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

Below is the uncorrected machine-read text of this chapter, intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text of each book. Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.

9 3.1.2. Indirect Costs Indirect costs, while straightforward to define, are more complex in practice and fleet managers may disagree on how best to distinguish between direct and indirect costs (Government Fleet 2014), which may not be clear (see the blue call- out box). Then, the treatment of indirect costs is the main challenge for fleet cost accounting. Indirect costs are considered a joint expense that cannot be linked directly to a piece of equipment or a certain department. Like direct costs, indirect costs can be fixed (capital or operational) or variable (avoidable or unavoidable), although most indirect costs are fixed (GSA 2014a) and can be a significant portion of overall fleet costs. Table 2 defines and categorizes several indirect costs applicable to a fleet. Can a Cost be Direct and Indirect? Some costs could be direct or indirect depending on fleet circumstances. For example, if a flowmeter measures fuel being dispensed to vehicles, then that fuel is a direct cost because it can be linked to a specific piece of equipment. If there is no flowmeter and vehicles refuel from a common pool, then that fuel is an indirect cost because it must be allocated to many pieces of equipment.

10 Table 2. Summary of indirect costs in fleets by category Cost Description Fixed Variable Capital Operational Avoidable Unavoidable Improvements to operations space Physical enhancements or repairs to any operations and support spaces (office, shop, and parking spaces). X Indirect labor Vacation, sick time, holidays, and other staff days off including time in trainings and staff meetings, on breaks, supervising or managing people, traveling, and lodging. X Maintenance of operations space Physical maintenance, grounds keeping, plowing, security, custodial services, disposal, and depreciation of fleet operational equipment (such as vehicles, lifts, and tools). X X Price of operations space Purchase price, rent, or lease payments for buildings and property that support fleet operations. X Support equipment and vehicles Tools, office supplies, cleaning supplies, equipment, or vehicles used to support the fleet such as a tow truck. X X Shared amenities Costs related to any amenities (such as cafeterias, break rooms, elevators, or training rooms). X Support staff wages, salaries, and benefits Wages, salaries, and benefits (such as health insurance and pensions) for fleet administrative and support staff (accounting, payroll, executive administration, counsel, procurement, communications, marketing, and others). X X Support equipment Computer hardware and software, office supplies, printing, and others. X Utilities Electricity, water, gas, internet, phone, and other utilities required for facility operation. X X Sources: GSA 2014a, GSA 2014b, and AFMC 2017.

11 The DOT fleet managers who were interviewed for this Guide shed light on how state DOT fleets treat indirect costs in their shop rates. Figure 3 shows the fraction of the state DOTs that add each given indirect cost to their shop rate. Notably, 46% of DOTs add vacation time, but only 8% add the cost for IT support. Figure 3. Indirect costs added to shop rates across interviewed DOTs 3.1.3. Allocating and Aggregating Costs DOT fleet managers often use ad hoc processes when aggregating and allocating costs, which hinders benchmarking and prevents consistent cost calculations over time. Cost aggregation is the process of combining similar costs for use in decision making or analysis. Cost allocation is the process of distributing costs—either direct or indirect—to different categories to inform decision making. There are several ways to aggregate costs—such as by shop, by district, or across multiple pieces of equipment—to identify the average cost of a class of equipment. Cost aggregation is generally straightforward: all costs are summed, then the total is divided by an appropriate unit, such as miles or hours. Cost allocation, on the other hand, can be complex, often requiring much common sense and determination. Any cost that is shared between cost centers requires allocation. For example, many DOTs have reduced organizational layers such that employees multitask in two or more core workflow processes at one time. Similarly, divisions within a DOT often share facility space, utilities, and janitorial services. Section 3.3 provides a consistent approach for allocating costs within a state DOT, drawn from

