The Significance of Costing Terms
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The reason for the segregation of the expenditure incurred in the operation of a commercial vehicle is examined here, together with a definition of terms employed.
VHEN starting this analysis of costing principles last week the several purposes to which costing results could be put were stressed. Before the newcomer begins verate it is vitally important that he should have adequate wledge of the real cost of operation so that he can formu
charges on a sound basis.
Llternatively, established hauliers can compare the results i, are obtaining with those compiled from other sources,
unless the significance of the terms used in commercial icle costing and the reason for the segregation of expertire are fully appreciated, the results, however accurately iulated. could be misinterpreted.
.ast week it was stated that it had been found convenient
m compiling "The Commercial Motor Tables of Operating its" for over 50 years to segregate the total expenditure :ctly involved in the operation of a commercial vehicle into items of cost. Whilst this number of items is admittedly itrary it has proved satisfactory in practice over many years. vertheless, several of the items are inter-related and it is ,ortant that any changes in operating policy. including mainance procedure, should be viewed as a whole and not in ation. Otherwise the expected ,economies in any particular n of expenditure might be achieved but only at the expense. a similar or even greater increase in another related item cost.
-he 10 items of cost can be conveniently grouped into five ns of standing costs and a similar number of runtiing costs.
explained last week standing costs are those which are urred whether the vehicle operates or not, whilst running ts, as their name implies, are directly related to the mileage t, with a few minor exceptions.
fhe five items which comprise standing costs are licences, ges, rent and rates, insurance, and interest: the expenditure erred on the first two--licences and wages—was examined i week.
fhe third item—rent and rates-refers to the expenditure un-ed solely in garaging vehicles. This particular item of t can vary substantially between differing operators. corre
sponding to the wide range of transport facilities provided. Whilst the housing ot vehicles might, in practice, amount to no more than their standing on open ground or, at the other end of the scale, in a fully heated garage, some expense will nevertheless be incurred and should be accounted for accordingly.
Insurance, as an item of operating costs. refers solely to the amount paid as premium to provide cover for the actual vehicle. According to individual operators, particular practice and the premium paid may limit the policy to third party cover only or alternatively to full comprehensive cover. In addition to the substantial variation in the amounts thereby paid, there would also be differences due to their businesses being in either low or high risk areas.
VV HEN dealing with insurance as an item-of operating cost it is important not to confuse this item of expenditure with the cost of insuring goods in transit, premises, employees or other aspects of running a transport business or department.
There is admittedly a difference of opinion as to the inclusion of the fifth item of standing costs--interest on capital outlay —as a valid item of operating expenditure. In support of its inclusion it is contended that in a hypothetical case a newcomer might invest his modest savings in the purchase of a vehicle. Prior to that he would presumably be receiving some rate of__ -interest on his investment even though th:s might be relatively low, Therefore, if after commencing to operate his vehicle the difference between the expenditure and revenue is no more than the interest on the capital he was previously enjoy:ng. then it can be claimed that the operator has achieved no real benefit---oi profit-410m his initiative and industry in accepting both the risk and responsibility of setting up in business on his own, For this reason it is considered in order to include interest on the capital outlay involved in the purchase of a vehicle as a legitimate operating cost. For the purpose of compiling the current edition of The Commercial Motor Tables of Operating Costs," however, the rate of interest on such outlay is conservatively limited to five per cent.
Because standing costs continue to be incurred whether the vehicle is operated or not, the total for the five items is shown relative to a, period of time, which may be per year, per week, per day, per hour or any other factor convenient for a particular need.
In contrast, running costs are almost directly related to the distance run by the vehicle, and therefore are shown--in this country—as a cost per mile. The five items of running costs are fuel, lubricants. tyres. maintenance and depreciation.
Dealing first with fuel costs, these are obviously a major item in an operator's expenditure, so that an adequate and accurate fuel recording system (as recommended in this series recently) is essential if complete costings are to be kept. Such recordings must include not only fuel issued at the home base, but all quantites received at outside depots, agencies or garages. Because fuel is such a major item of expenditure it is proper that every endeavour should be made to ensure that records are kept as accurately as is possible. Nevertheless, as with some other items of operating costs, some compromise has to be accepted if clerical work is to be kept within reason.^..ble bounds. Because of the zoning system which applies in the marketing of fuel in this country there can be a variety of prices for fuel supplied and used by one vehicle in successive days or even on the same day. Furthermore, varying discounts are enjoyed by some operators as a result of purchasing their fuel in bulk. These discounts will themselves be dependent both on the quantities consumed, the size of the fleet and, ultimately, upon commercial negotiation. Similar factors determine the price of fuel purchased on the road from agencies.
