Railway Accounts Department Examinations

Showing posts with label Handout on Traffic Costing. Show all posts
Showing posts with label Handout on Traffic Costing. Show all posts

Wednesday, November 21, 2018

Handout on Traffic Costing

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          The Indian Railways play an important role in the development of the nation’s economy.  They are the second largest organized carriers of freight and Passenger traffic in Asia.  Railway transport costs influence the pricing of commodities.  Being a Government undertaking Railways are not run on a purely commercial basis.   They perform the dual role of maintaining commercial viability on the one hand and the essential obligation of meeting efficiently the increasing transport requirements of the rapidly developing Indian economy.

          The Railway manufactures and sells transport. Accurate knowledge of Production costs is essential for the success of an enterprise.  The profitability of an undertaking depends on the level of costs vis-à-vis earnings.  In the private sector it is necessary to keep the costs as low as possible for maximization of profits.  Minimisation of costs without affecting the quality of the product or service requires perfect knowledge of various elements, which constitute the production costs.
Cost study helps in locating inefficiency under any department of Railway working and thus facilitates in devising remedial measures.  For a manufacturer of goods it is necessary to calculate the costs of the finished products for deciding the price fixation and to identify and rectify unfavourable elements and unnecessary expenses.
 Hence like other manufacturers, the Railways must know the cost of its products viz., transport of goods and Passengers, measure the efficiency of operation and decide on the fixation of freights and fares.  The primary responsibility of Railways is to convey Passenger and goods cheaply and quickly between pairs of points, hence suitable measures have to be adopted to reduce the cost of haulage, increase speed, comfort safety and punctuality which not only help the customers/traders but also develops the nation’s economy in the ultimate analysis.
Rail transport costs are one of the constituents of the overall cost of the commodities carried by them.  Railways are basically the bulk carriers moving various raw materials and finished products and thus Rail transport costs enter into the cost of commodities and affect the general price level.  Minimisation of Railways’ transport costs without affecting the commercial viability and the quality of service becomes the primary goal of Rail management.
The objective of traffic costing is to supply data for a wide field for management decisions and for the formulation of national policy in the transport field.  Its basic objectives are:
(i)           to provide basic data for rate fixing;
(ii)          to in carrying out the profitability analysis of existing and potential traffic;
(iii)        to create costs consciousness and help in cost control;  and
(iv)         to provide data for project appraisals and evaluation of further capital investment
Costing of Rail transport is not strictly comparable to costing of commodities and other services.  It presents many special features which are not present in other commodities and which create complex problems in the process of cost ascertainment.  For example, Rail transport services are offered at hundreds of stations all over India and uniform decisions have to be taken so as to achieve our objectives of development taking Indian Railways as a whole, whereas in case of road operators, they operate in a limited area with the sole aim of maximizing profit.
Second distinguishing feature is that the product is not homogeneous.  Common assets are used for carrying passengers and goods traffic.  Within both there are further varieties i.e., different classes of passenger traffic, luggage, parcels, RMs traffic, goods of several categories. 
Thirdly, Rail transport like any other transport is a perishing commodity i.e. it cannot be stores.  If a wagon is not utilized for loading on a particular day, its transport capacity the lost forever.  This is not the case in respect of other commodities.
Fourthly, Rail transport requires creation of vast costly assets for a long span of like and the overall cost of Rail transport depends on the efficient use of these assets during their life span or even beyond, for producing transport.
Therefore, analysis of transport costs present difficult problems.  Basic difficulties are created due to non-homogeneity of end products and spread over of the production unit over a large area.  Since the same assets are used for giving various services, the costs, which are common to a number of services, have to be apportioned among them on equitable basis.
A suitable basis has to be worked out for allocation of these common costs among different services.  The spread over of the production unit over a large area further complicates the task of costing as a number of elements enter into the cost calculation.
Wherever possible, expenses are debited direct and in full to coaching or goods service but in case of joint expenses, suitable basis of apportionment and also for further allocation to the constituent facets of goods services like marshalling, transhipment etc.  In the first stage a suitable procedure was developed for allocation of cost between coaching and goods services, then a suitable procedure for allocating freight costs into various facets of goods services and unit costs for various phases of goods operation like line haul, marshalling, transhipment are computed.  Traffic costing has entered the second stage of its development within the evolution of methodology for detailed costing of coaching services.
Computation of costs for individual streams of traffic is necessary to decide whether a particular category of traffic is remunerative and to examine the feasibility of quotation of special station-to-station rates to combat road competition or to move additional traffic in lighter sections or in empty movement direction etc.  Costing is also essential for new projects’ financial justification and to decide between various alternatives like dieselisation, electrification by replacing steam traction.


The term ‘cost’ assumes different meaning in different contexts.  The interpretation of cost depends on the viewpoint and the purpose of measuring the cost.  The society in general may be concerned with the amount and proportion of national resources of labour and material utilized to provide transport.  The users of Rail transport are concerned with the total cost of transport from one point to another.  It is therefore, necessary to describe some common terms used in cost analysis.

Fixed Costs

These are also known as non-variable costs, indirect costs or overheads.  Fixed costs remain constant, with the change in the volume of traffic over a period of time these include establishment charges, interest, depreciation charges, expense on maintenance of permanent way etc. these costs are of a fixed nature and have to be incurred irrespective of charges in the volume of traffic.

Fixed costs per unit vary inversely with the quantum of traffic.  As the volume increases, fixed cost per unit declines as the overhead expenses are spread over a larger output.  The fixed costs always relate to a particular scale of capacity.  Any change in scale may change the amount of cost, which may have been regarded as non-variable in the short run.

Variable Costs/Dependent Costs

These are known as marginal costs, incremental costs dependent Costs or differential costs.  Variable costs are those costs, which increase or decrease in direct proportion to changes in the volume of traffic.  For example cost of fuel lubricants, wages of running staff etc.  The determination of short-term variable costs helps in working out the direct costs of moving additional volume of traffic.  If, therefore, provides basis for quotation of special rates for attracting high rates traffic moving by road.

Fully Distributed Costs

These costs represent the total expenditure incurred by the Railways in providing Rail transport and consist of:

(i)           Working expenses and
(ii)          Interest and depreciation on capital

It helps in calculating average unit cost of transport and includes the element of overhead costs.

Common Costs:  These are known as joint costs, which arise due to non-homogeneity of the product mix.  Same assets are used for providing passenger and goods services.  Expenses incurred jointly constitute common costs.  These are allocated n the basis of certain ratios.
Consignor’s Cost:  It represents the costs incurred by the consignor for transport of goods.  It includes packing charges, charges for loading goods into trucks, transport from consignor’s godown to the Railway station, unloading and loading of the consignment into the wagon.
Consignee’s Cost:  It consists of expenditure in taking delivery of the consignment at the destination station i.e. cost of transport from destination station to consignee’s godown.  It includes unloading from wagon, loading in truck and transport from Rail head to godown.
Inventory Costs.  These are imputed costs.
These represent interest charges on the capital value of goods locked up during the period of transit.
Inventory cost per Tonne = v x r x ------

where V = value per Tonne of goods
          r = annual rate of interest
          t = Number of days in transit from consignors godown to that of the
Hence delay in transit puts the customer to loss because inventory will go up.

If Railway transit takes longer time, traders would prefer road transport, which takes much less time, even though Railway freight may be lower.

Trader’s Cost:  It consists of the total expenses incurred by the trade for the movement of goods by a particular mode of traffic.  Hence this will include consignor’s cost, consignee’s cost plus inventory costs and freight.  When a comparison is made between Railway freight with the rate charged by road haulers, we have to take into account all types of costs incurred by the Trade.  Hence the Trader’s cost goes into the price of a commodity in the market.

