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Vehicle costing and budgeting Ms. Ester Kalipi Lecturer PowerPoint Presentation
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Vehicle costing and budgeting Ms. Ester Kalipi Lecturer

Vehicle costing and budgeting Ms. Ester Kalipi Lecturer

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Vehicle costing and budgeting Ms. Ester Kalipi Lecturer

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  1. Faculty of Management Sciences Vehicle costing and budgeting Ms. Ester Kalipi Lecturer 23 April 2018

  2. Faculty of Management Sciences Contents Objectives of the unit Scope of vehicle budgeting costing; Vehicle financing alternatives and sources of capital. Factors influencing the vehicle selection process. Factors that impact on the vehicle replacement decision. Scope and structure of a vehicle maintenance programme References

  3. Objectives of the unit • By the end of this unit, student should be able to: • Discuss the operational costs of the vehicle; • List the principles of preparing the operational budgets; • Explain the vehicle financing alternatives and sources of capital; • Discuss the factors influencing the vehicle selection process; • Mention the factors that impact on the vehicle replacement decision. • Discuss the elements and structure of a vehicle maintenance programme.

  4. Importance of vehicle and Fleet costing • Enable transport operators to make decisions regarding • Rates to charge & how they may be changed • What vehicle to purchase • When to replace vehicles based on economic grounds It establish proper management and financial controls. Costing system provide accurate information on how each or part of the operations performs.

  5. Factors affecting costs Some factors are controllable while others are uncontrollable. Vehicle operating Expenses Fixed costs Variable costs Unforeseen expenses Vehicle associated expenses Overhead (administrative) expenses

  6. Fixed expenses These are expenses that you will pay whether your fleet works or just stands. Depreciation (lessen in value): the value of the fleet or vehicle depreciates in use and in value. Cost of finance: the interests paid to the bank on the money used to finance the vehicle License and registration fees: the vehicle must be registered (once-off fee) and licensed (paid every year) Insurance taken out on the car to reduce the risk to the owner in case of damage or accident. A fixed amount is paid per vehicle even if the vehicle is never damaged or involved in an accident. Driver wages

  7. Variable costs • These are the expenses paid when the vehicle works, influence by the way it is used, driven and looked after. • Fuel: largest and simple expenses of most transport operations. Complete and correct record must be kept and continuously reviewed. • Service, maintenance and repairs • Regular service according to the manufacturers specification • Regular mechanical inspections to ensure reliability and safety • Electrical repairs • Body repairs • All “breakdowns” costs • Paint repairs • All small parts such as light bulbs, and mirrors • Driver aid such as fog lights and the radio equipments. • Tyres: modern tyres are designed to support a load under the toughest operating conditions and stress of harsh road conditions, heat, overloading, and abusive driving. (applies to road transport) • Unforeseen expenses

  8. Overhead expenses • These are the expenses that incurred when running an organization. • Bookkeeping fees • VAT, PAYE, Regional services council fees and any other fee the company need to pay • Bank charges • Rent of premises • Lights and water • Maintenance- furniture & fittings and office appliances • Office supplies and stationery including computer accessories • Telephone expenses – includes fixed line (s), fax, mobile phone (s) • Computer and IT Expenses • Internet • Insurance, license and traffic fines • Salaries • Subscriptions to newspapers, magazines and other information • Provident fund and medical aid payments • Advertising

  9. Other expenses • Operational expenses • Vehicle / fleet utilization • Packaging • Lead times • Management proficiency • Vehicle selection • Financing techniques • Regulatory measures • Staff

  10. Source: ICAO

  11. Operational costs for railway transport • Operations & Maintenance Costs: the cost of running the trains and maintaining the infrastructure and rolling stock in a state of good repair. • the costs of train operations, which include a large labor element for train operators, station personnel, and the administrative staff required to provide full passenger services, including sales and services marketing. • cost of maintaining the infrastructure (e.g., track, signaling, and stations), which includes both the labor and materials required to regularly maintain the system • Capital asset renewal is the cost of replacing worn out components at the end of their useful lives. • Fuel and power

  12. Operational costs for water Transport • The cost structure for water carriers is relative high variable costs and low fixed costs. • Water carriers do not provide their own highways (right-of-way) • The water are provided by nature (except canals) and are maintained, improved and controlled by the government. Carriers pay user charges – lock fees, dock fees, and fuel taxes for using government provided facilities • The operating costs for carriers is 85% variable and 15 % fixed. • Fixed costs: depreciation and amortization and general expenses • Variable costs: line operating costs, operating rents and maintenance. • Infrastructure: construction and maintenance of waterways. • Construction of canals with public fund opens new markets and sources of revenue for water carriers. • Construction of locks and dams on rivers makes the water ways navigable for domestic water carriers. • Labour: required at the terminal to load and unload general commodities. • Port developments: improving the ports facilities to keep up with the accelerated developments in global trade.

