Office of Inspector General

Audit Report

AMTRAK’S NEW COST ACCOUNTING 

SYSTEM IS A SIGNIFICANT IMPROVEMENT 

BUT CONCERNS OVER PRECISION AND 

LONG TERM VIABILITY REMAIN

Federal Railroad Administration

Report Number: CR-2013-056

Date Issued: March 27, 2013
U.S. Department of

Memorandum

Transportation

Office of the Secretary

of Transportation

Office of Inspector General

Subject: ACTION: Amtrak’s New Cost Accounting System 

Is a Significant Improvement But Concerns Over 

Precision and Long Term Viability Remain

Federal Railroad Administration

Report No. CR-2013-056

Date: March 27, 2013

From: Mitchell Behm

Assistant Inspector General for Rail, Maritime, and 

Economic Analysis

Reply to 

Attn. of: JA-50

To: Federal Railroad Administrator

For several years, Amtrak management, Congress, and other stakeholders1

expressed concerns about weaknesses in Amtrak’s cost accounting system, the 

Route Profitability System (RPS). Specifically, they raised concerns over the 

system’s weaknesses in transparency, timeliness, system maintenance, and cost 

allocation. In 2005, the Government Accountability Office (GAO) reported that 

Amtrak’s reliance on cost allocation rather than cost assignment2 and RPS’s lack 

of transparency contributed to unreliable financial performance reporting.3 In 

response to these problems, Congress required the Federal Railroad

Administration (FRA) to develop and Amtrak to implement a modern cost

accounting and reporting system.

The Passenger Rail Investment and Improvement Act of 2008 (PRIIA)4

 1 Amtrak’s other stakeholders include FRA, States and freight and commuter railroads.

required 

the Department of Transportation’s Office of Inspector General (OIG) to review 

the new system to determine whether it produces reliable reporting on Amtrak’s 

financial performance. Specifically, our objectives were to assess whether the 

system: (1) tracks Amtrak’s financial performance by route, line of business, and 

2 In this report, assigned costs are referred to as costs that can be traced exclusively to a particular product or service; 

while allocated costs are referred to as costs that cannot be traced exclusively to a particular product or service and 

therefore must be apportioned in a reasonable and consistent way.

3 GAO, Amtrak Management – Systemic Problems Require Actions to Improve Efficiency, Effectiveness, and 

Accountability, GAO-06-145, October 2005. 4 P.L. No. 110-432 Div. B.
2

major activity; (2) addresses concerns with RPS; and (3) calculates Amtrak’s 

avoidable costs5 with respect to each of its routes using a sound methodology.

In conducting this audit, we interviewed Amtrak and FRA officials and their 

contractors and consultants to identify critical elements of the new system’s design 

and implementation, and assess whether the system meets its mandatory 

requirements. We also reviewed Amtrak’s new cost accounting system’s 

underlying cost methodology and FRA’s avoidable cost methodology, observed

system demonstrations, and analyzed system reports. Additionally, we interviewed 

officials at other railroads, and academics and experts in the fields of 

transportation economics, information technology, and cost accounting to assess 

the reasonableness of FRA’s avoidable cost methodology. We conducted this audit 

according to generally accepted Government auditing standards. A more detailed 

discussion of our scope and methodology is provided in Exhibit A. A description 

of some basic cost accounting principles is provided in Exhibit B.

BACKGROUND

As a private corporation that receives billions of dollars in capital and operating 

grant funds from the FRA, Amtrak is required to submit regular reports to 

Congress on the financial performance of each of its 45 train routes. For 34 years, 

Amtrak generated these route performance reports using RPS. However, RPS did 

not provide the reliable cost accounting information essential to making prudent 

business decisions. Furthermore, because RPS did not report on the financial 

performance of Amtrak’s ancillary lines of business,

6 there were also concerns 

over the system’s ability to delineate revenues and costs by lines of business.7

RPS’s shortcomings led to two congressional mandates requiring FRA to develop, 

and Amtrak to implement, an improved cost accounting and reporting system. The 

first, the Consolidated Appropriations Act of 2005,

8 required FRA to develop, and 

Amtrak to implement, a methodology to calculate and report Amtrak’s fully 

allocated costs and avoidable costs. The second mandate, PRIIA, required Amtrak 

to implement a modern financial accounting and reporting system to track and 

report on all its revenues and costs by route, line of business, and major activity.9

 5 Avoidable costs are those costs which can be eliminated with the cessation of an activity, such as the manufacture of a 

product line, or, in this case, the operation of an Amtrak route. 6 In addition to its intercity train operations, Amtrak engages in ancillary business activities, including commuter rail 

services for several States and transit agencies, equipment maintenance for other rail carriers, and rights-of-way and

real estate leasing.

