Accrual Accounting Concepts IR Impact of CostingWhat is

Accrual Accounting Concepts – IR– Impact of Costing-What is costing ØIntroduction: Ø Costing is the process of classifying, recording and ensuring appropriate allocation of expenditure so as to accurately arrive at the cost of final product i. e service, activity of a Zonal Rly, work shop or production unit. Costing system provide information on working out the viability of product or service before taking decisions on producing it, charging it and buying it. ØAccrual Accounting system should Budgeting and financial reporting. align costing, ØActivity Based Unit Costing enable identification of “Direct Cost centers” and absorption of “Indirect Costs” in a systematic way and timely. ØIn the case of workshops/Production units, as the WMS A/c is an Accounting document it should be suported by a proper Costing system for all activities.

Accrual Accounting – Impact of Costing in IR ØThe Railways have to gauge the efficiency of the system with the help of Unit cost of its operation and should have Cost effectiveness Study on Passengers & Goods Services. ØThis will provide information on optimizing the costs for both the user and service provider and to achieve the objective of the principle of “What traffic can bear” to contain the market prices and avoid spiralling costs of all other commodities. ØThe decision makers should be provided with the accurate and up to date information so that proper decisions are taken to maintain the system in good fettle and improve the efficiency of under taking. ØNow a regulator fares and freight structure on IR cannot afford to have ill data that will leading to misleading conclusions and end up the system in losses. ØThe working on averages connected with the results of operation arrived at by dividing one set of fundamental units by the other set of fundamental units help the managers to ascertain the relationship

Accrual Accounts- Revenue/Exp. booking- GAAP • Absorbing the expenditure and revenue against each allocation should be as per the Accrual accounting system. • However, GAAP principles indicate expenditure should be recognized based on standard practices that are agreeable to all stake holders: The following items should be ensured in absorbing the expenditure and revenue items of activities should be redefined: • Economic entity assumption means that activities of a business must be kept separate from the activities of the business owner. Indian Railways practices this aspect at present. Separate Accounting and budgeting system exists. • The monetary unit assumption means that only activities that can be expressed in money value are only to be included in accounting records. • The time period assumption means that business activities can be reported in distinct time intervals. IR follows submission of monthly and yearly Financial statement dates. • The going concern principle refers to the intent of a business to continue operations into the foreseeable future and not to liquidate the business.

Accrual Accounts- Expenditure booking- GAAP-Contd • The cost principle refers to the historical cost of an item that is reported on the financial statements. Historical cost is the amount of money that was paid for an item when purchased and is not charged to account for inflation. This is also done as the material costs are charged as per the Book Average Rates which are automatically charged to works. • The full disclosure principle means that all information that is relative to the business be reported either in the content of the financial statements or in the notes of IR are not under stood by the users. The Pink book though provides yearly various data on Accounts, the same is not correlated with the performance i. e. physical units turned out. • The matching principle refers to the manner in which a business reports income and expenses. This principle requires that businesses use the accrual form of accounting and match business income to business expenses in a given time period. For example, a sales expense should be recorded in the same accounting period that sales income was made. This is not done in the case of sale of transportation. However, the practice of booking of expenditure to work orders is based on matching principles. • The revenue recognition principle addresses the manner in which revenue, or income, is recognized. This standard requires that revenue be reported on the income statement in the period in which it is earned.

Accrual Accounts- Expenditure booking- GAAP…Contd Ø Considering each as Cost Centre, Activity Centre, Revenue Centre and Profit Centre the Units under IR should aim at: Development of Models of Costing: Models for Augmenting Earnings: ü Development of Traffic facilities, Passenger facilities( Goods Sheds, extension of platforms etc) Target Costing ü Capacity augmentation works (By pass lines, Automated signaling, Electrification of lines) Project Costing. Models for Cost Control(expenditure control): ü ABUC for various centers controlled at Divisional/Workshop level. ü Standard Costing models for controlling the Revenue expenditure, Target Costing. Ø Create awareness of costing among the managers of cost centers.

