PROBLEMS OF THE HAULIER AND CARRIER.
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Some Points About Running Costs That Are Often Misunderstood.
AVERY interesting letter was received by me recently from a correspondent. In it he raised several points in connection with running costs, which, he says, have puzzled him and which, as he rightly remarks, may just -as well turn out to be equally puzzling to many other readers.
Agreement on Ton-mile.
In the first place, I am rather glad to note that he confirms what I stated the other week about the use of the ton-mile as a unit for quotations in connection with haulage contracts. He says that already, in the interim between writing to me in the first place and reading my article on the subject, he has discovered that there are some real snags in the way of quoting with the ton-mile as a basis and he has come to the conclusion that it is much simpler for several reasons to quote on the basis of the mileage covered. The outstanding objection to the ton-mile is, as II pointed out in my article, that the figure for cost varies so tremendously and if, as is usual, it be necessary to , get down to a fairly close figure, in connection with any contract, the cost per mile is more accurate as a basis for calculation. He has realized, too, what I have so often emphasized in these columns, and that is the importance of knowing the weekly mileage.
Two of the points he raises are in connection with the item depreciation. Ile had not, hitherto, realized, lie states, that in calculating depreciation the cost of a set of tyres should be deducted from the initial cost of the vehicle in order to arrive at the basic figure on which that depreciation should be calculated. It is a fact that this deduction of tyre cost is necessary, although it is not by tiny means obvious to those who have not made any sort of a study of the operating costs of commercial vehicles. The point may usefully he enlarged upon and made to serve, for the benefit of less sophisticated readers, as an object lesson in the meaning of the term "depreciation," as applied to commercial vehicles.
Depreciation a Negative Expenditure.
I have repeatedly pointed out that depreciation, aithough one of the most important items of running cost; is not an actual out-of-pocket expenditure; it is not a sum of money which the user must find for each mile the vehicle runs or for each week, month or year while it is in use. It is a negative expenditure, a loss c48
which is going on continually but invisibly and, Unfortunately, in many cases, unregarded. The wise user takes warning from our Tables of Costs and converts it into an out-of-pocket expense by setting an amount equivalent to the depreciation on one side each week, or each month, towards the purchase of a new machine to replace that which he has and which is becoming worthless at the rate of pounds, shillings and pence per week as indicated by the figures in the Tables. The unwise reader ignores the warning which the Tables convey, overlooks the fact that depreciation is going on and he then suddenly is brought to realize that the capital on which his business—his very livelihood— depends has gone; his vehicle is done and he has no money with which to buy another to replace it r It is by considering what happens in the case of tyres that those who fail to appreciate the importance of noticing depreciation may be brought to .realize how vital it is not to overlook it. The cest of tyres is deducted from that of the complete vehicle before calculating depredation,, ostensibly because provision is already Made elsewhere in the Tables for the costar tyres, but really Ave must go farther back than that. We must understand why it is that separate provision is made forthe cost of what .is, after all,an insepar• able part of the vehicle as a whole. The reason is that the tyres, considered as a part of the vehicle, , depreciate lunch more rapidly than the rest and have to be renewed separately and independently. Actually, the figure. which appears in the Tables for cost of tyres is nothing more or less than a figure for depreciation of tyres.
Nearly every user of commercial vehicles realizes that he must look forward to the time when a new set of tyres will be necessary, although, as • a general rule, the user is fortunate in that he. is able torenew that set of tyres piecemeal one tyre at a time, so that the expenditure does not 'comc. as such a big item. It still has to be provided for, however, and the wisest way of making that provision is to set aside a sum corresponding to the .tyre cost over any given period. For example, if we take the ease of a one-ton lorry on pneumatic tyres and assitme that the figure for tyre cost as given in the current Tables„of Operating Costs to be 'correct at the time of writing, then a user should set aside id. per mile, that being the amount given in the Tables for tyre cost, towards the provision of new tyres. If he he doing an average of 400 miles
per week, then he will put 25s. per week on one side, towards new tyres and, if he does that the expense of buying either one tyre or a set of tyres will not come as a shock to him ; he will be able to make the purchase out of what is more or less a sinking fund for tyres and will not need to disturb any investments or any other more or less regular expenditure which the successful carrying on of his business necessitates.
Making Depreciation an Expense.
Now, if we can make this principle, so easily understood in connection with tyres, equally applicable to the vehicle itself we shall get over that too frequent oversight of depreciation, which is responsible for so much loss on the part of hauliers. The thing to do is to set apart, each week or each month, an amount to make up for the loss in value which the vehicle has suffered during that period. Taking, again, the case of the one-tonner on pneumatic tyres and assuming, as we did before, that the mileage it runs averages 400 per week, the amount which must be put on one side each week for depreciation will be four hundred Gibes one halfpenny—that being the figure for depreciation per mile. That sum, 16s. 8d. per week, put on one aide and regarded, as a reader recently suggested, as a sinking fund, will provide enough to buy a new vehicle when the time comes and any allowance which may be obtained on the old one in the course of the part-exchange transaction which, I assume, will be carried through at the time of the purchase, will be just so much to the good. Actually, the figure is based on a life of 150,000 miles, so that at the end of 71' years the user will have saved well over £200, which should buy a first-class and well-found one-ton vehicle of the heavier type.
The Allocation of Depreciation.
We turn, .naturally, from the consideration of this point to the next which is raised by this correspondent, namely, as to the proper allocation of depreciation; 'whether it -should be set amongst the running costs or the standing .charges. There has always been a difficulty there, as I have admitted time and again, inasmuch as there is a need for recording depreciation as an annual charge—that is to say, a standing charge --in order to meet the requirements of the income tax
assessor, who usually allows 20 per cent, per annum, calculated each year on the depreciated value of the vehicle. On the other hand, for our purpose, it is quite obvious that Such a method of calculation is of 110 use when we are trying to determine the actual cos.t of operation. So far as we are concerned, a vehicle rally deteriorates according to the extent to which it is used. Obviously, other things being equal, one that runs only 100 miles per week is going to last much longer, in point of time, than one-which does 500, 600, even up to 1,000 miles per week. Hence, the only practical way of calculating depreciation from our point of view is to take it as a running cost and I am very interested to have confirmation of my assertion from this correspondent, an experienced user, who, after trying to meet it as a standing charge, has come to the conclusion that it is sounder, from the business point of view, to take it as a running cost.
Comparison Between Two Depreciations.
As a r atter of interest we will take again this pneurnatic-tyred one-tonner and work out the loss caused by deterioration on a basis of a standing charge and see how long it is supposed to last. Taking the figure in the Tables as being correet, then the net cost of the vehicle in the first place, less tyres, was £312 1.0s. The depreciation for the first year will be one-fifth of that, which is £62 10s., and the value at the end of a year is £250. The depreciation for the Second year has to be calculated on that £250. It is still .20 per cent., which is £50, so that at the end of the second year it is worth £200; the third year £160; the fourth year £128; the fifth year £102 8s.; the sixth year £82; the seventh year £66. That means that at the end of 7i years it is really worth very little. It should be noted that, by this method of reckoning depreciation, the machine is never actually wiped off the hooks..
Now, I showed that at 400 miles per week it was wiped off, according to our Method of reckoning, in 7i years, so that on that mileage the 20 per cent. depreciation is approximately correct. If, Lowever, the vehicle does only 100 miles per week, then it will last 30 years, which is absurd. On the other hand, at 1,000 miles per week it will be worn out in three years t S.T.R.