  13. Fixed and Operating Transport Costs

  14. Budgeting Budgeting is a very important exercise and it is done once a year. Budgeting is a tool of management and should be used as a basis of direction and control of the function to which it refers. A budget set objectives for the business and the final aim is to forecast profit.

  15. Principles of budgeting A budget should have the following characteristics: • Principle of support: involves collaboration and consultation • Zero based budgets: done from scratch and not based on percentage increase of the previous years budget. • Organizational structure: awareness of how employees fit in the organizational structure and what they are responsible for. • Principle of trust: faith and belief that the aims & objectives will be achieved • Principle of participation: participation of employees in the budgeting exercise will motivate them to pursue the objectives • Principle of communication: good communication may assist in compiling realistic budget. • Management by exception principle: management should involve themselves only with the exception from budget and not areas that perform according to plan. • Principle of flexibility: if deviations occur, reasons must be sought and identified. • Principle of realism: realistic achievable standards should be set. • Principle of follow-up: actual results should be compared to planned results on a regular basis, and corrective actions needs to be in place where budget areas not achieved.

  16. Principles of budgets (Cont’d..) Limitations of budget: budgets have limitations but should not be used as an excuse for not compiling budgets or not adhering to them. Budget education: to improve budget forecasts it’s necessary to continually educate personnel in the principles and methodology of budgeting.

  17. Types of Budgets Operating budgets: is the budget which will be prepared to determine the day-to-day costs of a department for the next financial year. These costs include labour costs, fuel, depreciation, maintenance, charges for carriage of goods, licences, and all item incurred in running a department in order to give a required level of mobility of company personnel and ensure efficient customer delivery service. Capital budgets: is the budget that clearly indicate the equipment to be replaced during the period as well as the additional equipment which will be required to meet the needs of the company, because of expansion or of the development of new products which require different methods of handling and distribution.

  18. Vehicle financing • Factors influencing the financial policy • A financial plan is good or bad depending on how it fits specific circumstances. • Industry characteristics: the need for funds, terms at which the funds are found and risk involved in financial decisions are related to the industry. Factors include: • the stability of the business volume: ability to with stand the a temporary problem, decrease in sales, lack of capital or loss of key employee. Key customers, cashflow, lines of credit etc • Growth factors of the industry: technology, innovation, • Business practices within the industry, including competition • Seasonal factors • Assets owned by the undertaking

  19. Factors influencing the financial policy (Cont’d…) b) Status of the undertaking • It determines the most acceptable vehicle finance plan and whether it is possible to carry out the plan. • The following factors influence the status of the undertaking: • Stability of sales • Income • Growth patterns • Seasonal trends • Age size • Geographical coverage in terms of marketing area or owning physical assets with regards to the number of financial institutions available to the undertaking. • History of the undertaking including the reputation in the industry and credit, reputation of the management regarding experience, training and aggressiveness and management’s attitude towards various financial factors.

  20. Factors influencing the financial policy (Cont’d…) • C) Risks involved • Factors involved are: • insolvency (bankruptcy) • Ability of the company to pay its accounts and have access to funding to continue the work that it does • If the risk to high the company may have negative influence on capital attraction.

  21. Factors influencing the financial policy (Cont’d…) • d) Future growth plans of the undertaking: consider growth of the undertaking to enable it to have access to the capital. • e) Nature and size of external capital requirements: short terms funds can be used for long term needs and be funded in lumps into more permanent capital in order to reduce the number of times the firm goes to the financial market. • f) Company data: short term credit and long term credit needs financial data e.g. financial reports. If the company data is withheld from public, access to such funds are withheld. • g) Government influence: monetary and fiscal policy can both influence the availability and cost of funds. The government can also use fiscal policy to stabilize the economy, e.g. increase interest rates which can effects that companies borrow less money.