Operator’s Cost:  It includes expenses incurred by transport operator in providing the transport service. E.g., acquisition, maintenance, operation, improvement, replacement of transport facilities.  It also includes compensation for damages, interest on borrowed money, dividend on capital etc.

Economic Cost:  It includes the cost of transport to the nation in terms of national resources of labour and material, which go into production of Transport Service.  Its calculation is required for resource allocation on different means of transport.  Economic cost of providing Rail transport service should take into account the cost of movement of goods by other means of transport also.

It excludes the element of all taxes and duties of the central and state Govts. 

Indian Railways have adopted the I.C.C. model of fully distributed costs for developing the Rail transport costs.


The aim of cost analysis is to correlate expenditure to the physical outputs coming out of these costs.  This is done by first locating all the cost elements, which go into the production of an output.  The methods adopted for allocation of these costs to various services/outputs are given below:

Direct Costing

Firstly efforts are made to relate various expenses directly to different services.  The bifurcation of expenses between different gauges and coaching/goods services is done by the method of direct costing.  But the majority of expenses are joint/common expenses, which cannot be related directly to the output/services.  For example terminal charges maintenance of Railway line, overhead expenses etc.  For allocation of these joint costs, indirect costing methods are used for apportioning the residual cost elements.

Indirect Costing

Its aim is to apportion the joint costs between different services on some rational basis the methods used are discussed below.

Engineering Analysis

The experience and knowledge of engineers in the field of transport costing is used to identify and apportion the joint costs between various services and functions.  For example ratios for apportionment of track maintenance expenditure, repair and maintenance of locomotives operating expenses have been developed with the help of technical departments.

Statistical Analysis

The use of statistical methods for apportionment of common costs can be done extensively in transport costing as explained below.

Survey Method

This is used for working out ratios for allocation of joint costs between different services and functions.  For example in 1972 survey of 1200 stations on Indian Railways was done to work out ratios for allocation of joint costs between different transport functions.  On the spot studies help in working out how much of the time of an engine is spent on coaching and how much on goods and shunting services at stations, yards and running of trains, now station staff, running staff, train passing staff can be allocated to different services.  Survey method gives only approximate figures under different categories and if applied properly these provide closest approximation to reality/actual.

Statistical Regression Analysis

This is the method of theory and practice of correlation, which is used in traffic costing to work out the relationship between different categories of expenses and different parameters of physical output.  Regression analysis helps in working out ratios for allocation of joint expenses between services.  Simple and multiple regression analysis is used according to the nature of the problem.  In multiple regression analysis more than one independent variable are regressed or correlated with the dependent variable.  In simple regression analysis one dependent variable is correlated with one independent variable.

Per cent Variable Method

Under this joint expenses are allocated in the proportion of direct expenses to total expenses.  The percentage of variable cost to total cost is called “per cent variable”.  This is rough method to indicate a relation between expenses and services and whether and to what extent increase in expenses would cause by increase in output.

Allocation in the ratio of direct expenses

The overhead expenses, which cannot be directly apportioned to different services, are allocated among different services in the ratio of direct expenses of different services.

Cost Accountant’s method of apportionment

Cost accountants have developed method of apportionment of joint costs on the basis of behaviour of different elements of cost by observation i.e. study of employees duty hours, machine hours and other factors required for producing passenger and goods services.  Some times this method does not explain adequately variation of costs with variation in the level of output.



The basic documents or statements for accurate traffic costing are dependent on the sound accounting system.  The performance oriented accounting system, which is also function oriented is able to affectively relate expenses to different services and performances.  Earlier accounting system was based more on sound accounting principles and not on the requirements and necessity of cost accounting.  The classification of accounts was revised with effect from 1.4.1979 and is now “function” and “activity” based.  The Revenue expenditure has also been classified corresponding the Demands for grants” which also show relevant performance units.  While the alpha (i.e. letter of Abstract) corresponds to the Demand head, minor, sub and detailed heads of accounts represent classification of activity from a broad grouping into details.  Previous Nomenclature of Expenditure under different abstracts have maintained for easy identification and for the sake of continuity but side by side numerical, nomenclature have been given for a smooth switchover to computerization.  Hence its utility for analysis of costs if now greater with Railways introducing computerization.

Let us describe briefly the existing accounting procedure on the Indian Railways to understand clearly the method developed for analysis railway transport costs.

Indian Railways keep separate accounts for—

(1)          Capital and works expenditure on different new projects of construction, acquisitions, renewals and replacements.

(2)          Revenue Expenditure.

The revised classification of expenditure on works irrespective of being chargeable to Capital, D.R.F. DF/OLWR, Revenue and Capital Fund come under demand No. 16 known as “Assets-Acquisition, Construction Replacement.

Sources of financing demand No. 16 are indicated by letters:

P – for capital
Q – for D.R.F.
R – for Revenue (O.L.W.R.)
S – for Development Fund
T – for Capital Fund

There are twenty-seven plan heads, which for the purpose of link with the accounts of the Central Govt. from minor heads of Railway capital.

Minor heads of classification: -

New lines (construction)
Purchases of new lines
Restoration of dismantled lines.
Gauge conversion
Traffic facilities – yard remodeling and others
Railway Research
Rolling stock
Track renewals
Bridge works
S & T works
Taking over of line wires from P & T Dept.
Electrification projects.
Other electrical works.
Machinery and plant
Workshops including production units
Staff quarters
Amenities for staff
(i) Passenger amenities

(ii) Other Railway users
Investment in Govt. commercial undertaking public undertakings – IRCON, RITES
Other specified works.
Stores suspense
Manufacturing suspense
Miscellaneous advances
Metropolitan Transport projects.

The sub and detailed heads give the break up of expenditure on assets, viz. Preliminary expenses, Land, Formation, permanent way, Bridges, Stations, Buildings etc. Detailed classification has been given in Bahri Booklet entitled “Revised classification of Accounts of Expenditure and Earning” based on Indian Railways Finance Code Volume II.

Revenue expenditure is classified in 13 Revenue Abstracts seven are functional service Abstracts (BCD & E Repair and Maintenance and F.G.H. of Operating Expenses).  Five are overhead Abstracts (‘A’ of General Superintendence and Services, ‘J’ of Staff Welfare and Amenities ‘K’ of Misc.  Working Expenses ‘L’ of Provident Fund, pension and other retirement benefit ‘M’ for Appropriation to Funds.  The remaining one i.e. Abstract ‘N’ pertains to Suspense.

Each revised abstract correlates with demand for grant.  This ensures that the Demands for grants are compiled from the financial accounts directly and present useful data in a simplified and direct and clear manner.  Each Demand for grant distinguishes/ differentiates between variable, semi-variable and fixed items of costs and facilitates performance budget being integrated with it.  Each abstract is given a two digit Code also, as under:

S. No.
Demand for Grant
Abstract ‘A’
General Superintendence and Services
Abstract ‘B’
Repairs and Maintenance of Permanent Way and Works
Abstract ‘C’
Repairs and Maintenance of Motive power
Abstract ‘D’
Repairs and Maintenance of Carriages and Wagons
Abstract ‘E’
Repairs and Maintenance of Plant and Equipment
Abstract ‘F’
Operating Expenses – Rolling Stock and Equipment
Abstract ‘G’
Operating Expenses – Traffic
Abstract ‘H’
Operating Expenses - Fuel
Abstract ‘J’
Staff Welfare and Amenities
Abstract ‘K’
Miscellaneous working expenses
Abstract ‘L’
Provident Fund, Pension and other retirement benefits
Abstract ‘M’
Appropriation to Funds
Abstract ‘N’

(i)           Demands payable
(ii)          Miscellaneous Advances Revenue

The above Revenue Abstracts except ‘L’, ‘M’ and ‘N’ are subdivided into Minor heads which show departments and activities whereas Abstract ‘L’ exclusively deals with P.F., pension and other retirement benefits, ‘M’ for appropriation to Funds and ‘N’ for suspense.

