Chapter 4
Cost Control and Budgeting
STUDY OBJECTIVES
At the end of this chapter students will be
expected to:
Explain the importance of vehicle/fleet
costing.
Understand the factors which affect vehicle
costs.
Have insight into the different types of costs.
Be able to identify the costs to be considered
when charging for transport.
Understand the principles and types of
budgets.
Become well-acquainted with the importance
and role of managing fuel, oil and tyres with
regard to vehicle costs.
4.1 INTRODUCTION
4.1.1 THE IMPORTANCE OF VEHICLE FLEET
COSTING
• Profit is only part of the revenue received by
carriers;
• Rest of the income (revenue) must cover the
costs.
• Income is the charge to users for providing the
transport service.
• The charge (price) is the freight rate or the cost
of the ticket to a passenger.
4.1.1 THE IMPORTANCE OF VEHICLE FLEET
COSTING cont’
• Costing is a facility which provides essential
information upon which transport
management can base operating decisions.
• In order to have efficient and profitable
operations, such decisions must be based on
factual information rather than guesstimates.
• The value of the transport service to the user,
however, is largely a subjective concept.
4.1.1 THE IMPORTANCE OF VEHICLE FLEET
COSTING cont’
Function of doing costing:
Costing for the purpose of profit calculation
Costing with a view to tariff-setting or
tendering (what rates to charge, and
indications on how rates may be altered in the
case of strong competition)
Costing in order to arrive at certain norms or
standards with which the efficiency of a
transport operation can be measured
4.1.1 THE IMPORTANCE OF VEHICLE FLEET
COSTING cont’
Function of doing costing cont’:
Costing with a view to providing operators with
industry averages which can be compared with
their own cost figures
Costing for the purpose of checking the
performance of individual vehicles or groups of
vehicles
Costing to help with decisions regarding which
vehicles to purchase, based on vehicle cost
performance
4.1.1 THE IMPORTANCE OF VEHICLE FLEET
COSTING cont’
Function of doing costing cont’:
Costing aimed at anticipating the end of a
vehicle’s economic life (when it becomes
prohibitive from a cost point of view to
operate the vehicle and it should be replaced)
Costing in order to obtain an indication of the
suitability of the vehicle and of its
components and parts
4.1.1 THE IMPORTANCE OF VEHICLE FLEET
COSTING cont’
• Intermodal competition refers to provision of the
same transport service by different modes (truck,
rail, ship, pipe, plane).
• E.G. competition between a truck company and a
railway company to transport ferrochrome
• Intramodal competition refers to competition
among the same mode (e.g. trucks) in the
provision of the same transport service.
• E.G . Competition between two trucking
companies to transport logs for Mondi
4.1.1 THE IMPORTANCE OF VEHICLE FLEET
COSTING cont’
Why costing is so important:
1) Owing to high rates of inflation affecting
input costs such as fuel, oil, tyres,
maintenance, labour, etc., operators must
critically examine their expenditure in
comparison with their revenue and budget.
4.1.1 THE IMPORTANCE OF VEHICLE FLEET
COSTING cont’
Why costing is so important cont’:
2) Transport managers need to justify the
financial performance of their business when
seeking capital loans from banks.
3) Operators need to justify rate increases to
customers, with sound and detailed reasons.
4.1.1 THE IMPORTANCE OF VEHICLE FLEET
COSTING cont’
Why costing is so important cont’:
4) Benchmarking - It is necessary for operators
to compare their own transport costs with
those of other operators (intramodal
comparison) or other modes of transport
(intermodal- rail, sea, air)
5) Operators must continually determine
whether scarce economic resources (land,
labour, capital) are used effectively.
4.1.1 THE IMPORTANCE OF VEHICLE FLEET
COSTING cont’
DEF:
• Costing of vehicles is the process of
identifying, calculating and recording every
item of expenditure incurred in the
purchasing, maintenance, operation,
supporting, administrative and management
functions - necessary to control their use.
