Within all businesses, costs fall in layers, ranging from purely fixed to purely variable. Overhead or purely fixed costs, which constitute a distinct layer, do not depend upon sales volume or geographic regions, but exist because the company is in business and offers particular services senior executive salaries, corporate headquarters costs, advertising expenses are examples of overhead. Overlaying those are location-specific costs, which are infrastructure costs relating to the locations the company serves say, the costs of maintaining an intermodal terminal in Cleveland. Each service at each location carries a discrete cost. Next come shipment-specific costs, created by moving an additional shipment of a particular type through the carrier s network.
Some examples are fuel, driver wages and administrative expense.
A final layer, customer-specific costs, may also exist and will include outlays for retaining a particular customer s business. It is important to remember that these costs are mutually exclusive a cost that appears in one layer cannot be duplicated in another. The sum of all cost layers subtracted from total revenues should match total company profitability. This approach differs markedly from traditional accounting-based methods that tend to treat costs as one of two extremes, fixed or variable. The traditional method typically counts only those costs easily tied to a particular shipment, such as fuel and driver wages, as variable.