Total Cost Presentation
In logistical cost analysis, inventory and transportation are the two most important factors. These activities can be easily formatted in terms of their costs. E.g.: warehousing and material handling costs can be apportioned to inventory. Costs relating to inventory also include taxes, insurance, obsolescence, related to inventory. Cost of transportation would include hiring charges, legal and administrative expenses pertaining to transportation, etc.
Inventory and transportation are very important for logistical cost analysis. Transportation deals with geographical (spatial) dimensions of logistical operations by transporting the product to the place where the customer desires it. On the other hand, inventory involves the rate at which capital assets are used (temporal usage) to meet customer requirements. Again, transportation and inventory together account for more than 70 to 80% of the logistical cost. This is another reason why inventory and transportation are very important from logistics point of view.
In case of ordering cost, we can apportion it to either a specific order or to a particular customer. This basically depends upon the type of analysis adopted by the company.
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Cost Identification
All costs associated with the performance of logistics function should be in the activity based classification. The total costs associated with forecasting order management, transportation, inventory warehousing, packaging must be isolated and preferably segregated with regard to each of the products. Typical logistics costs can be categorized under the following headings.
Direct Costs:
Direct or operational costs are those expenses specifically caused by the performance of logistic work. For example direct cost of transportation, warehousing, material handling, order processing etc. can be identified. Again, for example, the transportation cost can also be identified with regard to specific order. Same is the case with the apportionment of other direct costs.
Indirect costs:
Indirect costs are a little more difficult to isolate. For example, cost of capital., in transportation equipment, in material handling equipment for inventory, in real estate will be a little difficult to isolate as was done in the case f direct cost. Here the manner of attributing the indirect costs is left to managerial judgment. E.g.: how should the indirect cost, such as equipments associated with a warehouse be allocated to the customer order shipped from that warehouse?
Overhead costs:
The other allocation to be considered is the overhead. Considerable expenses in terms of lighting, etc., are utilized for various facilities. Managerial judgment is required to determine how and to what extent various types of overhead costs should be allocated to specific logistical activity. In conclusion, therefore it should be logistical activity – based costs depend more on the managerial judgment.
Cost Time Frame
The basic concern in the Logistical activity – based costing is to identify the period of time over which costs are accumulated for measurement. To overcome this, costs are generally divided into two broad categories – one category assigns costs to a specific product and other category assigns costs associated with the passage of time.
From a logistical perspective, a great many of the expenses associated with procurement and manufacturing support can be assigned and absorbed into direct product cost.
In situations where considerable period of time elapses between production and sales, such as in seasonal business, it becomes difficult to associate costs incurred with revenue generated. That is, since the time lapse is considerable, the apportioning of costs requires expert managerial judgment.
Cost Formatting
In logistical analysis we try to analyze costs with regard to either customer orders or value – added services. Logistical expenses can be presented in different ways.
Functional grouping
In functional grouping, all expenditures for direct and indirect logistical services performed for a specified operating time is formatted. Thus a total – cost management can be constructed for comparison of one or more operating periods. But these functional grouping vary from industry to industry. There is no standardized functional grouping that is common to all industries. However every. industry must identify as many cost accounting categories so that a better analysis can be made. But such identification of functional groups can be achieved only over a period of lime.
Allocated cost grouping
In allocated cost grouping, the total logistical cost is divided on the basis of per ton, per kilogram, per product, per order or per product-line basis, etc., or in some other physical measure, which may be easy for the industry to compare. This sort of grouping helps the company to measure and compare the physical performance.
Fixed – Variance grouping
Fixed – Variance grouping is the most useful for any industry. Basically it involves separating out the fixed cost from the variable cost for comparison purposes. E.g.: when a company purchases a truck, the expenses incurred on its purchases is fixed, i.e. whether the company has business or not, the expenses on the purchase of the truck is not going to chance. But the expenses on petrol and for running the truck are variable as these expenses depend on the volume of business transacted.
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