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An Operating Cosi ecords Ouiz

9th October 1942, Page 34
9th October 1942
Page 34
Page 35
Page 34, 9th October 1942 — An Operating Cosi ecords Ouiz
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Which of the following most accurately describes the problem?

/ALGREEMENT and anderstanding have been reached, in the course of this conversation with an accounthnta newcomer to the haulage industry—on the standing charges and the way in which I think they should De dealt with in 'recording operating costs. I have also explained to him the need for setting out at the top of his operatingcosts analysis sheet all the basic items of information relating to the vehicle. It has been agreed that there should be one sheet for each vehicle in the fleet.

He has accepted the fact that there should be references to the registered number of the vehicle, the fleet number, pay-load and make, date of purchase arid initial cost, the amount of the annual Road Fund Tax, insurance premium, tyre sizes, current costs per set, and from that an estimate of the tyre cost per mile.

We have also agreed that there should be a statement of the estimated maintenance costs per mile and, for the time being, that that cost should be the figure taken from "The Commercial Motor" Tables of Operating Costs. There should be a figure for depreciation per mile and for establishment costs per week and, finally, a column of four items—tax, insurance, garage rent and interest—giving a total of standing charges per week.

He has explained to me that he is somewhat at sea as to how to assess establishment costs and, at the conclusion of the previous article, I promised to deal with that item.

A Simple Explanation to Define Establishment Costs "What do you mean by establishment costs, anyway? " he asked.

" They are, in effect." I replied, the same as o‘erheads ' in any other business."

" H so," he said, "why do you need to make such a point of them in dealing with the costs of running a fleet of vehicles? If there is nothing new about them, their recording should be almost automatic " " There is a reason," I answered, " which erises out of the peculiar nature of a haulage contractor's business. • It is essential, for the efficient operation of the vehicles, that their operating costs be segregated and 'presented in these records of operating costs, so that comparisons can be made year by year, or even month by month, throughout the course of the vehicle's life and so that any unexpected increase in operating costs be noted With that information available an operator is made 'aware that a vehicle ie becoming worn out, getting past its job, and due for either thorough overhaul or replacement!'

" I suppose," he interrupted, " that is the reason why you are so insistent on the need for providing a separate sheet for each vehicle?"

" It is one a the reasons," I retorted, ," Another is that it is advisable for a transport manager to be able to make comparisons between the costs of operation of vehicles of the same pay-load capacity but of different make. With that information available he is better able to recommend the on make which should be purchased when rolling-stock renewals become, due."

" But surely," he objected, "he can decide on that point by reference to the repair 'work which has to be effected . and the number of days a vehicle is off the road because of the need for such attention?"

" That is one side of the picture," I answered. "To pay attention only to that might give a• wrong impression. The guidance he obtains from the figures in his operating costs sheets should be the main basis of his future choice of a make of vehicle. The , information which comes from his repair and service shops should be used to supplement that from his costs figures. It affords explanation of the last-named.

" But let us settle this point about establishment costs. What exactly is it you want to know? "

"I want to be able to distinguish between what you regard as vehicle operating costs, pure and simple," he said, "and these establishment costs."

10 Items that Form the Basis of Vehicle Operating Costs

" That appreciation," I said, ." comes automatically if you realize the basic characteristic of vehicle operating costs It is that there are 10 items: fuel, oil, tyre costs, maintenance and depreciation (which, as you will have noticed from 4 The Commercial Motor Tables of Operating Costs, are what are called running costs '), and tax, insurance, garage rent and interest on capital outlay (which are the standing charges), the tenth item being wages, abont which we have already had some little discussion."

For the benefit of the reader it may be stated that this discussion occurred in that part of the conversation related in the first of this series in the issue dated September 25. " Some of the individtial iteens require a little expansion," I added. " For example, it is usual to include with wages provision 'for employees' insurances,' but I will tell you about that later when we come to laying down the form of analysis sheet you will need for your costs recording. On the whole it may be said that anything outside the 10 items is not a vehicle operating cost but an establishment cost 'S had almost gathered that,' he said, 'from reading the introductory matter embodied in The Tables of Operating Costs, but what you have said does clarify the, subject considerably.'

" Recently," I mentioned, I have gone farther in this standardization of costs by drawing up what I believe to be a comprehensive standard schedule of establishment costs. In that schedule I have included all the items likely to be encountered in the establishment costs of the usual haulage-cant:meting business, Actually, I have by me just such, a schedule and it relates to a fleet of practically the same size as that with which you are concerned--you did say there were 67 vehicles in all, didn t you?

• " That is right, came his reply.

" Here is the schedule I have in mind," I said, producing the figures which appear in Table I, and which he perused with considerable interest.

" How do you suggest," he asked, "I should obtain the information which will enable me to complete such a schedule cs: establishment costs, giving the figures which actually apply to the company for which I arts going to

act in the capacity of account keeper?"

