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FOR 'PROFIT
By S. Buckley
Assoc. Inst. T.
More About Depreciation
N discussing the etfect of depreciation on the cost of operating a commercial vehicle, two common misconceplions were noted. The first was that of under-rating, or uallv ignoring this item of cost completely, with the ortunate result of the misguided operator proceeding to le uneconomic rates to the detriment of both himself and local competitors.
a another category is the operator who is convinced that e the perfect formula has been evolved, the exact point xhich it is most economical to replace a vehicle can then letei mined. Academically such an objective may be praiseffiy, but because transport is basically a practical industry such finality could ever be achieved, however much it may desired.
here are several reasons for. this. As explained last week mechanical .condition of a vehicle may not be the sole on why it is considered a commercial proposition to aanee it. But even on this score alone, there must
be an estimate of probable life which in the final lysis is a personal opinion alone, however well informed. a the great majority of cases a commercial vehicle is puried and operated not only to provide a transport service, s:multaneously to maintain a standard of reliability adequate the traffic carried. For practical purposes. therefore, it °WS that few operators can risk running a vehicle until ; literally no longer usable. The inconvenience caused to concerned and the cost of obtaining a replacement vehicle he number of breakdowns increase will be out of all proion to whatever theoretical saving was thought would be lined by extracting a few extra miles from the life of original vehicle.
serve Allowance
a practice each operator, deliberately or otherwise, makes :serve allowance in the estimated mileage life of a vehicle )bviate just such disruptions of service which would other: occur. The more urgent the traffic carried the greater reserve allowance. For this reason the condition of a :icular vehicle may make it unsuitable for one type of Be but adequate for another, which, in fact, is the basis the extensive and continuing market for used vehicles. yen experienced transport engineers, however, may not ).e exactly as to the assessment of the condition of a vehicle for this reason opinion must vary as to the appropriate when it is considered necessary to replace the vehicle. In ct, whilst the problem of vehicle replacement is one that to be met at relatively long intervals, say five years or V, a similar problem—though in a lesser degree—has to be dyed daily in many transport garages. This arises when ;ibly several man-hours are necessary to replace an assembly ch itself consists of several parts in varying degrees of r. Here again it is largely a matter of personal opinion Lo just how many, and at what stage, these several parts themselves replaced. The increasing use of complete acement units is, in fact, another solution to the same blem.
1 essence, therefore, adequate allowance must be made for cost of depreciation (and with it obsolescence where applicable) but with a recognition that there is a practical limit to the standard of accuracy which can be achieved in such estimates. For this reason a relatively simple calculation is both appropriate and desirable.
Consideration will now be given to four alternative methods of calculating depreciation—namely, on the basis of time, mileage, time and mileage, and the fourth method making some allowance for obsolescence. These methods will now be applied to calculating the depreciation costs of a 7-ton goods vehicle fitted with an oil engine.
Applied to a 7-ton Diesel
Assuming that this 7-tonner, fitted with standard platform body, has an average cost of £1,383, some deductions will first be necessary from this amount before arriving at the amount to be written off as depreciation. included in the 10 items of operating costs is that of tyre costs. As these are accounted for separately the equivalent amount of the original set of tyres is deducted from the original cost of the vehicle. It will also be assumed that in the majority' of the cases where the type of work to be undertaken justifies the purchase and operation of a new vehicle, it would be irrational at the same time to assume that the original operator would continue to run the vehicle to virtual destruction. For that reason a nominal residual value is allowed—namely, 10 per cent of the initial cost of the vehicle. This amount is also deducted from the original cost of the vehicle, which in this case leaves a final balance of £1,054.
As the extent of usage of a vehicle will naturally vary between operators, five alternatives on this score will be allowed for in this example—average mileages per week of 200, 400, 600, 800 and 1,000. Expressed as yearly mileages on the basis of a 50-week year, the corresponding figures would be 10,000, 20,000, 30,000, 40,000 and 50,000. Because depreciation on a time basis is also to be considered, the appropriate amount of usage in terms of mileage over a five-year period is also recorded, i.e. 50,000 miles, 100,000 miles, 150,000 miles, 200,000 miles and 250,000 miles.
Dealing with the first of the four alternative methods of calculating depreciation; where a mileage basis is used a mileage life of 150,000 will be assumed, appropriate to this class of vehicle. The division of this figure into the balance of £1,054 gives a depreciation cost per mile of 1-69d. When the average weekly mileage is 600 this assessment would result in the vehicle being replaced every five years. Where no element of obsolescence applied and the yardstick of 150,000 miles was still adhered to, then the vehicle would be operated for a long period of time when the mileage was low and exchanged more frequently when the average weekly mileage exceeded 600. Thus, if the vehicle was working a double shift and so averaging 1,200 miles a week, it would be replaced in two and a half years under this method.
