A New Angle on Costing
Page 16
Page 17
If you've noticed an error in this article please click here to report it so we can fix it.
IN my first lecture to members of A.R.O. (now the R.H.A.) I made a statement to the effect that there was no such thing as rate cutting, upon which I enlarged by pointing out that without an agreed rates schedule there could be no rate to cut. My remarks were received in stony silence and practically no discussion followed,
I now see that a prominent member of the furniture removals industry, Mr. F. W. H. Winwood, a. past president of the N.A.F.W.R. and member of the executive committee of the Association, has expressed the same view in a letter which appeared in the May issue of the Association's official organ.
Mr. Winwood wrote: " I maintain that there can be no such thing as rate cutting simply because there is no rate to cut." Mr. Winwood went on to relate an experience in which a member said that he, Mr. Winwood, was a disgrace to the Association because it appeared that a price he had quoted for a six-ton-load job was about half that quoted by the complaining member. "I believe I know my costs," said Mr. Winwobd, " and what I am after, and to my surprise I found that actual profit was over 30 per cent. Now, is this price cutting ?" The explanation was that my staff did each load in a day, whereas my critic had allowed two days. Also, his vans were of about 650-cubic-ft. capacity compared with mine of 1,000 cubic ft." Other features that can 'affect the issue. said Mr. Winwood, are that an operator whose van averages only four days a week on productive work can undertake a removal for £10 and lose money, whereas another, whose van averages six days, can do the same job for £8 and show a handsome surplus.
A Difficulty in Costing
In the April issue of the same journal, there was an article entitled, "Further Aspects of the Costing Problem," by Mr. F. D. Grimesley, of Whites Removals and Transport, Ltd., Birmingham. The article was, I understand, an abridged report of a lecture delivered by Mr. Grimesley to the local Graduate and Students Society of the Institute of Transport. Having studied it with considerable interest, I propose to review it and offer some slight .criticisms.
One sentence in it was particularly illuminating in that it summed up in a few words a difficulty which confronts those who attempt to apply orthodox accountancy methods on cost recording of road transport operations, to the specific purpose of assessing rates. After stating that he had for 14 years been making a close study of costing, he said he found himself a little wiser, but not nearer the solution of costing an individual transport operation. The problem is that of applying figures of cost records in such a way that the cost of a single operation can be taken out and used as a basis for charging.
Mr. Grimesley said that the textbook method of costing road-vehicle operation was to take the total expenses relevant to an individual vehicle, and to apportion them between two units of production, that is, part of the expenses will be divided by the total vehicle mileage to obtain the cost per mile, and part by the number of working days, to arrive at the cost per day.
The success or otherwise of any business is shown in the profit and loss account, and that business in which there is a healthy difference between the debit and credit sides is a paying one. Mr. Grimesley points out how small is the value of a profit and loss account as a guide to rating any job of haulage, particularly that of furniture removals.
AS an illustration he took the hypothetical case of the annual turnover being one job of removals, in which case the total annual expenditure would represent the exact cost of the job. If there were 10,000 separate removals then it cl 0 would seem just as easy to divide this number into the total annual expenditure. Mr. Grimesley's comment on this was that as each operation varied in respect of time, distance, possibility of return load, size and nature, and there was no correlation between these variable factors, this method could not be applied.
Dealing with standard charges, overheads and so on, and assuming in the first instance a fleet of 10 vehicles all of the same size and type, he drew up Schedule B, here reproduced. This emphasized the important effect on variation in the number of hours worked per week and the incidence of these figures on charges, on an assumption of a maximum of 10 hours per day per vehicle. Mr. Grimesley takes 100 hours to be the maximum possible day's work for the fleet as a rule. However, this figure may be as low as 50 hours per day. His Schedule B shows, as might be expected, that the incidence of fixed costs rises steadily as the number of working hours per week diminishes.
Some Helpful Criticism
A similar picture is presented in Schedule A, which gives the cost of labour per hour, on the assumption that 20 men are employed, a maximum inclusive total of 200 working hours per day again being taken.
It is when I come to Mr. Grimesley's "running costs" that I find the opportunity of offering mild criticisms, and of making a suggestion which might be helpful. As regards these figures, he states that: "Petrol, oil; tyres, maintenance and part of depreciation, are costs incurred only when the vehicle moves, and can be identified with individual machines. If we attempt to calculate the cost per mile for individual vehicles we may find that a 6-tonner, bought in 1939, and which has been carefully maintained, is costing less per mile than a 4-turner purchased in 1948, due to heavy depreciation and initial cost of the latter. Again, during an accounting year. one vehicle may have a particularly heavy maintenance charge which cannot be borne by the particular jobs carried out by that vehicle during the year."
My method of budgeting for running costs is to be preferred in any attempt to use actual costs as the basis for rating. It cuts round both difficulties which Mr. Grimesley mentioned, both in respect of depreciation and of maintenance.
As to depreciation, I maintain that as far as the problem of schedules and costs is concerned, when a schedule is intended to serve as a basis for rate assessing whether depreciation be assessed on a time basis, mileage basis, or on a combination of the two, the figure to use when calculating the amount to be debited as depreciation must be the correct cost of a new vehicle of the type and size of that which is in use.
Maintenance Costs and Rates Schedules
As regards maintenance, I have repeatedly stressed the difficulties which arise when an operator attempts to use figures for actual cost of maintenance when preparing •a schedule of rates. If he takes the figures for the first year of operation on a „new vehicle, his assessment will be too low, and if he takes the figures for a year during which a major overhaul has been carried out, they will be too high. If, however, he takes an average figure of what he assumes he will have to spend on the vehicle throughout its life, that will be satisfactory if applied for the purpose of assessing rates.