  22. Procurement of Vehicles • There is no single best method to pay for the vehicle. • Several methods may be used over different period. • Most common method is financing with the loan from the bank, and this method allows a buyer to pay the vehicle over the period of the contract and structure the monthly payments the best way suit the cash flow (money you earn every month less the expenses you pay). • This means that the bank allows the buyer to pay the vehicle with the money it earns. A monthly instalment is calculated by considering the type of work the buyer does, the make and model of the vehicle, the and maintenance. • The buyer does not entirely own the vehicle until the last payment is done and all monthly payments must be made on time.

  23. Vehicle Financing Alternatives • Cash purchase: Using own cash to purchase a vehicle. No money is borrowed. The opportunity cost must be evaluated, i.e. the company must evaluate if it may get a better return on investment by using the money on other business needs. • Borrowing Money: money borrowed by companies to purchase a vehicle. • Bank overdraft- a facility in which the bank account is allowed to go unto debit, usually up to a specified limit. c) Instalment agreement (also referred as Hire Purchase): there are no surprises, only predictable and regular monthly instalments. A minimum deposit is required. Benefits of Instalment Agreement: • Acquisition of vehicle • Fixed or variable interest rates • Repayments over an agreed period • Tylor-made payment structures • VAT capitalised at the outset of an agreement • Finance charges and depreciation are deductible from income tax (dependant on customer profile)

  24. Vehicle Financing Alternatives (Cont’d..) d)Instalment agreement with Balloon: simple and effective way for acquiring a vehicle with lower monthly instalments, with a final payment that transfers ownership to you the customer. • a final payment is negotiated at the outset of the agreement, & the remaining cost, plus interest charges, is then repayable in regular or monthly repayments over an agreed period. Benefits: • lower monthly payments with a final payment- responsibility of the buyer. • Acquisition of vehicle –after final instalment • Fixed or variable interest rates • Repayments over an agreed period • Tylor made payment structures • VAT capitalised at the outset of agreement • Finance charges and depreciation are deductible from income tax (dependant on customer profile)

  25. Vehicle Financing Alternatives (Cont’d..) e) Lease: agreement that is Taylor-made to suit the needs of the customer, lease a vehicle for a agreed period with the option of ownership. • Option to take ownership of the vehicle or extend the lease at the end of the agreement. • Lease payments are tax deductible • VAT capitalized at the outset of agreement. e) Rental: paying for the use of the vehicle, rather than ownership. Most preferable option when the vehicle is required for a short period of time or when one of the vehicle is broken, or when more vehicles are needed to complete a job on time. • After an estimated mileage, a vehicle is rented for an agreed period. The vehicle is returned, removing the worry of disposal and the risk of ownership remains with the rental company.

  26. Vehicle Financing Alternatives (Cont’d..) Benefits of rental: • Capital expense eliminated and improved cash flow, (capital money is freed up for other projects) • Rentals fully tax deductible as operating expenses (dependent on customer profile) • Asset not reflected on balance sheet because they are not owned by the company • VAT claimable and not payable monthly (not capitalized up front) • No vehicle disposal risk, which means that the company is not stuck with the vehicle once the job which was rented for is completed • Only pay for use of vehicle. • New vehicle are used often, because the company can dictate that it wants to rent new vehicles. • Reduce monthly payment.

  27. Sources of capital • There are various sources of capital and there is no right or wrong way in terms of choosing the sources of capital for the funding of vehicles of an organization. • E.g. retained income, shareholder capital, commercial banks and rentals companies. • A company should assess its own set of circumstances and requirement to determine the best alternative method available. • Company capital: the company uses its own capital to buy vehicles from retained income. This decision must be investigated thoroughly before purchasing the vehicle.

  28. Advantages of using own capital • Ownership and control, the vehicles are owned by the company as soon as they are purchased and registered. • Management of risks and rewards of ownership is in the hands of the company. • On-going costs may be lower than hire and leasing options • Flexibility on vehicle change cycle, the company is not tied into a purchase contract over a fixed time period. If at any time the company wants to sell and get different vehicles it can do so. • The company can take advantage of market conditions, special deals when they are offered by the manufacturers or dealer, due to excess stock situations and when new models are introduced and large savings can often be the result.

