The Interrelation of Costs
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AN adequate costing system is a basic essential to the economic operation of a fleet of commercial vehicles. The use to which such a system may be put, however, can vary according to the type of operation and individual circumstances. An established haulier, for example, would be able to draw from his experienceS of past operations to make useful comparisons with current expenditure. Alternatively, results obtained from both past and present castings would provide sound material on which to base quotations for future contracts.
Where previous records are not available it will still be necessary to estimate as accurately as possible what the cost of future operation is likely to be. Subsequently. when sufficient experience has been obtained, such estimates can be adjusted as required. Btit whether costings are being formulated by an established haulier or a newcomer to the industry, it will always he necessary to keep clearly in mind this fundamental division between past. present and future records. Whilst the established operator will obviously have the advantage of ..having past experience on which to draw, there is nevertheless no finality in commercial vehicle costing. Even the experienced operator will, from time to time, find it necessary to readjust his previous estimates, albeit to a lesser degree than a newcomer. .
Because of this process of continual adjustment, necessitated by many factors such as changes in types of operation and vehicles, it is obviously necessary to insist that any system of costing installed should be flexible. Not only can changes result from variation in operational conditions, but the division of expenditure can be substantially affected by changes in overall policy. Particularly does this apply to any decision reached as to a replacement policy and the two closely related items of cost, namely maintenance and depreciation,
UNFORTUNATELY, in some instances, this aspect of 1,--) costing can be unnecessarily complicated and confused by the introduction of additional interest charges and payments relative to hire purchase and other forms of credit finance . facilities. Even where a comprehensive and accurate costing system is maintained, the mistake is sometimes made of including hire purchase costs along with interest charges on what would normally have been the capital expenditure.
Such a mistake, however, would be far less disastrous to profitable operation than the more common error which can result from the acquisition of commercial vehicles by hire purchase. This occurs when a newcomer to commercial vehicle operation, with little knowledge of costing, starts up in business with a new vehicle bought on hire purchase. His only immediate operational expenditure for the time being would then be fuel and wages, assuming he were not self-employed.
Other 'terns of ultimate expenditure, namely repairs, tyre replacement and (most important of all) vehicle replacement may well be overlooked. In many instances it could be that the total weekly amount that should have been paid into a sinking fund in respect of these various items would be similar in amount to the hire purchase repayments. At the outset. therefore, the newcomer may consider that he is operating efficiently only to be disillusioned when substantial expenditure becomes necessary in both repairs and replacements.
Changes in the range and availability of commercial vehicles
can also have repercussions on ultimate costing systems. For example, the increasing size of goods vehicles now available in the quantity produced range makes it 'possible for some operators to consider a policy of more frequent replacement than was previously considered economic for this type of vehicle. If such a policy were adopted, it may well be found that although the cost of depreciation increased, this was more than offset by a reduction in maintenance expenditure. This could happen because the overall term of "maintenance" when used in commercial vehicle costing implies washing, servicing and both minor and major repairs. In this instance few. minor and probably no major repairs would, in fact, be necessary. More difficult to assess, but nevertheless of real value when a policy of frequent replacement is shrewdly operated, would be the additional revenue accruing from the greater availability.
It is therefore particularly important when dealing with commercial vehicle costing, and the item of depreciation in particular, to keep in perspective the ultimate purpose of the costing system, namely the overall profitability of the fleet. Though records must be kept as accurately as possible, a sense of balance should be maintained when determining whether the extra work caused by endeavouring to achieve higher standards of accuracy is really justified. particularly when an element of estimation is in any case inevitable.
nEPRECIATION is calculated on .a mileage basis for the purpose of costings made in this series of articles or in The Commercial Motor Tables of Operating Costs. This policy is adopted because it is considered the simplest and generally more appropriate to commercial vehicle operation. In contrast to private motoring, in which convenience is often the major factor, commercial vehicles are largely acquired either for ensuring economic distribution of a company's products or as a source of profitability when forming the fleet of a professional operator. Again in contrast to the use of private cars, there is an economic incentive to employ commercial vehicles to the maximum. As a result. the mileage run over a stated period would normally give a fair indication of the actual depreciation which has occurred during that time.
Whilst adopting mileage as a basis for depreciation, it is recognized that some operators prefer to calculate this item of expenditure on a time basis. Although probably more discussion takes place on this difference in the method of calculating depreciation than on any other of the remaining nine items of operating costs, the two approaches are not so diametrically opposed as is generally assumed.
