an introduction to job costing for road freight...
TRANSCRIPT
Guid
e
An Introduction to Job Costing for
Road Freight Operators
Acknowledgements
Freight Best Practice wishes to thank the following
organisations for their help in the publication of this
guide:
DFF International Ltd
Freight Transport Association (FTA)
G Webb Haulage Ltd
Road Haulage Association (RHA)
Road Tech Computer Systems Ltd
Turners (Soham) Ltd
Extracts from documents produced by the Road Haulage
Association and DFF International Ltd are reproduced
with their kind permission.
“Having spent many years, commercially and
professionally, trying to establish the importance of
sound costing systems in the transport industry, I
am very pleased to support this contribution by
Freight Best Practice, with its clear statement of
principles and practicalities. I commend it to the
industry.”
Mike Farmer, RHA
i
Foreword
Freight Best Practice is funded by the Department for
Transport and managed by Faber Maunsell Ltd to
promote operational efficiency within freight
operations in England.
Freight Best Practice offers FREE essential
information for the freight industry, covering topics
such as saving fuel, developing skills, equipment and
systems, operational efficiency and performance
management.
All FREE materials are available to download from
www.freightbestpractice.org.uk or can be ordered
through the Hotline on 0845 877 0 877.
The aims of this guide are to:
Help freight operators of all sizes and types to
understand the principles of job costing
Explain the benefits of robust job costing for
business performance and customer
satisfaction
Describe the main elements of job costing
Outline the factors affecting the choice between
developing your own system and buying a
commercial package
Provide a working reference for regular use by
operational and logistics staff
Disclaimer: While the Department for Transport (DfT) has made
every effort to ensure the information in this document is accurate,
DfT does not guarantee the accuracy, completeness or usefulness
of that information; and it cannot accept liability for any loss or
damages of any kind resulting from reliance on the information or
guidance this document contains.
This publication has been reproduced by Freight Best Practice and
the information contained within was accurate at the date of initial
publication (2005).
iii
Contents
1 Introduction 1
1.1 What Are Cost Models? 2
1.2 Who Is This Guide Aimed at? 2
1.3 The Structure of the Guide 2
1.4 A Summary of the Job Costing Process 3
2 Benefits of Cost Models 3
2.1 Improving Operational Efficiency 3
2.2 Developing a Robust Pricing Structure 4
3 How to Price a Job Using a Cost Model 6
3.1 Records 7
3.2 Management Accounts 7
3.3 Breaking Down Your Costs into Meaningful Information 9
3.4 Historic Versus Current Costs 10
3.5 Producing an Operating Account 11
3.6 Cost per Vehicle 12
3.7 Obtaining Sufficient Information about the Job 13
3.8 Job Calculation 13
3.9 Example Job Costing Exercise 14
3.10 Managing the Information 15
4 What Type of System to Use? 16
4.1 Commercial Software Packages 16
4.2 Developing an In-house Model 18
4.3 Pros and Cons of Different Types of Systems 18
5 Conclusions 19
6 Proforma 20
v
Case Studies
Case Study 1: Know Your Costs, Know Your Business p.2
Case Study 2: Costing for Profit p.7
1 Introduction
Although many businesses with larger fleets are likely
to have robust rate structures and systems for costing
jobs, this is by no means the industry standard. Many
businesses still price work by ‘gut feel’. Such
businesses often find it is not easy for managers and
customers to identify where savings could be made.
This guide is intended to help road freight operators to
develop a system for costing jobs (a cost model) that is
both relevant to their operations and which will provide
accurate pricing. Robust job costing has many benefits
for both freight operators and their customers (see
Section 2).
1.1 What Are Cost Models?
A robust job costing system is one of the keys to a
profitable road haulage operation. A cost model allows
you to provide a price for a job that bears a direct
relationship to the costs involved. Its role is to
understand the cost of your operation at an individual
vehicle level.
A sensible approach involves knowing all your costs
before calculating a price, including a profit margin.
Cost models rely on accurate job information. You will
need to consider issues such as mileage, storage and
handling charges, time needed for loading and
unloading vehicles, etc. Section 3 outlines a method for
ensuring that you record all the information you need for
robust job costing.
Depending on your circumstances, you can obtain this
information from your accountant or from your
management accounts and records of other costs. From
these sources, you can develop a process for
making pricing decisions based upon your business’s
requirements.
The process is not difficult and will help you make the
right business decisions. It removes some of the
constraints of pricing based upon experience, which may
reflect past knowledge of the work but may not represent
the true costs. In the long term, pricing based on
experience is unsustainable and could put the business
at risk.
A cost model does not need to involve use of an
advanced computer-based package. However, you may
find a computer package is more efficient at managing
and handling data.
A number of off-the-shelf packages are available, but it is
possible to create your own cost model using office
spreadsheet software (e.g. Microsoft® Excel) or even
manually. The pros and cons of using a commercial
product or developing your own system are discussed in
Section 4. The most important thing is for you to have the
tools to work out the price for a job based upon a full
understanding of its costs.
You may also find the
Fleet Performance
Management Tool
developed jointly
by this
programme and
the Freight
Transport
Association
(FTA), helpful in
recording information about
your fleet. The tool comprises a
spreadsheet and manual, which can
be used to analyse performance. See
the FREE Freight Best Practice
publication section at the end of this
guide for details on how to obtain your
free copy.
1
1.2 Who Is This Guide Aimed at?
This guide is intended to form a working reference
document for regular use by operational and logistics
staff. Depending on the size and type of company, it is
expected to be of interest to owner/operators, transport
and logistics managers, and other operational staff to help
them improve the profitability of their business.
This guide has two main functions:
For medium and smaller operators, it explains the
importance of understanding your costs and
provides a step-by-step process for using cost
information to create a system of accurate pricing
It provides a useful checklist for those with an
existing method of job costing. Although larger
operators should already have accurate cost
modelling in place, research carried out during the
preparation of this guide suggested that this is in
no way certain and that such companies could
benefit from achieving a better understanding of
the principles of job costing
1.3 The Structure of the Guide
This guide was developed following extensive discussions
with hauliers, trade associations, software companies and
financial specialists about the issues surrounding costing
and pricing. It presents a combination of theory and
practice to help you understand the fundamentals
involved in creating and using cost models to produce a
meaningful and accurate price for a particular job.
The guide has the following structure:
Section 2 explains the benefits to the business of
using cost models to improve operational efficiency
and to develop robust pricing structures
Section 3 describes the main components of a cost
model and how to use it to produce job costings
based on accurate data rather than informed
guesswork
Section 4 outlines the main types of commercial
products and examines the pros and cons of
developing your own in-house cost model
Section 5 summarises the conclusions that can be
drawn from the guide
1.4 A Summary of the Job Costing Process
Establish a method of recording costs
(see Section 3.1)
Obtain a set of management accounts
(see Section 3.2)
Produce an operating account
(see Section 3.5)
Allocate costs per vehicle
(see Section 3.6)
Obtain satisfactory job information
(see Section 3.7)
Calculate the job costs (see Section 3.8)
Case Study 1: Know Your Costs, Know Your Business
Graham Doe is the Managing Director of Profresh
Solutions, a partnership between Turners (Soham)
Ltd, Solstor UK Limited and Spiers & Hartwell Ltd.
