costing sem2

8/19/2019 Costing Sem2

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MCOM PART-1SEMESTER-2 ROLL NO -4

EXECUTIVE SUMMARY

In late 2008, the American Transportation Research Institute (ATRI) published an Analysis of the

Operational Costs of Truc in! in an effort to pro"ide more accurate mar!inal cost data for motor

carrier operations# $e"eral pre"ious studies !enerated cost calculations that industry

sta eholders considered unreasonably hi!h or lo%& in other instances, analyses utili'ed some%hat

nebulous "alue of time calculations %hich also did not reflect direct carrier*borne costs#

Conse+uently, ATRI undertoo research to document and +uantify motor carriers ey

operational costs, stratified by fleet si'e, sector and re!ion of the country# The !oal of the

research %as to identify current and accurate operational costs based on data pro"ided directly

from motor carriers# The resultin! dataset could then be used by both motor carriers as a hi!h*

le"el benchmar in! tool and by !o"ernment a!encies for transportation impro"ement analyses#-ue to the popularity of the initial report, ATRI subse+uently updated the study %ith 200. and

first +uarter 20/0 data in 20//# $ince its ori!inal publication in 2008, ATRI has recei"ed o"er

/,800 re+uests for the Operational Costs of Truc in! reports# ATRI no% intends to update the

research on an annual basis# This 20/2 report includes full year 20/0 and 20// data#

In summary, tables $/ and $2 present the mar!inal cost per mile (C1 ) and cost per hour

(C13) for 20/0 and 20// 4u5taposed %ith 2008 and 200. data for comparison purposes# The

a"era!e mar!inal C1 for 20// %as 6/#7/, the hi!hest of the four years studied# After a sharpdecline in fuel prices resulted in decreased industry costs bet%een 2008 and 200., industry costs

ha"e steadily risen throu!h 20/0 and 20//# The C1 fi!ures %ere con"erted from per*mile

calculations to hourly fi!ures, usin! an empirical a"era!e industry operational speed of .#.8

miles per hour/# The total a"era!e industry C13 %as 698#20 in 20//, the hi!hest Operational

Costs calculation to date#

:uel and dri"er %a!es (e5cludin! benefits) continued to be the lar!est cost centers for carriers,

to!ether constitutin! 92 percent of the a"era!e operatin! cost in 20// (Table $ )# ;ease or

purchase payments %ere the third lar!est cost center, constitutin! // percent of costs in 20//,

repair and maintenance at . percent, dri"er benefits at . percent, and insurance at < percent#

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1.0 Introduction

Operating costs are the e5penses %hich are related to the operation of a business, or to theoperation of a de"ice, component, piece of e+uipment or facility# They are the cost of resourcesused by an or!ani'ation 4ust to maintain its e5istence#

Business operating costs

Commercial enterprise, operatin! costs fall into t%o broad cate!ories=

• :i5ed Costs , %hich are the same %hether the operation is closed or runnin! at /00>capacity# :i5ed Costs include items such as the rent of the buildin!# These !enerally ha"eto be paid re!ardless of %hat state the business is in#

• ?ariable Costs , %hich may increase dependin! on %hether more production is done, andho% it is done (producin! /00 items of product mi!ht re+uire /0 days of normal time orta e 7 days if o"ertime is used# It may be more or less e5pensi"e to use o"ertime

production dependin! on %hether faster production means the product can be more profitable)# ?ariable Costs include indirect o"erhead costs such as Cell 1hone $er"ices,Computer $upplies, Credit Card 1rocessin!, lectrical use, 5press ail, @anitorial$upplies, RO, Office 1roducts, 1ayroll $er"ices,Telecom, niforms, tilities, or Baste-isposal etc

. Business o er!ead costs

O"erhead costs for a business are the cost of resources used by an or!ani'ation 4ust to maintain

its e5istence# O"erhead costs are usually measured in monetary terms, but non*monetaryo"erhead is possible in the form of time re+uired to accomplish tas s#

5amples of o"erhead costs include=

• 1ayment of rent on the office space a business occupies

• Cost of electricity for the office li!hts

• $ome office personnel %a!es

on*o"erhead costs are incremental costs, such as the cost of ra% materials used in the !oods a business sells#

Operatin! Cost is calculated by Cost of !oods sold * Operatin! 5penses# Operatin! 5pensesconsist of =

• Administrati"e and office e5penses li e rent, salaries, to staff, insurance, directors feesetc#

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https://en.wikipedia.org/wiki/Expensehttps://en.wikipedia.org/wiki/Fixed_costshttps://en.wikipedia.org/wiki/Variable_costshttps://en.wikipedia.org/wiki/Resource_(project_management)https://en.wikipedia.org/wiki/Organizationhttps://en.wikipedia.org/wiki/Fixed_costshttps://en.wikipedia.org/wiki/Variable_costshttps://en.wikipedia.org/wiki/Resource_(project_management)https://en.wikipedia.org/wiki/Organizationhttps://en.wikipedia.org/wiki/Expense


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• $ellin! and distribution e5penses li e ad"ertisement, salaries of salesmen#

It includes all operatin! cost such as salary, rent, stationery, furniture etc#

1.1 Preparation of Cost Sheet under Operating Costing

:or preparin! a cost sheet under operatin! cost, costs are usually accumulated for a specified

period "i'#, a month, a +uarter, or a year etc#

All of the accumulated costs should be classified under the follo%in! three heads=

1. "i#ed costs or standing c!arges$

Which are the same hether the !"erati!n is c#!sed !r r$nning at 1%%& ca"acit'(

)i*ed C!sts inc#$de items s$ch as the rent !+ the ,$i#ding( These genera##' ha e t!,e "aid regard#ess !+ hat state the ,$siness is in(

