Fully Allocated Cost Analysis For Public Transportation

u s Department
ot Transportation
Urban Mass
Transportation
Administration
FULLY ALLOCATED COST ANALYSIS
GUIDELINES FOR
PUBLIC TRANSIT PROVIDERS
FULLY ALLOCAT ED COST ANALYSIS
GUIDELINES FOR PUBLIC TRANSIT PROVIDERS
APRIL, 1987
PREPARED BY
PRICE WATERHOUSE
OFFICE OF GOVERNMENT SERVICES
Piftasfi Dir ect Inquiries to

Fred U. Pshyk, Partner (415) 465-1000
Paul E. Lohneis. Partner (202) 296-0800
James M. Holec, Jr., Senior Manager (202) 296-0800
TABLE OF CONTENTS
SECOND EDITION
SECTION - PAGE
I. INTRODUCTION
A. Fully Allocated Cost Analysis - A Definition . 1
B. Organization of the Report 2
II. FULLY ALLOCATED COSTS - WHAT TO INCLUDE
A. Components of a Fully Allocated Cost

Estimate 4
B. Identifying Direct and Shared Costs

for a Segment of Transit Service ....... 6
III . DEVELOPMENT AND APPLICATION OF A FULLY ALLOCATED

COSTING MODEL - THE BASICS
A. Allocating Costs with a Three-Variable

Unit Cost Model - An Example 9
B. Additional and Alternative Allocation

Variables for Developing Unit Costs 20
C. Optional Methods for the Development of

Fully Allocated Cost Estimates 23
IV. DEVELOPMENT AND APPLICATION OF A FULLY ALLOCATED

COSTING MODEL - ADDED COMPLEXITIES
A. Multiyear Service Proposals 33
B. Complex Operating Environments 40
V. PRINCIPLES FOR THE TREATMENT OF COSTS THAT ARE UNIQUE

TO PUBLIC AND PRIVATE SECTOR TRANSIT PROVIDERS
A. Differences in Public and Private Sector

Costs 54
B. Principles for Treating Differences in

Public Sector and Private Sector Costs .... 60
APPENDICES
A. References for Costing Analysis
B. Glossary of Terms Used for Cost Allocation and Estimation
C. Generally Accepted Methods for Estimating Specific Cost

Elements
D. Generally Accepted Methods for Computing Depreciation

Expense
E. Generally Accepted Methods for Treatment of Capital Leases
F. Competitive Services Board's Principles on Cost Comparisons

in Competitive Bidding
—
LIST OF EXHIBITS
EXHIBIT
NUMBER TITLE PAGE
1 Hypothetical Transit Organization

Structure 7
2 Summary of the Cost Allocation Process . . 11
3 Assignment of Expense Object Classes to

Allocation Variables 12
4 Calculation of Total Costs Assigned to

Each Allocation Variable 14
5 Calculation of Unit Costs 16
6 Calculation of Route-Specific Values

for Each Allocation Variable 18
7 Calculation of Fully Allocated Costs. ... 19
8 Summary of Cost Allocation Variable

Options 21
9 Process for Developing Fully Allocated

Costs Using Direct Cost Estimates 25
10 Use of Cost Build-up and Unit Cost Methods

to Estimate Route-Specific Operator Wage
—
Cost Example Calculations. . 27
11 Summary of Cost Estimation Options 32
12 Projection of Selected Operating Costs. . . 35
13 Projection of Revenue Vehicle Costs

An Example 39
14 Relationship of Organization Structure to

Shared Costs for a Multi-Modal, Single
Facility Transit System 43
15 Calculation of Unit Costs for a Multi-

Modal, Single Facility Transit System ... 44
16 Relationship of Organization Structure to

Shared Costs for a Single Mode, Multi-
Facility Transit System 47
17 Calculation of Unit Costs for a Single

Mode, Multi-Facility Transit System .... 48
LIST OF EXHIBITS
(continued)
EXHIBIT
NUMBER TITLE PAGE
18 Relationship of Organization Structure

to Shared Costs for a Multi-Modal,
Multi-Facility Transit System 50
19 Calculation of Unit Costs for a Multi-

Modal, Multi-Facility Transit System. ... 52
20 Differences in Public and Private Sector

Cost Structures 55
21 Membership of the Competitive Services

Board 61
22 Competitive Services Board Principles for

Treatment of Unique Private and Public
Cost Elements 63
I . INTRODUCTION
UMTA guidance for implementation of the Private Enterprise

Policy (Federal Register, Volume 49, No. 205) stipulates that:
"When comparing the service proposals made by

public and private entities all the fully
allocated costs of public and non-profit agencies
should be counted."
The use of fully allocated costs to compare the service

proposals made by public and private entities in accordance with
this policy treats public and non-profit agencies as if they
were required to recover their cost of production, like a
private firm, in a competitive environment.
The purpose of this report is to describe generally accepted

approaches to fully allocated costing analysis which are
consistent with this policy guidance.
A. Fully Allocated Cost Analysis - A Definition
The principle underlying fully allocated costing analysis is

that the total cost incurred in producing a specific product or
in delivering a specific service should be attributed to that
product or to that service. The fully allocated cost of a
specific product or service includes both:
• The direct costs of the labor, capital and material

resources used exclusively in the production of the
product or the delivery of the service; and
• A portion of the shared costs of the labor, capital and

material resources used in the production of the range
of products or in the delivery of the range of services
"produced" by an organization. The cost of any
specific product or service, for example, would include
a portion of the fixed facility costs and a portion of
the administrative costs associated with the management
of the organization.
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The principles of fully allocated costing analysis are often

used by public agencies to determine the appropriate sharing of
fiscal responsibility for deficits. A common example is a
regional transit authority which receives local subsidies from a
central city and several suburban jurisdictions. The "fiscal
responsibility" of each jurisdiction is often determined on the
basis of the fully allocated cost of the service received by
each jurisdiction including (1) the direct cost of service
received by the jurisdiction and (2) a portion of the shared
costs of the management, administration and underlying
infrastructure supporting the service received by the
jurisdiction. This approach is intended to ensure full and
equitable sharing of the cost of the service delivered to each
jurisdiction.
I
This report builds upon these principles and describes

generally accepted approaches to fully allocated costing
analysis. It should be noted, however, that fully allocated
costing analysis requires analytical judgment and skill because
there are several acceptable techniques which can be used to
prepare a fully allocated cost estimate. This report, !
therefore, is descriptive and not prescriptive. It describes j
generally accepted methods and techniques that are consistent j
with the principles of fully allocated costing analysis. It '
does not, however, prescribe a specific fully allocated costing i
model
B . Organization of the Report
This report is organized to serve as a reference guide for

practitioners. The remainder of the report is presented in four
sections
II. Fully Allocated Cost Analysis - What to Include This

section describes the types of costs that should be
included in a fully allocated cost estimate.
.
- 3 -
III . Development and Application of a Fully Allocated

Costing Model - The Basics This section describes the
step-by-step process for developing and using a fully
allocated costing model. This process is described
using an example for a single mode, single facility
transit system. The section also describes generally
accepted methods for estimating specific items of
—
transit cost including methods for treating capital
costs in a fully allocated costing analysis.
IV. Development and Application of a Fully Allocated

Costing; Model - Added Complexities This section
describes how the principles outlined in Section III
should be modified and adapted for more complex
operating environments and more involved service
proposals
V. Principles for the Treatment of Costs that are Unique

to Public and Private Sector Transit Providers. This
section describes principles for comparing public and
private sector transit costs taking into account the
inherent differences of public and private sector
transit service providers. These principles are based
upon the consensus building efforts of the Competitive
Services Board established by the Urban Mass
Transportation Administration in cooperation with the
American Public Transit Association.
The report also contains six appendices. The first appendix

describes selected references bearing on fully allocated costing
analysis and on generally accepted techniques for cost analysis
in the transit industry. The second appendix presents a
glossary of terms used in cost analysis. The third appendix
describes generally accepted approaches to cost estimation for
each of the principal cost elements of transit operation. The
fourth appendix presents generally accepted approaches for
estimating the depreciation expense associated with capital
assets used in the delivery of transit service. The fifth
appendix presents generally accepted approaches to treating the
cost of leased capital assets in a fully allocated costing
analysis. The sixth Appendix presents the complete text of the
Competitive Services Board's Principles on Cost Comparison in
Competitive Bidding.
II. FULLY ALLOCATED COSTS - WHAT TO INCLUDE
The purpose of this section of the report is to describe

the types of costs that should be included in a fully allocated
cost estimate for service proposals by public and non-profit
agencies. The section first defines fully allocated cost in
terms of the cost components of transit service. The section
then indicates how to determine which costs should be included
in a fully allocated cost estimate for a specific segment of
transit service.
A. Components of a Fully Allocated Cost Estimate
The costs associated with the delivery of transit service

include
• Fixed Costs which are constant over very large

,
increments of service and therefore do not vary with

small changes in the level of transit service.
Examples of fixed costs include most administrative
labor costs, facility related capital costs, and
materials and supplies costs other than those costs
incurred directly to support revenue service.
• Variable Costs which normally vary with the level of

,
transit service provided. Variable costs include

driver wages and vehicle fuel costs which vary directly
with the level of service.
A fully allocated costing analysis recognizes that both

fixed and variable resources contribute to the delivery of any
specific segment of transit service. A fully allocated cost
estimate, therefore, represents a complete accounting of all the
labor, capital and material resources used in the delivery of a
segment of transit service.
By contrast, a marginal cost analysis recognizes only the

variable costs of any specific segment of service. Marginal
.
-5-
cost analysis understates the cost of service provision because

it does not account for the fixed costs incurred by the transit
operator.
The fully allocated cost for a segment of transit service

includes the portion of total transit system costs which are
attributable to the specific segment of service . Some costs can
be directly attributed to the specific segment of transit
service. These costs are the variable costs of that segment of
service. Other costs however, cannot be directly and
exclusively attributed to the specific segment of service but
instead are costs which support and are shared by the range of
services provided by the transit operator. These costs are
normally the fixed costs of the overall transit system. A fully
allocated costing analysis takes both of these types of costs
into account.
A fully allocated costing analysis, therefore, requires the

identification and estimation of the:
• Direct Costs of a segment of transit service - These

are the costs which can be associated on a one-to-one
basis with a segment of transit services. At the route
or vehicle level, for example, direct costs generally
consist of operator, mechanic and servicer wages,
associated fringe benefits, fuel and lubricants, tires
and tubes, and the depreciation costs associated with
the vehicles used to operate that service, including
spare vehicles
• Shared Costs of a segment of transit service - These

are costs which cannot be associated on a one-to-one
basis with a specific segment of transit service. The
shared costs relevant to a single bus route or vehicle,
for example, consist at a minimum of the costs to
operate the facility from which the route or vehicle is
dispatched. Shared costs must be allocated to a
specific segment of transit service in a logical manner
which reflects the rate at which the cost is incurred
to support the specific segment of service.
-6-
B . Identifying Direct and Shared Costs for a Segment of

Transit Service
To determine tlie fully allocated cost of a specific segment

of Lxa-iisix service, it is helpful to consider how that segment
of service relates to the overall structure of the transit
system. To illustrate this concept » Exhibit II-l shows an
organization .structure for a hypothetical public transit system.
If the segment of services being considered consists of all

routes operating from a specific facility (say the Alpha Base in
Exhibit II-l) the fully allocated cost includes the direct costs
of the facility and a portion of the shared administrative and
operations costs which support all of the facilities operated by
the public operator. At the operating facility level, direct
costs would consist of the direct costs of all routes or
vehicles operated from that facility plus the direct costs
associated with the facility itself, including all supervisory
and administrative labor, their fringe benefits, and related
capital and material costs. Shared costs include an allocated
portion of all of the functions which support the operation of
that facility.
As a general rule, the fully allocated cost of specific

segments of service can be related to this concept of an
organizational hierarchy. The fully allocated cost of the
service produced at any level in the organization consists of
all costs at and below that level (i.e., the direct costs) plus
some portion of all costs above that level (i.e., the shared
costs )
There may be certain functions of the organization, however,

which are not related to and do not support the segment of
service being considered. The costs associated with these
EXHIBIT 1
HYPOTHETICAL TRANSIT ORGANIZATION STRUCTURE
General Manager
Administration Operations Marketing
Personnel Finance Planning
Materials — Operations
Management
Planning &
Scheduling
Bus Rail
Paratransit
Contract Contracted Transportation Maintenance

Alpha Base Central Maintenance Beta Base Compliance Services
r 1
Transportation Maintenance Transportation Maintenance
RT. 1 Ri. 2 Rt. 3 Rt. 4

-8-
unrelated functions should be excluded from the fully allocated

cost analysis of the specific segment of service being
considered. For example, in developing a fully allocated cost
estimate for regular bus services, costs associated exclusively
with the provision of paratransit service (e.g., the
depreciation of paratransit vehicles) would be excluded from the
fully allocated cost analysis.
In summary, a fully allocated cost analysis counts total

labor, capital and materials costs, less excluded costs. The
fully allocated cost of any segment of transit service consists
of its direct cost plus its portion of shared costs.
Ill . DEVELOPMENT AND APPLICATION OF A FULLY ALLOCATED COSTING
MODEL - THE BASICS
Because it is widely used, comprehensive in its accounting

of both direct and shared costs, and generally applicable to
most public transit systems, the three-variable unit cost model
is used in this section to illustrate the development of fully
allocated cost estimates. The three variable unit cost model
is, however, just one of many acceptable approaches to
developing a fully allocated cost estimate for a segment of
service.
The development of a fully allocated cost estimate requires

a complete accounting of the direct and shared costs associated
with the service proposals of public and non-profit agencies.
The important consideration in preparing a fully allocated cost
estimate therefore is not the precise form of the estimating
method but rather the logic and rationale for the method, and
the completeness of the method in recognizing the total costs
(both direct and shared) associated with the transit services
being considered.
In this context, the first part of this section provides an

example of the development of a simple three-variable fully
allocated cost model for a medium-size transit operator. The
remainder of the section discusses modifications to this method;
these modifications are intended to provide for more accurate
measurement of specific cost elements (e.g., operator labor).
A. Allocating Costs V/ith a Three-Variable Unit Cost

