Implementation of ABC in Logistics

Implementation of ABC can provide greater visibility of the profitability impacted by differ­ent products, customers or supply channels. The company can more accurately trace costs and determine areas generating the greatest profit or loss. The product and customer profitability analysis performed by firms using ABC has significantly altered management perceptions. Prof­itability analyses using ABC can focus on management effort on non-value-added activities. Managers can target high-cost products or customers for reduction efforts, and they can use other techniques such as pricing modifications, minimum buy quantities, or charging by service to improve profitability (see Figure 20.2). ^{[1] [2]}

ABC achieves greater accuracy than traditional costing techniques. In ABC costing there are multiple cost drivers. Traditional techniques typically rely on the volume-based cost drivers to trace overhead costs to products. ABC uses multiple cost drivers to reflect different relationships occurring between activities and the resources they consume. The cost drivers fall into two broad categories. The first category includes cost drivers related to production volume wherein costs vary in direct proportion to production volume. The second category includes cost drivers unrelated to production volume wherein no direct relationship exists between production volume and the resources consumed. The areas where ABC can be used to get insights into the non-value-added costs and reduce the costs burden on the products/customers in competitive markets are:

• High overheads
• Product diversity or multiple products
• Customer diversity
• Service diversity
• Stiff competition

The major steps in ABC system implementation are:

1. Form cost pools. This means form groups or categories of individual expense items.
2. I dentify activities. In developing an ABC system, the organization identifies the various activities being performed such as move material, schedule production, purchase material, inspect items, respond to customers, improve products, introduce new products and explore new markets and so on. There are various types of activities that can be categorized as follows:

• Unit level: Performed each time a unit is produced
• Batch level: Performed each time a batch is produced
• Product level: Performed to support production of different types of products
• Customer level: Performed to support servicing customers
• Facility level: Residuary head

3. Map resource costs to activities. Financial accounting categorizes expenses by spending code, salaries, fringe benefits, utilities, travel, communication, computing, depreciation and so on. ABC collects expenses from this financial system and drives them to the activities performed.
4. Define activity cost drivers. The linkage between activities and cost objects, such as products and customers, is accomplished by using activity drivers. An activity driver is a quantitative measure of the output of an activity. The selection of an activity driver reflects a subjective trade-off between accuracy and cost of measurement (see Table 20.2).

Source: Sople V.V (2013), Logistics Management, Pearson Education India; Third edition.