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Innovating cost
Innovating cost accounting accounting
practices in rail transport practices
companies
Antonella Cugini, Giovanna Michelon and Silvia Pilonato 147
Department of Economics and Management, University of Padova,
Padova, Italy

Abstract
Purpose – The purpose of this paper is to present and discuss an accounting innovation in the cost
measurement system of rail transport companies.
Design/methodology/approach – The authors identify the distinctive features that cost accounting
systems should have in order to capture the particular structure of the production process of rail
transport companies and develop an innovative accounting practice that addresses the specific
features of railway services, particularly the high fixed costs associated with the infrastructure. This
accounting innovation is applied to Trentino Trasporti, a medium-sized, privately owned passenger
railway company operating in the Trentino Alto Adige region of Italy.
Findings – Evidence suggests that the new accounting practice facilitates the operational connection
between the company’s resources and their consumption during the provision of transport services.
Practical implications – This connection enables companies to identify new opportunities for
improvement and cost optimisation by finding the real origins of cost consumption in the provision of
rail transport services.
Originality/value – The case analysed also shows the necessity of integrating activity-based costing
(ABC) with an accounting innovation that can represent the resources consumed by the various
elements of the infrastructure that support the provision of services. This innovation has important
managerial outcomes for all service companies that operate with an infrastructure network, including
transport, service, and utility companies, and useful implications for the accounting profession that
deals with cost systems in networked-based companies.
Keywords Cost accounting, Activity based costs, Railways, Cost accounting in network services,
Activity-based costing, Rail transport companies
Paper type Research paper

1. Introduction
The liberalisation of European local public transport companies has introduced some
discontinuities in the industry in the last few decades, including new tendering and
financing methods and the development of competition (Shaw, 2000). The primary goal
of the reform process was to force rail companies to improve the quality of the services
they offer to the general public while ensuring economically sustainable management

JEL classification – M41

The authors thank the managers of Trentino Transporti for the availability of data and for
their support. The cost accounting system analyzed in the article has been applied by Donatella
Detassis – in charge of Management Control and Internal Auditing – to whom the authors are
extremely grateful and thank for the precious collaboration. The authors are also most grateful Journal of Applied Accounting
Research
for the helpful comments and suggestions from four anonymous referees and the Editor, as well Vol. 14 No. 2, 2013
as those from participants at the 9th Manufacturing Accounting Research conference “Cost and pp. 147-164
r Emerald Group Publishing Limited
Performance in Services and Operations” and at the 2009 SDA Bocconi School of Management 0967-5426
workshop “Innovating Management & Accounting Practices”. DOI 10.1108/09675421311291892
JAAR of the business (Crompton and Jupe, 2002; Wolmar, 2001). The new regulatory context
14,2 requires rail companies to introduce management and accounting tools that can
support these ambitious objectives. In particular, measurement of costs is important
both for internal efficiency (e.g. control of items such as labour costs) and for external
accountability (e.g. requests for contributions to cover losses) (Humphreys and Francis,
2002). This study investigates the features of the cost accounting system that
148 companies in the railway transport industry should adopt in order to support the new
dynamics of the liberalisation process.
Following Drury and Tayles’ (2005) call for more case-study research on how
organisational factors influence cost systems design, we propose the case of Trentino
Trasporti S.p.A. (TT), a medium-sized, privately owned passenger railway company
operating in the Trentino Alto Adige region of Italy. After discussing why and how
activity-based costing (ABC) is the most suitable system for measuring the amount
of resources consumed by the cost objects (from the methodological, empirical, and
operating perspectives), we highlight the system’s limitations in terms of its ability to
identify the costs absorbed by the rail infrastructure and the relationships between the
infrastructure and the production activities of rail companies. The first contribution of
this study, then, is to demonstrate that ABC is the most suitable system for measuring
the costs of a railway company’s production process. Although originally developed
for manufacturing processes (Broad and Crowther, 2001), the ABC system is also
useful in service companies, particularly in mass service companies like rail transport
companies, where the structural costs are high.
However, as the case study illustrates, the ABC system cannot fully satisfy the
information needs of rail companies, so we propose the adoption of a new practice,
which represents the second main contribution of our study. For practitioners, we show
that this innovative accounting practice takes into consideration the specific features
of railway services by dealing with the managerial accounting treatment of costs
associated with infrastructure, a characteristic that is common among other companies
operating in network systems (e.g. utility companies).
The proposed cost accounting system can support accountants in the rail
transport companies in their efforts to manage the requirements of the liberalisation
process. The main consequence of the distinction made by the regulatory reforms
between railway transport operators (RTOs) and railway infrastructure operators
(RIOs) is that fees should be defined based on the costs of services utilised.
The accounting practice proposed identifies the costs that belong to RTOs and those
that belong to RIOs with reference to the activities of the production process and to
the infrastructure.
The case analysed also shows the necessity of integrating ABC with an accounting
innovation that can represent the resources consumed by the various elements
of the infrastructure that support the provision of services. This innovation has
important managerial outcomes for all service companies that operate with an
infrastructure network, including transport, service, and utility companies, and useful
implications for the accounting profession that deals with cost systems in networked-
based companies.
The paper is structured as follows: the next section, Section 2, provides a brief
overview of the changes in the regulatory environment that pose a new challenge
for railway companies. Then Section 3 presents theoretical arguments in favour
of adopting an activity-based system in place of the traditional cost accounting
system in rail companies. Section 4 proposes the innovative accounting practice, while
Section 5 presents the case study of TT, an Italian rail company. Finally, Section 6 Innovating cost
provides some conclusions. accounting
2. The privatisation process in the railway industry practices
One of requirements of the reform is that the management of the railway infrastructure
(RIO) must be clearly separated from the provision of railway transport services
(RTO). RTOs refer to any private or public companies whose main business is to 149
provide rail transport services for goods and/or passengers. RIOs are any public bodies
or companies responsible for establishing and maintaining the railway infrastructure
and operating the control and safety systems[1].
RIOs charge RTOs a fee for using the railway infrastructure. Under the principle of
non-discrimination, the fee is defined according to the nature of the service offered,
considering the various elements that determine the amount of resources that
are utilised (e.g. the composition of the train, the load, the degree to which the
infrastructure is used, the mileage used). Thus, RIOs should be able to define their
pricing policies according to the various costs they incur.
For their part, RTOs should manage their activities by providing efficient and
appropriate services to the market at the lowest possible cost for the quality of the
service required. The activities should be managed as private companies even when
they are owned by the state or when they provide public services imposed by the state.
They are responsible for finding the resources they need to implement their business
plans and achieve their financial objectives.
Within this regulatory framework, the liberalisation reform has put pressure on
the role of cost accounting and cost measurement in the railway industry[2]. In order to
support the process of separating the accounting system between the two main
business units (i.e. management of the infrastructure and management of the transport
service), it has been necessary to adopt advanced and innovative cost measurement
systems (such as ABC) that allow for a clear identification of the resources consumed
by the activities. However, to the best of our knowledge, the literature does not provide
insights into how to build the various cost-consumption relationships among the
elements of the network and infrastructure, the resources they use, and the services
they provide to customers.