These Abstracts or sub-major heads are further divided to minor heads, sub heads and detailed heads.  Hence the Railway Revenue Expenditure is booked under more than 1200 detailed heads of accounts and this number will multiply many times when primary units (objects of expenditure) are suffixed to each detailed head.

Important Primary units of Expenditure (Revenue) are as follows:  These are identified with specific two digit numbers.  For instance salaries and wages are identified by digits 01, DA with 02 and so on.

(i)           Salaries and wages.
(ii)          Dearness allowance
(iii)        Kilometrage allowance
(iv)         Overtime allowance
(v)          Night duty allowance
(vi)         Other allowances
(vii)       Fees and Honorarium
(viii)     Productivity linked Bonus
(ix)        Travel expenses including Air Travel
(x)          Contingent expenses
(xi)        Cost of materials from stock
(xii)       Cost of materials directly purchased
(xiii)     Contractual payments
(xiv)      Other expenses

Such detailed analysis helps in apportioning various items of expenditure to the different functions of Railway Transport in the process of costing.

Initial accounts are prepared/maintained by various accounting units attached to the Divisional offices, Workshops, Zonal Headquarters and Railway Board i.e. 4 tier Railway Administration.  Expenses are booked directly from cash transactions or from the adjustment vouchers, which record the classification of Expenditure.




Traffic costing depends mainly on traffic statistics for basic data regarding Railways performance.  Railways compile statistical data on various aspects of Railways working and the same is published in the form of monthly and annual statistical statements every year as per detailed instructions given in Railway Boards’ Statistical Manual Vol.I and II.  Every Zonal Railway has a full-fledged statistical department and a statistical Directorate is functioning in the Railway Board’s Railway organizations.  Compile and collect data about the working and performance of their respective zones.  Hence sufficient statistical data is available on every facet of Railway working for use in Traffic costing. Railway statistics have been broadly classified under the following categories:

(i)           Financial statistics
(ii)          Commercial statistics
(iii)        Operating statistics
(iv)         Administrative statistics

Financial Statistics

These give the detailed information about the financial aspect of Railway working.  The compilation is done from the accounts maintained by each zonal Railway, giving details of financial results such as capital at charge, working expenses, gross earnings, payment of dividend to general revenues appropriation to D.R.F., Pension Fund for every year.  Capital expenditure incurred during the year is further broken up under the following heads:

(i)           Works including preliminary expenses, land etc.
(ii)          Rolling stock
(iii)        General and Miscellaneous charges
(iv)         Floating assets
(v)          Other assets etc.

The ordinary working expenses incurred during a year are also available under various heads of demands for grants available Abstract-wise.

The above information is available in the statements 1 to 7 of Annual statistical statements.

Commercial Statistics

They give data about commercial performance of each Zonal Railway.  It gives details of passenger and freight traffic carried by the Indian Railway along with earnings.  Commodity statistics for important commodities carried give details about originating tonnage, tonnage transshipped, earnings, average load of traffic, Net tonne kilometers, tones transshipped etc.  This information is contained in statements 8 to 16 of Annual statistical statements.

Statement No. 15 of Annual statistical statements gives results of working of coaching and goods services and provides background material for traffic costing.  This statement contains the following information:

(i)           Cost of hauling a passenger train and passenger vehicle per kilometer
(ii)          Cost of hauling a goods Train and goods wagon per kilometer, and
(iii)        Cost of hauling a tonne per kilometer.

Separate statistics are also available for Non-revenue tonnage like Railway coal, Railway material, number of claims settled and amount paid due to various causes like yard thefts, running train thefts etc. etc.


Operating Statistics

These describe operating performance of Indian Railway and are very important from the point of view of traffic costing.  It gives information about train kilometers, engine kilometers, gross tonne kilometers, engine hours, wagon kilometers etc.  Statements 17 to 37 of Annual statistical statements give details of operating statistics.  Operating statistics are used in Traffic costing for apportionment of expenses to various phases of Railway operating, marshalling yard and terminal yard operations etc.  This data is also used for calculating unit cost for the above-mentioned facets of Railway working.


Administrative Statistics

These relate to number and cost of staff by different categories and departments-giving further details of man-days lost due to various reasons, accident statistics, cost of police force, R.P.F. etc. statements 40 to 43 of Annual statistical statements deal with Administrative statistics.


Allocation:  means classification of earnings or expenditure with reference to a particular activity, object, service or a Cost center as the case may be.

Apportionment: means division of earning or expenditure among different services, activities or Cost Centres in accordance with certain pre-determined basis, norms and methodology.

Bifurcation: means division of earnings or expenditure between two activities, services or functions according to methodology, which uses techniques of allocation as well as apportionment of expenses.

Cost: is the amount of expenditure incurred on or attributable to a given output/product or service.

Costing or Cost Ascertainment:  refers to the techniques and processes of ascertaining cost, the methods used and the actual processes of cost finding.

Cost Centre: refers to a location, person or item of equipment (or groups of these) for which cost may be ascertained and used for the purpose of Cost Control.

Cost Unit:  constitutes a unit of quantity or volume of a product, service or time (or a combination of these) in relation to which cost may be ascertained or expressed.

Direct Costs: are essentially identifiable costs, which directly vary with the activity/service.  These are identified with a particular cost center, output or activity.

Depreciation: means the allowance made in the overall cost for general wear and tear of assets brought into use or loss of value with the passage of lime or due to obsolescence.

Depreciation Reserve Fund: is meant to meet the cost of replacement and renewal of the Railway assets according to the prescribed rules of allocation.  An annual contribution based on the recommendation of the Railway Convention Committee is made to this Fund from the Railway revenues.  Apart from this contribution, it is credited with the (i) amount realized from the disposal of assets replaced or condemned in accordance with the rules laid down for the purpose and (ii) interest earned on the balance of the Fund.  The contribution made to the Fund is distributed Railway-wise in proportion to the capital-at charge of each Railway.

Fixed costs: are those items of cost, which do not vary directly with output, but there is only a small increment in cost as compared to the volume of increase in the output.

Fully distributed Costs: include direct and joint costs together with costs relating to interest and depreciation on Capital investment and all other overheads.

Indirect Costs: are joint costs, other than overhead costs, which are directly related to the material cost and are shared by allocation between the services or activity that benefits from these.

Interest: is the amount charged off to revenue expenditure at a fixed rate for the use of capital investment.  In Railways’ accounting interest is treated as dividend payable to the General Revenues.

Overheads:are those costs which are not directly or indirectly identifiable with a particular service or activity but are necessary for setting up of an organization responsible for designing/production/marketing etc.

Marginal or Incremental Cost: is the additional essential cost of producing an additional unit of output.

Variable Cost: vary directly with the quantum of output or service and can be measured in proportion to the level thereof.


Indian Railway operates on three gauges – Broad gauge, Meter gauge and Narrow gauge.  Since the operating characteristics of these gauges are different, separate Costing is done for Broad and Meter gauges.  The detailed costing for Narrow gauge is not done for the present in view of its limited role on the Indian Railways.

The first step in the development of fully distributed costs is therefore, to segregate the expenses for different gauges.  For segregation of expenses for each gauge, the principle of direct allocation is followed for all those items of expenses, which are incurred exclusively for a particular gauge.  The expenses which are common to more than one gauge are apportioned among different gauges at the end of the financial year on the basis of certain ratios, the instructions for apportionment of joint expenses over the different gauges booked under various abstracts are issued by the Railway Board, which are contained in Appendix-I of the Manual of Statistical Instructions volume II.

