PUBLIC UTILITY FLEET MANAGEMENT: ACTIVITY BASED COSTING METHOD APPLICATION

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1 PUBLIC UTILITY FLEET MANAGEMENT: ACTIVITY BASED COSTING METHOD APPLICATION Aleksandar Manojlović, Faculty of Transport and Traffic Engineering, University of Belgrade, Serbia, Olivera Medar, Faculty of Transport and Traffic Engineering, University of Belgrade, Serbia, Dragana Drenovac, Faculty of Transport and Traffic Engineering, University of Belgrade, Serbia, Snežana Filipović, Faculty of Transport and Traffic Engineering, University of Belgrade, Serbia, ABSTRACT Public companies fleets are often composed of several hundreds of vehicles of different categories. Within the complex organization structure, the fleets are providing support for the company s core activities. The vehicles are used by company s departments for different purposes, i.e. such departments represent users of Fleet department s vehicles and services. The vehicles of the same categories used by different users significantly vary in matter of travelled distances, hours in operation and costs. Activities costs give impression of the effectiveness of fleet resource usage and to what extent important activities contribute to the services costs. Those information represent a key issue in the decision-making process on eventual restructuring of the Fleet Department or while outsourcing some of the activities.. Keywords: fleet management, large vehicle fleet, activity based costing, cost efficiency INTRODUCTION Considering transport costs structure in public utility companies, determining the amount of the overhead is the first emerging problem, followed by their allocation to specific services and users. The major part of transport overhead is being referred to as costs of the Fleet Department (FD). Company structure is complex: many departments, located on several sites in the wide area, where different sort of activities are performed: management, maintenance, transport. For those activities the FD engages facilities, utilities, and services of other departments. In such a situation by means of the traditional cost accounting, it is not 1

2 possible to identify the amount of the FD overhead, while the detailed data collection on transport costs requires additional efforts and investments. Developed procedure for transport cost allocation within a public company and for setting a rate regarding the transport service s cost coverage is presented. Applying Activity Based Costing gives more precisely and trustworthy basis for the transport cost allocation regarding the usage of vehicles. Determination of the transport direct costs and overhead amounts, and overhead allocation to services, performed by the FD, as well to vehicle groups and to specific user, by using the Activity Based Costing model are first activities of the procedure. Using the costs data obtained from described activities we could obtain information on the rates of services realized by the FD, vehicle usage rate upon vehicle-kilometre, and amounts charged to the departments. Creation of different rates is allowed for the vehicle usage upon categories and different users. Determined FD activity cost levels are valuable information for decision making about which services and in what extents should be preserved within the company and which ones will be outsourced. Previously defined procedure has been illustrated through a case study of public utility company in Belgrade, with a fleet of more than 400 vehicles classified in ten groups, within nine departments. Charged costs of vehicle-kilometres for certain users are differing for as much as 50%, influencing the size of the fleet. FLEET COSTS The knowledge of the level of realized costs and cost efficiency parameters, as unit costs per kilometre travelled, realized jorney and hours in operation, enables operation results analysis and represents a basis to for comparisons to other vehicle fleets. To provide a basis for cost management and monitoring, as well as to assure a referential foundation for measuring the cost control effectiveness, it is indispensable to standardize vehicle and fleet costs (Lauria and Owen, 2004). The Figure 1 show particular cost category, activities and cost objects of the transport subsystem. 2

3 Indirect costs Fleet Manager Salary Administration Drivers Utilities Other Department Services Other indirect costs KT KT (6) KT (...) (...) IC (m) Activities Manage in-service fleet Maintenance Management Acquire Vehicles Other Activities KT KT (6) KT (...) (...) Fuel Management A (n) Vehicle categories VC 1 VC 2 VC 3 VC 4 VC (o) Customers C 1 C 2 C 3 C 4 C (p) Figure 1 Cost category, activities and cost objects The procedure for transport overhead allocation within a public company and for setting the rate regarding the transport service's cost coverage, more precisely regarding the usage of vehicles established on the Activity Based Costing consists of several steps. Determination of the the transport direct costs and overhead is the first step (Roztocki et al., 1999). Afterwards overheads are allocated to the FD services, to the group of vehicles and to users by using the Activity Based Costing model (Figure 2). Identifying Main Activities Determining Costs Categories Determining Dependence Costs and Activities Identifying Expenditures on Resources Determining Activities Costs Cost Assignment to Cost Objects Figure 2 Procedure for transport overhead allocation 3

