COST CONCEPTS

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COST CONCEPTS

• SANJAY UPRETI
• PAM

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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.

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Variable Costs

• Variable 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.

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Opportunity Cost

• It 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.

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Indirect Costs

• Indirect 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.

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• 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.

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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.

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• 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 Boards office in early 1960s.
• The Indian Railways followed the trend set in USA
  and U. K.

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Methodology

• At 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.

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• 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.

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