Costing—right or wrong
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Despite all the changes forecast for road transport in 1968 the need fora knowledge of costing principles will remain
ALTHOUGH the effect of new legislation coming into force this year concerning the construction and use of vehicles and the fundamental changes proposed in the Transport Bill will be substantial, one important factor will remain largely the same. It is the high proportion of small units in the road transport industry. For about 85 per cent of operators have five vehicles or less.
Total ignorance of this vital fact, or the inability to recognize its true significance, has been a major reason for many failing to realize the source of the flexibility which has facilitated the continuing expansion and success of road transport in the UK.
Because the size of so many operating units is small they can more readily respond immediately to changes in their customers' requirements. Also, despite the existence of the well publicized giants of trade and industry, the British industrial scene likewise contains a high proportion of small units. In turn the transport service these require is compatible with that which can be provided by small transport units.
Special problems
However, each size and type of organization has its special problems. For small transport units one such problem is the provision of management and costing control which is adequate, but does not incur an administration expenditure out of keeping with the relatively small number of vehicles operated.
It is most important that the inauguration and maintenance of a costing system should be undertaken against this background. Because the requirements of a costing system suitable for an operator of a small unit are limited, the system itself must be kept simple both on the score of expense and the operator's ability to grapple with costing problems in addition to the practical operation of vehicles.
• There has been a commendable increase in the attention given to commercial vehicle costing recently and, in particular, since the first report of the Prices and Incomes Board on road haulage rates in June 1965. In subsequent reports this Board has reemphasized the need for more attention to be given to this subject. Outside the sphere of road transport there has also been a rapid evolution, if not revolution, in accountancy techniques, some of which stem from the increasing use of computers. Obviously where any of these new techniques can be shown to have purpose and advantage in being applied to road transport they should be so employed.
But while in no way discounting these new techniques when rightly and appropriately applied, the fact remains that the high proportion of small units in road transport is unlikely to be substantially reduced within the next five years at least. Therefore the need for simple costing systems will remain.
In the meantime, however, there is a possible danger that the "over-selling" of more sophisticated costing systems could result in most operators of small units deciding that all costing was too complicated and largely a waste of time and money—which would be unfortunate to say the least.
Two basic requirements of a costing system as applied to a professional road transport operator is to provide up-to-date information as to profitability and current operational efficiency. Additionally the same information provides the only reliable basis for forecasting future operating costs and the charges to be submitted to customers based on such forecasts.
Where vehicles are operating on one's own account, whether in the movement of goods or passengers, costing will provide the yardstick by which to assess the level of service provided against the expenditure incurred, as opposed to actual profitability in the case of the professional operator.
Allied to this insistence on a simple approach to costing for the majority of operators is the need to recognize the distinction between what is practical and what is an unnecessarily elaborate, if not unobtainable, ideal.
To emphasize this point a glance at a page in the COMMERCIAL
MOTOR Tables of Operating Costs reveals a mass of figures. To the layman this could readily infer that it was largely an arithmetical exercise. Once instilled with this contention a layman could easily lead himself to the conclusion that as in simple arithmetic there was one answer to a costing problem—the right one— and all others were wrong.
Although when so simply stated the fallacy of this line of thought should be self-evident, it is unfortunate that at least a modicum of such thinking is evident in the approach of many to costing problems. Obviously any figure patently incorrect or any forecasting which must be inevitably invalid because it contradicts both logic and experience must be discounted.
But that is a far cry from claiming that another point of view is "untrue" when in fact all that can be claimed is that it is different. In this category, for example, is the decision as to whether depreciation should be reckoned on a time or mileage basis, i.e. as a standing or running cost. Protagonists of either method could readily produce exceptional circumstances where the method they themselves do not approve seems to produce unlikely results. But in so doing they would not help the small operator wanting a simple costing system.
Likewise he would not be helped by those who, while not disagreeing with a particular method in principle, insist on further elaboration on the grounds of increased accuracy. Continuing use of the previous example, depreciation, need not be charged solely as a standing or a running cost: it can also be charged in part to both simultaneously.
Indeed there may well be certain types of operation where such a division would be justified in the demand for increased accuracy. A similar case can be made out for the charging of basic wages as a standing cost and any overtime as a running cost.
Real advantages
But in all such cases of further elaboration of costing procedures, their acceptance in particular circumstances should not be allowed to invalidate simple procedures where these are adequate. Moreover even increased accuracy—assuming incidentally that this is achieved—is not in itself a valid reason for adopting a more sophisticated procedure unless there is a real advantage to be obtained from the additional expenditure involved in the more elaborate system and not merely added "bookkeeping" satisfaction for satisfaction's sake.
Right at the outset in considering the cost of any commercial exercise, it is almost the inevitable practice to break down the total cost to facilitate more detailed examination.
