Estimating Establishment Expenses
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Our Costs Expert Discusses This Matter Further and Puts Forward the Method He Recommends as an Alternative to Usual Practice
IN last week's article I gave some examples of the method which is used by many operators in assessing establishment costs, namely, to take 25 per cent. of the vehicle operating costs as a standard. It so happens _that I have recently received from two entirely different sources some authentic figures for establishment costs. -They are interesting in that they appear to demonstrate that the figure of 25 per cent, is reasonable and widely applicable.
A summary of one set of figures is set out in Table I. It relates to four different fleets, the figures being given for two consecutive years in the case of each-fleet. Thus, the first column provides-data for a fleet of 20 vehicles; substantially the same fleet has reference in the second column but there has been the addition Of one vehicle.
In the same way, columns 3 and 4 relate to one fleet, 5 and 6 to another, and 7 and 8 to a fourth. The mileages in all cases arc in the region of 500-530 per week. The vehicles are of all sizes, ranging from 15-cwt. vans to eight-wheeled 15-tonners. Some of the vehicles are petrol-engined _whilst others are oilers. .
No General Inference It is clear that no general inference can be drawn corelating the percentage of establishment costs with the number of vehicles in the fleet. It is true that the smallest fleet appears to be burdened with the biggest percentage of overheads. At the other end, the largest fleet is in the most favourable place as -regards this'percentage.. The important thing to note is that the average percentage-25—is the one which I have already stated is a popular figure amongst operators.
The other information I have is from an operator of nine vehicles. His total expenditure for several consecutive years has reached £6,000. In that sum i are included vehicle operating costs and all his establishment expenses. He does not detail them in any way soI am unable to analyse them, or separate the vehicle operating .costs from establishment charges.
It is of passing interest to note that the cost per vehicle (11and 2-tonners) is £666 per annum or approximately £13 7s. per week. His net profit on that expenditure of £6,000 is £1,300 (actual figures for a year: expenditure 16,174, profit £1,324), that is to say his profit is rather more than 20 per cent, of his expenditure. This also is of interest since I usually suggest that 20 per cent. should, be the minimum.
Rate to Suit Both I am often faced with the argument: "A's establishment costs are sure to be bigger than mine," or "B's costs are less than mine, how are you going to apply a rate which will suit us both?"
My answer Is simply that what 1 am endeavouring to do is to set a standard—something analogous to the list price of commodity. Special circumstances may permit slight deoartures from that standard, but they will not affect the main principle.
I should emphasize that I do not like this method of )ssessing establishment costs. The mere fact that the above figures seem to confirm that 25 per cent, of operating costs is reliable is more coincidental than otherwise. What it does tend to confirm is that 25 per cent. is a suitable figure when the weekly mileage of the vehicles is about 500. The flaw which prevents it from being universally applicable is that it has a tendency for the provision of establishment costs to be excessive when the weekly mileage is high.
Let me briefly repeat some of the figures which I gave in the previous article. I was dealing with a 7-8 ton oiler. In the first inst,ance it wis assumed that.it was running 960 miles per week. Average figures for the standing charges for such a vehicle total £9 per week and the running costs 6d. per mile. For 960 miles total running costs will thus be £24 and the total operating costs, that is standing charges -plus running costs, £33 per week. If the establishment costs are assumed to be 25 per cent, of that total then we must allow £8 55. On that account, which is obviously excessive.
If, however, the mileage for this same vehicle had been only •360 per,Week, then the running costs instead of being £24 would be £9., per week, and the total operating 'costs 11.8. If the establishment costs be reckoned on the" basis of 25 per cent, they amount to. £4 .I0s. and that is More reasonable.
Not -Best Method
In any case, both of these figures cannot be right since establishment costs do: not vary' to that extent. -My conclusion is that the method of adding a percentage of operating costs to provide for establishment costs is not the best method.
The problem is mentioned in that admirable little bookie: "The Costing of Road Motor Vehicles in the Furniture Removing-Industry," published by the•National Association of Furniture Warehousemen and Removers. It is therein suggested that if the contractor wishes to spread these costs more:heavily on long-distance journeys and to' reduce the charge for short-distance -customers, he must reckon them against the combined total of -standing charges and running costs, using a percentage figure of this total. Should the mileage during the actual costing period prove to be less than that upon which the calculation had been Made, the actual establishment charges would not. lse covered. • On the other hand, if the annual mileage be more -than that of the estimate. an extra profit would be made.
The difficulty disappears, of course, if the operator keeps records of his establishment costs. It is, as a matter of fact. just as important for him to do that as it is for hint to keep
detailed notes of his operating' costs.
Taken as a Standard
Moreover, this recording of establishment cosis most be continuous; it would be a mistake to do so for a time and take the figures thus ascertained as a standard. Justification for going to the trouble of continuous recording of these costs is almost the same as that for keeping independent and individual. records of the operating costs.
This continuous recording is necessary, first, as a check, and second because establishment costs are just as likely to vary from year to year as are operating costs. They may be high in one year and low in another. If high, the operator should immediately investigate and try to discover the cause to see if it be removable. If they be low, then investigation is still advisable, if only to make sure that nothing has been omitted. •
In the event of proper recorded establishment costs being available, the customary procedure is to take the previous year's figures as a basis for assessment of current charges. In the absence of such records, some other method of assessment must be used, and, having condemned the percentage method I must indicate what the system should be.