Second step in Railway costing is to separate the expenses pertaining to Electric Multiple Unit (EMU) services from total expenses of those Railways, which operate these services.  The exclusion of expenses pertaining to EMU services from total expenses for each gauge is done, as the cost characteristics of suburban sections are different from that of other sections.  Due to heavy density of traffic, the wear and tear of rolling stock, rails etc. is very high on suburban sections.  The economics of operating the suburban services is therefore worked out separately.  The share of EMU expenses is worked out separately for all the relevant abstracts and it is separate account head-wise from the expenses of each abstract.  The instructions for the allocation of joint expenses between suburban service and other services are issued by the Railway Board, these instructions are contained in Appendix-II of the Manual of Statistical Instructions Vol.II.

The third step in the development of fully distributed costs, is to bifurcate the total expenses of each gauge after excluding the expenses on suburban service, between coaching and goods services.  Efforts are made to identify and allocate the expenses under each abstract directly to coaching and goods services.  But direct expenses are few, major portion is joint expenses, which have to be apportioned between coaching and goods, on the basis of certain ratios developed with the help of various costing techniques.


The basic purposes of freight costing is to allocate total expenses incurred for the movement of goods traffic into certain physical operations of goods movement which are broadly classified as follows.

Terminal functions: are carried out at various goods terminals on the Railway where goods traffic is accepted and delivered.  These functions are carried out at both originating and destination stations.  At originating station the terminal activities would include documentation, loading terminal haulage, shunting at terminal stations etc.  Similar activities take place at destination also.  The expenses incurred for carrying out terminal functions are called terminal expenses.  These expenses are not affected by the lead of traffic.

Marshalling: is an important function in the movement of goods, the goods, on receipt, is broken up for loading into wagons for different destinations.  The wagons require marshalling for formation of the trains, which carry the wagons either directly to the destination or to the farthest marshalling yard.  Expenses incurred for these functions are marshalling costs and are included in overall costs.

Transhipment is done where traffic is to change from one gauge to another.  For example, Rly. Wagons are unloaded and reloaded into MG wagons.  These expenses are known as Transhipment costs.

Repacking: This is done to improve the wagon utilization.  A number of small consignments for the same destination are collected from a number of wagons going to different directions at a junction and put in one wagon.  This wagon is then sealed and dispatched either directly to destination or to the next farthest repacking point.  This repacking activity involves unloading of “Smalls” consignments from wagons, planning their dispatch and reloading them into the wagons.  The expenses incurred in repacking of wagons are known as repacking cost.

Line haul: This activity consists of actual haulage of the wagon or consignment from originating station to the destination.  The expenses incurred in haulage between first and last marshalling yard in the movement of wagon or consignment excluding marshalling, transshipment and repacking constitutes the line haul cost.

For all these activities involved in the Transport of goods traffic heavy expenses have to be incurred.  These expenses make up Rail transport cost of goods traffic.  An effort is made to find out not only total transport cost but also the cost of various functions involved in the process.  The cost of each activity is the sum total of various expenses done for doing those functions the following expenses go into their cost of production.

The above items constitute total transport costs.  But to determine the total costs, the following are also taken into account:

(1)          Staff expenses:  A combination of staff from different departments is required for various operations done for the movement of goods traffic.  Staff cost includes wages, allowances, overtime, etc. as also expenses on staff welfare measures.

(2)          Provision and Maintenance of Rolling Stock:  These costs include not only the cost of repairs and maintenance of wagons but also the cost of detention to stock (wagons) which has to be quantified and taken into account for calculating the cost of various operations.

(3)          Material and Stores: A large quantity of materials and stores have to be supplied to each cost center for doing various activities.  The quantity and type of materials required is different for different cost centers and depends on its size and nature of work performed by it.  Therefore, the necessity of materials for goods shed will be different from loco shed or a station.  Expenses incurred to procure the materials and stores for various cost centers from necessary elements of cost of different functions of freight transport.

(4)          Overhead costs: These costs are incurred for Rail movement as a whole and cannot be related to a particular service because they are indirect expenses but are unavoidable for doing various functions.

The entire freight cost is analysed into constituent elements terminal, repacking, marshalling, line haul etc.  The method for division of freight cost into its elements is similar to that explained earlier for division of expenses in the coaching and goods service – i.e. expenses which can be apportioned exclusively to a function re allocated directly and common expenses are divided on the basis of ratios developed by costing techniques.  Expenses booked under various abstracts are distributed for each detailed and sub-detailed heads of account.  Indian Railways have worked out a proforma for this exercise known as “Green Book”.


Green Book is the basic document for development of Goods unit costs.  Green Book consists of seven Schedules running from Schedule A to G as detailed below:

(i)           Schedule A – It provides the framework for distributing working expenses of goods services including interest and depreciation among various functional groups of service.  General overheads are then distributed to these functional groups on pro rata rupee basis.  Whenever possible each individual account head is assigned directly to the concerned item of service and the remaining account heads where joint expenses are involved, are apportioned on the basis of apportionment factors.

Central Charges – expenses of Railway Board, Audit etc. are shown as a percentage of working expenses.  Expenses of line haul are bifurcated into the cost of carrying unit i.e. wagon and the cost of hauling the payload.  The costs are separately worked out for through Trains and Van/Shunting goods Trains.

(ii)         Schedule B – In this schedule working expenses for various functional goods services are divided by the corresponding service units to come to the unit cost, which are separately worked out for through and van goods trains.

(iii)       Schedule C – This consists of the   proforma for separating expenses under different heads further into sub-activity-giving details of cost documentation, traction-wise, cost of line haul etc.

(iv)        Schedule D – This schedule gives framework for working out the unit cost for expenses separately in Schedule C.  Hence this schedule gives the cost of documentation per invoices, cost of traction per engine hour and per shunting engine hour and maintenance cost of track and signaling for train kilometers/1000 Gross Tonne kilometers etc.

(v)          Schedule E– In this schedule expenses under different abstracts are combined for working out cost for various facets of operation – cost of terminal operations, transshipment repacking etc. – separately for through and van and shunting goods trains.

(vi)        Schedule F – In this schedule, total expenses under each facet of operation as worked out in schedule E are divided by the related performance factors to work out the respective unit cost.  Central charges are shown as a percentage of working expenses.

(vii)      Schedule G – This summarises the end results of schedules B, D and F in the form of a table.

Unit costs of goods traffic for various functional groups are worked out for each zone separately for BG and MG under three groups i.e. group ‘A’, ‘B’ and ‘C’ costs.

(i) Group A – These are fully distributed costs and include interest, depreciation and overhead costs.  Depreciation is based on actual contribution to D.R.F. Unit costs of the following groups are worked out under group ‘A’ costs:

(1)          Terminal cost (Per Tonne)
(a)  Per Tonne (i) small (ii) wagon loads
(b)  Per wagon – wagon loads
(2)          Repacking cost of small traffic per tonne and per Handling.
(3)          Transhipment cost – per tonne and per Transhipment
(4)          Marshalling cost per wagon, per yard Handled.
(5)          Line haul cost –
(i)       Per Train KMs
(ii)      Per wagon KMs
(iii)     Per Tonne KMs – Payload
(iv)     Per wagon KMs – carrying units

(ii)     Group B – Under Group ‘B’ unit cost for each type of traction and also for through goods and van and shunting goods trains are covered.  Overheads and central charges are shown separately as percentages and for working total costs, these are added to the unit costs at eh end.