Model - An Example
The three-variable unit cost model is widely used within the

transit industry to estimate the fully allocated cost of
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operating individual routes or vehicles. Some conimon

applications of the model include performance monitoring and
allocation of operating deficits among jurisdictions supporting
a regional transit system. The three-variable unit cost model
is also one of several appropriate methods for developing fully
allocated cost estimates for the service proposals of public and
non-profit agencies.
Exhibit 2 provides a step-by-step summary of the cost

allocation process using a three-variable, fully allocated, unit
cost model. The following example illustrates the process shown
in this exhibit for a hypothetical transit system operating
regular bus service from a single facility. This hypothetical
system is considering contracting out ten routes comprising
approximately fifty percent of its service for one year.
Step 1 — Assign Expense Object Classes to Allocation Variables
This first step requires a logical allocation of each

expense class to one or more allocation variables which are used
to develop unit costs. In this example three variables are used
for allocation: vehicle hours, vehicle miles, and peak
vehicles. The use of alternative and additional allocation
variables is discussed later in this section.
As shown in Exhibit 3, each expense class is assigned to the

allocation variable with which it is most closely associated.
Generally, transportation-related costs (e.g., operator wages)
are allocated to vehicle hours since these costs are a function
of the number of vehicle hours operated. Vehicle maintenance
and fuel costs are allocated to vehicle miles, since the number
of miles operated reflects the exposure of vehicles to wear and
the rate of fuel consumption. Administrative and capital costs
EXHIBIT 2
SUMMARY OF THE COST ALLOCATION

PROCESS USING A UNIT COST MODEL
1. Assign Expense Object Classes to

Allocation Variables
2. Calculate Total Costs Assigned
to Each Allocation Variable
3. Calculate Unit Costs
4. Calculate Route-Specific
Values for Each
Allocation Variable
5. Calculate Fully Allocated
Cost Estimate
EXHIBIT 3
ASSIGNMENT OF EXPENSE OBJECT CLASSES

TO ALLOCATION VARIABLES
VEHICLE VEHICLE PEAK

EXPENSE OBJECT CLASS HOURS MILES VEHICLES
LABOR
Operator Salaries X
flaint Salaries X
Other Salaries X
FRINGE BENEFITS
Operator X
Maintenance X
Other X
SERVICES
Professional & Tech X
Contract Maintenance X
Security Services X
Other Services X
MATERIALS & SUPPLIES

Fuel k Lubricants X
Tires & Tubes X
Other Materials X
UTILITIES
Utilities X
CASUALTY & LIABILITY

Premiums for Damage X
Recoveries of Losses X
Payouts for Uninsured X
TAXES
Vehicle Registration X
Fuel & Lubricant X
Other Taxes X
MISCELLANEOUS EXPENSES
Dues Sj Subscriptions X
Travel & Meetings X
Bridges, Tunnel Toils X
Advertising Media X
Other Misc Expense X
RECONCILING ITEMS
Interest Expense X
Leases & Rentals X
DEPRECIATION
Vehicles X
Other X
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are allocated to peak vehicles because they are largely a

function of the size of the transit system. Any sound rationale
in addition to those noted above may be applied in assigning
expenses to allocation variables.
Step 2 — Calculate Total Costs Assigned to Each Allocation

Variable
Once expense classes are assigned to allocation variables,

the costs in each expense class are summed by allocation
variable. This step is illustrated in Exhibit 4. The costs
used in this example are simply the costs incurred, by expense
class, for the previous fiscal year. The sum of the costs
allocated to each variable must equal the total costs for the
system.
Included in the expense items is the depreciation cost of

capital assets. In computing the depreciation cost of the
direct and shared capital assets used in the delivery of transit
service (e.g., fixed facilities), the following general
principles apply:
(1) The total cost of an asset, regardless of the source of

financial support, should be used in the cost
calculation. For example, if vehicles are purchased
with 75 percent federal funds and 25 percent
non-federal funds, the full 100 percent cost should be
used in the cost comparison.
(2) All assets used in the delivery of the service,

regardless of ownership, should be included in the cost
calculation. For example, if a public operator uses,
without charge, the facilities of a separate government
agency (e.g., a parking lot for vehicle storage) the
cost of these facilities should be included in the cost
calculation.
(3) The cost of capital assets should be calculated based

on generally accepted accounting principles for
computing the depreciation expense of direct and shared
capital assets. Appendix D provides a description of
EXHIBIT 4
CALCUSATIOM OF TOTAL COSTS

ASSIGNED TO EACH AL LOCATION VARIABLE
VEHICLE VEHICLE PEAK ANNUAL

EXPENSE OBJECT CLASS HOUR S MILES V EHICLES TOTAL COST
LABOR
Operator Salaries $3,535,172 $3,535,172
Mairit Salaries $726,1/5 726,175
Other Salaries $1,100,603 1,100,603
FRINGE BEMEFITS
Operator 1,526,282 1,526,282
Maintenance 352,526 352,526
Other 492,260 492,260
SERVICES
Professional & Tech 214,002 214,002
Contract Maintenance 68,906 68,906
Security Services 39,664 39,664
Other Services 2,004 2,004
MATEHJAJ.S & SUPPLIES

Fuel & Lubricants 1,654,021 1,654,021
Tires & Tubes 161,990 161,990
Other Materials 1,021,801 1,021,801
UTILITIES
Utilities 114,827 114,827
CASUAL^ & LIABILITY

Premiums for Damage 293,891 293,891
Recovers of loesses 72,887 72,887
Payouts for Uninsured 1,039 1,039
TAXES
Vehicle Registration 670 670
Fuel & Lubricant 83,700 83,700
Other Taxes 708 708
MISCELLANEOUS EXPENSES
Dues & Subscriptions 16,024 16,024
Travel & Meetings 6,516 6,516
Bridges, Tunnel Tolls 8,292 8,292
Advertising ^!edia 107,092 107,092
Other ffisc Expense 188,337 188,337
RECONCILING ITEMS
Interest Expense 24,492 24,492
Leases & Rentals 9324 9,824
DEPRECIATION
Vehicles 544,885 544,885
Other 64, 396 64,396
TOTAL COSTS $5,061,454 13,359,325 $4,012,207 $12,432,986

- 15 -
generally accepted accounting methods for computing

depreciation expense and includes a listing of
generally accepted useful lives and salvage values for
specific capital assets.
(4) If the public operator provides the capital assets

(such as vehicles or facilities) for all competitors
for a service contract those capital assets should not
be included in the cost calculation for the public
operator's service proposal.
(5) If the public operator leases capital assets, the lease

cost should be treated in the cost calculation using
generally accepted accounting principles consistent
with the treatment of operating and capital leases in
the public operator's accounting statement. Appendix E
provides a description of generally accepted accounting
methods for treating the lease cost of capital assets.
(6) If the public operator uses assets that have exceeded

their useful lives, there is no depreciation expense
included in the cost calculation for these assets. It
should be noted, however, that a management decision to
employ assets beyond their expected useful life is
likely to have an impact on maintenance costs. This
impact should to the extent practical be reflected in
the maintenance expense estimates.
In this cost assignment step, it is also important to

confirm that all costs supporting the delivery of the service
under consideration are recognized, including costs incurred by
other organizational units supporting the transit operator. For
example, a local transit system functioning as a division of the
local government must include in its cost assignments any
resources provided to it by other units of local government,
such as legal services or personnel administration.
Step 3 — Calculate Unit Costs
In this step, shown in Exhibit 5, unit costs are calculated

for each allocation variable. This consists of dividing the
costs allocated to each allocation variable by the value of the
EXHIBIT 5
CALCULATION OF UNIT COSTS
Value of
Allocation Allocated Allocation
. Variabl e . Costs _Va riable _ Unit Cost
Vehicle Hours (VH) $5,061,454 421,953 $12.00
Vehicle Miles (VM) $3,359,325 5,927,648 $0.57
Peak Vehicles (PV) $4,012,207 125 $32,097.66
Total Cost - ($12.00 * VH) + ($0.57 * VM) + ($32,097,66 * PV)

- 17 -
allocation variable. For example, the unit cost for vehicle

hours is $5,061,454 divided by 421,953 hours, or $12.00 per
vehicle hour. It is essential to the validity of the results
that the value of the allocation variables is measured for the
same period as the costs. For this example, the total costs are
expressed on a fiscal year basis and the values of the
allocation variables shown in Exhibit 5 reflect operating
statistics from that same fiscal year.
Step 4 — Calculate Route-Specific Values for Each Allocation

Variable
In order to estimate the fully allocated costs of the

service under consideration using the calculated unit costs,
values for the allocation variables for that segment of service
must be known or estimated. Exhibit 6 provides route-specific
values for each allocation variable and the total value of each
variable for the service under consideration (i.e., the sum of
the values for the ten routes). These values represent service
over the one year period for which the cost comparison will be
made
Step 5 — Calculate Fully Allocated Costs
The fully allocated cost of the service described in Exhibit

6 can now be estimated by multiplying the value of the
allocation variables for that service by the unit cost developed
for each variable. As shown in Exhibit 7, the fully allocated
cost of the ten routes for the period under consideration is
$6,169,976.
EXHIBIT 6
CALCULATION OF ROUTE-SPECIFIC VALUES

FOR EACH ALLOCATION VARIABLE
Allocation Variables
Vehicle Vehicle Peak

Route Hours Miles Vehicles
Route A 23,638 330,295 7
Route B 28,366 396,353 8
Route C 17,560 245,362 5
Route D 27,015 377,480 8
Route E 18,911 264,236 6
Route F 25,664 358,606 8
Route G 21,612 301,984 6
Route H 12,157 169,866 4
Route I 16,884 235,925 5
Route J 17,560 245,362 _5
Total— All Routes 209.367 2.925.469 tl

EXHIBIT 7
CALCULATION OF FULLY ALLOCATED COSTS
Allocation Total Value

Variable for Routes X Unit Cost Total Costs
Vehicle Hours 209,367 $12.00 $2,512,404
Vehicle Miles 2,925,469 $0.57 $1,667,517
Peak Vehicles 62 $32,097.66 $1,990,055
Total Costs $6.169.976

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. Addi tion a l and Alternative Allocation Variables for

Developing Unit Costs
While the three-variable unit cost model described above is

commonly used, it is important to note that variables other than
vehicle hours, vehicle miles and peak vehicles may also be used
as bases for allocating costs. The most important concept to
bear in mind in developing a fully allocated cost estimate is
that the bases used for allocating costs are logical, and that
the cost allocation process is complete in its consideration of
all the costs s-'pporting the transit system.
A number of generally accepted cost allocation variables are

summarized in Exhibit 8. The potential rationale for using
these alternative allocation variables in specific cost
allocation analyses is explained below:
• Vehicle hours —These hours measure the amount of time

that a vehicle is in operation. Since this represents
the minimum amount of time that bus (or rail) operators
are to be paid, it is an appropriate basis for
allocating operator wage and benefits cost. It is also
often used to allocate supervisory and administrative
labor costs attributed to the vehicle operations (or
transportation) function.
• Rev en ue hours — These hours are a subset of vehicle

hours, and measure the amount of time that vehicles are
available to board or discharge passengers (known as
revenue service). Revenue hours are often substituted
for vehicle hours in cost allocation. This measure is
particularly useful to capture the cost of service as
delivered on the street, because it excludes deadhead
(i.e., non-revenue vehicle travel) and layover time.
® Veh icle miles — These miles measure the distance

-
travelled by revenue vehicles during and in addition to

revenue service. Vehicle maintenance, fuel
consuDipt ion
, and use of tires and tubes correlates
closely with vehicle miles, and accordingly vehicle
miles is commonly used as a basis of allocation for
vehicle maintenance and materials cost.
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• Revenue miles These miles measure the distance

travelled by revenue vehicles while in revenue service,
and thus is a subset of vehicle miles. It can be used
in lieu of vehicle miles to measure the cost of service
as delivered on the street, because it excludes all
non-revenue mileage.
• —
Peak veh i cles These are the maximum number of
vehicles in service during the day. This measure is
typically used as a basis for allocating shared costs,
because peak vehicles can be used as a proxy for the
size and complexity of a transit operator's overhead
structure. Peak vehicles are also used in a more
direct sense for the allocation of vehicle servicing
costs (i.e., daily fueling and washing) and for the
allocation of capital costs for vehicles and facilities.
• Total vehicles — These are the total number of revenue

vehicles, including spare and idle vehicles. Total
vehicles can be used as a substitute for peak vehicles,
and may provide a particularly appropriate substitution
in cases where the spares ratio is materially and
defensibly different among operating facilities or
among modes
• Number of employees — This measure can be used as a

basis for allocating expenses shared among modes, since
it is measured in a uniform manner for different types
of services and is also a proxy for the relative size
and complexity of the overhead structure of various
modes or services. It is also a useful measure for
allocating particular types of costs which are closely
related to the number of employees (such as payroll
processing costs)
® Ridership This measure can be used as a basis for

allocating expenses shared among modes, for the same
reasons as cited above for the use of employees as a
basis for allocation. It is also a meaningful measure
for allocating costs which are ridership-dependent
such as pass or ticket sales and distribution.
• Percent of Direct Expenses — This measure can be

applied as a "multiplier" to direct expenses, and is a
logical choice for allocating those types of expenses
which are not closely related to service levels.
- 23 -
These options for allocating costs are found commonly within

the U.S. transit industry. They are not, however, intended to
represent an exhaustive list. Other variables may be more
appropriate for certain circumstances. For example, route miles
can be used as a basis for allocating bus stop maintenance
expense. The number of park-and-r ide lots is likewise a logical
choice for allocating park-and-r ide lot maintenance cost.
Similarly, track miles and passenger stations may be appropriate
bases for allocating certain types of rail system costs. In
fact, any variable or measure which can be related to the
services provided by a transit system, and is logically related
to the rate of consumption of an expense element, is an
acceptable basis for allocation of that expense to some segment
of transit service.
C . Optional Methods for the Development of Fully Allocated

