COSTING From the Word " Go "
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FOLLO WING recent reference to the inter-relationship between some of the items into which commercial-vehicle costing can be segregated, I have been asked to deal with all these items in one article, so as to give an overall picture of the principles involved. Newcomers are confused by the division of operating costs, as between standing and running costs, and by their segregation into current and deferred costs. Another division they sometimes find is made between actual and estimated costs.
To understand the reason for these divisions and the meaning of the various terms commonly used, it is necessary to ask ourselves the purpose of costing. Briefly, the reason is inherent in the difference between the operation of a .vehicle commercially, as distinct from private or pleasure purposes. The car owler, assuming he has the money, does-not need to note standing and running costs before running the vehicle whenever and wherever he desires. Many motorists look upon the whole exercise as a luxury, the expense of which they are prepared to meet in total, but are not concerned with the details.
If, however, a commercial-vehicle operator were to adopt such an outlook, he would soon be heading for financial difficulties. In this case the vehicle has been purchased either to provide a living for the owner, if he is a professional haulier or passenger operator, or to provide an ancillary service to a
business undertaking. ,
In the first two instances it is necessary to know one's operating costs if rates or charges to be made to customers are to have a sound foundation. Even in the case of the ancillary user, whilst the emphasis may well be on service, an efficient organization will want to know its real transport costs just as much as those relative to any other department.
As soon as rates are considered along with costs, a new element is introduced. In terms of time, actual costs (as distinct from estimated costs) relate only to the past. Rates must be available for quotation and use, both now and in the future.
Crux of Principles Herein is the crux of the principles underlying commercialvehicle costing. Because rates are required for future quotations, an endeavour has to be made to forecast costs for the corresponding period. Such forecasts can be made satisfactorily only by reference to accurate castings of vehicles operating under similar conditions in the past, coupled with as much fore-knowledge of future cost trends as is available. It is equally important, however, to make the estimation of probable costs against a background of long practical experience, otherwise the underlying Meaning of the figures will be misinterpreted.
Day-to-day operation of a vehicle is made up of two elements—time and mileage. As a natural corollary, operating costs are divided intostanding and running costs. Standing costs, sometimes termed fixed costs, continue to accumulate whether the vehicle is operated or not. The newcomer should note particularly that there is a slight misnomer in the use of the term " standing costs,7 insofar as they have to be met throughout the period the vehicle is in the owner's possession, whether it is standing or mobile. In this era of inflation, however, the term "fixed costs" would be an even greater misnomer.
The expression " running costs," on the other hand. fits their use precisely, because they are incurred only when the vehicle operates and, with comparatively limited exceptions, vary directly in relation to the mileage operated. As a result of this division into standing and running costs, total operating costs do not vary directly with the mileage operated, because standing costs remain the same. Cost per mile diminishes with increasing mileage.
Before 'proceeding to detail the 10 items into which it is recommended operating .costs should be divided, I must emphasize one point. Whilst every endeavour should be made
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to ensure that all records are as accurate as possible, .there must always remain an element of arbitrary estimation and on which, quite naturally, there will be differences of opinion.
This is where practical experience in transport operation is so valuable when dealing with costing problems. Otherwise it. is so easy to become bogged down on some finer point of principle which, set against a background of what is, at best, shrewd estimation, is relatively unimportant. Simplicity is the key word. Up-to-date records of reasonable accuracy are far more valuable to a transport operator than those of virtually detailed perfection 12 months in arrear.
Conveniently for memorizing, the 10 items of operating costs are equally divided between five standing and five running costs. The standing costs are: (I) licences, (2) wages, (3) rent and rates, (4) insurance and (5) interest. The running costs are: (1) fuel, (2) lubricants, (3) tyres, (4) maintenance and (5) depreciahon.
Time in Transport
Dealing first with standing costs and assuming that future costs are being estimated, I reiterate that these are based on the time-element of transport operation. It is natural, therefore, that any division of these costs should also relate to time-yearly, weekly or hourly. Without wishing to confuse the newcomer unduly, it is convenient to give the reason why a costing year in this context can Fonsist of either 50 or 52 weeks—or even on some occasions 54, although this is not
recommended here. '
When an operator uses the vehicle cost sheet recommended in this series (June 7, 1957) entries are made week by week, totalling 52 in all (assuming an eight-day week on one occasion to include the odd day). If he is an owner-driver or small fleet operator, the entry for OM of these weeks may not include' operating costs, but only repair costs coinciding with an annual overhaul. Alternatively it may result from drivers being on holiday, or a combination of the two.