(iii)    Group C costs – Under this group unit cost for each type of traction and also for through goods and van goods trains are given, overhead and central charges are shown separately as percentages.  For working out total costs, these will have to be added to the unit costs at the end.  Items for which unit cost are worked out under group ‘C’ are summarized below:

(i)           Terminal costs –
(a)  Cost of documentation per invoice
(b)  Cost of handling smalls per tonne
(c)  Cost of other terminal services per tonne and per wagon separately for small and full loads.
(ii)          Repacking Cost – Cost of repacking smalls per tonne and per handling.
(iii)        Transhipment cost – per tonne per Transhipment.
(iv)         Marshalling cost – per wagon, per yard handled.
(v)          Provision and Maintenance of carrying units per wagon day.
(vi)         Line haul cost:
(a)  Cost of track 1000 GTKMs for steam, diesel and electric separately.
(b)  Oyther transportation expenses – Per Train KM per 1000 GTM.
(c)  Track and signaling cost per Train KM & per 1000 GTKM.
(vii)       General overhead charges – percentage of direct costs.
(viii)     Central charges – percentage to total cost.

Line haul given in group ‘A’ and ‘B’ are applicable to goods trains general Group ‘A’ and ‘B’ are further bifurcated into line haul cost for through trains and van goods trains.  Costs for through and van goods trains in group ‘A’ are applicable to all tractions and include overhead costs.  These costs under group ‘B’ are separately available for each type of traction and do not include overhead can central charges.

Units cost under group ‘A’, ‘B’ have different applications group ‘A’ costs are used in working out transport cost for a commodity or stream of traffic when type of traction is not known.  Group ‘B’ cost are used for working out transport cost of specific streams of traffic.  These are fully distributed costs and give basis for quotation of station to station rates.


The system of collection for expenditure through financial accounts is based on departmental allocations.  Most of the major groups of traffic operation viz. Freight and Passenger services are organized with the cooperation of various departments which have to be arranged in terms of services/activities for working traffic costs.  The accounting technique is an aid to financial management, when presented in sufficient details; it can be used for projection of costs under alternative situations.  Hence the purpose of cost analysis studies is to assist the decision maker in evaluation of different schemes/revisions methods of operation, as well as choice of alternatives.  Specific problems with the management and the alternative services/schemes under consideration with regard to cost analysis have been to illustrate the manner in which cost analysis data has been used in some important applications.

Costing of specific streams of Traffic – The end results of unit costs can be used for the costing of specific streams of traffic.  Unit costs are basically zonal and all India averages.  When these costs are used for costing specific streams of traffic some refinements are required to be introduced for taking into account the cost characteristics of the particular movement.  The procedure adopted for costing specific streams of traffic has been detailed below:

The quantum of traffic in tones is first converted into loaded wagons on the basis of average load of a particular commodity, which is being costed.  Specific empty return ratio is applied keeping in view the type of commodity, pattern of movement and type of wagon.  The nature of the movement is known from the originating to destination station to identify the type of traction used and the distance the wagon would cover on through train and van or shunting goods trains.  Train engine kilometers required for the given quantum of traffic in terms of loaded wagons and corresponding empty engine kilometers are assessed on the basis of average load of the trains over the specific sections.  Proper allowance is also made for light engine kilometers and banking engine kilometers to arrive at total engine kilometers by the concerned traction.   Gross tonne KMs, Net tonne KMs. and wagon KMs. (loaded and empty) for the specific movement is also worked out.

Engine usage factor specific to the division through which the traffic would pass is applied on total engine KMs. to estimate the number of engines required for the movement of given quantum of traffic.  Banking engine requirements are worked out separately.  Provision is also made for the number of engines under or awaiting repairs and spares.

The number of marshalling yards, engine-changing points, and train examining points along the route are also estimated.  For small the number of repacking points enroute are worked out.  Wagon turn round time is calculated after considering total distance, type of traction average, speed of through and van goods trains, detention at Marshalling yards, transshipment points etc. Allowance is made for empty haulage and for wagons awaiting repairs to work out number of wagons required to move the given quantum of traffic.

The cost of line haul is worked as under:

(a)          Figures of engine KMs. are used for working out cost of repairs and maintenance of locos and cost of loco fuel.
(b)          Figures of GTKMs are used for working out fuel expenses.  Allowance is made for gradient, banking engines etc.
(c)          Cost of transportation staff including train passing staff and train staff is based on train kilometers.
(d)          The cost of track and signaling per 100 KTKMs, which is applicable to average density of traffic, is adjusted to show the specific densities of the section en route.

The element of expenses for Pension, P.F. and other staff benefits and welfare measures is expressed as a percentage of other direct expenses i.e. overhead percentage in group ‘B’ costs are split into two groups:

(i)           Staff overheads,
(ii)          Indirect general overhead and central charges

The total capital cost of Rolling stock (engines by traction and wagons by type) are calculated on the basis of their present day cost.  Depreciation charges are worked out on the life of a particular asset on strait line method.  Interest charges are calculated at the existing rate of dividend.

Costing and project appraisal: The end result of cost analysis can be applied for project appraisals.  All projects have to be financially justified before approval.  No proposal for expenditure should be considered financially justified unless earnings or savings in working expenses expected to be realized are such that after meeting average annual cost of service of the asset they yield a return of not less than 14 per cent.  Various types of Projects and schemes on Indian Railways can be classified under the following categories:
(i)           New lines
(ii)          Yard remodeling and terminal facilities
(iii)        Line capacity works such as provision of crossing stations, additional routes, gauge conversion etc.
(iv)         Dieselisation and Electrification
(v)          Microwave and other telecommunication projects.

Methods of preparing the operating costs estimates of new projects

The average annual cost of service consists of cost of repairs and maintenance, operating costs, interests and depreciation.  With the availability of unit costs for various services separately for each gauge on each railway, the working expenses of a new project can be assessed more accurately by applying unit costs.  The application of unit cost data for working out cost of moving additional anticipated traffic poses a problem of making a choice between the fully distributed cost and long-term variable costs.  It is not correct to take variable cost alone if expected additional traffic is not sizeable as compared to traffic already moving on the section.  In such a situation it is proper to incur additional costs of a fixed nature like strengthening the track, construction of new crossing stations etc.  In case the additional traffic over a section is expected to be heavy cost calculations need not be based on fully distributed costs.  A proper decision should be taken according to circumstances.  At present whenever cost calculations are based on variable costs only the variable costs are taken as 78% of full-distributed costs.  The percentage has been evolved through statistical analysis of each revenue abstract.

(a)          Empty haulage:  For moving additional is also estimated by considering special features of additional movement.  If not possible to do so, the following ratios are adopted.  The ratios are subject to reviews and may be varied in due course.

Special type wagons (BFR, oil tanks etc.)
Iron ore traffic and raw Material for steel plants
Other commodities

(b)          Marshalling yards Costs:  The number of wagons inward and outward required to be handled at various M/yards over existing or new line are assessed.  After working out cost of marshalling for loaded wagons it is inflated by applying ratio of empty haulage.  For through traffic, by passing the M/yard, cost would depend on actual nature of work done for through Train with the help of survey.  Cost of detention to wagons is covered under “carrying units – provision of maintenance” and the expenses on Train clerks, RPF; staff etc. are included under line haul costs.  The cost of detention to engine is worked out.  At present 25% of M. yard costs are taken for through Train bypassing M. yard.  The next problem is to know the number of marshalling that a wagon will undergo for a specified distance for working out marshalling cost.  Existing norms for general movement are as under:

Distance in KMs.
No. of Marshalling
1 – 40
41 – 200
201 – 500
501 – 800
801 – 1300
1301 and above

For individual and specific streams of traffic the marshalling yards en route should be taken into account.