Cost Estimates
In the cost allocation example presented above, the fully

allocated costs of the service under consideration were
estimated based on a three-variable unit cost model developed
from historical cost data. It consists of average unit costs
which are calculated based on the number of vehicle hours,
vehicle miles and peak vehicles operated, with expenses
allocated to each of these variables.
The model developed in the previous example does not

differentiate between the direct costs and the shared costs of
the service being considered. Thus, the unit costs calculated
are average costs, applicable to any segment of service. To
estimate a more precise cost for a specific segment of service,
the identifiable direct cost can be estimated separately from
the shared costs.
- 24
In particular, extensive research and development has been

conducted to establish accurate techniques for estimating
operator labor costs in transit. It is often especially
appropriate to consider using one of these direct estimation
techniques for calculating the operating labor cost of a service
proposal because the direct cost of operations labor is uniquely
related to the nature and extent of the services considered.
The process of developing a fully allocated cost estimate

with direct costs estimated separately is shown in Exhibit 9.
The steps for this process are explained below:
• Identify Direct and Shared Costs b y Expense Object

—
Class Expense classes which represent direct cost
(e.g., operator labor) are identified and separated
from other costs in this step.
• —
Develop Unit Costs for Shared Expenses For the
remaining expenses, unit costs are developed in the
same manner as for the example of a fully allocated
cost model shown above.
9 —
Est imate Total Shared Costs Total shared costs are
estimated by multiplying the unit costs by appropriate
values for each allocation variable reflecting the
service proposed. This step is also identical to the
calculation made for the fully allocated cost model.
• Estimate Cost for Each Direct Expense Class For each—

expense class identified as a direct cost, an estimate
of the cost of that expense class specifically for the
segment of service being considered must be developed.
Generally accepted estimation methods for use in this
step are described in Appendix C.
9 —
Sum Direct C o sts Across Expenses Classes This step
sums ail of the directly estimated costs for the
specific service being considered.
• Sum Total Shared Costs and Total Direct Costs Th i —

calculation results in the fully allocated cost
estimate for the specific service for which the direct
costs were estimated.
- 26 -
The separate treatment of direct costs, as described in this

process, can substantially improve the accuracy of the fully
allocated cost estimate for specific service proposals.
For example, estimates of operator wage costs for specific

service proposals can often be substantially improved with the
application of direct cost estimation methods. An example of
one possible direct estimation approach for computing the
operator labor costs of a service proposal is presented in
Exhibit 10. In this example, an estimate of operator wage cost
is developed using a cost build-up method based on scheduled pay
hours data. This data is commonly available because it is a
primary input to the payroll calculation. Using this method,
the estimation process consists of the following five steps:
® Obtain daily scheduled pay ho urs for sele cted ro utes --

These pay hours include driving and non-driving pay
hours that can be directly associated with the routes
be ng ana lyzed
i
® Compute am al schedu led pay hours for selecte rou tes

.l "!
— This step "expands" the daily data based on the

number of days that each type of schedule is operated.
In this example, a weekday schedule would be operated
254 days annually, adjusting for the common practice of
operating reduced service (such as Sunday service) on
weekdays which are also observed as holidays.
® Compute the rat o of total pay hours to s heduled pay

.
hours fo r the entire system -- This step is analogous

to the calculation of unit cost factors, in that it
develops a basis for allocating "shared" operator wage
cost to the routes being analyzed Non-scheduled
.
operator pay, such as unscheduled overtime paid to

extraboard operators, often cannot be associated on a
one-to-one basis with a specific route. Its impact on
cost, however, can be accounted for by measuring the
extent to which scheduled pay hours need to be
"expanded" to approximate total pay hours.
« Comp ut e av er age hourly wag e r ate -- Operators are

usually paid on a pay scale which reflects their
seniority. Also, certain types of pay may be paid at
to
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more or less than the standard hourly rate.

Accordingly, the use of an average hourly pay rate,
which is developed over a number of pay periods in
order to measure all these efforts, can serve as a
reasonable basis for converting pay hours to estimates
of wage cost
® Compu te current annual operator wage cost -~ Once the

annual scheduled pay hours, the ratio of total to
scheduled pay hours, and the average hourly pay rate
are known, then the current annual operator wage cost
for the selected routes can be readily computed by
combining these factors.
This example has illustrated the use of one possible direct

estimation method which incorporates features of the unit cost
approach. In general, direct estimation methods need to be
supplemented, as was done in this example, with some type of
expansion factor to ensure that all costs are taken into
account. In the example above, scheduled pay hours were
"expanded" to approximate total pay hours, thus accounting for
the pay hours of those operators who serve as a "shared"
resource for all routes.
A summary of the options for directly estimating costs for

each expense object class is presented in Exhibit 11.. This
exhibit also indicates whether an object class typically
represents either a direct or shared cost. Generally, direct
costs are estimated by either a unit cost method or a cost
build-up method. Shared costs are generally estimated by either
a unit cost or a ratios method (i.e., one type of cost, such as
administrative labor., is expressed as a percentage or ratio with
respect to direct cost). A more complete description of the
cost estimation options for each object class is presented in
Appendix C. References for work published on this subject are
included in Appendix A.
EXHIBIT 11
SUMMARY OF COST ESTIMATION

OPTIONS BY EXPENSE OBJECT CLASS
TYPICAL COST TYPICALLY APPLIED

BASIS COST ESTIMATION METHODS
EXPENSE OBJECT UNIT COST
CLASSES DIRECT SHARED COST BUILD-UP RATIOS
LABOR
Operators Salaries X X
Maintenance Sala-
ries X X X
Other Salaries X
FRINGE BENEFITS
Operators X X X X
Maintenance X X X X
Other X X X
SERVICES X
MATERIALS S. SUPPLIES
Fuel and Lubricants X X X
Tires and Tubes X X X
Other Materials
and Supplies X(a) X X X
UTILITIES X X X
CASUALTY AND LIABILITY X X X
TAXES X(b) X(b)
MISCELLANEOUS EXPENSES X
RECONCILING ITEMS
Interest Expense X X
Leases and Rentals X(c) X
DEPRECIATION
Vehicles X X(c) X
Other X X X
(a) Vehicle repair-related materials and supplies are typically considered

to be a direct cost.
(b) Taxes may be either a direct cost (such as fuel tax} or a shared cost
(such as property tax) depending on types of taxes paid by a transit system,
if any.
(c) Lease, rental and depreciation expenses for non-revenue vehicles would
normally be considered a shared expense.
IV. DEVELOPMENT AND APPLICATION OF A FULLY ALLOCATED COSTING
MODEL - ADDED COMPLEXITIES
The description of fully allocated costing model as

a
presented in Section III used a single mode, single facility-

transit operator as an illustration. It also considered the
case where the service proposal was for a single year only,
Multiyear service proposals or more complicated operating
environments introduce added complexity to the development and
application of a fully allocated costing model. The purpose of
this section of the report is to highlight the considerations
which are required in addressing these added complexities.
A. Multivear Service Proposals
Service proposals which encompass more than a single year

may require special consideration in conducting a fully
allocated costing analysis to account for anticipated:
• Escalation of administrative, operating and maintenance

costs
• Changes in administrative, operating or maintenance

cost structures
• Replacement of capital assets attributed to the segment

of service being considered
Each of these considerations are expanded upon in the remainder

of this subsection.
1 . Escalation of Administrative. Operating and

Maintenance Costs
The simplest method for projecting administrative, operating

and maintenance costs for a multiyear contract period is to
- 34 »
apply cost escalation factors to current costs This approach

»
would be appropriate when the transit system has not committed

to structural changes (such as the opening of a new operating
facility) which would affect the shared costs incliided in a
fully allocated cost estimate (e.g,* the cost of supervisory and
administrative labor associated with a new facility).
An example of the steps required to estimate future-year

operating costs by applying cost escalation factors is shown in
Exhibit 12, In this example^ three expense object classes
(operator labor^ fuel* and utilities) are estimated for a
five-year period. For each of these expense object classes^ the
following steps are performed in this examples
® ld.entifX„systemwide, current yQ3t costs. —

This will
be used as the base for the estimation of future-year
costs. In the exhibit, systemwide operator labor cost
for the current year is $3#250,,422e
® Identify cost escalation factors for each v eer of the

service proposal The cost escalation factor for each
year represents the impact of inflation or knovm price
changes relative to the prior year's cost. In the
example^ operator labor cost is expected to increase at
two percent annually for the first two years of the
contract period, reflecting increases in the hourly
wage rate that have already been incorporated into the
labor agreement. In the remaining years management
^
has assumed that labor costs would increase at four

percent annually. Similarly^ fuel costs (in this
example) are known to increase at two percent annually
for the first two years, reflecting the terms of a
purchase agreement with a local vendor
® Calculate estimated a nzma l costs —

The cost estimate
for each expense object class in each year is based on
the cost escalation factor for that year and the prior
year's cost estimate « For the first year of the
contract period, the "prior year" is the current year
cost. Operator labor for example, is estimated to be
^
$3,315,430 in year 1 of the contract period, based on

the current year cost ($3,250,422) and a 1,02 cost
(-1 H
P9
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O >•
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- 3S -
escalation factor. In year 2g operator labor cost is

estimated to be $3,381,739* based on the cost estimate
for year 1 and d cost escalation factor of 1.02.
These steps would be repeated for all other operating

expense object classes to obtain an annual systemwide estimate
of operating costs. These annual systemwide estimates would
then be used, following the step-by-step process outlined in
Section III to develop and apply a fully allocated cost model
for each year of the service proposal.
2. Adjustments Due to Changes in Administrative.

Operating or Maintenance C_gS-t_. Structures
In the event that the transit system has committed to or

plans structural changes in its service or organization that
would be implemented during the period covered by the service
proposal, the costs of these changes would need to be considered
in projecting fully allocated costs. Examples of structural
changes include the addition or removal of staff and
facilities. These actions may be occasioned by service
expansion or contraction, or may be taken in recognition of the
need for additional or fewer support activities (such as
training) . Typically, the most appropriate method for making
necessary adjustments in these cases would involve the use of a
direct cost estimation approach, taking into account the

specific characteristics of the planned structural changes.
3 . Adjustment for Replacement of Capital Assets

During the Period Covered by_..±he_Servic.e_., PmPQsal
Generally, the estimation of capital costs rests on

determining the annual depreciation cost of the current capital
inventory. When service contracts are to be extended over a
- 37 -
period of several years however, the fully allocated cost of

^
capital should include current depreciation costs^ plus the

depreciation cost associated with the anticipated replacement of
current assets.
Consider, for example, a transit operator that is analyzing

the five-year costs of a portion of its service in preparation
for a service proposal. On average, approximately 40 percent of
the revenue vehicle fleet would require replacement within this
period (i.e., five-twelfths of the fleet). These new vehicles
would have a higher annual depreciation cost than the vehicles
they replace, assuming that they have a higher purchase price.
Since this phenomenon is applicable to all capital assets
replaced during the period, the current annual depreciation cost
should not be used in determining the fully allocated cost for
the full term of the service proposal. Instead, depreciation
costs should be projected for the duration of the service
proposal based on anticipated capital replacement actions. The
depreciation cost of replacement assets acquired during that
period should then be included in the fully allocated cost
estimate
In summary, the estimation of capital cost involves carrying

forward through the contract period the depreciation cost of
existing assets, and the estimation of the depreciation cost of
any new assets expected to be acquired during the contract
period. Generally, the process for estimating capital costs
consists of the following steps:
• Calculate annual depreciation cost for all capital

assets — The annual depreciation cost should be
calculated using the generally accepted accounting
methods described in Appendix D. These costs are
usually constant for the entire depreciation period
(e.g., a bus which costs $144,000 and depreciated over
12 years would have an annual depreciation cost of
- 38 -
$12, 000 if a straight-line depreciation method were

>
@ Carry forward..the animal depreciation cost for exisfcina

assets thrQu^h the contract period or through th^
assets' depreciation period — The annual depreciation
cost ehoulfl be carried forward through each year of the
contract period^ unless an asset is fully depreciated
either prior to or during the contract period. For
examplBg the depreciation cost for a bus that is 10
years old would be carried through the first two years
of a contract period. A bus that is 12 years old would
be fully depreciated in the current year, and thus its
annual depreciation cost would not be carried forward
into the contract period.
® Calculate and carry forward depreciation. costs for any