Accrual Accounts- Method of Activity Based Unit Costing System • Under ABUC, the activity centers are required to be related to physical out puts to arrive at per unit cost of service(provided or delivered: Ø ABUC enabling identification of costs leading to train operations, Section operations, Route operations and Service operations. Finally leading to profitability analysis. Ø The cost for each field unit shall be related to measurable Units like Cost of maintenance of a Loco, Coach, Wagon, TKM maintained, GTKMs earned, Sq. Meter area maintained. Ø The outcome should be in terms of financial terms enabling comparison and Budgeting.

Accrual Accounts- Method of Activity Based Unit Costing System – contd… • Steps for implementation of ABUC: • Identification of Activity Centers in Sheds/Depots/ Workshops. • Define measurable output/service Units. • Link the MIS with the expenditure incurred in Cost centers. (Direct cost capturing) • Identification of Direct cost Centers and Indirect Cost Centers(On cost work expenditure) • Select a method of (allocation basis) absorption of on costs to measurable output/services. • Computation of Unit Costs and cost comparison. • Target costing (setting standards/Targets) for cost reduction and cost control.

Accrual Accounts- Performance Costing – Sheds/Workshops & Production Units. • At Present the On Cost expenditure is distributed to the Jobs under “Fully Distributed Costs” method. • The Costing system is concentrated at Zonal level should be extended to Field Activity Centers(Cost Centers) • The parameters like Repairs and maintenance cost of Loco, Coach and Wagon per vehicle, per GTKM, per EKM etc should be aimed at for cost control under performance costing. • This will enable accountability and cost control unlike at present the system is followed on incremental costs. • The system should enable cost comparison among periods, between the shops of IR and Trade.

Accrual Accounting – Impact of Costing • What is Job Costing system: Contd. . • The relevance of Job Costing under Accrual Accounting system is for its wider applications, as at present the administration is unable to avail complete benefits of Job costing system. • The users of Accounting records look for whether proper system is available to authenticate the cost of services and manufactured items are suitable as per the ‘relevant accounting’ methods. • The job costing system or batch costing as the case may be also depend on proper work order system that is prevalent in the work shop along with its computerization. • As such the system should be more elaborated and linked to each shop(cost centre) and finally to FMIS.

Accrual Accounting – Impact of Costing Prerequisites of Costing system: Ø For each item of manufacture there must be a time standard set i. e. having allowed times of each operation. Ø Availability of standard quantities of Raw Materials with their predetermined specifications. Ø Each work order should represent each item where in all relevant expenses are able to be charged correctly allocating the on cost expenses as per the standards set. Ø The standards fixed should enable comparison and in comparable units. Ø Standard drawings are to be made available for the rate fixer and also for the production planning and control. Ø Production control organization along with planning and inspection departments coordinating the various processes in manufacturing of a component enabling actual base absorption of costs. Ø Involvement of Finance and Accounts Managers in the above

Accrual Accounting– Impact of Costing • The following planning is required in PCO: Ø The quantum of work should be decided i, . e the no. of units of services or manufacturing of parts based on the available capacity. Ø There must be proper designs and drawings also ensuing that no alternatives are available. Ø Requirement of materials should be properly ensured with advance planning enabling continuous production Ø Matching plant machinery and tools are made available avoiding hampering the production. Ø Involvement of Finance and Accounts Managers in the PCO activities

Accrual Accounting – Impact of Costing • The following documents are needed: Ø A process sheet is an important document where in the details of work order No. , Component No (PL NO), Material specification etc of the planned production are recorded. Ø In this sheet the operation of manufacturing is briefly stated. Rate fixer provides the information on allowed times and preparatory times for completion of manufacturing process. Ø Process sheet being a basic record is a planning document any changes in the process should be done by competent authority as there are financial implications. Ø Involvement of Finance and Accounts Managers

Accrual Accounting – Impact of Costing • The following documents are needed Ø A Job Card is an important document where in the details of Time worked by a work men on jobs are recorded. The Job Cards may be issued for a)Normal production work, b)Replacement work, c)Squad Card for group of people. Ø The job cards enable the calculation of time taken to be absorbed to the jobs and also arriving at to the payment of Incentive Bonus to the individual employees. Ø On completion of Job cards the same are submitted to Costing section for verification and for the preparation of Cost sheets for arriving at unit costs of spares. Ø Link the documents with FMIS tp book the actual expenditure on Jobs

