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19 4. EXAMPLES OF ESTIMATING FLEET COSTS USING ABC METHOD Of the eight steps for fleet cost accounting outlined in the chapter above, Step 5a-5d (Apply ABC Approach) are perhaps the most conceptually difficult. This chapter provides examples of applying the ABC method for a hypothetical fleet. The chapter demonstrates how to calculate the equipment, maintenance and repair, parts, and fuel costs. The chapter begins with a description of the hypothetical fleet, then walks through the Steps 5a-5d. 4.1. Hypothetical Fleet Description Suppose a fleet manager needs to estimate four fleet-related costs: providing equipment, providing maintenance and repair, providing parts, and providing fuel. The blue call-out box describes a hypothetical fleet and the staff (which is highly simplified for this example). Annual direct and indirect costs for the hypothetical fleet are shown in Table 3. Note that the indirect costs reflect costs for the entire DOT (including non-fleet costs). For a real DOT, the list of direct and indirect costs will be much longer than that shown in Table 3. Table 3. Annual direct and indirect costs associated with hypothetical fleet Direct or Indirect Detailed Cost Division that Pays Costs ($ per year) Direct Equipment inspection Fleet Services $1,000,000 Fuel Maintenance Division $2,000,000 Parts acquisition Maintenance Division $1,000,000 Mechanic labor Fleet Services $5,000,000 Tires Fleet Services $500,000 Upfitting accessories Maintenance Division $500,000 Registration and fees Fleet Services $50,000 Vehicle purchase cost Maintenance Division $20,000,000 Total Direct Costs $30,050,000 Description of Hypothetical Fleet The fleet consists of 5,000 vehicles, of which 1,000 are passenger sedans and 4,000 are half- ton pickup trucks. The fleet has 10 shops in five districts and one central fleet office at the state DOT building. The fleet is supported directly by 48 employees (in addition to four accountants who provide partial support): â¢ 40 mechanics â¢ 5 parts and supplies personnel â¢ 3 managers
20 Direct or Indirect Detailed Cost Division that Pays Costs ($ per year) Indirecta Accounting support Accounting Division $4,000,000 Pension/401k contributions Maintenance Division $2,000,000 Janitorial services Support Services $1,000,000 Office supplies Human Resources $1,000,000 Refuse services Support Services $500,000 Software Information Technology $400,000 Training Support Services $500,000 Uniforms Support Services $600,000 Utilities (gas, water, electric, other) Support Services $7,000,000 Vacation and sick time Human Resources $3,000,000 Total Indirect Costs (including non-fleet costs) $20,000,000 a The indirect costs shown are the total DOT costs and have not been allocated to fleet activities. The indirect costs reflect values for the entire DOT (and much of this cost will be allocated to non-fleet activities). 4.2. Classify Direct Costs by Activity The first step of the ABC Approach (Step 5a) is to classify the direct costs above into activities. In this hypothetical fleet, there are eight direct costs and four activities, as shown in Table 4. Totals for each activity per year are shown in the right-most column. The total cost of all activities per year is $30,050,000. Table 4. Classification of direct costs by activity in hypothetical fleet Direct Cost Activity Costsa ($ per year) Subtotals by Activity Equipment inspection Equipment provision $1,000,000 Upfitting accessories Equipment provision $500,000 Vehicle purchase cost Equipment provision $20,000,000 Registration and fees Equipment provision $50,000 Equipment provision subtotal $21,550,000 Fuel Fuel provision $2,000,000 Fuel provision subtotal $2,000,000 Mechanic labor Maintenance and repair provision $5,000,000
21 Direct Cost Activity Costsa ($ per year) Subtotals by Activity Maintenance and repair provision subtotal $5,000,000 Parts acquisition Parts provision $1,000,000 Tires Parts provision $500,000 Parts provision subtotal $1,500,000 Grand total $30,050,000 a This table reflects the same costs as shown above in Table 3. 