Logistics Costing (Logistics Management: 2nd Ed. By Satish Ailawadi & Rakesh Singh) 1.

Traditional accounting Methods(TAM) and their Limitations: TAM consists of two accounting methods namely, Balance sheet and Profit Loss (P L) !tatements. ". These financial statements follow generally acce#ted accounting #rinci#les,designed to meet the re$uirements of in%estors and ta&ation agencies of central, state and local go%ernments. These methods do not satisfy logistics costing re$uirements. '. The #ractice of grou#ing e&#enses into se#arate accounts, such as salaries, rent, utilities and de#reciation fail to identify or assign o#erational res#onsi(ilities. )owe%er, this limitation can (e o%ercome (y su( di%iding the managerial or organi*ational areas of res#onsi(ilities within an enter#rise. Logistics e!"o!mance E#al$ation (L E): +t (ecomes necessary to identify costs associated with #erforming s#ecific logistics acti%ities or tas,s such as the warehousing e&#enses for s#ecific !-.. Though the cost of logistics function is gi%en in most accounting systems, allocation of logistics costs (ro,en down to indi%idual acti%ities is not gi%en. %e"iciencies o" &!aditional acco$nting: 1. /e#orting of trans#ortation e&#enditure. +n many #urchase situations, the freight is not re#orted at all as a s#ecific cost. The #rice often includes freight cost. Progressi%e #rocurement #rocedures re$uire that e&#enses for all ser%ices including trans#ortation are identified se#arately from #urchase0selling costs for e%aluati%e #ur#oses.

". 1ailure to s#ecify and assign in%entory cost. +nsurance and ta&es are not identified and assigned resulting in am(iguity in re#orting in%entory cost. +f the concerned manager is not held res#onsi(le for his (rand2s in%entory carrying cost, he will not (e moti%ated to reduce in%entory le%els. The financial (urden for assets committed to material, wor,3in3#rocess and finished goods in%entory is not identified, measured and se#arated from other forms of ca#ital e&#enses incurred (y the enter#rise. Acti#ity Based Costing (ABC) AB4 see,s to relate all rele%ant e&#enses to the %alue added acti%ities #erformed. )ere the costs are assigned to a customer or #roduct to reflect all rele%ant acti%ity costs inde#endent of when or where they occur. Conce't o" ABC AB4 relies on the conce#t that e&#enses need to (e assigned to that acti%ity that consumes a resource rather than to an organi*ational (udget. Logistical acti%ity (ased costing must #ro%ide the managers detailed information a(out the #rofita(ility of a s#ecific customer, order, #roduct or ser%ice. Cost (denti"ication All costs associated with the #erformance of a logistics function should (e included in the acti%ity (ased cost classification. The total costs associated with forecasting, order #rocessing, trans#ortation, in%entory, warehousing and #ac,aging must (e isolated and classified either as direct, indirect or o%erhead costs. %i!ect o! o'e!ational costs: 5&#enses that are incurred s#ecifically (y #erformance of logistics wor,. These include costs of trans#ortation, in%entory costs, warehousing costs and material

handling. 1or instance, trans#ortation costs for an indi%idual truc, load order can (e directly attri(uted to a s#ecific order. (ndi!ect E)'enses:4osts that are more or less fi&ed as a result of allocation of resources to logistical o#erations. 1or e&am#le, cost of ca#ital in%ested in real estate or cost of ca#ital e$ui#ment. +ndirect costs are attri(uted to logistics (y managerial 6udgment and are difficult to isolate. )ow do we allocate the e$ui#ment cost associated with a warehouse to a s#ecific customer order shi##ed out of that warehouse7 This can (e answered (y allocating the o%erhead cost on the (asis of a%erage cost #er unit. Cost &ime *!ame A (asic concern in logistical acti%ity is to identify the #eriod of time o%er which costs are accumulated for measurement. Traditional accounting #rinci#les ta,e into account accrual methods to relate re%enues and e&#enditures to the actual time #eriod during which the ser%ice is #erformed. )owe%er, the limitation is that the e&#enses associated with raw material #rocurement to finished goods distri(ution and all other logistical o#erations are incurred in antici#ation of future transaction ma,ing accrual methods difficult. To tac,le this #ro(lem, a (alance is created (y matching the #roduct and time #eriod costs to re%enue generated in a s#ecific #eriod. +n case of highly seasonal sales, there may (e significant time ga# (etween costs incurred and re%enue generated. +n such cases, the ris,s associated with logistics costs are higher. Cost *o!matting The ty#ical way to format acti%ity3(ased costs is to assign e&#enses to the e%ent (eing managed. 1or instance, to analy*e a customer order, all costs that result from associated #erformance cycle contri(ute to the total cost. The areas of analysis in logistical acti%ity (ased costing are: customer orders

 channels #roducts %alue3added ser%ices +ays o" *o!matting Three common ways of formatting are: 1. 1unctional 8rou#ing ". Allocated 8rou#ing '. 1i&ed39ariance 8rou#ing &otal Cost !esentation Method: +n terms of in#ento!y, total cost includes all e&#enses related to in%entory carrying cost. These include ta&es, storage, ca#ital, insurance and o(solescence (including damage defecti%e) costs. A closely related cost is of ordering. 4ost of o!de! '!ocessing includes communication costs, u#dating costs, (illing or in%oicing costs, cost of manufacture or in%entory which is order s#ecific and cost of managerial coordination and su#er%ision.2 Total cost of t!ans'o!tation includes hiring e&#enses, accessory charges, costs lin,ed to ris, and ha*ard associated with different modes of trans#ort, legal and other administrati%e charges. +n%entory and order #rocessing costs are tem#oral in nature, dealing with s#eed and timeliness of a%aila(ility of a #roduct. These ensure that customer gets the #roduct when he wants it. Trans#ortation deals with spatial dimension or the placement of the #roduct where customer wants it. 4lassification of costs in terms of in%entory, trans#ortation and order #rocessing #ro%ides trade off o##ortunities to the logistics networ, designers to o#timi*e the total logistics cost without reducing the customer ser%ice standard.