Accrual Accounting – Impact of Costing The following documents are needed ØMaterial Requisition : This is an important document enabling the shops to draw materials as prescribed /required for detailed in the process sheet. ØThis is an authority given to the shops to draw the materials. ØThis is having details with regard to material specifications, Control work order no, material required, material issued from time to time, value of the material and other details that are required analyzing the unit costs. s ØHowever, a material tag is also issued to move along with the route card to enable the document for recording transactions from Raw material stage to Completed items sent to shops. ØLink the material consumption to FMIS

Accrual Accounting – Impact of Costing The following documents are needed ØRoute Card : This is an important document enabling the shops to commence the processing of work in shops and is replica to the process sheet. ØThe route card move along with the various processes of work. ØThis is having details with regard to material consumed in various shops, along with the quantities, that are ordered, produced and passed. S ØThe Route cards and job cards are reconciled in the costing system with the control work order for working out of unit costs of manufacturing products. Link the Route Card data to the FMIS.

Accrual Accounting – Impact of Costing Reconciliation and merger of Costing records wih financial records: ØAll the expenses booked to WMS Account and their clearances from WMS A/c should be based on the costing data generated for type wise costing of Rolling Stock. ØAll budgetary reviews should be done based on the type wise costing of Rolling Stock data. ØThe balance under WMS Account should be only work in progress and there should not any amount of expenditure left over by not absorbing to the Revenue demands rightly it pertains. ØBench marking of costs and Transfer price for POH and IOH operations are aimed at for both components and services that are turned out in workshops.

Impact of Costing- Life Cycle cost Modeling ØRolling Stock play a very important role in the business of IR and are considered as Direct Earning Assets. ØIt is the responsibility of IR to ensure that resources are properly utilized by introducing scientific techniques in fleet augmentation and replacement. (Now it is Rolling Stock programme) ØThe workshops also deal with proposals of condemnation of Rolling Stock items. Locos, Carriages, wagons and other departmental vehicles. ØAt present for replacement of Rolling Stock the technique followed is “Financial Justification for replacement/condemnation of Rolling Stock is based on the” is Average Annual maintenance Cost of NEW Vs OLD Rolling Stock.

Impact of Costing- Life Cycle cost Modeling Develop a Life Cycle Cost Model (LCC) suitable: ØLife Cycle Cost may be defined as all the costs incurred from inception of an Asset to its disposal. It is to determine total cost of owner ship of an Asset. Also it is a methodology for the systematic evaluation of life cycle costs over a period of its entire life or any stage or any part there of. ØLCC may be represented as = Acquisition Cost + Operating Cost – Disposal cost(Scrap Value) Where ØOperating Costs are also Running Costs + Maintenance Costs. Where maintenance costs represent corrective maintenance costs also. ( In IR both On line and Off line maintenance i. e. POH) ØAs such the LCC involves cost capturing exercise across its use full life.

Impact of Costing- Life Cycle cost Modeling Model Life Cycle Cost Acquisition Cost Operating Cost Running Costs Fuel costs, Lube oil Costs, Vehicle drivers and other personnel costs Other costs of running expenditure related Disposal Cost Maintenance Costs A. Preventive: POH costs, Costs of major spares such as Wheels, tyres and axles Other costs. B. Corrective: On line maintenance, Breakdown expenditure, AMC costs of Plant & Mach Small parts and repairs

Impact of Costing- Life Cycle cost Modeling Importance of LCC model in IR: ØThe present mode of booking of the Revenue Expenditure separately with out assigning to the Asset, not enabling the management to under stand the usage of “Economic usage of life” of an asset. ØPreventive(POH)/Running maintenance(Operating) costs are not scientifically computed as per the Accounting Standards. ØInflation is not considered in the cost flows occurring over time periods during the life time of an asset. ØAnnual Equivalent Costs for each asset are not computed for each asset and there is no system. Assets are valued on Book Average Rates. ØCost breakdown structure should be redefined. At present it is becoming difficult to estimate corrective maintenance costs due to the factors i. e. age of the vehicle, climate conditions, type of cargo carried, type of maintenance, quality of spares etc. ØHence, it is time the IR should adopt suitable models of costing systems to conserve resources.