4.3. Identify Cost Drivers for Indirect Costs In Step 5b, the fleet manager identifies the cost driver associated with each indirect cost. Typically, each indirect cost has its own unique cost driver which must be determined using the fleet managerâs expert judgement. Table 5 shows how the fleet manager of the hypothetical fleet may define the cost drivers for his/her fleet. There are a few important considerations when identifying the cost drivers. Remember that, like activities, choosing the best cost driver is an art, not a science. Also, when there are several plausible cost drivers for a given activity, the decision may be driven by which data is available and easy to access over time. For example, a square-footage based cost driver only needs to be estimated when facility space is reallocated between activities (for example, when a new shop space is built). Table 5. Indirect costs and associated cost drivers in hypothetical fleet Indirect Cost Cost Driver Accounting support Fraction of hours accounting staff support each activity Pension/401k contributions Fraction of hours employees support each activity Janitorial services Fraction of square feet of indoor space occupied by each activity Office supplies Fraction of total office supplies consumed to support each activity Refuse services Fraction of square feet of indoor space occupied by each activity Software Fraction of hours software is used to support each activity Training Fraction of hours employees involved in training support each activity Uniforms Fraction of hours employees who wear uniforms support each activity Utilities (gas, water, electric, other) Fraction of square feet of indoor space occupied by each activity Vacation and sick time Fraction of hours employees support each activity
22 4.4. Allocate Costs into Activities Step 5c is likely the most time consuming of ABC: performing the indirect cost allocation using the cost drivers. The process of cost allocation is repetitive; allocation of other indirect costs follows the same process as given in the example below. As shown in Table 5, the cost driver for accounting support is the fraction of hours accounting staff support each activity. Table 3 shows that the cost for the entire DOT Accounting Department is $4 million per year. The fleet manager learns through discussions with the Accounting Department that four accountants support the hypothetical fleet activities, with a total base salary of $305,000. This is the amount that should be allocated based on the fleet activities those four accountants support. Cost allocation is conceptually quite simple. However, it can be difficult and time consuming to collect the cost allocation data. Table 6 demonstrates this process. The tables lists the four accountants, their base salary, and the fraction of time each one spends on non-fleet activities and four fleet activities, also outlined in the table. Table 6 shows that the total for all accountants to support fleet activities is $102,300. If the DOT does not have the data needed for this level of granularity, it is possible to simply aggregate all Accounting Department salaries into a single value that is allocated based on overall support for each activity. However, if time permits and data are available, the more granular approach yields more precise cost estimates. Table 7 shows the sum of all costs for each activity, brought over as a line item from Table 6 (see the orange arrows) and using the direct costs identified above in Table 4. For simplicity, Table 7 does not show all the rows that were outlined in Table 4. To estimate the total cost of each activity, a similar set of calculations must be performed for all indirect costs, based on the applied cost drivers.
23 Table 6. Example of allocating indirect costs associated with accounting support to fleet activities Position Available Time Salary Base Equipment Provision Maintenance and Repair Provision Fuel Provision Parts Provision Non-Fleet Activities Summed Fleet Activities % Time Cost % Time Cost % Time Cost % Time Cost % Time Cost % Time Cost Office Assistant III 100% $60,000 15% $9,000 15% $9,000 0% $0 0% $0 70% $42,000 30% $18,000 Accountant 100% $80,000 10% $8,000 15% $12,000 20% $16,000 0% $0 55% $44,000 45% $36,000 Controller 100% $120,000 4% $4,800 2% $2,400 2% $2,400 3% $3,600 89% $106,800 11% $13,200 Parts Act. I 100% $45,000 15% $6,750 20% $9,000 25% $11,250 18% $8,100 22% $9,900 78% $35,100 Total $305,000 $28,550 $32,400 $29,650 $11,700 $202,700 $102,300 Table 7. Summary of all costs by activity for hypothetical fleet Activity Direct costs Indirect costs Equipment Provision Accounting support $28,550 Equipment inspection $1,000,000 Upfitting accessories $500,000 Vehicle purchase cost $20,000,000 â¦ â¦ Maintenance and Repair Accounting support $32,400 Mechanic labor $5,000,000 â¦ â¦
