whether or not the vehicle operates, although at a minimum basic wage. In reality, of course, overtime is paid according to the level of activity, so this portion could be argued to belong to running costs. This is an example of an area of cost where it is potentially possible to get too bogged down with costing analysis. The suggested system provides for a completely separate analysis of drivers' wages so that the total actual ivages are charged to a vehicle.
?tinning costs This category of costs ac:ounts for a large percentage of otal costs in any road haulage )peration. It is also one of the iifficult areas to control. Runnng costs comprise the following our items' — own pumps and outside )unkering; fyres, tubes, flaps; Vlaintenance — labour and materials and outside repairs; ubricants — engine oil, etc.
'uel costs This is a cost area which must )e strictly controlled and a )umber of very good reasons an be put forward to justify the iffort in doing so:
p It is a very high individual cost tern within the total cost of ,ehicle operation;
• It is an area vulnerable to fiddling; • High fuel consumption can be an indication of bad maintenance, or malpractices such as drivers adjusting fuel pumps to gain more speed or selecting routes involving greater mileage.
Fuel costs are a relatively straightforward item for costing purposes, subject to one important proviso; it is absolutely imperative that fuel issues are accurately recorded whether they are from an operator's own pumps or bunkered from retail garages.
There are several methods available to record fuel issues ranging from a simple daily check list completed by the driver or fuel attendant, to the more sophisticated self-service pump which operates only when a special magnetic card or key is inserted. This system automatically records how much fuel is issued. Whichever system is adopted, it is well worth reconciling the total fuel issues figure with the tank dips and deliveries received figure.
Tyres, tubes and flaps The most convenient system of recording tyre costs is by multiplying the monthly mileage for each vehicle by the cost per mile for its type of tyres.
It is advisable to carefully monitor tyre costs by comparing this monthly calculation with the actual tyre cost for the year to date. The actual cost, you will remember from the second article, is obtained by recording stocks at the beginning and end of each period and adding the tyres purchased during the period.
Maintenance cost The size of vehicle fleet more or less dictates the degree of difficulty likely to be experienced in recording maintenance costs. There are three elements to consider: labour, materials, and outside repairs.
Labour costs The most effective way of recording maintenance costs is by the use of some form of job card system. The job card is then a means of recording the number of hours worked on a job and the materials used. Establishing the hours worked on particular jobs is not too difficult, but the hourly rate at which they are charged requires a little thought.
The best solution is to list all the costs that have to be taken into account and divide the number of hours for which a fitter is employed into the total costs; this establishes an hourly labour rate. Adjustments have to be made, however, to take account of holidays, labour diversions, waiting for instructions, fetching spares and so on.
In practice, this will have the effect of increasing the labour charge rate because it reduces the number of hours over which the costs can be spread. In fact, it may be that, of the total hours a fitter is employed, the actual utilisation is somewhere in the region of 60/65 per cent. Once a labour charge rate has been established, it should be checked at say, three-monthly intervals, to ensure its accuracy.
Materials It is advisable to maintain a simple form of stock control system involving the use of stock control cards. These can give all the relevant information about a particular part, including its price. When the part is issued, a simple requisition form can be raised and attached to the job card which is then priced accordingly. If the stock card is kept with the stock, there is less risk of its being overlooked inadvertently.
Outside repairs Even where haulage companies employ their own maintenance staffs, occasions still arise when outside repairers, such as garages and specialist repairers, are called upon. Emergency breakdown away from home base and specialist electrical repairs are two examples.
From a cost recording point of view, it is a simple matter to allocate them to individual vehicles, because the suppliers' invoice can be used as the source of information.
Lubricants Where this involves the topping-up of engine oil, for example, it can be recorded in the same way as fuel issues. If the issue is part of the maintenance procedure, it can be recorded in the same way as materials.
What else is there?
Provision is made for ropes and sheets and sundries. Ropes and sheets should be closely controlled and, if the volume is sufficient, they may be included in the stock control system and requisitioned similar to spares and the respective receiving vehicle charged accordingly. If they are brought for specific vehicles, the suppliers' invoice can be used to allocate the cost. Sundry items may be difficult to charge to specific vehicles unless they are bought especially for them, in which case the suppliers' invoice can, once again, be used for the information.
Costing the operation of eacn individual vehicle has merit especially when a variety of different services and types of vehicles are being operated. The costing system should not be an end in itself. It is essential to be realistic about the sort of information small haulage companies require, or can afford to produce with limited administrative resources. Simplicity, therefore, is the key word._