(c)          Terminal expenses: Documentation charges are calculated on the basis of one invoice per wagon for wagonload traffic and one invoice for 0.54 tonnes of smalls traffic.  For train load movements one invoice is taken for 10 wagons normally.  Due allowance made for staff employed by the consignee/consignor for these operations.
(d)          Provision and maintenance of carrying units:  Calculation is based on wagon KMs per wagon day.  The correct method would be to work out wagon turn round for particular movement from which the number of wagon days can be estimated.
(e)          Engine kilometers: For calculating engine KMs. it is necessary to compute train KMs.   To this figure the following KMs. are added:
(i)           Additional engine KMs. for double or triple heading.
(ii)          Engine KMs. for banking engine on graded sections.
(iii)        Engine KMs. for light engines.

These figures are worked out from the figures of engine KMs. per engine day for goods traffic.  Proper allowance should be made for the repairs and maintenance of engines.  The factors relating to movement – by through or van shunting goods trains should also be taken into consideration.  Fuel and lubrication costs should be calculated on the basis of GTKMs.

(f)           Track and signaling line haul:  These costs are calculated on the basis of gross tonne KMs.  It is possible to split up total costs into fixed and variable portions 47% of this expenditure various with GTKM for BG/MG.  Average unit cost applicable to BG and MG are adjusted by considering specific density of traffic on a section vis-à-vis average density of a Zonal Railway.  For example for a section with density of 18000 GTKMS per day as compared to overall density of 12000 KMs. per day on the Zonal Railway.  If average unit cost for track and signaling for the Railway is Rs. 6 per 1000 GTKMs, the average unit cost for the section will be Rs. 6 x 0.53 + (Rs. 6 x 0.47 x 12/18) or Rs.5.06 Rs. 1000 GTKMs.

(g)          Container costing:  Since container service is an alternative to road transport, its cost is important.  Method of costing container service follows basic principles of costing.  Container costs can be classified into Rail portion and road portion of costs.

For Rail Portion: (i) Terminal cost is the average terminal cost per wagonload consignment for concerned Railway less element of cost for compensation claims.  Cost of wagon flats containers; documentation charges should be calculated separately.

(ii)          Marketing: Number of marshalling that a container movement undergoes is worked out between the pair of stations and then the cost of marshalling per wagon for particular Railway is then applied.

(iii)        Empty return ratio:  Is assessed for particular container movement between a pair of points.  This ratio may vary from 0 to 100 per cent w.r.t. availability of traffic in the return direction.

(iv)        Line haulage: Consists of traction cost, transport cost and track and signaling cost.  Unit cost of a particular Railway per 1000 GTKMs is adopted for traction and transportation costs.  For cost of Track and signaling per 1000 GTKM due allowance is made for density on a particular route.

(v)          Road portion of the cost will consist of interest capital cost of lorries, garages, land (if purchased) rent/lease of land, depreciation charges.  Interest on capital cost as under:
(1)          Interest and Depreciation
(a)  On Tractor Trailers,
(b)  On Garages,
(c)  Cost of Land for Shed;
(2)          Cost of fuel, lubricants and other consumable stores;
(3)          Cost of staff-commercial, mechanical;

(vi)        The profitability of container service is worked out as under:

(i)           Total gross earnings for traffic carried by containers less earnings traffic which would have normally moved by wagons.. X
(ii)          Gross expenditure of container service including interest and depreciation less gross expenditure that would have been incurred for moving the traffic by wagons. Y
(iii)        Net additional earnings due to introduction of containers … (X – Y)
(iv)         Capital cost of container, flats, tractors, trailers less the cost of ordinary wagons that would have been required to carry the existing traffic. C
(v)          Net return on additional capital.
(X – Y) + C x 100
After the economics of operating container services has been worked out, the rates can be quoted covering either the variable costs of road portion or fully distributed cost depending upon circumstances and market position.


Coaching Traffic is concerned with movement of passengers, luggage, parcels and postal traffic etc.  It is divided further into “Passenger Traffic” and “Other Coaching Traffic”.  Passenger services include EMU service and Rail car service.  Since there are special features of EMU service, like heavy frequency of services, increased wear and tear of rolling stock and Rails etc. for a proper appreciation EMU services have to be studied separately.

The principles in costing of passenger services are the same as for goods service.  But in case of passenger the transport is pre-determined and compulsory.  Passenger service published in Railway Time Tables cannot be cancelled even if the occupation is poor.  Therefore, the cost study will take into account the average utilization and adjust profitability margins in the rate structure.

The method of apportioning total working expenses, cost analysis between coaching and goods has already been explained.  For the cost analysis of coaching services we have first to deduct the expenses of EMU service apportioning joint expenses of goods and coaching services and then device a formula for apportioning expenses between passenger services and other coaching services.  The coaching share of fully distributed costs as arrived at divided by total passenger train kilometers will give average cost per passenger train kilometer for the system.  The expenditure of coaching services is first apportioned among Terminal, Running and Overheads.  A further break up of terminal and line haul cost is done as under:

I.             Terminals

(a)  Passenger services
(b)  Parcel and luggage
(c)  Catering – static units

II.           Line haul

(a)  Passenger service
(b)  Parcel expresses and carriage of parcels and luggage by mail and Express and ordinary Passenger Trains.
(c)  Haulage of dining car by important trains.

Methodology adopted for allocation of expenses of coaching services to functional groups.

1.       Detailed costing techniques for various operations involved in movement of coaching traffic and apportionment of expenses to functional groups are given below.
2.       Method of apportionment of coaching expenses between passenger and other coaching services among various functional groups like terminals, line haul etc. follow broadly the pattern adopted for goods traffic.  Wherever possible, the items of expenditure under each sub-detailed head is directly allocated to concerned functional group of service and in the case of common costs suitable ratios have been worked out on sample studies.  For example, detailed instructions for compilation of vehicle KMs/GTKMs for Mail/Express Trains and ordinary and by classes of  Travel for passenger and the coaching services have been issued to Railways.  These are computed from the vehicle guidance register or way bill prepared for each train by the operating department.  Vehicle KMs involved in departmental working are excluded from vehicle KMs, so that expenditure can be related to public traffic alone.

Total expenditure on coaching services can be sub-divided as under:

I. (i) Terminal Service:  These include expenses for booking offices, waiting rooms, platforms, shunting which includes formation of passenger trains including attachment/detachment of sectional and slip coaches etc. provision and maintenance of coaching stock and provision of washing lines and other special services.

(ii) Special Services:  These include provision and maintenance of Enquiry office, Reservation office, Retiring rooms, left luggage office, provision of space for parking of private cars, Taxis, auto-rickshaws.  Expenses relating to station ticket collectors, platform Inspectors, passenger guides and ‘May I help you’ squads are also to be included besides proportionate cost of station staff of be allocated between coaching and goods services.  These relate to terminal facilities at stations.  Special services also include provision of conductor guards, coach attendants for first class corridor coaches, A.C. coach attendants T.T.Es in general services etc.

II. Line Haul Services:  These include a proportionate expenditure on traction (hauled by locos) cost of train passing staff including guards, provision and maintenance of track and signaling units etc.  The pattern is similar to that of goods services.

Direct expenses relating to operation of a train consist of cost of traction i.e. cost of fuel, crew and maintenance of loco, coaching stock allotted for the service, staff directly nominated for the service for stationery duties as well as staff on train.

Joint expenses: Which are to be shared between various services fall in two groups:  Terminal facilities for booking of passengers and other coaching services, ticket reservation, enquiry, retiring rooms and miscellaneous terminal expenses from the first group, while in the second group proportion of the cost of transportation staff responsible for train passing, maintenance of track, signal and other equipment and maintenance of facilities en route are taken.  Sub-groups under the coaching service consist of passenger, parcel and other coaching services etc. and dining car facilities.  These are studies separately and methodology worked out for coaching analysis allocates apportioned expenses directly related to these services at source and proportionately distributes other joint expenses from stage I.

