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Warehouse space allocation, use, load aggregation, as well as transport optimization to name but a few. From a financial point of view, it is imperative to proportion aggregated cost to principals in order to understand and maintain profitability per principal. Traditional cost accounting systems usually fail to provide such a split for reasons, such as,
- Ignoring true cost of servicing different customers
- Cost is captured at too high a level of aggregation
- Full cost allocation still reigns supreme
- They are functional in their orientation rather than output oriented
- Companies understand product costs but not customer costs – yet products don’t make profits, customers do
ABC is an effective means of deriving costs per principal. It requires a mind-shift from the accounting perspective, since accountants are used to direct and indirect cost allocations. While direct costs can be easily allocated, the remaining indirect cost allocation is largely subjective and, as a consequence, presents invalid results.
Example: For the period of six months, total warehousing and transport costs amounted to R9m. During that time three principals were served with the following pallet movements: see table 11.1 below.
| Principal 1 | Principal 2 | Principal 3 | Totals | |
| Pallets in/out | 4400 | |||
| Contracted Charge per pallet | R850.00 | |||
| Profit | R3,740,000.00 | R2,660,000.00 | R2,925,000.00 | R9,325,000.00 |
| ABC Cost split | R3,800,000.00 | R2,200,000.00 | R3,000,000.00 | R9,000,000.00 |
| Actual cost per pallet | R863.64 | R578.95 | R666.67 | |
| Profit () /Loss(-) | -R60,000.00 | R460,000.00 | -R75,000.00 |
Despite the business making profit, Principal 2 was the only contributor to profit. Servicing Principals 1 and 3 is done at a loss. One of the benefits of ABC is that it provides a basis to renegotiate contracts where profitability is crucial.
The Methodology
ABC methodology consists of two steps. The first one deconstructs General Ledger cost items into agreed activities using “trace criteria”. For example, wages could be allocated to activities such as administration, picking and loading using headcount as the “trace criterion”. The next step is to allocate activity cost to the principals using “cost drivers”. For example, picking could be proportioned to principals using pallets as the “cost driver”. Dealing with mixed principal loads (i.e. volume & weight based) specialised algorithms are required that consider factors such as customer stem distances, route distances, off-loading times, volume and weight of each load. Algorithms based on “centre of gravity” type theory render inaccurate results.