For the purpose of calculating depreciation on a straight time basis, a vehicle life of five years will be accepted. With no adjustments for exceptional circumstances a vehicle averaging 200 miles a week would have clocked LID only 50,000 miles in the five years, with a correspondingly high depreciation cost of 5-06d. per mile where a five-year life was still
applied. At 400 miles a week it would be reduced to 2.53d. and at 600 miles a week to 1.69d., or the same cost derived on a mileage basis. This is because the two chosen yardsticks —150,000 miles and five years respectively—happened to coincide at the equivalent of 600 miles a week.
Where a higher mileage a week applied the depreciation cost would be reduced to I-26d. per mile at 800 miles a week and 1.01d. per mile at 1,000 miles a week. Incidentally, if no other adjustments were made and a five-year replacement policy was adhered to, then 250,000 miles would have been run by the vehicle during that period when averaging 1,000 miles a week.
Time and Mileage Basis In some types of work operators may consider that a combination of both time and mileage would provide the most equitable basis for calculating depreciation. In effect, half the balance to be written off would be calculated accordingly in each case, but there would still remain the need to select whatever yardsticks were appropriate. Assuming that the two yardsticks already chosen (150,000 miles and five years) still applied, the following costs would result. At 200 miles a week the depreciation cost per mile would be 3-37d., at 400 miles 4-22d., at 600 miles a week once again 1.69d., whilst at 800 miles and 1,000 a week the cost would be 1.42d. and I-35d. respectively.
It will be seen that by the third method the depreciation cost per mile tends to decrease as the average weekly mileage increases, i.e. from 3-37d. to I.35d. This is a smaller variation, however, than the results obtained by the second method (time only) when the depreciation costs per mite decrease over the same range of weekly mileages from 5.06d.
to 1.01d. • Commenting on the results so far obtained, examples can be quoted in the two extremes of weekly mileage, i.e. either unusually low or high, where one or other of the methods so far used seem inappropriate. Thus, where the method adopted is on a mileage basis and the average weekly mileage is low, e.g. 200, then the yearly mileage would be only 10,000. If the chosen vehicle life of 150.000 miles nevertheless applied, then this would mean a vehicle life of 15 years.
Whilst therr could be occasions where such a vehicle life span was a practical possibility these would tend to be the exception. An example of such an exception would he a small haulier serving a rural community where economy rather than speed of service and attractiveness of vehicles was the main asset. Another exception applicable to a larger fleet would occur when a former general purpose vehicle was
" demoted " to sundry duties, e.g. collection of small lots ft transhipment to trunk vehicles.
At the other end of the scale, however, the mileage methoi would still be appropriate. If the yardstick of 150,000 mil as the vehicle life was correct, then it would be immateri how soon, because of high weekly• mileages, that total 150,000 was reached.
That would not be the case where a five-year life was ti chosen yardstick. Where average weekly mileages of 800 • 1,000 apply, 200,000 and 250,000 miles would have be clocked during that period, a one-third and two-thirds exce respectively on the estimated mileage life.
On balance, therefore, it is considered that depreciation cz culated on •a mileage basis is more generally applicable a wide range of vehicles such as are included in "The Tablet in the compilation of average operating costs.
Nevertheless it is recognized that when average week mileages are unusually low the depreciation costs per m derived purely on a mileage basis could be unrealistic. B in making allowance for this contingency it is equally impe tant not to introduce an undue complication whilst endeavot ing to achieve an appropriate adjustment.
Adjustment for Low Mileage Accordingly, for the purpose of The Commercial Mot Tables of Operating Costs and this series of article, depreci
tion is first calculated on a straight mileage basis. The where the weekly mileage is low; a percentage addition is ma to this basic cost of depreciation. In this particular examp where the lowest average weekly mileage is 200, an additii of 25 per cent is made to the basic cost of 1.69d. a mile, giving an increased cost of 2.11d. a mile for that particul average weekly mileage.
Appropriate to the size of this particular vehicle, a 7-tonni it is not considered appropriate to make calculations for lower average weekly mileage. When dealing with sm delivery vans a weekly mileage of 100 could apply. In tF event the standard cost of depreciation would apply at 4 miles a week with a 25 per cent increase at 200 miles a wet as before, and a 50 per cent increase at 100 miles a week.
As stated earlier, any attempt to estimate average operati costs must be, to some extent, arbitrary, but from to experience in compiling "The Tables "—over 50 years—tl fourth method of calculating the cost of depreciation, i.e. a straight mileage basis with appropriate percentage increal when average mileages are low, has proved both equital and practicable.