Profresh provides primary consolidation of fresh
products for Sainsbury’s in the UK. Graham began his
career at Turners, rising from a graduate trainee to
general manager before being instrumental in
establishing Profresh.
“Job costing takes up a significant period of my
management time. It is the crucial difference between
being profitable and not,” says Graham. “I get regular
information from the accounts department to ensure
that I know our expenditure. From that I start to price
up the jobs.”
The cost model developed by Graham is fairly simple.
“The most important thing for me is to get regular and
accurate information. This is then broken down into my
fixed, variable and overhead costs. This means I can
look at a job and build my tender.” Graham says that
the challenge has been building up his cost information
over time. “I had to work out what I wanted and then
start to record the information.” As Graham has done
this, it has become a more solid system and easier to
maintain. “When I receive updates from accounts on
current costs (e.g. fuel), I just amend the information in
my model.”
Having the cost model in place has saved
considerable time and avoided incorrect pricing. “If I
get a price wrong, I cannot ask the customer for an
increase, I am stuck with it,” comments Graham. “I
need to know that the prices I charge reflect my costs,
as this will secure the future of the company.”
2
2 Benefits of Cost Models
Using a cost model will help you to:
Improve your operational efficiency and thus the
performance and profitability of your business
Develop a robust pricing structure that all
stakeholders (customers, employees, shareholders,
etc.) will understand
These benefits are discussed in more detail below.
2.1 Improving Operational Efficiency
Introducing a method of pricing that reflects the true cost
of jobs will have a positive impact on your business.
Better information leads to improved planning and
informed decisions. This will assist the process of
allocating resources and creating a more efficient
operation. In some cases you may decline jobs you
identify as being unprofitable.
Better understanding of your costs can lead to
improvements elsewhere. It will allow you to identify
opportunities to save money by reducing the operating
costs of your fleet, e.g. cutting fuel costs and making the
best use of your vehicles with efficient planning and
maximising of loads. Freight Best Practice offers free,
authoritative and impartial advice on how you can do this.
See the Free freight publication section at the end of this
guide for a list of some of the publications that are
available.
Some of the areas in which the use of cost models for job
costing can benefit operational efficiency are outlined
below:
Planning - effective planning is concerned with
forecasting future events, developing appropriate
strategies and then allocating resources to carry
them out. The most profitable freight operators are
those that plan the direction of their business.
Being prepared for change is one way of alleviating
the risk that immediate issues or concerns could
take priority over planning for the long term.
Knowing your costs and pricing jobs in the light of
this information is the beginning of this process. It
can promote a culture of efficiency, which can
spread to the rest of the business. This will help to
make the operation more flexible and capable of
meeting new challenges
Purchasing - the purchasing function creates
considerable financial and time costs for a business.
A co-ordinated approach to managing this process
through a purchasing system, allows for common
standards, accurate recording, enhanced
relationships and more robust budgetary procedures.
The use of a purchasing system goes hand in hand
with job costing. You need one to understand the
other. There are considerable benefits to be had by
developing such a system in terms of efficiency and
cost control. In addition if you know your true costs
then any purchases can reflect them accurately.
There is little point in specifying additional equipment
for work, which does not cover the cost to carry it out
Resource Utilisation - resource allocation is
concerned with efficiency. The more a resource is
maximised in the business the more efficient the
organisation. It is difficult to know exactly how to
allocate the resources you need to run your
business successfully. Although customer service is
important, knowing what resources are necessary
and how to allocate them is even more so. A cost
model allows you to identify what it actually costs to
carry out work, giving you a better idea of how you
should allocate your available resources. It can also
help when you are seeking to make efficiency gains,
as you will know where to target effort while still
being able to manage the day-to-day operation
Understanding Your Business - there is little
margin for error in the road haulage market, where
one small oversight can cancel out any profits. This
makes cost control an important part of operating.
Having the tools to understand costs and to price
accordingly will reduce the risk of losing revenue. A
cost model can help you improve your
understanding of the business. You will be able to
target areas for improvement, as you will know
more accurately what the impact of an external
event (e.g. increased insurance premiums) will be
on your business and be ready to take action
accordingly
3
Pressure on the Business - there are many
operational pressures in road haulage, e.g.
competition, road works, delays at regional
distribution centres (RDCs), etc. Such pressures
can have a serious impact on the profitability of
your business. Establishing a good understanding
of your costs by using a cost model can help to
reduce the financial pressures on the business,
leaving more time to deal with operational
pressures
Total Quality Management (TQM) - TQM is a way
of thinking about goals, organisations, processes
and people to ensure that the right things are done
right first time. This thought process can change
attitudes, behaviour and hence results for the better.
Companies committed to managing and improving
performance will generally be more successful. The
crucial point is knowledge of costs. This underpins
everything else in terms of quality management and
leads to a better understanding of the aims of the
business and control of resources
Performance Management - this process ensures
an understanding of an organisation’s performance
by using information from key processes, for
example, cost control, customer satisfaction and
reliability to assess and manage progress. The
information needed for your cost model (e.g. fuel
and maintenance costs) will overlap in many areas
including the information needed to determine
performance measures or key performance
indicators (KPIs) (e.g. average cost per unit
delivered, average running cost, etc.) and can form
the basis of a KPI system. It may also give you a
better understanding of KPIs. The ‘Fleet
Performance Management Tool’ described in
Section 1.1 is a very effective mechanism for
managing this information
Organisation - an organisation consists of a
systematic, structured entity established to carry
out a defined function. The organisation consists of
systems, processes and resources to ensure it
operates. The understanding of your costs is one of
these processes, which should ensure a more
robust structure and will help you make the most
appropriate decisions. A cost model means that the
information is immediately to hand and time is freed
up for other activities, such as customer service. It
contributes to a more effective and stronger
organisation
Customer Relationships - an important business
function is ensuring that your relationships with
customers are maximised so they are mutually
beneficial for both parties. Part of this is
demonstrating to your customers how effective your
processes can be, i.e. a comprehensive
understanding of your costs. Your customers will be
more likely to place business with you in the long
term if you know these. This demonstrates
professionalism; if you price based upon your true
costs, it indicates you are not only good at running
vehicles but know how to run an efficient business.
You are likely to show the same level of effort with
your service. Some operators base their price on
one that is lower than their competitors, but which
may not reflect their true costs. In the long term,
this type of approach will lead to impaired financial
performance and adversely affect customer service
2.2 Developing a Robust Pricing Structure
The fundamental aims of operational efficiency may be
ensuring every vehicle is on the road, all loads are
delivered and that the customers are happy. But if you are
not making any money, the business will not prosper.
Accepting work based on real costs can prevent this.
An accurate job costing system will help you deal with any
changes to your operation and how these will affect your
costs. Accurate information will make you more confident
of your pricing and its ability to deliver profits.
Some of the benefits of using a cost model to develop a
robust pricing structure are outlined below:
Profitability - knowledge of your costs is essential.
