Four Methods of
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Reckoning Depreciation
"The Commercial Motor" Costs Expert Explains, with Examples, how this Item can best be Dealt with by Coach Operators
IN an article of mine entitled " Right and Wrong in Costing for Coaches," which appeared in the issue of "The Commercial Motor" dated September 21, 1 arrived at the conclusion that fair charges for coach hire would be 18s. 2d. per ltr and lOid. per mile. A coachowner wrote to me pointing out that whilst these might apply in some cases, they were not convenient for use in
assessing a price to quote for• a contract hire. It was pointed out that on this basis the charge for 100 rilil3 and 6 hrs. would be the same as for 60 miles and 8 hrs. No customer would agree that both those rates were fair. If the rate so calculated were reasonable for 100 miles; it was excessive for 60 miles.
The correspondent went on to point out that an organizer of a party, when he receives =3. quotation, is in the habit of comparing the charge per bead with what he would have to pay if the journ.ey were made by train or public service vehicle. When he does so, it is inevitable that the charge would be related to only the miles travelled without any consideration to the time occupied. The public is prepared to pay a little more for the convenience of a private conveyance but nevertheless has an eye on the cost per mile all the time, and if the coach operator is to cover the cost of operating his vehicle and make a profit, he must do so by making a considerable higher charge per mile and lower charge per hr.
I was particularly impressed by this letter and I promised this correspondent that I would deal with the matter in an article as soon as I could. A major matter of interest is involved which applies to the calculation of rates and charges for goods carrying as well as for passengers. The kernel of the subject is the treatment of depreciation.
Spilt the Differenct If depreciation be treated as a standing charge, stress is laid on the hourly figure to the detriment of that for mileage, and the tendency would be for a disproportionate charge per mile to appear to be mil& in a case v:Then the time occupied was long. If depreciation be treated as a running cost, then the mileage aspect is stressed. Probably the most satisfactory way would be to split the difference. When the subject is thrashed out in detail, the results are rather curious and might, if not carefully studied, lead to the conclusion that almost any price can be quoted. which, of course, is absurd. Take the case where the value of a coach is £4,000 and let us assume that it is agreed that depreciation Should be spread over 8 years or 240,000 !riles.
Considered as a standing charge, the depreciation will amount to £550 per annum, ill per week or 5s. per hour. n16 As a running cost it will amount to 4.4d. per mile. If the difference be split so that half depreciation is entered as a standing .charge, and the other half as a running cost., then the appropriate amounts are 2s. 6d. per hr. plus 2.2d. per mile.
Now suppose for the sake of argument that in a particular case the standing charges without depreciation amount to £13 per week and the running costs, again without depreciation, to 9.8d. per mile; let us calculate what the charges per,:hr. and per mile should be using different methods of taking depreciation into account.
Method A; Take depreciation as a standing charge and add £11 per week to the £13 so that the total of standing charges becomes £24 per week and the running cost pet mile stays at 9.8d. To ascertain the cost per hr. we must divide £24 by 44, which gives us 10s, 11d, per hr. On a job involving travelling 100 miles in 6 hrs., use of the coach would thus cost six times 10s. lid.; which is 65s: 6d., plus 980d., which is 81s, 8d. The total is £7 7s, 2d.
Charges Not Proportional
Using the same basic figures but relating them to a job which involves 8 hrs. use of. the coach and 60mile8 of running, the cost is eight times 10s. lid., which is 87s. 4d. plus 60 times 98d.-49s. The total cost is 136s. 4d, There is now a slight difference between the charges for those two jobs, but admittedly it is-not anything like proportional to the mileage. The 60-mile job costs are more than 2s: per 'mile and-the 100-mile job less than is. 6d., and I quite see that an experienced organizer for private parties would be inclined to query one or the other.
Incidentally. I should make the point here that these figures are hypothetical and relate to costs only and not
'charges. . .
Method B: In this case, the. whole of the depreciatior is treated as a 'running cost and 4.4d..per mile should be added to the .9.8d., :making 14.2d. _Our basic figures foi
costs are therefore Ela per week,. which 10s: hr. and 14.2d. per mile. Now to apply these figures to the two specific jobs which have been cited by my correspondent
First, the journey which involves 100 miles and 6 hrs. A hundred miles at 14.2d. per mile costs 118s. 4d.; 6 hrs. at 5s. lid, is 35s. 6d., and the total is 153s. 10d. For the other journey involving 60 miles and 8 hrs., the charge for mileage is 60 times 14.2d., which is 7ls., and the charge for time, 8 hrs. at 5s. I Id., iS 47s. 4d. The total is 118s. 4d. Thus the rates are certainly more in line with what this correspondent requires inasmuch as the difference between the two rates is nearly proportional to the mileage run.
Method C: Here I propose tosplit the difference putting half the depreciation asa standing charge, which is £5 10s. per week, and half as a running cost, which is 2.2d. per mile. Our basic figures' for cost thus become £13 plus £5 tOs„ which is £18 10s. per week or 8s. 5d per hr., and 9.8d. plus 2,2d., which is is. per mile. On that basis, the contract covering 100 miles and 6 hrs. works out at 50s. 61J. for the time, and 100s.. for the mileage, making 150s. 6d. altogether. The quotation for the -other job involving 60 miles and 8 hrs. works out in the same way at 129s. It is possible, to criticize all these three methods. Method A provides for the cost of the vehicle to be properly written off as intended in 8 years, but, of course, it has the disadvantagethat the rates obtained, as the result
of the way of calculating depreciation, are . not proportional to the mileage and meet. customer-resistance.
