Alternative approach to costing on Indian Railways: Linking outputs and expenses to activity centres

Costing of railway systems is complicated due to a large proportion of sunk and joint costs. Indian Railways (IR) currently estimates costs at the zonal level by assigning direct costs to a service directly and assigning joint costs based on ratios worked out a priori. As an alternative, the paper proposes and demonstrates a disaggregated approach where expenses and performance measures are linked at the activity centre level. The disaggregated data is used to build statistical models relating expenditure to outputs replacing the a priori ratios. The paper also shows how the approach can help in i) separating variable and fixed costs ii) developing sectional costs, iii) comparing and benchmarking performance of entities and finally iv) how the process can be automated. The paper also shows how the work could be useful for the accounts reforms project of IR and to the Rail Development Authority.