TN addition to the fundamental division as between past. I present and future costs. there is also the division between costs incurred only when the vehicle is actually operating or, alternatively, throughout its life whether operating or standing. For convenience, these are briefly termed standing and running costs. As the term implies, running costs only occur when a vehicle is on the move and, except for minor variations, are directly related to the mileage run. Standing costs, however, are a slight misnomer in that they occur throughout the life of the vehicle, and not only when the. vehicle is standing.
The five items of standing costs are licences, wages, rent and rates, insurance and interest on capital outlay. It will be 547 readily understood that these items are payable periodically (for example weekly, quarterly or yearly). It is convenient, therefore, to express them as a total per annum, per week or per hour. Where depreciation is reckoned on a time basis this item would then be added to the other standing costs and averaged out in the same way over the appropriate period.
In practice, and particularly with established hauliers, it will often be found that the total operating cost per mile, obtained as a result of the addition of standing and running costs, is similar whichever method of calculating depreciation is employed. This is because the weekly or yearly mileage which an established operator obtains from his vehicles is remarkably consistent, unless there were a major changesuch as the introduction of double shift working in place of single shift
operation. . . An operator who decides to calculate depreciation on a time basis—say over seven years—would be already aware that the particular vehicle he had in mind had averaged possibly 40,000 miles a year for the past few years, and was likely to continue to do so. It would, therefore, be immaterial to distinguish whether such a vehicle was being depreciated on the basis of seven years or 280,000 miles.
IT is agreed, however, that this contention as to the similarity of results. whichever system of calculating depreciation is employed, does not apply where abnormal conditions exist. These could include circumstances where only a very small mileage was run during the year. This could occur, for example, when operating mechanical horses on factory or internal transport, or with specialized types of vehicles, such as those used spasmodically in civil engineering work. In passenger operation similar circumstances could arise when coaches were licensed only for the summer season.
Whilst it is agreed that in these circumstances special attention has to be given to the assessment of depreciation costs, it is equally important at the same time to take particular care that the whole of the standing costs are met by the ultimate charges despite the limited use of the vehicle. This would inevitably imply a higher proportion of standing costs in the total operating costs than would normally be the case.
For this reason, when compiling The Commercial Motor Tables of Operating Costs, it is appreciated that calculation of costs or charges on the basis of either a cost per mile or a cost per week may not always be applicable. The same basic costs are, therefore, shown in the alternative form of a cost per hour plus a cost per mile. This is of particular advantage when the amount of standing time is high relative to the mileage run; alternatively, where there is no indication of the amount of standing time likely to be incurred in a new contract, the prospective operator can safeguard himself by quoting on a time plus mileage basis. To quote only on a mileage basis in such circumstances would result in the operator being liable, directly or indirectly, for the expense of excessive standing time. Alternatively, when quoting for work of which he had no previous experience, it would be imprudent to give a cost per hour or per day without a proviso as to the mileage run, or at least the charge to be made for excess mileage.
WHEN the average weekly or yearly mileage is exceptionally low some allowance will then almost certainly have to be made in respect of obsolescence, regardless of whether depreciation has been calculated on a mileage or time basis. Earlier it was stated that a sense of perspective must always be kept when dealing with commercial vehicle costing. Too academic insistence on the definition of terms used, for example, can only lead to confusion. Theoretically, it might be argued that if maintenance is what it is intended to be, namely to maintain the vehicle in its original condition, then depreciation must be a contradiction of this aim.
Except for very large organizations which are virtually in a position to rebuild a vehicle to the manufacturer's initial standard, the term depreciation is accepted in a more practical sense. It indicates the gradual decline in the condition of the vehicle for the purpose for which it was originally acquired.
TWO implications are inherent here. For the purpose of practical commercial operation, as applied to costing, it is generally assumed that for most types of operation a commercial vehicle will not he purchased as new and then run to ultimate destruction, so that in the majority of cases there would be a residual value. The reason for this general assumption is that most operators are under an obligation to provide a standard of reliable service which necessitates replacement of vehicle before such a stage is reached.
It follows, therefore, that the term depreciation as applied to commercial vehicle costing is relative to the circumstances of each user. It cannot necessarily be assumed that because a vehicle may be disposed of by the first owner, and then operated for a substantial mileage by the second user, that the original owner made a wrong assessment as to its mechanical condition. The urgency of the traffic handled by the first user may well have been the overriding factor which determined that the vehicle should be replaced at that stage. S.B.