But however expertly this is done and however standardized the procedure becomes, the extent and manner of the division must remain arbitrary. While this may well be recognized initially, continued use of such a procedure can result in a mistaken attitude that each item is an entity in itself.
Thus, the COMMERCIAL MOTOR Tables of Operating Costs were first published in 1911 and for the intervening period of over 50 years the division of the total operating cost into five items of standing costs and five items of running costs has proved a practical procedure. But despite this large measure of standardization it should not be overlooked that the items remain inter-related.
This applies particularly to the items of maintenance and depreciation. Thus it would be reasonable to expect that an increase in the cost of depreciation costs because of earlier replacement of vehicles would result in a reduction of maintenance costs. Similarly the interest charged on capital outlay would also be affected by differing replacement policies, which could arise not only from shorter intervals but also from more expensive vehicles with higher potential life.
In addition to recognizing the inter--relationship of several items which go to make up the total operating cost, there should also be a continuing recognition that in the interest of practicality there must be a compromise as to the extent one is prepared to go in detailed analysis.
Two basic factors in transport operation are time and mileage and in costing terms these are reflected in standing costs and running costs. Genuine differences of opinion can arise as to which group some items should be allocated, for example depreciation. In appropriate circumstances either method can be used successfully.
However, for the operator of a small fleet the elaboration of allocating some proportion of one or more of the 10 items to both groups, i.e. standing costs and running costs, though possibly valid in theory, would prove of little practical benefit. Examples of items dealt with in this way could be: wages (with the basic amount reckoned as a standing cost and overtime as a running cost); and maintenance (with weekly washing and servicing separated from repairs directly related to mileage). In some types of operation where the obsolescent factor is especially important a division of depreciation cost as between standing and running cost could similarly be made.
But in all these decisions as to alternative costing procedure the question to be decided is which is the most appropriate rather than determining which is right or wrong.
Problems which face the RTITB
I HAVE ALWAYS been a great advocate of the Industrial Training Act and especially its application to road transport through the RTITB. Unfortunately, the industry's road passenger and road goods sections have both lagged seriously behind other service industries in training and education programmes.
Whatever may be said about the fiscal arrangements of the levy and grant schemes, public hauliers and passenger operators have been compelled to think seriously about an area of work which has been so grieviously neglected. Increasingly, too, C licensees are now turning their thoughts in the same direction as training boards are established in the industries they serve. Cross-financial arrangements are made for own-account transport staffs training through the RTITB.
A great deal of lively discussion is taking place on the purposes of training and education in the industry. This is all to the good. The thinking of many operators has exposed doubts and difficulties, also a good thing, especially at an early stage of the RTITB work. There is always the inevitable problem that once a system has been operating for some years, its administration tends to gel and become inflexible.
What is training for? Two basic functions are paramount:
(a) to make a person more proficient and able to carry out his duties more efficiently; (b) to prepare selected personnel for promotion whether to the rank of foreman, inspector or a chief transport manager.
Following through these precepts brings specific problems. Driver training, conductor instruction, courses dealing with particular clerical activities, for example, are not lengthy processes and require little "refresher" work over the years. Not all drivers, conductors and those in other grades desire promotion—some are often hostile to the idea—while others are unlikely to be earmarked by the company concerned as candidates for posts of greater responsibility. What sort of training can be offered to these men once they have completed their basic courses? On the surface it would appear that little can be effected, even though the levy will still have to be paid in respect of each one every year. There is danger of drifting into a situation of "training for training's sake" and sending such staff to unsuitable courses with no other end in view but to regain a grant.
A much more constructive way of looking at the problem for this group of employees—and their numbers are considerable—is to focus attention on the educational facilities available, as opposed to specific job training.
Encouragement should be given to study part-time courses aimed at broadening an appreciation of transport problems and awakening other interests, perhaps, with a view to working towards a transport award like the RSA Diploma in Road Transport Studies. Or, and this is a section of the Industrial Training Act often forgotten, it can be valuable to send these employees to general courses on current economic problems to develop a more informed interest about contemporary society.
The RTITB grants scheme rightly concentrates attention—and money—for courses directly concerned with greater competence on the job and with courses giving training for the next step up the ladder. But the real issues beyond this point have not been properly faced—at least in terms of a grant. I would like to see a more lavish system of grant for those taking educational and professional awards and with courses less directly concerned with the day-to-day affairs of a particular job. After all, the RTITB will not be exactly starved of money with 1.111m estimated income for its first year of operation. Management training—both for those aspiring to management and to managers—presents a different problem. Constant work is needed by management to keep abreast of so many changes in road transport which happen so quickly. Management training is very much a continuous process and is an aspect I shall look at next week.