Accurate Costing
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Profitable Working MANY operators are still .living in the past in their ideas of what rates and charges should be. They are
• overlooking the fact .that during the past tWo or three years tyre prices have increased by nearly 50 per cent., fuel by 25 per cent., wages by 7s. per week and insurances by 12i per cent., whilst other items of operating cost have also undergone increases. .
This attitude of hauliers has been evident to me for some time, and this article is written in order. to bring home to readers the real situation. Its need was emphasized recently when I received a letter from an operator who has been in the haulage business for many years.
He wrote to me concerning a contract for the use of a 5-ton van running 600 miles per Week. He did not question what rate he should charge, but asked my opinion on Certain tern1s included in the proposed contract. It was onlyincidentallY that he mentioned that he intended to charge £28 per week for the hire of this vehicle. : I picked out that figure automatically, and applied a rough test to judge whether it was likely to be remunerative. My check was to take Is, 2d. per mile as a basis. By doing so, / came to the conclusion that he should get £35 per week. I therefore wrote and told him that before he entered into this contract he would be well advised to look into his costs as I felt sure that at £28 per week he would be unable to earn a profit: I continued "Your petrol and oil will cost you not less than 3id. per mile; your tyres will cost You about lid, per mile; maintenance will cost you another lid., and so will depreciation. That is 8d. per mile for running costs only. _ " For standing charges,your driver's wages, including insurance, etc., at to-day's rates are E6 !Os. per week. Your tax is 12s. per week, and insurance and sundries will cost you about £1 per week, making £8 2s, per week without any provision for garage rent or interest on first cost. If you spread that over 600 miles you will find that it is equivalent to 31d. per mile, so that your total vehicle operating costs amount to 111d. per mile.
"The £28 per week, which you mention in your letter in its application to a vehicle running 600 miles per week, is also equivalent to 111d, per mile, so that you are going to cover your vehicle operating costs only with no provision for establishment costs or profit."
Many operators imagine that they do not have to pay for establishment costs, in which belief, of course, they are quite wrong. I have dealt with this matter many times and endeavoured to prove that it is impossible for even the owner-driver to avoid some expenditure under that heading.
In the very earliest days of assessing costs and rates, it used to be the custom to double the operating cost to make the charge, the assumption being that the provision for the establishment costs and profit was equal to the operating cost of the vehicle. That method was satisfactory only at a time when competition was almost negligible, when mechanical transport was a novelty and rate-cutting had never even been thought of. Later, that 100-per-cent addition was halved and a figure of 50 per cent. used. Later again, it fell to 331 per cent.
Actually, 331 per cent, was too small, especially in relation to contracts in which the mileage was low. For example, assume that the standing charges in connection with a vehicle were El 10s. and that the running cost was 9d. per mile. In the case of a contract which involved only 100 miles per week, the total cost would be £7 10s. for standing charges plus 900d., or E3 15s, for running cost. The total is £11 5s. Adding 331 per cent. to that increases it to £15, which means that there is £.3 15s, to cover establishment costs and profit. If, as might well be, the establishment costs total E3 per week, there would ba only 15s. left for profit.
Now suppose that the contract involved 600 miles per week. The standing charges will remain at £7 10s., but the running costs become 5.400d. per week, £22 10s., making the total cost £30 per week. Adding 331 per cent, to that gives us the amount which should be charged, £40. Out of that there is provision of £10 to cover establishment costs and profit, and if the establishment costs remain at £3 per, week. there is now £7 per week profit, which is rather high. The only way to straighten the position, apart from recording establishment costs properly and making due provision for them and for profit, is to increase the percentage and to add it to the standing charges only, but at the same time to add something to the running costs as well. For general haulage, the appropriate figures are 50 per cent, to be added to standing charges and 20 per cent, to the running costs. We shall see how these figures apply in the two cases exemplified above in which the standing charges per week were taken to be £7 10s. and the running cost per mile 9d.
First, the case in which the vehicle runs only 100 miles per week. The running cost per week is £3 15s. To the standing charges we add 50 per cent., which is £3 15s. Then we increase the running cost, also by coincidence £3 I5s., by 20 per cent., I5s. The charge then works out at £15 15s., and of that £4 10s. is the sum set apart to cover establishment costs and profit. If the establishment costs be actually £3. then there is a margin of El 10s. per week for profit. Although that is perhaps hardly sufficient, it is more than would be allowed according to the previous calculation.
£8 5s. Above Cost
Now take the second case in which the vehicle runs 600 miles per week. The standing charges will remain at £7 10s., but the running cost for 600 miles at 9d. per mile amounts to £22 10s. Add 50 per cent., £3 15s., to the standing charges to provide for establishment costs and profit and add 20 per cent., £4 10s., to the running cost to cover profit. The " total charge is thus £38 5s., and in that there is provision for establishment costs and profit. £3 15s. plus £4 10s„ which . is £8 5s.
If the actual establishment costs be £3 per week, then there is £5 5s. left as profit. That is more reasonable than the profit shown in the case when costs and profits are calculated at 331 per cent, of the total, but is more in line with what an operator might expect to earn with a vehicle of this size running 600 miles per week.
