Operator CPC Training
This week, we move onto vehicle costings.
Here’s a breakdown of key terminology you’re likely to come across in this and next week’s article:
Cost Centre – a department, depot or a single vehicle
Cost Unit – cost per load, per mile, per tonne, for example
Direct Costs – can be directly attributed to a cost centre, e.g. standing and running costs
Indirect Costs – cannot be directly attributed to a cost centre
Fixed Costs – costs that do not vary over a period of time, e.g. overheads
Variable Costs – costs that vary on the amount of use of a cost centre
Before being able to work out a vehicle costing system, the vehicle utilisation must be calculated. Although the vehicle is available for work 365 days per year, in practice it will be for far less than that amount.
Example of annual utilisation:
Weekends – 104 days
Bank holidays – 8 days
Driver holiday – 15 days
Vehicle repairs – 10 days
Vehicle breakdowns (contingency) – 8 days
Total days not working: 145 days
Annual utilisation 365 days – 145 days = 220 days
Vehicle Standing Costs (Direct Costs)
Depreciation spreads the initial cost of a vehicle over its expected working life. There are two main methods of calculating annual depreciation:
1. Straight Line Method
Purchase price of the vehicle less cost of the tyres less re-sale value, divided by the number of years of the expected life of the vehicle.
2. Reducing Balance Method
The initial cost of the vehicle less cost of the tyres is divided by a set percentage for each year of the expected life. Here’s an example:
Purchase price of the vehicle – £34,000 (less 6 tyres @ £250 each) = £32,500 to be depreciated at 20% per annum.
Cost of vehicle less tyres – £32,500
1st year @ 20%: £6,500
2nd year @ 20%: £5,200
3rd year @ 20%: £4,160
The road fund licence is an annual fixed cost which will depend upon the gross weight and number of axles on the vehicle.
The operator’s licence is a set annual fee for each vehicle authorised on the operator’s licence.
The insurance premium will depend upon the operator’s no claims bonus, the type of operation and the experience of the drivers.
Must be paid whether the vehicle is working or not. Holiday and sick pay must be included, as well as National Insurance contributions, pensions, etc.
How to Work Out Annual Standing Costs:
Depreciation – £4,000
Vehicle Insurance – £2,500
Licences – £3,000
Driver’s wages – £17,500
Annual Standing Costs: £27,000
Vehicle utilisation: 45 weeks, 5 day working week.
Weekly standing costs: £27,000 divided by 45 = £600 per week.
Daily standing costs: £600 divided by 5 = £120 per day.
Standing costs can also be expressed as pence per mile:
Annual Mileage 54,000 miles
Formula: cost x 100/mileage = pence per mile
Example: standing costs: £27,000, annual mileage: 54,000.
Calculation: £27,000 x 100/54,000 = 50 pence per mile
These costs must be allocated to an individual cost centre. Overheads can be allocated by the number of vehicles in the fleet, tonnage carried by the fleet or mileage run by the fleet.
By number of vehicles: cost divided by number of vehicles
By tonnage carried: cost/total tonnage = cost per ton
By mileage run by fleet: cost x 100/total mileage = cost per mile
Example of overheads per tonnage:
An operator’s fleet consists of:
2 vehicles carrying 20 tons each = 40 tons
2 vehicles carrying 15 tons each = 30 tons
2 vehicles carrying 10 tons each = 20 tons
2 vehicles carrying 5 tons each = 10 tons
8 vehicles, total capacity: 100 tons
Business overheads are £8,000
Overheads based on carrying capacity of fleet is:
£8,000 divided by 100 tons = £80 per ton
2 vehicles carrying 20 tons each (£80 x 20) = £1600 per vehicle = £3200
2 vehicles carrying 15 tons each (£80 x 15) = £1200 per vehicle = £2400
2 vehicles carrying 10 tons each (£80 x 10) = £800 per vehicle = £1600
2 vehicles carrying 5 tons each (£80 x 5) = £400 per vehicle = £ 800
Total: = £8000
Example of overheads per mileage:
An operator has a fleet of 6 vehicles with an average annual mileage as follows:
3 vehicles averaging 40,000 miles each = 120,000 miles
2 vehicles averaging 50,000 miles each = 100,000 miles
1 vehicle averaging 80,000 miles = 80,000 miles
Total mileage: = 300,000 miles
If the total overheads of the business are £24,000, they may be allocated to each individual vehicle on a pence per mile basis.
Formula: Overheads x100/Total mileage of fleet = pence per mile
Example: 24,000 x 100/300,000 = 8 pence per mile
Vehicle averaging 40,000 miles (40,000 x 8 p.p.m.) = £3,200
Vehicle averaging 50,000 miles (50,000 x 8 p.p.m.) = £4,000
Vehicle averaging 80,000 miles (80,000 x 8 p.p.m.) = £6,400
These costs must be recovered in the number of days that the vehicle works.
Vehicle Running Costs
These include fuel, oil, tyres, repairs, etc. Running costs are expressed in pence per mile:
Formula: cost x 100 (change to pence)/mileage run = pence per mile
Fuel, oils and lubricants are the highest running costs and should therefore be monitored carefully. The estimated mileage life of a tyre is used to calculate a pence per mile figure for costing purposes, for example:
Estimated life of a particular tyre – 30,000 miles
A vehicle has 6 tyres @ £200 each – £1,200
cost x100/mileage = pence per mile
1,200 x 100/30,000 = 4 pence per mile tyre costs
Detailed records of all repairs and maintenance must be kept and allocated to a particular cost centre (vehicle). The annual costs are divided by the annual mileage.
Cost x 100/mileage = pence per mile
By calculating the standing costs, overhead costs and running costs, an operator is able to analyse the cost of providing a service or charge out rate which can be calculated by one of the following methods:
1. Standing & overheads costs (daily rate) + running costs (pence per mile charge).
2. Overall pence per mile rate (all costs on a pence per mile basis).