Activity Based Costing (ABC) Used in Logistics & Supply Chain Management As Cost Optimization & It's Benefits - LinkedIn

7/16/2021 (1) Activity Based Costing (ABC) used in Logistics & Supply Chain Management as cost optimization &
ain Management as cost optimization & it's benefits | LinkedIn
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Activity Based Costing (ABC)

used in Logistics & Supply
Chain Management as cost
optimization & it's benefits
Publicada el 12 de noviembre de 2016
Antariksh Joshi
Logistics & Supply Chain Management professional- more than 8 years of
experience, MBA Operations & Engineering Graduate
2 artículos
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Cost Optimization - Why necessary ?
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7/16/2021 (1) Activity Based Costing (ABC) used in Logistics & Supply Chain Management as cost optimization & it's benefits | LinkedIn
1
Any organisation's ultimate goal is to increase profitability, weather
they achieve it with the help of increased revenue or reduced cost is
managements decision. By increased revenue one can make themselves
profitable but reduced cost will always be more profitable as you need
not to work on product's price/ revenue part and customer is satisfied.
Most of the times, With reduced cost you may pass on cost savings to
customer in the form of reduced priced product (with same quality/
quantity/ features) and which will increase customer loyalty towards
product and organisation, This intern helps building a brand.
What is ABC - Activity Based Costing
The name Activity Based Costing is self explanatory. It clarifies -

Costing based on activity. It is 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. This model assigns more indirect
costs (overhead) into direct costs compared to conventional costing.
Traditional Costing - assigns costs to product/ service average

overhead rate. This method pools all indirect costs of Product/ Service
and applies those cost equally across the board using one appropriate
cost driver such as machine hours.
1
ABC -
determine
s all
activities
associate
d with
product/
service,
assigns a
cost to
those
activities
and then determines cost of the product.
Application of Activity Based Costing in Logistics &

Supply Chain
Logistics activities are oriented to create value to all the entities

involved in process by supplying right quantity of material, at the right
time, on the right place in right price. To realize the required level of
customer service at the lowest total cost, it is fundamental to analyse
the logistics activities presents in the company and the cost that these
activities generate. Many logistics operations require cooperation
1
among companies. The costs that the companies pay depends on the
decisions that they take about the realization methods of their logistics
activities. The cost recording and analysis system has to help the
companies to identify the best collaboration methods, to correctly
define economic advantage.
To reduce logistics costs and provide the level of customer service

demanded, it is important to know the resources used in every activity
through an efficient logistics cost analysis system.
ABC introduction to Logistics can be subdivided in below operating

phases -
1
Above steps to be performed individually for each of the below
Logistics/ Supply chain activities -
A firm may have more or fewer processes depending on the nature of

the business and the level of outsourcing implemented. To correctly
analyze the logistics cost, it is necessary to break down the processes
down into activities, creating a map of the logistics activities for the
company. An analysis of the resources consumed in each activity will
identify inefficiencies caused by poor logistics activities planning that
generate an excessive consumption of the resources. Different kinds of
resources are consumed according to the logistics activities presents in
the company and the way in which they are used. To define for each
activity the utilization of resources, ABC uses the concept of resource
driver. For a specific activity the resource driver is simply a factor that
causes or influences costs. The activity focuses on the most important
1
processes and sub-processes carried out in the company involving
several business functions. Once the resources for the activities have
been imputed, it is necessary to identify the factors that generate the
demand for that activity from each cost object. The activity drivers
measure the frequency and intensity of activity arising from each cost
object. Through ABC for each activity, it is possible to identify at least
one activity driver. Some costs may have numerous drivers, but only
the most relevant should be used. The selection of cost driver is an
important phase because it influences the level of accuracy of the final
object cost assessment. The most relevant drivers can often be
determined by questioning those employees who are most familiar with
the activity to indicate which factor causes an increase or decrease in
the time and effort they spend on the activity. The cost drivers should
have direct relationship with the amount of effort required by the
activity. A cost driver is usually expressed on a cost per unit basis. To
assess the total cost of an activity for an individual cost object, the
ABC multiplies the usage amount of a cost driver in performing that
activity by the unit cost of the driver.
Allocating resources directly to activities and specific cost objects that