%. Varia&'e costs or running c!arges( )"ue'( *ri er +ages( *epreciation( oi' etc.,$

Which ma' increase de"ending !n hether m!re "r!d$cti!n is d!ne. and h! it is

d!ne /"r!d$cing 1%% items !+ "r!d$ct might re0$ire 1% da's !+ n!rma# time !r ta e

da's i+ ! ertime is $sed( 3t ma' ,e m!re !r #ess e*"ensi e t! $se ! ertime

"r!d$cti!n de"ending !n hether +aster "r!d$cti!n means the "r!d$ct can ,e m!re

"r! ta,#e5( 6aria,#e C!sts inc#$de indirect ! erhead c!sts s$ch as Ce## Ph!ne

Ser ices. C!m"$ter S$""#ies. Credit Card Pr!cessing. E#ectrica# $se. Janit!ria#

S$""#ies. O7ce Pr!d$cts. Pa'r!## Ser ices. Te#ec!m. 8ni+!rms. 8ti#ities. !r Waste

9is"!sa# etc(

-. Se i/ aria&'e costs or aintenance costs. )Super ision sa'ar ( Repairs and Maintenance,

nder operatin! costin!, the per unit cost of ser"ice may be calculated by di"idin! the total cost

for the period by the total units of ser"ice in the period#

O"erhead costs for a business are the cost of resources used by an or!ani'ation 4ust to maintain

its e5istence# O"erhead costs are usually measured in monetary terms, but non*monetary

o"erhead is possible in the form of time re+uired to accomplish tas s#

5amples of o"erhead costs include=

• "a'ment !+ rent !n the !7ce s"ace a ,$siness !cc$"ies

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• c!st !+ e#ectricit' +!r the !7ce #ights

• s!me !7ce "ers!nne# ages

on*o"erhead costs are incremental costs, such as the cost of ra% materials used in the !oods a business sells#

Operatin! Cost is calculated by Cost of !oods sold D Operatin! 5penses# Operatin! 5penses

consist of=

• Administrati e and !7ce e*"enses #i e rent. sa#aries. t! sta;. ins$rance.

direct!r


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because either the cost is not reco!ni'ed or is bein! absorbed in %hole or part by the cost ofsomethin! else#

E uip ent operating costs a inc'ude$

•

$alaries or Ba!es of personnel

• Ad"ertisin!

• Ra% materials

• ;icense or e+ui"alent fees (such as Corporation yearly re!istration fees) imposed by a!o"ernment

• Real estate e5penses ,Rent or ;ease payments

•

o Office space rent

o furniture and e+uipment

o in"estment "alue of the funds used to purchase the land, if it is o%ned instead ofrented or leased

o property ta5es and e+ui"alent assessments

o Operations ta5es, such as fees assessed on transportation carriers for use ofhi!h%ays

• :uel costs such as po%er for operations, fuel for production

• 1ublic tilities such as telephone ser"ice, Internet connecti"ity, etc#

• aintenance of e+uipment

• Office supplies and consumables

• Insurance premium

• -epreciation of e+uipment and e"entual replacement costs (unless the facility has nomo"in! parts it probably %ill %ear out e"entually)

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https://en.wikipedia.org/wiki/Salaryhttps://en.wikipedia.org/wiki/Wagehttps://en.wikipedia.org/wiki/Advertisinghttps://en.wikipedia.org/wiki/Rentinghttps://en.wikipedia.org/wiki/Leasehttps://en.wikipedia.org/wiki/Internethttps://en.wikipedia.org/wiki/Insurance_premiumhttps://en.wikipedia.org/wiki/Salaryhttps://en.wikipedia.org/wiki/Wagehttps://en.wikipedia.org/wiki/Advertisinghttps://en.wikipedia.org/wiki/Rentinghttps://en.wikipedia.org/wiki/Leasehttps://en.wikipedia.org/wiki/Internethttps://en.wikipedia.org/wiki/Insurance_premium


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• -ama!e due to uninsured losses, accident , sabota!e , ne!li!ence , terrorism and routine%ear and tear #

• Ta5es on production or operation (such as subsidence fees imposed on oil %ells)

• Income ta5es

$ome of these are not applicable in all instances# :or e5ample,

• A solar panel placed on oneGs home for use in !eneratin! electric po%er !enerally hasonly capital costs& once itGs runnin! there are no personnel costs, utility costs ordepreciation and it uses no e5tra land (that %asnGt already part of the place %here it islocated) so it has no real operatin! costs& ho%e"er there may need to be ta en intoaccount costs of replacement if dama!ed#

• An automobile or any other item purchased for personal use has no salary cost becausethe o%ner does not char!e themsel"es for operatin! the de"ice#

• An item %hich is leased may ha"e some or all of these costs included as part of the purchase price#

It mi!ht be +uestionable to assert that the cost of ten e5tra people on the sales force are anincremental cost or an o"erhead cost, since the %a!es for these people are both o"erhead andincremental # The staff needed to eep the shop operational are mostly considered o"erhead#

• formula for operatin! cost H total cost number of %ee s

1.- Main 2eatures o2 operating costing are as 2o''o3ing =

• The underta in! %hich adopts ser"ice costin! does not produce any tan!ible !oods#

