Fluctuating Mileages Year
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and Depreciation
Compromise must be Resorted to in Reckoning with this Difficult Item of Operating Cost
THE most difficult to assess of all items of operating cost is depreciation. For the purpose of estimating probable expenses, to use figures thus assessed as the basis for charges, two alternative methods can be used: depreciation can be taken to be a running cost or a standing charge. _ The vehicle can be assumed to have a life of so many miles and depreciation be calculated at so much per mile, or the machine can be assumed to have a certain life in years and the depreciation assessed per annum, per month or per week.
Neither method is wholly satisfactory. The mileage figures arrived at are good enough only if the annual mileages be fairly high and regular throughout the year. The'time figures are satisfactory only if the same conditions apply. When the mileage is low or exceptionally high, neither method is good.
Let me explain by taking as an example a vehicle which • is referred to in Tables I to V inclusive. It is assumed to cost £1,500 new, to have tyres which cost £190 per set and to have a residual value of £110, so that the net figure on which depreciation should be calculated is £1,200. Considering depreciation as a running cost, that is, calculated on a' mileage basis, if I take 180.000 miles as a fair estimate of a vehicle's probable life under to-day's conditions, then depreciation per mile is 1.6d. If depreciation be calculated on a time basis and five years be assumed as the life, then the depreciation is £240 per annum, approxi mately £4 16s. per week_ , Both these figures are satisfactory only If the annual mileage be 36.000 or thereaboutS, and if that' figure applies then either method will be satisfactory no matter for what purpose the figure for depreciation is required, The two figures would in fain be almost interchangeable.
Now suppose the vehicle covers only 12,000 Miles per annum, it we still stick to our figure of 180,000 miles as the expectation of life, then the vehicle will not have run its course until it has been on the road for 15 years, an impracticable figure as the machine will be out of date tong before that period has expired.
We are no better off on a time basis, for if we take the figure of five years and the vehicle is running only 12,000 miles per annum, then at the end of five years it will havc covered only 60,000 miles and will still have a long way to go before it is worn out.
stress that these figures for depreciation according to either method are estimates only. Having in mind the high prices which are still being paid for used vehicles, these theoretical figures can be quite a long way wide of the mark: the residual value may or may not apply when the period of life estimated is completed.
Arbitrary Additions
In "The Commercial Motor" Tables of Operating Costs it has been customary to refer to depreciation as a running cost, and the difficulty of low annual mileages has been met by making some arbitrary additions to the basic depreciation figure per mile in order to wipe out the cost of the vehicle in a more reasonable period than would apply if the basic figures were applied without emendation.
The, method is first to calculate the figure for depreciation as a running cost on a mileage basis. That is to apply in cases where the annual Mileages are approximately those which, when divided into the estimated life of the vehicle in miles, would give the number of years which would be allatted to the vehicle if depreciation were to be assessed on a time basis. Let me apply this method to the example towhich I have already referred where the value of the vehicle, for purposes of assessing depreciation, is taken to be £1,200.
On a life of 180,000 miles that gives me, as I have already stated, a basic figure for depreciation of 1.6d. It has also been agreed that on a time basis the life of this same vehicle should be taken as five years. That means that the mileage to which the basic depreciation figure should apply is 36,000 per annum, as that divided into 180,000 gives five. If the vehicle runs 36,000 miles per annum or over, it is reasonable to apply the basic figure of 1.6d. If the annual mileage be not so great as 36,000, some provision must be made for obsolescence. I do this by adding 5 per cent, to the basic figure for depreciation for every 1,000 miles per annum less than 36,000.
Turning to Table I, and applying this principle, the next figure for mileage below 36,000 is 32,000, which is 4,000miles per annum less than the basic figure. Four times 5 per cent., 20 per cent., must be added to the basic figure to get the amount of depreciation to be debited. Five per cent. of 1.6d. is 0.08d., four times that is 0.32d., so that depreciation on 32,000 miles per annum must be taken al 1.92d. That method is applied right down the scale to 10.000 miles per annum where, as is seen, the depreciation is stated to be not less than 3.68d. per mile.
In the next column of the same table, I have taken a five-year life as a 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 lite ot the vehicle is five years. It shcruld be observed that the fluctuation in the amount of depreciation is far greater than by the first method.
