Allocating Overheads
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The Apportionment of Administrative Costs Incurred in Running Commercial Vehicles is Commented on Here Along with .Other
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Replies to Readers' Inquiries .
ANORTHERN reader states that he is responsible for operating a fleet of vehicles ranging from maximum-load eight-wheelers to 10-cwt. vans. He asks for advice on how establishment costs should be correctly allocated to the several iiehicles.
It should, perhaps, first be pointed out to those not familiar with the principles and practice of costing the operation of commercial vehicles that it is Usual to refer to operating costs as those items which can be directly attributed to the operation of specific vehicles It will be found, however, that, in addition, there are several other costs which could be said to be incurred in running a business as a whole, and which cannot be directly allocated to individual vehicles. According to the practice adopted by the operator concerned, this group of costs is alternatively referred to as overhead, establishment or administrative costs.
Both the amount and range of items included under the • heading of overhead costs will vary substantially according to the size of the undertaking and, in addition, to the type of work performed. As applied to medium or large organizations, it will usually be found that the wide range of items which can be included under this heading may number up to 50 or more. It will be found convenient to group them under such subheadings as management, office, garage and stores, warehouse, branch depots, sales and publicity, professional services and auxiliary fleet.
ONE of the advantages of itemizing overhead costs in this way is a reduction in the likelihood of small and occasional items of expenditure being overlooked when charges are being formulated. Many of these items, although small when accounted for separately, are accumulative and could, in total, detract substantially from the intended profit margin.
However, even when all the items have been included and a total arrived at for the period under review, there still remains the problem of apportioning these overhead costs as fairly as possible to the various vehicles in the fleet. It will be assumed, of course, that more than one vehicle is, in fact, involved, as otherwise no apportionment would be necessary.
In the sphere of public service vehicle operation occasions may arise when a substantial number of similar, or even identical, vehicles are operated under the same conditions within one fleet. In those circumstances a simple division of the total of overhead costs by the number of vehicles operated would suffice to provide a fair allocation.
But such a set of circumstances would seldom, if ever, apply to goods vehicles, even when operated by an ancillary user, and certainly not when operated by a professional haulier. In order to meet the requirements of both a wide variety of traffic and working conditions, mixed fleets of goods vehicles are the rule rather than the exception.
Where such mixed and varying conditions do apply, it is inevitable that, however impartial the approach to this subject may be, the apportionment of overhead costs must be, to some extent, arbitrary. Thus it could be contended that the many items which go to make up overhead costs are relatively static compared with operating costs. Alternatively, it could equally he claimed that the larger the amount of traffic carried, the greater will be the need for control and therefore, to some extent at least, the corresponding expenditure. But even this latter contention may not be strictly valid in certain circumstances. Thus it would seldom, if ever, be true to say that the B26
amount of control necessary for an eight wheeler with a 16 ton payload is 16 times that required for a 14on van. It might even be that within a particular fleet the amount, of documentation and overall control necessary for an eight'wheeler averaging,say, 800 miles per -week, could be less than for a much smaller vehicle averaging half that mileage on retail deliveries.
For the purpose of compiling "The Commercial Motor Tables of' Operating Costs" it is considered that a realistic compromise is achieved by apportioning overhead costs as a percentage of the total operating cost. For the purpose of the tables, the addition thus made to the overhead costs is
20 per cent. •
Applying this to the example just quoted, the total operating cost for a 1-ton van averaging 400 miles per week is shown in the current edition of the tables to be £22 Is., compared with £69 9s. for a 16-tonner. averaging 800 :miles per, week. It will thus be seen that the addition of overhead costs on a percentage basis is approximately in the ratio of I to 3, which is considered much more realistic than 1 to 16 on a tonnage basis.
If it were decided to apply this principle to individual circumstances, it would first be necessary to obtain the total operating costs of the entire fleet, and also the total overhead costs, in order to derive the actual percentage. Having obtained this last figure, it can then be applied to the operating costs of each vehicle. The total of these several overhead costs should then equal to actual expenditure on overheads, whilst at the same time achieving a reasonable apportionment.
When dealing with individual cases, as distinct from general averages as in the tables, it is possible to introduce refinements in connection with the apportionment of overhead costs so as to achieve a fairer allocation, whilst still retaining a reasonably simple system. If, for example, two or more quite distinctive types of work are undertaken within the same organization, such as parcels deliveries and long-distance haulage, it might be possible to treat these two activities as separate entities when allocating overhead costs.
AS from January 1 this year most users of oil-engined road • vehicles, as already announced, are no longer required to keep records, for Customs purposes, of the operation of such vehicles and of the fuel used in them. The regulations which gave effect to this change, together with certain consequential provisions, are contained in the Hydrocarbon Oils (Road Fuel) (General) Regulations. 1961, obtainable from H.M. Stationery Office, price 4d.
Some misunderstanding appears to have arisen, however, because persons authorized to use rebated oil, such as gas old or kerosene, upon repayment of rebate must still keep records. Until the introduction of these new regulations on January 1, road transport operators considered that they had a justifiable grievance in that, whilst it was they who had to pay tax on fuel oil (i.e., derv), it was also they who had to keep frustrating and, to them, useless records of mileage, fuel consumption and operation of their oil-engined vehicles. Conversely, those who did not pay tax were exempted from the necessity of keeping such records.
There is, however, a group of users who are only able to buy their fuel supplies, such as kerosene, rebated. (i.e.; on which no tax has been* paid). Should this fuel be subsequently used for a purpose for which tax has to be paid, in addition to the normal usage.for which it was presumably purchased and. on which no tax is payable, the user would continue to have to