cost allocation in transportation n.
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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

slide2
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
slide3
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?
slide4
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.
slide5
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
slide6
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?
slide7
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
slide8
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
slide9
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.)