Guide to Calculating Ownership and Operating Costs of Department of Transportation Vehicles and Equipment: An Accounting Perspective (2020)

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© 2020 National Academy of Sciences. All rights reserved. ACKNOWLEDGMENTS The research for this document was conducted through one or more programs administered by the Cooperative Research Programs (CRP) of the Transportation Research Board (TRB) of the National Academies of Sciences, Engineering, and Medicine: • Airport Cooperative Research Program (ACRP) research is sponsored by the Federal Aviation Administration (FAA). • Hazardous Materials Cooperative Research Program (HMCRP) research is sponsored by the Pipeline and Hazardous Materials Safety Administration (PHMSA). • National Cooperative Freight Research Program (NCFRP) research is sponsored by the Office of the Assistant Secretary for Research and Technology. • National Cooperative Highway Research Program (NCHRP) research is sponsored by the American Association of State Highway and Transportation Officials (AASHTO), in cooperation with the Federal Highway Administration (FHWA). • National Cooperative Rail Research Program (NCRRP) research is sponsored by the Federal Railroad Administration. • Transit Cooperative Research Program (TCRP) research is sponsored by the Federal Transit Administration (FTA) in cooperation with the Transit Development Corporation. COPYRIGHT INFORMATION Authors herein are responsible for the authenticity of their materials and for obtaining written permissions from publishers or persons who own the copyright to any previously published or copyrighted material used herein. Cooperative Research Programs (CRP) grants permission to reproduce material in this publication for classroom and not-for-profit purposes. Permission is given with the understanding that none of the material will be used to imply endorsement by TRB and any of its program sponsors of a particular product, method, or practice. It is expected that those reproducing the material in this document for educational and not-for-profit uses will give appropriate acknowledgment of the source of any reprinted or reproduced material. For other uses of the material, request permission from CRP. DISCLAIMER To facilitate more timely dissemination of research findings, this pre-publication document is taken directly from the submission of the research agency. The material has not been edited by TRB. The opinions and conclusions expressed or implied in this document are those of the researchers who performed the research. They are not necessarily those of the Transportation Research Board; the National Academies of Sciences, Engineering, and Medicine; or the program sponsors. The Transportation Research Board, the National Academies, and the sponsors of the National Cooperative Highway Research Program do not endorse products or manufacturers. Trade or manufacturers’ names appear herein solely because they are considered essential to the object of the report. This pre-publication document IS NOT an official publication of the Cooperative Research Programs; the Transportation Research Board; or the National Academies of Sciences, Engineering, and Medicine. Recommended citation: Morrison, G., E. Emil, H. Canipe, and A. Burnham. 2020. Guide to Calculating Ownership and Operating Costs of Department of Transportation Vehicles and Equipment; An Accounting Perspective. Pre-publication draft of NCHRP Research Report 944. Transportation Research Board, Washington, D.C.

CONTENTS GLOSSARY OF TERMS .............................................................................................................. vi SUMMARY .............................................................................................................................. xi 1. MOTIVATION OF GUIDE ..................................................................................................... 1 2. FUNDAMENTALS OF FLEET COST ACCOUNTING ................................................................. 2 2.1. Lifecycle Costing ............................................................................................................ 2 2.2. Users of Fleet Cost Information .................................................................................... 3 2.3. Role of Fleet Manager in Cost Accounting ................................................................... 4 2.4. Context for Fleet Cost Accounting ................................................................................ 5 3. METHODOLOGY FOR FLEET COST ACCOUNTING ................................................................ 7 3.1. Background Information ............................................................................................... 7 3.1.1. Direct Costs ............................................................................................................. 7 3.1.2. Indirect Costs .......................................................................................................... 9 3.1.3. Allocating and Aggregating Costs ......................................................................... 11 3.1.4. Activity-Based Costing .......................................................................................... 12 3.2. Defining Fleet Activities .............................................................................................. 12 3.2.1. Equipment Provision ............................................................................................. 13 3.2.2. Maintenance and Repair Provision ....................................................................... 13 3.2.3. Parts Provision ...................................................................................................... 13 3.2.4. Fuel Provision ........................................................................................................ 14 3.2.5. Other Activities ..................................................................................................... 14 3.3. Eight-Step Methodology for Cost Accounting ............................................................ 14 3.3.1. Step 1: Identify Users of Cost Accounting Information ........................................ 14 3.3.2. Step 2: Review Current Fleet Cost Accounting Practices ...................................... 14 3.3.3. Step 3: Identify Direct and Indirect Costs of Fleet Services and Equipment ........ 15 3.3.4. Step 4: Determine Equipment Groupings ............................................................. 15 3.3.5. Step 5: Apply ABC Approach ................................................................................. 16 3.3.6. Step 6: Apply Markup for Contingencies .............................................................. 17 3.3.7. Step 7: Determine a Method for Aggregating Costs to the Appropriate Level within Organization ............................................................................................... 17