3. Cost accounting systems in railway companies

Notwithstanding the important regulatory innovations in the industry and
their impact in terms of the cost information required, the literature has not yet
provided an in-depth and specific analysis of cost systems that would fit the
emerging accounting needs better or the manner in which they would do so.
Most studies on rail liberalisation have focused on the British liberalisation experience
and the difficulties, shortcomings, and failures of the liberalisation process (e.g.
Crompton and Jupe, 2002; Shaoul, 2006; Stittle, 2004). For example, Crompton and
Jupe (2002) analysis of the evaluation of the ten-year plan for the railway industry
issued by the British Government in 2000 focuses on the inadequacy and under-
performing instruments adopted to monitor costs and the performance of operators.
While the strategic plan for the British railways has raised public expectations
for real improvements in the trains and stations used by customers, rail track
companies have failed to engage meaningfully with the regional agencies and local
authorities responsible for putting the national transport policies into effect (Bolden
and Harman, 2002).
JAAR Stittle (2004) discusses the accounting framework for determination of track access
14,2 charges for freight and passenger traffic, highlighting its poor design and construction,
and its inability to reflect fully the costs borne by rail operators. Stittle identifies
the cause of such failure as the generous concessions given to freight operators since
British regulators do not require freight operators to pay either fixed freight costs or
the costs of rail tracks, as the tracks are common to both freight and passenger
150 operations. Thus, passenger train operators carry virtually all of the rail network’s
fixed and common costs. As Shaoul (2004) noted, half of general expenses are related to
the infrastructure, signalling, and property and half to train operations. This evidence
suggests that “rail is a high fixed-cost industry, where much of the costs are associated
with providing the network” (Shaoul, 2004, p. 30).
As these studies of the British rail industry have shown, changes in technology,
increased product diversity, regulatory innovations, and increased competition indicate
a need for a more sophisticated cost accounting system. Although traditional costing
systems based on the cost-centre methodology can identify each public transport “line”
as a productive cost centre, they do not provide insight into why certain costs are
incurred. The “products” of the production centres could be identified as the individual
“journey”, and the production volume could be expressed in terms of the number
of journeys or kilometres covered, telling management in which organisational unit
the costs arise. However, this approach would not provide information on why certain
costs arise (Kaplan, 1994), so it would not allow the management to monitor the
production processes properly. We argue that adoption of the ABC system leads to
understanding the “why”, that is, what causes costs to occur. This claim is based on
Hoque (2000) and Broad and Crowther (2001), who argue that the rapidly changing
environment requires a shift from traditional costing systems to a system that reflects
these challenges because cost behaviour in service companies “is complicated and thus
requires additional cost drivers that are unrelated to the volume of product produced”
(Hoque, 2000, p. 135).
In this sense, the literature promotes ABC as the solution to the distortion in the
product costs reported by traditional costing systems (Cooper and Kaplan, 1988;
Kaplan, 1994; Liu and Pan, 2007)[3]. Traditional systems assume that the products
determine the indirect costs by consuming the cost driver (e.g. the hours in direct
labour), which is then used to divide the indirect costs among the products. Conversely,
ABC breaks the company into its strategically relevant activities along the value chain
and determines their impact on cost variation and differentiation. Important studies
(Miller and Vollman, 1985; Brimson, 1998; Herget and Morris, 1989) suggest focusing
on the value chain, activities, and costing structure, which explains overhead
costs rather than just allocating them. Even though ABC was initially introduced in
industrial companies, the literature suggests that service firms are ideal candidates for
its development since the bulk of the costs sustained by service organisations are fixed
and indirect (Al-Omiri and Drury, 2007; Broad and Crowther, 2001; Cooper and Kaplan,
1988; Pierce and Brown, 2006).
However, ABC may distort costs when there is a high level of product diversity
(Cooper and Kaplan, 1988; Malmi, 1999). In the case of rail companies, diversity refers
to organisational support functions when their consumption differs for each product; to
processes that vary in their consumption based on different journeys and prices; and
to clients, which can be either companies (for freight transportation) or people. Product
diversity leads to a high potential for cost distortion in the identification of resources
consumed by each final product.
 Defining the consumption of resources in terms of activities facilitates the analysis Innovating cost
of overhead costs. The literature offers a great deal of evidence that ABC allows great accounting
control of the structural costs of industrial companies’ support functions (in other
words, their service or “tertiary” activities), so it seems that ABC would be useful practices
in service companies – particularly in mass service companies like rail transport
companies – where the structural costs are very high. ABC can analyse cost structures
based on high indirect costs correctly, while traditional systems often report distorted 151
costs (Abernethy et al., 2001; Al-Omir and Drury, 2007; Brierley et al., 2001; Cooper and
Kaplan, 1988, 1991; King et al., 1994). The decline in the total cost of labour and the rise
in the total cost of overhead relative to the total cost of production in many firms have
led to calls for the use of ABC.
Rail companies are characterised by all the elements discussed previously:
. they operate in the realm of service provision, even if with the specificities of a
network structure;
. their services are highly differentiated; and
. their cost structure is one in which indirect costs are highly relevant.
The debate on ABC systems has taken a number of paths, but one stream of literature
debates the practices of its application (e.g. Abernethy et al., 2001). On this issue,
King et al. (1994) explore the potential application of ABC in rapidly changing
environments that have greater managerial demand for cost information. They
investigate ABC in the health care industry after the major reform in the UK, which
required both a clear understanding of the costs of specific services offered and
assumptions about the efficiency of service provision to maintain competitive standards.
King et al. argue that the adoption of ABC has the potential to overcome the shortcomings
of traditional costing systems and significant benefits in the areas of budgeting, costs
analysis and reduction, performance measurement, and customer profitability.
A second stream of literature investigates the extent of ABC adoption and the
conditions under which it yields benefits to the firms that use it. In addition to
describing a low rate of application of ABC in practice (e.g. Al-Omir and Drury, 2007;
Malmi, 1999), Al-Omir and Drury (2007) find that the sophistication of a cost system is
positively associated with the importance of cost information, the intensity of
competition, and the type of business sector, and that service firms are more likely to
adopt ABC. This last finding is in line with the arguments of Kaplan and Cooper (1998).
Thus, even if the literature does not treat the issue concerning which cost
accounting system is better suited to rail companies, the various studies on the ABC
system’s characteristics confirm it as the more suitable cost accounting system for rail
companies. Nevertheless, the adoption of ABC is not sufficient to address the needs
of rail transport companies because the system cannot capture all the specificities
of the production process of rail companies, particularly those that refer to the use of
the infrastructure.