7 GAO-06-145 8 P.L. No. 108-447 Div. H. 9 Major activities within Amtrak’s routes and lines of business include train operations, equipment maintenance, food 

and beverage services, and sleeping car services. 
3

In 2010, Amtrak implemented its new system, Amtrak’s Performance Tracking 

(APT), which is based on a cost methodology developed jointly by FRA and 

Amtrak, to track and report on its financial performance. APT consists of two 

modules—one that tracks and reports on Amtrak’s financial performance and 

another that calculates and reports avoidable costs for each Amtrak route. In 2010, 

Amtrak also implemented its SAP Enterprise Resource (SAP)10 system that 

consolidates data from Amtrak’s supply chain, human resources management, and 

asset performance management systems with its financial accounting system. APT 

is one of SAP’s ancillary systems

11 and is dependent on the financial data that 

SAP contains to track and report on Amtrak’s financial performance. APT and 

SAP were independently designed and consequently are not fully integrated. This 

lack of integration has required Amtrak to develop a software bridge, or interface,

that allows the movement of financial data from SAP into APT.

In 2012, Amtrak announced its plan to reorganize its train operations into four new 

business lines—Northeast Corridor Services, Long-Distance Services, State 

Supported Routes, and Commuter Routes. This reorganization is intended to 

improve both Amtrak’s understanding of the sources of its revenues and costs and

its evaluation of each line’s financial performance.

RESULTS IN BRIEF

While APT and SAP, Amtrak’s cost accounting and financial accounting systems, 

were independently designed pursuant to separate congressional mandates,

together they allow Amtrak to track and report on its financial performance by 

route, line of business and major activity.

12 However, implementation issues 

related to data flow between the two systems have delayed its performance 

reporting. Amtrak developed a new software interface between the two systems

that is intended to align the data from SAP to work correctly with APT. While the 

new interface may resolve the underlying data flow issues, the company has not 

yet demonstrated that it can produce performance reports in a timely manner to 

meet statutory reporting requirements.

APT addresses the concerns raised about RPS’s shortcomings including system 

transparency and reporting timeliness but it does not address concerns related to 

system maintenance and cost assignment. To improve transparency, Amtrak 

maintains both paper and electronic copies of APT’s methodology and has 

developed a formal process to evaluate and document system changes. With APT, 

 10 SAP is a German software company that is an international leader in software and software-related services. 

Thousands of companies use SAP software to run their day-to-day business transactions and processes. 11 SAP has 29 ancillary systems, including ones that feed cost data into SAP from various business functions such as 

procurement, payroll, sales and distribution, etc., and others that rely on information generated within SAP. 12 Amtrak uses APT to report its performance by route and line of business, while SAP reports by major activity.
4

Amtrak expects to be able to produce monthly performance reports in 12 to 

14 days after the end of the reporting period, a significant improvement over RPS. 

However, when designing APT, Amtrak customized the system to its operations 

rather than using an off-the-shelf system. This custom design makes APT

challenging and more costly to maintain, raising concerns regarding its long-term 

utility. Furthermore, while it assigns about 90 percent of its revenues, Amtrak

assigns only 20 percent of its costs and allocates the rest. While all cost accounting 

systems rely on cost allocation to a degree, it is generally preferable to assign as 

many costs as practical and allocate the remainder on some reasonable and 

consistent basis. Amtrak is unable to assign a greater percentage of its costs or 

allocate costs more precisely because Amtrak does not collect sufficiently detailed 

cost data. For example, Amtrak does not measure and record each train journey’s 

fuel consumption, but rather relies on a formula that estimates a journey’s fuel 

consumption. In addition, Amtrak’s heavy reliance on cost allocation reduces the 

precision of its performance reporting. Finally, Amtrak developed APT and SAP

around its current business practices, but it did not assess those business practices 

to identify changes that would allow more precise tracking and financial 

performance reporting. 

According to Amtrak officials, Amtrak has not yet implemented FRA’s 

methodology for calculating avoidable costs due to time and resource limitations. 

