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Logistics Costing

Chapter 20 Logistics Management Vinod V Sople Chapter 3 Logistics & Supply Chain Management Martin Christopher


Components / Elements of Logistics Costs Traditional Costing Method rinciples of Logistics Costing !cti"ity#$ased Costing %!$C& Mission $ased Costing !$C "s' Mission $ased Costing Total#Cost !nalysis Steps to (e follo)ed for Total Cost !pproach
Tai(ah* +upali* Craig & Sri %LS+C T,$MS 20-- .i" !& /ila0sh* Chetan* $hupendra & 1rushi %LS+C T,$MS 20-- .i" 2& 2

Collated from presentation (y


Logistics is an area )here a firm has a lot of scope for cost control & cost reduction Logistics cost "aries from 5 to 30% of sales for different product#mar0et configurations in different industries The management of logistics costs has (ecome important due to its impact on product profita(ility* product pricing* customer profita(ility & ultimately firm profita(ility Logistics can offer competiti"e ad"antage through ser"ice differentiation or reducing costs & increasing firm3s profita(ility 1o)e"er the a"aila(le cost data and financial information often pro"es inade4uate (ecause of e5isting traditional costing methods

... Introduction

+easons )hy costing is re4uired

6or "aluation of in"entory & measurement of cost of goods sold for financial reporting 6or estimation of the costs of acti"ities* products* ser"ices & customers To pro"ide economic feed(ac0 to managers & operators a(out process efficiency

Logistics is a source of competiti"e ad"antage !ccording to Micheal orter* )ith cost leadership a (usiness can gain competiti"e ad"antage o"er its competitors Logistics has ample scope for cost reduction and enhancing customer ser"ice 1ence* logistics managers must understand ho) the (eha"ior of one cost differs from the other 4

Components / Elements of Logistics Costs

Components considered for computation of logistics costs are as (elo)

Traditional Costing Method

Traditional costing methods in"ol"e t)o financial statements

alance !heet
7 +eflects the financial position of the firm at a specific

point of time 8usually the end of the financial year9

7 Summari:es the assets & lia(ilities 7 ;ndicates the net)orth of the organi:ation

"rofit # Loss !tatement

7 +eflects the re"enues & costs associated )ith specific

operations o"er a specified period of time 8usually o"er the financial year9
7 urpose is to determine the financial success of the firm

"i: profits earned

... Traditional Costing Method


6inancial statements such as $alance Sheets & & L Statements follo) generally accepted accounting practices* designed to meet re4uirements of in"estors* ta5 authorities of central & state go"ernment These accounting methods do not satisfy logistical costing re4uirements "i: allocating costs to each logistical acti"ity The grouping of e5penses into separate heads such as salaries* rent & depreciation fail to identify or assign operations responsi(ility

The practice of classifying costs as per traditional costing methods creates a pro(lem in logistics (ased costing methods such as !cti"ity#$ased Costing & Mission $ased Costing

"rinciples of Logistics Costing

! logistics costing system should loo0 into the material flo) and identify the costs that result from pro"iding customer ser"ice ! logistics costing system should (e capa(le of ena(ling separate cost and re"enue analysis to (e made (y customer type and (y mar0et segment or distri(ution channel 8not to deal )ith a"erages9 ! mission cost approach can (e implemented* in )hich a customer ser"ice goal is set )ithin a specific product / mar0et* then cost associated )ith this mission are ta0en from a num(er of functional areas )ithin the firm

'cti(it)* ased Costing +' C,


Cost !ccounting approach )hich manages costs )ith acti"ities that cause those costs !cti"ity#$ased Costing %!$C& ;s the method of costing that measures the cost & performance of acti"ities* resources and cost o(<ects

!$C assigns cost to products in a more logical manner than traditional cost approach The reasoning (ehind !$C
7 ;ts the acti"ities that consume resources= therefore these

acti"ities are cost dri"ers

7 ;nstead of allocating costs to cost centers 8such as

manufacturing* physical distri(ution* mar0eting* finance etc9* direct & indirect costs are allocated to the acti"ities under the cost center &

'cti(it)* ased Costing +' C,

!$C first assigns costs to acti"ities that are the real cause of the costs ;t then assigns the cost of those acti"ities only to those products that actually demand the acti"ity as sho)n in 6;> ! !s sho)n in 6;> $* !$C is strictly a cost allocation method (ut it uses a more logical (asis for cost allocation than traditional costing


... 'cti(it)* ased Costing +' C,

0I1 '


... 'cti(it)* ased Costing +' C,



... 'cti(it)* ased Costing +' C,

'd(antages of ' C

!ssigns costs to products according to acti"ities performed on them Trac0s cost of acti"ities & )or0 process +e"eals lin0s (et)een performing particular acti"ity and the demand that acti"ity ma0es on resources 1as acti"ities as cost dri"ers 8traditional costing methods allocate direct & indirect costs on a proportionate (asis using "olume#(ased cost dri"ers9 ;dentifies the profita(le / non#profita(le customer* product & channel 6inds the root cause of poor financial performance for a firm