These underta in!s render uni+ue ser"ices to their customers#

• The e5penses are di"ided into fi5ed and "ariable cost# $uch a classification is necessary

to ascertain the cost of ser"ice and the unit cost of ser"ice#

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https://en.wikipedia.org/wiki/Accidenthttps://en.wikipedia.org/wiki/Sabotagehttps://en.wikipedia.org/wiki/Negligencehttps://en.wikipedia.org/wiki/Terrorismhttps://en.wikipedia.org/wiki/Wear_and_tearhttps://en.wikipedia.org/wiki/Leasehttps://en.wikipedia.org/wiki/Incremental_costhttps://en.wikipedia.org/wiki/Accidenthttps://en.wikipedia.org/wiki/Sabotagehttps://en.wikipedia.org/wiki/Negligencehttps://en.wikipedia.org/wiki/Terrorismhttps://en.wikipedia.org/wiki/Wear_and_tearhttps://en.wikipedia.org/wiki/Leasehttps://en.wikipedia.org/wiki/Incremental_cost


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• The cost unit may be simple or composite# The e5amples of simple cost units are cost per

unit in electricity supply, cost per liter in %ater supply, cost per meal in canteen etc#

$imilarly cost per passen!er ilometers in transport cost per patient*day in hospital, costs

per room*day in hotel etc# are the e5amples of composite cost unit#

• Total cost is a"era!ed o"er the total amount of ser"ice rendered#

• Costs are usually computed period*%ise# 3o%e"er, in the case of utili'ation of "ehicles,

use of road*rollers etc#, the costs are computed order %ise#

• $er"ice costin! can be used for ser"ice performed internally or e5ternally#

• -ocuments li e the daily lo! sheet, cost sheet etc# are used for the collection of cost data#

E#a p'es o2 t!e cost units 2or ser ices

Transport Ton* Jilometer, 1assen!er J , J Tra"elled

3otel Ked* ni!hts a"ailable, occupied, meals

Colle!eL$chools $tudents hours, full timeLpart time student hours

3ospitals 1atient bed days, occupied, per operation, per "isit

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lectricity Jilo%att*hours

$%immin! pool Kathers attended, 3ours of openin!

Canteen eals pro"ided, In!redients of -ishes

1.4 I''ustration o2 Operating cost s!eet$

1articulars Total cost Cost per m

A $tandin! char!es =*

;icense fees

Insurance 1remium

Road ta5

Mara!e rent

-ri"er s %a!es

Attendant*cum*cleaner s %a!es

$alaries and %a!es of other staff

Total

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K Runnin! char!es =*

Repairs and maintenance

Cost of fuel (diesel, petrol etc#)

;ubricants, !rease and oil

Cost of tires, tubes and other spare parts

-epreciation

Total

C Total char!es N (A) D (K)

1.5 Main areas of operating costing

O"erating c!sting is +$rther di ided in and $sed in : main areas name#'

• 3otel industry• 3ospital industry P• Transport industry

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5ote' industr

In the hotel industry e5penses are di"ided into main cate!ories

*irect E#penses =

These are the e5penses that "ary %ith the le"el of production# :or e5ample, in the :ood and Ke"era!e

department, the Cost of :ood, in the Telephone -epartment, the Cost of Calls is a direct e5pense# :or, the

more %e connect !uests to %hate"er destination %anted, the more cost of calls the hotel incurs#

At this "ery sta!e a brac et %ould be departments# $er"ice type departments are re"enue !enerators

ma in! money from solely pro"idin! ser"ices ( 5# Rooms -i"ision department)# On the other hand,

merchandisin! departments ensure re"enue by !ettin! use of certain ra% material, processin! it, and then

sell the final product ( 5# :PK department, Telephone departmentQ)# Therefore, only merchandisin!

departments ha"e a direct e5pense called Cost of $ales#

Indirect E#penses$

These are the e5penses that do not "ary %ith the le"el of production, or "ariable costs that cannot befeasibly distributed to "arious :inancial Reportin! Centers# In the hotel industry, indirect e5penses are,

hence, di"ided into t%o different cate!ories=

"i#ed C!arges$

5amples mi!ht include rent, insurance, property ta5es, and interest e5pense# :or, these "ery e5penses are

incurred for the benefit of the hotel as a %hole not for the benefit of each sin!le department# To illustrate,

if a hotel insures itself a!ainst fire, theft and bur!lary, and one day some "aluable e+uipment has been

stolen, from any department %hatsoe"er, the insurance company %ill indemnify the hotel#

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1. Undistri&uted E#penses$

5amples mi!ht include electricity, ener!y, and %ater e5penses# :or, usually the hotel recei"es a total

ener!y bill to be paid# In the old days, some hotels %ent for allocatin! this amount accordin! to certain

factors (e5# $urface, -epartment sa!eQ)# 3o%e"er, this practice pro"ed to be misleadin!, since it mi!ht

under*allocate ener!y e5penses for some departments and o"er*allocate it for others# o%adays, most of the hotels decide not to allocate such e5penses any more# Rather, hotels report such e5penses in separate

schedules#

At this sta!e, departments of a typical hotel %ould be listed alon! %ith their "arious related direct

e5penses# ;ater, e5amples of fi5ed char!es and undistributed e5penses %ould be discussed# ;ast, a

brac et %ould be opened to discuss one of the most important -irect 5penses in any hotel, %hich is

1ayroll and Related 5penses# :or, hotels bein! described as labor intensi"e companies de"ote a bi!

percenta!e of their financial resources to such an e5pense#

5ospita' industr

3ospital cost information is deri"ed by relatin! the inputs of resources in monetary terms to the outputs of

ser"ices pro"ided by the hospital# Cost information is part of the basic information needed by mana!ers

and policy ma ers for ma in! decisions about ho% to impro"e the performance of a hospital, %here to

allocate the resources %ithin or amon! hospitals, or to compare the performance of different hospitals to

