Logistics Costing
Chapter 20 Logistics Management Vinod V Sople Chapter 3 Logistics & Supply Chain Management Martin Christopher
Contents
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Components / Elements of Logistics Costs Traditional Costing Method Principles of Logistics Costing Activity-Based Costing [ABC] Mission Based Costing ABC vs. Mission Based Costing Total-Cost Analysis Steps to be followed for Total Cost Approach
Taibah, Rupali, Craig & Sri [LSRC TYBMS 2011 Div A] Nilaksh, Chetan, Bhupendra & Hrushi [LSRC TYBMS 2011 Div ?] 2
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Collated from presentation by
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Introduction
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Logistics is an area where a firm has a lot of scope for cost control & cost reduction Logistics cost varies from 5 to 30% of sales for different product-market configurations in different industries The management of logistics costs has become important due to its impact on product profitability, product pricing, customer profitability & ultimately firm profitability Logistics can offer competitive advantage through service differentiation or reducing costs & increasing firm's profitability However the available cost data and financial information often proves inadequate because of existing traditional costing methods
3
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... Introduction
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Reasons why costing is required
–
For valuation of inventory & measurement of cost of goods sold for financial reporting For estimation of the costs of activities, products, services & customers To provide economic feedback to managers & operators about process efficiency
–
–
?
Logistics is a source of competitive advantage According to Micheal Porter, with cost leadership a business can gain competitive advantage over its competitors Logistics has ample scope for cost reduction and enhancing customer service Hence, logistics managers must understand how the behavior of one cost differs from the other 4
?
?
?
Components / Elements of Logistics Costs
?
Components considered for computation of logistics costs are as below
5
Traditional Costing Method
?
Traditional costing methods involve two financial statements
–
Balance Sheet
» Reflects the financial position of the firm at a specific
point of time (usually the end of the financial year)
» Summarizes the assets & liabilities » Indicates the networth of the organization
–
Profit & Loss Statement
» Reflects the revenues & costs associated with specific
operations over a specified period of time (usually over the financial year)
» Purpose is to determine the financial success of the firm
viz profits earned
6
... Traditional Costing Method
?
Limitations
–
Financial statements such as Balance Sheets & P & L Statements follow generally accepted accounting practices, designed to meet requirements of investors, tax authorities of central & state government These accounting methods do not satisfy logistical costing requirements viz allocating costs to each logistical activity The grouping of expenses into separate heads such as salaries, rent & depreciation fail to identify or assign operations responsibility
–
–
?
The practice of classifying costs as per traditional costing methods creates a problem in logistics based costing methods such as Activity-Based Costing & Mission Based Costing
7
Principles of Logistics Costing
?
A logistics costing system should look into the material flow and identify the costs that result from providing customer service A logistics costing system should be capable of enabling separate cost and revenue analysis to be made by customer type and by market segment or distribution channel (no to deal with averages) A mission cost approach can be implemented, in which a customer service goal is set within a specific product / market, then cost associated with this mission are taken from a number of functional areas within the firm
?
?
8
Activity-Based Costing [ABC]
Definition
?
Cost Accounting approach which manages costs with activities that cause those costs Activity-Based Costing [ABC] Is the method of costing that measures the cost & performance of activities, resources and cost objects
–
?
ABC assigns cost to products in a more logical manner than traditional cost approach The reasoning behind ABC
» Its the activities that consume resources; therefore these
–
activities are cost drivers
» Instead of allocating costs to cost centers (such as
manufacturing, physical distribution, marketing, finance etc), direct & indirect costs are allocated to the activities under the cost center 9
Activity-Based Costing [ABC]
–
ABC first assigns costs to activities that are the real cause of the costs It then assigns the cost of those activities only to those products that actually demand the activity as shown in FIG A As shown in FIG B, ABC is strictly a cost allocation method but it uses a more logical basis for cost allocation than traditional costing
–
–
10
... Activity-Based Costing [ABC]
FIG A
11
... Activity-Based Costing [ABC]
FIG B
12
... Activity-Based Costing [ABC]
Advantages of ABC
?
Assigns costs to products according to activities performed on them Tracks cost of activities & work process Reveals links between performing particular activity and the demand that activity makes on resources Has activities as cost drivers (traditional costing methods allocate direct & indirect costs on a proportionate basis using volume-based cost drivers) Identifies the profitable / non-profitable customer, product & channel Finds the root cause of poor financial performance for a firm
13
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?