• Total operating costs are then analysed per
unit of load, e.g. ton, m^3, passengers, etc.
4.1.1 THE IMPORTANCE OF VEHICLE FLEET
COSTING cont’
Financial Reporting (Accounting) vs Costing
• Financial Reporting (Accounting)
– Income Statement
– Balance Sheet
– Cash Flow Statement
– Historical (takes place after events occur)
– Strict Accounting procedures
– Done by Auditors and Accountants
4.1.1 THE IMPORTANCE OF VEHICLE FLEET
COSTING cont’
• The Costing system
– Provides accurate and uncomplicated info on how
each part of the operation performs.
– There is no prescribed format.
– Includes all the relevant cost items to obtain a
clear and accurate picture of vehicle/fleet costs.
– Categorise the costs into fixed, variable and
overhead costs.
– This simplifies cost analysis and assists in tariffselling.
4.1.2 PRICE CALCULATION
• Costing for the purpose of price calculation
• Demand and other market factors often
dictate a transport rate which does not reflect
the costs of producing the transport service.
• It is justifiable to base the rate on marginal
costing when transport equipment is underutilised.
4.1.2 PRICE CALCULATION cont’
• The carrier may, because of actual tactical
business considerations, decide to accept
consignments at a tariff that does not fully
cover the total costs, but covers all the costs
associated with undertaking the service
(direct operating costs).
• This method of minimum-limit tariff quoting is
known as marginal cost coverage.
4.1.2 PRICE CALCULATION cont’
Cost knowledge is important in price-setting,
both for the:
1. operator so that he at least knows to what
extent his rates differ from his costs,
2. and for the transport user so that he can
judge the rates quoted to him.
4.1.3 VEHICLE REPLACEMENT
Issues:
1. Replacing vehicle too early:
– Vehicle still has usable life
2. Replacing too late:
– Vehicle has become very costly
4.1.3 VEHICLE REPLACEMENT cont’
• Proper knowledge of a vehicle’s maintenance
costs it is possible to predict the time when a
vehicle will be nearing the end of its economic
life.
4.1.3 VEHICLE REPLACEMENT cont’
Factors to take into considerations when
deciding to replace vehicle:
availability of finance,
cost of a new vehicle,
cost and availability of spares and
cost and availability of workshop labour,
cost and availability of future work of the
vehicle,
4.1.4 COST COMPARISONS
• Compare Actual Cost to Standard Cost
• Standard Cost indicates what cost and
performance should be under normal, not
ideal, conditions.
4.1.4 COST COMPARISONS cont’
• The difference between the Actual Cost and
the Standard Cost will give the Variance
(Actual Cost - Standard Cost = Variance)
• When the difference or variance is abnormally
big then steps will have to be taken to
decrease it.
4.1.5 FACTORS AFFECTING VEHICLE
COSTS
Factors affecting vehicle costs include the
following:
A. The Driver
•
•
•
•
Correct recruiting and training
If the driver handles vehicle badly, potential fuel
saving will not be realised.
Driver must operate engine in optimum range
(where the relation between: road speed, engine
speed and fuel consumption is at a optimum)
Driving technique also influences the fuel usage,
maintenance costs and lifespan of the vehicle.
4.1.5 FACTORS AFFECTING VEHICLE COSTS cont’
B. Accidents and Insurance Claims
– Accidents affect the availability of a vehicle
(making vehicles unavailable)
– Other vehicles will have to stand in for the laid-up
vehicle (by means of rental and the use of spare
capacity or overtime).
– This increases operational costs
– also affect vehicle and product insurance as well
as excess payments.
4.1.5 FACTORS AFFECTING VEHICLE COSTS cont’
C. Operational Characteristics
– Fuel consumption and vehicle wear and tear are
affected by the topography (mountainous terrain)
and types of roads (gravel, tar, cement) traversed.
4.1.5 FACTORS AFFECTING VEHICLE COSTS cont’
D. Vehicle/Fleet Utilisation (load, distance, time)
– strive to have a full load on the vehicle (mass or
volume), for most of the distance and for as many
hours as possible in a day.