(Please see next page for Flow Chart of Coaching Expenses)


Coaching Expenses-flow Chart
Railway …… Gauge.. …Year (Figures in lakhs of Rs.)

Coaching Expenses includes EMU & Rail Cars but excludes Road and Ferry Services etc.
Coaching Expenses excluded EMU & Rail Cars but includes over-heads and excludes Central charges
Rs.          % age-Stage-I
(…….. Running Stage-2 …..
( ….. Terminal Stage-7 ….
Rs.       %
Note:   Expenses to be taken from
             Form 2 Summary Line 36.

(Stage-3 Passenger
(Mail & Exp:                  Rs.         %
(Ordy.                              Rs.         %
(Stage-5 Parcels etc.
(Mail & Exp:                  Rs.         %
(Ordy.                              Rs.         %
(Stage-6 Catering
(Mail & Exp:                  Rs.         %
(Stage-8 Booking
(Mail & Exp:                  Rs.         %
(Ordy.                              Rs.         %
(Stage-10 Ticket
(Mail & Exp:                  Rs.         %
(Ordy.                              Rs.         %
(Stage-12 Enquiry etc.
(Mail & Exp:                  Rs.         %
(Ordy.                              Rs.         %
(Stage-14 Special Services
(Mail & Exp:                  Rs.         %
(Ordy.                              Rs.         %
(Stage-16 Misc. Terminal
(Mail & Exp:                  Rs.         %
(Ordy.                              Rs.         %
(Stage-18 Parcels etc.
(Mail & Exp:                  Rs.         %
(Ordy.                              Rs.         %
(Stage-19 Catering
(Mail & Exp:                  Rs.         %
(Ordy.                              Rs.         %



AC   I




Stage-9 (Booking)

AC   I




Stage-11 (Ticket)

AC   I




Stage-13 (Enquiry etc.)

AC   I




Stage-15 (Spl. Services)

AC   I




Stage-17 (Misc. Terminal)

AC   I






  1. Total Coaching expenses Rs.
  2. Share of Road & Ferry Services Rs.
  3. Coaching Expenses Rs.         Crs.
  4. Share of EMU & Rail Car Services Rs.           Crs.
  5. Crores of Rs.                   (Line 3 Minus line 4)

Total Loss




Services in suburban areas comprise of EMU and Non-EMU suburban services operated in the suburban areas with steam, diesel and electric services.  Expenses of EMU services are apportioned separately due to the following reasons:

(i)       Density of traffic is very heavy in suburban sections
(ii)      Use and wear and tear of rails, rolling stock is very intensive

Detailed instructions for evaluation of cost of operation of EMU services are given in Appendix-III to Manual of Statistical Instructions Vol.II.

The general method for segregating EMU expenses and finally evaluating profit and loss is given below:

(i)                   Ordinary working expenses:  For evaluating cost of operation of EMU Services direct costs such as entire expenditure on a station served only by EMU and cost of repair and maintenance of EMU stock are allocated to these services, including cost of staff working only for EMU services and cost of repair and maintenance of EMU stock.  Where the services are confined to a particular division, expenditure on the Division only is taken into account for working out the cost instead of total expenditure of the entire Railway.  For repairs and maintenance of Civil Engineering assets including track, allocation is made between EMU other coaching and goods services on the basis of respective gross tonne kilometers of respective trains.  For joint staff common to EMU as well as other coaching services, the pay and allowances of such staff are apportioned in the ratio of number of respective trains run.  On electrical side, cost of electric energy consumed is apportioned in the ratio of power consumption by EMU services to the total power consumption by all services under electric traction.  Expenses under repairs and maintenance of overhead equipment are apportioned in the ratio of  train kilometers of EMU to total Kilometrage of all services under electric traction.  General overheads are then allocated on pro-rata basis viz. in the ratio of expenses apportioned to EMU services to the total expenses of the Division.

(ii) Depreciation:  Charges are calculated for EMU stock on present day cost on straight line basis, taking the normal life of the assets as 25 years.  For other assets, depreciation is calculated on the booked cost.
(iii) Dividend:  Interest charges for EMU services are first calculated on booked value of assets charged to capital to the end of the year, at rates prescribed for calculating dividend to general revenues.  These are then adjusted pro-rata to the actual dividend payment to general revenues.  Same principle applies to the assets created out of Capital fund because the rate of interest (earned) on Capital Fund is the same as the rate for payment of Dividend.

Questions & answers

Q.1    An efficient costing system is a sine qua non for a sound commercial undertaking.  Discuss this statement w.r.t. Traffic costing developed on Indian Railways highlighting the limitations.

What is your opinion are the limitations and shortcomings of traffic costing developed on Indian Railways?

(1)          The Traffic costing data produced on the Railways has serious shortcomings.  The present system generates aggregated costs for various facets of operation for the Zonal Railways as a whole, whereas the financial accounts are prepared division-wise.  There are wide variations in the costs from one Zonal Railway to another, which remains unexplained.  The figures appear prima facie unreliable.  The Railways instead of concentrating on production of aggregated costs should which over to route-wise costing on each Division.
(2)          A serious drawback of the existing system is that a major portion (75 per cent) for the expenditure on repairs and maintenance is common to both coaching and goods services and is bifurcated on assumptions which can be questioned.  There is urgent need for developing suitable parameters for apportionment of joint costs.
(3)          The traffic cost data is available quite late, usually after 18 months of the close of the financial year by which time it is only of historical interest and cannot be profitably used by the management.  It is essential that the costing system should be integrated with the management information system and provide useful traffic costing data in real time.  With gradual computerization, it should be possible for the Railways to produce costing reports in time and quarterly instead of only once a year so that the effect of seasonal variations on the cost of operations can be gauged.
(4)          In the computation of unit costs, the element of depreciation, interest and freight charges have not been included in a scientific and reasonable proportion.  This defect may be corrected.
(5)          The variation in unit cost from one Zonal Railway to another and within a Zonal Railway from year to year should be studied in greater detail so that cost centres with wasteful and avoidable expenditure are identified and corrective and remedial steps are possible.  When the Division-wise costing is introduced the reasons for variations from one Division to another in a Zonal Railway should be analysed by the concerned Zonal Railway and suitable steps taken to eliminate waste and control costs.
(6)          Under the existing system the Traffic Managers concentrate only on achieving physical targets without relating them to costs and profits to be derived.  In other words there is lack of awareness of the Profit Centre approach.

Q.2    What is the purpose of cost accounting?  To what extent has this been achieved in Railway workshops where cost accounting has been in use for some time.

To what extent has traffic costing helped in rational revision of rates and freight structure and attracting more traffic?

Ans. Traffic costing is of immense value in comparing financial working of different Zonal Railways, taking policy decisions in the matter of fare and freight structure, quotation of station to state rates financial appraisal of Railway projects and cost control.  With the very large investments that are envisaged in the next five year plans and emphasis placed on self-reliance transport costing will gain importance and become a vital tool in the hands of management for taking major policy decisions in areas which are nerve centres and control the profitability of the system.  The exercises conducted by the Traffic costing cells in determining the movement of selected commodities are routine rituals and should be done away with.  Instead the Railways should switch over to stream-wise costing.  About 75% of goods traffic moves arterial routes (between 4 Metropolitan cities) and most of this traffic comprises 8 bulk commodities (Coal, Food grains, Steel Iron Ore, Cement, Mineral Oil, Fertilizers, Limestone and Dolomite).

