 Personal finance, practice problem, one note presentation, auto operation cost, calculation and projection. Get ready to get financially fit by practicing personal finance. You're not required to, but if you have access to, one note would like to follow along or in the icon on the left-hand side, practice problems tab and the 6190 auto operation cost, calculation and projection tab. Also take a look at the immersive reader tool or practice problems will be in the text area too with the same name, same number, but with transcripts, transcripts that can be translated into multiple different languages and either listened to or read in them. When thinking about projections into the future, it's often useful to break our costs down into two categories that being the fixed cost and the variable cost, breaking them down in other words by behavior, how the costs act when there's changes to say an activity base, which in this case with a car might be the mileage as opposed to just categorizing the cost in terms of what we used them for, things like just gas or parking and so on. We wanna be able to categorize them by behavior, tying them to an activity base. In this case with the car, that typically being the idea that if we use the car more, sometimes some costs will go up and if we use the car less, some costs will go down whereas other costs will remain the same. We can of course, the measure, the increase and decrease in the use of the car with the term of the mileage that gives us our measuring tool. So as mileage goes up, that's gonna be our activity base. We're gonna have some costs that we can tie to it and have a similar relationship going up in a similar way and other costs will remain the same. This is a crucial concept anytime you're doing any kind of budgeting into the future so you can apply this similar concept to a budget you might use some other kind of activity base which might be say revenue. You might say that some costs are likely to go up with regards to increases with revenue and down in relation to a decrease in revenue and other costs will remain the same. The classic cost that remains the same would be like rent. Rent doesn't go up or down with changes to the activity base of something like revenue. Typically other costs, many other costs, a lot of other costs will kind of fluctuate you would think to some degree as revenue goes up and down. Now note that this isn't a perfect kind of world too. We have a thing like that we call mixed costs costs that might have a variable component and then a fixed component it to it. So in that case, we gotta make kind of an estimate. We gotta deal with the fact because we wanna put them in one category variable or fixed so that we can make projections into the future. And the idea of this would be that then you can kind of once you work this out into the behavior you can make projections using like Excel for example based on different scenarios. So in our scenario with the car usage, we can think about well, what if we use the car more or less what will be the costs and we can figure that out or give an estimate a lot more quickly if we break those costs out by behavior by the cost of the fixed and variable costs. So the first thing we need to do is kind of think about okay, which costs will be fixed and which will be variable. We have our list of costs up top. So we might take like the current year for example with a car and we might try to determine what were our costs this year over the last year and then we might try to determine how many miles did we drive during that year and then we'll see when appropriate to try to see if we can come up with a relationship between the mileage and with the cost that then we can project and use that relationship to that ratio into the future if we plan on driving more or less. So we have the annual depreciation. Now depreciation is a little bit tricky because it's not a cash flow cost here. We're taking the cost of the car, the purchase of the car that we're allocating over the useful life of the car. So on an accrual accounting system, it's an expense but it's not really a cash flow type of expense. It's also something that's not generally going to change with an increased usage of the car or in relation to the usage of the car because it's usually based on just the number of years as opposed to a mileage depreciation method which you could use but most people don't. It's based on a number of years. So that would be more of a fixed cost you would think but not a cash flow cost. We've got the current year's loan interest, the 750. So if we have a loan or financed the car it doesn't matter if we drive the car more or less that we're gonna have to pay the same amount of the loan that was related to the car. The insurance typically is gonna be basically the same as well for the most part. We drive the car more or less. We still gotta pay the same amount of insurance generally. Average gasoline price per gallon. So now we've got the 350. That then is something that clearly will change with the use of the car. So as we increase the use of the car you would expect then the price to be going up and down in some kind of relationship to that. The tolls and parking that you would think maybe that's like a one time thing that we had tolls or parking but it's likely that as we drive more we're gonna get more of those. So you could say that that would be kind of a variable cost. It wouldn't be like a one to one, as easy a relationship as you would think the gas would be but you would think you'd get more tolls and whatnot. Especially tolls, I was thinking fees. You would think you'd get more tolls as you drive more. So annual mileage we're gonna say is the 15,600. So that's how much we drove and we might then figure how much we drove in the current year and then vary that in future years if we think we're gonna drive more or less. Miles per gallon. So we gotta basically think about if we're gonna think about the price per gallon up top we've gotta think about okay how many miles per gallon are we getting here and we're gonna say 24. License and registration fees are gonna be the 148. That's something that's typically you would think would be fixed because whether you drive more or less you're typically gonna have the same license registration, oil charges and repairs. This is something that's not quite as easy to tile but you would think again the oil changes would be somewhat regular with the change to the driving. So that's gonna be variable. So the projected miles are gonna be 20,000. So we drove last, we're saying that we drove 15,600 but now we're gonna project out into the future 20,000. So how can I take my numbers up top and change them to the fact that I think I'm gonna drive 20,000 miles and all these costs are related to the car. Well, we're gonna use the mileage as the activity basis. So how might that work? We're gonna say all right, the gas costs, the annual miles that we drove, the actual miles not the projected 15,600 and the miles per gallon is 24. So if we do our trusty calculation 15600 divided by 24 we got 6,650. So 650 and then we've got the average gasoline price per gallon, which is the 3.5. So if we take that 650 times the 3.5, we're getting the 2,275. 