Method B obviates the objection that rates are not in proportion to mileage. . but is unsatisfactory because instead of the cost of the vehicle being amortized in 8 years it will take 15 years, having in mind that the annual mileage is only 16,000, which is about an average figure . for coaches largely used for private hire. Method C is better than either of the
other two as the rates quoted are in the same proportion to mileage, but vehicle cost is not wiped out so quickly. After 8 years there will still be Ft quarter of the life unused.
There is still another way which I will call Method D. According to this, the depreciation is treated as a running cost, but in assessing the -actual amount provision is made for obsolescence in this way. The basic figure is calculated. as has been done already, dividing the cost, £4,400, by 240.000 for mileage, giving 4.4d. per mile. Provision is
• made for obsolescence by adding 5 per cent, to 4.4d. for every 2,000 miles less than 48,000 per annum which the vehicle runs.
As I have already stated, the annual mileage is 16,000. which is 32,000 less than the basic figure of 48,000 and there are 16 2,000-mile periods in 32,000, so we must add 16 times 5 per cent., which is 80 per cent., to our basic figure of 4.4d That brings the depreciation up to 7.92d., nearly 8d., and if I add that to the 9.9c1., the remainder of the running costs, I get 17.8d. as the total running cost.
Higher Rates The standing charges remain at £13 per annum, or 5s. 11 d. per hr. In that case, the trip which occupies 6 hrs. and involves the vehicle in running 100 miles will cost 100 times 17.8d.', which is 148s. 4d., and the 6 hrs. at 5s, ltd. will cost 35s. 6d., so that the total cost of that journey is 183s. 10d. The other journey. covering 60 miles in 8 hrs. will cost 136s. Here, provision is properly made for wiping out the cost of the vehicle in 8 years, but the rates quoted may be rejected as they. are high compared. with the others.
Now I will refer to the previous article, taking the actual example quoted there and applying these various methods to see how results compare with the 18s. 2d. and 101d. per mile which became the subject for criticism. First, I Wad better avoid the complication of trying to deal with six vehicles, four full-time and two on half-time. It will make a little difference to the results, but will• not effect the argument I am pursuing.
It was assumed' that the initial cost of a 32-seater coach was £4,260: the tyres were taken to be 8.25 by 20, the current price of a set of which is £160. Deducting that from £4.260 leaves me £4,100 as the net cost without driver, and takine £0 as the residual value I was left with £3.680 upon which to reckon depreciation. I assumed a life of 8 years. which meant that the figure for depreciation must be £460. The standing charges per annum comprise: tax, £58; rent, £26; insurance, £60; depreciation, £460; interest, £130; giving me a net total for fix-td charges without wages of £734, an amount which was quoted in the article to which we are referring. The wages were assumed to be £320 per annum, and establishment costs £240, so thetotal of fixed charges amounted to .£1,294,
The annual usage of the vehicle involves 2.000 hrs. se that the cost per hr. is 12s. 11d. I add 25 per cent, to that for profit, which is 3s. 3d., and get a figure of 165. 2d. as the time charge.
For the running costs, I take the figures again from that article, they are fuel (8 m.p.g. and 3s. 4d per gallon), 5d.t lubricants, id.: tyres, reckoning on 30.000 miles per set, lid.; maintenance, 2d.; 'total, 81d. Add 2d. per mile for profit (slightly less than 25 per cent.) and we thus arrive at my 101d.-per-mile charge.
I take again the two examples quoted by my correspondent, namely, a journey involving a mileage of 100, and 6 hrs. of time, and the one-involving a mileage of 60 in 8 hrs.
For the firs!, 100 miles at 101d. is 87s. 6d., and 6 hrs. at 16s, 2d. per hr. is 97s., so that the total is 129s. 4d. The total charge is 18 Is, 10d., which as my correspondent points out, is not sufficiently different from the charge for 100 miles to satisfy the customer that he is not being cheated, either as regards the short journey or the long one. He apparently takes the view that if 184s. 6d he the correct charge for a 100-mile journey, then 181s. 10d. is too much
for a 60-mile journey. _ Now to try the method of assessing the charges by transferring the depreciation from the standing charges to the running costs. For my standing charges..per, annum I have tax, £58; garage rent, £26; insurance, £60; interest, £130; wages, £320; establishment costs £240;. total £834.
Before I deal with the running costs, I must refer to depreciation, and this might easily become a problem except for the fact that I feel that the only fair way to deal with it is to make the calculation on such lines as would previde for the purchase price to be written off in the same period. namely, 8 years. This is likely to be a problem because the vehicle would be.doing only 16,000 miles per annum and in 8 years will therefore cover only 128,000 miles. Even with a residual value of £420, it seems as. if 128,000 miles is not a long distance for a first-class coach to run. However, adhering to the 8-year period, I get 7d. per mile as the amount of depreciation.
Hourly Charge of 10s. 5d.
The running costs now become: petrol, 5d.; lubricants, id.; tyre, 1d; maintenance, 2d.; depreciation, 7d.; total, Is, 31d. If I add 25 per cent. for profit, taking an approximate figure of 311d., I gel is. 7d. as the charge per mile. The time figure is arrived at by dividing the standing charges per annum, £834, by 2.000 hrs., which gives me 8s. 4d.; if I add 25 per cent., that is 2s. Id., so that I get 10s. 5d. per hr. as the basis for the time charge.
Taking our two examples, I have for the 100-mile and 6-hr. journey, 100 miles at Is. 7d., 158s, 4d.; 6 hrs, at 10s. 5d., 62s. 6d. Total, 220s. 10d. For the 60-mile and 8-hr. journey I have for time, 8 hrs. at lOs. 5d., which is 83s. 4d. plus 60 miles at is. 7d. which is 95s. The total is I78s. 4d„ wha.h does show a reasonable diminution compared with the 100-mile price of 220s. lOd.