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one another# $ome of the basic reasons for %antin! cost information are to impro"e efficiency, increase

effecti"eness, enhance sustainability, and impro"e +uality#

Cost data can be used for t%o primary purposes, relati"e to time= for the present and for the future# It can

be used to assess the current situation of a hospital, such as for assessin! its efficiency, determinin! the

effecti"eness of the hospital, re"ie%in! its priorities, and settin! of prices# Cost information may also be

used for the future= ma in! cost pro4ections, bud!etin!, and scenario plannin! %ith %hat ifF situations#

Information on the costs and outputs of hospitals can pro"ide considerable information for mana!ers of

hospitals, re!ional coordinators of health ser"ices, and policy ma ers o"erseein! the issues of the national

health system# The information can be used to assess the internal operations and performance of a sin!le

hospitalEsuch as helpin! assess the utili'ation of health personnel in different departments of the hospital

in pro"idin! ser"icesEand to ma e comparisons of the operations and efficiency of different hospitals#

$ome of the specific potential uses of cost information for a health care administrator are=

• Comparison across facilities to identify those that are efficient from those those are not,• comparison of costs %ith fees,• de"elopment of a cross*subsidi'ation strate!y,• e"aluation of the financial re+uirements of a ne% pro!ram, or • Analysis of the effect of chan!in! the use of staff, e+uipment, and supplies in pro"idin!

ser"ices in an e5istin! pro!ram#

Bhen the cost data (the financial cost of the resource inputs) can be related to information about the

outputs (the type and +uantity of ser"ices pro"ided) assessments of efficiency of the input output

relationship can be made#

Cost data on a series of hospitals, %ithin an area or country, may be used by national, re!ional, and

pro"incial mana!ers to compare the performance of similar types of hospitals# They may also use such

information to establish standards of performance and efficiency for hospitals#

The mana!ers or administrators of hospitals may also use the cost data on their indi"idual hospital# This

information can be used to

• measure performance of different departments, %ards or units %ithin the hospital&• e5amine composition of costs= staff, supplies& and

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• assess re"enue !eneration to costs of "arious ser"ices

The process of determinin! the costs of a hospital in"ol"es si5 steps=

The steps in costin! of the hospital ser"ices are pro"ided in the si5 sections belo%#

Step 1$ *e2ining t!e a6or and re'e ant acti it areas o2 t!e !ospita'

-efine the rele"ant areas of hospital operations %hich need to be costed# :actors to consider are

(/) The importance of an acti"ity relati"e to the hospital s total output or le"el of acti"ity,

(2) The Amount of detailed costin! information a"ailable, and

( ) The amount of detail needed from the Output of this e5ercise#

a4or Cost Areas for 3ospital

/# Inpatient

edical %ard

$ur!ical %ard

aternity

1ri"ate %ard

2# Outpatient clinic

# Ancillary ser"ices

1harmacy

;aboratory

Radiolo!y (S*Ray)


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# Trainin! school

Step %$ 7at!ering in2or ation on t!e ser ices pro ided or t!e output o2 t!e !ospita'

Information to be !athered for each of these areas %ill be based on a typical measure of %or load# :or

inpatient ser"ices t%o outputs are sou!ht= total inpatient days and total admissions# The reason for t%o

measures is that since these measures %ill ser"e as a denominator and determine the outputs of this

model, it is often useful to ha"e not only the unit cost per day of hospitali'ation (total costsLtotal patient

days) but also to ha"e the a"era!e cost per admission (total costsLtotal admissions)# This latter output of

the modelEtotal cost per admissionEis especially helpful if attemptin! to determine the payments or

premiums on a capitation basis#

:or outpatient clinics it is typical to use total "isits for a time period as a measure of %or load#

Ancillary ser"ices %ill use the number of e5aminations, procedures, or prescriptions filled#

Outreach ser"ices %ould use number of "isits to the mobile clinic, number of contacts, or number of

sur"eillance "isits# Trainin! schools may be a ma4or source of resource commitment#

The number of students enrolled %ould be a useful measure of the %or load of the institution#

Step -$ *eter ining t!e 'a&our and ot!er recurrent costs

In this step you must identify the ma4or cost components for the ma4or acti"ities identified in step

The ma4or components of e5penditure are detailed belo%

Recurrent costs:

• ;abour• $alaries• Allo%ances (uniforms, housin!, education, home lea"e, rural or hardship incenti"e pay,

etc#)• :ree labour (forei!n or missionary health personnel %ho pro"ide their ser"ices at no

cost to the facility)# Their ser"ices should be costed as the e+ui"alent of %hat a national

%ould recei"e for doin! that same 4ob• -ru!s• edical $upplies

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• Transportation (petrol and maintenance for "ehicles and ambulances)• aintenance (for all facilities and e+uipment other than "ehicles)• :ood (total food costs incurred for both patients and staff)• Telecommunications• Office e5penses• Other

Step 4$ Ascertaining t!e capita' costs o2 t!e !ospita'