Now, whilst "The Commercial Motor" method of assessing depreciation on mileage with some provision for obsolescence is quite correct, it has its disadvantage in practice. A vehicle may be doing 700 or 800 miles one week, in which case the depreciation is 1.6d. per mile. The next week it may do only 200 miles, in which case the depreciation figure is 3.68d. per mile. It would be extremely inconvenient to calculate costs and rates every time the weekly mileage differed.
On the other hand, t..) assess depreciation on the basis of time, four, five or six years as the case may be, may be easier, but presents the same difficulty when calculating costs per week. If the vehicle runs between 700 and 800 miles per week, the depreciation figureis still 1.6d., but if it runs only 200 miles per week the depreciation must be taken as 5.76d.
The third method gives the results which are set down in the last column of Table 1. This is the method which has for some years been applied by the National Association of Furniture Warehousemen and Removers. It combines the other two methods. Half of the depreciation is assessed on a time basis and half on mileage. Thus in the case of the vehicle I am usibg as an example, half the cost, £600, would be spread over five years, giving me £120 per annum; the other half would be spread over 180,000 miles. In that way 1 get the figures set out in the fourth and fifth columns of Table 1, and 1 must add them to get the total depreciation as set out in the final column. It is' apparent that there is not a great deal of difference between the depreciation amounts obtained by this method than that of the first. In actual use, however, 1 have come to the conclusion that this third method is the best, for reasons which were made apparent in a recent article in which I discussed the method of assessing coach fares.
I showed there, that if the full amounts of depreciation be included under the heading of standing charges, there would then be a tendency for a short-distance run to be charged more in proportion than a long-distance run, a fact which would be apparent at once to the customer, who would expect the charges to bear at least some relation to the point-to-point distance to be run by the coach.
On the other hand, if the whole of the depreciation be assessed as a mileage charge the contrary tendency is brought about. The charge for shortdistance loadings 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. The man who asks for goods to be taken over a short distance will be neither under-charged nor over.charged, and the same applies in' respect of a load to be carried over a long distance.
Tables 11 and I1I should be selfexplanatory. TableII shows how the depreciation per annum works out On the basis of the three differing methods 'of calculation and .in Table '11 1 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 andthe years of life bear some relation to the mileage the vehicle is covering per annum, and to the effect of obsolescence.
Another aspect of depreciation is dealt with'in Tables IV and V. For some five years now the Inland Revenue authorities have been making an initial allowance as well as a wear-and-tear allowance, in connection with the purchase of machinery, including motor vehicles, and latterly that initial allowance has been 40 per cent, of the outlay. In the first year of use of each vehicle costing altogether £1,500, the operator has been able to claim for 40 per cent., which is £600 plus the wear-and-tear allowance of 25 per cent., £375, £975 in all, so that if he be paying Income Tax at the rate of 9s. 64, in the pound, his income tax will be eased to the extent of £460. In Table IV I have set out the
amounts of these allowances year by year and have carried the table forward to cover 12 years. not because 1 imagine that in the ordinary way a vehicle will last for 12 years, but because I wanted to compare the figures in Table IV and Table V over a lengthy period.
The concesston providing for an initial allowance of 40 per cent. comes to an end with this final year, that is to say,• it will not apply in the case of any vehicle purchased on or after April 5, 1952. I ant assuming that the wear-and-tear allowance will still apply and in Table V I have therefore drawn up a schedule of allowances in accordance with that view.
The point that.! wish to make is that there is not a great deal more benefit to the operator for the provision of that mitial allowance than when there is no such allowance. In _12 years, the total provision in the first case is £1,478 and in the other £1,453, a difference of £25 over 12 years, which is not a great deal.
The initial allowance, however, is often a great help for the operator and I am putting forward this reference to this income-tax allowance with the suggestion that if a new vehicle is to be bought and delivery can be taken before April 5 of next year, it is to his advantage to proceed accordingly.
In Tables VI, VII and VIII 1 have drawn up figtires corresponding to those in Tables!, II and III, taking a maximum-load eight-wheeler costing initially 14,400. There is no point in giving any lengthy explanation of these figures; they are compiled and assessed in precisely the same way as those in Tables 1, II and III. S.T.R.