‘Cost’ Vs ‘Value’ of Service • The fixation of Rly Rates depend upon two principles i. e. -Cost of Service, -Value of service. • Cost of Service indicate that such charge is no case less than the cost to the Rly Management for rendering the required service. (Lower Limit) • Such charge is no case more than the value of the service to the customers. (Upper Limit) • For Rlys the ideal system of charging would be: Ø to ascertain the cost of each service rendered Ø to allow a reasonable margin over the cost.

‘Cost’ Vs ‘Value’ of Service • The following points have to be considered for determining the “Cost of Service”: Ø Rates have to be fixed in advance hence require certain assumptions, Ø System of apportionment of joint Costs, Ø Factors of loadability, perishability, handling issues, regularity of movement, empty direction. Etc‘. , There fore it is the “Value of the Service” which determines the rail users ability to pay.

Cost effectiveness Study Passengers & Goods Services • • • Provide basic data for rate fixation. Facilitate carrying out profitability analysis Create cost consciousness Assist in cost control. Facilitate project appraisals and evaluation of capital investment.

Cost effectiveness Study Passengers & Goods Services Fixed Costs that remain constant over a period of time, irrespective of increase or decrease in the volume of production. -- Establishment expenditure. – Interest on capital. – Depreciation. – Maintenance of Permanent Way and Infrastructure – Fixed cost remain constant only up to a particular scale of performance or operation Variable Costs Cost that change proportionately with every increase or decrease in the volume of production. – Fuel & lubricants – Additional infrastructure & manpower deployed for additional service – Wages of running staff etc. , •

Long term Variable Cost Additional expenditure incurred for additional activity introduced within the existing capacity on long run. - Cost of movement of additional traffic in empty moving direction - Cost of additional train introduced - Cost of augmentation of rake composition

Short term Variable Cost • Additional expenditure incurred for additional activity for a short term – Running of Mela/Summer special trains – Extension of run of a train – Attaching additional bogies for clearing wait listed passengers

Fully Distributed Costs • Costs worked out based on total expenditure incurred for providing the services including 1. Working expenses 2. Depreciation 3. Interest • Expenditure on all the establishments, divisions, zonal headquarters and Railway board level are included. • Indian Railways follow the system of Fully Distributed Costs for compilation of unit costs.

Common Costs • Expenditure on assets which are common to two or more services. e. g. Track, locos (engines), stations, etc. , utilized for running - Coaching services including Passenger, Parcel, Luggage and catering services, Mail/Exp, ordinary, etc. - Goods services including Through goods, Van & Shunting goods, etc.

Consignor Costs The expenditure incurred by a consignor for transporting his goods from his godown to Railway premises and loading into wagons which includes 1. Booking of traffic & indenting rakes 2. Handling & Road transportation charges for bringing the materials to Railway premises 3. Loading charges 4. Freight charges.

Consignee Costs The expenditure incurred by the consignee for taking delivery of the consignment at the destination from Railway premises to his godown. - Unloading charges - Handling and road transportation charges for taking the materials from Railway premises to his godown

Direct Costing Where the expenditure on a particular item can be identified with a particular service, the total expenditure for the service is allocated to particular service directly. Eg: Expenditure on Repair & Maintenance of coaching vehicles is allocated directly to Coaching Services

Indirect Costing • Expenditure is joint or common in nature, which is allocated to the respective heads of expenditure by apportioning the expenditure on the basis -Engineering analysis -Statistical analysis -Survey method -Statistical regression analysis -Percent variable method. • Ratios are worked out on the basis of above analysis for apportionment of common expenditure.

