Freight Costing

There are two main reasons why a special form of cost reporting is beneficial to a manager running a transport operation. These are

• the need to know the details of the vehicle and fleet performance in order to control the operations
• the need to know in sufficient time to make any necessary changes.

A weekly system of reports for every vehicle in a fleet will show, amongst other things, the distance that the vehicle has travelled and how much money has been paid out for fuel for this vehicle.

Two types or aspects of a costing system have been identified:

• the recording of actual costs and performance in order to monitor and control the transport operation
• the measuring of costs to identify the amount to allow to cover costs and to budget for a job.

Important considerations in costing are

• manpower: the drivers of the vehicles;
• machinery: the vehicles themselves;
• materials: associated resources, such as tyres, fuel, etc;
• money: the respective costs of the resources;
• minutes: the time when these resources are used for different purposes.

Various types of costs involved are

• Direct cost – It is a cost that is directly attributable to a cost center and would include – fuel, the vehicle road licence and vehicle insurance.
• Indirect costs – They are the general costs that result from running a business. They are also referred to as overhead costs, administrative costs or establishment costs. These costs have to be absorbed or covered in the rates charged to the customer. Thus, they need to be spread equally amongst the vehicles in the fleet. Examples are office staff wages, telephone charges and advertising.
• Fixed costs – It refers to the cost center itself (ie the vehicle). These costs will not vary over a fairly long period of time (say, a year) and they are not affected by the activity of the vehicle and include depreciation of the purchase cost of the vehicle, vehicle excise duty and vehicle insurance.
• Variable cost – It is the opposite of a fixed cost in that it varies with respect to the distance the vehicle travels. It is sometimes known as the running cost. Examples include fuel and oil.

Whole life costing

This approach to assessing the cost of owning and operating an asset has become accepted as a particularly good way of identifying the true cost of a vehicle. It is especially useful when trying to compare quotations from different companies.

The idea is to include in the analysis all the cost elements that are involved in a vehicle’s life or at least that part of its life when it is owned by a particular organization. The major cost elements are the initial purchase price of the vehicle and the total operating costs incurred by that vehicle during its life, ie maintenance, tyres and fuel, with reduction of the achieved/guaranteed residual value of the vehicle.

Zero-based budget

It involves as though the operation had never existed and is being planned for the first time, hence the name ‘zero’ or back to the starting point. Each element of the operating budget must be analyzed line by line. For example, the cost of fuel will be calculated by examining the fuel consumption of the different types of vehicle in the fleet according to the manufacturers’ technical figures, which will be divided into the annual mileages for this type of vehicle and finally multiplied by the cost of fuel.