5 Cost Calculation in a Transport Firm
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If the right decisions are going to be made in a transport firm, one first needs to know costs. In practice it will often suffice to make a rough calculation, dividing transportation costs over time costs and distance costs: time costs are imputed on the basis of the duration of a transportation movement, distance costs according to mileage. In Europe, the distinction between time costs and distance costs is standard practice in courses on costing, as they are taught by the training institutions that prepare for the transport profession. Such a division cannot be applied perfectly to all costs components, but it works for the vast majority. This approach has gained broad acceptance and is widely used. Not only does it have a common-sense appeal, it is also justified in economic terms: if transportation costs are a linear function of the kilometres covered, and there is a limit to the number of hours a vehicle can perform, an economic analysis will typically arrive at a solution which allocates a constant marginal cost per kilometre plus a shadow price per hour for keeping a vehicle in service1. In the long term that shadow price equals the cost per hour of having a vehicle, with crew and so forth, available.
1 Time costs and distance costs Time costs are due quite simply to the passing of time. As such, they accumulate even if a vehicle is standing still, during loading or unloading, and in case of delay. The total time costs in a transport firm are determined not so much by the kilometres to be covered as by the total number of hours to be worked. The total number of hours will show how many vehicles and how much staff are required, thus determining time costs. The number of hours is the criterion for allocating time costs to each individual consignment. Distance costs are superimposed on time costs. They arise only when the vehicle is actually moving, not when standing still. They are allocated to each individual consignment according to mileage, and added to the time costs per hour. Transportation that involves a greater distance over the same duration will accordingly charge more. One element in the time costs is, for instance, the wages of crews and the annual insurance premium for vehicles. These are costs that accrue even when waiting or standing still. They are an automatic consequence of the passage of time. Time costs also comprise all the fixed costs in a transport firm, which automatically have to be met in order to maintain a certain capacity: they include, for instance, the rent of garage space and even the general administrative costs of running a fleet of vehicles and staff.