4. An innovation in accounting practices in railway companies: the cost

destinations
Operating with a network structure posits complexity in the choice of the cost
accounting system because the infrastructures imply certain costs of providing the
service (Drury and Tayles, 2005; Schoute, 2009). For rail companies, after all specific
and common costs have been attributed to the activities that consumed them, there are
JAAR still numerous cost items, including some of significant amounts, that cannot be
14,2 attributed to the activities because they are not directly or indirectly consumed by
them (Maher and Maraia, 1998). These costs do not link to the activities of the service
provision process, but they do link to some components of the rail network
infrastructure. What is more, even the outputs of certain activities of the service
provision process are absorbed by specific components of the infrastructure.
152 This analysis highlights the need to break the infrastructure into its components
and to find the relationship among the costs, the activities of the production process
and the individual components of the rail infrastructure. The individual components
of the rail infrastructure entail varying specific and common costs (not referred to in
the activities) and link in various ways with the activities of the production process
(identified and analysed by ABC). Therefore, in order to correctly identify these links, it
is necessary to break down the companies’ infrastructures into their component parts
and to create an accounting container for each component.
Therefore, we need to create new cost containers, which we name “cost
destinations”, that gather the costs that have components of the infrastructure as their
consumption destination. From the methodological point of view, the cost destinations
are another dimension of analysis, external to the activities of the production process.
As the case shows, destinations are not activities or specific levels of activities
(as hierarchy); instead, they refer to specific elements of the infrastructures used to
varying degrees by each transport service provided[4]. Destinations are not even
identifiable with cost centres because they do not belong to the organisational
structures or refer to specific organisational units. Instead, they refer, for example, to
single components of the infrastructures or elements of the network.
The next section presents the case study of TT in order to provide insight into why
network organisations like rail companies should implement a cost accounting system
ad hoc, even when it differs from the systems of other companies.
5. TT: main characteristics
The TT[5] operates in the local public transport sector in the Trentino Alto Adige
region through two main business units: the rail transport service (rail division (RD))
and the coach service (coach division (CD)). The rail transport service covers about
900,000 km with more than 30 trains and approximately 2.5 million rail passengers.
This study focuses in particular on the RD unit, which builds railway lines and
manages rail transport. Its activities include maintenance of the vehicles and
infrastructure, the latter of which consists of rail networks (roadbed, foundations,
tracks), engineering works (bridges, flyovers, tunnels, and supporting structures),
overhead contact lines for electric traction, station buildings, level crossings, signal and
safety systems, telephone systems, rail workshops, and train depots.
In TT’s organisational structure are the two basic organisational units typical of
local public transport companies[6]:
. the movement function, which represents the core of the management of
transport services, deals with planning and running the transport; and
. the technical service deals with storing, maintaining, and repairing the vehicles
and manages the systems and infrastructures.
In addition to these functions, the support services consist of administration,
procurement/tender, marketing and communications, general services, management
control, and quality.
 Today’s transport companies face challenges in the areas of new regulations, Innovating cost
the market, and the need to participate actively in tenders to obtain the concession to accounting
provide transport services. As a result, the company must develop managerial tools
that can guarantee prompt delivery of information about the costs the company incurs practices
in providing its transport services. This need was initially identified in 2002 by the
CEO of the TT (today the CEO of the RD). The goals of identifying the costs of
the production process were to: 153
. break the costs into to the company’s business areas in order to create a detailed
income statement with business area results, assign organisational
responsibility, and separate the business of infrastructure management from
the business of transport management; and
. reveal the cost of the individual journey in order to compare it with the fare set
by the local government (the Autonomous Province of Trento); the journey can
be considered the company’s service unit, as it is used to compare the fare to the
cost of production.
In order to achieve these aims, the company contacted the researchers to develop an
appropriate cost accounting system that would fully capture all the costs incurred in
providing the transportation service, that is, both those costs linked to the service
provision process and those linked to the network infrastructure. The researchers’
active role included studying the specific production process of the TT, they
identifying ABC as the appropriate cost accounting system with which to manage the
costs of the production process, proposing the adoption of the new practice – cost
destinations – to capture and manage the costs of the rail infrastructure, and
supporting TT in adopting this new cost accounting system to verify that all the steps
to implementation were performed correctly.
Before the application of ABC and the introduction of cost destinations, the
company had used cost information that was organised by nature and that referred to
single units of the organisational structure. With this system, which was quite close
to the logic of the cost centre system, the company could not determine the real cost of a
journey. Although the costs were allocated to single journeys based on volume
parameters (no. of kilometres, no. of passengers, no. of trains, etc.), these parameters
did not express the actual consumption of costs by each journey, nor did they
distinguish the costs consumed by the infrastructure from those related to the actual
movement of the train. However, the application of the cost destination process
revealed which costs referred to the management of the infrastructure and which
to the management of the transport service itself. The head of management
accounting control and internal auditing managed the application of the new
measurement cost system.
The next section describes analytically the various steps undertaken to implement
the new cost accounting system.