• Bui'ding (construction or modification but not routine maintenance, %hich is included in

recurrent costs)• E uip ent (ma4or e+uipment purchased for the facility)# +uipment is considered

capital e+uipment if its cost is hi!her than some set amount (such as $6 200) and it has

an e5pected useful life of more than one year# If it does not meet these re+uirements then

it is a recurrent cost# :or e5ample, %aste cans ha"e a useful life of !reater than one year

but because they cost much less than 6200 their purchase is considered a recurrent rather

than a capital cost#• Ve!ic'es

Step 8$ A''ocating t!e indirect costs

The model includes a summary chart, constructed from the labour and the other costs listed, %hich lists

the total cost for each acti"ity area# Kecause %e also %ant the unit costs of those areas pro"idin! patient

care ser"ices, the indirect or administrati"e costs must be allocated to the inpatient, outpatient, other

ancillary ser"ices, and any other acti"ities as defined in the first step#

The administrati"e costs are considered indirect in that they support the care and ancillary ser"ices

deli"ered to patients and are part of the total costs of the facility# To allocate these indirect costs of

administration %e must use %hat is termed the step*do%n allocation method#

$ince the ancillary, inpatient, and outpatient ser"ices cannot use a common %or load measure %e %ill use

the other direct costs as a basis for allocatin! the indirect costs# The assumption is that the indirect costs

follo% the same proportional representation that the direct ser"ice costs use amon! these areas#

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Step 9$ Re ie3ing and using t!e !ospita' cost su ar

The resultin! information can be used by an indi"idual institution or for comparin! se"eral institutions#

The uses, as mentioned in the introduction, include=

1. Accounta&i'it

sin! the information to report to the hospital board or the ministry ho% financial resources ha"e

been used, and that they ha"e been used properly and efficiently# Kud!ets may be !enerated

usin! cost information#

%. Assessing e22icienc

fficiency is achie"ed %hen more hospital ser"ices (outputs) are produced %ith the same amount

of resources (staff, finances, e+uipment) or %hen the same output is produced %ith fe%er

resources# $o %hen cost profiles of se"eral hospitals are a"ailable for the mana!er to re"ie%, anassessment of their relati"e le"els of efficiency may be made#

-. Esta&'is!ing standards

Bhen cost information is a"ailable for a cross*section of similar type hospitals, the comparison

can result in settin! a standard for %hat that type of hospital should be able to produce %ith a

!i"en set of resources#

4. Cost Reco er $ Esta&'is!ing prices

Jno%in! the cost of ser"ices allo%s the mana!ers to set prices for all ser"ices at cost plus a

small mar!in, or determine %hich ser"ices %ill recei"e cross subsidies#

8. Cost :ro6ections$ :'anning 2or t!e 2uture

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Bhat*if scenarios may be !enerated %ith the ser"ice "olume and costin! information !enerated#

This can help in the plannin! of ne% ser"ices or e5pandin! e5istin! ser"ices

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%.0Transportation Industr

1rice, cost and in"estment issues in transportation !arner intense interest# This is certainly to be

e5pected from a sector that has been sub4ect to continued public inter"ention since the nineteenth

century# Bhile ar!uments of mar et failure, %here the pri"ate sector %ould not pro"ide thesocially optimal amount of transportation ser"ice, ha"e pre"iously been used to 4ustify the

economic re!ulations %hich characteri'ed the airline, bus, truc in!, and rail industries, it is no%

!enerally a!reed, and supported by empirical e"idence, that the mo"e to a dere!ulated system, in

%hich the structure and conduct of the different modes are a result of the interplay of mar et

forces occurrin! %ithin and bet%een modes, %ill result in !reater efficiency and ser"ice#

any factors ha"e led to a ree5amination of %here, and in %hich mode, transportation

in"estments should ta e place# :irst and perhaps most importantly, is the !eneral mo"e to place

traditional !o"ernment acti"ities in a mar et settin!# The pri"ati'ation and corporati'ation of

road%ays and parts of the a"iation systems are !ood e5amples of this phenomenon# $econd,

there is no% a continual and increasin! fiscal pressure e5erted on all parts of the economy as the

nation reduces the proportion of the economy s resources %hich are appropriated by !o"ernment#

Third, there is increasin! pressure to fully reflect the en"ironmental, noise, con!estion, and

safety costs in prices paid by transportation system users# :inally, there is an a"id interest in the

prospect of ne% modes li e hi!h speed rail (3$R) to relie"e airport con!estion and impro"e inen"ironmental +uality# $uch a ma4or in"estment decision ou!ht not to be made %ithout

understandin! the full cost implications of a technolo!y or in"estment compared to alternati"es#

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There are many types of costs# Jey terms and brief definitions are belo%#

• Fixed costs $ The costs %hich do not "ary %ith output#

• Variable costs = The costs %hich chan!e as output le"els are chan!ed# The classification of costs

as "ariable or fi5ed is a function of both the len!th of the time hori'on and the e5tent of

indi"isibility o"er the ran!e of output considered#

• Total costs $ Total e5penditures re+uired to achie"e a !i"en le"el of output#

o Total costs H fi5ed costs D "ariable costs#

• Average costs $ The total cost di"ided by the le"el of output#

• Marginal )or incremental , cost $ The deri"ati"e (difference) of Total Cost %ith respect to a

chan!e in output#

• Opportunity costs $ The actual opportunities for!one as a conse+uence of doin! one thin! as

opposed to another# Opportunity cost represents true economics costs, and thus, must be used in

all cases#

• Social cost = The cost the society incurs %hen its resources are used to produce a !i"en

commodity, ta in! into accounts the e5ternal costs and benefits#

• Private cost $ The cost a producer incurs in !ettin! the resources used in production

• Sunk costs $ These are costs that %ere incurred in the past# $un costs are irrele"ant for decisions,

because they cannot be chan!ed#

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• ndivisible costs = -o not "ary continuously %ith different le"els of output or must e5penditures,

but be made in discrete UlumpsU# Indi"isible costs are usually "ariable for lar!er but not for

smaller chan!es in output

•

!scapable costs )or Avoidable costs ,$ A cost %hich can be a"oided by curtailin! production#There are both escapable fi5ed costs and escapable "ariable costs# The escapability of costs

depends on the time hori'on and indi"isibility of the costs, and on the opportunity costs of assets

in +uestion

The production of transport ser"ices in most modes in"ol"es 4oint and common costs# A 4oint

cost occurs %hen the production of one !ood ine"itably results in the production of another !ood

in some fi5ed proportion# :or e5ample, consider a rail line runnin! only from point A to point K#