Pricing on experience is not always a true reflection
of the potential profitability. Pricing based upon a
mixture of experience and accurate knowledge of
should improve profitability
Pricing as a Tool for Profit - a strong approach to
pricing can often be neglected in an operational
environment. However, it establishes a culture that
4
is focused on improving the professionalism of the
business. Knowledge of costs is the starting point
for using price management as a straightforward
but powerful tool in your company’s development
Price Reflects True Cost - the main problem with
pricing on experience is that it does not tell you
the true cost of your decision. This will eventually
become an issue. When you price based upon
costs, you know which jobs pay and which do not.
You can also be more confident in your dealings
with customers, as the price you quote will be
what it costs to carry out and not what you think
the customer will be prepared to accept
Sustainable Business Practice - recovering
your costs will ensure your business’s financial
survival. A long-term strategy of pricing above
cost with a realistic operating margin will allow for
investment, growth and profit. Your cost model will
help you to achieve this. Below cost pricing may
make you popular with your customers but not
with your accountant or bank manager, and is not
sustainable in the long term
Maintaining Standards - a major disadvantage of
ad hoc pricing based upon experience alone is
that different people may use different methods
and have varying standards. There is a danger
that different staff in a traffic office will quote
differing prices for similar jobs. This problem is
solved by a set pricing structure within your cost
model
Management Resource - considerable
management time can be taken up providing
quotes for potential customers. Starting from
scratch each time can be a lengthy process.
Using a cost model will not only provide an
accurate system of pricing, it will also free up
management time for other tasks
Quotation and tender response - in a
competitive industry such as freight transport, the
time taken to get back to a customer can mean
the difference between securing and losing a job.
Therefore there is always pressure to provide a
quick response to a request from a potential
customer. A cost model will already contain the
information you need to calculate any rate and
you will be able to respond quickly. Without that
information to hand, you could lose potential work
Sound Financial Management - the discipline to
control business outputs and inputs is at the heart
of financial management. Creating a robust
5
pricing structure makes the relationship between
the price of a job to the customer and what it
costs your organisation easier to maintain. This
fosters more accurate pricing and, to some
extent, reduces reliance on the unknown
Customer Management - operators can
sometimes find themselves in the situation where
the work they are carrying out is losing them
money. Using a cost model to obtain the true cost
will allow you to make a commercial decision,
based on the particular circumstances, as to
whether to continue with this work. What is
important is that you do not price below cost just
to become busy and ‘grow’ the business
Business Development - to build your operation,
you will need to devote time to business
development. In the early stages of developing a
relationship with a new customer, it may be
sensible to offer them incentives including
discounting the rate. You will be able to do this
more easily if you know your costs than if you do
not. If you are aware of the impact of such a
discount on your costs, then it may be worth
proceeding. However, you need to proceed
carefully to avoid ending up with long-term
under-pricing of jobs. In addition, this strategy
alone may still not prevent the customer moving
away after the initial ‘cheap’ period
Competitive Advantage - often, there is little in
competitive terms to differentiate one haulier from
another. This makes it difficult to take the initiative
in the market to gain a competitive edge. Having
correctly costed rates for jobs is such an edge. It
may also be something that your competitor lacks
Customer Confidence. The systems you employ
in your business will have a direct effect on how
your customer views your business strategy. While
the main concern is getting the customer’s goods
delivered, your relationship with the customer can
be improved if you consider other areas such as
performance management or pricing systems. This
demonstrates your commitment to business
systems and raises your profile in the eyes of your
customer. A varied tariff structure indicates a sound
understanding of your costs and can be a unique
selling point when looking for new work
3 How to Price a Job Using a Cost Model
Pricing based upon experience, or gut feel, is common
practice in the road freight industry for a number of
reasons. As owners, managers and traffic planners, you
will have a thorough knowledge of the business brought
about by involvement with the day-to-day operation of
vehicles and experience of many different scenarios. You
will have a good idea of what the work costs, but does
this knowledge reflect actual costs? When was the last
time you used accounts information to calculate your
costs before pricing a job?
Another reason why instant pricing is widespread is the
need, in general haulage, to get back to a potential
customer as soon as possible to avoid losing the work to
a competitor. Thus, people are encouraged to satisfy the
customer by offering a price instantly. This is a risky
strategy because you will never be sure that the price
quoted reflects the true cost. If customers are aware of
this, it also makes it easier for them to influence the price.
Using a cost model to relate price to actual costs will
avoid these problems.
Cost models do not provide all the answers and are not
designed to replace your staff’s skills. Their purpose is to
give you confidence that pricing decisions are made using
accurate cost information.
As the business grows, it can be increasingly difficult to
keep cost data in your head. Cost models allow you to set
this information out in a structured way. The process is
reasonably straightforward but needs to be carried out in a
logical manner.
The main stages are described below and involve:
Setting up a suitable system of record keeping
(Section 3.1)
Using management accounts to obtain the
information required for job costing (Section 3.2)
Breaking down your costs into clear and
meaningful information (Section 3.3)
Taking account of current costs (Section 3.4)
Producing an operating account (Section 3.5)
Considering cost per vehicle (Section 3.6)
Obtaining sufficient information about the job
(Section 3.7)
Calculating the cost of the job (Sections 3.8 and
3.9)
Managing the information (Section 3.10)
Section 3.9 contains a simple example of costing a job
based on the RHA’s ‘Goods Vehicle Operating Costs
2005’. Example proforma are provided in Section 6 to
help you develop your own job costing system based on
accurate and up-to-date costs.
6
Case Study 2: Costing For Profit
Brian Fish knows more than most about job costing. A trained accountant, Brian spent time as Managing Director for
the family business, John Fish and Sons, a container haulier based in Avonmouth. Now as a Partner in leading
logistics consultancy company DFF International Ltd, Brian has managed a variety of projects aimed at improving
efficiency in the freight transport industry. One of his roles is to advise the RHA on vehicle/job costing and to compile
its annual Goods Vehicle Operating Costs guide.
When it comes to job costing, Brian has some straightforward advice.
“Operators must know their costs. This is always the starting point to job costing. I am still confronted
regularly by operators who have only a limited grasp of what their true costs are.”
According to Brian, it may be tempting to price from experience, but this is a highly risky strategy.
“All too often in this highly competitive industry, the method of rate setting consists of merely finding out
what is currently being paid and undercutting it! This suicidal approach has always been prevalent in our
industry, accounting for a generally unacceptably low level of rates. I would advise operators to spend time
studying their costs. All you need is a mechanism to properly understand your costs and apply this to the
work to be undertaken.”
However, Brian warns:
“Many transport companies have, in recent years, begun to employ increasingly sophisticated systems for
management purposes. Unhappily, it must also be said that many of the systems used suffer from being
unsound in principle and/or inappropriate to the specific needs of a particular operation. Few take adequate
account of the ability of a business to produce the detailed inputs required and then effectively use the
resulting output information.”
Using this guide will help all operators to understand the principles of job costing and to choose the most appropriate
type of system for their circumstances and requirements.