However, this methodology has significant limitations. FRA’s methodology relies 

notably on the use of statistical estimation that is not supported by economic 

theory; fails to account for key factors such as wages and rents; and bases its 

calculations on a limited data sample. Consequently, Amtrak and Congress may 

not have a reliable estimate of the savings that could result from eliminating a 

route. 

We are making several recommendations to FRA to improve the precision of 

Amtrak’s financial performance reporting.

APT CAPTURES AMTRAK’S FINANCIAL PERFORMANCE, BUT 

PROBLEMS WITH DATA FLOW HAVE DELAYED REPORTING 

With APT and SAP, Amtrak can capture its financial performance by route, line of 

business and major activity, as PRIIA requires. However, issues related to the 

implementation of the software interface between the two systems affected the 

flow of data from SAP into APT and prevented Amtrak from compiling timely 

performance reports. Consequently, Amtrak has not yet complied with PRIIA’s 

requirement to produce performance reports within 90 days of its fiscal year’s end. 

Amtrak has recently made changes to the interface that it believes corrects the data 

flow issues and should enable it to comply with PRIIA’s reporting timeline.
5

APT ADDRESSES SOME BUT NOT ALL OF RPS’S

SHORTCOMINGS 

APT is an improvement over RPS with regards to system transparency and 

reporting timeliness, but its high level of customization could make it costly and 

challenging to maintain. Furthermore, Amtrak developed APT and SAP around its 

current business practices, and did not assess those practices to identify changes, 

such as collection of more detailed cost data. Such data might enable Amtrak to 

assign additional costs or make more precise allocations, which would lead to

more precise financial performance reporting. As a result, like RPS, APT allocates

rather than assigns a majority of Amtrak’s operating costs.

APT Is More Transparent and Timely than RPS, But Its Complex 

Design May Be Challenging and Costly To Maintain 

APT is more transparent than RPS and is capable of timely reporting, but its 

complex design, caused by a high level of customization, will be difficult to 

maintain. RPS lacked transparency because Amtrak did not adequately document 

its methodology, and only a few individuals had access to the system. 

Consequently, Amtrak management and other stakeholders questioned the 

accuracy and reliability of the system’s performance reports. 

APT is more transparent than RPS because Amtrak maintains up-to-date paper and 

electronic copies of the system’s methodology, and grants access to both internal 

and external stakeholders to review the methodology. Furthermore, Amtrak has a 

process in place for reviewing suggestions from system users for changes to the 

methodology. As revisions are implemented, Amtrak updates both the paper and

electronic copies of the methodology to maintain transparency.

While RPS regularly issued performance reports as late as 6 weeks after the end of 

each reporting period—each month of the fiscal year—Amtrak officials told us 

that APT will require only 14 business days following the end of the month to 

produce reports. This reporting time meets the timeliness requirements of 

Amtrak’s management and aligns more closely to the reporting timelines of

comparable railroads.

While APT’s transparency and reporting timeliness are markedly better than

RPS’s, its maintenance may be problematic because of its high level of 

customization. RPS used an obsolete software platform and was also highly

customized. As the system aged, Amtrak had difficulty finding individuals with 

the expertise to operate and maintain the system. FRA and Amtrak jointly 

designed and developed APT. As a result, Amtrak will have to maintain APT 

itself, as it did RPS. While off-the-shelf software systems must be customized to a 
6

degree to support their users’ operations, Amtrak’s high level of customization, 

which includes the SAP/APT interface, will require ongoing investment to ensure 

continued viability.

Amtrak’s Reliance on Cost Allocation Reduces the Precision of APT’s 

Reporting

Amtrak’s heavy reliance on cost allocation, which requires cost estimation, 

reduces the precision of APT’s performance reporting. While it assigns over 

90 percent of its revenue, Amtrak assigns only about 20 percent of its costs, and 

allocates the rest. APT increased the percentage of assigned costs from RPS’s 

5 percent to 20 percent. However, Amtrak is unable to assign a greater percentage 

of costs because its current business practices do not require the collection of

detailed data on costs. The company did not assess its business practices to 

identify changes that would allow more precise financial performance reporting. 

For example, Amtrak’s current business practice does not call for tracking each 

train journey’s fuel consumption, but rather relies on a formula that estimates a 

journey’s fuel consumption. While every cost accounting system relies on 

allocation to a degree, other railroads assign as much as 80 percent of their costs to 

track their performance with precision. Before they introduce new systems, these 

entities, for example, the Canadian National Railway Company and the Swiss 

Federal Rail Company, analyze their business practices to identify changes that 

will improve reporting precision. 