Application of the ABC methodology to TT

The first step in applying ABC lies in identifying the activities that make up the
production process. This phase, which lasted about three months, was carried out
through interviews with the heads of the 29 organisational units that make up the
“movement and traffic management” and the “technical management” of the company,
and through questionnaires sent to those who had to fill in timesheets. This phase led
JAAR to the identification of 52 activities associated with the rail and coach service, listed
14,2 as follows:
(1) checking lines and infrastructure, which consists of periodically checking the
condition of the railway network (tracks, points, lighting systems, line areas,
stations, etc.);

154 (2) propping up the tracks, which consists of making the tracks level using
special machinery;
(3) removing and cutting grass, which consists of removing the grass at the sides
of the tracks using suitable machinery;
(4) supervision of the railway;
(5) checking work done by external suppliers, which consists of checking and
inspecting work carried out by external suppliers on the railway network;
(6) clearing snow and ice, which consists of removing snow and ice from the
tracks and stations;
(7) cleaning buildings;
(8) managing maintenance material;
(9) managing railway maintenance personnel;
(10) managing coach service maintenance personnel;
(11) maintenance and checking of the railway infrastructures;
(12) management of environmental problems, including rubbish disposal and
environmental protection;
(13) building maintenance;
(14) planning building work and rail systems;
(15) management of personnel safety;
(16) special project management;
(17) railway electrical maintenance;
(18) railway mechanical maintenance;
(19) railway carriage maintenance;
(20) carpentry;
(21) cleaning trains and stations;
(22) railway warehouse management;
(23) maintenance of electric signal systems (ESSs), such as level crossings and
tunnel telephones;
(24) ACS safety systems maintenance;
(25) maintenance of overhead cables;
(26) electrical maintenance of coach service;
(27) mechanical maintenance of coach service;
(28) carriage maintenance of coach service;
 (29) cleaning of coaches and depot; Innovating cost
(30) tyre maintenance; accounting
(31) management of coach service warehouse; practices
(32) minor maintenance;
(33) railway operations, which consists of managing shifts of staff that travel,
assigning rolling stock to the journeys, defining the composition of the trains, 155
and applying railway regulations;
(34) ticket sales;
(35) railway traffic support;
(36) opening/closing level crossings;
(37) goods transport management;
(38) driving trains;
(39) management of timetable changes (times, stops, journeys);
(40) coach service operations;
(41) driving the coaches;
(42) inspecting rail and coach staff;
(43) supervision of rail and coach services;
(44) sales of rental services;
(45) administrative management of rental services;
(46) management of rental shifts;
(47) driving rented coaches;
(48) co-ordinating operations on the railway network;
(49) co-ordinating circulation and traffic;
(50) driving service vehicles;
(51) transferring maintenance material; and
(52) testing rolling stock.
The next step consisted of attributing costs to the activities by attributing the costs
that exclusively concern an activity to it and attributing the costs common to more
than one activity using the resource drivers. In particular, the annual cost of personnel
was obtained by summing all the expenses connected to the use of human resources:
basic salaries and various additional payments, including allowances, overtime,
national insurance, and welfare contributions; and set-asides for severance pay or
deferred payments of other kinds. The average cost of the workstation and the space
needed by the personnel to carry out the various jobs was also calculated by summing
all the cost items regarding or originating from the building and dividing this cost by
the overall area of the office space in question, thereby obtaining a cost per square
metre that was multiplied by the average area occupied by a workstation. These costs
are included in the labour costs. Table I contains the list of the cost items attributed to
the activities listed in the columns.
JAAR

5: Checking work done by external suppliers

11: Maintenance and checking infrastructure

14,2

18: Mechanical maintenance of railways

1: Checking lines and infrastructure

25: Maintenance of overhead cables

17: Railway electrical maintenance

19: Railway carriage maintenance

3: Removing and cutting grass

21: Cleaning trains and stations

156

2: Propping up the tracks

6: Claering snow and ice

13: Building maintenance

4: Railway supervision

7: Cleaning buildings

23: ESS maintenance

34: Ticket sales

20: Carpentry
Activities

Costs
Personnel costs                
Maintenance equipment        
Maintenance material       
Consumable workshop
material   
Cleaning materials  
Consumable electrical
material   
Miscellaneous material      
Miscellaneous
maintenance       
Railway cleaning
service  
Maintenance of ticket
machines 
Depreciation:
Railway engine     
Railway equipment     
Table I. Railway workshop
Example of cost items machines    
attributed to the activities Ticket machines 

Defining cost destinations

Numerous cost items, some of significant amounts, are not attributed to the activities,
because they are not directly or indirectly consumed by them. The outputs of certain
activities of the production process are absorbed by the plants, vehicles, and railway
network (stations, trolleys, crossing, signs, etc.), so we decided to create new cost
containers – the destinations – that gather the costs that are not referable to the
activities but that have parts of the infrastructure as their consumption destination.
Therefore, the companies’ infrastructures must be broken into their component parts
in as much detail as the company sees fit to create an accounting container for each
destination. TT opted for a highly analytical definition of the cost destinations – 592 in
total, 437 of which pertained to the railway, 130 to the coach service, and the remaining
25 to the common infrastructures. Table II contains the list of all the costs destinations Innovating cost
identified by TT[7]. accounting
Each cost destination gathers:
practices
. specific costs, which refer to the resources consumed directly and exclusively by
the individual cost destination;
. common costs, which refer to the resources used by more than one cost 157
destination and which must be attributed to these drivers; Table III lists the main
specific and common cost items attributed to the main types of destination; and
. the costs of the activities, which are attributed to the cost destinations according
to how much of the output of the various activities they consume; Table IV lists
the activities that are absorbed by the main types of cost destinations.

