PART 2 — Cost of sales, and selling and general & admin expenses in running a Trucking Business in the Philippines

In our previous article (PART 1 — Variables and Fixed Costs in running a Trucking Business in the Philippines), we discussed about what are variable and fixed costs, and we have learned that major difference between these two is that for variable costs, it moves when volume moves but it does the opposite for fixed costs. In this article, we will now learn the other perspective of applying costs and expenses in computing trucking rates.

As a start, we need to learn what are cost of sales, or could also be called as cost of production (cost of good sold if the business is in merchandising), overhead expenses, or also called as general selling and administrative expenses, and how all of these are related to variable and fixed.

What are cost of sales? In the simplest definition, cost of sales are costs directly related to the production of service, in this case, the trucking service per se. When we create value for our customer (like performing the trucking service), we also spend money that are associated in creating that value because after all, nothing is free, right? Normally, the perspective of cost of sales is often used in reading financial statements and reports such as profit and loss statements (P&L) / income statement, but, I also prefer to look at them in profitability at a transactional level (per trip). This should allow us to determine how desirable a transaction is even before the application of overhead in the computation of trucking rates.

When we create value for our customer (like performing the trucking service), we also spend money that are associated in creating that value

We now understand that cost of sales are simply costs that are directly related or associated in the production of service or performance of the trucking service. How now is this different from variable and fixed costs? are they directly related?

The answer could be best understood by determining some notable examples as shown below:

Cost of sales that are variable (that moves based on volume):

• Salary of truck driver and helper paid on a per trip basis
• Fuel costs
• Toll fees
• Rental expenses for truck parking paid on a per use basis
• Permits and passes paid on a per entry basis

Cost of sales that are fixed (that usually remain the same even with or without volume):

• Salary of truck driver and helper paid on a per day basis
• Staff employed as part of operations
• Rental expenses for truck parking, or for warehouse
• Permits and passes paid on a weekly, monthly, quarterly or annual basis
• Maintenance expenses
• Utilities that are directly used for operations

You will notice here that these are (may be) all directly related to value creation or the performance of trucking service for the customer.

If the cost of sales are costs directly related in the performance of the trucking services, what now are general selling and administrative expenses or also called as overhead expenses? In the simplest definition, these are costs that are supporting to the production of service, they contribute to the overall operations of the company and cannot be related back in producing the service for the customer.

Overhead expenses that are fixed:

• Staff employed as part of backend office such as finance, sales, human resource, customer service, and etc.
• Rental expenses for office and other facilities that may not be directly related to operations
• Statutory / Government permits and passes paid on a weekly, monthly, quarterly or annual basis
• Office utilities

Here comes the tricky part as often overhead expenses are related to backend operations (Finance, Customer Service, Sales, HR and Admin, IT, Purchasing and others). This means that there is little to no variable costs for overhead expenses. In computing for trucking rates in the Philippines, there is a need to translate overhead expenses on a per trip basis if the agreement between the trucking company and customer is on a transactional basis — meaning per trip. To do this, we need to use some data and art. We will work on computing Trucking Rates in the succeeding posts and articles.

In these last articles, we have discussed about variable, fixed costs, cost of sales, and overhead expenses (general admin, and selling expenses). These comprise mostly of the cost component in calculating trucking rates in trucking business in the Philippines. In the next article, we will now proceed to the revenue side – computing the markup. So please stay tuned and keep reading these learning materials to guide you in computing trucking rates. At the end of these learning materials, we will hand our a free trucking calculator. So please send your information HERE.

NEXT: PART 3 – What is markup, and how do we say that our markup is just right.