Logistics Costing

Meaning

ABC

Mission based costing

Total Cost anaysis

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Logistical costingAn important activity of Logistics Management

to reduce logistical costs to improve performance

Methods of logistical costingTraditional costing method & total cost method

Types of modern costing methodsMission based costing and activity based

costing

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Logistical cost analysisConventional Approach

• Focus on function• Conventionally costs of logistical functions are apportioned • Impact of decisions at function level on the system is not considered • Cost information tends to get hidden [pushed under the carpet] out of fear that it may highlight functional weakness• Cost in no man’s land is never owned

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• Cost cutting is fragmented so doesn’t reduce system cost• Customer dissatisfaction, competitive edge is lost by the organization

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Total cost approachModern approach to logistical costing• Focus on reduction of cost of output of the system [product delivery to customer]• Provides competitive edge to the company•Includes costs like inventory, warehousing, production, distribution, transportation, packaging and customer service costs. • Reveals several trade off points in the system & further areas of improvement Transportation - Inventory Warehousing – Customer serviceFTL/LTL and cost of transportationFTL/LTL and cost of inventory

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Mission based costing [budgeting approach] in logistics

• Output focused costing• Mission goals and costs are set

• Functional inputs are worked out to meet the system deliverables

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15 45 10

5 35 10

Mission A

Mission B

Mission C

Customer service goals [QCD] At market type A

Customer service goals [QCD] At market type B

Customer service goals [QCD] At market type C

transportation

Ware housing

Functional Inputs to Logistical Management

5 20 10

C1 =Rs. 25/-

C1 =Rs. 100/-

C1 =Rs. 30/-

Rs.155/- 70 50 35

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Activity Based CostingAll logistical activities involved in product delivery are identified and resource consumption is calculated

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Activity Based CostingFixing resource consumption to logistical

activities of a customer’s orderTwo main concerns of ABC are cost identification and time cost frame.

Cost identification• Logistical activities in delivering an order are

identified starting from procurement• Costs generated in performing these

activities are collected from logistical environment and (Resource consumption)

are fixed to the activities

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Types of costsDirect costs, indirect costs and overhead

costs.Direct or operational costs: Transportation,

material handling, warehousing and some aspects of order processing and inventory –

can be allocated to a customer’s orderIndirect costs: indirect costs are cost of

capital resources of logistics – allocation is difficult, generally discretionary

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Overhead costs: an organization’s spending centrally. The benefits are availed by all entities in the organization - allocation is difficult and generally left out in modern

costing methodsTime cost frame

Locating the cost element from the right time span

Obstacles1.Traditional accounting practices like

balance sheet and profit & loss account 2. Lack of importance to logistical costing

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3. Grouping of costs for allocation under arbitrary heads

4. Raw material purchase and all inbound activities are far removed from the time of

product delivery, such activities are performed even before particular order is

procured5. Raw materials that are purchased in huge

bulk [imported materials in ship]

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How are these obstacles overcome?1.Modern measurement methods which reconcile cost and service are employed

2.Just-in-time procurement provides a good solution as it compresses the process by

crashing down lead-times