Curbing Running Expenses
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IDISCUSSED last week the standing costs of commercial vehicles and pointed out that a background of practical experience was necessary if a sense of proportion was to be maintained. Whilst accuracy is obviously always desirable, the underlying principles on which records are based should not be allowed to become too academic, otherwise the casting system as a whole will become too involved for the purposes it has to serve.
It has three objects. One is to provide a yardstick by which day-to-day efficiency can be checked. Second, over a longer period it enables the profitability of the undertaking as a whole to be ascertained. Equally important is the third purpose, of providing a basis for calculating charges. In the interests of simplicity, a single system should serve all three ends.
The five items of standing costs—licences, wages, rent and rates, insurance and invest—were enumerated last week. All these costs are incurred, and continue to be incurred, the moment the vehicle is acquired and have to be met whether it is operated or not.
Running costs similarly fall under five headings. These are fuel, lubricants, tyres, maintenance and depreciation. As the name implies, these expenses have to be met only when the vehicle is operated and, with minor exceptions, vary directly in relation to the mileage run. This is in contrast to standing costs, which are calculated on a basis of annual, weekly or hourly costs.
As with other operating costs, fleet users will probably have to adopt an arbitrary average in respect of fuel costs. This is because of the surprising number of differences in the cost per gallon which can arise through vehicles picking up supplies in the several zones to which varying prices apply. Superimposed on these variations are the bulk gallonage and fleet discounts, which may also differ according to the picking-up points.
Must be Accurate
Each operator would have to determine his own average price from which to calculate the fuel cost per mile, dependent upon his particular fuel consumption. Because fuel is such a major item of total operating cost, it is necessary that this calculation should be made as accurately as possible.
The term " lubricants " in connection with operating costs is intended to refer only to engine-oil consumption and sump replenishment. In the interests of simplicity most fleet users will probably find it more convenient to include the cost of greasing, gear and axle oils under the general heading of overhead expenses, rather than endeavour to segregate these small costs to individual vehicles.
For the purpose of calculating tyre costs in connection with " The Commercial Motor' Tables of Operating Costs," the total outlay on a set of tyres does not include the cost of the spare. This is because otherwise an artificially inflated impression of tyre mileage would be obtained, and, in any event, it is B26 now common practice to remove the spare wheel and cover from a new vehicle and place them into stock. The total cost of the outlay on a set of tyres should, however, include not only the cost of the covers but also tubes and flaps.
In trying to arrive at a fair estimate of tyre mileage life, due recognition should be given to unfortunate experiences which most fleet users will undoubtedly have, as a result of which a comparatively new tyre will have to be written off through accidental or abnormal damage. Thus, for example, if from a set of four tyres a mileage life of 30,000 was reasonably expected, and then because of premature failure one had to be written off at 5,000 miles, the average for the set would be immediately reduced to 26,000 miles or thereabouts. Whilst such occurrences may be exceptional, they can substantially reduce the fleet average.
As with other terms used in commercial-vehicle costing, the definition of maintenance" should be clearly understood. It is here intended to include all work necessary to ensure that the fleet is not only efficiently maintained by engineering standards, but is regularly cleaned, and the paintwork and body receive attention to retain the advertising value of the vehicle.
Whilst the cost of maintenance as a whole is included under the heading of "running costs," it may be necessary to adjust the cost per mile for this particular item when exceptionally low mileages per week are averaged. This is because, although the chassis and body generally would tend to wear in relation to the mileage run, some of the minor duties, such as _washing and greasing, may be carried out weekly, or at some other regular period, irrespective of mileage.
Costing methods must be periodically adjusted to meet changes in manufacturing and operational standards. This applies particularly to maintenance, and to the closely related item of depreciation. Resulting from the ever-increasing range of vehicles available in the quantity-produced class, together with a shortage of skilled fitters, there has been a greater tendency to replace vehicles more frequently.