24 Once all indirect costs are allocated in a similar fashion according to their cost drivers, they can be summed with the direct costs to estimate the total cost of each fleet activity. This is shown in Table 8. Note that the $800,000 in indirect cost for the equipment provision includes the $28,550 cost of the four accountants illustrated in Table 6 and Table 7. Other indirect cost values shown were not calculated explicitly but include a mix of indirect costs shown in Table 3. Table 8. Summary of direct and indirect costs by activity Fleet Activity Direct Costs Indirect Costs Total Equipment Provision $21,550,000 $800,000 $22,350,000 Maintenance and Repair Provision $5,000,000 $300,000 $5,300,000 Parts Provision $1,500,000 $100,000 $1,600,000 Fuel Provision $2,000,000 $200,000 $2,200,000 Total $30,050,000 $1,400,000 $31,450,000 4.5. Calculate Detailed Costs of Activities In the last step, Step 5d, costs are summed together for each of the four fleet activities to enable fleet management decision making. 4.5.1. Equipment Provision The equipment provision activity entails providing equipment to users. All capital and operational direct costs associated with providing equipment should be charged to the specific unit where they belong. Examples of capital costs, which are typically amortized over time, include purchasing and upfitting equipment that has a multi-year life expectancy. The amortization schedule is typically based on the scheduled life of the equipment. For example, if a given unit should be replaced in eight years, the amortization schedule is eight years. Ideally, this amortization schedule reflects the actual loss in residual equipment value as it ages and is used. This allows the remaining book value of the asset (the unamortized amount) to more closely reflect its actual market value. However, many fleets use a linear depreciation schedule for simplicity and ease of administration. For indirect costs associated with equipment provision, there are three common approaches to cost allocation: 1. Unit-Based Approach. Some indirect costsâsuch as for accounting, systems support, and even any applicable fleet management chargesâare relatively linear in nature and do not vary by equipment type. These costs can be evenly distributed between each equipment type, in a unit-based cost driver approach (i.e., each piece of equipment is
25 allocated the same cost). This approach is easy to administer and understand, but can proportionally overburden low cost equipment, such as a hand mower, especially if the range of equipment costs are large. To demonstrate this method, consider the $28,550 indirect costs from the four accounting staff (shown in Table 6). To allocate this cost to the 5,000 fleet vehicles, simply divide $28,550 by 5,000, which comes to $5.71 per vehicle. 2. Percentage of Direct Cost Approach. To more equitably allocate costs to equipment, use the percentage of direct fleet costs approach, which is allocated based on the direct costs for each respective class of equipment. In turn, the share of indirect costs for a class of equipment can be divided by the number of units in that class. This approach is relatively easy to administer while avoiding the potential over-burdening issue associated with the unit-based approach. The hypothetical fleet example has two equipment classes: passenger sedans and half-ton pickup trucks. If the $21,550,000 in direct costs for the equipment provision is composed of $6,465,000 in direct costs for the passenger sedans and $15,085,000 for the half-ton pickups, or 30% is sedans and 70% is pickup trucks, the $28,550 indirect costs for the accountants should be divided so that 30% ($8,565) goes to the sedans and 70% ($19,985) goes to the pickup trucks. Then those amounts can be distributed evenly within each class using the unit-based cost driver approach (or could be allocated by the percentage of direct fleet costs if the direct costs of each vehicle are known). 3. VEU Approach. A third option for allocating indirect costs is to use the VEUs approach, a ratio-based methodology that compares the maintenance requirements of different equipment classes. This concept is discussed in detail in Section 5.10. Indirect costs are allocated to equipment classes based on total VEU count by class, divided by the total fleet VEUs. In the hypothetical fleet, the 1,000 passenger sedans have a VEU of 1.0 and the 4,000 half-ton pickup trucks have a VEU of 1.5. Therefore, the total number of VEUs in the fleet is 7,000 (1,000 * 1.0 + 4,000 * 1.5). Using the VEUs approach, 14% (1,000/7,000) of the $28,550 of accountant-related indirect costs should by allocated to the sedans and 86% (6,000/7,000) should be allocated to the half-ton pickup trucks. 4.5.2. Maintenance and Repair Provision The maintenance and repair provision is one of the most common calculations for fleet managers. More commonly called the shop rate, this cost is expressed in dollars per hour of shop operation. To estimate the example shop rate, begin with the $5,300,000 total estimated for the maintenance and repair provision. The denominator of the shop rate (hours) can be estimated using the guidance in the call-out box below.