Curiously enough, Mr. Grimesley does refer to budgeting, but he views it in quite a different, but none the less interesting, light. His method of dealing with the everlasting problem of the return load and its effect on rates is worth consideration. Every transport concern, he said, has the problem of return loath with dead mileage and time cost. A vehicle travelling to central Wales has little opportunity of obtaining a return load, whilst one travelling from Birmingham to London is invariably loaded both ways. It may take 10 tons out and bring five tons back. Return loads, be said, present such a temptation to the small contractor who says: " I have covered my costs with the outward journey, and whatever I receive for a return load above the extra titne-cost involved, is profit."
if a fair and reasonable charge is to be made to all users of transport services, said Mr. Grimesley, there should be no return-load price." The return journey should be charged at the Same rate as theoutward one.
The percentage of return-load traffic must vary, he goes on, but over a period, the total of ton-miles carried and earning hours operated must bear some relation to the total running cost, so that an earning-cost per ton-mile can be arrived at irrespective of the direction of the traffic. In explanation of the foregoing, he takes two examples. The first considers the cost of journey A in which the Vehicle travels from Birmingham to South London with 10 tons and brings back a similar load on the return journey. Another vehicle, B, travels from Birmingham to Aberystwyth. again with 10 tons, but this machine returns empty.
At first it would appear•that the cost of carrying 10 tons according to example B, would, except for a certain amount of handling-time cost, be the same as for transporting 20 tons on journey A. This is substantially true, but when it comes to making charges and at the same time eliminating the tendency 10 quote . a cut rate for the return load. Mr. Grimesley is able to put forward a simple yet logical proposition which involves no rate cutting. •
His suggestion is that the extra handling-time costs be ignored. He estimates the total time cost for both journeys to be £30, running costs .£15, end the earning hours in connection with journey A, 20, and those in connection with journey H, 10.
The cos( per earninghour is, of course, the 'total time cost (flO) divided by the total number of earning hours
(30) which gives as the cost per earning-hour. The useful ton-miles completed on journey A are 2,400. In the case of journey B. it is 1,200 ton-miles. The cost per ton-mile is the total running cost (£15) divided by the total ton-miles (3,600), so that the cost per ton-mile is Id. To arrive at a separate cost for each journey, we find that journey A comes out at 20 hours at £1 per hour, plus 2,400 ton-miles at Id. per ton-mile, which gives a total of £30. Regarding journey B, there are 10 hours at LI per hour, plus 1.200 ton-miles at Id, per ton-mile, giving a total cost of £15. Number of Working Days-307
SCHEDULE B
0
£3,500 £3,600
r_
50 S.
4
cl,
7
s.
4 d.
8 55 4 2 4 3 60 3 10 3 11 65 3 6 3
7
70 3 3 3
4
75 3
3
1
80 2
to
2
11
85 2
2
9
90 2
6
2 7 95 2
• s
2 6 100 2 4 2
Clearly,therefore, each of the customers concerned in journey A, and the one in journey B, hiving 10 tons carried 120 miles, will pay the same, and all costs will be covered.
The foregoing is a simple example which introduces the basic principle Mr. Grimesley has in mind. He puts it in this way. Multiply the foregoing by 1,000 journeys and take the time total and running cost. From these figures it is possible to cost other journeys per ton-mile and per tonhour, and all expenses will be recovered, irrespective of. the quantity or the direction a the traffic.
He assumes, of course,that profit will be added to these costs at the correct percentage in order to arrive at a fair charge. By adherence to this method of costing, the temptation to offer a low price for a return load will be eliminated for the reason that the method of costing has been based on the assumption that there will be no rate cutting for return loads. If it be attempted. Wen the money so earned will not represent easy profit. On the contrary, the journey will show a loss.
If the same principle he applied to every size and type of machine owned by the operator, it wilt be possible to arrive, at charges in the same simple way for all vehicles. In discussing this difficulty of various sizes of vehicle, Mr. Grimesley said that it sometimes happened that the operator might have a load which is one ton heavier, or 100 Cubic ft. larger, than the capacity of the-vehicle. That is when estimating becomes -difficult.
It is obvious that to carry a 12-ton load in one vehicle is more economical than to carry it in two 6-tonners, but if the fleet be a mixed one it may be accessary to do this because the larger vehicles may be already chartered. The customer, however, could not be expected to meet-any extra charge on this account..
Having got so far, and havingmapped out a simple method of assessing costs and rates, Mr. Grimesley proceeds to blast the whole structure sky high! The factor concerned is that of turnover, and it is here, as 1 have said before, that the difficult subject of budgeting arises.
"No matter what costing system be .used," Mr. Grimesley points out, "the only cost figures available are for a period already passed. No contractor can calculate what his expenses will be until the end of an operating period, that is, on the previous year or month's operation. from these
£6,600 £6,700 £6,600 46,900 d.
,A*mmmMNNN,4,,
s. d. s. d.
4 4 5 4 6 11 4 0 4 1 7 3 9 3 9 4 3 5 3 5 1 3 2 3 2 19 2 11 3 0 8 2 9 2 10 6 2 7 2 8 5 2 5 2 6 3 2 4 2 4
Numb,,' of men-20
figures only, can a budget be made of the earning hours,
vehicle miles, and tonnages carried. It would need an astute person to estimate with accuracy future turnover The value of -a costing system, says Mr. Grimesley, is that it is a guide to the general efficiency of the fleet. It gives an indication as to the most economic vehicle life, and whether the maintenance system is working correctly.