.replacemerit..g_o f existing capital assets The transit
system may or may not choose to replace fully
depreciated assets during the contract period. This
represefits an explicit trade-off # however with
^
increased maintenance costs. The depreciation costs of

replacement assets should be calculated and carried
forward in the same manner as identified above for
existing capital assets,
© Calculate. total capital costs The total capital

costs for the contract period is the sum of the
depreciation costs for existing assets and for
replacement assets.
A simple example of estimating the capital costs associated

with revenue vehicles is presented in Exhibit 13, In this
example^ the existing re¥enue vehicle fleet consists of five
buses (labeled ¥ehl through ¥eh5) e An annual depreciation cost
is calculated for each based ©n their respective purchase price,
using a straight-line depreciation method and assuming a 12-year
depreciation period-. In this example^ each vehicle would be
retired (and a replacement vehicle purchased) at the end of its
depreciation period (labeled ''retirement year''). The annual
depreciation cost for each vehicle is carried forward for each
year of the five-year contract period (i.e., 1988 through 1992),
or through the end of each vehicle's depreciation period (or
retirement year). The vehicles labeled Veh4 and Veh5, which
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- 40 -
were purchased in the same year (1977) will be retired in

*
1989c Accordingly^ no depreciation cost is carried forward for

these vehicles beyond 1989 »Two replacement vehicles (labeled
Veh6 and Veh7) are purchased in 1990# and their depreciation
costs are carried forward through the end of the contract
period. The total annual depreciation cost for all vehicles is
the sura of the depreciation cost for existing vehicles and for
replacement vehicles.
B. Complex Operating Environments
As noted earlier, the fully allocated cost of any segment of

transit service should reflect the direct cost of that service
as well as the relevant costs shared by that service with other
services operated by the transit system. Cost allocation within
a multi-modal or multi-facility operating environment requires
particularly careful identification and treatment of shared
costs. In a multi-modal or multi-facility environment, these
shared costs could include 1) the shared costs specific to the
facility from which the service is operated; 2) the shared costs
within the mode or program to which the service of interest
belongs; 3) other systemwide costs which are shared by all
service programs or modes, including the cost of services
provided by other units of local or state government, where
relevant
This section describes the additional steps required to

develop a fully allocated cost model for a multiple-mode and/or
multiple-facility operating environment. The primary emphasis
in this section is on the allocation of shared costs. Again, a
three-variable cost allocation model is used to illustrate the

approach for allocating these shared costs. Other cost
allocation methods may be preferable depending on the
circumstances of the cost comparison to be performed.
- 41 -
Within this context, cost allocation considerations for the

following cases are discussed^
• Multiple modes operating from a single facility
• One mode operating from multiple facilities
• Multiple modes operating from multiple facilities
Each of these cases are presented in order, below. These three

types of operating environments, along with the single mode#
single facility case presented earlier, illustrate a wide range
of cost allocation situations likely to be relevant to U,S,
transit systems.
1 . Multiple Modes Operating from a Single Facility
The characteristic of this operating environment that

distinguishes it from the single-mode, single-facility case is
the proper allocation of costs shared among the modes. In this
case, the term mode is used to denote different service delivery
options, such as fixed-route transit and paratransit, which are
distinct primarily in regard to their operating characteristics.
The development of fully allocated cost model for this

a
case must carefully consider the relationship of costs to the

types of services being provided (modes). The process for
developing a fully allocated cost model should include the
following steps:
• Identify the costs to be excluded from the

public-private cost comparison —
Generally, any cost
devoted exclusively to supporting both publicly and
privately operated services can be excluded from the
development of the unit costs described below. In the
case where a portion of an activity is attributable to
the support of both public and private services, costs
can be excluded on a pro-rata basis.
- 42 -
Identify direct and shared costs — This step

identifies those costs which are associated exclusively
with a particular mode, or support all modes. An
example of this step is presented in Exhibit 14 for a
relatively simple operation providing bus and
paratransit services.
Allocate expense object classes to the Physical and
operating r esources (i.e.. allocation variables) of the
services ~~ This step is slightly different than the
single mode, single facility ease because the typical
bases for cost allocation (i.e., vehicle hours, vehicle
miles and peak vehicles) may not be uniform across all
modes. In the case of paratransit, for example, it is
arguable whether a paratransit van is comparable to a
full-sized bus when considering the allocation of
systemwide costs using a unit cost per peak vehicle.
Accordingly, the allocation of systemwide costs shared
among modes should be performed using a consistent
system of measurement, such as pro-rata costs,
employees or ridership. These costs can be interpreted
as an additional expense object class at the modal
level, and then allocated using a common allocation
variable (such as peak vehicles) within a mode. The
process of allocating expense object classes to
variables within each mode should proceed in the same
manner as described in the single mode, single facility
case, with the exception that different variables can
be used as a basis of allocation within each mode.
Allocate systemwide share d costs to individual modes —

This step consists of three tasks: 1) sum expenses
allocated to each variable (e.g., employees) across all
costs which are shared among all modes; 2) calculate
unit costs by dividing the summed expenses by the
relevant value of that variable, systemwide; 3)
calculate the costs to be allocated to each mode based
on each mode's respective value of the allocation
variable. In the example shown in Exhibit 15, a
systemwide unit cost of $4,000 per employee was
calculated. This resulted in costs of $800,000 and
$400,000 being allocated to bus and paratransit
services respectively based on the number of employees
in each of these modes.
Calculate unit costs for services operated within each

mode ~- This final step in developing a fully allocated
cost model consists of two tasks: 1) for each
allocation variable within each mode, sum the costs
across the relevant expense object classes including
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- 45 -
system wide shared costs allocated in the previous

step ; and 2) divide the summed costs by the
appropriate value of the allocation variable specific
to each mode. A sample calculation of these unit costs
is also presented in Exhibit 15.
In summary, the cost allocation process for a multi-modal,

single facility operation should explicitly account for: 1)
systemwide costs which are shared among the modes of service
provided; and 2) the shared and direct costs specific to each
mode
2 . One Mode Operating from Multiple Facilities
The characteristic of this operating environment which

distinguishes it from the single mode, single facility case is
the consideration of facility-specific shared and direct costs.
Generally, operating facilities have different cost
characteristics which should be reflected in the cost estimates
for services operated from a specific facility. For example,
workers compensation costs can vary dramatically on a
facility-by-facility basis, as can overall labor productivity.
Shared costs which can vary on a facility-by-facility basis
include supervisory staffing, utilities, leases, rentals, and
depreciation. It is important that these cost differences are
reflected in the cost allocation scheme, rather than being
masked by a general, system wide allocation of these costs.
The process for developing a fully allocated cost model in

this context differs slightly from the cases presented earlier.
Generally, the following steps should be employed:
~9 Identify costs to be excluded from the public-private

cost comparison —
Generally, any costs that are
devoted exclusively to supporting both publicly and
privately operated services can be excluded from the
„ 46 -
costs to be allocated to the services of interest. In

cases where a portion of en activity falls into this
category, the excluded costs could be prorated.
@ Identify direct and shared costs — This step

identifies which costs are shared among all operating
facilities and which costs are specific to individual
facilities. Exhibit 16 illustrates these two types of
costs in the context of a two-facility transit system.
® Allocate expense object classes to allocation
variables ~- This step is identical to that described
for the single mode, single facility case. Each
expense object class should be assigned to one or more
of the variables (e.g., vehicle hours) being used as a
basis for allocation of expenses. This allocation
scheme should be consistent across all operating
facilities
® Calculate unit costs for costs shared among all

operating facilities — This step consists of two
-
tasks. First, expenses are summed for each variable

across all expense object classes. Second, unit costs
are calculated by dividing the costs allocated to each
variable by a svste mwide value of the relevant
variable. A sample calculation of these systemwide
shared unit costs is illustrated in Exhibit 17.
« Calculate unit costs for costs within each operating

facility — These unit costs are found by summing the
expenses for each variable across all expense object
classes within each operating facility, then dividing
these expenses by a facilit y-specific value of each
variable. A sample calculation of these unit costs is
presented in the lower portion of Exhibit 17 for a
two-facility operation.
» Calculat e unit costs to be applied to all services

operated from each operating facility — The fully
allocated unit cost for the services operated from a
given facility is the sum of the above two sets of unit
costs: systemwide shared unit costs, and
facility-specific shared and direct unit costs. A
sample calculation of these unit costs is presented in
the lower portion of Exhibit 17 and is labeled "total
unit cost".
In summary, the cost allocation process for a single mode,

multiple facility operation should explicitly account for:
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- 49 -
1) system wide costs which are shared among services operated

from all operating facilities; and 2) the shared and direct
costs specific to each operating facility.
3. Multiple Modes Operating from Multiple Facilities
The process for developing a fully allocated cost model for

a multi-modal, multi-facility transit system is similar to that
described in the immediately preceding section. It differs
primarily in that it must explicitly incorporate systemwide
costs shared among modes, as well as modal-specific costs shared
among operating facilities within a mode and facility-specific
direct and shared costs.
In this context, the process for developing a fully

allocated cost model consists of the following steps:
• Identify costs to be excluded from the public-private

cost comparison — Generally, these costs would include
those which exclusively support both publicly and
privately operated services, as described previously.
• Identify direct and shared costs — This step
-
identifies those costs which are shared among modes,

shared among operating facilities within a mode, or
contribute to direct or shared costs within a specific
facility. An example of identifying these
relationships is illustrated in Exhibit 18 for a three
mode, three facility transit system,
• Allocate expense object classes to allocation

variables — This step is slightly different than in
previous cases because the typical bases for cost
allocation (i.e., vehicle hours, vehicle miles and peak
vehicles) will probably not be uniform across all
modes. Peak buses, peak rail cars and peak paratransit
vans, for example, are logically not uniform.
Accordingly, the allocation of systemwide costs shared
among modes should be performed using a consistent
system of measurement, such as pro rata costs,
employees or ridership. These costs can be interpreted
as an additional expense object class at the modal
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- 51 -
level, and. then allocated via a common allocation

variable (such as peak vehicles) within a mode. The
process of allocating expense object classes to
variables within each mode and facility should proceed
in the same manner as described in the other cases,
with the exception that different variables can be used
as a basis of allocation withir e^ch mode,
• Allocate svstemwide shared costs to individual mo des —

This step consists of three tasks: 1) sum expenses
allocated to each variable (e.g., employees) across all
costs which are shared among all modes; 2) calculate
unit costs by dividing the summed expenses by the
relevant value of the variable, systerawide; 3)
calculate the costs to be allocated to each mode based
on each mode's respective variable value. In the
example shown in Exhibit 19, a system wide unit cost of
$7,617 per employee was calculated. This resulted in
costs of $13.6 million, $2,8 million and $0.1 million
being allocated to bus, rail and paratransit services
respectively based on the number of employees in each
of these modes.
• Calculate unit costs for costs shared among operating

facilities within each mode —- This step consists of
two tasks within each mode: 1) expenses are summed by
allocation variable (e.g., vehicle hours) across all
relevant expense object classes; 2) these summed
expenses are divided by the appropriate value of the
variable within that mode. A sample calculation is
presented in Exhibit 19 for the hypothetical three-mode
system. Note that this step includes the systemwide
costs allocated to each mode from the previous step.
• Calculate unit costs for costs within each operating

facility within each mode — The same two tasks are
performed as in the previous step, with the exception
that facility-specific data are used. A sample
calculation is presented in Exhibit 19 for the bus
mode, since the sample rail service operates from a
single facility, and since paratransit services are
contracted out.
• Calculate unit costs to be a pplied to all services
operated from each operating facility — The "true"
unit costs for the services operated from a given
facility is the sum of the above two sets of unit
costs: modal-specific shared unit costs (including
allocated systemwide costs), and facility-specific
shared and direct unit costs. A sample calculation of
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these unit costs is also shown in Exhibit 19, and is

labelled as the "total unit cost".
In summary/ the cost allocation process for a multi-modal,

multiple-facility operation should explicitly account fors 1)
systemwide costs which are shared among modes including the
costs of any services provided by other units of state or local
government, where appropriate; 2) modal-specific costs which are
shared among services operated from all operating facilities
within a mode; and 3) the shared and direct costs specific to
each operating facility.
EXHIBIT 20
Page 1 of 3
DIFFERENCES IN PUBLIC AND PRIVATE

SECTOR COST STRUCTURES
Unique to
Private Public
Cost Element Sector Sector
(1) —
Income Tax The private carrier is
required to report income from
operation and pay federal and
possibly state income taxes.
These taxes are returned to
government and therefore do not
represent a public cost. Accordingly,
in determining the minimum public
cost for transit service, these taxes
should not be counted as an
element of cost. In computing
taxable income, the private carrier
can deduct depreciation as an
—
expense reducing the tax burden.
The public carrier has no comparable
tax benefit from depreciable capital
except through safe-harbor leasing
provisions which provides for the sale
of certain public tax benefits to
private investors.
(2) —
Profit The private carrier is allowed X
a profit which is passed on as a cost
in the bid. This is a legitimate cost
of doing business with a private-
carrier and should be included in the
cost comparison.
(3) Registration and licensing fees X

This is a legitimate cost of doing
business with a private carrier,
however, it represents a form of
taxation and the revenue flows to
the public.
(4) Administration of Carrier Contracts- X

When the public carrier also serves
as the local/ regional planning and
policy organization, costs may be
EXHIBIT 20
Page 2 of 3