Therefore, although in recording his costs the haulier will no doubt have to make entries for 52 consecutive weeks, when it comes to the matter of assessing rates or charges, it will be necessary to take into account these two weeks when it is estimated that no revenue will be earned. Nevertheless, all standing costs for the year still have to be met, which requires their division by 50, rather than 52, to coincide with the 50 weeks when revenue is in fact being earned.
An alternative way of dealing with this matter concerns particularly the larger operator, who is able by suitable rostering to employ either temporary or maintenance staff during the period when, regular drivers ire not available. In this event, the vehicle continues to be operated for 52 weeks, but in addition to the regular driver's 52 weeks' pay (whether working or on holiday), there will also be two weeks' nay for temporary staff to be included, making a total of 54 weeks to be debited to the operation of the vehicle.
It will be noticed straight away that even in this comparatively small point, varying circumstances can affect the estimated number of non-revenue-earning weeks per year. Where overnight or week-end maintenance facilities are available, it could be possible to have a vehicle available for service 52 weeks in the year. In the other extreme, in addition to a -fortnight's holiday, there may well be periods of sickness which cannot be covered by relief staff at short notice. It may even be that three or four weeks of operation are lost during the year. Two weeks are, therefore, taken as the average. The first item of standing costs is the amount payable for licences for the vehicle. This includes the duty payable under the Vehicles (Excise) Act, 1449, formerly referred to as the Road Fund tax. This, of course, varies with unladen weight in the case of goods vehicles. To this sum must be added the fees payable for either a carrier's licence or licences and certificates permitting passenger operation.
Emphasizing again that we are dealing with future costs, it is convenient to enter under the item of wages an amount based on such statutory rates as are applicable for 44 hours. To this figure must be added the employer's contributions to• National Insurance and probably a further sum for voluntary eroploiers' liability insurance premiums, which .prudent operators pay in place of the former Workman's Compensation Act contributions.
When dealing with wages, in estimating the cost on which to base overall rates (as distinct from a specific job or contract) it is convenient to use the figure payable for 44 hours, regardless of the weekly mileage involved. It must be admitted that this cannot be strictly accurate, particularly when applied to the higher weekly mileages. If, however, one tries to formulate an acceptable alternative, the overall objective of simplicity is lost in the complexity of one item.
Because the proportion of terminal time varies so largely under differing conditions of operation, it would be virtually impossible to arrive at any acceptable average of drivers' hours relative to varying weekly mileages. At first sight the compromise 44-hohr week would seem unduly short, but there is a compensating factor. In the final division of standing costs before drawing up rates, a 44-hour week is assumed.
If that figure is in fact exceeded, whilst admittedly a higher amount of wages will be payable—and at overtime rates—the whole of the remaining standing costs will have been met by revenue received in payment for the first 44 hours of operation. Therefore, both for convenience and simplicity, it is arbitrarily assumed that beyond 44 hours the increase in wages will be offset by the absence of other standing costs.
Responsibility Without Reward The next item—rent and rates—although comparatively small, should be included whether the vehicle is housed in a _ public garage, in a rented garage or in one owned by the operator. In any event, some expense will be incurred. whether it be on rent or rates. Even if, in the first instance, an ownerdriver were to park his vehicle on open land, he would no doubt wish to make provision for the eventual acquisition of a garage.
Insurance refers only to premiums on the vehicle itself, but can vary greatly in amount according to area of location, type of operation, capacity and value of vehicle, and the extent of cover required.
The justification for the last item of standing costs—interestis sometimes disputed. It is included in " The Commercial Motor' Tables of Operating Costs " for this reason: if, before entering the transport industry, an operator had capital invested in securities at 3 per cent., and then withdrew it to purchase a vehicle, only to find that the margin of profit on its operation never exceeded all costs plus interest at 3 per cent., he would have taken on the great responsibility of engaging in business on his own account to no financial advantage. The criticism that be would also have provided himself with a living would be invalid, particularly at a time of near full employment.
