Calculating • Costs for Workmen's Services
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Discussion at a Meeting of Coach Operators Reveals Extraordinary Ignorance. of the Principles of Costing and Assessing Charges THE conveyance of work people between their homes and their places of occupation has become an important part of the activities of coach owners. The demand also seems likely to increase as the drive for production grows. At a recent conference of coach operators, the subject for discussion was the charges to be made for services of this kind. In the course of the debate, some interesting, even startling, figures for cost of operation, were disclosed, and, as no objection was raised to my making these figures public,
I am taking this opportunity of doing so.
The operators present were concerned only with 26-seaters and 32-seaters. They were seriously apprehensive that if they continued to work at the rates in force, they would, in the long run, suffer serious loss.
That phrase, "in the long run," may need a little explanation, especially to those operators who are inclined to assess their charges in terms of immediate day-to-day costing, overlooking the need for provision for expensive overhauls and the replacement of rolling stock. To base charges on expenditure on wages, petrol, oil, tyres, garage rent, running repairs and maintenance is what I mean by taking the short view. In the long run, operators taking that attitude vvill find themselves short of funds when the bills for overhauls of chassis and bodywork fall due. They will find themselves in still greater trouble when they reach the stage of having to buy new vehicles. These fellows, moreover, take no account of establishment costs. The operators who called the meeting were al've to these matters and were aware that there were several amongst their number who were taking the short view. Instead, however., of accusing the latter of rate-cutting, thereby causing bad blood in the community, they adopted the wise procedure of calling a general meeting of all concerned to discuss costs and rates openly. I was invited to attend as an unbiased observer.
As usual, nobody had any specific data: there were no records from which cost of maintenance of any particular type of vehicle could be ascertained. One man brought a sheet of figures to the meeting, but it was unintelligible. As a matter of fact, I do not think the man himself understood them. , Cost of Overhauls After a great deal of argument, it was resolved to base the meeting's conclusions on the subject of cost of maintenance and repair on information given without reference to notes, by one operator. He was the owner of 12 32-seater coaches. Their average mileage was 500 per vehicle per week. His first statement was that he had three men engaged on chassis maintenance alone and their wages, with overtime, totalled £800 per annum. His annual expenditure on material, spares. renewals and chassis maintenance was £2,400. Engine overhauls were extra.
He always returned the engines to the manufacturer for reconditioning at an average cost per engine of £120. As this work was necessary in alternate years, the cost was £60 , per annum per engine, or £720 per annum for the fleet. Body repairs were costed separately, and the average expenditure on the overhaul of a coach body was £200. This, too, was necessary in alternate years, so that the cost was £100 per vehicle per annum, or £1,200 per annum for the fleet.
The total expenditure on this fleet of 12 vehicles was thus £5,120, made up of (1) chassis repairs, costing £800 for labour and £2,400 for materials; (2) engine overhauls, £720; and (3) body repairs, £1,200.
The annual mileage, reckoning, as was agreed, on a 48-hour working-week year, was 48 by 500 per coach, or 24,000, a grand total of 288,000 for the fleet. The maintenance cost was thus £5,120 for 288,000 miles, or 4.27d.
per mile. •
This figure astounded others besides myself, and, after considerable and occasionally heated discussion, a figure of 3id. per mile was agreed upon for 32-seaters and 3d. per mile for 26-seaters. Tyres came next. There was gt neral agreement on tyre cost. Apparently most of the vehicles, of both sizes, were equipped with 9.00 by 20 tyres. The average mileage per set was quoted as 20,000 for the 32-seaters and 24.000 for the 26-seaters. Taking a figure of £70 per set, that is equivalent to 0.84d and 0.70d. per mile respectively for tyre cost.
On petrol and oil, too, a similar unanimity prevailed. Seven m.p.g. for the 32-seaters and & m.p.g. for the 26-seaters were the accepted figures. For oil an average of 400 m.p.g. was taken. With petrol at Is. 8d per gallon and oil at 5s., the equivalent cost figures are 2.86d. per mile for the fuel cost of the 32-seater and 2.5d. per mile for the smaller coach. Oil cost works out at 0.15d. per ni;le for both.
As what I call routine maintenance—that is. washing, cleaning, greasing and oiling—was carried out by the drivers, there was clearly no extra debit against the vehicles on that account. " Depreciation" was all that was left of the running-cost items. Over that there was an argument, and, for once in P while, I found myself on the wrong side of the fence. I had to plead the cause of the customer, instead of, as usual, that of the operator.
