Introduction to Logistics costing
Logistics cost is the factors associated with the acquisition, storage, movement, and disposition of goods. In a competitive market the firms require the detailed costing information to take the future decisions and to expand the customer services. The complexity of the cost will depend on the diversity of the products handled, customer requirements or the supply channels used.
Importance of logistics costing
Logistics cost will become more important in product pricing decisions, as firms seeks to reduce cost and attain a competitive advantage. The enhanced competition forced the firms to have more accurate and sophisticated cost information and to increase the visibility of logistics cost. The visibility of logistics cost can be increased by adopting the following approach: Conduct a process value analysis of key process, Develop cost for key activities in logistics, Develop precise cost associated with logistics process, Develop an ongoing cost management system to monitor process cost.
Components of logistics costing
Components of logistics involve order processing, warehousing and inventory. Where order processing includes order registration, order checking and acceptance, order processing and coordination. Warehousing includes material handling, material storage, order picking, order filling and dispatching. Finally inventory component includes inventory (WIP&FG), handling damages, obsolescence and shrinkages.
Factors driving logistics costing
Logistics cost control must be effective only when it adapts the support of integrated supply chain management within the firm and across the supply chain. The evaluation of possible trade off within the logistics depends on the proper evaluation of the following factors.
Identifying the cost drivers, measuring the cost drivers to understand the cause and effect activities, measuring the interaction of cost, identifying the specific service levels for the customer, finding out of the correct tradeoffs among the logistics and service levels and evaluating the above without compromising the service quality.
Logistics costing methods
Logistics costing is divided into two: traditional costing and activity based costing (ABC).
The traditional method of cost accounting refers to the allocation of manufacturing overhead costs to the products manufactured. The traditional method assigns or allocates the factory’s indirect costs to the items manufactured on the basis of volume such as the number of units produced, the direct labour hours, or the production machine hours. Using traditional method we can calculate two types of costs. Production costs and Period costs.
Calculation of production costs includes direct labour, direct materials and factory overhead. These factors commonly appear on the income statement when goods are sold, prior to that time they are stored on the balance sheet as inventory. Direct labor and direct materials are easy to trace to products. But the problem comes with factory overhead.
Calculation of period costs includes the administrative expenses and sale expenses. These expenses generally appear on the income statement in the period incurred.
Problems in Traditional method
Problems that can occur in traditional method, because mmanufacturing processes and the products they produce are now more complex. These results in over-costing or under-costing: such as complex products are not allocated an adequate amount of overhead costs and simple products get too much.
Activity Based Costing (ABC costing)
Activity-based costing (ABC) is a costing methodology that identifies activities in an organization and assigns the cost of each activity with resources to all products and services according to the actual consumption by each.
Key Features of Activity based Costing are:
Cost of a product is the sum of the costs of all activities required to manufacture and deliver the product, Products do not consume costs directly, Money is spent on activities, and Activities are consumed by product/services.
How Activity Based Costing works
The steps involved in how activity based costing works starts from Plan and Design the ABC System, Identify activities, Reconstruction of general ledger accounts, Map resource costs to activities, Assign Costs to Cost Objects.
Calculating costs using ABC
Calculation of cost by ABC method is series of process from identifying resources, identifying activities, identifying objects, defining resource drivers, defining activity drivers, entering resource costs, entering resource driver quantity and to entering the activity driver quantity.