COST ACCOUNTANTS OPPORTUNITY FOR INDIAN RAILWAY
In the recent budget Indian
railways have highlighted on adoption of Activity base costing in Indian
railways. Its nice to find that Indian railways are adopting and changing’s its
mindsets and policy towards cost optimization and to recover from losses
despite of higher revenues. We all know that Indian railways earns a lot through
advance ticket booking but it has loses on its books. This is very reason that
after independence Indian government is aggressive looking ahead for adoption
of costing methods in its railways operating process. Before I move ahead I would like to inform my readers that I will cut down on words and would give images to portray the concepts of Cost Management in Indian Railways. Now this activity based
costing adoption in Indian railways is going to be wider scope since it has
many functions and many departments linked under several segments. If we make a
quick look towards the several areas where activity based costing can be implemented:
·
Freight traffic
·
Passenger Traffic
These two segments are further
divided and in to several part where in order to design a cost model we need to
identify the various parts of the cost drivers. A question might come up that
what type of cost information is required and which areas to be focused to plugging
the gaps. Well cost information and understanding is needed so that our results
to could identify the final objective. Cost Optimization is a broader term
hence we drill it further and we conclude are as follows:
ü Identify
money makers or money losers
ü Take
resource allocation decisions
ü plan
and control operations and activities
ü Find
economic break-even points
ü Compare
different options
ü Discover
opportunities for cost improvement
ü Prepare
and actualize business plans
ü
Improve strategic decisions making
Now moving ahead we find that Indian
railways needs pricing decision of its Freight Tariffs and also about its investments
decisions so that movement of goods and services brings more trade and investment
opportunities. We are all demanding GST but once it’s come the biggest
requirement over the years will be logistics and Indian railways demand will go
up. Hence pricing become more important so as neither the customer neither the government
burns a hole in its pocket. So my activity based costing should be linked not
only with cost optimization but with identification of pricing of its services.
In railways we can derive the
Activity based costing either by Top down Approach or By Bottom up approach.
To clarify these terms two examples may be given:
Example I: When using the top-down
approach to calculate the staff costs for the traction, they would be
calculated by dividing the total costs for driver wages in a railway company by
the number of driving hours of all drivers in that company.
A bottom-up approach would be to
multiply the number of driver working-hours for a certain activity by the gross
salary per driver-hour.
Example II: When using the
top-down approach to calculate the energy costs for a certain activity, the
total traction-related energy costs in a railway company would be divided by
the total train-kilometres (or gross ton-kilometres or whatever unit of
measurement is considered suitable) this railway company produces during a
given period, giving the energy cost per train-kilometre.
A bottom-up approach would be to
calculate the energy consumption for that activity using a suitable formula
which takes into account running resistance, air resistance, losses, etc. and
then multiplying the calculated energy consumption, suitably expressed in kWh,
by the actual working price per kWh.
Which of the approaches is used
in the model depends partly on what data are available. Generally a bottom-up
approach is preferable for the following reason:
In the top-down approach, there
is no longer any direct connection to the factors causing and determining the
costs; instead, the total costs are simply distributed over some measurement
units (train-kilometres, working hours, tons, etc), although no linear
connection necessarily exists at all.
For example, when calculating
infrastructure charges for a train, these can of course, easily be calculated
by dividing a railway company’s total annual infrastructure charges by the
total train-kilometres, although in reality they might be charged per
gross-ton-kilometre or vice versa.
A
bottom-up approach makes it easier to take into consideration specific characteristics
of a transport, as well as changes in
the relevant cost determining factors, as the following examples illustrate:
When
calculating energy costs for example, a bottom-up approach makes it possible to
take into account the weight of the train and if it is running at high or low
speed, while the top-down approach normally only calculates the costs on the
basis of the average energy consumption per train-kilometre, irrespective of
the speed and weight. Another example would be infrastructure charges.
Please
do remember they have common cost and joint cost in many departments hence you
need to design the costing models and also the cost drivers accordingly. The below picture will elaborate about the flow chart:
At the
same time there is incremental cost of operating which also needs to be taken
into account. Hence I have included one format for the incremental costing of
the Railways based on the departments and segments. The below flow helps me cut my words and complexity in explanation:
Now
lets come to the model of Activity Base costing where cost drivers are
segmented: I have given the format for making its much easier to understand.
Hence In my 1st series i give an idea about the steps and the process to be taken while designing the activity based costing models for railway segment. In my next series I will come up with more valuable insights of other segments raised in the Indian Railway Budget 2016-17 related to cost management profession.
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