Process of Traffic Costing • The process of traffic costing starts from the time the financial accounts for a year are closed and Capital and Revenue accounts are drawn up by Acts. Dept. (St. No. 12). • Annual Stat. St. 15 which gives the results of working of Chg. & Goods Services (incl. DRF & Int. ) provides the back ground material for Traffic Costing and contains : (a)Cost of hauling a passenger train and a passenger vehicle per km. (b)Cost of hauling a Goods Train and Goods Wagon per km. © Cost of hauling a tonne per km

Apportionment of expenses • The Total Coaching Expenses under Abstract A to K , Accounting Head wise are now allocated to different activities viz. Terminal, Running & Overheads. • Overheads are those expenses which are not directly allocable to any service, and are shown as percentage to total expenditure. These include Hqrs. Costs, representing expenses on Genl. Management, Financial, Personnel, Material Management, Staff Welfare and Amenities. Appropriation to Pension Fund under M-200, Retirement Benefits under Abast. L. Further, RPF, Safety and Staff Training.

Stages of apportionment of Chg. Exp. Stage I II IV V VI VII Expenses Total Expenses Running Expenses Passenger Express & Ordinary Parcel Catering service Terminal Expenses VIII Booking IX Bkg. Exp. M/E & Ord. Terminal Activities. Runng Passenger Parcel Over-Heads Catering M/Exp. Ordinary Class wise M/Exp. Tkt. Bkg. Tkt. Ckg Enq& Res. Ordinary Spl. Serv. Misc. Serv. Express Parcel Ordinary Class wise Catrng

Stages of apportionment of Chg. Exp. X XI Tkt. Checkg Tkt. Check. Exp. &O rdny Service M/Express XII Enq & Resv. M/Express XIII Enq. Resn. M/Exp. & Ord. XIV Spl. Services XV Spl. Serv. M/Exp & Ord. XVIII XIX Ordinary Class wise M/Express Ordinary Class wise Misc. Service Miscl. Serv. M/Exp. & Ord. M/Express Ter. Parcel Ter. Catering M/Express Ordinary Class wise Ordinary

Preparation of Unit Cost Grouping of Expenses • The next step is grouping of Working Exp. , DRF. , Interest and Overhead Exp abstract wise. This is done in Form-2. Then Overheads under the column ‘Overheads’ are grouped and apportioned to the Functional Groups on pro-rata basis. The percentage of overhead Exp. and Central charges to total exp. are worked out here. Functional wise Grouping of Exp • Further the grouped exp. in Form -2 are regrouped functional activity wise viz. , Loco Exp. Traction wise, exp. of Track, Other optg. Expenses. Cost of S gnaling etc in Form No. 3, 4 & 5.

Preparation of Unit Costs • Finally Unit Costs for different Performance Units are Worked out in Form No. s. 6 to 11, which are as follows : • Form-6: Contains Overall (both Exp. &Ordny together) Unit Costs including over heads. • Form-7: Contains Overall (both Exp. &Ordny together) Unit Costs excluding over heads. • Form-8: Contains Unit Costs of Mail/Exp. services excluding over heads. • Form-9: Contains Unit Costs of Ordny. services excluding over heads • Form-10: Contains Unit Costs of M/Exp. services excluding over heads—Class wise. • Form-11: Contains Unit Costs of Ordny. services excluding over heads —Class wise.

S. No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Freight Services. GTKMS- Traction wise WKMS-Loaded, Empty-tractionwise TEKMS-Shtg. Kms, Other. Ekms TE Hrs- Shtg Ehrs, & other E. Hrs. Wagons Loaded – Originating, Terminating, Carried both Rev. Non-rev. Tonnes originated, terminated, carried both Rev. non- rev. Tonnes transhiped at break of guage. Avg. Ld. per wagon on run: Avg. starting Ld. per wagon Total no. of Invoices issued Brake Van Kms. Net Tonne Kms –coal, other than coal NTKMS -Non-Rev Equated Track kms, Plinth areas of service & other buildings. 15 Survey ratios of different facets in train operation

COMPUTATION OF UNIT COSTS • Common expenditure under each service like coaching and goods services is further apportioned into constituent elements of rail transport by class, type, etc. • Expenditure under each constituent element is aggregated for arriving at the total expenditure for the element. • The total expenditure is divided by the performance factor of the concerned service for computation of the unit cost of that service.