Probably the most common example is in the provision of staff cars, which many users now find it economic to replace yearly. As a result, maintenance is reduced, in practice, to little more than washing and servicing. The absence of any expense for major repairs that would normally occur later tends to offset the higher charge for depreciation which has to be met when a fleet is constantly maintained in almost new condition. For the purpose of calculating depreciation, it is first necessary to deduct the cost of the original set of tyres from the total price of the vehicle. This is because tyre costs are dealt with as a separate item; otherwise there would have been duplication in recording this expense. It will also be necessary to estimate a residual value for the vehicle when it is ultimately sold. it is assumed, incidentally, that the average user of a commercial vehicle is under an obligation to provide a reasonable standard of service to his customers, which implies that it would be impracticable to continue to operate a vehicle to a point of breakdown, and hence the further assumption that there will, in fact, be a residual value.
Having deducted the cost of the set of tyres and the residual value from the initial price of the vehicle, depreciation is calculated on a mileage basis by a division of this sum by whatever is considered to be a reasonable estimated mileage life. Several factors can affect the expected life. A major one would obviously be the class of vehicle, which could result in a variation in life ranging from 150,000 to 300,000 miles or even more. The geographical operating conditions, as well as the particular traffic carried, are other influences.
Whilst not directly affecting the condition of a vehicle, another factor which would have to be allowed for is the margin of reliability required for any particular traffic. For example, an operator delivering perishable traffic, such as fish or vegetables, to market, must allow a substantially higher margin than one engaged in short-distance delivery of sand and gravel.
Justified Replacement Where advertising value is particularly important, the user may replace the vehicle sooner than is economically justified by engineering standards. Obsolescence is also of special signi-ficance to passenger-vehicle operators, especially when engaged on coach tours and private-hire work.
Having thus obtained both the standing and running costs, the total operating costs are calculated by the addition of the two. As, however, standing costs are calculated on time and running costs on mileage, it may be necessary to express total operating costs in either of these elements, or as a combination of both.
Dealing first with the total operating cost shown as a cost per mile, this item tends to decrease as the average weekly mileage increases. Thus, in "The Tables," the total operating cost per mile for a 10-cwt. petrol-engined van is shown as
17.19d. where the weekly average is 200 miles. This cost is reduced to less than half-8.28d.—when the weekly average mileage is increased to 600. This is because, as the mileage increases, the proportion of standing costs per mile decreases in direct relation to the mileage. As, however, the running cost per mile, except for small variations, remains constant, irrespective of the mileage operated, the variation in the total operating cost per mile falls approximately midway between the two.
Specify Maximum
Where vehicles are hired by the day or the week, a customer may prefer a quotation which is Similarly framed. It is imperative, in the operator's own interest, to insist that some arrangement is made as to the maximum mileage it is considered reasonable to operate within a given period, and to be in agreement as to the extra charge for additional mileage. Continuing the example of the 10-cwt. petrol-engined van, the total operating cost per week when 200 miles per week were averaged would be £14 7s., but at double this mileage the total cost would be £17 8s.—not £28 14s. At 600 miles per week the total operating cost would be £20 14s.
So far, the costs have related directly to individual vehicles. There are, in addition, many overhead or administrative costs which cannot be allocated in this way, and must be totalled as a separate item, and then divided in whatever proportion is considered appropriate to the individual vehicles of the fleet. In general, these expenses could be said to be incurred in the running of the undertaking as a 'whole, as distinct from individual vehicles.
There are varied opinions as to how overhead costs should be allocated. Where the sizes of vehicle differ, it would not be fair to divide the total cost merely by the total number of vehicles in the fleet. Some allowance must also be made for the individual mileage operated by the several vehicles, because it would be reasonable to assume that the greater the mileage, the more the traffic control required.
A further variation could result from differing types oil traffic. Thus, the documentation needed for the collection and delivery , of 2 tons of parcels or smalls, could well involve far more clerical work than a 16-ton load conveyed on trunk work. Eachoperator has to devise his own method of allocating overhead _ costs to meet his needs. For the purpose of a general apportionment, 20 per cent. is added to the basic operating costs to cover overhead expenses in " ' The Commercial Motor' Tables of Operating Costs." S.B.