4 Based on obtained costs data, the information on services rates, vehicle usage rate upon vehicle-kilometre and tehe amounts charged to the departments, could also be achieved. The creation of different rates is allowed for the vehicle usage upon categories and different users. Determined Fleet department activity costs allows the decision makers to decide which services and in what extents will be preserved within the company and which ones will be outsourced. CASE STUDY Previously defined procedure has been implemented in one public utility company in Belgrade, whose fleet is composed of 409 vehicles sorted in ten categories within nine departments. The transport process as a supporting process to the core company process is decentralized in such a way that it is integrated into sectors, functions and administration s vehicle users where the core processes are performed. On the other hand, there is a central Transport organization unit (FD) with competencies in particular segments of the transport process. Vehicles are designated for fulfillment of particular users needs within a sector, and any assistance is effected neither between vehicles belong to the same sector nor among specific sectors, regarding vehicle loan and/or exchange. Fleet Department activities are: administrative activities, analysis of customers activities, acquisition and re-market of vehicles, vehicle condition verification and certification, fleet maintenance management, fuel management and transport. Cost categories and cost drivers are presented in Table 1. Table 1 Cost categories and cost drivers Cost categories Cost driver Fleet manager salary Time (h) Maintenance manager salary Time (h) Driver salary Time (h) Mechanics salary Time (h) Utilities Space (m 2 ) Office costs Level of use of office resources (%) Other department services Level of use of other department services (%) Driver cost of own vehicles Distance (km) Driver costs of special vehicles Distance (km) Figure 3 presents the results of cost tracing and cost allocation to the the cost object (vehicles categories and fleet customers) and Figure 4 shows fleet costs and activities costs. 4

5 Total transport costs Total PA PA Direct costs - Customer fleet Transport service PA 3 DOS KOM TER Direct costs - Fleet Department Cargo veh Pass. car Special veh Indirect costs ,68% 51,15% Activities costs Fleet management Maintenance management Customer fleet /km PUT TV 1 TV 2 SPE /vehicle , ,87 / refueling Trucks K Total Indirect cost Fleet Department ,84% Fuel management K 2 K 3 K Customer drivers ,34% Transport K 5 K 6 K 7 K Figure 3 Cost tracing and cost allocation to the cost objects Indirect costs Fuel Management Maintenance Management 100% 0,95% 16,51% 0,87 per refueling 5,34 per 1 used spare parts and materials Fleet Management 12,27% per vehicle 29,73% Rates 70,27% Direct costs Tires Washing Own Maintenance Outsourced Maintenance Fuel 1,16% 3,12% 3,09% 4,02% 21,87% Insurance Taxes 2,82% 2,04% Depreciation 32,15% 0% Figure 4 Fleet costs with activities costs 5

6 The cost structure and values of total and unit costs with included activities costs, sorted by vehicle groups (Figure 5), are well-suited for recognition of the possible fleet operation enhancements in the phase of vehicle ownership model definition and for considereation of the subcontractors engagement and choice. Besides, this is an important element in the decision-making regarding fleet dimension and also provides a basis for the chargeback system establishment. Direct costs Indirect costs 3, % Jedinični troškovi ( /km) /km 2,500 2,000 1,500 1,000 0,500 0,000 1,303 0,686 0,523 0,388 1,329 0,265 0,153 0,172 0,934 0,135 0,126 0,814 0,100 0,596 0,446 0,311 0,264 0,350 0,415 0,451 Vehicle Grupa category vozila Učešće Figure 5 Total and unit cost 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Vehicle Grupa category vozila Different vehicle groups "spend" activities in different amounts. The value and structure of annual indirect costs per vehicle is shown in Figure 6. In relation to the origination moment, the activities costs are composed of a fixed part, costs of activity "Fleet Management", and variable part, costs of activity "Maintenance Management" and "Fuel Management". Fleet Management Maintenance Management Fuel Management % % 80% Vrednost indirektnih /km troškova ( ) Grupa vozila Učešće 70% 60% 50% 40% 30% 20% 10% 0% Grupa vozila Vehicle category Vehicle category Figure 6 Cost of main activities Activities costs give an impression about effectiveness of the fleet resource usage and to what extent important activities contribute to the services costs. 6

7 CONCLUSIONS This paper presents the procedure for transport overhead allocation within a public company and for setting the rate regarding the transport service's cost coverage, more precisely regarding the usage of vehicles established on the Activity Based Costing. Recommended procedure ensures a high-quality basis for the decision making regarding fleet utilization strategies, especially in matter of public companies' fleets. The cost structure with incorporated activities costs is suitable for the recognition of possible enhancements and for the decision-making in matter of vehicle fleet dimensioning. Information on activities costs represents a key issue in the decision-making process about eventual restructuring of the Fleet Department or while outsourcing some of the activities. REFERENCES Lauria, P., and Owen. R. (2004). Managing Managed Competition. NAFA`s Fleet Management Institute Roztocki, N., Valenzuela, J., Porter, J., Monk, R. and K. Needy (1999). A Procedure for Smooth Implementation of Activity Based Costing in Small Companies, Proceedings from the ASEM National Conference, American Society for Engineering Management 7