Combining Depreciation
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with Obsolescence
Some Vehicles, Like Luxury Coaches, are Obsolete Before They are Worn Out, whereas Others, Such as Those of Country Carriers, May be Depreciated Before their Age and Appearance Count Against Them : How to take these Factors into Account is Described in this Article by "The Commercial Motor" Costs Expert IHAVE been asked to clarify the position in respect of the assessment of depreciation, particularly as to whether it should. be treated as a standing charge, a running cost or a combination of the two. It is most appropriate to take depreciation as a running cost as it is intended to indicate the rate at which the vehicle is worn out. As, however, obsolescence can be an important factor, some provision for this should be made.
There is no direct way of assessing obsolescence, none, that is to say, that could be given without some reservations. The kind of work that the vehicle is doing is important In some occupations the question hardly arises; the fact that the yehiele is 10 years or more old does not matter so long as it continues to run and does not involve excessive expenditure for repairs and maintenance. Owner-drivers' vehicles operating in rural areas and engaged almost exclusively on the Carriage of parcels from .market to housewives and farmers afford perhaps the best
example of lack of need to consider age and decrepitude. Country folk do not mind what age the vehicle may be; all that they require is that their parcels should arrive in good time and that the cost of carriage should not be too much.
On the other hand, perhaps the best example of the need to take age and obsolescence into account is the coach used on excursions, tours and private hire. In that case, competition and the demand on the part of passengers for luxurious vehicles make the consideration of obsolescence vital. How then should it be provided for in a scheme of cost assessment?
As a Running Cost Let me first describe the methods used in "The Commercial Motor" Tables of Operating Costs, wherein it is the rule to include depreciation among the running costs. First, decide on a figure for the life of the vehicle calculated on a mileage basis. Then take a period by the end of which the vehicle may be deemed to have become obsolete. If these two periods coincide, that is to say, if the agreed number of miles has been covered or more than covered by the end of the period for obsolescence, there is no need to worry about the provision for obsolescence.
If, however, the mileage covered by the time the period of obsolescence is reached is less than the critical figure, then something must be added to the amount set aside for depreciation. That additional amount is the provision for obsolescence.
Take, for example, a 6-ton petrol-en -ined vehicle the cost of operating which is set out in Table 'II of the booklet. It will be noted that the depreciation in that Table is 3.I5d. per mile when the vehicle is running 200 miles per week, 2.89d. when it is running 300 miles per week, 2.61d. at 400
iiles per week, 2.38d. at 500 miles per week, and 2.17d. )r 600 miles per week and upwards of that figure.
The inference which may be drawn from those figures is tat about 600 miles per week is the critical mileage. Until at is reached provision has been made for obsolescence 3 the extent of 0.21d. per mile at 500 miles per week, 0.44d. er mile at 400 miles per week and so on.
A 6-tonner with a van body, painted and lettered and eady for the road, will cost £1,600. Proceeding in the usual 'ay, I deduct first of all the price of a set of tyres, bringing he outlay on the vehicle alone to be £1,450, and then £150 s the residual value, leaving £1,300 as the basic figure on vhich depreciation must be calculated. The expectation of ife of the vehicle, that is the number if miles which it ought to run before it weds to be sold, is 144.000, and lividing £1,300 by 144,000 gives me .17d. per mile.
The life of the vehicle in terms of ime has been taken as just short of ive. years. If the vehicle covers 600 rifles or more per week or 30,060 per annum, depreciation can be entered mirely as a running cost. For every 100 miles per week fewer than 600, an addition of 10 per cent, must be made to 2.I7d. to provide for obsolescence. Thus, if the weekly mileage is 500, 10 Der cent of 2.17d., 0.217d., brings it to 2.38d. per mile. If the vehicle runs 400 miles per week, the addition is 20 per cent., that 0.44d., making the depreciation figure 2.61d.
