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8th October 1948, Page 62
8th October 1948
Page 62
Page 65
Page 62, 8th October 1948 — COST RECORDING
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Which of the following most accurately describes the problem?



ADMITTEDLY, the principal reason why most operators cut rates is so that they may filch work from competitors, and it might be thought that knowledge of their costs, or the ability to estimate costs, would not deter them and that they would cut rates in any case. I do not think they would cut so severely, however—that is down to below the uneconomic level—if they were aware of what their minimum earnings should be And that is just where we started so many years ago.

We started with the idea that if we could instil that basic knowledge, at least we should put some sort of a rockbottom to this rate cutting, below which no rate-cutter would he inclined to go. That would be helpful even if rockbottom remained below the level to which rates could fall without becoming uneconomic.

In pregenting this subject to the small operator, I always try not to be dogmatic, at any rate about how individual items of cost are assessed or even how they are made. I insist only that the schedule should be comprehensive and that nothing should be omitted.

That attitude results from 25 y::ars or more of dealing with small operators who have little knowledge of costs and are not sufficiently cost-minded to be able to keep such simple records as are necessary. They may keep rough notes of some of their expenses, but they do not enter them all and that is where they go astray. If the record of costs be not complete, the assessment of rates based on it is certain to be too low for a profit to be made and that is why certain operators are willing to cut rates as much as they do.

It was always my experience, in checking over these rough accounts, that something was omitted—often a significant part of the cost of operation of the vehicle.

10 Items of Cost

To meet that situation I have always laid down as a principle that there are 10 items of operating cost in which are comprised the total expenses of running a vehicle. I have stipulated that in any haulier's estimate of his cost of operation there must be something set against each one of those 10 items. If there be one item missing, the costing is incomplete.

That is the first stage in making an operator appreciate what is the sum total of his costs. Having gone so far, it becomes less difficult to deal with the items individually and arrive at a rational and logical estimate of what they are likely, to be.

It becomes possible, first, to make use, of such figures as he has, then to supplement them by estimates, to cover those for which he has no record, and finally to check back on his own original figures to make sure that he has not forgotten to enter something. It is necessary to ensure that in respect of each of the 10 items, appropriate allowance is made for

what I know to be reasonable minimum cost. ,

The amount set down under each of the 10 main headings must, in my opinion, be adequate—not excessive, but most emphatically not inadequate. It has often been difficult in dealing with an individual to make him accept my figures, but I have almost invariably found a way of getting round that. In what follows I propose to indicate methods of doing that which I have found to be effective.

The 10 items of operating cost are of two kinds, and are generally referred to as standing charges and running costs. The standing charges are the fixed charges which are involved in the very ownership of the vehicle—the Road Fund licence, the driver's wages, together with the National insurance contribution and provision for holidays with pay, the rent of the premises in which the vehicle is housed, the vehicle insurance and interest on the capital invested in that vehicle.

Except for the wages it is true to say that these expenses have to be met before the vehicle has turned a wheel. Obviously it has to be licensed and it cannot be licensed until it has been insured. It is usual to pay rent in advance and the interest on the capital outlay becomes chargeable against the enterprise as soon as the vehicle is purchased.

The other five items are running costs, consisting of the expenditure on fuel, be it petrol or fuel oil, on lubricants, on tyres, on depreciation and on maintenance.

Stubborn Objectors

It might be thought that the standing charges, as enumerated above, leave little or no room for argument and that there should be no difficulty in dealing with these and persuading even the least cost-conscious operator as to their existence and as to the amount. It is not as easy as all that in some cases. I have come across some stubborn objectors to the inclusion of at least two of them.

The item " rent and rates of garage" is the first stumbling block. The vehicle or vehicles may be housed in an old shed or may even stand in the open, and the operator insists that the shed or the ground costs him nothing. That can never be true. They could be put to some other use and could earn some monetary return. That possibility must be taken into consideration and the value debited against the vehicle as an operating cost.

There is often a query as to the sense of including interest on capital outlay as an item of operating cost and here the case is more difficult to argue, because the operator is not taking anything out of his pocket to pay that interest and cannot be made to see that he is a loser if it be not included in the schedule of costs. The argument has, nevertheless, always seemed to me to be a simple and straightforward one.

If, instead of investing the amount in the vehicle, the operator had put the money to some other remunerative use, he would at least have earned a sum of money each year as interest. Until that interest has returned to his pocket, his enterprise as a haulier is not of itself-showing a profit. 1 have sometimes found it rather difficult to put that point of view over, but have generally succeeded in the long run.

I should like it make it clear that in using the term " interest " in this connection, that is to say as an item of the operating costs of a commercial vehicle, I am not concerned with interest on hire-purchase. That is something

which is entirely different. It is not fair to debit that against the vehicle. I shall have more to say about that later.

Every one of the five items of running cost is likely to be the subject of controversy. First there is the item of fuel. Nine operators out of 10 are optimistic about the mileage their vehicles run per gallon of fuel. They take a pride in the fact that their machines are capable of a high figure for m.p.g. and are apt to quote exceptional figures obtained in exceptional circumstances.

I always discount figures of that sort by at least 10 and sometimes 15 per cent. In assessing cost, it is not wise or even sensible to take the most favourable figure of performance in m.p.g. and although I would not recommend the operator to look at this thing in the worst possible light at least he should split the difference and take an average figure.

New Vehicles Misleading

In this and indeed in all running cost figures, it is wrong to assume that the performance put up by a new vehicle will continue throughout its life. The operator is expecting to earn a profit from the operation of that vehicle throughout its life and therefore he must assess his costs in such a way that he takes into consideration the fact that the performance of the vehicle will depreciate.