2,275. So we've calculated our gas costs. Now note that in the current year you might have it going the other way, for example, as well too, you might be saying, okay, what if I look at my books and I know for last year I've got the gas costs of 2,275 and I know that I drove the 15,600 miles and the miles per gallon is around 24. Then you can kind of back into, you can back into the average gasoline price because the gasoline price might change over the year. So you could say, okay, well, if I know this number, if I know the 2,275, what I actually paid last year and I divide that out by the gallons, the 650, that's gonna give us our average price to 3.5 per gallon. You can also try to back into the miles per gallon here. In other words, if you knew the gas costs and you knew the average gasoline price per gallon, but you didn't know the miles per gallon, then you could try to back into that because again, that could vary depending on the, if you're driving more on the city roads or stopping and going and versus this and that. So in any case, then we got the oil charges and repairs. That's gonna be the 850 that we're including here and we've got the parking and tools. These are the variable costs, these 750 and that's gonna give us our total. So we're gonna say we got the 2,275 gas costs, 850 plus the 750. That's gonna give us our 3,875 of the variable costs. And then we've got the fixed costs, the annual depreciation. Now that one's tricky because that could be something that's like a deductible item. It's an accrual item, but it's not a cash flow item, but it's certainly not a variable cost unless you calculated it by based on the mileage, which most people don't usually do, it's based on years. So the current year's loan interest, so we're gonna pay the loan no matter what on that cost. The insurance is gonna be the 940, that's not gonna change with the number of miles and the license and registration is 148. So if I punch that in the trustee calculator just for the fun of it, 3200 plus 750 plus 940 plus the 148, there's the 5038. And then we take our annual operating costs, which are the 8913. So if I took my 3875 plus the 5038, we got the 8913 for the total costs, the miles that were driven, the 156, that is not the projected miles, but the annual miles. That would give us then the cost per mile if I divide this out to 1500 and that gives us, if I make this about 0.571. So we can get our cost per mile using that method, but it gets a little tricky if I use that number when I increase the mile is driven because now I've included in this and this, you could say, okay, well, there's my cost per mile, I can multiply that times the 20,000 and you could to try to figure out what your costs are gonna be next time. But some of these costs will not change in the same way, right, because you got the variable and the fixed costs. So that means if I took that and they got the projected miles of the 20,000, so times take that times 20,000. I notice that this number's rounded here. So if I take that times 20,000, then I get the 11,427, 11,427, but that's not a very nuanced calculation because again, this kind of, when I increase the miles, this is saying that the relationship is the same for everything, but it's not because we wanna apply that relationship to the variable costs, but not the fixed costs, really, is the kind of, that's the thing. So then we can go down here and get a little bit more complex on it. And if we think about each one of these items, we could say, okay, if I take my gas costs to 2,275 and I divide that by the miles that we actually drove, the 15,600, then we're going to get to the cost of, or the ratio of that point, one, four, five, so let's do that. We got the 22,75 divided by the 15,600. So we get about this number and that should be something that should change with the number of miles. So if I increase the miles to 20,000, so times 20,000, that should be an appropriate kind of estimate for us because it's a variable cost. If I was to do the same thing for the oil, I'm gonna say, okay, the oil was 8,50. We drove the 15,6 miles for it. So that's gonna give us this ratio. So I'm gonna say the 8,50 divided by the 15,600, that gives us this ratio and that's gonna change in relation. So it would be appropriate for us to take that times 20,000 and that would give us the 10,90. And then we can take the parking and so on and do the same thing, the tolls. We would expect the tolls to go up in the same ratio. So we're gonna say the 7,50 divided by what we drove 15,6. So there's our ratio here for that particular item. And if we take that times the 20,000, that's gonna give us the 9,62 and that would be our variable cost. Those would be the cost where that would be appropriate to do that kind of thought process. 1,917 plus 10,90 plus 9,62. And that'll give us our 4,968 on the variable side of things. Now you could also do that this way. You can kind of combine the variable cost together. You could say, okay, my total variable cost for the 2,275 plus the 8,50 plus the 7,50. And so there's a total variable cost divided by the whole thing divided by the 15,6 divided by the 15,6. And so there's our rate and then multiply that times the 20,000 times the 20,000 and you get the 4,968 about here. So there's the variable portion. So that makes sense to do it that way for those but not for these items because these are fixed stuff. So now the depreciation isn't gonna change if I move, if I go from 15,6 up to 20,000, I shouldn't be increasing the fixed costs. So that should stay the same. Same with the interest. It doesn't matter if I drive it more. I'm still gonna have the interest. It's gonna be the same. The insurance, 9,50 is the same. The license and registration is fixed as well. So my total fixed cost, if I throw that in the trusty calculator, throw it in that plus that plus 9,40 plus 1,480. Hold on a second. Miss key 3,200 plus 7,50 plus 9,40 plus 1,48. And then 5038. And then if I add that plus the variable component 5968, we get to the 10,000, the 10,006. And so you can see that that's a bit different than the costs up top. So it's useful for us to do these projections into the future using this kind of method. Oftentimes we can, and this works, the same kind of activity base will work with many different types of things that you're projecting into the future. It's how you really generally want to be, to be adjusting your costs to try to put them in categories of fixed and variable costs and then try to adjust them as a relation to a change in some other thing. And if you don't have anything else for like a business type of thing, oftentimes you would use revenue, right? As revenue goes up and down, some costs will go up and down with it, other costs will not. And that allows you to use a ratio to get an idea of what's gonna be increasing and decreasing. And you could do anything that you could do a similar basis and tie it to an activity basis, such as in this case, the usage, such as the mileage of something, you're gonna usually get a more accurate kind of projection if you could break out your costs between the variable costs and the fixed costs. And then think about into the future, are you gonna be using this thing more or less and then hopefully get a more precise number to help you out with your budgeting and projections and whatnot.