It is by the use of this method that the figures given in the second column of Table I have been calculated. The basic figure for depreciation, 2.17d. per mile, applies continuously so long as the weekly mileage does not fall below 600. In the next column I have taken a five-year life as the basis for calculation, no matter what the annual mileage may be. The figures in that column indicate the amount which will have to be set aside per mile on account of depreciation in order to comply with the assumption that the life of the vehicle is five years. It should be observed that the fluctua tion in the amount of depreciation is far greater than it is if the first method be applied. It is as little as I.20d. per
mile if the vehicle runs 1,000 miles per week but goes up to 6d: per mile if the vehicle runs only 200.
I should point out that although this method of assessing depreciation and
obsolescence. is the best, it has a dis
advantage in practice. A vehicle may be doing 700 or 800 miles one week, in which case the depreciation is 2.17d. per mile. The next week it may run only 200 miles, in which case the depreciation is 3.15d. per mile. It would be extremely inconvenient to have to calculate costs and rates anew every time the weekly mileage differed and became greater or less than 600.
On the other hand, to assess depreciation on the basis of time may be easier but it presents the same difficulty in calculating costs per week. If the vehicle runs between 700 and 800 miles per week, its depreciation figure is approxi is to say TAB
Income•Tax Allowa Year Value 2 3 4 5 6 7 8 9 1.600 400 1,200 300 990 225 675 169 506 127 379 95 284 71 213 53 160
• .■•■■■■•••■•
TA
Life of vehicle in yea methods schedul Miles per week
cm.
method (a) 200 9.80 300 7.20 400 5.54 500 5.20 600 4.80 700 4.10 800 3.60 1,000 2.90
mately 1.60d. per mile, but if it runs only 200 miles per week, depreciation must be taken to be 6d.
• The third method gives the results which are set down in the last column of Table I. This method combines the other two. Half of the depreciation is assessed on a time basis and half on mileage. Thus in the case of the vehicle I am using as an example, half the cost. £650, will be spread over fivc years giving me £5 per week. The other half would be spread over 144.000 miles. In that way I get the figures set out in the fourth and fifth columns, and I must add them together to get the total depreciation as set out in the final column. If the reader will examine Table I he will observe that there is not a great deal of difference between the depreciation amounts obtained by this method compared with those of the first.
It is of interest to study the figures in this third method, which more nearly meet the requirements of an operator who one day will be doing a short run with plenty of waiting time and another day will be doing a long run with hardly any. if the full amount of depreciation is included under the heading of standing charges, there would be tendency for a short-distance run to be charged more in proportion than a long-distance run, a fact which would be apparent to the customer. But if the whole of the depreciation is assessed as a mileage charge, the contrary tendency is brought about. The charge for short distances would be much less in proportion than a charge for long runs. By combining the two methods a medium figure results for any distance and there is no apparent discrepancy in the charges.
Tables II and III should be selfexplanatory. Table 11 shows how the depreciation per week works out on the basis of the three methods of calculation, and in Table III I give figures for the estimated life of the vehicle in years, again according to these three methods of assessing depreciation. The point to have in mind is that in "The Commercial Motor" method and in the combined method the annual debit and the years of life bear some relation to the mileage the vehicle is coYering per annum and to the effect of obsolescence.
Some interesting figures are given in Table III, which indicates the life of a vehicle in years according to the three methods of assessing depreciation scheduled in Tables I and II. Table IV is inserted in case the operator wishes to have a little guidance in making his claim on the Income Tax authorities on account of wear-and-tear allowances. The only point to which it is necessary to draw attention is that the vehicle apparently never dies; even after nine years of use it is worth, according to this method, £160, which is absurd.
LE IV
nce for Wear and Tear
Summing up: if the vehicle is engaged on work which involves running on regular weekly mileages, not departing much one way or another from an average figure, the first method should be applied. This will meet the requirements of the majority of cases. If the work involves low weekly mileages, depreciation is better regarded as a standing charge, that is, using the second method described in this article.
If the weekly mileage is high and the journeys usually involve fairly long runs and not an excessive period of standing, it is better to have depreciation among the running costs. Finally. if the journeys run by the vehicle are sometimes short with fairly long terminal delays, but on other occasions long without excessive terminal delays, the best method is that which provides for one half of depre ciation to be a standing charge and the other half a running cost.
Readers can recognize from this which method most advantageously to adopt, but if not they can' give each a trial and keep to that found most satisfactory. S.T.R.