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17 3.3.6. Step 6: Apply Markup for Contingencies Experienced fleet managers understand the need to expect the unexpected, such as when equipment price inflation rates exceed other inflation measures. While many DOTs do not have dedicated fleet funds or the ability to build fleet capital reserves, those that do have the advantage of including some contingency funding in their budgets. One approach is to simply include some reasonable cushion in activity costs, such as the equipment provision. Should the DOT fleet budget not allow for carrying any such surplus over fiscal years, the fleet can simply rebate customers or use any available funds for equipment replacements. 3.3.7. Step 7: Determine a Method for Aggregating Costs to the Appropriate Level within Organization Aggregating costs is much easier that allocating costs. To aggregate DOT fleet data, the focus is on combining equipment categories or locations to provide meaningful insights for the respective decision makers. The lowest organization level within a DOT is typically a local shop. If costs are known at the shop level, they can be easily aggregated to other regional groupings. However, as discussed in Step 5, the fleet manager needs to use expert judgement to determine if the shop-level details provide enough data points to adequately assess costs for a given equipment category. If not, reporting will need to be focused at a higher organization level (such as by district). Thankfully, the fleet manager can adjust the organizational-level reporting to have large enough equipment categories to provide meaningful reporting. Reporting costs on a statewide, category-by-category basis provide a decent starting benchmark for other estimated costs. 3.3.8. Step 8: Estimate Future Costs to Understand Impacts from Use and Aging, Technology Change, and Deferral of Spending The final step in fleet cost accounting is to incorporate future change into fleet cost estimates. A fleet manager should understand historical costs as well as the potential for significant changes to costs in the future. Many recent trends have the potential to significantly disrupt fleet replacement and planning. Among these are DOTs increasing use of contractors for services such as snow and ice removal or interstate system maintenance (such as in Virginia). Vehicle and computer technologies are rapidly changing, and new equipment/technology may soon be needed. For example, drones are increasingly used to replace or partially replace bridge snooper vehicles. Similarly, automated/semi-automated technologies are replacing DOT- manned equipment (such as automated attenuator trucks, remote-controlled equipment, artificial intelligence, steep slope mowers, and culvert cleaning machines).
18 DOTs have also repeatedly faced situations where poor state economics or natural disasters have cause freezes in fleet replacement or even diversion of fleet replacement funds. While these situations cannot always be forecasted, they can be anticipated with contingency planning. At minimum, a fleet manager should keep an ongoing list of likely changes that would impact their fleet, as well as the relative magnitude and direction (positive or negative) of that impact on fleet costs.
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 $30,050,000 Description of Hypothetical Fleet The fleet consists of 5,000 vehicles, of which 1,000 are passenger sedans and 4,000 are half- ton pickup trucks. The fleet has 10 shops in five districts and one central fleet office at the state DOT building. The fleet is supported directly by 48 employees (in addition to four accountants who provide partial support): ⢠40 mechanics ⢠5 parts and supplies personnel ⢠3 managers
20 Direct or Indirect Detailed Cost Division that Pays Costs ($ 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 ⦠⦠Maintenance and Repair Accounting support $32,400 Mechanic labor $5,000,000 ⦠â¦