Calculating the cost of the journey

At this stage of the application of the cost accounting system, the company has
identified the activities and the cost destinations, has attributed the specific and
common costs to them, and has allocated the costs of the activities to the cost destinations
that consume their output. The next step is to calculate the cost of the journey, taking into
consideration both the cost of the infrastructure and the cost of the movement of the train.
The steps needed are summarised as follows.
The first step consists of calculating the cost structure of the individual
sections, which is obtained by summing the costs of the cost destinations that
physically exist in the individual sections. The second step consists of calculating the
cost structure of the individual journey: the sum of the costs of all the sections that
make up the individual journeys are divided by the number of journeys made annually
on them. Table V shows an example of the sections involved in the railway journey
from Trento to Lavis.
The third step consists of calculating the operational cost of the individual journey
by allocating to the individual journey the cost of the activities involved and the cost
destinations concerning the journey; the driver used is the time taken (by the activity)

Railways n Coach services n

Propping up 1 Bus shelters 1
Railway warehouse 1 Signs 1
ACS system 1 Bus depot 8
Railway workshop and depot 3 Coaches 116
Track sections 44 Warehouses 4
Stations 105
Bridges 65
Tunnels 12
Trains 18 Common n
Trolleys/trucks 43 Special projects 1
Level crossings 77 Purification plant 5
Electrical signalling systems 20 Vehicles 8
Telephone lines 3 Table II.
Overhead cables 44 TT cost destinations
JAAR Overhead Level Track Bridges and
14,2 cables crossings ESS sections Stations tunnels Trains

Consumable materials:
Sleepers 
Road metal-slabs 
158 Tracks and points 
Material for tracks 
Material for building
maintenance 
Electrical material for
stations 
Material for electrical
systems    
Level crossing material 
Overhead cable material 
Mechanical maintenance
material 
Electrical energy    
Water 
Bodywork material 
Supply of services:
Premises maintenance 
Building maintenance 
Station maintenance 
Bodywork maintenance 
Mechanical maintenance 
Air conditioner
maintenance 
Railway maintenance      
Depreciation:
Head office 
Trento terminal 
Grumo S. Michele station 
Self-cleaning toilets 
Air-conditioning system
at Trento 
Electric trains 
Miscellaneous cost items:
Fuel for heating stations 
Surveillance services  
Rail transport insurance 
Rail infrastructure
insurance 
Rubbish disposal 
Table III. Inspections and
Attribution of cost items certification       
to the cost destinations Total costs attributed

by the individual journey. The sum of these two types of cost is used to calculate the
operational cost of the journey. The activities involved in the railway journey that are
not related to specific cost destinations are listed as follows:
(33) railway operations;
(34) ticket sales;
 Overhead Level Track Bridges
Innovating cost
cables crossings ESS sections Stations tunnels Trains accounting
practices
1. Checking lines and
infrastructure     
2. Propping up tracks 
3. Removing and cutting grass   159
4. Railway supervision      
5. Checking work done by
suppliers      
6. Clearing snow and ice  
7. Cleaning buildings 
11. Maintenance/checking
railway infrastructure     
13. Building maintenance 
17. Railway electrical
maintenance 
18. Railway mechanical
maintenance 
19. Railway carriage
maintenance 
20. Carpentry  
21. Cleaning trains and stations   Table IV.
23. Maintenance of ESS   Attribution of activity
25. Maintenance of overhead costs to the cost
cables  destinations

Overhead cables (in km), 5 sections: Tracks, 6 sections:

Trento station Trento station
Trento-Gardolo stretch Trento-Whirdestination stretch
Gardolo station Whirdestination-Gardolo stretch
Gardolo-Lavis stretch Gardolo station
Lavis station Gardolo-Lavis stretch
Lavis station
Level crossings: Stations:
16 destinations between Trento and Gardolo 19 cost polls
Electrical signalling systems, 4 cost destinations: Bridges and tunnels:
Trento station 10 cost destinations Table V.
Industrial area intersection Sections involved in
Gardolo station the Trento-Lavis
Lavis station railway journey

(35) railway traffic support;

