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Budgeting for All Costs
Page 123
Page 124
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/WAS once called upon to give evidence to settle a dispute about costs of operation. I had said my piece and was awaiting the chairman's summing-up, and was astonished to hear that my evidence was not to be taken as having a bearing on the question at issue because " ' The Commercial Motor 'Tables of Operating Costs," it was said. were theoretical or calculated, and thus not necessarily applicable in a case wherein actual data were to form the basis of any judgment which the court might give.
I was enraged but could do nothing to rectify the matter: I had had my say and could not re-enter the box. I wanted to shout from the housetops that'the Tables were neither theoretical nor merely calculated; they were cost figures taken from all sources, painstakingly collected throughout the years and applied to each new edition at intervals of not more than two years.
A new edition of those Tables is now available and I take this present opportunity to emphasize that the figures are based on facts, not theory. Furthermore I would like to deal in advance with the queries which usually arise when a new edition appears.
First comes an inquiry about depreciation. always a controversial subject, although this first question is a little out of the ordinary run. A haulier asks: " I. find it a little difficult to understand how I should go about assessing the falling value of a vehicle spread over eight years of use."
Depreciation Period Now I am not sure that 1 quite understand the question,. especially when he talks "abOut spreading the depreciationover eight years: the type of vehicle he is considering does not normally last as long. except in unusual cases. His machine is of a type which I Usually depreciate dyer 160,000 miles.
Let me assume that the vehicle eost. io . the first place, £1,300. In order to get at the basic figure for assessment of depreciation, as it is done when checking over the figures to be used in the Tables, 1 first of all deduct the price of a set of tyres, which today would cost £150, leaving £1,150. Having done that, I make an estimate of what the owner would get for the vehicle after it .had run those 160,000 miles. I take it as approximating to £150. Deducting that amount from the £1,150 1 am left with £1.000, the net value of the machine—a figure to he used in calculating depreciation.
To get the basic figure for depreciation per mile, and I would like to stress the use of the word basic in this connection, I bring the £1,000 to pence and divide by 160.000 miles, which gives me 1.50d. per mile. If I did no more than that and the operator ran the vehicle no more than 20,000 miles per annum it would, according to that calculation. last for just eight years. That figure of 1.50d. per mile is the depreciation as assessed on a mileage basis. When, in this particular case for example, the vehicle has run its 160,000 miles, it will have worn out all its essential parts and be due for sale or used in part-exchange for a new one. If the operator had put away 1.50d. per mile and used it to build up a fund • from which he would be able to draw for the purchase of a new vehicle, he would have precisely enough to pay for the new vehicle and be able to pay cash for it with no need to use hire-purchase.
Obsolescence Factor
There is, however, another factor which must be taken into consideration and that is obsolescence. The importance of obsolescence differs according to the class of work, the type of vehicle, and other factors. An outstanding txample of the importance of that factor is in connection with coaches, especially those which arc used for tours and excursions.
A look around the stands at Earls Court will convince any who do not think obsolescence matters that they are wrong. On the other hand, there are some types of vehicle and conditions of use wherein obsolescence does not matter much. The country carrier, for example, is not greatly worried if his vehicle is out of date. In competitive businesses, however, the factor of obsolescence may be important.
The figures for costs as they are set out in the Tables are averages and the factor of obsolescence is provided for in this way. I allow the basic figure for depreciation per mile, calculated as above, to apply so long as the vehicle does not cover less than 24,000 miles per annum. If it does that mileage or more every year it is going to be out of use at the end of six years—if it runs as long as that.
If it does not run 24,000 miles per annum, then for every 1,000 miles less than 24,000 I add 5 per cent. to the above figure for basic depreciation Per mile. For example, if it covers only 16,000 miles per annum, that is 8,000 miles less than my standard figure. Then I must add eight times five, or 40 per cent., to the 1.50d., making it 2.10d. per mile. According to that, it will be written off in slightly more than 4+ years, which is a reasonable period for the type of vehicle I have in mind.
If it does only 12,000 miles per annum, which on the figures previously given would imply a life of about eight years—taking the basic figures for depreciation without any consideration for obsolescence—that is 12,000 miles under my standard. I must add, therefore, 60 per cent. of the basic figure. making it 2.4d. per mile.
