Allocating Overhead Costs
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The Proportion of a Haulier's Establishment Charges that any Vehicle Has to Bear Depends on its Capacity and the Amount of Work to Which it is Put: The Value of the "Ton-hour" Factor is Explained in this Article
AHAULIER friend of mine asked me recently to go . •through his books and draw up a Statement of establishment costs:. 1 gathered that he wanted to discuss the subject with a view, to setting his house in order so that he could make proper allowances in his future estimates. Up to this time he had used hypothetical figures suggested by me, which 1 am accustomed to apply in most of the calculations I make and are used in "The Commercial Motor" Tables of Operating Costs. He wavuite satisfied with my figures, inasmuch as-he found himself making a handsome profit, but he was sure that my allowances for establishment costs were excesssive, compared with what he
felt were really his own. '
This state of affairs was all very well so long as jobs were easy to get and while there was a minimum of competition, hut he had lost one or two contracts within recent weeks and had been told that his price was too high. That was something which he thought could easily happen again and he was sure that if his establishment costs were properly assessed he would be able to reduce his charges, at least where such reductions seenied advisable in order to ensure acceptance of quotations.
1 should emphasize that the question of rate-cutting does not arise. The work which this haulier is accustomed to do is usually of a kind for which no rates schedules have as yet been compiled, neither is it likely that rates schedules would ever find a place in the scheme of things so far as this haulage contractor's activities are concerned.
Went Through Accounts 1 accepted his commission, little knowing what I was letting myself• in for. First; I went carefully through his accounts, taking items of expenditure out of them which I judged should properly be charged against the establishment, and as'a result obtained the figures set out in Table I. Next, he asked me to show how that expenditure should be allocated among the vehicles of his fleet. There were 50 in all, two 15-ton eight-wheelers, four 12-ton six-wheelers, eight
10-ton six-wheelers, 16 8-tonners and 20 6-tonners. The total tonnage capacity is shown in Table II to be 406.
Readers not accustomed to this aspect of tonnage calculations should appreciate that the figure of 406 tons is made up in this way. First, two 15-tonners give me a capacity of 30 tons; the four 12-tonners give me 48 tons, and so on down the schedule of capacities as set out in the table.
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Following the usual procedure, I divided that tonnage into the total of establishment costs, thus arriving at the amount to be debited per ton per annum. The amountis £18 to the nearest round figure. Readers should appreciate that absolute accuracy is impracticable and of no service in a matter of this kind. The allocation of establishment costs is in any case approximate only, and is never a stable figure as the total is always changing.
The next thing to do is to allocate the establishment charges among the different vehicles according to the capacity of each, and that is effected in this way. A 15-tonner receives 15 times £18, that is £270 per annum; a 12-tonner is similarly allocated 12 times £18, which is £216 per annum; and so on as set out in Table 111.
Great Saving
When I presented these figures to my, friend, his first comment was that these amounts would be a great saving on the figures which he had used hitherto. I accepted that without umbrage. As I have already said, establishment costs vary greatly between one haulier and another. According to my hypothetical figures, the debit against the 6-tonner, for example, should be £120 per annum instead of £108.
Then my friend asked: "What about the repair shop? "
"I always treat that as a separate department," I answered. "The cost is debited against the item ' maintenance ' in the running costs of the vehicle."
"1 understand that," he stated, "but what I am trying to impress upon you is that some of this expense which you have set down as establishment charges is incurred directly in connection with the repair department and, that being so, I maintain that we should deduct anything so spent from your total of establishment charges before you distribute them among the vehicles."
"You are right," I said, "but what proportion do you think should be so allocated-5 per cent?"
"1 don't think it right to take any such percentage," he answered. "1 think that the only way to deal with it is to go through the list item by item and allocate a certain amount where that seems desirable."
We did this. For telephones he suggested £20; most calls were incurred in telephoning for spare parts. He wanted to include something for messages from outside which applied when a vehicle broke down, but I would not agree to that; any expenditure of that kind was fairly debited against the business.
The same applied to telegrams, althOugh I had to pive way to the ex:ent of £5, the Same justification being put forward, namely. that. they were largely in connection with requests for spare parts. Printing and stationery called for another £5 for expense on order forms in connection with ' jobs'in the repair shop, He allocated a
further £5 for postage for the same reason.
We left out bank charges and, of course, ferries and tolls were ignored, but in respect of management he thought that £100 should be debited and 050 for clerical wages,
He asked £20 for office rent and a zorresponding amount, £12, for office rates. We covered lighting and power, heating, water, tbflir.-e supplies and so on by the round sum of £25; and £5 of the auditor's fees, were considered to he reasonably debited against the repairs department. Nothing more seemed advisable until we got to travelling expenses,, and a £20 debit was put on that account. as well as £100 from the car account to cover the cost of taking mechanics out to. breakdowns on the road.
At that we finished, the total being £567.