(36) opening/closing level crossings;
(37) goods transport management;
(38) driving trains; and
(43) supervision of rail and coach services.
The next step is to sum the cost structure of the journey and the operational cost of the
journey to obtain the total cost of the journey, which represents the cost that TT incurs
when a train travels, based on the length and duration of the journey. For the coach
service, the cost of the journey is determined primarily by the operational cost, since
JAAR there are no significant cost structures related to the railway structure. For example
14,2 (Table VI), to calculate the cost structure of the Trento-Lavis journey, we divide the
total annual cost of the cost destinations by the number of annual journeys (14,330
journeys). The total annual cost of the cost destinations is found by summing the costs
attributed to the activities (h78,400) and the costs attributed directly to the cost
destinations (h470,000). The cost structure of the Trento-Lavis journey is h38.27
160 (h548,400C14,330 journeys per year).
To calculate the operational cost of an individual journey (e.g. the Trento-Lavis
journey made between 7.17 and 7.29 a.m. with the ETO11 train), we consider the cost of
the train (cost destination) and the activities attributed to the journey in terms of the
time it takes. The costs of the train are calculated by summing the costs of the activities
attributed to the “ETO11” destination and the costs attributed to the same cost
destination, for a total of h115,000 (5,000 þ 110,000). The total cost of the ETO11 train
is divided by the production capacity of the train (329,472 minutes’ use in a year) to
calculate the cost per minute, which is h0.35 (h115,000C329,472). Therefore, the cost of
the train absorbed by the 7.17 a.m. Trento-Lavis journey is h4.20 (h0.35  12 minutes).
The cost of the activities is calculated by dividing the total annual cost of the activities
(h350,000) by their annual production capacity (195,000 hours): the result of the ratio is
h1.80. The cost of the activities absorbed by the Trento-Lavis journey is h21.60 (h1.80  12
minutes). The total cost of the Trento-Lavis journey between 7.17 and 7.29 a.m. with
the ETO11 train is h64.07, obtained by summing the cost structure of the journey (h38.27),
the cost of the train (h4.20), and the cost of the activities (h21.60).
Starting with the cost of an individual journey, one can calculate the cost of the individual
fare based on the potential or actual number of passengers travelling on one journey.