iii 3.3.8. Step 8: Estimate Future Costs to Understand Impacts from Use and Aging, Technology Change, and Deferral of Spending .................................................... 17 4. EXAMPLES OF ESTIMATING FLEET COSTS USING ABC METHOD ........................................ 19 4.1. Hypothetical Fleet Description ................................................................................... 19 4.2. Classify Direct Costs by Activity .................................................................................. 20 4.3. Identify Cost Drivers for Indirect Costs ....................................................................... 21 4.4. Allocate Costs into Activities ....................................................................................... 22 4.5. Calculate Detailed Costs of Activities ......................................................................... 24 4.5.1. Equipment Provision ............................................................................................. 24 4.5.2. Maintenance and Repair Provision ....................................................................... 25 4.5.3. Parts Provision ...................................................................................................... 26 4.5.4. Fuel Provision ........................................................................................................ 27 5. KEY CONSIDERATIONS IN FLEET COST ACCOUNTING ........................................................ 28 5.1. Weighing Precision versus Effort ................................................................................ 28 5.2. Determining which Indirect Costs to Include ............................................................. 29 5.3. Accounting for Inflation .............................................................................................. 29 5.4. Applying Indirect Costs to Rates ................................................................................. 30 5.5. Capitalizing all Equipment and Associated Make-Ready Costs .................................. 30 5.6. Segregating Accident and Operator-Caused Repair Costs ......................................... 31 5.7. Segregating Preventive Maintenance Costs from Repairs ......................................... 31 5.8. Segregating Corrosion Repair Costs ............................................................................ 31 5.9. Creating Standard Operating Procedures for Collecting and Entering Fleet Data ..... 31 5.10. Using Vehicle Equivalency Units ................................................................................. 32 5.11. Relationship of Federal Equipment Rental Rates to this Guidebook ......................... 32 5.12. Estimating Federal Equipment Rental Rates .............................................................. 32 6. TRACKING COSTS ............................................................................................................. 35 6.1. State DOT Management Information Systems ........................................................... 35 6.1.1. Fleet Management Information System Overview .............................................. 35 6.1.2. DOT Fleet Management Information Systems ..................................................... 36 6.1.3. State DOT Fleet Management Information System Usage ................................... 37 6.1.4. Custom Systems .................................................................................................... 38

