the costing column
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Fairly but simply
• In previous weeks examples have been given of the expenditure which an operator can incur is overhead costs. But when all the items have been accounted for and duly totalled for the period under review, what then?
Obviously all quotations—and subsequent accounts for work done—must include both the operating cost of the vehicle(s) and the appropriate amount of overhead costs (and profit margin when operating for hire or reward) if the whole exercise is to be viable.
Determining the appropriate amount of overhead costs to charge to a particular vehicle for costing purposes is a contradiction in terms; by definition overhead costs are items of expenditure which cannot be attributed to specific vehicles.
Nevertheless, the practical need to do this must override theory, while recognizing that any allocation of overhead costs to vehicles must inevitably involve some arbitrary decisions. So there is no one "correct" system of allocating overhead costs appropriate for all occasions.
The simplest method is a straight line division of total overhead costs by the number of vehicles. This will suffice where an operator has only one type and size of vehicle in his fleet all engaged on a similar type of work.
There are, however, many more operators where these simple operating conditions do not apply. Other methods then have to be adopted.
For example the type of traffic may be similar throughout the fleet but the vehicle carrying capacity may vary. Then the payloads of the vehicles could prove an effective and still relatively simple yardstick.
A division of the total overhead costs by the total fleet payload will give the overhead cost per unit of payload. Relating this to the actual payloads of specific vehicles would then give the appropriate amount of overhead costs chargeable to that vehicle.
However, in both these two methods no allowance has been made for the effect which vehicle mileage could have on overhead costs. When the average mileage is similar for each vehicle in the fleet then there is no point in complicating the allocation of overhead costs by the addition of the mileage factor.
When both payload capacity and mileage vary then a still relatively simple method of allocating overhead costs to specific vehicles can still be adopted. This is to apply the percentage figure obtained by comparing the total operating costs • and the total overhead costs for the whole fleet to the operating costs of each vehicle and so obtain the appropriate amount of overhead costs for that vehicle.
By so doing some account is taken of the effect of both payload and mileage as both, in turn, affect the amount of operating costs incurred.