12 several guidance materials (Joyner 2000, APWA 2008, and APWA 2016). 3.1.4. Activity-Based Costing Activity-based costing (ABC), sometimes referred to as activity-based cost management, is generally recognized and advocated as the preferred approach for cost allocation by nearly all fleet financial management references. Broadly, ABC seeks to identify a cause and effect relationship between indirect costs and each line of business or activity. ABC is useful when the relative fraction of indirect costs is high (some guidance says to use ABC when more than 20% of all costs being measured are indirect) or for an organization that provides several services or products and needs to understand the total cost of each line of business. Over the years, ABC language has begun to overlap heavily with that of traditional cost accounting. Key terms for understanding the ABC method include activities, resources, and cost drivers. • An activity is a line of business to which direct costs can be traced. In private fleets, each activity typically has its own income stream (associated with shop rates, fuel and parts markups, or fleet administrative charges). Indirect costs are shared across activities— whether fleet related or otherwise. • A resource is simply an indirect cost. In ABC terminology, resources support the performance of activities. This Guide refers to resources simply as indirect costs (although the preferred term in ABC vernacular is resource). • A cost driver is the basis used to allocate costs. Per ABC principles this allocation should be based on the relative amount of resources used by each activity. It is common to consider the percentage of time or management attention devoted, the percentage of facility space absorbed, or something similar. In ABC, direct and indirect costs are first categorized by activity, then activities are traced to more detailed units of analysis (Cooper and Kaplan 1988). 3.2. Defining Fleet Activities This section describes how to organize costs around fleet activities. As discussed in Section 2.3, fleet managers use costing information to perform at least six broad management tasks: • Equipment replacement decisions • Outsourcing decisions • Equipment retention or removal decisions • Justifying costs to stakeholders

13 • Determining fleet cost recovery rates • Identifying program strengths and weaknesses Cost accounting calculations need to be structured to directly address these six tasks. Many fleet management guidebooks describe the fleet activities as “business lines”—a term that evokes an image of a private fleet attempting to generate revenue. DOT fleets and private fleets provide a similar, discrete set of services, except that DOT fleet customers are the users of the equipment, parts, fuel, and maintenance and repair shops. While cost is not the only consideration for organizing fleet activities, it is central and perhaps the most important consideration involved in the six management tasks. The following subsections describe the main DOT fleet activities. 3.2.1. Equipment Provision Equipment provision costs are any associated with providing fleet equipment to users, whether purchased, financed, leased, or rented. Depending on the specifics (typically, the cost and the length of the benefit period), these costs are either amortized over the life of the equipment or expensed during the year incurred. Examples of equipment provision direct costs include the equipment purchase price, make- ready costs such as installing decals and adding lights, and registration, titles, and fees. Similarly, this category includes any costs associated with end of life assets, including disposing of equipment or preparing equipment for sale, advertising, or auction. Any income returned to the fleet from the sale of a fleet unit represents a reduction in equipment provision costs. An example of how to estimate equipment provision costs is given in Section 4.5.1. 3.2.2. Maintenance and Repair Provision All equipment requires maintenance and repair. These costs typically represent another major DOT fleet activity. Direct costs for equipment maintenance and repair include internal labor, the parts used in repairs (see the Parts Provision section), and any external maintenance or repairs. Equipment maintenance and repair costs are typically charged in the year these costs are incurred rather than amortized over time. As a result, these costs are typically low for new equipment and increase over time. 3.2.3. Parts Provision Fleets typically devote significant budget to providing parts and materials support for equipment maintenance and repair. Accordingly, parts provision direct costs include the actual parts. Parts provision indirect costs include materials parts personnel dedicated to this

14 function, the costs of the facilities, consumable materials associated with parts, and the cost to support utilities dedicated to this activity. 3.2.4. Fuel Provision The fuel provision direct costs are only the fuel itself. Indirect costs associated with the fuel provision include fuel testing and treatment, fuel additives, personnel and utilities dedicated to this function, and the amortized costs of the fueling infrastructure (such as fuel tanks, pumps, and information systems). 3.2.5. Other Activities Beyond the identified activity categories outlined above, some fleets provide additional services and activities that represent a business line and costs category. These additional services include operating motor pools, providing a central place to share equipment (sometimes operated similarly to a rental fleet), or even providing other functions such as warehousing or materials management. The size and scope of these additional activities, as well as the extent to which they either fully or partially support the other core fleet functions, should be used to determine whether they are treated as separate activities (with costs allocated to this category) or simply as fleet support activities (with costs allocated to the existing functions). In either case, the basic approach described above and elsewhere in this document provides overall guidance for determining how to treat the cost accounting for these types of activities. 3.3. Eight-Step Methodology for Cost Accounting 3.3.1. Step 1: Identify Users of Cost Accounting Information The first step is to identify the target audience for the fleet cost information. This typically includes a range of personnel, from the shop mechanic to elected officials. The users of the cost accounting information determines the granularity needed when compiling and presenting the information. 3.3.2. Step 2: Review Current Fleet Cost Accounting Practices In Step 2, the DOT fleet manager needs to review the internal processes, programs, and systems used for tracking fleet cost and equipment use data. For data in multiple accounts and systems, the challenge is to determine how to avoid either double counting or failing to capture some of these costs.