While it did not engage in a business process analysis for APT and SAP’s 

development, Amtrak is in the process of making changes to its business practices 

in at least one area. For example, it is expanding its asset management system,

known as Maximo, to collect more detailed cost data regarding Amtrak’s capital 

assets that will allow the company to increase its percentage of assigned costs. 

Eventually, Maximo will be used to track the maintenance expenses for all of 

Amtrak’s infrastructure and rolling stock assets, and feed these data into SAP. As 

a result, Amtrak’s reporting of its maintenance and capital costs by route and line 

of business will be more precise.

FRA’S AVOIDABLE COST METHODOLOGY, WHICH AMTRAK 

HAS NOT YET IMPLEMENTED, HAS SIGNIFICANT LIMITATIONS

According to Amtrak officials, Amtrak has not yet implemented FRA’s 

methodology for estimating avoidable costs because of time and resource

limitations. However, the methodology—meant to provide Amtrak and Congress 

with information on the financial impact associated with eliminating any route—

has significant limitations because it relies to a substantial extent on statistical 
7

estimation13 that: (1) is not supported by economic theory; (2) does not account for

key factors such as wages and rents; and (3) is based on limited data. Other 

railroad officials we met with have developed transparent and systematic 

approaches to identify savings without using statistical estimation.

FRA’s Methodology Relies on a Questionable Use of Statistical

Estimation

Economic theory does not support FRA’s use of statistical estimation. According 

to economic theory, the response of costs to changes in output at one company can 

be estimated by using the relationship between costs and output levels seen across 

multiple companies. For example, if costs are $100 higher at one company that 

produces 1,000 more units of a product than other companies making the same 

product, economic theory supports concluding that if another company increases 

output by 1,000 units, its costs will also increase by $100. This support only holds 

up under the assumption that individual companies minimize costs. FRA’s 

methodology substitutes Amtrak’s responsibility centers14 for individual 

companies. It then uses the relationship between costs and activity levels across 

responsibility centers to predict the change in costs for Amtrak as a whole 

following a change in activity level. 

The use of this relationship is problematic because minimizing Amtrak’s total 

costs may be incompatible with minimizing responsibility center costs. For 

example, minimizing total costs may require Amtrak to reduce its fuel costs, 

which are assigned to one responsibility center. However, achieving lower fuel 

costs may require increasing locomotive maintenance costs, which are assigned to

another responsibility center. Consequently, both responsibility centers cannot 

minimize costs when Amtrak minimizes its total costs.

Economic theory does not support FRA’s designation of estimates derived using 

one statistical process as “short run avoidable costs,” and those derived using 

another process as “long run avoidable costs.” In economic theory, the difference

between short run and long run costs is based on some production factors, such as 

railroad tracks, being fixed in the short run and all production factors being 

flexible in the long run. Because FRA’s methodology does not account for any 

fixed costs, it cannot produce appropriately differentiated cost estimates, which 

may affect rail service planning. 

 13 The avoidable cost shares of approximately one-fourth to one-third of total costs were determined using this 

methodology. 

14 A responsibility center is an organizational unit within Amtrak’s financial system for which a specific manager can 

be held responsible for financial results. FRA has grouped these centers by similarity of activities and functions into 9

cost families, such as maintenance of equipment and sales and marketing, and with 36 subfamilies including 

maintenance of way track, locomotive maintenance, and fuel. 
8

The absence of key cost drivers, such as wages and rents, in FRA’s estimations 

may bias results. For the most part, the estimations only relate cost changes to 

changes in an activity measure, such as train-miles. Estimates of how much costs 

would decrease with a reduction in train-miles using FRA’s methodology would, 

for example, be biased upward if both wages and train-miles fell over the same 

time period. 

Two other aspects of the methodology’s use of statistical estimation raise 

concerns. First, the estimates’ reliability and precision may be questionable 

because FRA bases them on only 3 years’ worth of data. Second, for many cost 

categories15 the methodology uses an estimate of the share of costs that is 

avoidable for one cost category to stand in for the share of costs that is avoidable 

for other categories. For example, the share of costs estimated as avoidable for the 

preventive and as-needed cost categories for locomotive and car maintenance is 

used to calculate avoidable costs for major equipment repairs and capital 

overhauls.