Mission ased Costing

;n the conte5t of logistics a mission is a set of customer ser"ice goals to (e achie"ed (y a system )ithin a specific product / mar0et Thus missions can (e defined in terms of the type of mar0et ser"ed* )hich products and )ithin )hat limits of ser"ice & costs ! mission (y its "ery nature cuts across the functional areas of a firm The achie"ement of defined mission goals in"ol"es inputs from a large no' of functional areas )ithin the firm Mission (ased costing see0s to determine the total system cost of

Meeting a desired o(<ecti"e or mission )hich is the output of the system The "arious inputs in"ol"ed

... Mission ased Costing

0I1 C


... Mission ased Costing

6;> C sho)s the relationship (et)een functions & missions

6unctions could (e transportation* )arehousing* sales* purchasing etc Missions could (e mar0et areas ser"ed* products ser"ed in mar0ets etc Each mission ta0es some inputs from the different functions Success of each mission depends on ho) )ell indi"idual functions perform & degree of coordination (et)een functions

!s sho)n in 6;> C* functional cost per mission is identified hori:ontally $y summing the costs "ertically* functional (udget can (e determined

' C (s. Mission ased Costing

' C

Mission ased Costing

+eacti"e in nature 6ocuses on indi"idual acti"ities !nalysis ?riented !nalyses acti"ities already performed during a specific period "i: 4uarter* half year or one year

roacti"e in nature 6ocuses on the entire mission "i: product / customer mar0et lanning ?riented !ims at (udgetary control of indi"idual missions "i: product / customer mar0ets

?(<ecti"e ;mpro"e ne5t round of performance (y analy:ing pre"ious performance

?(<ecti"e ;mpro"e present round of performance (y proper planning in ad"ance


Total*Cost 'nal)sis

;s (ased on the concept that (usiness should (e "ie)ed as an integrated system of interconnected lin0s Value deli"ered to customers can (e ma5imi:ed only if costs incurred (y all lin0s in the chain are minimi:ed The purpose of Total#Cost !nalysis is to identify the change in costs (rought a(out (y logistics decisions !ny decisions ta0en in one area could ha"e an impact in another area e'g' Change in policy on minimum order "alue* may influence customer (uying pattern & lead to other costs Cost must therefore (e "ie)ed in incremental terms e'g' !ddition of an e5tra )arehouse to the distri(ution net)or0 )ill (ring a change in costs of transportation* in"entory in"estments and communications costs ;t is the incremental cost in the t)o options that is rele"ant in .% decision ma0ing

... Total*Cost 'nal)sis

6or the purpose of presenting logistical total cost analysis* focus remains on in"entory and transportation Transportation & in"entory account for 80 to 90% of total logistics e5penses ;n terms of in"entory* total cost includes all cost related to

;n"entory carrying cost

7 ;ncludes ta5es* storage* capital* insurance* o(solescence

Customer ordering
7 ;ncludes full e5pense of in"entory control* order preparation*

communications & managerial super"isions

;n terms of transportation* total cost includes

1iring e5penses* damages and pilferage in "arious modes of transport* associated administrati"e e5penses .&

... Total*Cost 'nal)sis

;n"entory in"ol"es rate at )hich capital assets are used to meet customer re4uirements (y ha"ing the products a"aila(le )hen the customer )ants to purchase them Transportation deals )ith the geographical aspect of logistics as it places product )here the customer )ants to purchase Transportation related costs are mainly direct costs & indirect costs


resentation ;mage http@//)))'clipartof'com/portfolio/0<pargeter/illustration/)hite#character#stepping#on#a#giant# calculator#to#push#a#(utton#2AB2C'html http@//)))'google'com/urlDsaEt&sourceE)e(&cdE-&"edE0CC,F6<!!&urlEhttpG3!G26 G26ptgmedia'pearsoncmg'comG26imagesG2602H3AI-HA-G26samplechapter G2602H3AI-HA-Jch03' .6&eiErtm6Tom0MK.;rFeLABSI.!&usgE!6F<C/63$?A5-o;HAA4 InBKeL:.tMLL?M!&sig2E>F$L#F.fs<-toy6oC,SE+g rinciples of Logistics Costing http@//)))'geocities')s/danielcanada/scm/logisticsJcosts'html !cti"ity#$ased Costing Logistics Management N Sople g 30I Logistics & Supply Chain Management N Martin Christopher g -0I Mission $ased Costing Logistics & Supply Chain Management N Martin Christopher g IO Total Cost !nalysis Supply Chain Management N Chopra g CI Logistics Management N !ila)adi g -0O Logistical Management N $o)erso5 g AC3 Logistics & Supply Chain Management N Vinay andit g -A0