COACHING SERVICES UNIT COSTS Terminal cost per passenger originating/carried. Line haul cost per vehicle KM/train KM. Line haul cost per 1000 GTKMs Line haul cost per passenger KM Terminal and line haul cost per vehicle KM. Terminal and line haul cost per passenger. ¬ The costs are compiled service wise like mail express and ordinary, diesel and electric tractions, etc.

GROUP ‘A’ PASSENGER SERVICES a) b) c) d) e) f) g) h) Unit cost of terminal functions. Booking cost per passenger originate. Ticket checking cost per passenger carried. Enquiry/reservation for passenger carried. Special services cost for passenger carried. Meals services cost per passenger carried. Total terminal cost passenger cost per passenger carried. Total terminal cost per passenger originate

UNIT COST OF RAIL HAUL FUNCTIONS a) b) c) d) e) f) Line haul cost per VKM. Line haul cost per 1000 GTKMs Line haul cost per passenger KM Overhaul passenger cost per VKM. Overhaul cost per passenger carried. Overhaul cost per passenger KM

GROUP ‘B’ PARCEL, LUGGAGE AND POSTAL SERVICES a) b) c) Terminal cost per VKM. Line haul cost per 1000 GTKMs. Overhaul cost per VKM. GROUP ‘C’ CATERING SEVICES a) b) c) d) Terminal cost per passenger carried. Line haul cost per dining/pantry car KM. Overhaul cost per passenger carried.

Overhaul cost per coaching services per passenger /per VKM a) b) c) d) e) f) g) Mail express / Ordinary. A/c First Class. A/c Sleeper. A/c 3 Tier. A/c Chair Car. Sleeper Class. Second Class. All the above unit costs are direct costs. Overheads and Central charges are expressed as a percentage to total direct expenditure.

FREIGHT SERVICES UNIT COSTS • These are compiled in a standard format called Green Book consisting of 7 schedules. Schedule A to G. • Schedule A: Frame work for distributing working expenses including interest and DRF among various functional groups/services – – – Terminal, Transshipment, Marshalling, Line haul Overheads.

FREIGHT SERVICES UNIT COSTS • Schedule B The expenses under each function head are divided further into corresponding services • Total expenditure under each service is divided by the concerned performance factor for arriving at the Unit costs. - Through trains - Van and shunting goods trains. Unit Cost of services • Schedule C: Expenditure under each function head is segregated under different activities/services like Documentation Train engine/Shunting engine working Diesel/Electric traction, etc. • Schedule D: Unit costs are compiled for various activities/services worked out in Schedule ‘C’.

Unit Costs of Constituent Elements • Schedule E: Working expenses under various constituent elements of a service from various heads are aggregated for assessing the expenditure under each element such as: – Terminal operations – Transshipment operations – Marshalling operations – Line haul operations.

Unit Costs of Constituent Elements • Schedule F: Working expenditure under each constituent element. (excluding overheads) of schedule ‘E’ are divided by relevant performance factors for arriving at Unit costs of individual elements. • Overheads and Central charges are shown as a percentage of total expenses. Summarization • Schedule G: Summarization of the end results of unit costs worked out in Schedule ‘B’, Schedule ‘D’ and Schedule ‘F’ in the form of a table.

GROUP ‘A’ COSTS (INCLUDING OVERHEADS) a) b) c) Terminal cost per tonne. Terminal cost per wagon. Transshipment cost at break of gauge per tonne per transshipment. d) Marshalling cost per wagon per yard handled. e) Line haul costs - Through train / Van and shunting goods trains a) Per Train KM b) per wagon KM c) Pay load per MTKM d) Carrying units per wagon KM.

GROUP ‘B’ COSTS (EXCLUDING OVERHEADS) a) b) c) d) e) f) Cost of documentation per invoice. Cost of other terminal services per tonne. Cost of other terminal services per wagon. Transshipment cost at break of gauge per tonne per transshipment. Marshalling cost per wagon per yard handled. Cost of provision of maintenance of carrying units (Wagons) per wagon day.