He insisted that that sum be taken from the grand total of £7,340 before we 'began to divide the establishment costs among the 50 vehicles. That reduced the total of establishment costs to £6,773 per annum, and I was proceeding to divide that by the 406 payload tons when he stopped me again,
'‘ There is another point which 1 think we should take into consideration now.he said, " that of some vehicles not being in full use all the year round."
"That would make quite a difference, and if you have any definite figures for the number of days the various vehicles are in use. then perhaps we can do something about making allowances for these," I replied. " I cannot give it to you in days. hat I can in weeks," he replied. `' First ait all we will take those which are
regularly in use through. the year. That will be one of
the 15-tonners two of the 12-tonners. eight of the 8-tormers and 15 of the 6-tortners."
" What about the 1.0-tormers ? 1 asked.
"They are not used during the whole year and will come in later. The next list I had better give you is that of the vehicles which are used in the sugar-beet season, and we will put that down as being 12 active weeks."
" But you work mote like 15 or 16," I put in.
That is all might. I make provision for that later on. One of the 12-tonners is used for a further 12 weeks, and so are four of the 10-tonners and four of the 8-tonners. 1 should rather like to know how you are going to deal with that problem ? "
" It is quite easy," I responded.
Instead of taking the total tonnage and spreading it over a year (as I have done in Table III), I am going toetake a figure for tonzweeks, and that means the number of tons multiplied by the
weeks per year in which those tons or tonnage capacities are in use.,
"'Taking your first lot of vehicles, those which are in use regularly throughout the year, and assuming a year u) be 50 weeks, then you have one 15-tonner in use throughout the year and the ton-weeks worked by that vehicle are thus 15 multiplied by 50, 750 ton-weeks, "Then for the two 12-tonners that are in use throughout the year, we have twice 12; 24 tons by 50 weeks is 1,200 ton-weeks—and so on for each of the vehicles which works throughout the year. When it comes to those which are not fully employed we take similar measures. There is first of all a I5-tonner which is in use for 12 weeks; the ton
Capacity No. of (cons) vehicles IS 12 10 8 6 Total 15 270 Capacity (tort:) No. of vehicles 15 1
2
a a
6
15 15 1 12 2 10 4 8 6 4
s 12
1 10
.4
13 4 Total
weeks therefore come to 15 times 12, which is 180. Then the two 12-tonners which are in itse for 12 weeks; twice 12 is 24, which multiplied by 12 weeks gives me 288 tort-weeks."
Wait a minute," he intervened. "One of those 12tonners is regularly engaged for 24 weeks."
" I am not overlooking that; you will find that when I get a little further down' I have made provisionfor the extra work done by that one 12-Ionner."
answered. Continuing to set out the figures, 1 marked the sheet as is S,11(1W11 in Table IV until I got to the five 6-tortners.
"Now," I said, "we come to your 12-tonner which does an extra spell. It goes down here as one 12-tonner for 12 weeks, 144 ton-weeks." In that way 1 satisfied him that there was a total of 12,350 ton-weeks' work done by his 50 vehicles, some of which were continuously used and some not.
"We now have to divide £6,773 by 12,350 ton-weeks," 1 said, "and in so doing we get a fraction under Ils, per ton-week as the basic figure for the allocation of establishment costs."
" It seems all right." he stated, "and 1 am rather surprised, but don't we have to work this out to arrive at a proper figure for each vehicle?"
" That is the next step. For the 15-tonner you have 15 times Ilse which makes £8 5s. per week as the debit of establishment charges against that vehicle, and with the others, for the 12-tonner, £6 12s.; for the. 10-tonnei, £5 10s.; for the 8-tonner, £4 8s.; and for the 6-tonner, £3 6s. Are you satisfied?
" I'm satisfied with your figures." he answered " but it doesn't seem to he helping Me much. I told you that 1
thought your hypothetical figures for establishment costs were high and when we had completed the first set of calculations, it looked as
if t were right. 'Ihesc new figures which we have got, however, taking into consideration that the vehicles do not work all the year round. tire, if anything, a little higher than your hyaotheti.t1 figures, and .a new probleni arises. If 1 get one or two extra contracts and am' able to put more vehicles en the road all the year round, and if my establishment charges, totals do not increase as the result of that, the establishment charges per vehicle will diminish," he said.
" That is quite 'true, trt that is a normal risk of almost any business." I replied, "and that is why if you see a reasonable chance of getting work which will keep most of your vehicles on the road all the year round, you will, it' possible, get your price lower, because you will know that your establishment costs per vehicle are diminishing." I propose to develop this theme in a subsequent article on establishment charges.
Another aspect of establishment costs, which makes for even more complication than that with which I have 12.350 just dealt, -occurs when a haulier
handles several classes of traffic. In this article I have considered a sandand-ballast carrier. If an operator has some of his vehicles engaged in carrying smalls. a far different story can be
told. S.T.R.