PART 1 — Variables and Fixed Costs in running a Trucking Business in the Philippines
If I am to choose a subject in my collegiate years that I hold dear due to its value, accounting and finance would probably be one of those subjects that I appreciate because of their relevance in my chosen career, entrepreneurship/ business management. This is not because, I intended and planned my career to be in finance, but in my over a decade of managing companies, there is a great need to have an in-depth understanding of accounting and financial management.
But to truly appreciate accounting and finance in our chosen line of business, you don’t need to be a CPA as we will only need a few things at the very least, and that is to understand what variable and fixed costs, cost of sales, and overhead expenses are. In this article we will focus on understanding what are variable and fixed costs in the simplest way possible, and relate these principles in the trucking business.
First, let us understand what variable costs are.Variable costs are costs that vary or move (upwards or downwards) as the use arises. For example, the distance of the trip may determine the estimated consumption of fuel in total liters. When a driver works longer, assuming that the driver is paid on a per hour or day basis, the costs of labor becomes higher. Or the cost of tires that are chargeable to a customer on a per kilometer basis.
These are some of notable variable costs used in trucking operations:
- Fuel
- Maintenance costs (e.g. tires charged on per kilometer basis, and etc.)
- Direct labor (if the driver and truck helper are both paid on per trip basis)
- Toll fees, delivery fees, other incidental fees
- Manpower fees for loading and/or unloading of cargoes from/to the truck/container van
- Port and terminal fees charged on a per transaction basis
“Variable costs are costs that vary or move (upwards or downwards) as the use arises”
On the other hand, fixed costs are costs that a trucking business incur without varying with the volume of production. With or without revenue, bookings or trips, fixed costs remain the same and cannot be avoided. For example, a truck owner or operator will still have to pay for salaries for employees paid either daily or monthly basis. Or spend for rental fees for leased facilities, even if there is no revenue generated.
These are some of notable fixed costs used in trucking operations:
- Lease of equipment yard or garage
- Salaries and wages of staff employees paid either daily or monthly basis
- Utilities (e.g. Internet, telecommunication, electricity, water and etc.)
- Depreciation expenses of equipment
- Interest expenses paid to creditors
- Government services (e.g. vehicle registrations, etc.)
In a nutshell, a trucking company will incur both variable and fixed costs in providing trucking services to its customers. Variable costs move, while fixed costs generally don’t regardless of the sale.