utilize those activities are the most important phases of the ABC
system. Through the identification of the costs sustained for each
operation, connected to specific cost objects, it is possible to value the
1
cost differential between customers, products, market segments or
distribution channels. The ability to trace the costs to specific cost
objects has immeasurable benefits in corporate decision-making roles.
Nevertheless the information related to costs sustained in each business
activity might not be sufficient. To face up to important management
decisions, it could be necessary to determine the costs sustained from
all of the companies in the supply chain to fully understand the logistics
activities and the variations that these costs undergone in relation to
changes in the collaboration relationship
Trade-off Identifications
The development of an integrated logistics system needs the

organization of an efficient cost analysis system that helps to identify
beneficial collaboration relationships among the companies present in
the supply chain, and to recognize the possible trade-offs existing
between the different logistics activities made with the object of
minimizing total cost while achieving a desired customer service level.
The evaluation of possible cost trade-offs within the logistics system
requires the identification, measurement and comparison of several
factors. Below are identified necessary factors
1
Identifying cost drivers or the structural determinants of the
company’s logistics activities and their behavior
Measuring cost drivers in sufficient detail so as to understand

causes and effect activities
Measuring the interaction of cost drivers (determining whether they

reinforce or counteract each other)
Identifying the specific service levels that matter to customers and

measuring their value
Recognizing the correct trade-offs among the logistics and service

criteria
Evaluating these, both as a whole and incrementally, to contain

costs without undermining needed differentiation in the distribution
function.
The information obtained from integrated logistics management

supports such key logistic decisions as determining needs for
warehouse space, identifying warehouse locations, choosing delivery
channels, deciding to outsource, etc. Despite the significant impact and
costs involved in these decisions, the information needed to make these
1
decisions remains largely inaccessible. Furthermore the planning of an
integrated logistics system doesn’t need only the total cost valuation for
a logistics activity, but it is necessary to consider the effects produced
on other important business processes such as production and
marketing in order to minimize the company’s total cost.
Benefits / Advantages
ABC addresses to solve the problems concerning the use of

traditional cost accounting system based on volume and the
improvement of business profitability.
The activity cost analysis provides managers with useful

information about labor and other resources, including
consumption for products, consumers and supplying channels,
leading to the management and control of the overheads present in
the company.
Through the analysis of factors that determine the overhead

consumed it is possible to make the logistics activities more
efficient by eliminating redundant or unnecessary tasks, and
optimizing resource allocations to activities adding more value to
the product or customer.
1
ABC permits the planning of more efficient collaborative
relationships among the companies in the supply chain.
The identification of costs reciprocally influenced allows for a

choice of collaborations as a method which is more convenient for
the whole partnership.
Correct information about the differential costs arising from

possible alteration of the collaboration relationships help
companies to make those appropriate strategic decisions with their
logistics activities. This in turn helps them realize, with other
companies, how best to modify the object of the cooperation in
order to make the whole supply chain more competitive.
Drawbacks/ Dis-advantages
Implications of the application of ABC to logistics activities are not

always positive.
Typical drawbacks include, the lack of perfect cost data; the

reluctance of companies to communicate their data; and the loss of
attention on the customers.
1
It has long since been understood that no one cost analysis system
could be considered perfect.
ABC does not always allow allocation to every activity or every

cost concerning the resources employed. To identify and measure
some logistics activities requires a lot of time and work.
Even if ABC helps to analyse the resources consumed and to

highlight the real cost connected at every logistic activity, the
managers have to know that, sometimes, the correct and complete
information is not available, especially when in the process of
making important strategic management decisions.
ABC provides important information about the costs incurred by