Use of Statistical Estimation to Identify Avoidable Costs Is Not 

Standard Practice in the Railroad Industry

None of the passenger and freight rail entities we interviewed uses statistical 

estimation to identify avoidable costs. There is no industry standard for avoidable 

cost analysis, and it is viewed as an internal process meant to provide information 

to management’s decision-making on future levels of service. FRA decided to use 

a statistical method because it believed the method to be transparent and objective.

Other entities’ processes for these calculations vary from finance departments’ 

calculation of savings through systematic cost review, to use of checklists of 

issues and costs developed by experts with detailed guidance on how to assess 

them. Transparency is achieved by making thorough documentation of 

assumptions and rules used in cost savings calculations publically available.

CONCLUSION

As it reorganizes, Amtrak will need APT and SAP to provide accurate and reliable 

financial information and data to evaluate its business lines’ performance. While 

APT and SAP represent an improvement over the prior cost accounting system, 

weaknesses such as overreliance on cost allocation may inhibit Amtrak from 

achieving improved operations and oversight of its business lines. Furthermore, 

these weaknesses will inhibit Congress from obtaining the information necessary

to ensure the appropriate expenditure of tax payer provided funds.

 15 The share of these categories in total costs however, appears to be limited to less than ten percent.
9

RECOMMENDATIONS

We recommend that FRA:

1. Verify that the software interface enables the data from SAP to work correctly 

with APT.

2. Work with Amtrak to develop a plan to maintain APT’s long-term utility.

3. Work with Amtrak to analyze its business processes to identify changes that 

would enable it to assign additional costs wherever economically feasible.

4. Evaluate alternatives for addressing the requirement to calculate avoidable 

costs.

AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL 

RESPONSE

We provided a draft of our report to FRA on January 9, 2013 and received its 

response on March 11, 2013. FRA’s complete response is included as an appendix 

to this report. In its response, FRA concurred with all four of our 

recommendations and provided planned actions and target dates for completion. 

However, FRA stated that its existing avoidable cost methodology fulfills the 

purpose of providing an order of magnitude estimate of changes to Amtrak’s 

expenses from the elimination of a single route. We question FRA’s assertion 

because if a comparison of the impact of eliminating different routes is necessary, 

order of magnitude estimates could not likely differentiate between the savings 

associated with eliminating each route. FRA also stated that in the event of major 

reductions in Amtrak’s Federal grants, the elimination of multiple routes would 

have to be considered and that the avoidable cost methodology would not be 

sufficient under those circumstances. While FRA plans to update its analysis of 

alternative approaches to avoidable cost estimation, we believe that FRA’s 

statement demonstrates why the Agency needs to evaluate alternatives to the 

current avoidable cost methodology. Therefore, we ask that FRA reconsider its 

response to recommendation 4.

ACTIONS REQUIRED 

We consider recommendations 1, 2, and 3 resolved but open pending completion 

of planned actions. Concerning recommendation 4, we ask that within 30 days 

from the issuance of this report, FRA provide us with additional information on its 

planned approach to updating its prior analysis of alternative approaches for 
10

calculating Amtrak’s avoidable costs. Accordingly, we consider recommendation 

4 as open and unresolved until we receive FRA’s revised response, or the results 

of its evaluation demonstrating that FRA has met the intent of our 

recommendation. Toward that end, FRA also asked if we could share the 

information we obtained on how related entities calculate avoidable costs. We 

agree and plan to arrange a meeting to share that information with FRA at the 

Agency’s convenience.

We appreciate the courtesies and cooperation of Federal Railroad Administration

representatives during this audit. If you have any questions concerning this report, 

please call me at (202) 366-1995, or Ms. Yana Hudson, Program Director, at 

(202) 366-2985.

#

cc: DOT Audit Liaison (M-1)

FRA Audit Liaison (RAD-41)
11

Exhibit A. Scope and Methodology

EXHIBIT A. SCOPE AND METHODOLOGY

We conducted this congressionally-mandated performance audit from March 2012 

to January 2013, in accordance with generally accepted Government auditing 

standards. Those standards require that we plan and perform an audit to obtain 

sufficient, appropriate evidence to provide a reasonable basis for our findings and 

conclusions based on our audit objectives. We believe the evidence we obtained 

provides a reasonable basis for our findings and conclusions based on our audit 

objectives.

