Question

Briefly discuss how approaches such as activity-based costing (ABC) can be used to evaluate the financial dimensions of warehousing.

Answer 1

Activity-based costing is the method of allocating the cost to the value based activity rather than the business unit. ABC makes sure that the costs are allocated to the relevant activity or process and the same can be analyzed easily to determine the efficiency and effectiveness of the process.

Various costs involved in a warehouse are the direct and indirect costs. Direct costs are labor hours, machine hours (forklifts, conveyers, pallet holders etc.) and indirect costs include electricity, rent, etc. With the traditional method of costing the cost of the operations will be equally distributed to each activity and hence it will be tough to calculate the efficiency of labor, machine and also to bill various consignments (coming to the warehouse) based on their size. WIth ABC these problems can be easily solved. Ex. A manufacturing unit sending 3000 tons of material and another sending only 1000 tons. As per ABC, the labor, machine, electricity, inventory carrying cost etc. will be distributed in the ratio of 3:1 as the activities and efforts required in handling 3000 ton is more when compared to 1000 tons. The manufacturer can be charged accordingly.

ABC can also help in evaluating efficiency. The cost of operations of various activities can be easily attained and necessary actions can be taken to rectify the process. The respective cost can be assigned to various machines like conveyors, forklifts, trucks etc.

This can also help in determining the cost to handle and distribute the material to different customers and the customers can be charged accordingly.