The mo"ement of a train from A to K %ill result in a return mo"ement from K to A# $ince the tripfrom A to K ine"itably results in the costs of the return trip, 4oint costs arise# $ome of the costs

are not traceable to the production of a specific trip, so it is not possible to fully allocate all costs

nor to identify separate mar!inal costs for each of the 4oint products# :or e5ample, it is not

possible to identify a mar!inal cost for an i to 4 trip and a separate mar!inal cost for a 4 to i trip#

Only the mar!inal cost of the round trip, %hat is produced, is identifiable#

Common costs arise %hen the facilities used to produce one transport ser"ice are also used to

produce other transport ser"ices (e#!# %hen trac or terminals used to produce frei!ht ser"ices is

also used for passen!er ser"ices)# The production of a unit of frei!ht transportation does not,

ho%e"er, automatically lead to the production of passen!er ser"ices# Thus, unli e 4oint costs, the

use of transport facilities to produce one !ood does not ine"itably lead to the production of some

other transport ser"ice since output proportions can be "aried# The +uestion arises %hether or not

the presence of 4oint and common costs %ill pre"ent the mar et mechanism from !eneratin!

efficient prices# $ubstantial literature in transport economics has clearly sho%n that conditions of

4oint, common or non*allocable costs %ill not preclude economically efficient pricin!#

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%.1 Transport costing case stud

nit costin! is the method of costin! used %hen the cost units are identical# Identical cost units

should ha"e identical costs and this concept of e+uality of costs is the basic feature of unit

costin!# It may be noted that process costs, output costin! and ser"ice costin! are the sub*

di"isions of unit costin! method#

$er"ice or operatin! cost is the cost of pro"idin! ser"ices# $er"ice costin! is the term applied to

describe the system used to find the cost of performin! a ser"ice such as transport, !as or

electricity# $er"ice costs are particularly suitable for the costin! of road and rail transport

ser"ices and they are also utili'ed by electricity underta in!, hospitals, canteen, boiler house, etc#

the method of costin! is different from that used in connection %ith production, and the

difference lies chiefly in the manner of assemblin! the cost data and finally in its allocation to

cost units# The principle of ser"ice or operatin! costin! is to accumulate costs under suitable

headin!s and to e5press them in terms of the unit of ser"ice rendered#

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$er"ice costin! is similar to output costin!# All costs are suitably classified under fi5ed and

"ariable# These costs are then collected, analy'ed and e5pressed in terms of an appropriate cost

unit# The classification of costs into fi5ed and "ariable is "ery important, as it dra%s

mana!ement s attention to the fi5ed costs to %hich they are committed re!ardless of the units of

ser"ice ultimately !i"en# It also indicates the chan!e in the cost structure due to chan!e in the

operatin! le"el#

In transport underta in!s most of the statistical data re+uired for cost findin! and cost control

purposes are obtained from -aily ;o! Report# All repairin! and maintenance %or are recorded

on repair tic ets and are then costed# In order to prepare a Transport Cost $heet for a transport

underta in! the costs may be subdi"ided as under=*

a) Wages and running costs - These inc#$de c!st !+ "etr!#. !i#. grease. ages !+

assistants and dri ers. etc(

&, Maintenance c!arges = * These include repairs and o"erhaulin! of "ehicles, !ara!e char!es,

tyres, etc#

c, "i#ed c!arges = * These fi5ed e5penses include insurance, license, depreciation, etc#

The statistica# data regarding c!sts. maintenance and "er+!rmance are he#"+$# in

"re"aring a "er+!rmance in res"ect !+ each ehic#e(

In order to compare the operatin! efficiency for each period, the total costs thus arri"ed at are

di"ided by the bases such as number of hours or days, number of ilometres run, number of commercial ton* ilometres, etc# Costs per unit thus obtained are compared %ith the past result# A

monthly ?ehicle Cost $heet and 1erformance $tatement are !enerally used in many transport

underta in!s#

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Cost control is al%ays possible by means of comparison of actual performance %ith the bud!eted

performance# ?arious control measures, "i'#, securin! the optimum use of "ehicles, re!ular

maintenance as a planned operation, a"oidance of loadin! and unloadin! delays pre"ention of

o"erlappin! and duplicated 4ourneys, planned replacement of "ehicles, etc#, may be instituted#

Bhere transport department is treated as ser"ice department all costs are collected and

apportioned to other departments on the basis of commercial ton* ms# The haula!e of incomin!

material mi!ht be char!ed as an addition to cost of ra% material, and the haula!e of fabricated

Menerally, commercial ton* m, is obtained by multiplyin! the total tonna!e carried by the

ilometres tra"elled and di"idin! the product by t%o# This is done %here the "ehicles return

empty as is found in most cases#

-.0 I;TRO*UCTO; O" AMERICA; TRA;S:ORTATIO; RESEARC5I;STITUTE

$ince 2008 the American Transportation Research Institute (ATRI) has annually published thereport, Analysis of the Operational Costs of Truc in!, to pro"ide more accurate mar!inal costdata on motor carrier operations# In the literature re"ie% for the inau!ural study in 2008, ATRI

identified pre"ious research that reported cost calculation findin!s ran!in! from 622 per hour too"er 6 70 per hour/& fi!ures %hich %ere considered unreasonably hi!h or lo% by many in thetruc in! industry# Additionally, some of these studies calculated costs usin! hi!hly sub4ecti"e