  29. Disadvantages of using own capital • Higher capital investment in depreciating assets • Vehicle assets are shown on the balance sheet, which means that the company return on investment is lower compared to when the vehicle is financed off the balance sheet e.g. rentals • Negative cash flow • Residual value risk, in other words the vehicles may depreciate at a rate higher than anticipated. • Higher administrative responsibility in terms of invoicing, maintenance and disposal of vehicles at time of replacement.

  30. Bank financing • The bank has a core function for vehicle financing and it offers different lease options. Advantages include: • Payments can reduce in line with the residual value of the vehicle. • It puts less of a cash drain on companies that can use spare cash. • VAT is paid on the rental rather than upfront. • There are options to purchase the vehicle if the company objectives change and this is required. • Operator can share in the residual value of the vehicle.

  31. Disadvantages of financial leases • On-going costs may be higher than equivalent outright purchase of vehicles • Maintenance risks in that it’s not fixed and could be higher than anticipated. Vehicle maintenance is not covered under a financial lease as compared to a full maintenance lease where maintenance is included in the monthly payments. • Flexibility reduced – set period of repayments – vehicle can only be sold after payments are completed or settlement is made.

  32. Vehicle Selection Process • Factors to be considered in vehicle selection: • Business Need: the purpose of the vehicle • Identify the passengers- understand the day to day vehicle requirement to meet the intended passenger’s needs • Cargo- identify what the vehicle will be carrying/transporting keeping in mind business growth and future business expansions. • Additional specifications- high considerations of safety and driver and passenger specialized needs and the particular needs for the business industry. • Fit-for-Purpose; Operating specifications • Fleet operators Safety • Environmental performance • Fleet size • Vehicle purchase timeline • Cost effective ownership

  33. Factors that influence the decision regarding the replacement cycle or time • As a vehicle gets older the repair costs starts rising • As more repairs are required the downtime starts increasing which reduces the vehicle utilization • Unscheduled maintenance or breakdowns can start happening which means that the vehicle becomes less reliable • Older vehicles are also less fuel efficient than newer and more moderns vehicles.

  34. What makes a replacement programme works • A well-managed maintenance programme. • A maintenance records for each individual vehicle from purchase date to present. • Fuel consumption figures for each individual vehicle • Age records of all vehicles • Accurate kilometre records for each vehicle • Records breakdowns for each vehicle and the reasons for the breakdowns • The correct vehicle for the job ( a proper selection and vehicle specification programme).

  35. What makes a replacement programme works (Cont’d..) • Maintenance, breakdowns and fuel consumption records serves as an early warning system that something is wrong with the maintenance programme. • A good maintenance programme will extend the life of a vehicle, while a poor programme will shorten it. • A good well managed maintenance programme should therefore support a good replacement programme. • Good kilometre records normally forms a basis of replacement policies and not necessarily years. • Whenever a replacement policy is changed or implemented for the first time, A proper mechanical audits should be done to determine the effectiveness of the current maintenance programme that could render the new replacement programme ineffective

  36. What is a replacement Cycle? • Replacement cycle refer to operating life of a motor car or a freight vehicle with the principle objective of cost minimization. • It should be simple and realistic, taking into account all cash and tax flows. • It should produce an easily interpreted result. Advantages of a replacement cycle: • Transport cost may be minimised. • Since the operator knows when the vehicle is to be replaced, he can obtain the best terms and acquisition method, as there will be sufficient time. • Time exits to correctly specify vehicles to suit the particular operation. • Capital budgeting and financial planning is simplified. • Downtime is minimized.

  37. Vehicle replacement • Firms have to consider options of replacing the vehicle at the end of economic life with a new vehicle or to replace with a refurbished vehicle. • Refurbishment of vehicles are now popular due to excessive price increases on new vehicles and cost savings could be realized. • Car engines, gearboxes and differentials are rebuild and remanufactured, sometimes rebuild of complete vehicle according to manufacturer’s original specifications. • Refurbishment carry a vehicle warranty • The introduction of the economic service life method as a means to establish whether a vehicle has reached the end of its economic does not necessarily mean that it has to be replaced. • The decision whether a vehicle has to be replaced with a new vehicle or to refurbished the vehicle could be assisted by the use of the economic control limit.