Unique to
Private Public
incurred to administrate the

contracting process. These costs
are borne on behalf of the general
public and not for the purpose of
delivering service by the public
operator. Accordingly they may be
considered as separate from the
normal cost of the public provider
for service delivery.
(5) Local/Regional Public Transportation X

—
Administration certain costs of the
public provider are borne on behalf
of the public for the purposes of
planning, coordinating, marketing,
administering services. These costs
benefit both public and private
carriers and are separable from the
cost of service delivery and the
administrative aspects directly
attributable to service delivery. In
fact, several local/regional organi-
zations are formally separating these
functions and activities with insti-
tutional restructuring (e.g., Chicago
RTA, Minneapolis). Where they are com-
bined (most public transportation
authorities), the costs should be
separately accounted for in deter-
mining an appropriate comparison
between public and private service
delivery costs.
(6) —
Fuel, sales and other taxes These Not necessarily
taxes are paid by private carriers Unique to Pri-
and are a legitimate cost of vate or Public
business. However they are not
, Sector
always paid by public carriers who
may have tax-exempt status for
many taxable items used in the
course of providing transit
E XHIBIT 20
Page 3 of 3

Unique to
Private Public
service. This tax exempt status

represents a form of subsidy to
the public carrier.
(7) "Cost" of Capital Interest expense Not necessarily

related to loans for capital Unique to Pri-
—
investment The private carrier vate or Public
needs to borrow to invest, whereas Sector
the public carrier has invested
largely with grant income. The
interest cost associated with
private carrier borrowings is
therefore a cost which is typically
not borne to the same extent by the
public carrier due to the public
subsidy program.
8) Cost associated with funding prior X

—
unfunded pension liabilities Many
public carriers have plans in place
which are intended to fully fund-over
a period of time-past unfunded pension
liabilities. This is a cost which is
largely unique to the public carrier.
V. PRINCIPLES FOR THE TREATMENT OF COSTS THAT ARE UNIQUE TO
PUBLIC AND PRIVATE SECTOR TRANSIT PROVIDERS
The costs of public and private sector transit providers are

to a certain extent inherently different. Therefore, to conduct
a fair comparison of service proposals made by public and
private entities it is necessary to consider the implications
and appropriate treatment of these inherent differences. This
section of the report presents principles for treating costs
that are unique to public and private sector transit providers
when conducting cost comparisons.
A. Differences in Public and Private Sector Costs
The significant costs which are unique to public and private

sector transit providers are summarized in Exhibit 20. As shown
in this exhibit, the costs which are unique to the private
sector largely reflect the for-profit status of private sector
transit providers. These costs include the profit charged by
the private provider and the taxes and fees paid by the private
provider - these are common costs of doing business with a
private carrier and are appropriately included in the private
carrier's bid for transit service.
The taxes and fees paid by the private carrier are unique to
the private sector because in many instances, public carriers
have been exempted from the responsibility to pay these taxes
and fees. This exemption represents a form of subsidy to the
public carrier. Further, these taxes and fees are returned to
the government for public use and in certain instances are used
to fund publicly subsidized transportation services.
The costs shown in Exhibit 20 which are unique to the public

sector are largely related to the unique "public"
- 58 -
responsibilities of public transportation operators. These

"public" responsibilities encompass functions and activities
that are of broad public benefit and extend beyond the basic
function of delivering transit services. They include planning,
coordinating, and promoting publicly subsidized transportation
services whether those services are delivered by public or
private providers. This "public" responsibility includes the
implementation of UTITA's Private Enterprise Policy and therefore
the related costs for administration of carrier contracts.
Each of the unique costs shown in Exhibit 20, could be

treated in a variety of ways when conducting a comparison of the
service proposals of public and private entities. The potential
treatment of these cost elements in a cost comparison could
generally include one of the following approaches:
® Deducting the unique public or private sector cost from

the public or private sector providor when making the
cost comparison. For example, deducting income tax
from the private sector's cost basis when making the
cost comparison
® Add in g or adjusting the cost structure of the public or

private provider to compensate for unique costs
"avoided" by virtue of public or private operation.
For example, adding an estimate for registration and
licensing fees to the public provider's cost basis when
making the cost comparison
® Maki ng no adjustment to the cost structure of the

public and private provider s
Each potential treatment, however, has its associated merits

and shortcomings. The selection of an appropriate treatment is
a significant policy issue which (1) requires a delicate
balancing of public and private sector interests and (2) takes
into consideration the impact of any potential adjustment to the
fully allocated cost estimates associated with competitive
transit service proposals.
- 59 -
B . Principles for Treating Differences in Public Secto r

and Private Sector Costs
In order to address these and other issues associated with

the use of contracted services, UMTA, in cooperation with the
American Public Transit Association (APTA), established the
Competitive Services Board (CSB). As shown in Exhibit 21, the
Competitive Services Board consists of a broad cross-section of
public and private sector interests assembled to establish
consensus principles for the comparison of public and private
sector transit costs. Through a series of meetings and
workshops, the CSB developed principles of common understanding
and consensus relating to the important cost comparison issues
outlined above.
The principles developed the CSB are presented in Exhibit

22. Although these principles may be further developed and
clarified by the Competitive Services Board as experience with
implementation of the Private Enterprise Policy increases, they
represent a logical and balanced consideration of the
appropriate treatment of unique public and private sector costs.
In addition to these principles, which relate directly to

specific cost elements and their treatment in a cost comparison,
the Competitive Services Board concluded its deliberations on
cost comparison issues with the development of the following
significant statement of public and private consensus:
"The public agency has a responsibility to minimize

public-sector costs and to maximize the amount of service that
can be provided. Guided by this objective, the Board has
EXHIBIT 21
MEMBERSHIP OF THE
COMPETITIVE SERVICES BOARD
. Regular Membership II . Ex Officio Membership
Transit Operators (6 Ralph Stanley (UMTA) Cochairman

Doug Wentworth (Houston) Jack Gilstrap (APTA) Cochairman
Jerry Premo (New Jersey) Frank Francois (AASHTO)
Michael Grovak (New York CTA) Norm Sherlock (ABA)
Raleigh D'Adamo (St. Louis) Wayne Smith (UBOA)
Tom Niskala (Corpus Christi) Al LaGasse (ITA)
Roger Snoble (San Diego) Ray Mundy (ACTA)
Karen Finckle (National School
Private Operators ( 6 Transportation Association)
Gene Stalians (Taxi Operator, David Raphael (Rural America)
S. Calif.) Randy Isaacs (National Association
Byron Fanning (Greyhound) of Transportation Alternatives)
Ted Knappen (Trailways) Richard Hartman (NARC)
Phil Ringo (ATE)
Terry Van Der Aa (School Bus
Operator, Chicago)
John McCarthy (Continental Air
Transport, Chicago)
State DOTS (2)

John Hartz (Wisconsin)
Dave King (North Carolina)
Local Governments/Transit Board (2)

Elliot Perovich (RTB-Twin Cities)
Florence Boone (RTA-Chicago
Regional Councils (2)

Mark Pisano (SCAG)
Peter Levi (Mid-America Regional
Council
Special System Operators (2)

Linda Wilson (Charlottesville)
(Section 18)
Tom Phillips (Hartford)
(Section 16b(2))
EXHIBIT 22
Page 1 of 2
COMPETITIVE SERVICES BOARD

PRINCIPLES FOR TREATMENT OF UNIQUE
PRIVATE AND PUBLIC SECTOR COST ELEMENTS
Exhibit 20
Cost Element Reference Principle /Treatment
Taxes and Fees Items (1)» Taxes and fees paid by some operators and
(3), (6) not others should be recognized by
decisionmakers as revenue to the public
sector. To some extent, these revenues
may be available for local public trans-
portation purposes, and to that extent
should be considered as an offset against
the bid costs of those operators that pay
them. Ideally, efforts should be made to
remove these tax and fee differentials
through changes in relevant laws and
regulations.
Nonattributable Item (5) Public sector costs that benefit both

Public Sector Costs public and private operators should not
be included by the public carrier in a
fully allocated cost comparison if they
are not attributable to the service up
for bid. Fundraising, grants management,
and financial reporting, among others,
generally fall into this category. Other
activities, such as marketing and
planning, may be partly attributable and
partly nonattributable. For example, to
the extent that a private operator is
responsible under the contract for
planning and marketing a proposed
service, the public agency's costs of
performing the same functions should be
included in the cost comparison.
Costs Imposed by Public agencies incur some costs as a

Federal and State ^ result of federal and state requirements
Requirements for grant fund recipients. Some of these
costs are not attributable to the service
up for bid (such as financial reporting)
and should not be included in a fully
allocated cost comparison. Other costs,
such as handicapped accessibility, will
be attributable and should be included in
both public and private sector costs.
EXHIBIT 22
Page 2 of 2
COMPETITIVE SERVICES BQARD

PRINCIP LES FOR TREATMENT OF TOIQUE
PRIVATE AND PUBLIC SECTOR COST ELEMENTS
Exhibit 20
Cost Element Reference PriBciple/Treatmetit
Interest Expense Item (7) The cost of capital equipment tised to

provide transit service will often
include interest charges » These charges
should be included in the cost comparison
to reflect the cost of capital. Although
the public agency will often have access
to a lower interest rate than private
operators, this appears to be an
advantage inherent to the public sector,
and there is no valid reason to
compensate for it in the cost
comparison. Mhere public sector interest
charges are much lower, it may be
preferable for the public agency to
obtain the vehicles, regardless of who
operates them.
Costs of Contracting Items Certain costs will arise as a result of

(4), (8) contracting services to the private
sector^ such as bid preparation, labor
protection, and contract management. To
the extent that these costs are
identifiable and unavoidable, they should
be included in the costs associated with
the contracting option.
- 63 -
adopted the principle that public/private cost comparisons

should employ a fully allocated costing procedure. Fully
allocated costs include all direct and shared costs of capital,
operations, and administration attributable to the services
under consideration for competition. Fully allocated cost
comparisons in competitive bidding require that all
public-sector costs be shown with an explanation of what is
attributable and what is not. Such cost comparisons will
provide the information necessary for decisionmakers to assess
both the short-run and long-run cost implications of public
versus private-sector transit operations. In the evaluation of
the bids, however, decisionmakers should take into account the
fact that upon contracting out existing service, some or all of
the shared public-sector costs attributable to such service may
not be eliminated, and therefore may not produce cost savings
for the public agency, and the fact that public operators
bidding on new services under fully allocated costs may not
actually incur some of the costs identified."
The complete text of the CSB Principles on Cost Comparison

in Competitive Bidding is presented in Appendix I.
APPENDICES
t
APPENDIX A
SELECTED REFERENCES FOR COST ANALYSIS AND

COST ESTIMATION
REFERENCES
Booz, Allen, Bus Route Costing Procedures: Final Report . USDOT

(UMTA), April, 1984.
Cherwony, Gleichman and Porter, Bus Route Costing Procedures: A

Review U.S. Department of Transportation, May 1981.
,
Cherwony and Mundle, "Peak-Base Cost Allocation Models",

Transportation Research Record 663, 1978.
Cherwony and Porter, "Scheduling - Based Marginal

Cost-Estimating Procedure", Transportation Research Record
862, 1982.
Drake and Carter, "An Evaluation of Maintenance Manpower

Requirements," Transportation Research Record 1019, 1985.
Ferreri, "Development of Transit Cost Allocation Formula",

Highway Research Record 285, 1969.
Jones, "Tri-Met Bus Operator Costing Methodology",

Transportation Research Record 862, 1982.
Office of Management and Budget," Cost Principles for State and

Local Government", Federal Register Vol. 46, No. 18,
,
January 28, 1981.
Office of Management and Budget, "Performance of Commercial

Activities" 0MB Circular No. A-76 Supplement August 1983.
.
Peskin, "Development and Testing of a Cost-Allocation-Based Cost

Estimating Method", Transportation Research Record 862, 1982.
Porter, Driver /Extraboard Cost Model User's Guide , USDOT (UMTA),

October, 1984.
U.K. Transport and Road Research Laboratory, Symposium on the

Costing of Bus Operations, Supplementary Report 180UC,
Crowthorne, UK: U.K. Department of the Environment,
Transport and Road Research Laboratory, 1975.
UMTA , Introduction to Transit Operations Planning U.S.,
Department of Transportation, Urban Mass Transportation

Administration
Wentworth, Cost Allocation Model , Houston METRO, February 11,

1986.
APPENDIX B
GLOSSARY OF TERMS USED FOR

COST ALLOCATION AND COST ESTIMATION
feu
GLOSSARY
1. Average Cost - Total cost to produce a number of

units divided by the number of units
produced
2. Capital Costs - Expenses incurred for long term

capital acquisitions (e.g., buses,
facilities
3. Cost Center - An activity or organizational unit

within a transit system for which
costs can be accumulated.
4. Depreciation Cost Decrease in value of a capital asset

due to age as determined by purchase
price and useful life of the asset
5. Fixed Costs - Expenses that do not vary with the

level of production
6. Incremental Cost - Same as marginal cost
7. Marginal Cost - Change in cost resulting from an

increase or decrease in the level of
output
8. Mode - A type of transit service which is

differentiated by its vehicle
technology or operational
characteristics.
9. Operating Costs - Expenditures for resources consumed

during a single year
10. Operating Facility A facility from which vehicles are

dispatched
11. Peak Vehicles - Maximum number of vehicles required to

provide service at the hour of most
concentrated service
12. Revenue Hours - Number of hours of service operated

(does not include time required to
travel to and from storage facilities
or other "deadhead" travel)
13. Revenue Miles - Number of miles of service operated