E. Packaging
– Good packaging techniques could result in fewer
incidences of theft and breakages and claims.
– E.g. shrink wrapping of packets of sugar etc.,
containerisation, strapping down of loads, etc.)
4.1.5 FACTORS AFFECTING VEHICLE COSTS cont’
F. Warehouse Location
• E.G.
• A warehouse situated 8km from the ‘optimum
point” (in relation to customers) involving 30
delivery vehicles, would result in an additional
R432 000 (30 vehicles x 16km per vehicle per
day x 225 working days x R4 per km) per
annum to operate the fleet.
4.1.5 FACTORS AFFECTING VEHICLE COSTS cont’
G. Standardisation (of vehicle)
– reduces parts inventory,
– Reduces diverse training needs of mechanics and
drivers,
– Reduces maintenance problems, etc.
– Standardisation thus leads to lower transport
costs in the longer term.
• ENDEND
4.1.5 FACTORS AFFECTING VEHICLE COSTS cont’
H. Strikes and labour unrest
– Good labour relations normally result in a
motivated workforce where absenteeism is low,
and productivity is high.
I. Lead times
– This term refers to the time lapse between
receiving an order, and the execution thereof.
4.1.5 FACTORS AFFECTING VEHICLE COSTS cont’
U. Management proficiency
– The better the decisions the lower the costs, and
vice versa
– Important that managers are well-educated and
well-informed about their jobs and that their
performances are monitored on a regular basis.
K. Vehicle selection
– Important that the correct vehicle is selected for
the job that is to be undertaken.
4.1.6 PLANNING A COSTING SYSTEM
The step-by-step sequence for the
establishment of a vehicle costing system is as
follows:
(a) Preparation
(b) Define the objectives
(c) Design the system
(d) Implement the system
(e) Maintain the system
4.2 COSTS
4.2.1 FIXED COSTS
There are certain constantly present cost
elements in road transportation undertakings
for the lifespan of a vehicle, independent of
the amount of work it has done.
These costs have to be paid even when the
vehicle is not used.
• All the fixed-cost elements put together
indicate the total costs of owning a vehicle
(not using it) for a specific period.
4.2.1 FIXED COSTS cont’
The most important elements of fixed costs are:
a) Licence fees
– This is a fixed cost as it is usually a fixed amount
paid annually whether the vehicle is used or not.
b) Insurance
– This is usually a fixed amount paid annually.
– This includes only the insurance of the vehicle(s).
– Goods-in-transit insurance for loads carried is
included under overheads.
4.2.1 FIXED COSTS cont’
c) Salaries/wages of drivers
– This is a fixed amount paid to a driver whether the
vehicle is running or not.
– This amount includes his salary plus all other fixed
extras such as housing subsidy, medical aid
holiday bonus, etc.
4.2.1 FIXED COSTS cont’
d) Rent and tax en premises
• In order to allocate the cost of premises to the
vehicles, the part of the premises allotted to
parking has to be determined.
• This is then incorporated in the total amount for
rent and tax to determine the amount per
vehicle.
• This can be done in one of two ways:
i.
ii.
Divided by the total number of vehicles
In proportion to the size of the vehicle
4.2.1 FIXED COSTS cont’
e) RETURN ON CAPITAL (opportunity cost)
• It must be kept in mind that when money is
borrowed to purchase a vehicle, interest will
have to be paid on that loan;
• Therefore, in this instance, the cost of the capital
is the interest paid on the loan.
• When a vehicle is purchased with cash, it must be
kept in mind that the amount could have been
invested and interest received thereon.
• This interest (opportunity cost of capital) must
also be included; in this instance, as the cost of
this capital.
4.2.1 FIXED COSTS cont’
f) DEPRECIATION
• Depreciation - a certain amount of the income
of the present vehicle is kept separate with
the aim of making provision for the new
vehicle.