26 4.5.3. Parts Provision As shown in Table 8, the direct costs of the hypothetical fleet are $1,500,000 and the indirect costs are $100,000. Thus, at the highest level, the cost of providing the parts provision to the hypothetical fleet is $1,600,000 for the year. However, that information has limited benchmarking or decision-making value unless it can be expressed in a way that allows for year-over-year or fleet-to-fleet comparisons. Generally accepted fleet practice is to apply a markup percentage to the direct cost of parts to cover the indirect support costs for this activity. In the terminology of this Guide, the parts provision is the ratio of the indirect costs (including personnel, utilities, facilities, etc.) to the direct costs (the pure cost of procuring parts). In the hypothetical example, the markup is 6.67% ($100,000 divided by $1,500,000) as shown in Table 9. Table 9. Parts markup calculation example Amount Parts Cost Category $1,500,000 Actual parts cost $100,000 Indirect parts costs 6.67% Part markup required In applying the parts markup, as parts are consumed (issued to an equipment unit to support maintenance or repair), each specific equipment unit is charged a price for that part that equals the actual price plus the markup. For instance, if a replacement sideview mirror that costs $100 Guidance on Estimating Mechanic Hours to Estimate Shop Rate The available hours are the number of hours an employee is paid. A subset of this number is the productive labor hours, reflecting the hours available for performing customer service work (and can therefore potentially be charged). For full-time positions, 40 hours per week for 52 weeks per year equates to 2,080 hours per year. Reduced by 200 hours of vacation, holiday, and sick time, there are 1,880 available accountable hours per position, per year. Some productive hours will be absorbed for activities like clean up, breaks, and training. The remaining hours are referred to as billable or wrench-turning hours. The ratio of available to billable hours is a key benchmark against which to measure a fleetâs success. The fleets interviewed to inform this Guide have an average productivity ratio of 75% to 80%, meaning that an average of 6.0 to 6.4 hours per day are used for billable activities. The remaining 1.6 to 2.0 hours are called the shop indirect labor hours. This ratio is typically calculated after removing holiday, vacation, and sick time. In this simple example with a 75% productivity, there are 1,410 total productive labor hours per year [(2,080 - 200) * 0.75].
27 to purchase is installed on a truck, the equipment unit price to the fleet for that part would be $106.67 (direct parts cost + 6.67% markup). 4.5.4. Fuel Provision Like the parts provision, the cost of providing fuel is typically expressed as a markup. However, the markup for fuel is per gallon, not a percentage. In the hypothetical example summarized in Table 8, direct fuel costs are $2,000,000 and indirect costs are $200,000. The direct costs include only the cost of the fuel, while the indirect costs include personnel support, amortized fuel infrastructure costs (such as storage tanks and dispensing equipment), and operational costs (such as for fuel quality testing and treatment). Suppose 1,000,000 gallons of fuel is used per year in the fleet. This means that the markup is $0.20 per gallon ($200,000 divided by 1,000,000 gallons), as shown in Table 10. Table 10. Fuel markup calculation Cost Fuel Cost Category $2,000,000 Total direct costs $200,000 Fuel indirect costs 1,000,000 Gallons of fuel $0.20 Fuel markup per gallon In applying this markup, as fuel is pumped into equipment units, the cost of fuel charged to that unit should reflect the actual per-gallon cost of fuel plus the per-gallon fuel support markup. For a fuel purchase averaging $2.00 a gallon, fuel would be dispensed at $2.20 per gallon.