iv 6.1.5. Enterprise Resource Planning Systems ................................................................. 38 6.1.6. Enterprise Asset Management Systems ............................................................... 39 6.1.7. Commercial Off-the-Shelf Fleet Systems .............................................................. 39 6.2. Fueling Systems ........................................................................................................... 39 6.2.1. Private Fueling ...................................................................................................... 39 6.2.2. Fleet/Fuel Cards .................................................................................................... 40 6.3. Telematics ................................................................................................................... 40 6.4. Parts Integration ......................................................................................................... 40 7. REFERENCES ..................................................................................................................... 42 8. APPENDIX A. FLEET MANAGEMENT INFORMATION SYSTEM IN DOTS .............................. 46 9. APPENDIX B. QUICK-GUIDE FOR FLEET COST ACCOUNTING ............................................. 48 10. APPENDIX C. PRESENTATION OF COSTS ........................................................................... 49 10.1. Data Visualization Best Practices ................................................................................ 51 11. APPENDIX D. INTERVIEW SUMMARY TABLE ..................................................................... 53 12. APPENDIX E. INTERVIEW GUIDE ....................................................................................... 56 13. APPENDIX F. ANNOTATED BIBLIOGRAPHY ....................................................................... 59 14. APPENDIX G. FREQUENTLY ASKED QUESTIONS ABOUT COST ACCOUNTING .................... 74 LIST OF TABLES Table 1. Summary of direct costs in fleets by category .................................................................. 8 Table 2. Summary of indirect costs in fleets by category ............................................................. 10 Table 3. Annual direct and indirect costs associated with hypothetical fleet .............................. 19 Table 4. Classification of direct costs by activity in hypothetical fleet ......................................... 20 Table 5. Indirect costs and associated cost drivers in hypothetical fleet ..................................... 21 Table 6. Example of allocating indirect costs associated with accounting support to fleet activities ........................................................................................................................... 23 Table 7. Summary of all costs by activity for hypothetical fleet ................................................... 23 Table 8. Summary of direct and indirect costs by activity ............................................................ 24 Table 9. Parts markup calculation example .................................................................................. 26 Table 10. Fuel markup calculation ................................................................................................ 27 Table 11. Guidance on which indirect costs to include in cost-related decisions ........................ 30

v Table 12. Summary of FMISs by state DOT ................................................................................... 46 Table 13. Summary of interviewee responses .............................................................................. 53 Table 14. Suggested performance metrics by Wiegmann (2011) ................................................ 59 LIST OF FIGURES Figure 1. Equipment operating, owning, and total costs ................................................................ 2 Figure 2. Example organizational chart of state DOT fleet ............................................................. 3 Figure 3. Indirect costs added to shop rates across interviewed DOTs ........................................ 11 Figure 4. Conceptual diagram of DOT with separate accounting FIM and FMIS .......................... 36 Figure 5. Categories of fleet management systems used by DOTs .............................................. 38 Figure 6. Process framework for communicating fleet costs ....................................................... 50

vi GLOSSARY OF TERMS Accumulated Depreciation. Accumulated depreciation is the cumulative depreciation of an asset up to a single point in its useful life. An asset’s book value is the difference between its purchase price and its accumulated depreciation. Activity. Within the activity-based costing (ABC) framework, an activity is a service or product provided to or by the fleet that is comparable to the same service in the private sector. The term is sometimes used interchangeably with “line of business.” Activity-Based Costing. Activity-based costing is a costing framework to allocate direct and indirect costs onto activities within the fleet based on the intensity with which the activity incurs those costs. Asset Management. Asset management is the practice of coordinating and overseeing any item or system that holds value, typically with the goal of maintaining or raising the value of that item or system. Bill Code. Also called a charge code or cost code, a bill code is a numeric (or alpha-numeric) code used for tracking equipment and maintenance. Many fleets use the Vehicle Maintenance Reporting Standards developed by the American Trucking Association. The level of coding used is up to the fleet manager to determine. Book Value. Book value is the difference between the purchase price of the equipment (complete with all upfitting costs) and the accumulated depreciation. Capital Asset. A capital asset is a significant, tangible asset (such as property or machinery) that is used by an organization to conduct regular business. Generally, the asset is expensed over the item’s useful life, frequently through depreciation. Capital Budgeting. Capital budgeting is the method in which managers plan significant investments in projects that have long-term implications, such as purchasing new equipment or introducing new products. Charge Code. See bill code (previously defined). Chargeback Rate. Chargeback is a time- or usage-based rate charged by the fleet to other organizations for the use of fleet equipment. Chargeback rates recoup costs associated with use of the equipment. Chargeback rates sometimes (but not always) include indirect costs associated with providing the equipment (such as fleet management and administrative staff costs). Typically, chargeback rates are used in an “enterprise approach” to fleet management in which a public fleet mimics the cost accounting system of a private fleet. Proceeds from the chargeback sometimes contribute to a “sinking fund” (see definition below), which is used to pay for future capital expenses.