• The operator has to decide in terms of
depreciation, the period for which he is going
to use the vehicle, or what the life expectancy
is in terms of years or kilometres.
4.2.1 FIXED COSTS cont’
• If the life expectancy of the vehicle is, for
example, five years, the fleet manager must
know where the money to purchase a new
vehicle in five years’ time will come from.
• A method is therefore needed which will
ensure that at the end of the five-year life of
the vehicle, sufficient funds have been
accumulated to pay for its replacement.
4.2.1 FIXED COSTS cont’
• If sufficient provision has not been made the
operator will have to dip into his own capital
or seek financial assistance.
• The original cost of the vehicle plus all the
extras, minus the cost of a new set of tyres
(these are included under variable costs)
minus the resale value of the vehicle, will
determine the amount for depreciation.
4.2.1 FIXED COSTS cont’
• The straight line depreciation method divides
the cost by the life.
• SL = (Cost – price of tyres – residual value) /
Life
Depreciation Example
• A delivery van is purchased for R250 000. The
expected life is 5 years. The tyres are valued at
R10 000 and the expected repurchase price
(second hand value) after 5 years is R90 000.
Calculate the annual depreciation as follows:
• (R250 000 – R10 000 – R90 000) / 5 years =
R30 000 per year
• Each year for 5 years R30 000 would be
expensed.
4.2.2. VARIABLE COSTS (RUNNING
COSTS OF VEHICLES)
• Variable or running costs are those costs
which are incurred solely when a vehicle is
operating.
• These costs have nothing to do with owning
the vehicle, or the expenses involved in
running the business as a whole.
4.2.2. VARIABLE COSTS (RUNNING COSTS
OF VEHICLES) cont’
• Elements for variable costs are:
(a) Fuel cost
– There are different reasons for keeping fuel
records:
1. It is a high individual cost item costs of a vehicle.
2. It can easily be stolen.
3. High fuel consumption can be an indication of
other problems:
4.2.2. VARIABLE COSTS (RUNNING COSTS
OF VEHICLES) cont’
Engine problems:
Problems with the engine efficiency
Drivers who fiddle with the pump to get more
power and higher speed
Drivers choosing wrong routes, which are not
as direct as could be
Poor driving techniques
4.2.2. VARIABLE COSTS (RUNNING COSTS
OF VEHICLES) cont’
(b) Tyre cost
(c) Maintenance cost
– These costs can be subdivided into material costs
and labour costs.
(d) Oil and lubrication
These costs are not included in maintenance costs
and are separately included in the costing system.
(e) Overtime
4.2.3 OVERHEAD COSTS
(ESTABLISHMENT COSTS)
• Overhead costs collectively describe all those
expenses incurred in running a transport
business which cannot be directly attributed
to any individual vehicle.
• Management’s salaries, the rental of the
premises, electricity accounts, telephone bills,
etc. have to be paid whether or not vehicles
are idle, for example due to lack of work or
mechanical failure.
4.2.3 OVERHEAD COSTS (ESTABLISHMENT
COSTS) cont’
The following are categories of overhead costs:
Management costs (e.g. salary of the
transport manager)
Administration
Workshops and stores
Branch offices
Sales and publicity
4.2.3 OVERHEAD COSTS (ESTABLISHMENT
COSTS) cont’
categories of overhead costs cont’:
Auxiliary fleet
Professional services
Telephone/telex/fax
Rent and rates
Business cars, travelling and accommodation
expenses
Training, journals, conferences, etc.
Advertising
4.2.3 OVERHEAD COSTS (ESTABLISHMENT
COSTS) cont’
Insurance, excluding specific vehicle insurance,
forms an important part of general overheads,
e.g.:
• Building insurance
• Content insurance
• Goods-in-transit insurance
• Public liability cover
• Life cover
• All-risks insurance
4.2.3 OVERHEAD COSTS (ESTABLISHMENT
COSTS) cont’
Two methods of apportioning overheads are
available:
1. A direct and equal division of costs between
the total number of vehicles in the fleet.
