MoneySaver Tip - Vehicles

Keep on Truckin’

Monitoring each vehicle as a cost centre is the key to managing fleet costs.

Understanding the cost of owning and operating vehicles and/or other heavy equipment is critical to making a profit. Ensuring that each vehicle is contributing to the bottom line can be a logistical nightmare. Each vehicle must be monitored as a cost centre. Only by establishing the cost of running each vehicle is it possible to determine the cost of the fleet and determine whether sufficient markup has been included in the client billing to recover costs.

Cost per Vehicle

The following is a list of factors that need to be recorded: 

date and cost of purchase 

vehicle identification number (VIN), 

year of manufacture, 

make, 

model, 

and any customizations or post-purchase modifications 

all financial data whether the vehicle was bought outright, financed or leased terms of any loan or lease, including payment amount, date, interest rate, and forecasted payoff date amortization schedules to provide information on principal repayment, interest expense and date of final

payment and to calculate the capital cost allowance for each vehicle and the tax impact of disposal details of the sale of the vehicle, including date of sale or disposal trade-in and to whom profit or loss on the sale a record of the operational history (i.e., maintenance, fuel, storage/parking, and repair costs)

any enhancements required either for a specific task or a site-specific job.

Most measurement methods are a best guess estimate.

Measuring Costs

Most measurement “methods” are, in fact, a “best guess estimate” since it is nearly impossible to know precisely the length of the asset’s useful life. To calculate the cost of operating each vehicle, one of the following factors is a useful denominator: life expectancy in hours or days

kilometres driven before disposal or trade in hours of productive capacity.

Once the denominator is chosen, it is then possible to assign a cost to each piece of equipment (e.g., a purchase price of $100,000, plus estimated kilometres driven 500,000, equals a cost recovery of 20 cents per kilometre). Although management would never hire an employee without knowing their salary or hourly wage plus benefits, it is not uncommon for management to purchase assets knowing the base cost but having only a vague idea of the operating cost.

Estimating operational cost can be difficult without having a history of operational cost available. Start creating a history by collecting and recording data from the following sources:insurance costs from your broker or an online search maintenance costs using the suggested maintenance schedule and the shop rate from the dealer or local mechanic tire replacement costs using an online search combined with estimated replacement kilometres fuel costs based on the manufacturer’s rating or from the manufacturer’s website; Natural Resources Canada www.nrcan.gc.ca provides estimates for most vans, pickup trucks, etc. fuel consumption of long-haul vehicles is harder to estimate because of the variables in distance, loads and terrain; a starting point can be a review of various manufacturers’ claims to arrive at an acceptable average; another source is the Natural Resources Canada website under the heading Fuel Efficiency Benchmarking in Canada’s Trucking Industry where a recently updated study indicates that fuel efficiency is improving to 40L/100 km (seven miles per imperial gallon).

Operational Unit Costs

Once costs have been estimated, it is possible to estimate a per unit cost for operations. Thus, if a per year cost estimate is $15,000 and the vehicle is driven 30,000 kilometres per year, 50 cents per kilometre should be added to the pro rata capital cost. Management has thus determined the minimum amount to include in billing to recover vehicle expense. At this point, you may wish to consider whether your billing model should include a mark-up on the established operational cost to recover administrative cost or downtime.

Recording Real Time Data

Software is now available for asset management and tracking vehicle costs. These systems help in building a data base for future reference. Sophisticated systems will also integrate driver records, provide service alerts, track service done, schedule future service, map vehicle locations through GPS, record distances driven and time spent at the docking bay, and create route optimization maps.

If software costs are prohibitive, a spreadsheet can be used. The most difficult aspect of tracking real time costs is educating staff to track vehicles and provide that information to the accounting department.

Actual versus Estimate

Actual costs per vehicle should be compared to the original estimated costs. If estimates are too high or too low, adjustments can be made to the cost allocation formulas.

Comparing tracked costs to various “job” revenue establishes whether a vehicle is making money. Management’s review of data by vehicle enables informed decisions about the operational efficiency of capital assets by raising the following questions: Is an idle vehicle redundant and should it be sold or traded?

Do we need to find more jobs that can use a particular vehicle? Are operational costs too high because of constant downtime for repairs and maintenance? Are we allocating the most effective vehicles to the job efficiently and economically?

Better Cost Management — Better Profit

Whether your business owns one, two or 10 vehicles, building a history that provides information to ensure the costs of owning and operating a vehicle are considered when bidding on or billing a job means a better bottom line.