COST CONCEPTS

SANJAY UPRETIPAM

Some important cost concepts

Fixed Cost Fixed costs are such costs which will still have to be

incurred even if the production level is zero as long as the firm continues to be in existence. Thus fixed costs do not vary in short run with the change in level of production. Fixed costs are relative to time.

In the context of railways fixed costs would include establishment charges, interest and depreciation charges, cost of maintenance of Permanent way, Signals, etc.

It follows from above that the for a given scale of capacity, fixed costs per unit of output would decrease with the increase in the level of production. Fixed costs constitute approximately 75% of the total cost in railways.

Variable CostsVariable costs are such costs which vary with changes in production. They are also known as marginal costs, incremental costs or differential costs. In the Railways such costs include expenses on fuel and lubricants, wages of running staff etc.Marginal Cost It is the same as variable cost except that it is the

additional cost of producing one additional (marginal) unit of output.

Standard Cost Standard cost is the cost, scientifically predetermined,

of one unit of production, service or function. It is intended to act as a reference point for comparison of actual cost.

Opportunity CostIt is the measurable advantage foregone as a result of the rejection of alternative use of resources – whether materials, labour or facilities. In other words this is the cost of the opportunity (i.e. benefit) lost in rejecting other alternative uses of the resources employed in alternative which has been selected.

Direct Cost Direct costs are such costs which can be directly

attributable to the output, function or service. Direct costs may be both of fixed or variable nature.

Indirect CostsIndirect costs are such costs which cannot be directly attributed to output, function or service. They are also called overheads or on-costs.

Specific Costs. Specific costs are those which are uniquely

associated with one service. For example, the costs in the marshalling yard are direct and specific to the freight operation.

Common Costs All such costs which are shared between services in

a well defined way such that it is possible to trace them to individual services e.g. train crew costs.

Joint Costs

Fully Distributed Costs Fully distributed costs mean complete

apportioned costs– fixed or variable, direct or indirect- amongst all types of outputs, functions or services produced. Indian Railways have adopted fully distributed costing approach in costing of its services. Such costs include working expenses, interest and depreciation on capital and overheads. It is used for calculating the unit costs of transport services.

Traffic costing of Indian Railways

Objectives In the context of Indian Railways, the main objectives

of traffic costing are as under: To improve productivity of resources and to inculcate cost

consciousness with a view to achieving Cost Control/reduction.

To provide data for fixing realistic tariffs for the various categories of service namely passengers, Goods, parcels etc.

To provide data for Project appraisal and taking management decisions for further capital investments.

To conduct Profit Analysis of existing and potential services/routes/streams of traffic.

Transportation is a perishable commodity which cannot be stored.

Railways are a highly capital intensive undertaking.

Traffic costing of Railway services in India, in the meaning of the term as now understood, commenced in early 1960s. Before this, the Indian Railways had only an overall average cost expressed in terms of.This principle is generally known as charging what the traffic will bear.Main driving force for the Indian Railways to set up a proper costing organisation came from the World Bank and it was at their instance that the Railway Board took up the setting up of costing cell in Board’s office in early 1960s.The Indian Railways followed the trend set in USA and U. K.

MethodologyAt present, fully distributed costs are being worked out for constituent functional elements of passenger and goods services. The pre-requisite for having a traffic costing system is a sound accounting system. 1979-80 w.e.f. 1.4.97. Capital and revenue accounts are drawn up by the accounts Department. From the details of expenditure incurred on revenue account, the expenditure is split amongst three gauges viz. broad, metre and narrow. The expenses so tabulated according to the detailed heads of accounts are generally known as Statement No. XII.

The expenses incurred on working of ferry and road services are segregated and excluded from the total costs. The balance represents expenses on rail borne traffic only.Segregate the expenses incurred in running of Electrical Multiple Units.The next step is to bifurcate the expenditure in two parts viz. goods and coaching.These expenses are to the tune of 25% of the total expenses. The remaining part viz. 75% of the total is to be segregated and allocated to goods and coaching services by using certain performance factors and survey ratios.