" You will get most of it," I replied. " from the annual balance sheet of the company. Your difficulty will probably be that, whilst the total will be accurate, you will be unable directly to allocate the precise amounts opposite each of the items in this schedule. I do suggest, however, that you take the trouble to itemize the establishment costs account in this way. In the first place, it will involve some little trouble because you will have to check back the company's account books to find out on what the money has been Vent. It will, however, be worth while in the long run, and when you have discovered the information, you can, or should, take steps to see that any future expenditure is recorded under these heads, so that you can the more readily check it.

" I am sure you appreciate," I continued, " that it is just as important for you, as accountant, to guard against unjiistifiable expansion of establishment costs as it is for the transport manager to watch that his vehicle operating costs do not increase, unless there be some unavoidable cause."

" Yes," he said, " I agree with you there."

"Now," I continued, ".so that we may get on with our job of devising a satisfactory method of keeping operating costs records, suppose you accept, for the time being, the figures in Table I as being those which apply to your business. If you do that we can complete all the information which we have agreed should be set out at the top of the analysis sheet of each vehicle."

Reducing Total Expenses to a Per Vehicle Standard " That will suit me nicely," he answered, " but I want to know how I am going to reduce this figure of £12,064 per annum to establishment costs per week per vehicle, which is the figure for which we have made provision at the top of our analysis sheet. Do I divide that total by 67 and take that to be the annual cost per vehicle? "

" No," I replied. " It is not quite so simple as 'that. Before I can answer your question I want to know exactly the position of your fleet of 67 vehicles in terms of pay load." • " I have already told you," he butted in, " that we have 43 10-tonners."

" Yes," I replied, " I have made a note of that. Now what are the others? "

"Let me see," he mused audibly, taking out pencil and paper, " we start with 43 10-tonners . . ."

" Here," I said, " give me the pencil and paper, if you please. I would like to put the figures down in my own way as that will simplify the explanation I am going to give you."

I took the pencil and paper from him and set out the figures which appear in Table II.

" Now," I said, " the important figure there for our present purpose is the 653 tons total pay-load capacity of your fleet. It is customary to allocate establishment charges over a fleet according to the pay-load of each. This is how to do it in this case, taking the figure of £12,064 as being the total of your establishment charges. You divide 653 into £12,064; the answer is nearly £18 10s. I may say that there is no need to carry the calculation to a degree of accuracy closer than the nearest shilling.

" Now, the total establishment costs per annum for each of your 10-tonners will be 10 times £18 10s., which is £185 per year. Divide that by 52 and you will get the amount to be debited each week against that capacity of vehicle, which is what we require for our analysis sheet. The amount is £3 Ils. 2d. per week."

We then proceeded to work out that item for each of the other *es of vehicle and as a result we obtained the following amounts:—For the 12-tonner, £222 per annum Or £4 5s. 9d. per week; for the 15-tonner, £277 I,0s. per -annum or R5 7s. per week; for the 6-tonner, £111 per annum or E2 2s. 8d. per week; for the 2-tonner, £37 per annum or 14s. per week. It is of interest to note that the total approximates to 7s. per week per ton of pay-load.

" Can you explain to me in greater detail," he asked, " how you arrive at the conclusion that establishment costs should be allotted according to the pay-load of the vehicle? "

" I am afraid that the only answer I can give you," I replied, " is that it is the usual custom. I imagine it has become the custom largely because it is a simple way out of what might become a difficult problem, if there be any attempt to deal with it as fully as some might think it necessary."

" What do you mean? " he questioned. " Surely this is a problem which need be solved only once, after which it would be just as automatic and simple as this method."

Establishment Costa Planned on a Scientific Footing " No, I'm afraid I don't agree with you there," I replied, " for it is my belief that if you really feel you must assess your establishment costs per vehicle on what I might call a scieetific.basis, you would have to take into consideration the number of hours that each vehicle worked per annum, because really it is unfair to load a vehicle with establishment costs when it is not working. That expenditure should be carried by the vehicles in proportion to the work they do.

" For example, suppose one of your 10-tonners, by reason of the absence of suitable traffic, was laid up for the best part of a year. That vehicle would do no work. You would probably cut out the expeiase of insurance and tax, so that you would be involved in only payment of garage rent and interest on capital outlay, a comparatively small amount. According, however, to this method of allocating establishment costs, you have to debit it with £185, which is rather a big item."

" But," he objected, " surely that is fair or, at least, it is more reasonable that, because one vehicle is out of commission you should load its proportion of establishment costs on to the others?"

" That," I said, "is at least an argument in favour of the simpler system. But look at it this way. Suppose you know throughout the whole period of a year that about only 70 per cent. of the vehicles are fully engaged and that by reason of lluctualions in traffic the other 30 per cent, are, for the main part, idle."

" In that case," he replied, " I should think it fair to take it that establishment costs were carried by 70 per cent, of the fleet and should allocate them accordingly."

" Then in that case," I said, " we are of the same mind. How do you stand with regard to this fleet of vehicles for which you are to record the costs? "

" They are all of them engaged full time," be said, " or as near as makes no matter. At least those are the conditions under which we are now operating. What may happen in future, if haulage business deteriorates, I don't know."

" Then for the time being," I said, " I think we will agree to work along the lines I have suggested and stick to the figures we have already calculated as the weekly establishment costs." S.T.R.



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