"alue*of*time calculations that may e5tend far beyond direct costs V resultin! in dramatic"ariability for industry costs dependin! on the metrics used#

Conse+uently, ATRI undertoo research to document and +uantify motor carriers eyoperational costs, stratified by fleet si'e, sector, and re!ion of the country# The !oal of theresearch %as to accurately identify current operational costs based on real*%orld data pro"ideddirectly from motor carriers# The resultin! analyses could then be used by both motor carriers asa hi!h le"el benchmar in! tool, and by !o"ernment a!encies for "arious transportation impactcalculations#

This research %as initially identified as a top research priority by ATRI s Research Ad"isoryCommittee (RAC)2# The RAC sou!ht to better inform policyma ers on the impact that ne% and

potentially inefficient transportation fundin! strate!ies could ha"e on frei!ht mo"ement# Thetruc in! industry, %hich is hea"ily reliant on the < million miles of public road%ay in the nited

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$tates , has a "ested interest in efficient, effecti"e, and e+uitable fundin! and maintenance of thenation s transportation system#

$ince its ori!inal publication in 2008, ATRI has recei"ed nearly /0,000 re+uests for the Analysisof the Operational Cost of Truc in! reports# Kased on this continued hi!h demand for the

research, ATRI updates the ops cost data on an annual basis, ma in! minor ad4ustments andimpro"ements to the data collection methodolo!y as necessary# O"er the years, theseimpro"ements ha"e led to a more streamlined process for obtainin! sensiti"e fleet cost data on anannual basis# This report includes the most recent 20/< cost data#

The American Transportation Research Institute (ATRI) released the findin!s of its 20/ update

to An Analysis of the Operational Costs of Truc in!# This annual research documents and

analy'es truc in! costs from 2008 throu!h 20/< pro"idin! motor carriers %ith a hi!h le"el

benchmar in! tool, and !o"ernment a!encies %ith a baseline for future transportation

infrastructure impro"ement analyses#

The a"era!e mar!inal cost per mile in 20/< %as 6/#70, an increase from the 6/#98 found in 20/ #-espite fallin! fuel prices, the rise in a"era!e operatin! costs in 20/< is attributed to an increasein e+uipment purchases, as %ell as dri"er %a!e increases dri"en by the on!oin! dri"er shorta!eand the need to retain the industry s most e5perienced professional dri"ers#

Jai Hind Page 24


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$ince its ori!inal publication in 2008, ATRI has recei"ed nearly /0,000 re+uests for itsOperational Costs of Truc in! report, %hich continues to be amon! the most popular of ATRI sresearch studies# In addition to a"era!e costs per mile, ATRI s report documents a"era!e costs

per hour, cost brea outs by industry sector, and operatin! cost comparisons by re!ion ofoperations#

3.1 Mission

• :ROTECT/ The collecti"e interests of truc in! companies in the political and re!ulatoryarenas#

• :ROMOTE/ The dynamics of truc in! so that people ha"e a better understandin! of thelin bet%een AmericaGs primary frei!ht deli"ery system and the standard of li"in! theyen4oy#

• SERVE * embers to help them to !ro% their business and their profits#

RESEARC5 OB


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the "alue or si!nificance of certain transportation in"estments, %hile unreasonably hi!h fi!uresha"e been used to minimi'e the financial impact that inno"ati"e financin! initiati"es ha"e ontruc in! companies and dri"ers# The result is a standardi'ed sur"ey methodolo!y that capturesand analy'es sensiti"e motor carrier operational costs# The data presented in this report reflects20/< cost data collected from a %ide ran!e of motor carriers# Bith the addition of this 20/<data, ATRI no% has se"en complete years (2008 V 20/


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Bith Class 8 truc orders totalin! appro5imately 7 ,000 units in 20/


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-ri"er*based Ba!es or Kenefits

otor carrier operatin! costs !enerally beha"ed as e5pected %hen considerin! the operatin!en"ironment of 20/


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:uel Costs 62 # 0 6/9#/7 6/.# // //> /0> / >

Jai Hind Page 2@


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Repair andaintenance

9> 8> 8> . 8> .> .>

Truc Insurance1remium

> <

1ermit and ;icense /> 2> > 2 /> 2> />Tires 2> 2> 2> 2 > 2> >Tolls /> 2> /> / /> /> />

-ri"er Ba!es 29> 28> 2.> 27 29> 29> 27>-ri"er Kenefits .> .> /0> . 7> 8> 8>Total /00> /00> /00> /00> /00> /00> /00>

As pre"iously noted, the analysis stratified motor carrier responses by operatin! sector %hereapplicable# Mi"en the different operatin! conditions and models for each sector, the total a"era!emar!inal costs "aried fairly si!nificantly# 3istorically, ;T; carriers ha"e consistently had the

hi!hest C1 in this study# 3o%e"er, due to an increase in reported speciali'ed truc and trailerlease and purchase cost per mile as %ell as insurance cost increases associated %ith these

purchases, $peciali'ed carriers ed!ed out ;T; carriers by t%o cents for the hi!hest C1 in 20/<T; carriers sa% a lar!e drop in fuel costs per mile, ta in! the most ad"anta!e of the fallin! fuel

prices of the sectors# ;T; carriers reported a drop in fuel cost, but also reported a decrease indri"er pay per mile# This led to "ery sli!ht decreases in total cost per mile in these t%o sectors#