We interviewed Amtrak and FRA officials and their contractors and consultants to 

identify critical elements of APT’s design and implementation and assess whether 

the system meets the requirements to report Amtrak’s results by route, line of 

business and major activity. From these interviews, we also determined the roles 

and responsibilities of each entity in APT’s development and implementation. We 

also reviewed APT’s cost methodology and participated in system demonstrations.

We interviewed officials at comparable railroads and academics and experts in the 

fields of information technology and cost accounting to assess the reasonableness 

of FRA’s cost methodology and to evaluate whether APT incorporates best 

practices. Finally, we reviewed APT’s reports to assess whether Amtrak can track 

and report on its financial performance by route, line of business and major 

activity, and whether these reports capture all of Amtrak’s revenues and costs.

To assess whether APT addresses the concerns regarding RPS, Amtrak’s prior cost 

accounting system—the issues of timeliness, over reliance on allocation of costs, 

system maintenance and transparency—we interviewed Amtrak management staff 

who oversaw both RPS’s operation and APT’s development. We also had Amtrak 

management demonstrate how APT works and explain how aspects of APT 

overcome specific shortcomings of RPS. We also interviewed consultants that 

Amtrak hired in support of the development of their IT systems. We obtained and 

reviewed a copy of FRA’s cost allocation methodology. We also interviewed 

information technology and cost accounting experts with regards to how 

comparable European transportation entities allocate and account for costs. 

Finally, we interviewed officials with both North American Class I freight 

railroads and intercity passenger rail carriers to explore comparable systems.

To assess whether APT’s avoidable cost module would produce avoidable costs 

for each Amtrak route using a sound methodology, we reviewed module 

documentation and interviewed Amtrak, FRA, and Volpe officials. We also 

reviewed basic economic theory and common economic practice as exemplified 

by Mas-Colell, Whinston, and Green’s “Microeconomic Theory” and 

Wooldridge’s “Econometric Analysis of Cross Section and Panel Data.” To 

determine how related entities calculated their avoidable costs, we conducted 
12

Exhibit A. Scope and Methodology

interviews with North American Class I freight railroads and North American and 

European intercity passenger rail carriers. We also interviewed rail cost experts at 

Leeds University, Steer Davies Gleave, Lufthansa Systems, and Civity 

Management Consultants.
13

Exhibit B. Glossary of Key Cost Accounting Terms

EXHIBIT B. GLOSSARY OF KEY COST ACCOUNTING TERMS

allocated cost: In this report, allocated costs are the same as indirect costs (see 

definition below).

allocation: The process of distributing costs or revenues to individual train 

services and other businesses and customers. In this report, allocation refers to the 

distribution of indirect costs.

assigned cost: In APT, these costs are directly traced to trains or other businesses 

and customers rather than allocated. See definition of Direct Costs below for 

further clarification.

direct costs: Costs that are directly expended or committed in the process of 

producing a service or other output and that can be traced in the accounting system 

exclusively to that service and/or output in an economically feasible manner. 

indirect cost: The costs of resources committed or used as a result of the 

production of a service or other output that cannot be traced in the accounting 

system exclusively to that service and/or output in an economically feasible 

manner.

shared costs: The costs incurred that support more than one service or other 

output and that cannot be uniquely associated with an individual service or output.
14

Exhibit C. Organizations Visited or Contacted

EXHIBIT C. ORGANIZATIONS VISITED OR CONTACTED

During this audit, we visited or contacted the following organizations:

FRA’s Contractors:

• John A. Volpe National Transportation Systems Center (Volpe Center)

• Dr. Robert Church – Contractor to Volpe Center

Amtrak’s Information Technology Consultants:

• Accenture (SAP system)

• Sandpoint Consulting (APT system)

North American Class I Freight Railroads:

• Canadian National Railway Company

• Norfolk Southern Corporation 

Intercity Passenger Rail Carriers:

• Deutsche Bahn AG Railway Company

• Swiss Federal Railway Company

• VIA Rail Canada

Information Technology, Cost Accounting and Economic Experts:

