Union pacific, like any other company in the American railroad industry, faces a cost structure that is comprised predominantly of fixed costs. Largely as a consequence of theses fixed costs and, which create an environment for a natural monopoly, the company operated in an environment of strict regulation practically since its inception. The concept of pricing, was as foreign to its managers as to the managers of, for example the United States Postal Service. In such an environment it is not difficult to see that Union Pacific's costing systems followed a very different evolution path then those of companies in other industries. When deregulation hit in 1980, it changed the way the company does business, and could not have no effect at all on the companies managerial accounting systems and practices. The changes that took place at Union Pacific are the subject of this analysis.
Before 1980 the companies entire accounting system had an overall external orientation. All accounting reporting was subject to Interstate Commerce Commission's reporting requirements. These requirements were developed based on the regulators research of the industry, and served to help the regulators keep the industry under proper control. The regulators cared for the "efficient allocation of resources" by setting the prices that Union Pacific was allowed to charge for its services.
The accounting systems that Union Pacific had in place were likely to be typical stage II accounting systems. That means that they were financial reporting driven. As such they provide measures of expenses that, though allocated to specific services, in our cases moves, are only aggregately correct. However, since auditors and external users of the information are more concerned with the consistency of the methods used from year to year then with their accuracy, they are content.
The cost accounting system was based on an Interstate Commerce Commission's costing formula.