Magazine article Financial Management (UK)

Freight Accompli: A Major South African Railway Network Has Won a CIMA Financial Management Award for Its Innovative Activity-Based Costing System. Luis Gillman Explains How He and His Team Developed It

Magazine article Financial Management (UK)

Freight Accompli: A Major South African Railway Network Has Won a CIMA Financial Management Award for Its Innovative Activity-Based Costing System. Luis Gillman Explains How He and His Team Developed It

Article excerpt

[ILLUSTRATION OMITTED]

Transnet Freight Rail (TFR) is South Africa's sole provider of railway freight services. The company moves about 180 million tonnes of goods over its 17,000km of track every year and has an annual turnover of R16.5bn (1 bn [pounds sterling]). It has successfully developed what I have termed a network activity-based costing system (NABC) from scratch over the past three years.

NABC is based on the standard principles of activity-based costing, but it has been necessary to apply them specifically to costing in a network. Many other systems strive to obtain historical operational data, whereas NABC recreates simulated data from the company's outputs--ie, it "reverse-engineers" the inputs.

Networked industries--for example, telecoms, shipping and postal services--are particularly difficult to cost and produce profitability and efficiency reports for because of the shared nature of their operations. A further complication is that it is often very hard, if not impossible, to recreate historical network transactions because there are often millions of them--if not billions, in the case of a telecoms network. All these transactions flow through the same network but each takes its own individual route.

A number of railway costing systems depend on extensive operational data, which is often very difficult or impossible to obtain. This data is not necessary in NABC, since it obtains what it needs from the existing invoicing figures and relatively static master data--ie, the service routes. Even if this data is available, railways then have the tough task of spreading costs over the whole network.

NABC provides a novel method of recreating and simulating all this operational data from invoicing information, using only a limited set of operational master data. This allows for the creation of a complete set of almost infinite activity data, which otherwise would not be feasible to track. The system uses this readily recreated activity data as a basis for better allocations of costs to smaller sections of the network, which are used together with the already created activities for rate determination. These determined rates are then used for costing services. NABC has given us a practical and economical solution to costing network businesses and producing profitability and efficiency reports. This is because the system can self-generate rates and activities from an invoicing file. As a result, once the initial master data (which can readily be updated annually) has been established, little updating is required to make the system self-sustaining and comparable from period to period. The detailed recreation of rates and activities allows users to reconcile both regional and customer views of profitability at extremely high levels of detail, making the system a crucial tool for network management.

Thousands of trains travel over TFR's network every month. Other railway costing systems have tried to trace such movements and accurately reproduce what occurs on the network. Assuming that this could be done, you would then have the difficult task of reconciling these consignments back to billable freight. This is made onerous by the fact that the same consignment can move on three or four trains before it reaches its destination. Then you have the further complication of empty returning trains running on the network with no direct billable freight. To compound matters, in order for any costing system to be credible, the data has to be accurate and applied consistently across the network.

Taking account of these complications and the immense information systems required to reconcile and monitor all movements, we set out to create a practical model for determining all these individual consignments and their concomitant activities on the network. The key to developing our NABC was to use the invoice file--ie, the output of the entire network--to derive the inputs. …

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