• Lufthansa Systems

• Civity Management Consultants, Hamburg, Germany

 Frank Zschoche, Founder and Partner

 Klaus Wittmeier, Senior Project Manager

• Andrew Smith, Ph.d., Leeds University Business School, Leeds, United 

Kingdom

• Tessa Wordsworth, Principal Consultant, Steere Davies Gleeve
15

Exhibit D. Major Contributors to this Report

EXHIBIT D. MAJOR CONTRIBUTORS TO THIS REPORT

Yana Hudson Program Director

Name Title

Betty Krier Supervisory Economist/Program Director

Jay Borwankar Project Manager

Kevin Sanders Senior Financial Analyst

James Lonergan Senior Financial Analyst

Brian McNamara, Ph.D. Senior Economist

Kang Cao, Ph.D. Senior Economist

Susan Neill Writer-Editor

Tom Denomme Consultant
16

Appendix. Agency Comments

APPENDIX. AGENCY COMMENTS

U.S. Department

of Transportation

Federal Railroad Administration MEMORANDUM

Subject: INFORMATION: FRA Response to OIG Draft Report 

on Amtrak’s New Cost Accounting System Date: March 11, 2013

From: Joseph Szabo

Federal Railroad Administrator

To:

Mitch Behm

Assistant Inspector General for Rail, 

Maritime, and Economic Analysis

Reply to the 

Attn of: ROA-03

Amtrak’s new cost accounting systemstrengthened by detailed study of intercity 

passenger rail expense allocation and avoidabilitymarks a major step forward in rail 

cost analysis. Amtrak Performance Tracking (APT) is designed to produce systematic, 

rational, and practical results with regard to both allocated and avoidable costs, at a level 

of complexity commensurate with the Amtrak’s diverse business lines and its necessary 

reliance on shared services and facilities.

APT provides a consistent and reliable basis for establishing and allocating the costs of 

each train route operated by Amtrak, and thus supports implementation of section 209 of 

the Passenger Rail Improvement and Investment Act (PRIIA). Amtrak and the States, 

with approval from the Surface Transportation Boardthe Nation’s impartial arbiter of 

railway costingendorsed this APT-based methodology, demonstrating its broad 

acceptability among diverse stakeholders.

Amtrak Enterprise Drives Complexity of Design

The complexity and customization of APT represent a case of form following function. 

Amtrak operates 44 routes; of these, routes that substantially share facilities account for 

approximately half of Amtrak’s total train-miles and expenses. Furthermore, Amtrak 

engages in related ancillary businesses, e.g., commuter railroad services, infrastructure 

provision for commuter and freight rail, reimbursable rail services for other operators, 

and real estate leasing and management, which share facilities, personnel, and operations 

with many of Amtrak’s intercity passenger services.

While simplicity and efficiency were goals throughout the methodology development 

process, allocating costs for a multiproduct enterprise with many joint costs necessitates 

customization and complexity. An off-the-shelf system would likely be criticized as 
17

Appendix. Agency Comments

simplistic, inaccurate, and unreliable. Moreover, given APT’s transparency and design 

approach, FRA believes the system will be straightforward to maintain in the future.

Prudent Cost Allocation

Direct assignment of expenses is preferable to allocation, and APT was so designed, to 

the extent practicable. However, some aspects of Amtrak operations will inevitably have 

allocated components because routes that share all or most of their facilities with other 

routes generate about half the company’s train-miles and expenses. At the same time, 

Amtrak’s organizational structure and complexity necessitate some level of allocation. 

About two-fifths of Amtrak expenses (corporate overhead and shared facilities) must be 

allocated and another fifth (maintenance of equipment) must be substantially allocated as 

they concern assets that are, in most cases, rotated among routes (Figure 1). Even the 

transportation operations accounts include support activities, such as dispatching, that 

necessitate allocation. Moreover, direct assignment in some cases, such as fuel, would be 

costlyand without sufficient benefit to justify the costthereby making allocation the 

more cost-effective approach.

Figure 1: Analysis of Amtrak’s 2012 Route Expenses

Source: APT Report for FY 2012

Balancing the costs and benefits of further APT refinements was a critical guiding 

principle throughout APT development. FRA agrees with OIG that, where cost-effective 

opportunities to further refine the allocation methods or substitute assignment for 

allocation become apparent, Amtrak should certainly pursue them. However, provision 

of improved financial performance data, particularly data that do not affect the total 

corporate results, would not necessarily justify additional investments.

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Appendix. Agency Comments

Avoidable Cost Methodology Fulfills Module’s Purpose

The avoidable expense module of APT is a significant advance in intercity passenger rail 

costing. To estimate Amtrak’s route avoidable costs, APT developers analyzed detailed 

operating expenses and used a hybrid approach involving business analysis and, where 

possible, empirically-based equations. The level of detail and analysis are 

unprecedented.

Identifying all possible trade-offs between cost centers, and, for each, determining the 

precise combination of actions that a company would take in the event of a deletion of a 

business segment would be impractically complex, costly, and beyond the scope of APT. 