(does not include miles required to
travel to and from storage facilities
or other "deadhead" travel)
14. Spare Ratio - Number of unassigned vehicles on hand

compared to the required number of
peak vehicles
- 2 -
15. Variable Costs Expenses which are directly related to

and vary with the level of production
16. Vehicle Hours Number of revenue and non-revenue

hours of service operated during any
given period
17. Vehicle Miles Number of revenue and non-revenue

miles of service operated during any
given period
APPENDIX C
GENERALLY ACCEPTED METHODS FOR

ESTIMATING SPECIFIC COST ELEMENTS
APPENDIX C
GENERALLY ACCEPTED METHODS FOR ESTIMATING

SIGNIFICANT TRANSIT COST ELEMENTS IN A FULLY
ALLOCATED COST ANALYSIS
The purpose of this appendix is to describe generally

accepted methods for estimating selected significant cost
elements associated with transit service operation and
maintenance when conducting a fully allocated cost analysis.
The appendix does not comprehensively describe the treatment of
all potential objects of transit service cost but is limited to
the most significant cost elements.
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APPENDIX D
GENERALLY ACCEPTED APPROACHES FOR

ESTIMATING DEPRECIATION EXPENSE
APPENDIX D
Page 2 of 14

COMPUTING DEPRECIATION EXPENSE
The purpose of this Appendix is to describe generally

accepted methods for computing the depreciation expense of
capital assets used in connection with the delivery of transit
service. The Appendix also includes a listing of useful lives
for selected capital assets and indicates accepted methods for
computing salvage value as a percentage of acquisition cost.
APPENDIX D
Page 3 of 14
GENERALLY ACCEPTED
DEPRECIATION METHODS
The depreciation methods listed below describe generally

accepted accounting methods. Some entities will use one method
for book reporting and another method for tax reporting. The
methods described here are the most commonly used in business.
Straight Line Depreciation Each year of service absorbs

:
an equal portion of the acquisition cost.
Depreciation per year = cost - net salvage value

# of years
Accelerated Depreciation Assets yield a greater quantity

:
of service in the early years of service life.
2a. Fixed percent of declining balance method a :
percentage depreciation rate is computed which when

applied to the book value of the asset at the
beginning of the period will result in decreasing the
asset's book value.
Depreciation per year = book value x depreciation rate
Depreciation rate = 1 net salvage value

- / n /
cost
where n = useful life (years)
2b. Sum-of-the-years-digits method is computed by a :
simple mathematical procedure relating to arithmetic

progressions.
Depreciation per year = Book Value X (Total § of Years - Years Depr)

[Life of Asset X ( life + 1) ]
2
3. Units of Output Method :(cost of asset less estimated net

salvage value) X estimated unit of output divided by life of
machine - note: depreciation per unit is constant.
Example: a buscosts $30,000, useful life 200,000 miles $0

salvage value, $30,000/200,000 = $.15 per mile
depreciation expense. Miles driven in year X $.15
per mile = depreciation expense.
.
APPENDIX D
Page 4 of 14
In addition retirement and replacement methods are sometimes

used in the railroad and public utility industries.
4. Retirement Method the asset cost less net salvage value is

:
expensed in the year of retirement.
5. Replacement Method the asset cost less net salvage value

:
is expensed in the year of replacement.
These methods are used when the service life of assets is

difficult to estimate and the distinction between maintenance
and replacement is difficult to analyze. They are normally used
when considering a group of interrelated assets each of which
has a relatively small unit cost.
The last two methods are used less frequently with utilities and
railroads
6. Annuity Method the period cost of using an asset is

:
considered to be equal to the expired cost of the asset plus

the interest on the unrecovered investment in the asset.
Depreciation = cost of asset less percent value of net salvage value

present value of ordinary annuity of X periods at Y %
Sinking Fund Method might be used when a fund is to be

:
accumulated to replace an asset at the end of its estimated

useful life. Under this method the amount of the annual
depreciation is equal to the increase in the asset
replacement fund.
APPENDIX D
PAGE 5 Of 15
USEFUL LIFE AND DISPOSAL VALUE TABLE
Disposal Value
Expected Factor as a
FSC Useful Life Percent of
No. Nomenclature (Years ) (a) Acquisition Cost
2210 Locomotives 29 16.51

2220 Rail Cars 40 10.27
2230 Right-of-Way Construction and
Maintenance Equipment, Railroad 20 18.69
2240 Locomotive and Rail Car
Accessories and Components (b) 9.98
2250 Track Materials, Railroad (b) - ' 41.00
2305 Ground Effect Vehicles 15

2310 Passenger Motor Vehicles See Below 17.00
Passenger Cars and Station Wagons 6
Buses (11 or more passengers) 12(c)
Ambulances 7
2320 Trucks and Truck Tractors, Wheeled
Less than 12,500 (payload 1 ton
and less)
12,500 through 16,999 (Payload,
1-1/2 through 2-1/2 tons)
17,000 and over (payload, 3 tons
and over) 9
Multiple Drive Vehicles 6
2330 Trailers 23 10.09
2340 Motorcycles, Motor Scooters and
Bicycles 12 27.31
2350 Combat, Assault and Tactical
Vehicles, Tracked 14 32.82
2410 Tractors, Full Track, Low Speed 14 27.62

2420 Tractors, Wheeled 13 22.70
2430 Tractors, Track Laying, High Speed (b) 7 .42
2510 Vehicle Cab, Body and Frame

Structural Components 10 14.18
2520 Vehicular Power Transmission
Components 12 16.22
2530 Vehicular Brake, Steering, Axle,
Wheel and Track Components 12 12.17
2540 Vehicular Furniture and Accessories 18 6.95
a. Unless specifically noted otherwise. Source: Office of

Management and Budget, "Performance of Commercial Activities,"
0MB Circular No. A-76 Supplement August, 1983.
.
b. There is no expected useful life reported for this iterr.

c. Source: Urban Mass Transportation Administration.
t
APPENDIX D
PAGE 6 of 15
Disposal Value
No. Nomenclature (Years)(a) Acquisition Cost
2590 Misc. Vehicular Components lU 1 . 04
2805 Gasoline Reciprocating Engines,

except Aircraft and Components 7 5 . 68
2815 Diesel Engines and Components (b) 13 . 33
o oo c
28 J5 Gas Turbines and Jet Engines,
except Aircraft and Components 15 3 . 59
2845 Rocket Engines and Components (b) 0 . 11
2910 Engine Fuel System Components,

Nonai re raf (b) 8 . 01
2920 Engine Electrical System
Components, Nonaircraft (b) 10 .32
2930 Engine Cooling System
Components, Nonaircraft (b) 21 .96
2950 Turbo superchargers (b) 8 .26
2990 Misc. Engine Accessories, Nonaircraft (b) 1
3010 Torque Converters and Speed Changers (b) 5 . 93

3020 Gears, Pulleys, Sprockets and
Transmi s s ion Cha in (b) 4 . 64
3040 Misc. Power Transmission Equipment (b) 3 . 22
3110 Bearings, Antifriction, Unmounted (b) 22 14 .
3120 Bearings, Plain, Unmounted (b) 4 78 .
3130 Bearings, Mounted (b) 7 80 .
3210 Sawmill and Planning Mill Machinery 15 28 41 ,,
3220 Woodworking Machines 15 27 37 ,,
3405 Saws and Filing Machines 20 30. 87 ,
3408 Machining Centers and Way-Type

Machines (b) 7 . 49
3410 Electrical and Ultrasonic Erosion
Machines 10 9 75 .
3411 Boring Machines 20 49. 61

3413 Drilling and Tapping Machines 15 40. 16
3414 Gear Cutting and Finishing
Machines 10 29. 58
3415 Grinding Machines 15 35. 06
3416 Lathes 20 39. 84
3417 Milling Machines 20 28. 22
3418 Planners and Shapers 20 27. 66
3419 Misc. Machine Tools 15 17 . 92
3422 Rolling Mills and Drawing
Machines 10 68. 35
APPENDIX D
PAGE 7 of 15
Disposal Value
3424 Metal Heat Treating and

Non-Thermal Treating Equipment 25 11.72
3426 Metal Finishing Equipment 20 6.63
3431 Electric Arc Welding Equipment 10 9.87
3432 Electric Resistance Welding
Equipment 15 9.90
3433 Gas Welding, Heat Cutting and
Metalizing Equipment 15 6.76
3436 Welding Positioners and
Manipulators 30 26 88 .
3438 Misc. Welding Equipment 10 4. 88

3439 Misc. Welding, Soldering and
Brazing Supplies and Accessories 5 10.98
3441 Bending and Forming Machines 25 42.25
3442 Hydraulic and Pneumatic Presses,
Power Driven 10 20. 14
3443 Mechanical Presses, Power Driven 11 59.41
3444 Manual Presses 30 29.67
3445 Punching and Shearing Machines 15 44. 83
3446 Forging Machinery and Hammers 20 77.56
3447 Wire and Metal Ribbon Forming
Machines (b) 24. 60
3448 Riveting Machines 10 14. 12
3449 Misc. Secondary Metal Forming and
Cutting Machines 10 35.22
3450 Machine Tools, Portable 20 13 28.
3455 Cutting Tools for Machine Tools (b) 9.89

3460 Machine Tool Accessories 15 17 41.
3461 Accessories for Secondary Metal-

working Machinery (b) 4.32
3465 Production Jigs, Fixtures and
Templates 5 2.28
3470 Machine Shop Sets, Kits and Outfits (b) 3 .57
3610 Printing, Duplicating and

Bookbinding Equipment 16 4.31
3611 Industrial Marking Machines 10 2.20
3620 Rubber and Plastics Working
Machinery 8 45 18 .
3650 Chemical and Pharmaceutical

Products Manufacturing Machinery (b) 7 .85
3655 Gas Generating and Dispersing
Systems 12 7.35
3660 Industrial Size Reduction
Machinery 9 27.30
APPENDIX D
PAGE 8 of 15
Disposal Value
No. Nomenclature (Year s ) (a) Acquisition Cost
3680 Foundry Machinery, Related Equip-

ment and Supplies 10 12.61
3693 Industrial Assembly Machine (b) 0.45
3694 Clean work Stations, Controlled
Environment and Related Equipment (b) 6.43
3695 Misc. Special Industry Equipment 4 7.58
3710 Conveyors 12 6.85
3920 Materials Handling Equipment

Nonself Propelled 22 9.07
3930 Warehouse Trucks and Tractors,
Self Propelled See Below 18.60
Gasol ine
Fork Truck (2,000 pounds to
6,000 pounds) 8
Fork Truck (over 6,000 pounds 10
Tractor 8
Crane 12
Platform Truck 8
Straddle Truck 15
Electric
All types 15
3940 Blocks, Tackle, Rigging and
Slings (b) 9.61
3950 Winches, Hoists, Craines
and Derricks 13 10.23
3990 Misc. Materials Handling Equipment 30 8.71
4010 Chain and Wire Rope (b) 5.11

4020 Fiber Rope, Cordage and Twine (b) 6.81
4030 Fittings for Rope, Cable and Chain (b) 13.16
4110 Refrigeraton Equipment 11 7.07

4120 Air Conditioning Equipment 10 3.82
4130 Refrigeration and Air Condi-
tioning Components 16 4.26
4140 Fans, Air Circulators and Blow
Equipment 7 4.79
4210 Fire Fighting Equipment 14 6.55

4220 Marine Lifesaving and Diving
Equipment 10 5.65
4230 Decontaminating and Impregnating
Equip 17 5.87
4240 Safety and Rescue Equipment 19 2.53
APPENDIX D
PAGE 9 of 15
Disposal Value
4310 Compressors and Vacuum Pumps .10 7 . 59

4320 Power and Hand Pumps 15 4.27
4330 Certifuges, Separators and
Pressure and Vacuum Filters 20 4.90
4410 Industrial Boilers 9 3.78

4420 Heat Exchanges and Steam Con-
densors (b) . 9.73
4430 Industrial Furnaces, Kilns, Lehrs
and Ovens 10 6.59
4440 Driers, Dehydrators and Anhy-
drators . 10 4.55
4460 Air Purification Equipment 11 3.71
4510 Plumbing Fixtures and Accessories 15 5.91

4520 Space Heating Equipment and
Domestic Water Heaters 8 8.36
4540 Misc. Plumbing, Heating and
Sanitation 8 3.01
4610 Water Purification Equipment 14 4.55
4620 Water Distillation Equipment,
Marine and Industrial 15 15.61
4710 Pipe and Tube (b) 7.79

4720 House and Tubing, Flexible (b) 6.13
4730 Fittings and Specialities, Hose
Pipe and Tube (b) 4.83
4810 Valves Powered

, (b) 2.20
4820 Valves, Nonpowered (b) 4.91
4910 Motor Vehicle, Maintenance and

Specialized Equipment 11 6.63
4930 Lubrication and Fuel Dispensing
Equipment 15, . 5.00
4931 Fire Control Maintenance and
Repair Shop Specialized Equipment 9 1.18
4933 Weapons Maintenance and Repair
Shop Specialized Equipment 15 •
1.91
4935 Guided Missile Maintenance,
Repair and Checkout Specialized
Equipment 19 0.40
4940 Misc. Maintenance and Repair Shop
Specialized Equipment 20 4. 48
5110 Hand Tools, Edged, Nonpowered 10 9.26

APPENDIX D
PAGE 10 of 15
Disposal Value
No Nomenclature (Years ) (a) Acquisition Cost
5120 Hand Tools, Nonedged, Nonpowered 21 5.53