3.1 Records
To develop a successful cost model, you will need a good
system for recording:
Vehicle mileages
Fuel consumption
Vehicle wear and expenditure
Vehicle and driver utilisation
This information is vital for successful business
performance. Even if you do not intend to have a cost
model, it is advisable to hold this information for the
purpose of performance management.
Keep your record keeping simple; the more
information you collect and the more complicated it
becomes, the harder it will be to manage. You may
find the spreadsheet provided as part of the ‘Fleet
Performance Management Tool’, developed by
Freight Best Practice, helpful in recording fleet
information. The manual and spreadsheet are
available free of charge from the Hotline
0845 877 0 877 or via the website
www.freightbestpractice.org.uk
Discuss record keeping with your accounts
department or accountant (depending on your
business’s circumstances)
3.2 Management Accounts
An effective job costing system depends on your business
having:
A competent financial accounting procedure
Meaningful management accounts from which to
generate detailed vehicle costings
A good working relationship with your accounts
department or accountant based on experience, skill and
communication will create the conditions necessary for
reliable job costing.
Management accounts provide a documented report of
your company’s financial health. They need to be
up-to-date and easy to comprehend. If you do not have
accurate management accounts, you will not be able to
build a reliable cost model.
7
Table 1 shows an example set of management accounts terminology. If this is the case, ask your accounts
given to a haulier by his accountant. On their own, such department or accountant to explain how they are set out
accounts may not tell you a great deal. The process of and what each heading and figure means. Spending time
reviewing and understanding management accounts can with you will benefit them as well, as the more you
be daunting if you are not familiar with financial understand the easier their job will be.
Table 1 Example Set of Management Accounts (As Presented by the Accountant)
2004 2003
% of turnover* £ % of turnover* £
TURNOVER 2,790,921 2,183,988
Less cost of sales:
Wages and National Insurance contributions (NIC) 22 626,124 29 622,920
Drivers’ reimbursed expenses 1 15,906
Subcontractors 21 579,478 16 350,605
Ferries 0 889 0 4,204
Hire and rentals 1 27,562 1 27,966
Motor expenses
Fuel 20 548,179 20 436,107
Repair and parts 7 201,212 7 163,481
Tax and insurance 5 140,758 5 119,142
77 (2,140,108) 79 1,724,425
GROSS PROFIT 23 650,813 21 459,563
Less overheads:
Rent 1 31,754 1 24,697
Heat, light and power 0 1,221 0 1,946
Use of home as office 0 100
Leases:- Lifter/copier 0 1,341 0 2,156
- Units 5 136,301 3 68,011
- Trailers 0 10,680 0 10,680
- Tracking systems 1 16,220 0 6,550
Contract hire 1 33,088 1 27,888
Telephones 1 16,256 1 11,915
Repairs and renewals 0 2,763 0 2,122
Postage, stationery and adverts 0 2,552 0 2,885
Accountancy and auditing 1 15,000 0 10,700
Insurance† 1 28,912 1 15,562
Fines 0 104 0 160
Legal and professional fees 0 7,919 0 1,873
Hire purchase interest 0 9,866 0 6,329
Bank charges 0 2,292 0 1,769
Bank interest 0 47 0 1,129
Pension contributions 0 11,470 0 9,238
Office expenses/uniforms/cleaning 0 3,137 0 1,382
Computer updates 0 1,137 0 1,716
Sundries 0 4,438 0 4,454
Depreciation 1 33,939 3 70,944
13 (370,617) 13 (284,206)
Net profit before directors’ remuneration 10 280,196 8 175,357
Interest received 0 1,500 0 1,169
Profit/loss on sale of unit 1,800
Directors’ remuneration 1 (18,468) 1 (17,653)
Net profit before tax 9 263,228 7 160,673
Dividend 2 (60,000) 2 (45,000)
Corporation tax 2 (50,000) 2 (35,956)
NET PROFIT 5 153,228 4 79,717
8
* Rounded to nearest percentage point. † Buildings, contents, public liability, etc.
Source: Fish, B. H. ‘Know Your Costs. Costing and Management Accounting for Road Haulage Operations’. March 2005.
3.3 Breaking Down Your Costs into Meaningful Information
When you are confident with the information contained
in your management accounts, break them down into
more manageable headings. In the format shown in
Table 1, the accounts are not very useful for
understanding true performance. They only tell you
whether you made or lost money. To price work based
on costs, you need more detailed information that you
can analyse and build into a cost model.
Combining all revenues and expenses for different
parts of the business into one common pot can be
confusing and even misleading. It is therefore best to
divide your different activities into separate headings,
i.e. transport, warehousing, training, maintenance, etc.
This avoids cost lumping and makes analysis and
allocation per vehicle much easier.
Table 2 shows the management accounts for 2004
given in Table 1 re-organised into group information
relating to time related costs, overheads and distance
related costs. These categories and other terms used
in Table 2 are explained below:
9
Table 2 Management Accounts for 2004 Re-organised for Easier Analysis
£ £ £ £
Turnover (all) 2,790,921
Subcontract revenue 740,000 740,000
Subcontract cost 579,478
Subcontract profit 21.7%* 160,522
Turnover (own vehicles) 2,050,921
Time related cost (fixed costs) %†
Drivers’ wages and NIC 28.1 576,124
Drivers’ expenses 0.8 15,906
Ferries 889
Hire and rentals 1.3 27,562
Tax, insurance (vehicle, GIT) 6.9 140,758
Leasing: units and trailers 7.1 146,981
Depreciation (vehicles) 1 20,100 167,081
45.2 928,320 928,320
Distance related costs (variable costs)
Fuel 548,179
Repairs and parts 201,212
749,391 749,391
1,677,711 1,677,711
Operating margin 373,210
Overheads 370,617
Less: Leasing (units and trailers) 146,981
Depreciation 20,100
Interest 1,500
168,581
202,036
Add: Non-drivers’ salaries 50,000
Directors’ remuneration 18,468
Dividend 60,000
128,468
16.2%† 330,504 330,504 330,504
Profit own vehicles 2.1%† 42,706
Profit subcontract 160,522
Net profit before tax 203,228
(Please note the dividend
of £60,000 is removed
from the profit figure here
unlike in the
management accounts)
* Of subcontract revenue. † Of turnover (own vehicles)
Source: Fish, B. H. ‘Know Your Costs. Costing and Management Accounting for Road Haulage Operation’. March 2005.
Note the following about Table 2:
You will need to research subcontract revenue.
Sometimes it can be determined accurately, but
often it has to be estimated
In Table 1, the value for wages and NI includes
£50,000 for non-drivers’ salaries (i.e. traffic office
staff). Drivers’ wages and non-drivers’ salaries are
shown separately in Table 2 under overheads
Depreciation of £20,100 in Table 2 relates to
vehicles. It is shown under overheads in Table 1
but is moved to vehicle time costs in Table 2. The
balance is non-vehicle depreciation and remains in
overheads
Fixed or Time Related Costs
Fixed or time related costs are paid whether or not the
vehicle’s wheels are moving. They include:
Finance payments on equipment
Drivers’ wages
Vehicle depreciation
If you decided to stop running a vehicle for a day, you
would be able to remove the variable costs but not the
fixed. We will refer to these costs as time related costs.
