This formula attempted to link the total operating expenses of the railroad to particular activities that were felt to best explain them. The numbers that were obtained in this manner were in compliance with requirements, but provided little useful information to the operational management of the firm. This arbitrary allocation of the firm's enormous fixed costs is not at all accurate. There is a clear need for additional systems for the purpose of controlling organizational costs, as well as for the purpose of providing managers with critical information necessary to make strategic business decisions.
For this reason in 1965 the management of Union Pacific has launched an effort to design a system that would produce results more suitable for internal management purposes. The Cost Out All Traffic (COAT) system had as its goal finding out the cost and profitability of each move service performed by the railroad. In 1965 the company was still deep in the regulation era, and thus the goal was to compare the cost of the move with the rate that the ICC allowed them to charge. In markets for moves where the cost exceeded the ICC price the management wanted to try to force an increase from ICC or try to exit the market.
The COAT system was very advanced for its day, because it was an attempt to create a primitive Activity Based Cost System. The system attempted to use the industry and system averages, calculated by the ICC to make a connection between the company's costs and each particular move, as opposed to tying the costs to service units, as was already done by the ICC. The cost drivers and the cost driver rates were already in place, and all that was left for the COAT system to do was to take in the information about the move, such as type of car used, cargo weight and type, and the shortest distance between origin and destination, do the multiplication, and come out with the supposed cost of the move.