With such a wide range and combination of variations in the possible price of fuel consumed by a vehicle over a comparatively short period it would obviously be inconvenient to attempt to record the precise amount paid for each and every vehicle. Nevertheless, it should be possible to devise some simple method of averaging prices over a given -period (say a month) for general application the following month, with adjustments each month should these be found necessary.
N contrast to fuel, lubricants are a: relatively small item of expenditure—but nevertheless need to be recorded. For the purpose of "The Tables" this item of expenditure is limited to the cost of replacing the normal engine oil consumption and, in addition, sump replenishment as and when this is necessary. Bearing in mind that this analysis is concerned with all expenditure which can be directly related to the operation of a commercial vehicle, the cost of grease, gear and axle oils should also be included in this item. But here again, although this would be theoretically correct, it would be impracticable to make such an analysis and, even if it were done it would add little or nothing to the overall accuracy of the total operating cost of the vehicle. In practice it is convenient to include the cost of grease, gear and axle oils and similar minor items as an overhead cost.
With the cost of tyre equipment on a commercial vehicle amounting to several hundred pounds according to type, it is obvious that the cost of tyres is an important item of running costs justifying, once again, an adequate recording system. At first sight it might seem possible to relate the tyre expenditure on a particular vehicle to the actual tyres fitted to the vehicle when originally supplied, together with any new tyres ' subsequently used to replace the original equipment.
As applied to fleet operation, as distinct from the costing of an owner-driver's sole vehicle, this approach to tyre costs is not a practical proposition because interchange of tyres between vehicles is common practice far a variety of reasons. so that track is soon lost of the original set of tyres fitted to any particular vehicle.
Moreover, when a driver returns to depot having already c44 fitted his spare tyre on the road to replac damaged tyre, it would be normal practice him to receive a replacement tyre before st ing his next journey. Where the size of I justified some stock of tyres, it would prolx be a matter of *chance in such a circumstal whether the driver received a new, partor retreaded tyre as a replacement. But actual cost could vary substantially, and if sc other method were not employed to record real cost of tyre usage appropriate to e vehicle some vehicles would inevitably be overcharged, alternatively, undercharged, on this account.
Whilst it is not possible to discuss in detail here the set; up of a tyre recording system the object of such a system she be to allocate to each vehicle the cost of the proportional us on each tyre.
OF all the 10 items of operating costs, "maintenance as a term--is probably the most flexible in its meaning different operators. Assuming that a new vehicle is purcha at the outset, then in a literal sense " maintenance " we imply that this vehicle was kept in a new condition in respects.• Such an attitude must remain an ideal rather ti a practical reality.
However, high the standard of maintenance, some ove deterioration must be tolerated. It is at this point that opc tors will have differing opinions as to just how ml deterioration can be tolerated before replacement is necessi Such differences may depend not only upon 'personal preferer but also on the type of traffic carried and its urgency.
For practical purposes therefore the term " maintenant in the context of operating costs should be considered to all expenditure incurred in keeping vehicles in a clean, cffici and roadworthy condition. It is considered as a running c because wear and tear is normally directly related to mile run. But because maintenance in this sense is a comt hensive term in which it is convenient to include washing ! servicing as well as major repairs, this item of cost is completely related to mileage run. Irrespective of a 1 average weekly mileage it would be common practice for majority of operators to arrange for their vehicles th be wasE and possibly serviced, weekly or at some similarly regt period. Consequently this proportion of maintenance cost mile would decrease as the mileage increased.
But however thorough this maintenance may be, the ti will eventually arrive when it is more economic to repl a vehicle than to continue to operate it. Obviously, pi provision must be made for such an occasion.
Depreciation can be calculated either on a mileage or a ti basis, or alternatively a combination of both. For the purp of "The Tables" the calculation is made on a straight mile; basis, with a nominal percentage increase when the aver; weekly mileage is exceptionally low. The range of estima mileage lives for the several vehicles is from 75,000 to 300,0
In order to obtain the balance to be written off as depreciat and divided by the appropriate estimated mileage so as obtain a depreciation cost per mile, the following calculat is necessary. Because the cost of tyres is dealt with a! separate item, the equivalent cost of the original set as fit to the vehicle when it was acquired is first deducted from cost price of the vehicle. From this latter amount a furt deduction is made in respect of the estimated residual va at the time of its disposal, assuming that the original opera does not intend to run the vehicle until it has no furt working life whatsoever. S.B