Trento-Lavis – cost details of single journey h

(A) Total annual cost of the structure: (1) þ (2) 548.400 Unitary cost of the structure
(1) Total cost of activities attributed to destinations 78.400
(2) Total cost of destination 470.000
(B) Number of annual journeys 14.330
(I) Unitary cost of the structure for the journey
Trento-Lavis (A)/(B) 38.27
(3) Total annual cost of activities 350.000 Operating unitary cost
(4) Production capacity of activities (total minutes) 195.500
(C) Cost of activities/minute (3)/(4) 1.8
(D) Length of the journey (in minutes) 12
(II) Unitary cost of activities of the journey
Trento-Lavis (C)  (D) 21.60
(5) Cost of activities attributed to the destination
“train – ET011” 5.000
(6) Cost of destination “train – ET011” 110.000
(7) Annual production capacity (total minutes) 329.472
(E) Cost of the train by minute 0.35
(F) Length of the journey (in minutes) 12
(III) Unitary cost of the train for the journey
Table VI. Trento-Lavis (E)  (F) 4.20
Total cost of the Trento- (IV) Operating unitary cost of the journey
Lavis journey (7.17-7.29 Trento-Lavis (II) þ (III) 25.8
a.m. with train ET011) (V) Total cost of the journey (I) þ (IV) 64.07
6. Conclusions Innovating cost
The decline of monopoly management of rail transport services and the move towards accounting
efficiency have motivated demand for optimisation tools for the management of public
and private transport companies’ resources. Based on the ideas discussed in this practices
study, these tools apply a cost accounting system characterised by two different but
complementary types of intermediate cost aggregates: the activities and
the destinations. The use of this particular cost accounting system is justified by the 161
special nature of both the production process (in terms of the organisational structure,
concurrence between production and consumption, the immateriality of output, and the
great importance of the qualitative aspects of the process) and the cost structure (high
significance of the costs of the network infrastructure). We believe that the system is a
particularly useful tool for supporting the complex interrelationships involved in the
decision processes of a rail company’s strategic business units.
Applying a cost accounting system to TT’s activities and cost destinations results
in an accurate calculation of the cost of the individual journeys. The case study shows
that it is possible to determine analytically the amount of resources consumed by the
infrastructure, rather than by single transport services. This result is important to
the strategically relevant task of associating the infrastructure’s fixed costs with the
transport services (Shaoul, 2004; Stittle, 2004).
Cost allocation is important for rail transport companies, which provide services
characterised by heavy investments, a variety of clients, diversity of outputs, and
considerable fixed costs. In these companies, cost allocation is often problematic
because of the high costs of the plants and the infrastructure. To calculate the cost of
providing a service, it is necessary to plan and implement an analytical cost accounting
system that addresses both the production process and the infrastructures.
The application of the ABC system to TT underscores the fact that the costs are
connected not only to the volume of the services provided but also to the characteristics
of the transport lines available and to the complexity of the company’s provision
process. For example, with the cost accounting system previously adopted by TT
(cost centres), the cost of “planning the shifts” would have been attributed to the
journeys, according to the driving time required by the journey, as though there were
proportionality between the cost and the production volume. We know, however, that
some lines require more work than others do in terms of planning shifts for reasons
that have nothing to do with the amount of driving time, such as the number of times it
was necessary to go back to the shift and timetable plan or the number of statistical
observations made.
The application of ABC can also be used to control working costs, which are
important in rail companies and for planning the transport. This point leads us to
another fundamental aim that the adoption of the ABC methodology has allowed the
company to achieve: measuring and governing the levels of performance of the service
provision process. In railway companies, the process of transport provision represents
the product itself; consequently, the analysis of the activities that constitute it, their
sequence, and their responsibility must take on the same importance and receive the
same attention as the physical and functional characteristics of a physical product in
an industrial company.
By analysing the ways in which the activities of the production process are carried