A particular example of this depreciation arises, of course, in connection with the cost of engine oil and every operator should have enough knowledge of his subject to be able to appreciate that. Even given appreciation of that fact, however, I have found operators make absurd mistakes in their assessment of the consumption of oil.

remember discussing this very question of oil consump(ion with an owner-driver. He put forward a view, with which I entirely agreed, that engine reliability could be, if not increased, at least maintained at a high level by regular and frequent changes of oil and he told me that he changed the lubricant in his sump every, 2,000 miles. In almost thc same breath he told me that his oil consumption worked out at about 1,200 miles to the gallon.

I pointed out to him that the capacity of his engine sump was 3i gallons so that if he put in only half a gallon to top up, during the 2,000 miles, he would have used four gallons for 2,000 miles, which is 500 m.p.g.

He had never thought of that before and was almost • inclined to be offended because I had corrected him as to his cost per mile for oil.

The three remaining items of running cost, however, are the source of most of the trouble in this struggle to educate the small operator to an appreciation of what are his actual costs of operation.

Tyres Wear Individually It is till very well for people like myself to say that to-day the average mileage to be expected from a set of 34-in, by 7-in. tyres on a lorry carrying 6 tons is, say, 15,000 miles. Tyres do not wear out in sets. They are replaced one at a time and although one of the set may have gone fairly quickly, the others may seem good enough for a considerable distance beyond this average of 15,000.

Even appearances do not count for much, for tyres are apt to go suddenly without warning and if the operator has never kept a check an his mileage and particularly on his tyre mileage, it is very difficult to get down to a cost-per-mile figure.

Moreover, even experienced operators who keep the most accurate records of their operating costs are apt to make an important initial mistake which completely vitiates the data they may have compiled for tyre-cost per mile. They omit to debit the heading " tyres" with the cost of that set which was on the vehicle when it was purchased.

Assume that the tyres average a life of 15,000 miles; then by the time the vehicle has run 30,000 miles and the second set is worn out, this type of operator has debited the vehicle with only one set, so that his figure for cost per mile of tyres is only half of what it should be.

A set of 34-in. by 7-in. tyres to-day costs £90, so that if the operator has debited only one set of tyres in 30,000 miles, his cost per mile will seem to be very nearly Id. In reality he has worn out two sets of tyres in that distance and his cost per mile is lid.

Now a difference of Id. per mile in the operating cost of a vehicle is quite a big amount. As regards this figure, and others to which 1 am coming, the operator with no record of cost and no means for making any accurate check of his tyre costs, will do well to take the appropriate figure from "The Commercial Motor" Tables of Operating Costs.

I will discuss maintenance next, chiefly because I want to devote more space to considering depreciation than is available in the rest of this article.

There is a tendency, among big operators, as well as small, to use the word " repair " instead of "maintenance," and in so doing they fall immediately into error, for maintenance is more than repair. Even the dictionary makes a distinction. To maintain is to "keep up the condition and to keep in repair," whereas to repair is to "restore or to mend by replacing or refixing parts." These definitions convey that maintenance covers repair but is more than just repair, and that is how it should be regarded in making an assessment of cost.

Maintenance covers such operations as washing, polishing, greasing and minor adjustments such as cleaning the carburetter, setting the distributor points or, in the case of the oil engine, cleaning out the fuel filters and cleaning the atomisers. These are not repair jobs, but the work still costs money and the cost must be debited against the vehicle.

Cost of Repairs In addition to the foregoing operations, there are the actual repair jobs and replacement of components. The whole of these attentions, whether they be maintenance operations designed to keep the vehicle in trim, or the replacement of the parts which have become worn or broken, are debited under the costing system as maintenance and it is in the recording of this item that so many operators fall short.

It is-not that they have no intention of keeping a record of what they spend; it is just that they forget. This or that item of expenditure is omitted from the list and a small operator's ideas of what he spends on maintenance is always less than reality.

Sometimes the weekly wash and polish, the all-round greasing and other maintenance operations are carried out by the driver. The cost is therefore included in his wages and does not appear as a maintenance cost. This is always a difficult situation, because it is nearly always the case that the driver does that work at a time of the week when there is no other work for him to do, so that it cannot be said that he is wasting time; on the contrary, he is making good use of time which otherwise would be wasted, and that is another reason why maintenance figures are rarely complete.

It is impossible to compare the figures of maintenance for one operator with those of another, for if we take maintenance figures of a big operator who keeps his cost records meticulously, whose system of recording is such that no expenditure can be overlooked or forgotten, and whose drivers drive the vehiclesonly and are not responsible for maintenance operations at all, his figure for maintenancecost per mile is probably twice as much or perhaps three times as much as that coming from the small operator who does not keep proper records and whose drivers do much of the maintenance. That is why the figures for maintenance which I suggest for a small operator seem to be far and away beyond what his experience may show.

Refer to "The Tables"

So far as he is concerned with the saving in maintenance involved in making use of the services of his drivers, the small operator has an argument which is unanswerable, but so far as the case of his maintenance cost is concerned he is in the wrong. Here, again, the best thing that a small operator can do is to refer to the maintenance-cost figures in "The Commercial Motor" Tables of Operating Costs and if it be his custom to allow his drivers to do certain maintenance operations he will be sufficiently accurate if he takes the figures "Maintenance (e)" from the Tables and omits those which arc entered opposite the heading "Maintenance (d)." That is not precisely what is meant by those distinguishing letters (d) and (e), but it is sufficiently accurate if the operator uses the figures in the way I have just suggested.

The final item, depreciation, I have deliberately left for another article, because there are some new aspects of it which must be discussed. Also, I have still to consider wages..


Organisations: Road Fund

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