5130 Hand Tools, Power Driven 10 10.31
5133 Drill Bits, Counterbores and
Countersinks, Hand and Machine 10 24.07
5136 Taps, Dies and Collets, Hand
and Machine 10 8.08
5140 Tool and Hardware Boxes 20 26.42
5180 Sets, Kits and Outfits of Hand
Tools 23 3.83
5210 Measuring Tools, Craftsmen 10 4.87

5220 Inspection Gages and Precision
Layout Tools 12 3.17
5280 Sets, Kits and Outfits of
Measuring Tools 25 1.01
5410 Prefabricated and Portable

Building 8 2.48
5411 Rigid Wall Shelters 20 2.44
5420 Bridges, Fixed and Floating 17 7.25
5430 Storage Tanks 7 6.83
5440 Scaffolding Equipment and
Concrete Form 5 6.83
5445 Prefabricated Tower Structures 23 5.23
5450 Misc. Prefabricated Structure 25 1.30
5670 Architectural and Related Metal

Products 10 59.16
5680 Misc. Construction Materials 69 9.59
5805 Telephone and Telegraph Equipment 23 2.37

5810 Communications Security Equipment
and Components 16 0.40
5811 Other Cryptologic Equipment
and Components 11 1.25
5815 Teletype and Facsimile Equipment 22 0.99
5820 Radio and Television Communications 8 2.44
5825 Radio Navigation Equipment, except
Airborne 24 1.44
5830 Intercommunication and Public
Address Systems, except Airborne 24 1.74
5835 Sound Recording and Reproducing
Equipment 22 1 . 43
5840 Radar Equipment, except Airborne 23 0.92
5845 Underwater Sound Equipment 13 1.14
APPENDIX D
PAGE 11 of 15
Disposal Value
No. Nomenclature ( Years ) (a) Acquisition Cost
5850 Visible and Invesible Light

Communication Equipment 24 0.32
5855 Night Vision Equipment, Emitted and
Reflected Radiation 25 1 . 18
5860 Stimulated Coherent Radiation
Devices, Components and Assessories 25 0.71
5865 Electronic Countermeasures Counter
,
Countermeasur es and Quick Reaction

Capability Equipment 20 0. 27
5895 Misc. Communications Equipment 23 0. 67
5905 Resistors 8 1. 02
5910 Capacitors 8 2.32
5915 Filters and Networks 25- 0. 93
5920 Fuses and Lightning Arrestors 25 3 12.
5925 Circuit Breakers '10 7.49

5930 Switches 10
'
1.55
5935 Connectors, Electrical 22 20. 61
5940 Lugs Terminals and Temminal
,
Strips 8 1. 66
5945 Relays and Solenoids 25 1.36
5950 Coils and Transformers 8 1.35
5955 Piezoelectric Crystals 8 0.65
5960 Electron Tubes and Associated
Hardware 8 1.00
5961 Semiconductor Devices and
Associated Hardware 8 1.04
5962 Microcircuits Electronic
, .8 0.54
5963 Electronic Modules 8
5965 Headsets, Handsets, Microphones
and Speakers -24 4. 28
5970 Electrical Insulators and Insulting
Materials 8 34. 93
5977 Electrical Contact Brushes and f
Electrodes 8 2. 08
5985 Antennas, Waveguide and Related
Equipment 8 2 . 02
5990 Synchros and Resolvers 14 1.65
5995 Cab'.e, Cord and Wire Assemblies,
Communications Equipment 24 4. 16
5999 Misc. Electrical and Electronic
Components 20 1.01
6105 Motors, Electrical 10 5.31

6110 Electrical Control Equipment 8 2.45
APPENDIX D
PAGE 12 of 15
Disposal Value
6115 Generators and Generator Sets,

Electrical 19 6.50
6116 Fuel Cell Power Units, Components
and Accessories 15 22.88
6120 Transformers: Distribution and
Power Station 36 7.87
6125 Converters, Electrical, Rotating 25 2.88
6130 Convertors, Electrical, Nonrotating 22 1.75
6135 Batteries, Primary 15 2.51
6140 Batteries, Secondary 25 6.91
6145 Wire and Cable, Electrical 25 16.29
6150 Misc. Electric Power and
Distribution Equipment 15 2.55
6210 Indoor and Outdoor Electric

Lighting Fixtures 16 3.95
6220 Electric Vehicular Light and
Fixtures 10 4.58
6230 Electric Portable and Hand
Lighting Equipment 17 3.44
6240 Electric Lamps 10 6.92
6250 Ballasts. Lampholders and Starters 10 3.91
6310 Traffic and Transit Signal Systems 4 3.52

6320 Shipboard Alarm and Signal Systems 4 2.68
6350 Misc. Alarm, Signal and Security
Detection Systems 6 1.38
6620 Engine Instruments 15 3.04

6625 Electrical and Electronic
Properties Measuring and Testing
Instruments 15 1.15
6630 Chemical Analysis Instruments 5 1.70
6635 Physical Properties Testing
Equipment 13 6.62
6636 Environmental Chambers and Related
Equipment 10 2.20
6640 Laboratory Equipment and Supplies 20 2.12
6645 Time Measuring Instruments 25 5.54
6650 Optical Instruments 8 2.31
6655 Geophysical and Astromical
Instruments 25 2.02
6660 Meterological Instruments and
Apparatus 10 1.05
6665 Hazard-Detecting Instruments and
Apparatus 16 1.44
APPENDIX D
PAGE 13 of 15
Disposal Value
6670 Scales and Balances 18 4.77

6675 Drafting, Surveying and Mapping
Instruments 19 2.44
6680 Liquid and Gas Flow, Liquid Level
and Mechanical Motion Measuring
Instruments 10 2.87
6685 Pressure, Temperature and Humidity-
Measuring and Controlling Instruments 10 2.53
6695 Combination and Misc. instruments 8 2.06
6710 Cameras, Motion Pictures 25 5 . 29

6720 Cameras, Still Picture 24 1.82
6730 Photographic Projection Equipment 25 3.52
6740 Photographic Developing and
Finishing Equipment 24 3 . 32
6750 Photographic Supplies 25 8 . 64
6760 Photographic Equipment and
Acces sor ies 24 1.36
6780 Photographic Sets, Kits and Outfits 22 3 24 .
6910 Training Aids 20 0.96

6920 Armament Training Devices 20 3 . 22
6930 Operation Training Devices 21 0. 62
7010 ADPE Configuration 8 0.73

7021 ADP Central Processing Unit,
Digital 15 0.73
7022 ADP Central Processing Unit,
Hybrid 15
7025 ADP Input/Output and Storage
Devices 13 1.01
7030 ADP Software 15 0.97
7035 ADP Accessorial Equipment 13 0.72
7040 Punched Card Equipment 15 0.87
7045 ADP Supplies and Support Equipment 11 1.50
7050 ADP Components 15 0.95
7105 Household Furniture 10 9.94

7110 Office Furniture 10 16.20
7125 Cabinets, Lockers, Bins and
Shelving 20 9 . 47
7195 Misc. Furniture and Fixtures 10 6.17
7310 Food Cooking, Baking and Serving

Equipment 12 40
7320 Kitchen Equipment and Appliances 18 60
APPE N DIX D
PAGE 14 of 15
Disposal Value
No. Nomenclature ( Years ) (a) Acquisition Cost
7360 Sets, Kits and Outfits: Food

Preparation and Serving 10 11.41
7420 Accounting and Calculating

Machine 12 Electric/
15 Manual 1.46
7430 Typewriters and Office Type
Compos ing Machines 12 Electric/
15 Manual 6.10
7450 Office Type Sound Recording and
Reproducing Machines 12 1.17
7460 Visible Record Equipment 2.26
7490 Misc. Office Machines 12 3.30
7910 Floor Polishers and Vacuum

Cleaning Equipment (b) 5.72
8145 Specialized Shipping and Storage

Containers 22 6.55
8340 Tents and Tarpaulins 5 4.86

8345 Flags and Pennants 5 8.30
8415 Clothing, Special Purpose 5 10.81
8820 Live Animals, Not Raised for Food 3 55.05
9320 Rubber Fabricated Materials 5 19.40

9340 Glass Fabricated Materials 5 4. 14
9515 Armor Plate 10 19.00

9530 Metal Bar 10 47.51
9535 Metal Plate 10 52 44
.
APPENDIX E

TREATING LEASED CAPITAL ASSETS
The purpose of this Appendix is to describe generally

accepted methods for treating leased capital assets in a fully-
allocated costing analysis of public and non-profit agency
service proposals.
APPENDIX E

TREATING LEASED CAPITAL ASSETS
APPENDIX E
Page 1 of 6
ACCOUNTING FOR LEASES
Lease agreements are classified as either operating leases

or capital leases for financial reporting disclosure in the
private sector. The classification criteria and accounting
treatment described below follows the standards prescribed by
the Financial Accounting Standards Board,
A. Criteria for Classifying Leases
If a lease fulfills one of the following criteria, it is

treated as a capital lease. All other leases are treated as
operating leases.
The lease is classified as a Capital Lease if:
1. The lease transfers ownership of the property to the

lessee by the end of the lease term; or
2. The lease contains a bargain purchase option (where the

lease purchase price is lower than the expected fair
market value of the property) or ;
3. The lease term is equal to 75 percent or more of the

estimated economic life of the leased property (unless
the term begins in the last 25 percent of the estimated
economic life) or ;
4. The present value of the minimum lease payments

(amounts lessee is minimally obligated) excluding
executory costs (insurance, maintenance, tasks^, etc.
that are paid by the lessor) equals or exceeds ninety
percent of the fair market value of the lease prop-
erty. Again, the term cannot begin in the last 25
percent of the property's economic life. The present
value is calculated using the lesser of the interest
rate implied in the lease or the lessee's incremental
borrowing rate.
APPENDIX E
Page 2 of 6
B, Treatment of Leases
1. Q£eriMjlS_M3â_JTraainLent
The winimum lease payments for operating leases are expensed

in the period that they are due.
2. Capital Lease Trea tment
The present value of the minimum lease payments less execu-

tory costs (amount must be equal to or less than fair market
value) is recorded as a fixed asset and an obligation (liabil-
ity). The asset is then depreciated according to the entity's
depreciation policies or the term of the lease as defined in the
Financial Accounting Standards Board Statements. Each minimum
lease payment is allocated between reduction of the obligation
(liability) and period interest expense. The allocation of the
minimum lease payment is based on present value analysis.
C , Treatme n t of Leases— Two Examples
Example describes an operating lease and its treatment.

1
Example 2 describes an agreement to be treated as a capital

lease and describes its proper accounting treatment according to
Financial Accounting Standards.
1 o Operating Lease Treatment— Example 1
a. Situation
The lessee enters into an agreement to use a new piece of

equipment for 24 months at monthly cost of $1,000. The stated
a
interest rate is six percent. The lessee has the option to buy
the equipment at the end of the term for $28,000. Executory
APPENDIX E
Page 3 of 6
costs equal $1/000 for the lessee term. The equipment has an
economic life of five (5) years and a fair market value of
$50/000 to the lessor. The equipment has no residual value at
the end of its expected economic life.
b . Lease Classification
1. The lease does not automatically transfer to the lessee

at the end of the lease term.
2. A purchase of $28,000 at the end of the lease term does

not represent a bargain purchase.
3. The lease term is forty percent of the equipment's

economic life, less than the required 75 percent life
for a Capital Lease.
4. Present value of the minimum lease payments equals:

24 months x $1,000 = $24,000
less executory costs 1.000
$23,000
Present value of minimum payments $20 47p
.
at 6% interest rate
$20,470 is less than ninety percent of fair market

value ($50,000)
Therefore, none of the criteria for a Capital Lease have

been met. This lease is to be treated as an Operating Lease.
In the first year $12,000 would be charged to period expense and
in the second year $12,000 would be changed to period expense.
2 . Capital Lease Treatment — Example 2
a. Situation
The lessee enters into an agreement to lease equipment for

sixty (60) months at $100,000 per month. The lease interest
rate equals six percent (6%). The lessee can currently borrow
.
APPENDIX E
Page 4 of 6
funds for major equipment purchases at 6.5 percent (6.5%). At

the end of the lease, the lessee can acquire the equipment for
$200,000. The lessor's estimated economic life of the equipment
is eight (8) years. The fair market value of the equipment is
$4,600,000. The taxes equal $100,000 over the term of the
lease. Maintenance and insurance is contracted for by the
lessee
b. Lease Classification
1. Ownership does not transfer at the end of the lease

term.
2. A bargain purchase option does not exist.
3. The lease term is less than 75 percent of the

eight-year economic life.
4. The Present Value of the minimum lease payments equals:
60 months x $100,000 = $6,000,000

Less executory costs 100 OOP
.
$5,900,000
Present Value of minimum payment $4,407,300
at 6% interest rate
The present value of the minimum payments equals 95.8 percent

of the fair market value.
Therefore, since the minimum lease payments exceeds ninety

percent of the fair market value, this lease qualifies as a
Capital Lease.
APPENDIX E
Page 5 of 6
c . Capital Lease Accounting Treatment
Each year payments equaling $1,200/000 are made. The pres-

ent value of those payments at a six percent interest rate is
$4,482/000/ the amount to be initially capitalized and recorded
as an obligation (liability). Each year the $1,200/000 is allo-
cated between interest expense and depreciation based on the
following schedule.
APPENDIX E
Page 6 of 6
EXAMPLE 2
SCHEDULE OF ACCQUNTINg TREATMENT
Minimum Lease Payments: 60 x $100,000 $6,000,000