15 In this step, the fleet manager should answer several types of questions: • How are equipment cost and usage data tracked, collected, and stored? • Which cost codes, bill codes, charge codes, or cost centers are used within the fleet and by the wider DOT? • Which department or office maintains each piece of information and who is the point of contact in that department? Answers to these questions become the source of fleet information data used in subsequent steps of this process. It is recommended to physically list on a piece of paper or in a spreadsheet the department, person’s name, and contact information for each cost category so that this information is accessible for future fleet costing exercises. 3.3.3. Step 3: Identify Direct and Indirect Costs of Fleet Services and Equipment Using knowledge of the DOT accounting system derived from Step 2, the fleet manager needs to create a detailed list of all direct and indirect costs associated with the fleet. To add complication, many DOTs organize a number of these costs around field operational units such as district/division maintenance budgets. Also, some costs, such as equipment depreciation, may reside within a separate area of the DOT budget such as the capital equipment budget. See the Background Information section above for discussion and examples of common direct and indirect costs. 3.3.4. Step 4: Determine Equipment Groupings While Steps 1 through 3 are relatively straightforward, Step 4 requires a contextual discussion. Several fleet-oriented organizations, such as the American Trucking Association, the NAFA, and the APWA, have developed methodologies for categorizing equipment to support management reporting. A common thread in these approaches is the use of equipment attributes (such as gross vehicle weight rating, cab type, fuel type, vocation, number of wheels, and numbers of axles) as the basis for such categorization, allowing users to determine how specific to make these groupings. The number of equipment classes used by a fleet reflects the number of units of a given equipment type and attribute. If a fleet only has one or two units of a given type, reporting on this fleet category would provide little meaningful information. The alternative is to reduce the number of class subtypes and make equipment groupings more general. Using the prior example, cab type differences (standard, extended, quad) would be ignored but gross vehicle weight ratings would be used. One of the overriding considerations in selecting the subclass groupings is the extent to which these differences reflect significantly different initial, maintenance and repair, or residual costs. In the pickup truck example, diesel versus gas may be the more significant factor.

16 When more dissimilar units are grouped together, there will likely be more variances in the reporting. Accordingly, each fleet must determine the appropriate balance between class granularity and having enough units of each type/subtype to support useful reporting. Generally, a sample of 30 units is enough to generate meaningful statistics. Therefore, fleet managers should define equipment categories so that at least 30 pieces of similar equipment comprise the category. However, it typically takes three years of history to identify any patterns in the data and it takes five years to have a solid history to infer trends in equipment cost and performance. These considerations should influence the selection of fleet classes, particularly if the DOT desires to continue this analysis at more granular reporting levels (such as by district or by shop). 3.3.5. Step 5: Apply ABC Approach Step 5 is a core element and, as with any aspect of fleet cost accounting, a fleet manager must balance the need for precision with the level of effort required. To apply ABC, a fleet manager must have a keen understanding of the fleet activities. As noted above, the most common fleet activities include the provisions for equipment, maintenance and repair, parts, and fuel. Step 5a: Classify Direct Costs by Activity Fleets incur a wide variety of direct costs. In this step, the fleet manager maps those direct costs to each fleet activity. For example, the upfront vehicle direct cost will likely be mapped to equipment provision. The assignment of direct costs to activities can impact the perceived cost-effectiveness of fleet operations, so these decisions must be made with care. For most direct costs, this choice is fairly straightforward. Step 5b: Identify Cost Drivers for Indirect Costs The next substep is to identify the appropriate cost driver for each indirect cost. Cost drivers are the units of measure that determine which fraction of an indirect cost will be applied to each activity. A simplified example is the electricity cost, which may be allocated based on the square footage of floor space used for each activity. Step 5c: Allocate Costs into Activities In this substep, the fleet manager will use the cost drivers in Step 5b to allocate the costs into the activities. The importance in this step is double checking that equations and calculations are set up correctly. Step 5d: Calculate Detailed Costs of Activities Finally, the fleet manager will organize the costs in a way that enables benchmarking and decision making. In general, this means organizing equipment provision into costs per unit or per class, maintenance and repair provision into costs per hour per shop, parts provision into a cost markup, and fuel provision into a fuel markup.