First of all, I should mention that all the.vehicles were of the more expensive type. A basic figure of 200,000 miles of life was suggested, subject to a residual value (the selling price when that .mileage is completed) of 10 per cent. of the original cost.
Running Cost or Standing Charge ?
The usual query was raised as to whether depreciation should be a running cost or a standing charge, and running cost was chosen. Then one of those present objected that if depreciation were treated as a running cost there would be no allowance for obsolescence, a serious factor when annual mileages were low.
Noticing, I suppose, my half-smile, he hurriedly went on to say that he was thinking of the future, as all the vehicles with which we were concerning ourselves were upwards of 10 years old.
I suggested that my own method be adopted, assessing depreciation per mile on a rising scale as the annual mileage diminishes. "If, for example," I said, "a vehicle of the type we are considering covers not less than 48,000 miles per annum, the depreciation figure is the normal one. This basic fi cure, however, is increased by 5 per cent. for every 2,000'rniles per annum below 48,000."
Pressed to explain, I did so as follows, taking as an example a vehicle costing £2,220:—First, we deduct the residual value of £220, leaving LIMO as the amount on which depreciation is calculated. On a life of 200,000 miles, the basic figure for depreciation is 2.4d. per mile. That applies if the annual mileage be 48,000 or over. If it be less, say, 46,000 or between 46,000 and 47,000, we add 5 per cent, to the basic figure, i.e., 0.12d., to bring the depreciation charge to 2.52d. The extra 0.I2d. is on account of obsolescence.
In the case of the vehicles in the fleet of 12 32-seaters, covering 24,000 miles per annum, the addition will be !2 times 5 per cent., i.e., 60 per cent. The depreciation figure will thus be 2.4d., plus 1.44d., or 3.84d. per mile.
Trouble Over Depreciation
. It was when the calculation of depreciation was being made that my trouble began. The purchase price of the vehicles averaged £1,100 for the 26-seaters, and £1,500 for the 32-seaters. To-day's prices were reckoned at £2,000 and £2,400 respectively. It was proposed to assess depreciation on the basis of the cost of new vehicles.
Here I demurred. The operators were astonished, and pointed out that depreciation was really the provision of a fund to buy new vehicles. It should, on that account, he related to the expected cost of new vehicles.
I agreed, but stated that that was a general rule, to which their case was an exception. Depreciation calculated on that basis is fair when the expenditure on maintenance is reasonable. These machines were old; every one of them had run many thousands of miles over the allotted span of 200,000. There should be ample credit on account of depreciation to allow for the increased cost of new vehicles when they were bought. It was because they were old that so much had to be spent on their maintenance.
Eventually they agreed to use the old prices as a basis, and so, ignoring tyre cost but providing for 10 per cent. residual value, the basic depreciation figure was taken as 1.2d. for the 26-seaters and 1.62.1. for the 32-seaters.
There were various annual mileages to be considered14,400, 19,200, 24,000, and 28,000. The percentage additions to the basic depreciation figures are thus, for 14.400 miles, 90; for 19.200, 70; for 24,000, 60; and for 28,800, 50. The actual allowances for depreciation are:—
After some discussion, and bearing in mind the advantage of having an agreed charge to apply in all cases, it was decided that a standard figure should apply to each size of vehicle, namely, 2d. per mile for the 26-seaters and 2.1.d. pet mile for the 32-seaters.
About the standing charges (licences, wages, rent, insurance and interest) there was no discussion. They, and the running costs, are set out in Table I. About the establishment costs, however, there was much argument. Quite a number of those present took the view that the establishment costs were insignificant in amount. There were a few, however, who held the contrary and wiser view.. In the end I had to intetvene. I did so by producing my usual schedule of items (see Table II) and asking for some amount, however small, to be put to each. The list itself caused a stir, especially amongst the many who did not -believe in the existence of establishment costs. Eventually I persuaded twtyof those present—they seemed to be the only people who had real ideas 'cla the subject—to fill in the schedule with me. One operated a fleet of three vehicles, the other 12. The result is shown in Table II.
Following the procedure adopted in .respect of depreciation it was decided to apply an average figure, and £300 per annum was taken. This amount is included in Table I.
The outcome of these deliberations is thown in Table III. . A profit ratio of 20 per cent, was agreed, for in the majority of cases this was regular work, in which circumstance that margin was reasonable.' Rates per mile were not calculated, as the terms were usually on the basis of weekly hire.