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" system. The Indian railway is also pursuing to build the

B

highest railway track in the world overtaking current
record of Beijing-Lhasa Railway line. Cost reduction
and cost control stand imperative for all industries
irrespective of the nature of market like monopoly or
perfect competition. This article provides the reader an
insight of activity based costing and application of ABC
costing in Indian Railways as an effective tool for cost
eyond Book-keeping” control.
is one of the seven missions of Indian Railways as
depicted in the Rail budget 2016-17. In the National Meaning of Activity Based Costing:
Conference of Indian Railways held on 20th December CIMA defines Activity Based Costing as, ‘cost
2016, Minister of Railways Shri Suresh Prabhakar attribution to cost units on the basis of benefit received
Prabhu mentioned that accounting system is like from indirect activities e.g. ordering, setting up, and
a health card of an organization which reflects its assuring quality.’
financial health and accounting reform is an integrated The concept of ABC was developed in the
project on management accounting, cost accounting manufacturing sector of the United States during the
and management information systems. And, Indian 1970’s and 1980’s. During this time, the consortium for
Railways should adopt a cost centre and profit centre advanced manufacturing (CAM) was formalized which
approach to ensure correct allocation and utilization of become known as Activity Based Costing. This model
resources. (Source: Press release of National conference was formulated by Robert Cooper and Kaplan which
on accounting reforms). Indian Railway is a crown jewel focussed on discarding the deficiencies of traditional
of India and makes Indian feel proud at global arena costing system. ABC costing traces the indirect costs
as Indian rail network is the fourth longest network associated with different types of activities consumed.
in the world with operating route length more than The focus is made on the activities performed during
65,000 km. The United States has the world’s longest the production or rendering of services. Activity based
railway network (over 250,000km), followed by China costing is applied with an objective to identify non
(100,000km) Russia (85,500) and India (65,000) value adding activities in the manufacturing processes
[Source: Railway-technology.com]. Indian Railways or services provided and it can help in the elimination
has been enlisted in the Guinness book of world records of non core activities. It enables to improve product
by offering the steepest rise in altitude in the space of costing. Here, the costs are first traced to activities and
96 kilometres. The railway station of capital of India, then to products or services. The cost of the product or
New Delhi has been entered in Guinness Book of world service will be computed in the following manner with
records for world’s largest route relay interlocking the help of activity based costing
Figure 1: Cost determination with Activity Based Costing

Direct material + direct Allocation of overheads
labour + direct expenses with the help of cost drivers
to activities

Cost of
Activities

Cost of product/service

www.icmai.in May 2017 l The Management Accountant 29