I have for some years when compiling "The Commercial Motor" Tables of Operating Costs used average figures, that is to say, averages compiled from infOrrnation which I have been able to collect. I am aware, of course, that in some particular types of business establishment costs will invariably be above the average just as in other kinds of work the costs will be below. That, however, cannot be taken care of in a publication such as the Tables. In any event, as I have pointed out in recent articles, some of the items of operating costs vary within wide limits. The Tables are a check for reference in the absence of actual figures.
It may be of interest to take again the case of the 7-8-ton oiler and use the average figure which I have taken in the Tables, namely,. £5 per week, and see how the figures thus compiled compare with the ones given above. So as not to confuse the case 1 will take my figures in these calculations from the current issue of the Tables, ignoring the many increases in costs which have occurred recently, .
The standing charges for this size of vehicle are given as £9 per week (ignoring the odd pence), and the running costs per mile (on the basis of a 1,000-mile week) as 50. (the actual figure is given as 5.49d). If, therefore, the weekly mileage is 960, the total of running costs becomes £22 and the total operating costs £31.
Now I add £5 for establishment costs, bringing the total expenditure per week on this vehicle up to £36. In the Tables for goods vehicles 1 usually add 20 per cent, to
the total cost as profit. In this case, • 20 per cent. is £7 4s., so that the minimum revenue MAL be £43 '4s, per week. In the Tables, £44 6s is quoted for 1,000 miles. If the operator can obtain more than £7 4s. per week, if. for example, he bases his profit ratio on 25 per cent. of the operating cost, then he will need to add £9 to his total expenditure of £36 to obtain a revenue of £45 per week.
Minimum Revenue
If the weekly mileage be 360, then for the total of running costs I must take the amount set down in the Tables for a 400-mile week, which is 60. The total of running costs "then becomes £9 15s. and the total operating costs £18 I5s. 1 still add £5 per week for establishment charges, so that the total expenditure becomes £23 15s. per week. For profit I add 20 per cent., which is £4 15s. per week, so that the minimum revenue must be £28 10s. In the Tables for a 400-mile week the operator is recommended to get not less than £29 18s. If the operator can obtain 25 per cent. profit, That is £5 18s. per week, then his revenue will be £29 13s. These figures should be compared with those already quoted in this article.
As a tailpiece, on another subject altogether, let me tell of a blunder I nearly made the other day. The story provides a lesson in the use of depreciation.
A friend of mine wanted rile to set out for him the comparative costs of an oil-engined and a petrol-engined 5-6tanner. I calculated the figures and arrived at the following conclusions. For the oiler the standing charges per year would comprise tax, £35e wages, including insurance and holiday pay, £312; garage rent and rates, £26; insurance, £25; interest, £36. The total is £434 per year. For the running costs per mile in pence I gave him, fuel, 1.60d.; lubricants, 0.18d.; tyres, 1.40d.; maintenance, 1.65d.; depreciation, 1.17d. Total is 6d. per mile. The corresponding figures which I quoted for the petrol
engined vehicle, were standing. charges as above, except interest which is only £24, giving a total of £422. Running costs per mile, fuel, 3.02d.; lubricants, 0.18d.; tyres, 1.40c1; maintenance, 1.80d.; depreciation, 0.73d. Total 7.I3d.
"You appreciate," I said to him, "that in order to make a proper comparison you must take the annual mileage multiplied by the running cost and add the standing charges."
"Oh yes!" he responded" 1 do realize that, but I should be rather glad if you would calculate for me the critical mileage over and above which it must pay to use the oiler, that is the annual mileage at which the total cost of the two vehicles is alike."
"Certainly," I said, "that is fairly easy. The difference in the standing charges is £12 per annum in favour of the petrol-engined vehicle, that is 2,880d. Now all that we have to do to work that off is to run sufficient miles saving 1.13d. per mile to equal that total. To arrive at that we divide 2,880 by 1.13d."
We did so and the result was 2,650 miles.
"That is an extremely low mileage," he said, "practically negligible. It means that the oiler should be purchased no matter what the annual mileage is."
"Yes," I said, "it is a low mileage, but wait a minute, there must be something wrong. Of course, we cannot use an average figure for depreciation in connection with a vehicle running so small a mileage as that. We shall have to put the depreciation in the standing charges."
I worked out the figures on that basis and found that in the case of the oiler the annual depreciation was £160 and for ,the petrol-engined machine £100. I added these figures to the standing charges already set out and obtained £594 per annum for the oiler and £522 for the petrol-engined machine. A difference of £72 per annum.
"That is the figure we shall have to equalize," I said. "Then we divide that by 1.13d.?" he asked.
"No. We have still another correction to make. We have to take the figure for depreciation away from those running costs, bringing those for the oiler down to 4,83d, and those for the petrol vehicle down to 6.4d., so that the difference now is 1.57d."
We divided 1.57d. into 17,280d. (which is £72) and reached a figure of almost precisely 11,000 miles per annum. "That" I said, "is your limited mileage." .
The moral should be fairly obvious. 'Average figures for depreciation per mile can safely be used only in respect of medium and high mileages. For comparatively low annual mileages some addition must be made to the average figure to provide for obsolescence, and for really low mileages it is correct to take depreciation as a standing charge.-S.T.R.