  38. Replacement policies in practice • Irrational process of vehicle replacement will lead to unnecessary expenses. • The aim should be to establish the economic life cycle of a vehicle, which lead to savings in running costs by reducing repairs and maintenance expenditure. Elements of replacement policies / cycle • Number of kilometres or years. • Cumulative repair costs exceed the accumulated depreciation in the books. • The vehicles is fully depreciated in the books. • The vehicle is beyond repair/ has become absolete, or its appearance becomes incompatible with the public image that management wants to create.

  39. Reassessment of replacement cycles • Six major costs influences have an effect on replacement cycle. These costs are not the same for all vehicles, hence no ideal policy exists for all types of vehicles. • The vehicle used (the cost to keep the vehicle in working order) • Annual kilometres • Used vehicle condition • Capital cost of the vehicle • Tax implications • Relationship between cost groups, in other words the comparison of different costs like fuel, maintenance, insurance, licensing fees and tyres. • In order to have a rational policy, there should be a good database covering these major cost influences.

  40. Classification of replacement Programmes • Arbitrary replacement – when vehicles break down for the final frustrating time or when customers complain about poor delivery service, the replacement decision becomes inevitable. ad hoc unplanned decisions and events control the undertaking rather than rational planned decisions. • Predetermined replacement – when a vehicle reaches the end of its originally projected economic life; after a given period or distance covered. This policy is often found with motorcars. • Rational economic replacement – when replacement is made at an optimum time calculated on the basis of progressive cost analysis throughout the life of the vehicle to the point where it is obvious the maximum predetermined cost has been reached and increased cost will commence. This method take into consideration previous as well as the six items mentioned above. • Productivity Oriented - When replacement is determined by cost criteria measured by either excessive downtime or the vehicle's inability to achieve predetermined productivity standards (availability and volume of deliveries - the workload).

  41. Arbitrary Replacement • Replacement is considered absolutely necessary – when “wheels fall off” • Replacement may happen before it is normally due, costing the undertaking money as the scarce capital resources are not used optimally. • The undertaking cannot plan its future transport capacity or vehicle/ fleet requirements. • The fleet becomes unreliable, resulting in rental costs increasing to replace unserviceable vehicles on a day to day basis, or quality of service rendered drops, following leading to lost contracts. • Workshop planning becomes impossible. • Vehicles will not necessary be replaced on a systematic basis, so it’s possible that some units are kept operating longer than is wise, because there is no rational replacement policy.

  42. Predetermined Period • An operator replaces a car or commercial vehicle once it has reached a predetermined age or kilometres. Advantages: • Due warning is given that vehicles are to be replaced so that planning can take place. • Financial planning becomes meaningful • Every vehicle will be replaced at some point in time. Disadvantage: • There is no guarantee that the selected replacement programme/ interval is the most economical for undertaking’s operating circumstances. • This technique is not recommended for commercial vehicles as too much expenditure goes into road transport for the fleet operator to risk guessing the economic replacement period for the different types of vehicles in his fleet.

  43. Rational Economic Replacement • This policy determine the time at which the total minimum costs occurs as the point at which the vehicle should be replaced, since it is beyond, the average cost per unit output begins to increase. Advantages: • It is possible to minimise the cost over a vehicle’s operating life • Due warning is given that vehicles are to be replaced so that planning can take place. • Financial planning becomes meaningful • Every vehicle will be replaced at some point in time.

  44. Economic Service Life Method • This technique will assist in the determination of the point at which a vehicle need to be replaced. • Existing costing information is the input of this method, and a simple computer programme should extract the information from the vehicle costing system. • The computer programme may run on monthly/quarterly basis to monitor the vehicle’s performance.

  45. Fleet Maintenance Management • Definition: • The purpose of maintenance management is to maintain a fleet of vehicles, using both preventative maintenance and corrective maintenance, to minimize breakdowns and reduce maintenance cost. • A well maintained vehicle may: • Deliver products on time to meet the deadline • Be always available to make regular visits to customers • Full service and repair record has a higher resale value • Reduce the risks of breakdowns at night or in remote areas.