Discount Factor @ 6% for 5 years X .747
Present Value of Lease Payments $4,482,000
Interest Portion Recognized in
Lease Agreement $1,518,000
(1) (2) (4)

LEASE INTEREST (3) REMAINING
VST A O PAYMENT EXPENSE DEPRECIATION ASSET VALUE
1 $1,200,000 $505,494 $694,506 $3,787,494
1
£ 1,200,000 405,306 794,694 2,992,800
3 1,200,000 303,600 896,400 2,096,400
4 1,200,000 201,894 998,106 1,098,294
D 1,200,000 101,706 .1^098,294 ~0-
Total
Lease $6,000,000 $1,518,000 $4 ,482,000
1 e $100, 000/Month x 12 months
2. "Rule of Eights" Interest Amortization .
Year 1 5 33.3% X 1,518,000

5 + 4 + 3 + 2 + 1
Year 2 4 26,7% X 1,518,000

5 + 4 + 3 + 2 + 1
Year 3 3 20.0% X 1,518,000

5 + 4 + 3 + 2 + 1
Year 4 2 13.3% X 1,518,000

5 + 4 + 3 + 2 + 1
Year 5 1 = ^,71 X 1,518,000

5+4+3+2+1 100,0%
Column (1) - Column (2)
$4,482,000 less cumulative depreciation

APPENDIX F
COMPETITIVE SERVICES BOARD'S PRINCIPLES ON
COST COMPARISONS IN COMPETITIVE BIDDING

The Competitive Services Board was established by Che Urban Mass
Transportation Administration (UMTA), in cooperation with the American Public
Transit Association (APTA), as a forum for a broad cross-section of public and
private sector interests to consider issues related to the competitive
provision of transit services. The Board seeks to develop a thorough
understanding of these issues with the objective of reaching a consensus on
principles for the guidance of local decisionmakers. For issues on which
agreement cannot be reached readily, the Board clarifies and documents the
concerns and identifies potential actions to address them.
The Board's membership (listed overleaf) is a diverse group representing

a wide variety of interests, Including public transit agencies, private
operators, state departments of transportation, local governments, regional
councils, and rural and specialized transit operators. In addition, the
administrator of UMTA, the executive director of APTA, and senior

representatives of other national associations serve as ex officio members.
They help provide policy direction and are encouraged to attend and
participate at all Board meetings.
The Board has been established for a two-year initial period. It is
expected to meet at least twice a year, with working groups convening in the
Interim to consider specific issues in depth. The Board's Inaugural meeting
was held in Washington in September 1986.
Technical Secretarial: The Urban Insiiiuie

2100 M Sireei. N W. • Washington. D C. 20037 • 202-857-8523
Kerobership
Florence Boone Regional Transit Authority (Chicago) 312 364-7223

Raleigh D'Adamo Bi~Scate Development Agency (St. Louis) 314 982-1588
Byron Fanning Greyhound Lines 602 248-7346
Michael Grovak New York City Transit Authority 718 330-4123
John Hartz Wisconsin Department of Transportation 608 266-0658
David King North Carolina Department of Transportation 919 733-4713
Ted Knappen Trailways 202 347-3827
Peter Levi Mid-America Regional Council (Kansas City) 816 474-4240
John McCarthy Continental Air Transport 312 454-7800
Tom Kiskala Regional Transit Authority (Corpus Christ!) 512 883 2287
Elliott Perovich Regional Transit Board (Minneapolis-St Paul)
. 612 292-3818
Tom Phillips Hartford Transportation Services 203 722-8464
Mark Pisano Southern California Assn. of Governments 213 385-1000
Jerry Premo New Jersey Transit 201 648-7418
Phil Ringo ATE Management and Service Company 513 381-7424
Roger Snoble San Diego Transit Corporation 619 238-0100
Gene Stalians Diversified Paratransit 714 622-1316
Terry Van Der Aa VancoEj Inc. 312 474-6404
Doug Wentworth Metropolitan Transit Authority (Houston) 713 739-4625
Linda Wilson JAUNT (Charlottesville, VA) 804 296-3184
Ex Officio Members
Karen Finkel National School Transportation Association 703 644-0700

Frank Francois American Association of State Highway 202 624-5810
and Transportation Officials
Jack Gilstrap American Public Transit Association 202 828-2800
Richard Hartman National Association of Regional Councils 202 457-0710
Randy Isaacs Natl. Assn. of Transportation Alternatives 214 414-1949
Al LaGasse International Taxicab Association 301 946-5700
Ray Mundy Airport Ground Transportation Association 615 525-1108
David Raphael Rural America 202 659-2800
Norman Sherlock American Bus Association 202 293-5890
Wayne Smith United Bus Owners Association 202 484-5623
Ralph Stanley Urban Mass Transportation Administration 202 366-4040
Technical Secretariat
Ronald Kirby The Urban Institute 202 857-8728

William Gellert The Urban Institute 202 857-8523
.
THE COMPETITIVE SERVICES BOARD'S PRINCIPLES

ON COST COMPARISONS IN COMPETITIVE BIDDING
NOVEMBER 16, 1986
The current interest in encouraging competition for the

provision of public transportation services has raised a number
of issues regarding the proper way to compare public and private-
sector costs. The Competitive Services Board has developed the
principles presented here with the intent of helping state and
local decisionmakers resolve these issues. These principles are
responses to actual concerns raised by state and local
decisionmakers and public and private operators with respect to
cost comparisons in competitive bidding. The Board recognizes
that cost comparison is an important consideration, but not the
sole consideration, in evaluating competitive bids. Other
considerations include service quality, service continuity,
financial and managerial ability to carry out the contract, and
relevant experience in the provision of public transportation
services
In developing these principles, the Competitive Services

Board recognized the complexities inherent in balancing the
demands of public policy, sound economics and service to the
public. The Board also recognized that competition which draws
upon the skills and resources of both the public and private
sectors is extremely valuable. Accordingly, the Board has
developed these principles on cost comparisons as a practical,
general guide to help in fostering an even-handed competitive
environment for public transportation.
The public agency has a responsibility to minimize public-

sector costs and to maximize the amount of service that can be
provided. Guided by this objective, the Board has adopted the
principle that public/private cost comparisons should employ a
fully allocated costing procedure. Fully allocated costs include
all direct and shared costs of capital, operations, and
administration attributable to the services under consideration
for competition. Fully allocated cost comparisons in competitive
bidding require that all public-sector costs be shown with an
explanation of what is attributable and what is note Such cost
comparisons will provide the information necessary for
decisionmakers to assess both the short-run and long-run cost
implications of public versus private-sector transit operations.
In the evaluation of the bids, however, decisionmakers should
take into account the fact that upon contracting out existing
service, some or all of the shared public-sector costs
attributable to such service may not be eliminated, and therefore
may not produce cost savings for the public agency, and the fact
that public operators bidding on new services under fully
allocated costs may not actually incur some of the costs
identified.
»
The following sections deal with the application of the

fully allocated costing principle to specific aspects of
public/private cost comparisons
OaV-ggniLen^Fiâncipl ^ppport
The total costf regardless of source of financial support,

should be used in cost comparisons to reflect actual costs to the
taxpayer. For example, if vehicles are purchased with 75 percent
federal funds^ 10 percent state funds, and 15 percent local
funds^ the full 100 percent cost should be used in the cost
comparison,
MlBiît.,catto Cpgts
The portion of a transit agency's administrative costs that
are attributable to the service should be included in the cost
cortipar isoHj including the attributable portion of senior
management compensation.
Contributions from Other Government or Aoencv Units
Some public operators use without charge the services or

facilities of other government or agency units (for example,
legal or clerical services^ or parking lots) « Because these
contributions are real costs to the taxpayer, they should be
included in cost comparisons at their actual cost to the relevant
government or agency unit,
Honattributable Pu blic-Sector Costs
Public-sector costs that benefit both public and private

operators should not be included by the public carrier in a fully
allocated cost comparison if they are not attributable to the
•
service up for bid„ Fundraising, grants management, and

financial reporting, among others, generally fall into this
categoryo Other activities, such as marketing and planning, may
be partly attributable and partly nonattributable. For example,
to the extent that a private operator is responsible under the
contract for planning and marketing a proposed service, the
public agency's costs of performing the same functions should be
included in the cost comparison.
Public agencies' physical assets should be included in cost

comparisoRS using generally accepted accountifig principles for
competing appropriate depreciation charges. However, if the
public agency provides the capital assets (such as vehicles or
facilities) for a private bidder, those capital costs should not
be included in the cost comparison^
2
.
Costs Imposed bv Federal and State Requirements
Public agencies incur some costs as a result of federal and

state requirements for grant fund recipients. Some of these
costs are not attributable to the service up for bid (such as
financial reporting) , and should not be included in a fully
allocated cost comparison. Other costs, such as handicapped
accessibility, will be attributable, and should be included in
both public and private-sector costs.
Taxes and Fees
Taxes and fees paid by some operators and not others should
be recognized by decisionmakers as revenue to the public sector.
To some extent, these revenues may be available for local public
transportation purposes, and to that extent should be considered
as an offset against the bid costs of those operators that pay
them. Ideally, efforts should be made to remove these tax and
fee differentials through changes in relevant laws and
regulations.
Disclosure of Private-Sector Cost Information
Whether private carriers should be required to disclose the

composition of their bids, and if so, to what level of detail,
are matters to be decided based on local conditions and
preferences. In principle, full disclosure is not necessary for
cost-comparison reasons, since the "bottom line" provides
sufficient cost information to award a contract.
However, there are other reasons for requiring disclosure.

Some limited disclosure is necessary to take advantage of the
capital cost of contracting policy, although competitive
pressures and UMTA's percentage limits on the capital component
of contracts can provide adequate safeguards without requiring
detailed information. Disclosure is necessary also when the
outcome of the contract competition is legally challenged, and
may be preferred in order to ensure fairness in terms of bid
preparation costs, reassure the public agency about the validity
of the private carrier's cost structure, or guard against "low-
balling" (bidding low to win the initial contract, with the
intention of recovering losses in subsequent negotiations)
Identification of taxes and fees paid by the private operator may
also be necessary if they are to be adequately considered in cost
comparisons.
On the other hand, strict disclosure requirements may

greatly increase paperwork, and may discourage private operators
from bidding, especially where the information would be public
knowledge under freedom of information laws.
U U.S. GOVERNMENT PRINTING OFFICE: 1987— 181-7 8 3 ' 6U61't

DOT LIBRARY
00399686

Fully Allocated Cost Analysis For Public Transportation

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u s Department

FULLY ALLOCATED COST ANALYSIS

OFFICE OF GOVERNMENT SERVICES

Piftasfi Dir ect Inquiries to

A. Fully Allocated Cost Analysis - A Definition . 1

B. Organization of the Report 2

II. FULLY ALLOCATED COSTS - WHAT TO INCLUDE

A. Components of a Fully Allocated Cost

B. Identifying Direct and Shared Costs

III . DEVELOPMENT AND APPLICATION OF A FULLY ALLOCATED

A. Allocating Costs with a Three-Variable

B. Additional and Alternative Allocation

C. Optional Methods for the Development of

IV. DEVELOPMENT AND APPLICATION OF A FULLY ALLOCATED

A. Multiyear Service Proposals 33

B. Complex Operating Environments 40

V. PRINCIPLES FOR THE TREATMENT OF COSTS THAT ARE UNIQUE

A. Differences in Public and Private Sector

B. Principles for Treating Differences in

A. References for Costing Analysis

B. Glossary of Terms Used for Cost Allocation and Estimation

C. Generally Accepted Methods for Estimating Specific Cost

D. Generally Accepted Methods for Computing Depreciation

E. Generally Accepted Methods for Treatment of Capital Leases

F. Competitive Services Board's Principles on Cost Comparisons

1 Hypothetical Transit Organization

2 Summary of the Cost Allocation Process . . 11

3 Assignment of Expense Object Classes to

4 Calculation of Total Costs Assigned to

5 Calculation of Unit Costs 16

6 Calculation of Route-Specific Values

7 Calculation of Fully Allocated Costs. ... 19

8 Summary of Cost Allocation Variable

9 Process for Developing Fully Allocated

10 Use of Cost Build-up and Unit Cost Methods

11 Summary of Cost Estimation Options 32

12 Projection of Selected Operating Costs. . . 35

13 Projection of Revenue Vehicle Costs

14 Relationship of Organization Structure to

15 Calculation of Unit Costs for a Multi-

16 Relationship of Organization Structure to

17 Calculation of Unit Costs for a Single

18 Relationship of Organization Structure

19 Calculation of Unit Costs for a Multi-

20 Differences in Public and Private Sector

21 Membership of the Competitive Services

22 Competitive Services Board Principles for

UMTA guidance for implementation of the Private Enterprise

"When comparing the service proposals made by

The use of fully allocated costs to compare the service

The purpose of this report is to describe generally accepted

A. Fully Allocated Cost Analysis - A Definition

The principle underlying fully allocated costing analysis is

• The direct costs of the labor, capital and material

• A portion of the shared costs of the labor, capital and

The principles of fully allocated costing analysis are often

This report builds upon these principles and describes

therefore, is descriptive and not prescriptive. It describes j

generally accepted methods and techniques that are consistent j

with the principles of fully allocated costing analysis. It '

does not, however, prescribe a specific fully allocated costing i

B . Organization of the Report

This report is organized to serve as a reference guide for