Variable or Distance Related Costs
Variable or distance related costs are costs that only ocur
when the vehicle is moving. They include:
Fuel
Vehicle repairs and maintenance
Tyres
If the vehicle is not in use these costs do not ocur. We will
refer to them as distance related costs.
Operating Margin
The operating margin is the total turnover less your ‘direct
costs’, i.e. distance related costs and time related costs. It
tells you what income you will receive from operating your
vehicles, and is a useful tool for understanding your
overall financial performance.
Overheads
A common cause of confusion when analysing costs is to
consider only your operating costs. But you will have other
business costs, overheads, which do not fit this category.
These include the cost of:
Your office heating, lighting and power
Advertising the business
Telephone and postage
Office equipment
Professional fees
Bank charges
Overheads have to be factored into the costs of the
business. When you quote a price, you need to allow for
these.
Overheads can be shown as a separate cost heading in
addition to distance and time related costs. This will give
you a realistic breakdown of the costs of running your
business. Alternatively, you can add overheads as a time
related cost. What is important is that they are included.
Net Profit before Tax
This is calculated by subtracting your total business costs
(distance related, time related and overheads) from total
turnover. Net profit is another useful measure of your
company’s performance.
3.4 Historic Versus Current Costs
Management accounts can provide detailed costs for a
particular period and tell you much about the performance
of your business. However, these costs are from a period
in time. They do not reflect current costs.
If you use only historic information, the price you quote
will not be accurate. As an example, consider insurance
costs. They may have been £6,500 per vehicle for 2004,
but if your insurance premiums increased by 5% in 2005,
then your costs will be incorrect. Your records should
include current cost details such as these.
For the purpose of a cost model, you will need to establish
a budget that contains the costs that are currently being
10
incurred and those that are likely to be incurred. You need
to do this for every area of expenditure. For some items, it
will not be easy and may involve some assumptions. This
is acceptable as long as you are comfortable that these
assumptions are realistic.
3.5 Producing an Operating Account
Total costs can be divided into distance related costs, time
related costs and overheads to form an operating account.
A standard proforma for an operating account containing
annual figures is provided in Section 6, Figure 4. This
provides a budget for future events that links past known
costs and future predictions.
The Average Cost Problem
Costs should always be split into distance and time figures
to avoid the problems of unreliable average cost per mile
figures. If the two are lumped together, then there is the
potential for wild variations. For example, the time related
costs will be the same if a vehicle travels 400 or 200 miles
a day. But the distance related costs will be different.
Total cost is always a function of these two elements.
Reducing total costs to a figure per mile - as an average
- will give an incorrect value. There will only be one
period or distance at which the supposed average cost
per mile is correct; below that figure, it will be too low
and above it too high.
While it is acceptable to produce average costs per mile
for monitoring past performance or key performance
indicators, it would be misleading to use such average
costs for pricing jobs.
Job Specific Costs
Certain jobs may have unique costs. To address this
issue, a job specific cost heading is added to the
operating account. These costs refer to special items,
which may apply only to a particular job, e.g. tolls, ferries
etc.
Job specific costs can be added to the operating account
so as not to affect the time and distance related costs. If
they are not separated out, they will not be a true
reflection of the costs.
For example, if one delivery includes a ferry and one
does not, you might add the cost of this to the distance
related costs. This will obscure the distance related cost
figure and make it harder to price jobs accurately.
Alternatively you could simply miss it out, in which case
you would be under-estimating the true cost.
It is not necessary to include a job specific heading, but it
can be useful for completeness.
Annual Utilisation
Ideally, you want to have your fleet running as many
days as possible to maximise its revenue earning
potential. However, there are certain constraints.
Vehicles must be serviced, inspected and tested as part
of the requirements of your ‘O’ licence. There will also
be times when a vehicle is off the road undergoing
repairs. In addition, night and weekend utilisation could
be hindered by practicalities and thus be low.
Therefore, time related costs should be based on the
actual number of working days per year (i.e. effective
working days) and not 365. This means that the daily cost
will be higher.
An effective working day is one when the vehicle was at
work earning revenue (and preferably a profit) from a
customer. It takes account of downtime (e.g. for
maintenance, repairs and annual testing) and idle time
due to lack of work or non-availability of a driver.
One way to obtain a competitive edge is to use your
vehicles more during off peak times, such as weekends,
spreading the fixed costs across more days. Remember
that you will have to pay additional distance based costs
(fuel, wear and tear) and some time based costs (drivers’
wages). However, you will be receiving increased
revenue. As long as the total costs are not higher than the
revenue, such a strategy is worth considering.
11
3.6 Cost per Vehicle
In order to understand what each job costs, it is crucial to
relate the information in the operating account to the
vehicle fleet. You can then work out what each vehicle
costs to operate. Knowing what each vehicle costs to
operate will allow you to determine what price to charge
for a specific job. Section 3.9 contains an example job
costing based on such information.
The first step is to list all your vehicles by type. The Fleet
Performance Management spreadsheet can help you to
record information about your fleet. The spreadsheet is
included with the ‘Fleet Performance Management Tool’
published by Freight Best Practice. You can order your
free copy by calling the Hotline on 0845 877 0 877 or by
visiting www.freightbestpractice.org.uk
Now assign costs to your different types of vehicles.
Start by calculating the time related costs per
vehicle type, e.g. wages, insurance, licence,
depreciation, etc. Divide the total time related costs
given in your operating account (Section 6, Table 7)
by the number of effective working days in the year
to give a value in pounds per day. Alternatively,
you can use figures for a particular vehicle type
given in the RHA’s annual ‘Goods Vehicle
Operating Costs’ - but remember that these are
only average costs and not your costs
Now calculate a figure for the distance related costs
(e.g. fuel and lubrication) by dividing the total
distance related costs given in your operating
account (Section 6, Table 7) by the total miles
travelled to give a value in pounds per mile or
kilometre (but take care with units). The RHA’s
annual ‘Goods Vehicle Operating Costs’ also
contain mileage related costs. Certain time costs
will be easy to allocate to specific types of vehicles,
e.g. licence, insurance and depreciation and
drivers’ wages. Others, such as workshop costs
and goods in transit insurance must be allocated
across the fleet by reference to the number of
vehicles, the carrying capacity of the vehicles
(usually the most equitable method), or a
combination of the two factors
Finally, you need a figure for overheads, e.g. office
light and power, etc. There are a number of ways of
achieving this, including overheads as a proportion
of:
• Total number of vehicles in the fleet (simple but
gives the same proportion to a 7.5-tonne vehicle
as a 44-tonne vehicle)
• Carrying capacity (the larger the vehicle, the
greater proportion it will take)
• Miles travelled (the more miles, the higher the
proportion taken)
Table 3 (on page 13) shows a worked example. A blank
form to assist you can be found in Table 8 in Section 6.