out, it is possible to measure their performance (quality and time taken) in order to
identify opportunities for improving it. For each activity, it is necessary to have the
information (though not necessarily in terms of money) that, by explaining the cause of
JAAR their execution (cost drivers) and the quality of standards reached (performance
14,2 measures), can indicate how much efficiency and effectiveness the activity provides
for the production process. For example, maintenance activities can be analysed other
than in terms of costs, such as by the number of man hours needed, the number of
repairs carried out, the number of vehicles repaired, and so on.
The ABC methodology, together with the cost destinations, links the costs of a
162 rail company to the individual parts of the infrastructure and combines the cost
information to the physical-technical information, all of which is useful for managing
the capacity of the production process and the infrastructure. Thus, the accounting
system proposed should be able to support the information needs that arise in
the process of liberalisation better than traditional systems can because it allows the
resources used by RTOs and RIOs to be distinguished.
Finally, the case study sheds light on the role of accountants in developing the
appropriate systems that can capture the specific features and needs of companies that
operate with an infrastructure network. Our evidence encourages researchers
to investigate how accounting practices can improve accountants’ ability to respond to
the specific information needs of management.
Notes
1. According to the regulation, organizational or institutional separation of RTOs and RIOs is
optional, while the separation of accounts is compulsory.
2. By using cost accounting, managers can trace the progress of their business while it is being
carried out, so they can identify how each activity contributes to the overall financial results
(Fearnley et al., 2004). Moreover, a suitable costing system should be able to identify
resources consumed by each business area (e.g. railway transport vs railway infrastructures)
in order to meet regulatory requirements.
3. The basic idea of ABC methodology is that resources are consumed by the activities the
company carries out that are consumed by products/services.
4. The application of ABC in complex production contexts leads to the development of a
“hierarchy of activities”, which is used when the output of an activity is not consumed by the
final cost object but by another activity. In such cases, the intermediate activities are
distinguished based on how the activities refer to the final output. According to Cooper and
Kaplan (1991), in the context of manufacturing companies, the hierarchy of activities
encompasses four levels:
. unit-level activities;
. batch-level activities;
. product-sustaining activities; and
. facility-sustaining activities.
Defining the hierarchy of activities is useful because it identifies the drivers related
to the product: for every level of activity, the drivers are identified to reflect the
underlying behaviour of the demand for activities by the product (cost object).
5. In 1993 the autonomous Province of Trento issued a new law on local transport that
promoted the constitution of TT by merging the Società di Autoservizi Atesina
S.p.A. (autoservice company) and the FTM S.p.A. (rail company). The main purpose of
the merger was to rationalise public transport throughout the province, but it also aimed to
expand the local railway network. In 2002, the merger took place. The new company,
known as TT, was later divided into Trentino Trasporti Infrastrutture S.p.A. and Trentino
Esercizio S.p.A.
 6. TT is a joint-stock company, the main shareholders of which are the Provincia Autonoma di Innovating cost
Trento (73.75 per cent), followed by Trento Council (18.75 per cent), the TT (own shares –
6.91 per cent) and other small local councils in the valleys (0.58 per cent). The remaining accounting
shares are held by private shareholders (0.01 per cent). practices
7. The numbers designate coach service destinations. Number 1, referring to the bus shelters
and signs, indicates that the company has created two cost designations: one that groups the
bus shelters and one for all the signs; for these infrastructure components, the company 163
chose not to go into any greater degree of analytical detail.

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About the authors

Antonella Cugini is Associate Professor of Accounting at the Department of Economics and
Management of the University of Padova.
Giovanna Michelon is Assistant Professor of Accounting at the Department of Economics
and Management of the University of Padova.
Silvia Pilonato is Assistant Professor of Accounting at the Department of Economics and
Management of the University of Padova.

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