?
?
?
Mission Based Costing
?
In the context of logistics a mission is a set of customer service goals to be achieved by a system within a specific product / market Thus missions can be defined in terms of the type of market served, which products and within what limits of service & costs A mission by its very nature cuts across the functional areas of a firm The achievement of defined mission goals involves inputs from a large no. of functional areas within the firm Mission based costing seeks to determine the total system cost of
–
?
?
?
?
Meeting a desired objective or mission which is the output of the system The various inputs involved
14
–
... Mission Based Costing
FIG C
15
... Mission Based Costing
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FIG C shows the relationship between functions & missions
–
Functions could be transportation, warehousing, sales, purchasing etc Missions could be market areas served, products served in markets etc Each mission takes some inputs from the different functions Success of each mission depends on how well individual functions perform & degree of coordination between functions
–
–
–
?
As shown in FIG C, functional cost per mission is identified horizontally By summing the costs vertically, functional budget can be determined
16
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ABC vs. Mission Based Costing
ABC
?
Mission Based Costing
?
Reactive in nature Focuses on individual activities Analysis Oriented Analyses activities already performed during a specific period viz quarter, half year or one year
Proactive in nature Focuses on the entire mission viz product / customer market Planning Oriented Aims at budgetary control of individual missions viz product / customer markets
?
?
?
?
?
Objective Improve next round of performance by analyzing previous performance
?
Objective Improve present round of performance by proper planning in advance
17
Total-Cost Analysis
?
?
?
?
?
? ?
?
Is based on the concept that business should be viewed as an integrated system of interconnected links Value delivered to customers can be maximized only if costs incurred by all links in the chain are minimized The purpose of Total-Cost Analysis is to identify the change in costs brought about by logistics decisions Any decisions taken in one area could have an impact in another area e.g. Change in policy on minimum order value, may influence customer buying pattern & lead to other costs Cost must therefore be viewed in incremental terms e.g. Addition of an extra warehouse to the distribution network will bring a change in costs of transportation, inventory investments and communications costs It is the incremental cost in the two options that is relevant in 18 decision making
... Total-Cost Analysis
?
For the purpose of presenting logistical total cost analysis, focus remains on inventory and transportation Transportation & inventory account for 80 to 90% of total logistics expenses In terms of inventory, total cost includes all cost related to
–
?
?
Inventory carrying cost
» Includes taxes, storage, capital, insurance, obsolescence
–
Customer ordering
» Includes full expense of inventory control, order preparation,
communications & managerial supervisions
?
In terms of transportation, total cost includes
–
Hiring expenses, damages and pilferage in various modes of transport, associated administrative expenses 19
... Total-Cost Analysis
?
Inventory involves rate at which capital assets are used to meet customer requirements by having the products available when the customer wants to purchase them Transportation deals with the geographical aspect of logistics as it places product where the customer wants to purchase Transportation related costs are mainly direct costs & indirect costs
?
?
20
References
Presentation Image ?http://www.clipartof.com/portfolio/...a-giantcalculator-to-push-a-button-26924.html ?http://www.google.com/url?sa=t&source=web&cd=1&ved=0CCYQFjAA&url=http:/ %2Fptgmedia.pearsoncmg.com%2Fimages%2F0273681761%2Fsamplechapter %2F0273681761_ch03.PDF&ei=rtmFTom0MJDIrQeU69S8DA&usg=AFQjCNF3BO6x1oI766q 8n9JeLzDtKLUOKA&sig2=GQBL-QDfsj1toyFoCYSERg ? Principles of Logistics Costing ?http://www.geocities.ws/danielcanada/scm/logistics_costs.html Activity-Based Costing ? Logistics Management – Sople Pg 308 ? Logistics & Supply Chain Management – Martin Christopher Pg 108 Mission Based Costing ? Logistics & Supply Chain Management – Martin Christopher Pg 85 Total Cost Analysis ? Supply Chain Management – Chopra Pg 48 ? Logistics Management – Ailawadi Pg 105 ? Logistical Management – Bowersox Pg 643 ? Logistics & Supply Chain Management – Vinay Pandit Pg 160
?