12
3.7 Obtaining Sufficient Information about the Job
Obtaining sufficient information for the jobs you wish to
price is essential. Too often operators accept jobs
without asking the customer for all the relevant
information. This can result in higher costs and lower
profit than expected.
For example, a collection from a factory needs to be
loaded from the warehouse bay into the rear doors of a
trailer. If the trailer is a side-loading curtainside unit with
a rigid back wall, then it will not be possible to load.
Without this knowledge, the job will be unsuccessful.
A proforma is provided in Section 6, Table 9 for ensuring
that you obtain as much information as possible about
the job before pricing it.
Table 3 Breaking Down the Costs per Vehicle for a
Ten-vehicle Fleet
Ten vehicles: 40 tonne gross (4x2) combination each
Time related costs
Known costs (easily allocated to each
vehicle)
Wages (55 hours per week) £24,100
Depreciation £9,500
Licences £1,850
Vehicle insurance £5,700
Interest on capital £2,280
‘Unknown’ time related costs
These costs cannot be so easily allocated
to each vehicle. They must therefore be
allocated across the fleet. Referring to
your operating account can help. In this
instance you can take the total figure and
divide it by the number of vehicles
Total goods in transit insurance per year £3,300
Divide this by 10 (10 vehicle fleet) £330 per vehicle per
year
Total time cost £43,760 per vehicle
Distance related costs
Fuel 45 pence per mile
Tyres 1 pence per mile
Repairs and maintenance 13.6 pence per mile
Total distance related costs 59.6 pence per mile
Overhead costs
The same guideline applies to overheads
as to the ‘unknown’ time related costs.
For this example, divide the total overhead
cost by the number of vehicles
Total overhead costs £166,000 per year
Divide this by 10 (ten-vehicle fleet) £16,600 per vehicle
Total time costs + total £60,360 per vehicle
overhead costs
Total time costs per day £251.50 (based on
240 working days
Total distance costs 59.6 pence per mile
Healthy Profit, Healthy Loss
An English haulier had worked hard for many years to
build up a successful business. It had a good
reputation based upon hard work and customers were
generally very pleased with the service. There was a
high turnover with plenty of revenue and work.
As he neared retirement, the haulier decided to sell the
business as a going concern. As a first step, he
contacted his accountant to get an exact figure for the
value of the business. He proudly told the accountant
that last year had been exceptional and that he was
just as busy this year.
The accountant spent some time going through the books.
The revenue for last year was clear, but a different picture
emerged as the accountant looked further. Since the last
year, the position of the business was far from what the
owner believed was the case. Revenue was coming in as
normal and the operation was busy, but the costs had
begun to rise significantly. The owner had little knowledge
of these increases and the accountant identified
inadequate recording of cost information and prices that
were below cost as a significant issue.
Accurate job pricing based on true costs would have
put the business on a much sounder financial footing
and allowed the haulier to retire and live comfortably off
the proceeds.
3.8 Job Calculation
Working out how many vehicles you will need for a job is
the same as basic traffic planning. It requires matching
up:
The total distances required
Carrying capacities
Geographical locations
Time needed
The possibility of finding a backload
At this point, you will know how many vehicles you will
need and how long the job will take. Having worked out
what each vehicle costs you per mile and per day, you
will be able to match this cost information to the job
details and thus work out your job costs.
When you know what the job will cost you, you can start
to work out a realistic level of return from the job. This is
your profit.
If you are not going to make any profit, you will at least
know what the impact will be on your business.
13
This Guide cannot advise you on such matters, as this is
a decision for each operator. The important thing is to
ensure that you appreciate the implications before making
any choices.
Once you have established the cost to you and allowed
for an operating margin (profit), then you can go back to
the customer. Ensure that any quote:
Is clear and well presented
Includes any assumptions regarding job specific
costs
One of the best ways to illustrate the job costing process
is through an example like the one below.
3.9 Example Job Costing Exercise
Your company operates three 44-tonne tractor units on
traction only work from Harwich in Essex. A customer asks
you for a quote for transporting six trailers from Harwich to
Walsall, reloading in Corby and back to Harwich. You work
out the round trip distance to be 329 miles.
Each trailer will take one day to deliver. This is based
upon an 8-hour shift, including reload and breaks.
Using the costs given in the RHA’s ‘Goods Vehicle
Operating Costs 2005’ for a 44 tonne (6 x 2 + tri axle
trailer) (see Table 4), you can work out a cost per trailer
and for the entire job (see Table 5). In this example, the
overheads are added to the time related costs.
This is a basic example, but it demonstrates that the
process need not be complicated.
Note that:
Every operator will have different costs and factors
to consider, but you can use this example as a
proforma (a blank version of Table 5 is provided in
Section 6, Table 10, to help you work out your own
job costings)
The RHA cost tables provide an average. They are
not your costs. Using your own values from your
cost model would allow you to substitute your own
information for that in the RHA guide
Table 4 RHA Average Costs for a 44 tonne gross (6x2)
Tractor Unit
Data Average figures
Vehicle price (representative) £70,000
Average deprecation (years) 6
Average miles per year 69,000
Average days worked per year 240
Average miles per gallon 6.5
Average tyre life (miles) 65,000
Costs £
Time related per year
Wages: 55 hours* per week including NIC 24,100
Depreciation 11,670
Licences (£640, combined transport) 1,200
Vehicle insurance 6,620
Goods in Transit (GIT) insurance 430
Interest on capital (8.0%) 2,800
Overhead per vehicle 18,300
Total time costs 65,120
Time cost per day 271
Note Bonuses, excess hours, subsistence
and similar are not included. These
should be added to costings for rates as
incurred by job.
Mileage related pence per mile (ppm)
Fuel 49.4
Tyres 1.2
Repairs and maintenance 14.1
Total mileage costs 64.7
* Costs are estimated, at current average rates, for 55 hours per week
including NIC and holiday entitlements. The Road Transport
Directive will curtail average working time to 48 hours per week from
March 2005. However, with periods of availability still eligible for
payment, the RHA deem it appropriate at this time to assume that
wage costs will remain at anticipated levels even if spread over a
reduced number of hours per day.
Source: ‘Goods Vehicle Operating Costs 2005’. Prepared for the
Road Haulage Association by DFF International Ltd
14
Table 5 Job Costing Proforma Based on Example Haul
Customer: A N Other Ltd
Job: Six trailers from Harwich to
Walsall, reloading in Corby and
back to Harwich
Distance: 329 miles
Time taken: 1 day per trailer
Cost information per trailer
Time related cost
Time cost per day (from Table 1) £271.00
Mileage related cost
Cost per mile (from Table 1) 64.7 pence per mile
Total 329 x 0.647 £212.87
Job specific costs
Reload charge £30.00
Total cost £513.87
Operating margin (5% profit) £25.69
Desired rate £539.56
Total job cost 6 x 539.56 £3,237.36
3.10 Managing the Information
It is important to manage the job costing process in the
same way as any other task:
Make sure that all those involved are aware of its
existence and know how to use it
Store all the information in an accessible area
(either on a computer or simply on paper in a file)
Keep the information up-to-date
Do You Need to Change Working Practices?