vii Cost Accounting. Cost accounting is the process of identifying, summarizing, and interpreting information needed for planning and control, management decisions, and equipment procurement, lease, use, maintenance, storage, and resale decisions. Cost Allocation. Cost allocation is the process of linking a cost or groups of costs with one or more cost objects, such as regions, districts, departments, or categories of vehicles, divisions, shops, or activities. Cost Code. See bill code (previously defined). Cost Driver. The cost driver is the unit by which indirect costs are allocation (for example, electricity costs for a facility may be allocated to different activities using the square footage of floor space as the cost driver). Depreciation. Depreciation is a non-cash accounting adjustment used to take into consideration wear and tear and the expected useful life of the asset. For example, a $100,000 asset with an expected life of 10 years would have $10,000 of annual straight-line depreciation until the accumulated depreciation equaled the book value. Direct Cost. Direct costs can be directly ascribed to a particular piece of equipment (for example, a vehicle or class of vehicle). These are typically tracked by the state department of transportation (DOT) at the asset-level and include maintenance and repair costs (including labor, parts, and vendor-performed repairs) as well as fuel. Enterprise Approach. Enterprise approach refers to the operation of a fleet on a self-funding, cost- recovery basis. In this approach, fees (such as chargeback rates on equipment, parts and fuel markups, and the use of full-burdened labor rate for shop repairs) are charged to the various fleet services provided to recover the costs of providing those services. In private fleet operations profitability goals typically apply, but in public-sector fleets the objective is to break even (fully recover costs but not create a surplus). Equipment Rental Rate. For most non-DOT fleets, the equipment rental rate is used interchangeably with the chargeback rate (previously defined). However, within a DOT context, this term typically refers to equipment usage charges that are reimbursable by the Federal Highway Administration (FHWA) for federal aid projects or by the Federal Emergency Management Agency for disaster recovery. Federal Accounting Standards Advisory Board. The Federal Accounting Standards Advisory Board is an organization that produces and develops a compendium of generally accepted accounting principles (defined below) for federal entities, updated annually. The “FASAB Handbook of Accounting Standards and Other Pronouncements, as Amended” is available online: http://www.fasab.gov/accounting-standards/.

viii Financial Accounting. Financial accounting is the process of recording, summarizing, and reporting the many transactions resulting from business operations over a period of time. It is expressly for external financial reporting and producing financial statements, as opposed to managerial and cost accounting, which are for internal tracking and management. Fixed Asset. Fixed assets are purchased for long-term use and are not likely to be converted quickly into cash, such as land, buildings, vehicles, and equipment. Fixed Cost. Fixed costs do not change in total within a relevant range, despite wide fluctuations in the use of equipment. For examples, vehicles depreciate every year regardless of whether they are driven. Thus, vehicle depreciation is a fixed cost. Other costs, such as for tires, fuel, or parts, depend on the intensity of use and are therefore variable costs (defined below). Fringe Benefit. Fringe benefits supplement an employee’s salary, such as health insurance, education-related benefits, and transportation subsidies. Generally Accepted Accounting Principles. Generally Accepted Accounting Principles are the set of accounting standards adopted by the U.S. Securities and Exchange Commission. Historically, these principles had been set by the American Institute of Certified Public Accountants, subject to compliance with U.S. Securities and Exchange Commission regulations. Indirect Cost. Any cost that cannot be ascribed to a particular piece of equipment is considered indirect; this includes, for example, personnel costs, office supplies, building rental, utility costs, and information technology (IT) costs. The line between direct and indirect costs sometimes blurs. There are several examples of potential indirect costs in fleets: (1) storage and shop facilities, (2) administrative costs, (3) utility costs, (4) support for parts and fuel, (5) IT system costs, and (6) accounting/finance support. Internal Service Fund. Internal service is an accounting approach used to distribute, on a cost- reimbursement basis, the cost of providing goods or services to other funds, departments, or agencies of primary government and its component units. Typically, internal service funds are associated with a shared service approach (defined below). Long-Term Assets. Long-term assets are not readily converted into cash and include fixed assets and intangible assets such as trademarks and goodwill. Maintenance Repair Units (MRU). Maintenance repair units, coined by the U.S. military, are annual labor demands from a combination of equipment and non-equipment assets. This term is sometimes inaccurately used interchangeably with vehicle equivalency units (defined below). Both deal with expressing the annual labor demands for one class of assets in terms of another class of asset, except vehicle equivalency typically refers solely to equipment-based assets.