An Operating Cost,
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ecords Quiz
Solving the Problems of the Carrier
IN this series of articles I am describing a conversation with a junior accountant who, when I met him, had just taken employment in the establishment of a haulier and .had been asked to overhaul th,e system of keeping check of the records of operating costs of the vehicles owned by his new employer.
Inall, there were 67 vehicles, comprising 43 IO-tonners, seven 12-tonners, five 15-tonners, 10 6-tonners and two 2-tonners. The total pay-load capacity of the fleet is seen to be 653 ton& I have, in the previous articles, described how, in this coaversation, we dealt with many of the points which presented difficulties to this newcomer to the industry. He bad been recommended by his new employer to take "The Commercial Motor " Tables of Operating Costs as a basis for his system of costing and a good de'al of our conversation has been devoted to explaining how that may be done.
The outcome is the form of analysis sheet which accompanies this article. Most of the reasons for setting out operating costs in this way have been discussed, but there were a few other matters which we touched upon but which I have not yet mentioned.
Some illuminating Facts by Comparing Costs Totals Continuing the conversation I said it would be interesting, at this stage, to compare the figures for total costs, revenue and profit as set down in the analysis sheet with those which would have aCcrued had we not made provision for estimated expenditure on tyres and maintenance.
" I am glad you thought of that," he said, "for I was going to suggest the same thing myself."
" For that purpose," I continued, "we shall need to add the amounts in columns 5, 10, 19. 20,.21, 23, 24, 25, omitting the amounts in columns 14 and 18. It would be sufficient if we do it for one week and I suggest we take the data relating to the week ended April 11."
We then proceeded to carry out this simple sum in addition and arrived at a total of £25 16s. 91d.
" That," I remarked, " compares with the figure of £35 12s. 61d. in column 26. Now we need to add the establishment costs-the amount of £3 ifs. 2d, in column 30-and we get £29 7s, 111d. as the total weekly expenditure, instead of £39 3s. 80., which is set down in column 31 of the analysis sheet.
" Subtracting this new total from the revenue of £44 8s. 3d. in column 32 the result is £15 Os. 31d apparent profit, as compared with £5 4s. qd. which is set down."
" That is a big difference," he interjected, " it is nearly £10 per week. Can it be as much as that? "
" Obviously," I replied, "for we have .£4 4s. 34. on
account of tyres and £6 9s. for maintenance, a total of £10 13s, 3d. (estimated), from which we can deduct only the 17s. 6d. (actual) total maintenance expenditure during that week.
" You see," I added, " how easily an operator with little knowledge of costs and no appreciation of the need for making provision for future expenditure on tyres or maintenance could go astray. With that figure for weekly profit for one vehicle before him he would most likely come to the conclusion that he had plenty of margin for a reduction of rates if competition made such a course seem desirable. Actually, of course, the real margin for profit of £5 4s. 61d. is by no means excessive."
" How does the operating cost per mile compare? " he asked. " I ,mean, taking this new figure that you have just obtained and comparing it with the 10.15d. for cost per mile which appears in column 27."
"We can easily find that out," I said. "We simply have to divide 125 16s. 91d. by the number of miles per week from column 2, that is 842."
The calculation was made and the figure of 7.36d. per mile obtained.
" Are there many operators who are likely to assess their costs in that way? he asked.
" Very many," I replied. " Indeed, I might say that most of them assess their _expenditure in that way. There are far too many who go farther astray in their calculations, because they even omit the allowance for depreciation.
" In that case, the total for vehicle operating costs is reduced by a further £6 ]Is. 2d. and becomes £19 6s. 71c1., as against £35 12s. 61d. Adding establishment costs.' to that you get, for the week's expenditure, only £22 16s. 91d., so that there is an apparent profit of £21 us. 51d.
" If the man imagines, as so many do, that his establishment costs are about £1 per week for that vehicle, then the error is even more stupendous. The profit, in such circumstances,, appears to be no less than £25 2s. 71d. per week."
When Available Figures Do Not Tell the Whole dtory " I3ut surely," he said, " an operator whose figures seemed to show all that profit per week would begin to have doubts and would check over his figures with a view to finding out if he had made some mistake? "
" It isn't very likely that he would do so," I. replied, "because his banking account, you must appreciate, would appear tcu corroborate the story told to him by his operating costs records."
" How could that he? " he queried. "Well," I said, "assuming that his accounts are paid fairly promptly he is banking approximately the amounts set down in column 32. His actual expenditure, in many weeks, does not include anything for tyres or for depreciation, but only a small amount for actual maintenance and probably only a proportion of his full establishment costs. If, therefore, he does not think deeply he will seem to have all the evidence to prove that he is making a profit of upwards of £20 per week from that one vehicle.
" It may be," I continued, "that I am putting the case at its worst. Nevertheless, something of the sort is always happening. Even where, here and there, a small operator does make some sort of provision for future expenditure on tyres and maintenance or repairs, he probably overlooks depreciation or underestimates it. Even the fact that he has made inadequate provision for these items is likely to lead the operator astray and tend to give him the impression that he is making excessive profits and can cut his rates. The mistake is not so great, so far as the amount is concerned, but the tendency to go wrong remains."
Making Provision for the Correction of Estimated Figures " Ahl " he said, " I appreciate better now why you were so insistent upon including these figures for estimated expenditure in the analysis sheet. But I have this difficulty in mind now. These figures which we have taken for the estimated cost of tyres and of maintenance may not be correct. In fact, it seems to me that they may be wide of the mark. Is it not possible to make provision against such a tendency? "
" Certainly," I said. " and I most emphatically suggest that you do, from time to time, make provision for correcting the estimated figures as your experience grows and as you collect more accurate data concerning your actual expenditure on these items."