As this example scenario illustrates, robust job costing
may require a change in culture within your company or
a change in procedures and working practices.
All operational and customer service phone calls to a
traffic office came through to the traffic desk, including
requests for price quotes. Such requests were
supposed to be passed on to the company’s sales staff,
but they were often on the road or not contactable. This
meant that many of the price queries fell to the
operational managers in the traffic office to deal with.
On a busy day, the manager was unable to devote the
proper time to working out a price and tended to
estimate by finding out competitors’ rates.
As operational pressures took more time up, the task of
pricing work fell to the traffic clerks. All that was
available to the clerks was a collection of prices
charged to a variety of customers over the past 4-5
years and the rates charged for current jobs. If it was a
new destination, a little more was added to the price if it
was further away and a little taken away if it was nearer.
Thus, jobs were costed on the basis of an out-of-date
information, competitors’ rates and ‘what feels right’.
The situation was exacerbated by an edict from head
office to boost traffic by not refusing work and setting a
price to win it.
However, soon head office had concerns about falling
revenue and jobs being undertaken at below cost. This
led to the introduction of a sophisticated job costing
programme to analyse all jobs undertaken.
Investigations took up many hours but failed to identify
the real cause of the problem. Only limited access to
this system was given and it could not be used to quote
for new work, only to look at past work.
Equipping the traffic clerks, operational managers and
sales staff with the same, up-to-date cost information
and instructing them to follow the same costing
procedure would have led to a more structured pricing
system. This would have been far more effective in
cutting costs and boosting profits.
15
4 What Type of System to Use?
Cost models allow you to use accounting information for
the purpose of pricing jobs. This process could be
carried out by a fairly advanced computer package, a
more basic system based on a spreadsheet or even by
a manual procedure based on paper records and forms.
The process used is not important as long as it fits your
requirements and helps you to understand your costs.
The main choice is between:
Buying a commercial software package
(either off-the-shelf or bespoke)
Developing your own company-specific cost
model
This section outlines these two options and presents a
summary table of their advantages and disadvantages.
4.1 Commercial Software Packages
The basic requirement for a cost model used to set
prices is accurate cost information. Computer software
packages can help you to store, manage and use this
information to produce job costings that reflect your true
costs.
Although such packages cannot complete the entire
task, they will speed up calculations and processing,
which can be a hindrance for a manual or low-tech
system. Operators with numerous sources of data may
particularly benefit from using a computer-based
package. Such packages may be
Bespoke
Off-the-shelf
An off-the-shelf package tailored to the
organisation’s exact requirements by a software
supplier
With a bespoke product built to your specification by a
supplier of business software, you will have the
advantage of integration with other systems in the
business. This means that certain functions can
communicate and work together. For example, job
costing information could be linked to a customer
management system that lists all your customer
requirements. This reduces duplication of tasks (i.e. the
need to enter data again) and reduces the chance of
error.
16
A computer system is an aid to cost modelling and not
necessarily the solution. Do not be lulled into thinking that
having a sophisticated computer system in place is
sufficient. All computer systems depend on the quality of
the data and information entered into the system, which in
turn relies on a sound understanding of the costs
associated with any job.
There are a number of different options depending upon
your requirements, which may range from simply wanting
to achieve a better understanding of job costing to making
extensive changes to your operation.
The main types of commercial products now available are
described below. Before deciding to buy a particular
product:
Ask for case studies of its proven use
Insist on a product testing process to ensure the
package is reliable and is fit-for-purpose
Job Costing Programmes
Great care must be taken in selecting any package that
claims to offer rate calculations. The main function of the
package is to manage the data flow from accounts and
turn it into accurate and usable information for job costing.
Computer Vehicle Routing and Scheduling
(CVRS) Systems
CVRS can help you to plan the best routes and schedules
to fulfil your orders - both quickly and accurately - using a
set of digital maps and user-set parameters. In-house
knowledge is not lost - users interact with the systems to
check the feasibility of the routes and schedules
generated and to make changes as necessary until they
are satisfied that the best solution has been found.
Basic CVRS systems can:
Reduce planning time
Reduce journey times
Minimise vehicle mileage
Reduce fuel costs
Improve customer service
More sophisticated systems will match customer locations
and requirements, and the types and quantities of goods
to be delivered and/or collected to available vehicle
capacity. This will produce the most economical routes
and achievable schedules.
Part of this function is the ability to build in costing
information. A CVRS system will take your cost
information and add it to its mileage data to establish a
costing system.
The use of a CVRS system is a long-term commitment
and one that can radically alter the business. You should
therefore consider the direction and aims of your business
before deciding to pursue this option.
Computerised Routing and Scheduling for Efficient
Logistics, published by Freight Best Practice, provides
practical guidance on CVRS. The guide is available free
of charge from the Hotline on 0845 877 0 877 or via the
website at www.freightbestpractice.org.uk
CVRS Brings Business Benefits
CVRS enables a specialist distributor of premium chilled
and frozen foods to balance its deliveries much more
evenly between vehicles and to plan more efficient
routes. Not only has customer service improved, but the
company has also saved thousands of pounds a month
in fuel, wear and tear and depreciation. It has also
reduced the number of vehicles required.
Accounts Packages
Accounts departments have generally benefited from
automation in the same way as many activities in
business. A number of suppliers offer computer based
accounts packages. These are systems designed to allow
faster management of your accounts through the use of
information technology. This has the effect of improving
efficiency, allowing greater understanding of cost
information.
Job costing functions can be specified as part of accounts
packages. The main benefit is that cost information from
the accounts system is transferred into a ready-made tool
for pricing jobs. This reduces the need for you to obtain
information first and will help to eliminate errors in data
entry.
17
Table 6 Advantages and Disadvantages of Commercial Packages Versus In-house Cost Models
Factor Developed in-house Commercial package
Helping you understand Good (it will be designed to do this). Will not do it for you. You will still need to understand
your costs what the data is saying.
Expense Time and effort by staff. Avoids the need to Can be expensive. Will need to consider whether the
purchase a dedicated software package. time saved and other benefits outweigh the extra cost.
Specification You decide what you want and what is required. Need to think carefully about your requirements and
draw up a detailed and clear specification. Otherwise,
you may end up with something you do not want.
System design Can keep it simple and do specifically what you Some of its functions will be suitable for your operation,
need. some will not.
Commercial advantage Specific to your business and its needs. Not unique to your company. May be being used by a
Allows you to decide your profit margin and be competitor.
confident you are recovering your costs for a
particular job.
Reliability Will depend on its design and how effectively it is You may feel more confident about its reliability.
updated.
Information processing May find it difficult to manage numerous data Efficient and quick.
sources and different outputs.
Communications Easier to maintain control of project and Will need to communicate requirements to external
communicate requirements. contractor with a different company culture.
Fit into business time A planned project with a clear timescale, objective May not be as easy to fit into business time as will
and budget can be built into other business required dedicated periods to implement.
activities, offering a productive use of resources
in downtime periods.
Time to develop Have to start from scratch. Could take some None as product already in existence.
considerable time though this guide will help.