21
doc_751591129.pdf
Chapter 20 Logistics Management Vinod V Sople Chapter 3 Logistics & Supply Chain Management Martin Christopher
Contents
?
Components / Elements of Logistics Costs Traditional Costing Method Principles of Logistics Costing Activity-Based Costing [ABC] Mission Based Costing ABC vs. Mission Based Costing Total-Cost Analysis Steps to be followed for Total Cost Approach
Taibah, Rupali, Craig & Sri [LSRC TYBMS 2011 Div A] Nilaksh, Chetan, Bhupendra & Hrushi [LSRC TYBMS 2011 Div ?] 2
?
?
?
?
?
?
?
Collated from presentation by
?
?
Introduction
?
Logistics is an area where a firm has a lot of scope for cost control & cost reduction Logistics cost varies from 5 to 30% of sales for different product-market configurations in different industries The management of logistics costs has become important due to its impact on product profitability, product pricing, customer profitability & ultimately firm profitability Logistics can offer competitive advantage through service differentiation or reducing costs & increasing firm's profitability However the available cost data and financial information often proves inadequate because of existing traditional costing methods
3
?
?
?
?
... Introduction
?
Reasons why costing is required
–
For valuation of inventory & measurement of cost of goods sold for financial reporting For estimation of the costs of activities, products, services & customers To provide economic feedback to managers & operators about process efficiency
–
–
?
Logistics is a source of competitive advantage According to Micheal Porter, with cost leadership a business can gain competitive advantage over its competitors Logistics has ample scope for cost reduction and enhancing customer service Hence, logistics managers must understand how the behavior of one cost differs from the other 4
?
?
?
Components / Elements of Logistics Costs
?
Components considered for computation of logistics costs are as below
5
Traditional Costing Method
?
Traditional costing methods involve two financial statements
–
Balance Sheet
» Reflects the financial position of the firm at a specific
point of time (usually the end of the financial year)
» Summarizes the assets & liabilities » Indicates the networth of the organization
–
Profit & Loss Statement
» Reflects the revenues & costs associated with specific
operations over a specified period of time (usually over the financial year)
» Purpose is to determine the financial success of the firm
viz profits earned
6
... Traditional Costing Method
?
Limitations
–
Financial statements such as Balance Sheets & P & L Statements follow generally accepted accounting practices, designed to meet requirements of investors, tax authorities of central & state government These accounting methods do not satisfy logistical costing requirements viz allocating costs to each logistical activity The grouping of expenses into separate heads such as salaries, rent & depreciation fail to identify or assign operations responsibility
–
–
?
The practice of classifying costs as per traditional costing methods creates a problem in logistics based costing methods such as Activity-Based Costing & Mission Based Costing
7
Principles of Logistics Costing
?
A logistics costing system should look into the material flow and identify the costs that result from providing customer service A logistics costing system should be capable of enabling separate cost and revenue analysis to be made by customer type and by market segment or distribution channel (no to deal with averages) A mission cost approach can be implemented, in which a customer service goal is set within a specific product / market, then cost associated with this mission are taken from a number of functional areas within the firm
?
?
8
Activity-Based Costing [ABC]
Definition
?
Cost Accounting approach which manages costs with activities that cause those costs Activity-Based Costing [ABC] Is the method of costing that measures the cost & performance of activities, resources and cost objects
–
?
ABC assigns cost to products in a more logical manner than traditional cost approach The reasoning behind ABC
» Its the activities that consume resources; therefore these
–
activities are cost drivers
» Instead of allocating costs to cost centers (such as
manufacturing, physical distribution, marketing, finance etc), direct & indirect costs are allocated to the activities under the cost center 9
Activity-Based Costing [ABC]
–
ABC first assigns costs to activities that are the real cause of the costs It then assigns the cost of those activities only to those products that actually demand the activity as shown in FIG A As shown in FIG B, ABC is strictly a cost allocation method but it uses a more logical basis for cost allocation than traditional costing
–
–
10
... Activity-Based Costing [ABC]
FIG A
11
... Activity-Based Costing [ABC]
FIG B
12
... Activity-Based Costing [ABC]
Advantages of ABC
?
Assigns costs to products according to activities performed on them Tracks cost of activities & work process Reveals links between performing particular activity and the demand that activity makes on resources Has activities as cost drivers (traditional costing methods allocate direct & indirect costs on a proportionate basis using volume-based cost drivers) Identifies the profitable / non-profitable customer, product & channel Finds the root cause of poor financial performance for a firm
13
?