2. A division of the total overhead cost between
the total tonnage cubic capacity, revenueearning potential, etc. is more feasible
4.2.4 TOTAL OPERATIONAL COST OF
VEHICLES
• Fixed costs, variable costs plus overhead
costs, together make up the total operational
cost of vehicles.
Total operational cost of vehicles = Fixed costs +
variable costs + overhead costs
• 4 x 2 rigid commercial vehicle
– Total number of wheels = 4
– No. of driving wheels = 2
– Note that a pair of dual wheels
is classified as one wheel
4.2.4 TOTAL OPERATIONAL COST OF
VEHICLES cont’
• Increasing revenue trends (especially in
inflationary) are not sufficient evidence that
the operator is performing well, because
additional revenue is of no value unless it is
sufficient to cover the extra costs incurred in
earning that revenue, and also to provide for a
reasonable (predetermined) profit margin.
4.2.4 TOTAL OPERATIONAL COST OF
VEHICLES cont’
• Costing enables the operator to determine
whether work carried out for particular
customers is providing sufficient revenue to cover
the total cost of providing that work.
The use of costing information can also determine:
 Whether the fuel consumption is what it should
be.
 Whether the amount being spent on
maintenance and repairs is excessive/adequate.
4.2.4 TOTAL OPERATIONAL COST OF
VEHICLES cont’
Whether the vehicle is performing according
to the planned availability, and if not, why
not?
Ratios of labour costs versus output
(kilometres, tons, etc.)
Whether tyre costs are acceptable, etc.
4.3 CHARGING FOR TRANSPORT
• 4.3.3 CALCULATING CHARGE-OUT RATES
• Note: As actual costs cannot be known at the
time of setting the charge-out rates, budgeted
costs have to be used.
4.4 BUDGETING
4.4.1 INTRODUCTION
• A budget sets the objectives for the business
and has as a final aim: the forecasting of
profit.
4.4.3 TYPES OF BUDGETS
a) Operating budget
– the actual running costs of a department
b) Capital budget
– which contains the plans for the acquisition of
additional capital equipment to meet the
requirements for the expansion of the company,
– as well as the approved programme for the
replacement of existing capital assets
4.4.3 TYPES OF BUDGETS cont’
(a) Operating budget
• The operating budget is the budget which will
be prepared to determine the day-to-day
costs of a department for the next financial
year
• It would include all costs in order to give the
required level of mobility to company
personnel and to ensure an efficient customer
delivery service
4.4.3 TYPES OF BUDGETS cont’
(a) Operating budget cont’
• The following cost areas should be identified
in the operating budget:
(i) Personnel - headcounts and costs including
salaries, wages, pensions and medical aid
contributions.
(ii) Land and buildings - floorspace, rent lighting,
water, telephones, etc.
4.4.3 TYPES OF BUDGETS cont’
(a) Operating budget cont’
(iii) Company-owned transport - depreciation,
licences, insurance, tyres, repairs and
maintenance costs, drivers’ costs, fuel, etc.
(iv) Internal transport - including maintenance
costs for internal transport such as works
trucks, materials handling equipment and
loading facilities.
4.4.3 TYPES OF BUDGETS cont’
(a) Operating budget cont’
v) Vehicle hiring - including the hiring of trucks,
cars and delivery vans to supplement the
company-owned fleet.
vi) Freight - the cost of shipping goods by air,
rail, road and sea transport, and also mail.
4.4.3 TYPES OF BUDGETS cont’
(a) Operating budget cont’
(vii) Administration - clerical services, stationery,
office requisites, copying machines, etc.
(viii) Materials and supplies - the cost of
packaging materials, cases, pallets, etc.
4.4.3 TYPES OF BUDGETS cont’
(b) Capital budget
• A capital budget should clearly indicate the
equipment to be replaced during the period
as well as the additional equipment which will
be required to meet
– the needs of the company because of expansions
or
– the development of new products
• which require different methods of handling
and distribution.
• THE END