Time to implement Should be straightforward. Some staff may need Available for use when purchased (once you have
training in its use. managed its introduction). Some staff may need training
in its use.
Time saving Even a simple spreadsheet will save you Saves considerable time in performing calculations.
significant amounts of time.
Testing May not be possible to test it to the same level. Any ‘bugs’ in the system should have already been
identified and removed by the supplier.
Support No direct support. May have option of support package.
Modification Any changes should be reasonably straightforward. May not be possible to change package to suit different
circumstances or it may be expensive to do so.
Barriers Cost models may be a new experience for you. Reduces the uncertainty by using a proven product.
However, there are significant cost and business
implications associated with such packages. Computer
accounting packages offer real benefits to a business, but
this has to be weighed against the additional cost. They
tend to be most suitable for larger operators. Any operator
will have to look at the payback on a system to see if it is
worth it.
If you are considering a computer accounts system, look
at the options for selecting a job-costing module.
Combined CVRS and Accounts Packages
The final type of system available is one that combines
the process of traffic planning with accounts. The job
costing function can be built in as described above.
These systems offer considerable benefits in the process of
co-ordinating outputs and activities. Some larger
organisations have opted for such systems, but they can be
just as appropriate for smaller operators. Their main
disadvantage is their cost.
4.2 Developing an In-house Model
It may be that the option of buying a commercial product
is not suitable for your company. Indeed, as mentioned
previously, one is not necessary and you can use
whatever system you like to understand your costs. A
more practical option may be to develop a
company-specific solution using the advice and proformas
given in this guide to help you.
4.3 Pros and Cons of Different Types of Systems
Table 6 summarises the pros and cons of buying a
commercial software package and developing your own
in-house model.
Accurate job costing can be the difference between profit
and loss. What is essential is that you have a system you
can trust and does what you want it to do.
18
5 Conclusions
A cost model allows you to provide a price for a job that
bears a direct relationship to the costs involved. It uses
current costs rather than historic ones and enables you
to understand the true cost of your operation down to
individual vehicles in the fleet.
Cost models have many benefits for freight operators
including:
Robust pricing structures based on true costs
Tighter control of operating costs
Informed business decisions
Improved business performance
Better utilisation of resources
Increased professionalism
Competitive advantage
Cost models allow you to set out cost data in a
structured way. They require:
A suitable system of record keeping
A good working relationship with your accountant
or accounts department
The importance of understanding the time and
distance related costs associated with your
business
An understanding of the business’s overheads
The use of management accounts to obtain the
required cost information
The production of an operating account
A method for calculating what a job will cost to
carry out.
A system for managing the job costing
information, which is accessible and easy to use
It may not be easy at first to develop a cost model for
use in your business but, over time, it will be worth the
effort. One option is to purchase a commercial software
package, which could be linked to other business
functions such as vehicle routing and scheduling. The
other is to develop you own in-house model. Both
options have their pros and cons; the choice will depend
on your circumstances and requirements.
Cost models do not provide all the answers and are not
designed to replace your staff’s experience. Their
purpose is to give you confidence that pricing decisions
are made from accurate cost information. 19
6 Proforma
The following pages contain blank versions of proforma mentioned in the text for you to photocopy and use.
Table 7 Operating Account Form (Annual Figures). This provides a template on which to set out all the costs into
distance, time, job specific and overhead related costs.
Year:
Haulage revenue (own vehicles only) £ A
Distance related costs
Fuel and lubrication £
Tyres £
Spares £
Outside repairs £
Total distance related £ C
Time related costs
Drivers’ wages and NIC £
Depreciation (vehicles) £
Licences £
Insurance: Vehicles £
GIT £
£ £
Sheets and straps* £
Workshop: Wages and NIC £
Consumables £
Establishment £
£ £
Total time related £ B
Job specific costs £
Drivers’ subsistence £
Special bonus payments £
Tolls and ferry charges £
Total job related £ D
Total operating costs (B + C + D) £ E
Gross profit own vehicles (A - E) £ F
Revenue from subcontractors £
Less paid to subcontractors £
Gross profit on subcontract £ £ G
Total gross profit (F + G) £ H
Overheads as schedule £ I
Net profit (H - I) £
* Sheets = load-covering tarpaulins. Straps = load-securing equipment.
Source: Fish, B. H. ‘Know Your Costs. Costing and Management Accounting for Road Haulage Operation’. March 2005.
20
Table 8 Individual Vehicle Costs. This is a method for allocating all the distance, time and overhead costs to each vehicle.
Time related
Total time related costs A
Total actual working days B
Total cost per day (A divided by B) C
Distance related
Total distance related costs D
Total mileage E
Total distance related cost per mile (D divided by E) F
Overhead costs
Total overhead costs G
Total fleet H
Total overhead per vehicle I
Total fleet
Now list down the total fleet
Fleet information J
Vehicle type
Cost per type of vehicle
Now by using the information from your cost records and the operating account allocate the costs to each vehicle type.
Type Time cost (per day) Distance cost (per mile) Overhead cost (per vehicle)
21
Table 9 Proforma for Rate Quotation. This form is to be used to gather the information for a job in order to price
1. Name of customer:
2. Details of job (include any special features):
3. Size of truck required 15. Return load time cost
4. Estimated days/hours for job 16. Return load distance cost
5. Estimated trip miles 17. Return load specific costs
6. Market/competitor rates (if known) 18. Total return load costs
7. Anticipated time cost of job 19. Total round trip costs (10 + 18)
8. Anticipated distance cost of job 20. Return load revenue
9. Job specific cost: 21. Minimum required outward revenue (19 - 20)
Subsistence
Bonus
Tolls
Ferry
Other Profitability
10. Total cost of job (7 + 8 + 9) 22. Actual revenue (i.e. actual price paid by the customer)
11. Target margin 23. Actual time-related costs
12. Target revenue (10 + 11) 24. Actual distance-related costs
13. Target rate 25. Actual job-specific costs
14. Agreed rate 26. Actual profit or loss (22 - 23 - 24 - 25)
Notes a) You will often find that a job will be completed with some hours in the day left over. These hours will be
costing you money. You will need to decide whether you can use them for something else. If not, can those hours be charged to the job without making you uncompetitive?
b) Where a return load is involved, it is important that you cost the whole round trip, allowing for the revenue you are likely to earn for the return and deciding how much to allow against the outward job for which you are quoting.
c) When you are allocating costs in lines 7, 8, 15 and 16, don’t forget when using the appropriate figures from Table 4, if possible to substitute your own costs where they are different.
Based on: Fish, B. H. ‘Know Your Costs. Costing and Management Accounting for Road Haulage Operation’. March 2005.
22
Table 10 Job Costing Proforma. This form is to be used to calculate all the costings for a particular job.
Customer:
Job:
Distance:
Time taken:
Cost information per vehicle
Time related cost
Time cost per day (from Figure 5)
Mileage related cost
Cost per mile (from Figure 5)
Total
Job specific costs
Reload charge
Total cost
Operating margin ( % profit)
Desired rate
Total job cost £
23
Help Us to Help You
An Introduction to Job Costing for Road Freight Operators
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