          Stream wise costing of these commodities over the arterial routes will be of great value of the management in fixing the classification of various commodities more accurate financial appraisal of Railway functioning and of projects to be carried out on these routes which are already saturated etc.  Successive committees have brought out the importance of imparting cost orientation to the fare and freight structure.  The Railways should leave the habit of marking ad hoc changes and aberrations and instead adopt a rational approach towards formulation of their fare and freight structure.

          The costing data produced by a Railways being aggregative in nature and unreliable cannot be used in bringing about requisite changes in their fare and freight.  This is a serious handicap and must be corrected.  They should make their fare and freight structure cost based; on the lines suggested by Rail Tariff Enquiry Committee and annually revise their fares and freight on the basis of escalation formula.

          The introduction standard costing of each facet of traffic operation is a different proposition.  Instead for cost control, Railway costing cells must conduct special on-the-spot studies and investigation of important marshalling yards, goods sheds, terminals etc.  They will, this way, be able to identify and eliminate areas of waste and unjustified expenditure.  Traffic costing organization on the Railways is weak and should be strengthened on the basis of World Bank report.

Q.3    Bring out clearly the special characteristics and constraints of Traffic costing and its methodology as compared to costing in Commercial understandings.
Ans.  Traffic Costing Methodology

The revenue working expenses on each Division, Workshop and the headquarters office of a Zonal Railways are compiled separately by the attached accounting units.  These are then consolidated for the Zonal Railways as a whole.

Under the existing system, though the financial accounts are maintained division-wise or workshop-wise, the Zonal Railway is considered the operating unit for the purpose of ascertaining transport cost for various facets of Traffic operations.  The process of computation begins as soon as the financial accounts of the Zonal Railways are closed for the year.

The revenue expenses are first segregated by the Traffic costing cell located at the Zonal Headquarters gauge-wise.  The expenses, which can be identified as pertaining to a particular gauge, are allocated to the gauge.  For apportionment of the balance expenses under different gauges, detailed instructions have been issued by the Railway Board to the Zonal Railways.

The next stage is to segregate the expenditure for each gauge between coaching and goods service.  Here also the principle followed is that the expenses, which are attributable, either to coaching and goods services are allocated to the respective service.  The remaining expenses are bifurcated between the two services on the basis of certain ratios developed with the help of statistical analysis, surveys and experience and knowledge of engineers and the field staff.

Once the annual working expenses are segregated gauge-wise and service-wise, the costing organization undertakes computation of various unit costs for goods services and passenger services.  Various process involved in this working are discussed below separately for goods and passenger services.


Traffic Costing of Goods Services

The annual working expenses for goods services including appropriation to Depreciation Reserve Fund, and payment of interest on capital at charge are separated among various functional groups of services i.e., Terminal, running, marshalling transshipment at break of gauge point, special service for smalls (repacking etc.) and general overheads.  Some of these functional groups of services are further divided into the operations performed within each service.

The working expenses for each functional group of service are then divided by the relative revenue units of service to produce unit costs, for example the expenses attributable to running when divided by the total number of wagon kilometer would give the line haul cost per wagon kilometer.  Like this several other unit costs are computed such as cost of documentation per invoice, cost of transshipment per tonne, line haul cost per 1000 GTKMs.

The cost statements prepared by the Zonal Railways are sent to the Railway Board.  The Railway Board compiles them in a final statement, working out the unit costs for the Rail system as a whole separately for BG/MG.  The unit costs, Zonal Railway-wise and for the system as a whole, separately for each gauge are sent to each Zonal Railway through a booklet titled “summary of the end results freight services unit costs.”


Traffic Costing of Coaching Services

The share of expenses on coaching services excluding EMU and Rail car services are apportioned between terminal and running costs.  The terminal costs are further apportioned amongst ticket booking, ticket checking, reservation/enquiry, parcels, luggage, and postal and catering services.  The running expenses are distributed among passenger services, parcels, luggage, and postal and catering services.  The next stage to apportion these expenses into Mail/Express and ordinary Trains.  The expenses are then distributed amongst various classes of travel.

On the basis of the methodology and the apportionment factors laid down by the Railway Board, the unit costs are developed by each Zonal Railway and an All India average compiled in the Railway Board.

Q.4.  What is meant by Activity Based Unit Costing System (ABUCS)?  Describe its salient features and merits.

Ans.  On Indian Railways, though the existing accounting classification is activity based, yet it does not serve the objective of responsibility.  Accounting because there is no system of determining the costs incurred – direct and indirect at the Activity Centre level i.e. at functioning level, usually headed by a senior subordinate such as IOW, PWI, SI, TCI, Loco Foreman etc.) who are concerned more with achieving the physical targets or ensuring proper maintenance functions without any regard to the costs involved.  To this extent, the existing system of budgeting and expenditure control based thereon also suffers, particularly because the costs are incurred at functions level while the expenditure data are compiled in the Accounts Department.

In order to remove the above deficiency, a High Powered Committee (Hassan Iqbal Committee) appointed by the Ministry of Railway for identification of Cost/Profit Centres, development of Accounting system and modernization of Financial Management Information System on Indian Railways have suggested in their report (1994) that with the aim of having Cost (Performance) Centre, Railways should introduce the Activity Based Unit Costing System (ABUCS).  The system envisages, costing at three levels of costs incurrence viz:

(i)           at the level of functional unit/Activity Centre;
(ii)          at the Divisional level;  and
(iii)        at the Zonal/Headquarters level.

The salient features of the above system, at each level are:

(i)       Functional Level:  The direct cost of an Activity will be worked out under:

(a)          Labour
(b)          Material
(c)          Plant and Equipment
(d)          Others (General)

The methodology suggested is as under:

Labour Cost:  Based on hourly cost worked out from the total cost or wages, allowances, bonus, leave salary, pensionary benefits, duly updated periodically.

Material Cost:  Periodical updated costs to be provided.

Plant and Equipment:  To be worked out by Divisions for each group of plants and equipment, taking into account the cost of acquisition, operation and maintenance etc. Other costs may be provided on the basis of the relevant prices etc.

The total cost incurred by the Activity Centre will be divided by the physical units of activity produced in a given period (usually a month).  This will be done by preparing a simple cost sheet by posting the costs on daily basis.

The unit costs will be furnished to the Divisional Office which will verify accuracy prima facie and thereafter undertake comparison of these costs of different units is order to evolve the strategy for achieving the best unit cost at other units, Eventually standard and unit costs will be evolved to maintain the temp of increasing productivity at reduced costs.

(ii) The Divisional Level:  The Divisions will also document the direct costs incurred by them at Divisional level and thereafter allocate these to each unit of each Activity Centre on predetermined basis.  Thereafter, they will work out the average (total) unit cost of each activity on the Division and furnish it to Headquarters, furnishing the break up of that cost at Functional and Divisional level.

(iii) Zonal level:  The Zonal/Headquarters will act in a similar manner as the Division and after comparing the costs at divisional level, of different divisions, allocate the costs incurred at zonal level on pre-determined basis and thereafter work out the total (average) unit cost of each activity thereafter, an inter-zonal level comparison may also be undertaken.

For the above purpose, the elements such as depreciation and interest on capital will be left out until detailed Assets Registers are introduced completely on Indian Railways.  However, the gross total of these costs should generally reconcile with aggregates of financial accounts at the close of the accounting period.


(i)           Wastage of resources will be minimized through cost control/reduction.
(ii)          Spare/idle capacities/resources will get identified for better utilization and reduction in costs on fresh acquisitions/augmentation of labour strength.
(iii)        Decision making for diversifications, Buy or Make, etc. will be facilitated.
(iv)         It will help identify factors such as speed restrictions, light running of engines/empty trains under load haulage, and other impediments.
(v)          It will promote competitiveness among Units/Divisions/Zonal Railways and thus increase productivity or help achieve greater economy.
(vi)         It will enable fixing prices for services rationally.