It is also unnecessary to achieve such theoretical purity and precision, given the purpose 

of the avoidable costing function.

That purpose is to provide an order-of-magnitude estimate of changes to Amtrak’s 

corporate expenses that would result from elimination of a single route, not from a full 

restructuring of Amtrak. The analysis was guided by economic theory and commonly 

used empirical techniques for estimating variability of costs. The result provides a 

systematic and rational methodology for estimating the avoidability of route-level costs.

Moreover, the avoidable cost module provides only one piece of the net effect of a route

deletion on Amtrak’s bottom line. Connecting and diverted revenues, as well as 

incremental costs on parallel routes, if any, can have a significant impact of overall 

financial results. For example, the ticket revenue earned from a passenger traveling from 

New York to Los Angeles (via Chicago) is divided between the Lake Shore Limited and 

the Southwest Chief. If the Lake Shore Limited is eliminated, the passenger has some 

choices:

a. Forgo the trip, or use another mode entirely. This will eliminate the Lake Shore’s 

revenues and those on all connecting routes.

b. Use another mode on which to reach Chicago, then transfer to the Southwest 

Chief. This will eliminate Lake Shore revenues but preserve those on connecting 

routes.

c. Find another way to reach Los Angeles from New York by all-rail. There are 

three other obvious routings, plus a much longer route via New Orleans. This will 

eliminate Lake Shore revenues; the net revenue effect on Amtrak will depend on 

the routing chosen. Conceivably, there could be an expense effect as traffic 

increases on parallel routes.

Thus, the revenue projection is far from straightforward. Because of the complexity of 

the assumptions that must be made on a city-pair basis (at least for high-volume city 

pairs), uncertainties in the revenue domain are as challenging as those pertaining to 

avoidable expenses.

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Appendix. Agency Comments

Finally, PRIIA defined the “national rail passenger transportation system” largely on the 

basis of Amtrak’s route structure as it existed in 2008. No deletions from that route 

structure have been proposed or are imminent, thus further limiting the potential 

immediate applications of APT’s avoidable cost methodology. In the event of major 

reductions in Amtrak’s Federal grants, eliminating any single route would not likely be 

adequate. Elimination of multiple routes might well need to be considered, as happened 

in the late 1970s. The avoidable cost module would not suffice in such a circumstance, 

because its results are not additive for more than one route. Instead, a case-specific 

operating and financial analysis would be necessary.

OIG Recommendations and FRA Responses

OIG Recommendation 1: Verify that the software interface enables the data from SAP 

to work correctly with APT.

FRA Response: Concur

FRA-funded action on this recommendation is underway at the Volpe Center. We 

expect Volpe to deliver to FRA a summary of its findings not later than the 

second quarter of FY 2014.

OIG Recommendation 2: Work with Amtrak to develop a plan to maintain APT’s longterm utility.

FRA Response: Concur

FRA will require Amtrak to submit to FRA such a draft plan within 6 months of 

the effective date of the full-year FY 2014 operating grant agreement between 

FRA and Amtrak.

OIG Recommendation 3: Work with Amtrak to analyze its business processes to 

identify changes that would enable it to assign additional costs wherever economically 

feasible

FRA Response: Concur

Within 6 months of publication of OIG’s final report, FRA will identify cost 

elements in which Amtrak could either substitute assignment for allocation 

methodology, or further refine the method of allocation (given the minimum of 

allocation implicit in Amtrak’s mission and structure). The analysis will 

consolidate and update previous studies, and will incorporate Amtrak’s 

comments.

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Appendix. Agency Comments

OIG Recommendation 4: Evaluate alternatives for addressing the requirement to 

calculate avoidable costs.

FRA Response: Concur

While the adopted method fulfills the Congressional mandate for an avoidable 

costing methodology, FRA recognizes that alternative methods exist for avoidable 

expense estimation. Accordingly, within 6 months of OIG’s publication of its 

final report, we will summarize and update our prior analysis of such alternatives. 

To that end, we look forward to reviewing information OIG might have from its 

interviews to determine how related entities calculated their avoidable costs.

We appreciate this opportunity to offer additional perspective on the OIG draft report. 

We also appreciate the courtesies of the OIG staff in conducting this review. Please 

contact Rosalyn G. Millman, FRA Planning and Performance Officer, at 202.493.1339, 

with any questions or requests for additional assistance.

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