the companies in the realization of their logistics activities.
In order to express financial judgement on the collaboration

relationships present along the supply chain, it is first necessary for
every company to share with the other companies in the supply chain
its costs structure concerning the activities reciprocally influenced. The
company’s recording system has to help the other companies with
which they interact to choose the cooperation modalities which are
1
more effective in order to optimize the operation of the whole supply
chain,
Denunciar esto
Publicado por
Antariksh Joshi 2 Siguiendo
Logistics & Supply Chain Management professional- more than 8
years of experience, MBA Operations & Engineering Graduate artículos
Fecha de publicación: 4 años
In today's world, cost optimization or reduction is key for business survival. Logistics &
Supply Chain functions are considered as process of opportunities for cost optimization and
achieving goals in terms of improving organisation profitability.
Refer this article to know how Activity Based Costing (ABC) can be used in Logistics & Supply
Chain Management as cost optimization tool - it's benefits and drawbacks
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Pedro Melo •
+3er 3 semanas
Global Sourcing, Supply Chain & Logistics Director| Sonae Sports&Fashion
Hi Joshi. A simple question. In an ABC model how to address fixed costs? My

warehouse area is fixed and does not changes with volumes or activity variations. I
have 3.000 sqm for truck unloading. Variations on my activities do not change this
fix cost.
Thanks
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Mehmet Naci Sonmez •

+3er 2 años
Uluslararası Ticaret, Eğitim & Danışmanlık / International Trade, Education &
Consultancy
Hello My Joshi , could you send me full text of the article . mnsmts11@gmail.com
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Antariksh Joshi
Logistics & Supply Chain Management professional- more than 8 years of experience, MBA
Operations & Engineering Graduate
Siguiendo
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7/16/2021 (1) Activity Based Costing (ABC) used in Logistics & Supply Chain Management as cost optimization &

ain Management as cost optimization & it's benefits | LinkedIn

Inicio Mi red Empleos Mensajes Notificaciones Yo Prod

Activity Based Costing (ABC)

Cost Optimization - Why necessary ?

What is ABC - Activity Based Costing

The name Activity Based Costing is self explanatory. It clarifies -

Traditional Costing - assigns costs to product/ service average

Application of Activity Based Costing in Logistics &

Logistics activities are oriented to create value to all the entities

To reduce logistics costs and provide the level of customer service

ABC introduction to Logistics can be subdivided in below operating

A firm may have more or fewer processes depending on the nature of

Allocating resources directly to activities and specific cost objects that

The development of an integrated logistics system needs the

Measuring cost drivers in sufficient detail so as to understand

Measuring the interaction of cost drivers (determining whether they

Identifying the specific service levels that matter to customers and

Recognizing the correct trade-offs among the logistics and service

Evaluating these, both as a whole and incrementally, to contain

The information obtained from integrated logistics management

ABC addresses to solve the problems concerning the use of

The activity cost analysis provides managers with useful

Through the analysis of factors that determine the overhead

The identification of costs reciprocally influenced allows for a

Correct information about the differential costs arising from

Implications of the application of ABC to logistics activities are not

Typical drawbacks include, the lack of perfect cost data; the

ABC does not always allow allocation to every activity or every

Even if ABC helps to analyse the resources consumed and to

ABC provides important information about the costs incurred by

In order to express financial judgement on the collaboration

Recomendar Comentar Compartir

Inicio Mi red Empleos Mensajes Notificaciones Yo Prod

Hi Joshi. A simple question. In an ABC model how to address fixed costs? My

Mehmet Naci Sonmez •

Más de Antariksh Joshi

Inicio Mi red Empleos Mensajes Notificaciones Yo Prod

GST Impact on Logistics and

Acerca de Accesibilidad Talent Solutions ¿Tienes preguntas? Seleccionar idioma

LinkedIn Corporation © 2021

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