Cost allocation in transportation
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Cost Allocation in Transportation. Assigning Costs on Cause-Effect Basis. Efficient pricing requires that costs be allocated correctly to the service or customer that is creating the cost (i.e., on a cause-effect basis). Not all costs are easily traceable to a given service or customer.

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Cost Allocation in Transportation

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Cost allocation in transportation

Cost Allocation in Transportation

Assigning Costs on

Cause-Effect Basis


Cost allocation in transportation assigning costs on

  • Efficient pricing requires that costs be allocated correctly to the service or customer that is creating the cost (i.e., on a cause-effect basis).

  • Not all costs are easily traceable to a given service or customer.

    • Separable costs: costs that can be directly assigned

    • Common costs: “shared” costs


Cost allocation in transportation assigning costs on

  • Costs that are separable for one type of transportation service may not be separable for another.

  • Transportation example of a separable cost?

  • Transportation example of a common cost?

  • What is the backhaul cost (or cost of deadhead miles) and who should pay for it?


Cost allocation in transportation assigning costs on

  • Activity Based Costing: determining the activities that are required to perform a given service and attaching a cost to each activity.

  • Determining the appropriate unit of measure for costing and pricing in transportation is also complicated by the nature of transport costs.


Cost allocation in transportation assigning costs on

  • How do TL firms price? LTL firms? Railroads?

  • How do the following costs vary (i.e., what unit of measure would be best for allocating these costs)?

    • Fuel

    • Driver/crew

    • Equipment maintenance

    • Equipment capital cost (financial expense)

    • Parts

    • Dock labor


Cost allocation in transportation assigning costs on

  • As you can see, transport costs vary on different bases. In theory, a multiple factor (or multi-tiered) costing and pricing method would be best. In practice, shippers prefer a one-tier price because it removes uncertainty. How?


Cost allocation in transportation assigning costs on

  • One last cost concept needs to be discussed: variable vs. fixed cost.

  • Variable costs –vary with volume of output

  • Fixed cost – firm incurs cost whether or not there is output

  • In transportation competing firms often have different cost structures: e.g., railroads vs. TL – railroads have higher FC

  • Public sector affects modal cost structures: infrastructure ownership and taxes


Cost allocation in transportation assigning costs on

  • Cost structure affects pricing

  • Railroads utilize price discrimination (value of service pricing)

    • Railroads have few or no competitors in some markets

    • Different products have different price elasticity of demand for transportation service

    • Railroads charge higher “mark-ups” above VC (and thus recover more of their FC) from shippers in non-competitive markets and from high value products


Cost allocation in transportation assigning costs on

  • Trucking firms and air freight carriers face rigorous competition in nearly every market.

  • Thus, trucking and air freight carriers utilize cost-based pricing across the board while product demand factors and transportation competition play a major role in railroad pricing. (This is why competitive access issue is so important to shippers.)


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