Now to proceed with showing how to assess costs and charges in the easiest possible way. First of all, take the three items with which operators are best acquainted-petrol, oil and wages. As an example. I propose to take a 5-ton petrol-engined sided lorry, which, so far as the majority of operators is concerned, usually carries a 6-ton load.
Under favourable conditions when the work comprises mainly medium-distance runs with not too many stops and starts, the average fuel consumption rate is about 10 m.p.g. Petrol may cost the user anything from 3s. 4d. to 3s. 61d. per gallon, depending upon the way in which he buys it, and if I take an average of 3s. 5d. and divide that by 10 m.p.g., I get a fraction over 4d. per mile as the cost of petrol.
The consumption of lubricating oil may not in the early stages be quite 600 m.p.g., but it will probably be more than that when the engine is worn, so I propose to take .600 m.p.g. as the average. If the oil costs 6s. 3d. per gallon, then that is 1d. per mile and adding that to the figure for petrol, it is safe to take 41d. as a fair figure for the expenditure of petrol and lubricating oil, Taking a Grade 1 area. the basic wage for a 44-hr. week is £5 13s. It is likely that there will be a little overtime worked during the week, and I am going to assume 4 hrs. at -s. 21d. That gives us 12s. 10d. per week, which, added to the £5 lls., makes £6 5s. 10d., or £327 3s. 4c1. per annum.
Now for the other items of cost which are not so frequently in the mind of the operator as the three I have just considered. There is first of all the Road Fund tax. The net figure is £35, but on the assumption that it is paid quarterly, the total per annum will be £38 10s.
Something must be allowed for garage rent, even if the vehicle be put into a shed. I suggest an allowance of 5s. per week, or £13 per annum. The next item is insurance, and here I assert that so far as the average operator is concerned, he would be most unwise to arrange for anything other than for a comprehensive policy, the premium for which is likely to be £50 per annum. I realize that some operators content themselves with a third-party only policy, but I am sure that in the long run those who do so pay mort than £50 per annum for the privilege.
1 am not going to argue about whether interest on first cost should be included. I will simply state my opinion that it is correct to include that item, because without it the operator is not taking into consideration that if he puts he money into the bank instead of spending it on a 'vehicle it would earn that interest for him. He loses that interest and therefore this amount is a debit against the vehicle.
A 5-ton petrol-engined sided lorry of well known and fairly popular make would cost to-day £980, to which must be added at least another £50 to cover the cost of painting and lettering, bringing the total to £1,030. The interest on that at 3 per cent. per annum is, in round figures. £31.
I have not quite finished the item wages, for there are numbers of small items which must be taken into consideration. These are just the sort of expenses so many operators overlook. First of all, there are two contributions on account of employees' insurances. There is National. Insurance, which at present costs the employer 4s. 2d. pet week; there is the provision for workmen's compensation. the 'premium for which varies, but I am going to assume it to be Is. 4d. per week. Then there is the need to provide for holidays with pay, for if the operator wishes to run the vehicle while the driver is on paid holiday he will have to firul wages for another man. I assess these small extra•items of expense as amounting to approximately £26 per annum.
Let us put down what we have and see how we stand. The items are shown in the following table and I take the total figure as £486 per annum.
Standing charges per annum for petrol-cngined vehicle carrying 6-ton load.
It is now necessary to take into consideration that the vehicle does not work for 365 days every year. It is usual in making calculations of this kind to assume 50 weeks only. In this case, as an allowance has been made for 4 hrs. overtime every week, the total hours per annum are 50 times 48, which is 2.400. if I divide £486 by 2,400 hrs. I get a small fraction over 4s. per hour.
Tyres are Important
Another cost item with which the operator who makes no study of recording is not well acquainted is tyres. The price of a set of 35 by 71 tyres is to-day approximately £185. that is 44.400d. If the average mileage per set be 22,000-admittedly that is less than might be expected, but we are justified in keeping these figures on the low side, the cost per mile for tyres is 2d,
The next thing to take into consideration is that the vehicle itself begins to wear out as soonas it is put upon the road. and the cost of weal and tear must be assessed. I have assumed that the vehicle complete, painted, lettered and varnished and ready for the road, costs £1,030. From that amount I deduct £185 for the tyres, and I do so because I have already made provision for the tyre wear. That leaves £845 as the value of the vehicle less tyres.
A vehicle of this type will give good service if it be carefully maintained for 180,000 miles, when it will be wise for the operator to dispose of it and get a new one. At the end of those 180.000 miles he may possibly get £95 for it. and £95 from £845 leaves £750, so that it may be taken that this operator is wearing out £750 worth of vehicle in 180,000 miles. If the reader likes to reduce £750 to pence and divide it by 180,000, hewill ,find that he is wearing out Id. worth of vehicle for every mile run.
1 come now to the most difficult item of all, the cost of maintenance. It is practically impossible to reach agreement among operators as to what the average allowance for maintenance should be. This item and the general consideration, to be drawn from these calculations will be dealt with in another article S.T.R.