  46. Why is maintenance required? • The legal requirement to operate the road worthy vehicles • Homologation: checking of vehicles to see that they conform to the rules and definitions that determine whether a vehicle or vehicle type is fit for use on the roads. • Vehicle homologation usually takes place at a manufacturing plant level, where design features are checked against safety criteria. • Ongoing homologation continues in the form of roadworthy checks. • Checks are required to re-license vehicles upon change of ownership, and on a regular periodic basis for commercial vehicles. • Vehicle fitness: vehicles are required to be roadworthy in order to legally use public roads. Roadworthy test checks: identification and documentation, electrical systems, fittings and equipment, braking system, wheels, suspension and undercarriage, steering, engine, exhaust system • The need to ensure fleet and vehicle productivity: availability and reliability over the economic life of the vehicle. • Vehicle availability: the extent to which the vehicle fleet is available for revenue-earning work, and to large extent reflects the effectiveness of the maintenance arrangements. • Availability is expressed as a percentage of the owned or licensed fleet which is available over a period. Availability is also expressed in terms of average days available per year • Vehicle reliability: quality of measurement; consistency or repeatability of the measures; unreliable vehicles are the one that breaks down often. • Maintenance standards play a significant role in vehicle operating costs, levels of safety and reliability, and pollution. • Vehicles maintained according to a properly designed preventative maintenance program are less expensive overall than those maintained on a reactive basis.

  47. Why is maintenance required? (Cont’d..) • PM is designed to prevent premature failure. This means that as far as possible, parts are replaced shortly before they fail, fluid levels are checked, adjustments are made when necessary and loose fastenings tightened. • Cost of vehicle downtime: the time that a vehicle spend off the road because it is not running condition is called downtime. • Vehicle downtime results in increased fleet cost in two ways, namely directly as a result of the vehicle being repaired, and indirectly because the vehicle is unproductive. • Vehicle utilization: the extent to which the vehicle is used. Measures of utilization include mileage or hours (kilometres per vehicle per period or operational hours/days per vehicle per period); analysis of days or hours of operation as a percentage of total available time or number of vehicles operated in a day as a percentage of the number available. • The most useful indicator is the number of vehicles used on revenue-earning service at a particular time as a percentage of the number of vehicles which are available for service at that time.

  48. categories of maintenance • There are three categories of maintenance that need to be performed on a fleet vehicles: • Preventative maintenance: performed in order to prevent failure and breakdowns. This category of maintenance achieve its purpose through regular servicing according to manufacturer specifications. • Care and servicing by personnel for the purpose of maintaining equipment and facilities in satisfactory operating condition by providing for systematic inspection, detection, and correction of anticipated failures before they occur or before they develop into major defects. • Maintenance, include tests, measurement, adjustments, and parts replacement, performed specifically to prevent faults from occurring. • Class 1: regular care for normal operating components or parts and systems (lubrication, cleaning, adjustments etc.) • Class 2: periodic inspection to uncover conditions that could lead to failure of parts or components (coolant level and battery condition checks etc.) • Class 3: Upkeep actions to adjust, repair, remove and replace components (adjustment of drive belts, adjust and remove/replace brake pads)

  49. Categories of Maintenance (Cont’d..) • Predictive maintenance: monitoring of components or parts to determine whether deterioration is occurring that could lead to vehicle failure. • It helps to determine the condition of in-service equipment in order to predict when maintenance should be performed. • It offers cost savings over routine or time-based preventative maintenance because tasks are performed only when warranted. • A driver may do visual inspection before and after a trip as well as listening to out-of-ordinary noises from the engine of a vehicle. • Daily walkaround look over the whole vehicle or combination, covering the external condition ensuring that lights, tyres, wheel fixings, bodywork, trailer coupling, load and ancillary equipment are serviced. • Defect reporting: drivers are responsible for the condition of their vehicles when in use on the road and must, therefore, be able to report any defects or symptoms of defects that could prevent safe operation of vehicles. • Drivers must also monitor the roadworthiness of their vehicles when being driven and be alert to any indication that the vehicle is developing fault, such as warning lights burning, exhaust emitting too much smoke, vibrations or other symptoms. • Any defects found must be reported in writing by the driver, and remedial action must be recorded. Recording should include vehicle registration or identification mark, date, details of the defects or symptoms and the reporter’s name.

  50. Categories of Maintenance (Cont’d..) • Corrective Maintenance: maintenance that results from component failure and aims to restore the vehicle to a pre-specified condition. The equipment should be inspected to identify the reason for the failure and to allow action to be taken to eliminate or reduce the frequency of future similar failures.