Interface-3 – REWOLVE TM

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3. VEHICLE STANDING COSTS

Standing costs are the costs of having a vehicle and driver available for work.
They are generally fixed costs and are not normally affected by the amount the vehicle is used.
The five major standing-cost components are:
Vehicle Excise Duty (VED).
Vehicle insurance.
Drivers' wages and NI costs.
Vehicle depreciation.
Administration costs.

Goods vehicle excise duty is based primarily on the vehicle's gross or train weight.
For each of the seven VED bands, the training material identifies a lower amount for low-emission vehicles holding a Reduced Pollution Certificate.
For larger vehicles, the number of axles is also relevant.
VED is paid in advance, either six-monthly or annually.

Include the premium for motor insurance: third party, third party/fire/theft or comprehensive cover.
The premium should be taken from the insurer/broker charge note.
Other insurance costs, such as goods-in-transit insurance, are treated as administration expenses.

Whether drivers' wages are treated as fixed or variable depends on how the company pays the driver.
A basic or guaranteed wage is treated as a standing cost.
Overtime, bonuses, subsistence and similar additional payments still have to be recovered.
These additional payments are normally added after the main costing calculation or estimated and included with the standing cost if the company uses that approach.

Depreciation is an estimate of the reduction in a vehicle's value over its life.
For costing, the vehicle's initial cost is normally written off over its expected life.
Original tyre equipment is treated as a running cost and is deducted before depreciation is calculated.
Two methods are described: straight line and reducing balance.

The same amount of depreciation is charged each year.
Formula: (original vehicle cost − initial tyre equipment − estimated residual/resale value) ÷ expected vehicle life in years.
Training example: £85,000 purchase price − £6,875 initial tyres − £25,625 residual value = £52,500 to depreciate.
£52,500 ÷ 5 years = £10,500 depreciation per year.
A straight line is easier to calculate and is the method identified as most commonly used for vehicle costing in the material.

A percentage is applied to the written-down value each year.
Depreciation is higher in the earlier years and lower in later years.
Training example: £85,000 − £6,875 tyres = £78,125 starting value; at 20%, year 1 depreciation is £15,625.
The method is intended to produce a written-down value close to a realistic resale value at the end of the vehicle's life.
It is more realistic where a vehicle is not retained for its full expected life.

Straight line: simpler, easier to understand and operate.
Reducing balance/diminishing value: more realistic where value falls fastest in the early years.
The depreciation method used for costing does not determine the tax treatment.
The source notes state that depreciation in annual accounts is added back to net profit before tax, and current HMRC allowances are then deducted for tax purposes.

Where trailers/semi-trailers are used and there are more trailers than towing vehicles, trailer depreciation must be allocated fairly.
Add the depreciation costs of all trailers and divide by the number of towing vehicles.
Example: 6 trailers × £1,800 annual depreciation = £10,800.
With 4 tractor units, £10,800 ÷ 4 = £2,700 trailer depreciation allocated to each tractor unit.

Administration costs are overheads that cannot be specifically allocated to individual vehicles.
Examples: rent, rates, telephone, heating, lighting, postage, office salaries, printing and other insurance.
Historical profit-and-loss figures should be updated/projected for the current period using current information and estimates.
Where premises are owned freehold, the material notes that a hypothetical rent may be included for charging/rating purposes.

Administration costs must be apportioned equitably across the fleet.
The method chosen is a company decision, but the full overhead must be recovered if the business is to avoid reducing its profit.
It is unwise to add an arbitrary percentage surcharge to operating costs without analysing the actual overhead requirement.

Useful for mixed fleets because it takes account of carrying capacity/earning potential.
Step 1: calculate total fleet carrying capacity.
Step 2: divide total administration costs by total tonnes of capacity.
Step 3: multiply the cost per tonne by the payload/capacity of the vehicle being costed.
Training example: £120,000 ÷ 250 tonnes = £480 per tonne.
26-tonne vehicle: 26 × £480 = £12,480.
17-tonne vehicle: 17 × £480 = £8,160.
10-tonne vehicle: 10 × £480 = £4,800.
7-tonne vehicle: 7 × £480 = £3,360.

A combined method can split overhead recovery between a per-vehicle basis and a payload basis.
Training example: 50% of £120,000 is allocated by number of vehicles and 50% by payload.
Vehicle element: £60,000 ÷ 15 = £4,000 per vehicle.
Payload element: £60,000 ÷ 250 tonnes = £240 per tonne.
26-tonne vehicle: £4,000 + (26 × £240) = £10,240.
17-tonne vehicle: £4,000 + (17 × £240) = £8,080.
10-tonne vehicle: £4,000 + (10 × £240) = £6,400.
7-tonne vehicle: £4,000 + (7 × £240) = £5,680.

Administration costs can be apportioned according to miles or kilometres travelled.
This may be less fair for mixed fleets because a smaller vehicle travelling further could absorb more overhead than a larger vehicle travelling fewer kilometres.
Formula: total administration costs ÷ total fleet distance = administration cost per km.
Training example: £120,000 ÷ 1,000,000 km = £0.12, or 12 pence per km.
Multiply the 12p/km by the expected distance of each vehicle to allocate its share.