?
?
?
?
Mission Based Costing
?
In the context of logistics a mission is a set of customer service goals to be achieved by a system within a specific product / market Thus missions can be defined in terms of the type of market served, which products and within what limits of service & costs A mission by its very nature cuts across the functional areas of a firm The achievement of defined mission goals involves inputs from a large no. of functional areas within the firm Mission based costing seeks to determine the total system cost of
–
?
?
?
?
Meeting a desired objective or mission which is the output of the system The various inputs involved
14
–
... Mission Based Costing
FIG C
15
... Mission Based Costing
?
FIG C shows the relationship between functions & missions
–
Functions could be transportation, warehousing, sales, purchasing etc Missions could be market areas served, products served in markets etc Each mission takes some inputs from the different functions Success of each mission depends on how well individual functions perform & degree of coordination between functions
–
–
–
?
As shown in FIG C, functional cost per mission is identified horizontally By summing the costs vertically, functional budget can be determined
16
?
ABC vs. Mission Based Costing
ABC
?
Mission Based Costing
?
Reactive in nature Focuses on individual activities Analysis Oriented Analyses activities already performed during a specific period viz quarter, half year or one year
Proactive in nature Focuses on the entire mission viz product / customer market Planning Oriented Aims at budgetary control of individual missions viz product / customer markets
?
?
?
?
?
Objective Improve next round of performance by analyzing previous performance
?
Objective Improve present round of performance by proper planning in advance
17
Total-Cost Analysis
?
?
?
?
?
? ?
?
Is based on the concept that business should be viewed as an integrated system of interconnected links Value delivered to customers can be maximized only if costs incurred by all links in the chain are minimized The purpose of Total-Cost Analysis is to identify the change in costs brought about by logistics decisions Any decisions taken in one area could have an impact in another area e.g. Change in policy on minimum order value, may influence customer buying pattern & lead to other costs Cost must therefore be viewed in incremental terms e.g. Addition of an extra warehouse to the distribution network will bring a change in costs of transportation, inventory investments and communications costs It is the incremental cost in the two options that is relevant in 18 decision making
... Total-Cost Analysis
?
For the purpose of presenting logistical total cost analysis, focus remains on inventory and transportation Transportation & inventory account for 80 to 90% of total logistics expenses In terms of inventory, total cost includes all cost related to
–
?
?
Inventory carrying cost
» Includes taxes, storage, capital, insurance, obsolescence
–
Customer ordering
» Includes full expense of inventory control, order preparation,
communications & managerial supervisions
?
In terms of transportation, total cost includes
–
Hiring expenses, damages and pilferage in various modes of transport, associated administrative expenses 19
... Total-Cost Analysis
?
Inventory involves rate at which capital assets are used to meet customer requirements by having the products available when the customer wants to purchase them Transportation deals with the geographical aspect of logistics as it places product where the customer wants to purchase Transportation related costs are mainly direct costs & indirect costs
?
?
20
References
Presentation Image ?http://www.clipartof.com/portfolio/...a-giantcalculator-to-push-a-button-26924.html ?http://www.google.com/url?sa=t&source=web&cd=1&ved=0CCYQFjAA&url=http:/ %2Fptgmedia.pearsoncmg.com%2Fimages%2F0273681761%2Fsamplechapter %2F0273681761_ch03.PDF&ei=rtmFTom0MJDIrQeU69S8DA&usg=AFQjCNF3BO6x1oI766q 8n9JeLzDtKLUOKA&sig2=GQBL-QDfsj1toyFoCYSERg ? Principles of Logistics Costing ?http://www.geocities.ws/danielcanada/scm/logistics_costs.html Activity-Based Costing ? Logistics Management – Sople Pg 308 ? Logistics & Supply Chain Management – Martin Christopher Pg 108 Mission Based Costing ? Logistics & Supply Chain Management – Martin Christopher Pg 85 Total Cost Analysis ? Supply Chain Management – Chopra Pg 48 ? Logistics Management – Ailawadi Pg 105 ? Logistical Management – Bowersox Pg 643 ? Logistics & Supply Chain Management – Vinay Pandit Pg 160
?
21
doc_751591129.pdf