7ANDING COSTS, as discussed in the o previous articles in
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this series, are quently referred to as overhead costs but is term is not strictly correct. They are sts which relate directly to individual hides. Overhead costs are those which !, more commonly taken to mean the costs running the business as opposed to rifling individual vehicles.
We prefer to call such • costs stablishment costs" and this is a term 'erred to in the CM Tables of Operating )sts. In the Tables, the .manner of callating these costs is simply to add to the al operating cost a 20 per cent margin, t the operator making a cost analysis of , operations will undoubtedly wish to mine individual items comprising the ablishment costs because it is in this area it the greatest potential savings are likely be found. First, it is important to asider exactly what is to be included der this heading and then decide where I how to include the item in the cost alysis. In general terms the items could lude expenses grouped under the heads of management, office, garage and res, warehouse, branch depots, sales and ,licit, professional services and auxiliary :t.
For the sake of simplicity let us take the ,e of the owner-driver or the very small nator as an example using his home as a ie. Such an operator should have little iculty in separating his costs into stand and running expenses and then the lainder of his overheads (establishment its).
hen the wife helps.
:n our example the operator will probably re his wife helping in the business. She y answer the telephone, write letters, pare and send out invoices and suchlike, ticularly so if her husband drives the icle (or one of the vehicles) himself. In irn for this she will probably be a ;ctor (in the case of a limited company) ! will receive payment. This payment will an item of establishment cost. The cost .elephone calls and the annual telephone :al will also count, as well the cost of ionery (ie letter-headed paper, invoices, signmcnt and delivery notes, carbon er, envelopes, business cards and so on) the cost of postage.
proportion of the rent and rates, and ting and lighting costs in respect of the le should be included but only in direct portion to the amount by which the le is used as business premises. The rator may well operate his private car as )usiness expense in which case its iding and running costs become a rgeable item in this section. Where our example operator does his own maintenance, perhaps on his own premises, there will be expenditure on items which again cannot easily be accounted against the cost of operating any individual vehicle. Bulk supplies of grease, cleaning rags, nuts and bolts, wire and many other consumable items, plus, of course, once more, heat and lighting costs, maintenance record forms and suchlike.
All these expenses and possibly many more besides. which the operator will recognize if he examines his past expenditure, should be carefully recorded.
In the case of the operator with, say, five to 10 vehicles he may well have an office used exclusively for the business, in which he will have equipment such as a desk, chairs, filing cabinets, a typewriter, adding machine and so on. These items are classed as capital assets, not expenses, and therefore should appear in the establishment cost analysis in the form of an annual depreciation charge (calculated by dividing the initial cost less the possible resale value by the number of years of its expected life in the same way as described for vehicles). Exactly the same situation applies in the case of capital equipment used on vehicle maintenance, for example tools. jacks, compressor, greaser, steam cleaner and suchlike.
When the business grows As the size of the business grows so the establishment costs rise to the point where office and maintenance staff and management salaries have to be included; office and garage rents and rates; the manager's car; travelling, accommodation and entertaining expenses incurred in dealing with customers or seeking new business: trade association subscriptions; training and educational expenses (ie attendance at seminars and so on) not covered by training grants; repairs to office and garage equipment; advertising and other forms of publicity; insurances on buildings and life insurances on the proprietor and senior managers; employer's compulsory liability insurance goods-in-transit cover and any other general insurance — not vehicle insurances; the cost of operating a service truck for the maintenance department; the cost of providing canteen facilities for staff and/or other social facilities and soon and so on.
The list. as I have already suggested, is almost endless and individual operators will need to carefully sift every item of expenditure to see whether it may be included as a legitimate business expense.
It is usual for the accountant to pick out these item s at the time of preparing the annual accounts for taxation purposes but I suggest that to wait until well after the end of the financial year to find out what these items amount to is far to long. And by the time the information is available it is too late to take corrective action where expenses are found to be high. Incidentally, the accountants' fees, and legal fees if a solicitor is used should also be set against establishment costs.
Having decided on all the items to he included under this heading the next consideration is how to apportion the total annual cost between individual vehicles. Two basic alternatives may be chosen. Either a direct division of the total cost between the number of vehicles in the fleet or a division of' the total cost between the total carrying capacity of the fleet in terms of tonnage, cubic footage or gallonage depending on the type of vehicles operated and multiplied by the capacity of each individual vehicle.
Where the fleet consists of a similar type and capacity of vehicle the former alternative is satisfactory but where the fleet comprises a variety of types or carrying capacities the latter is a much more equitable system.
For example, in a five-vehicle fleet, if the total of establishment costs are £2000 per annum the .cost per vehicle is £400 per annum.
However if the carrying capacities of the five vehicles are 2 x 10 tons. 2 x 12 tons and 1 x 16 tons totalling 60 tons this represents £2000 ÷ 60 = £33.33 per ton per annum or £333.30 per annum for each of the 10-tonners. £399.96 per annum for each of the 12-tonners and £533.28 per annum for the 16-tonner.
From this it will be seen that the larger' revenue earners carry a larger proportion of the overhead costs.
Next week: Running costs. Costs that count (3) In last week's article on the subject of depreciation, calculations illustrating the reducing depreciation method for a chassis over three years were omitted. These should read as follows: Depredation of chassis • Net amount to be depreciated=£1410 over three years at 50 per cent, 30 per cent and 20 per cent per annum:
year 1 50 per cent 705 year 2 30 per cent 423 year 3 20 per cent 282 £1410
The depreciation calculation shown over a period of six years should have under the heading "depreciation of bor,i.