The heavier type of vehicle, which is usually more substantially built, will cover a much bigger mileage before it is worn out. It should be noted that it is the wearing out aspect that I have in mind when calculating the basic figure for depreciation. In the case of such vehicles I take • 240,000 miles and sometimes as much as 320,000 miles as the expectation of life.
Taking an eight-wheeler costing £4,000, allowing £360 for a set of tyres and.£800 for what is called the residual value, I get a net figure of £2,840 as the basis for the calculation of depreciation. Calculated as before, I get a figure of 2.13d. per mile.
That basic figure applies only if the vehicle travels 48,000 miles per annum or more. If it runs less than that I add 5 per cent. for every 2,000 miles below the 48,000. For example, if it runs only 40,000 miles (8,000 miles below my standard) I must add four times five, or 20 per cent, to the basic figure, which gives me 2.55d. per mile. If it runs only 32,000 miles per annum, I add 40 per cent, and get 3d. per mile. If it runs only 24,000 miles, I add 60 per cent., making the depreciation figure up to nearly 31d. per mile.
This means that at 40,000 miles per annum the vehicle is allowed a life of about eight sears, at 32,000 miles a life of 10 years, and so on.
I must again stress that the above figures are averages
and as,sue.k. .to. challenge by reference to figures greater or tersA an c 'hverages.
An important factor in this consideration is the cost of maintenance. This increases more and more rapidly as the vehicle gets older, so that there comes a time at which it becomes cheaper to dispose of the vehicle and bu) a new one than to keep it in operation.
Coal jraffic in Bulk I can quote two examples to illustrate what I mean by this. Some years ago, I was investigating the cost of the haulage of cpal for industrial purposes,. as distinct from household or domestic consumption. The traffic was carried in loads of upwards of 5i tons each frothn the pits to the factories.
Among the many concerns tbe costs of which I investigated was one whichhabitually used and in fact, standardized on a comparatiyelY cheap class of vehicle. The annual mileage for each machine was round about .45,000, and e:ii:.was the _practice Of this concern regularly to dispose of the yehicles „after One yeae.s;service. On one ocaasion as an experiment, the operator extended that period from one y.-_,car. to 18 months..It—was discovered that. the increased cost of maintenance for the extra six months demonstrated beyond a shadow of doubt that it was uneconomical to keep_ the, vehicles so long and, after due consideration by the company of the costs of operation as assessed and
experienced under the two sets of conditions,. the previous practice was re-instituted.
In another case a haulier friend of mine was engaged in a dispute about rates and had produced figures in detail in order to prove his case. One of the parties on the other side, an ancillary operator, was using the same type of vehicle as was my friend on the same class of work.
He disputed my friend's figures for cost of maintenance which, he said, were too high On going into detail my friend found that the ancillary operator kept his vehicles for only four years whereas he kept his own machines in operation for five years. The difference in practice was pointed out and the ancillary user persuaded to accept the higher figure for maintenance.
Income Tax Method
Of course, the original inquirer may have had in mind . the method of depreciation as followed by the inspectors of income Tax. They calculate the depreciation On a percentage basis. The value of the vehicle is written down year by year, the percentage each year being reckoned on the depreciated value of the vehicle at the beginning of each financial period.
A suggestion has reached me that I should deal with maintenance and depreciation costs as "funds," that is to say, make -provision for a maintenance fund and a depreciation fund so as to have the money available for repairs and for new vehicles. In other words. the suggestion is that I should in that way indicate how to budget for future expenditure_ on those items.
Actually, the Tables are framed on that basis. They provide for what is called budgetary control. It should be appreciated that one of the main objects of thes,e. Tables was to make hauliers conscious of their real costs. -.Many hauliers still base their rates on what they can ,stee in the way of running costs, that is to say, for fuel and-wages and little else. That was one of the fundamental reasons why rate-cutting was so rife. They were unable to.4 visualize that, in the future, they would have to buy new tyres, to pay repair bills and, ultimately, buy new vehicles. The industry has, I am glad to state, travelled far since those days, if not perhaps far enough. The principal underlying purpose of the Tables remains unaltered. The figures in the Tables are definitely intended to be regarded as budgetary. They indicate what the operator may exect to have to spend on tyres, maintenance and repairs and to insist that if, in his accounts or in some other way, he does not make provision for such expenditure, and if he assesses his rates without that provision, he is going to lose money.