4.4 E uip ent >ease or :urc!ase :a ents

Truc and trailer payments %ere classified as a +uasi*operational cost since many motor carriers purchase additional truc s and trailers in response to capacity constraints in stron! economic periods, and those payments continue %hether the truc is operated or not# $ur"ey respondentsindicated that truc Ltrailer lease or purchase payments rose in 20/< to 2/# cents per mile# Thisrise in lease or purchase payments follo%s the pre"ious year s Ops Cost report %hereby anindustry source noted that a stron! e+uipment replacement cycle should be!in bet%een 20/<and 20/ 2 V %hich resulted in a record number of Class 8 truc orders in 20/


31/39


moderate increase from the /


32/39


Another +uasi*operational cost, truc insurance premiums can "ary %idely bet%een carriers V particularly based on miles*tra"eled e5posure# any lar!er fleets self*insure or utili'e umbrella policies %hich do not readily e+uate to per*truc unit costs# Additionally, property and liabilityinsurance costs still apply %hile a truc is unoccupied and stationary#

Bor in! %ith industry e5perts, ATRI ultimately determined that includin! insurance costs as aline*item in this analysis is appropriate since most insurance ris assessments are based onmilea!e e5posure and "ehicle replacement costs# Carriers often pay liability and car!o premiums

by the mile (e5cept for e5cess co"era!e)# $ince physical dama!e co"era!e is calculated bytractorLtrailer "alue, the premium can be di"ided by the total miles tra"eled to obtain the cost permile#

Accordin! to the motor carriers sur"eyed, commercial truc insurance premiums increased in20/


33/39


paid the most per mile in tire costs ( #0 cents), follo%ed by ;T; carriers (


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8.0 Cost Trends

After increasin! by three percent from 20/2 to 20/ , the total a"era!e mar!inal costs increased by another t%o percent from 20/ to 20/< (Table / )# Risin! lease and purchase payments,repair and maintenance costs, truc insurance premiums, tire costs, tolls paid, and dri"er %a!es

sli!htly out%ei!hed fallin! fuel and permit and licensin! costs#

8.1 A erage Margina' Cost Trends

MotorCarrierCost

%00=/%00C!ange

%00 /%010C!ange

%010/%011C!ange

%011/%01%C!ange

%01%/%01-C!ange

%01-/%014C!ange

:uel Cost * 9> 20> 2/> .> /> */0>Truc ;ease 2/> *28> 2> *8> *9> 2>Repair and

aintenance

/.> /.> 22> *.> 7> 7>

TrucInsurance1remium

* > * > / *9> 2> //>

1ermit and;icense

8 8 * *< > /8> *27>

Tires * > * > /8> > *9> 7>Tolls > > .> 8> > /8>

-ri"erBa!es

*7> //> > *.> 9> >

-ri"erKenefits

*//> 29> *9> *2 > //> 0>

Tota' /1% ? 10 /4 - %

Table sho%s the cost trends bro en out by sector# As pre"iously mentioned, $peciali'ed carriersreported the only increase in cost from 20/ to 20/< led by an increase in truc Ltrailer lease and

purchase payments# ;T; and T; carriers reported a "ery sli!ht one percent decrease dri"en bythe steady decline in fuel prices seen in 20/


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A erage Margina' Cost Trends & Sector

Sector %00=/%00C!ange

%00 /%010C!ange

%010/%011C!ange

%011/%01%C!ange

%01%/%01-C!ange

%01-/%014C!ange

;T; *8> > /0> * > > */>$peciali'ed *2/> 2 > /0> *7> * //>Tl *//> * //> * > 9> */>

8.% Cost & Region

A"era!e mar!inal costs %ere also calculated by re!ion of operations in the #$# #2. Carriersoperatin! predominantly in the id%est reported the lo%est a"era!e cost (6/#9 .), %hile carriersoperatin! hea"ily in the ortheast reported the hi!hest a"era!e (6/#7. )#

A erage Margina' Cost per Mi'e & Region( %014

Motor CarrierCost Centers

Mid3est ;ort!east Sout!east Sout!3est +est

:uel Cost 60# 9 60# .7 60# / 60# 70 60#9/<Truc ;ease 60#/.< 60#2/ 60#2// 60#/.7 60#/./Repair and

aintenance60#/ 7 60#/8 60#/9 60#/80 60#/79

Truc Insurance1remium

60#097 60#08 60#09/ 60#077 60#0./

1ermit and;icense

60#0/. 60#02/ 60#0/ 60#020 60#022

Tires 60#0


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9.0 CO;C>USIO;

sin! financial data pro"ided directly by motor carriers throu!hout the country, ATRI has oncea!ain documented and updated the mar!inal operational costs that carriers e5perienced in 20/


37/39


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7'ossar

"or/!ire carrier V Amotor carrier that offers frei!ht transportation ser"ices to the !eneral public#

>ess/t!an/truc@'oad carrier V 3auls a +uantity of frei!ht less than that re+uired for the

application of a truc load rate, usually less than /0,000 pounds# Typically maintains a hub andspo e model %hereby carriers pic up smaller shipments, often on a set route, and return to a base terminal %here the pac a!es are unloaded, sorted and consolidated %ith other shipments!oin! to similar locations# ;ine haul dri"ers mo"e the shipments bet%een terminals %hile pic *up and deli"ery (1P-) dri"ers deli"er shipments to their final destination#

>onger Co &ination Ve!ic'e V A combination "ehicle consistin! of a po%er unit (tractor) pullin! more than one trailer# Common trailer confi!urations include doubles (t%o 28 foottrailers), Roc y ountain doubles (one O7RA:5Y

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%%%atri#online#or!#in

httpLLen#%e ipedia#or!#in

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