" How then should I do it? " he asked.
• " Quite simply:" I answered. " In the case of tyres, for example, we have, in this analysis, provided for an expenditure at the rate of 1.2d. per mile. That was on the assumption that the life of a set of tyres was 25,000 miles. rt may be that, with care, you will get better results. The best time at which to deal with this matter is at the end of the first complete year of keeping your costs records.
" Suppose, then, that during that time the vehicle had covered 40,000 miles. Your estimated expenditure for that mileage, at 1.2d. per mile, would total £200 and that would appear at the bottom of column 14.
" Suppose, for the sake of argument, your actual expenditure on tyres during the year, as shown by the total of all the items in column 15, was £160 only. Then, for the next year, I would recommend you to use a new figure for your estimated expenditure on tyres per mile. That new figure will be the average of the actual and estimated cost during the first year. The average is £180 and, if you divide that by 40,000 for the mileage, you obtain a new figure of 1.08d. per mile, which you should use during the second year."
" You would recommend me to do the same again I suppose," he questioned, " at the end of the second year? "
" No," I replied. " At the end of the second year you should total the estimated cost for two years and the actual cost for two years and again split the difference between those amounts, the totals to date."
" And maintenance costs," he asked. " Do I deal with those in the same way as you recommend for tyre costs? "
" No, I would not," I replied. "It is much more necessary to be on the safe side in making provision for maintenance and I would not split the difference exactly, but would ' weight' the balance towards the bigger figure."
" I don't quite see what you mean," he said.
" Let us take an example then," I answered. " Assume, again, that during this first year the vehicle covers 40,000 miles. The total at the bottom of column 16 will thus be 40,000 times 1.84d., which is £306 13s. 4d.
" Now, suppose your actual expenditure, that is to say, the total at the end of the year at the bottom of column 19, is no more than £150. Just to make the calculation easy we will suppose that it is actually £156 13s. 4d.
Actual and Estimated Costs Used to Good Purpose " The difference between actual and estimated expenditure is thus £150. I suggest you should take two-thirds of that £150, that is £100, and add it to the actual expenditure, £156 13s. 4d. so that you will have £256 13s. 4d. as your estimate on what you are going to spend on maintenance during the second year. Now, if you, divide that by 40,000 you get I,54d. per mile as the amount to use as your estimated expenditure per mile on maintenance.
" In your particular case, however," I continued, " you can do better than that. The procedure I have just described is necessary when an operator has only one or two vehicles of any particular size. If he has upwards of six vehicles, all of the same size and doing the same wodiz, provided-and you must bear this particularly in mindthat they are not all new vehicles but are of differing ages, then you can .obtain a precise figure for estimated expenditure without taking this original figure into consideration at all."
"That is interesting," he butted in. "How do I do that? "
" Quite simply," I said, ' by totalling the tyre costs for all the vehicles of one size and taking out your average from that. Similarly, total the maintenance costs for all the vehicles of one size and take your average for estimated maintenance from that " You see," I continued, "if you have a considerable number of vehicles, all doing similar work and Carrying the same load, then you will have sufficient information, in the course of a year, to judge, with sufficient accuracy, what you will be likely to need to put by for expenditure on tyres or maintenance in respect of any vehicle."
" But why do you stress that point about the vehicles being of different ages?" he asked.
"For this reason," I replied, "which -I think should be obvious to you. Expenditure is much less during the first year of a vehicle's life than it is in later years. If your vehicles be all new,you would have an exceptionally low figure for maintenance and that would not be satisfactory to use as an estimate for future expenditure.
"On the other hand, if in this fleet of vehicles you had some machines six years old, some five years, some four years, and so on, then there would be sufficient data amongst the fleet to enable you to judge what the average cost was likely to be during the life of one ofthem."
" But surely that does not applSi to tyres? " he interrupted.
" To a certain extent it does," I replied. " You will find that expenditure on tyres tends to increase with the age of the vehicle, Is there anything else you would like to know?"
" There are one or two questions I would like to ask," he replied. " In the first place why is it necessary to go to the trouble of recording figures for mileage to date as shown in column 3? " "It is always useful," I answered, " to be able to ascertain from your records, at any time, the period of 'the useful life of the vehicle which has been consumed, so that you may have some idea as to what is left and how many miles it may still run before it is likely to need replacement. In addition, there are other uses for these (figures as I think we shall see."
Well, then," he said, "what is the point of keeping records of total fuel.consumption, as in column 6? "
" So that you can," I replied, "in conjunction with the information in column 3—that is the total mileage to date —arrive at the mileage per gallon to date in column 8."
" What is the good of that? " he queried.
",To enable you to compare the M.P.G. to date with the M.P.G. for the current week, as set down in column 7. If you compare the two you know at once whether the current consumption is higher or lower than the average throughout the life of the vehicle. In this case the current consumption is higher, the vehicle is running fewer miles to the gallon than its average, so that you may reasonably assume it to be in need of some attention M the maintenance shop, or that it is getting past its work. " In the same way," I continued, "the figures in columns 12 and 13 are comparable. In this case, however, they seem to contradict the conclusions we have drawn from the comparisons of the figures in columns 7 and 8, because:, the oil consumption has diminished, and the vehicle is covering more miles per gallon just now than it has been on an average throughout its life. There may be some special reason for that. For example, a leakage which cannot be stopped -without taking the engine down, or the oil now used may be of a different quality from that generally obtainable, or sonic such explanation. " The point is that both as regards the Consumption of fuel and oil it is useful to be able to make comparisons between up-to-date figures and those which have prevailed throughout the life of a vehicle. The data available from columns 27 and 29 are similarly comparable and for it* same reasons " S.T.R.