In estimating rates for general use, it is convenient to accept a week as the standard period. By so doing, whatever, type of work was under consideration, the vehicle would normally be back at base each week-end. Standing costs are, therefore, totalled for the week, with a division into hourly rates for occasions when this is required.
Running costs, in contrast, are calculated in terms of pence per mile and, because mileage will eventually reach a large figure, it is usual to compute them to two decimal places. Calculation of fuel costs is virtually self-evident, although, because of zoning and bulk, fleet and agency discounts, the variations in the price at which -one long-distance. vehicle can be supplied with fuel in a week will surprise the newcomer.
• Lubricants obviously include not only engine oil used for topping-up, but also for sump changes. For simplicity, again, fleet operators may find it convenient to allocate a suitable proportion of the overall cost of other oils and greases rather than charge them literally per vehicle.
In contrast to calculations for fuel and lubricants, which are based on known costs, the remaining three items of running costs—tyres, maintenance and depreciation—must embody an element of estimation. For example, although the cost of the initial set of tyres should be known precisely, their mileage life must be an estimate based on past experience, with allowance for possible continuing improvements in performance. The division of this estimated mileage into the Cost of a set would give the tyre cost per mile.
Similarly, the amount likely to be spent on maintenance must depend largely on past experience, coupled with some adjustment according to the operator's replacement policy_ Incidentally, the word " maintenance " in this context includes all work necessary to keep the vehicle in an acceptable,, efficient and roadworthy condition, ranging from washing and servicing to major overhaul.
Finally there is depreciation, which gives rise to probably more discussion than any other item as to the manner in which it should be calculated. Nevertheless, if the operator is to continue in business, there can be no doubt that some amount for depreciation, however calculated, must be included in total operating costs.
The method recommended here is to deduct from the price of the vehicle the cost of the initial set of tyres and the estimated residual value, and to divide the balance by the estimated mileage life of the vehicle while it is in the owner's possession. -As, detailed in successive articles (January 17 and 24) there is close relationship between depreciation, obsolescence, maintenance and vehicle replacement policies.
Because both "'The Commercial Motor' Tables of Operating Costs" and this series of articles deal with all types of vehicle, it is considered that the calculation of depreciation on a mileage basis would fit the majority of circumstances. As with other items of operating costs, there will always be cases requiring special treatment either by assessment of depreciation on a time basis or possibly on a combination of both time and mileage.' For example, sonne types of luxury passenger transport or low-riaileage haulage -necessitate a much heavier depreciation charge than would be justified on mileage alone, if, however, the vehicle is subsequently degraded for other work by the same operator, for which class of work depreciation on a mileage basis was then applicable, it would probably be found Inconvenient to attempt to make use of both methods of calculation at subsequent stages of the vehicle's life.
Vital Information Obsolescence occurs when the vehicle becomes no longer fit for the purpose it has to serve, although mechanically it has not come to the end of its useful life. Normally this would occur when the appearance of the vehicle is no longer a match for those of competitive operators. Although it is Usual to depreciate in such circumstances on a time basis, if the approximate mileage during this limited vehicle " life " is known, the same result in terms of overall depreciation cost could still be obtained if a mileage calculation was used.
I have dealthere with only those costs which can be allocated specifically to the operation of individual vehicles. I cannot discuss now the other costs—overheads—which have to be included before rates and charges can be calculated, These can briefly be described as the cost of operating a business, as distinct from those applicable to specific-vehicles, and I mention this solely to avoid the possibility of a newcomer assuming that the 10 items of operating costs so far enumerated form the whole of his expenses.
For the smaller operator at least, it cannot be stressed too often that a knowledge of his operating costs is vital to the success of his business an.4 that, once the underlying principles have been understood, th6'weekly recording of costs is a much less onerous task than the newcomer might first assume. But regularity in recording is imperative for two reasons. Not only does it prevent the operator from being overwhelmed with a niass of clerical work, which may not be to his liking, but, more important still, he is made aware as soon as possible of the most vital information of all—whether he is operating at a profit or
at a loss.—S.B. ,