1.What is meant by total cost approach? What are its basic features and elements?
2.What is conventional approach to costing? Explain the concept and implications.
3.Explain the strengths and applicability of Mission based costing [or budgeting] in
4.What difficulties are encountered in practicing Activity Based Costing? How can
these be overcome?
5.What factors are taken into consideration while outsourcing?
Christopher, Page # 72,73]
Conventional approach to costing fails to provide information on the impact of cost of
an individual function on the system. Logistics costs are traditionally apportioned to
the function handling that particular logistics activity. As a result these costs get
submerged and competitive edge is lost by the organization. Total cost analysis
comprises of identifying such impact on system due to change in cost of individual
If we add a warehouse to the network, certainly this cost will have an impact on
transportation, inventory and so on. If we have the total cost of delivering the service
to the customer with this warehouse and without this warehouse we shall know the
impact of introducing the new warehouse on the system. Total cost analysis is
measuring this incremental cost to the system on account of changes to the system. In
approach by K.K.Khanna \u2013 page # 48]
Highly compartmentalized, impact of policy decisions of one function on other
functions and on system out put is ignored.
a. Cost information is biased, cost elements tend to get hidden out of fear that they
expose functional weakness.
b. Costs in no man\u2019s land are never owned
c. Cost cutting is fragmented so doesn\u2019t reduce system cost
d. Focus is on input function. Hence attempt is to reduce function cost in isolation.
b. Provides competitive edge to the company.
c. Several trade off points in the system are established. Further areas of
[Bowersox- pages 643 to 649]
Total cost is the cost of all logistical components incurred in delivering the product to
customer and these cost components are the resources expended in performing the
logistical functions for meeting the customer service objective.
1. Total cost reduces as all logistical functions are integrated
2. Sub optimization increases total cost
3. Increase in one cost element may reduce the cost of another element thereby
Above analysis emphasizes redesigning logistic system as an integrated performance
system. In making total cost concept operational main hurdle is non-availability of
critical logistical cost data elements in conventional financial accounting practice
balance sheet and profit and loss account. Balance sheet reflects the financial position
of the firm during a particular span of time. It also states the assets and liabilities of
the firm and the net worth of the ownership is established by balance sheet. Profit and
loss account of company shows revenues and costs associated with specific operations
during a period of time. As we see both statements reveal the financial success of the
operations. Logistical operations are part of company\u2019s activities and logistical
functions are part of these basic statements.
Accountants in a firm prepare these financial statements. Logistical costs and activities
lose their cost benefit relationship in accounting systems adopted in a firm.
Traditionally, various elements of costs are bundled and allocated to budget heads in
accounting practices. This kind of grouping of cost elements make them lose their
logistical identities and analysis of logistical costs becomes impractical. Main reason
for this situation is that management does not attach enough importance to logistical
analysis. In the changed management situation, efforts are on to remedy this basic flaw
in the accounting system so that costs and benefits of logistics function are correctly
identified and management focus is placed on reducing total cost of logistics.
Eg. inventory carrying costs and transportation costs are grouped under the cost head
plant \u2018A\u2019. as these two elements of logistical costs lose their individuality effect of
each on other is lost and their cumulative influence on cost of delivering the product is
Supply Chain Management by Martin Christopher, Page # 75,76]
Traditionally managers have tried to minimize costs of individual logistical function
inputs, believing that they are contributing to achieving the cost [QCD] objective of
the company. But minimizing these costs in isolation has a negative impact on cost of
the deliverable output. Hence a new approach to costing, namely, mission based
costing is becoming popular.
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