Line haul costs h) i) j) k) Cost of Traction per Train KM/1000 GTKMs , (diesel/electric, through/van goods). Cost of other transportation services including train passing staff per train KM/per 1000 GTKMs. Cost of Track per train KM/1000 GTKMs Cost of Signaling per Train KM/1000 GTKMs

AVAILABILITY OF UNIT COSTS • As the unit costs are compiled after closing of the financial documents by June/July, the process of compilation starts in July/August and sent to Railway Board by Oct/Nov. • The Railway Board collects information from all the Railways, consolidates the data, compiles all India average costs and publishes the Freight Services and Coaching services Unit Costs, which are generally available by July/Aug of next year.

ESCALATION FACTOR • For escalating the unit costs to the level of the current year, escalation factors are worked out separately for coaching and goods services by each Railway based on actual expenditure for the current year and budget estimates for the coming years • Escalation factors for coaching and goods services are given in the Unit Cost Books.

Traffic costing in Indian Railways Vs Cost computation in Commercial Establishments. • • Availability of the end result Factors affecting computation Activities (Goods, Coaching, Gauges etc) Units compiling the costs and their authenticity Decision making forum Superfluous factors (in Rlys. ) Processing methodology

Traffic costing in Indian Railways Vs Cost computation in Commercial Establishments. • Comparative factors i. e Zonal Rlys with All Indian Railway index • Fully distributed cost and unit costs of the activities (Coaching, Goods, EMU etc) • Correctness of the data i. e statistics • Methodology adopted. (Age old process) In commercial undertaking the rates are flexible to the extent providing customers on the principle “Telescopic Rates and Terminal Costs” to retain customer base. Commercial under takings work on a basis of calculation of determinants of cost of services i. e. value of services with costs and classification of each service.

TRAFFIC COSTING APPLICATIONS • • Ø Ø Ø Unit costs published are zonal average costs worked out taking into account the total expenditure of a Zone under various heads. These are basically indicative in nature than quantifying actual cost involved in rendering a particular service. Transportation is a perishable which cannot be stored. If the transport facility is not utilized in time and the assets remain idle, the carrying capacity and earning capacity of the particular period is last for ever. Unit costs should enable to provide data on detailed revenue and cost in puts for assessing: Profitability of different operations Profitability on different routes/sections Margins in flexibility in tariff regulations

Applicability - Identification of specific operations • Railways are highly capital intensive undertaking. • Most of the expenditure for repair and maintenance of the infrastructure is fixed in nature and has to be incurred even if a single train is running. • Variable portion of expenditure is very limited and break even point is reached at substantially higher density of traffic. • Evaluate the costs and profitability of individual traffic streams – Development of costs/financial statements of different lines. (Business lines Vs Strategic/Service lines) • Facilitate a more dependable estimation of costs to Regulator to based on Fully Distributed Cost/Marginal Cost methods to indicate: a)True Cost of providing a service b)Cost of running a train(passenger/Goods) c)Cost of running a train between two points d) per trip cost analysis to Rajdhani/Duronto/Shatabdi services(Special Category)

Dynamic Pricing Policy • The objective of Dynamic Pricing Policy is to yield management revenue to the desired level basing on the market conditions and providing a policy on set of pricing strategies. The policy arrived for both Bulk Traffic and ordinary Traffic segments. Tatkal fares policy is one example. • The IR has not derived benefits on the seasonal traffic and lack flexibility in pricing based on the elasticity of demand. Due to lack of flexibility in pricing and Stations (Sales centers) are not in a position to fix the prices, Rlys are loosing market share. • The Price structure should be based on the seasonal variance, and incentives to customers for additional volumes. Tariff rationalization initiative by introducing busy reason surcharge, congestion surcharge, development surcharge, Terminal charges, and freight incentive schemes is aimed in the dynamic pricing policy. • Identified surcharges on CONCOR traffic, on Development of Freight Corridors, surcharges on Rly owned terminals and Private terminals to build infrastructure. • Freight Incentive schemes applicable to Iron Ore, Coal, POL, Container traffic, OYW Scheme, Bench Marking in NTKMs, Discount across the RR, Loading of bagged consignments in Open/Flat wagons.

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