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Questions and Answers
Which step involves the determination of service elements that will directly or indirectly impact the costs of service?
Which step involves the determination of service elements that will directly or indirectly impact the costs of service?
What is the basic tenet of activity-based costing (ABC)?
What is the basic tenet of activity-based costing (ABC)?
According to the text, what is the purpose of logistics cost analysis?
According to the text, what is the purpose of logistics cost analysis?
What is the point at which the principles of activity-based costing and mission costing coincide?
What is the point at which the principles of activity-based costing and mission costing coincide?
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What is the principle of 'avoidability' used for in logistics cost analysis?
What is the principle of 'avoidability' used for in logistics cost analysis?
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What factors are considered in the determination of service costs?
What factors are considered in the determination of service costs?
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What is the purpose of supply chain management according to the text?
What is the purpose of supply chain management according to the text?
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What does the basic purpose of logistics cost analysis aim to achieve?
What does the basic purpose of logistics cost analysis aim to achieve?
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What does the step of attributing activity costs by customer type or segment involve?
What does the step of attributing activity costs by customer type or segment involve?
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What is the purpose of identifying the specific resources used to support customer segments?
What is the purpose of identifying the specific resources used to support customer segments?
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True or false: The purpose of logistics cost analysis is to provide managers with reliable information for resource allocation.
True or false: The purpose of logistics cost analysis is to provide managers with reliable information for resource allocation.
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True or false: The principle of 'avoidability' is used to attribute activity costs by customer type or segment.
True or false: The principle of 'avoidability' is used to attribute activity costs by customer type or segment.
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True or false: The determination of service costs involves identifying the specific resources used to support customer segments.
True or false: The determination of service costs involves identifying the specific resources used to support customer segments.
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True or false: The principles of activity-based costing and mission costing coincide at the point of identifying specific cost drivers.
True or false: The principles of activity-based costing and mission costing coincide at the point of identifying specific cost drivers.
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True or false: Supply chain management aims to meet customer service requirements in the most cost-effective way.
True or false: Supply chain management aims to meet customer service requirements in the most cost-effective way.
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True or false: Logistics cost analysis aims to achieve better allocation of resources for customer service requirements.
True or false: Logistics cost analysis aims to achieve better allocation of resources for customer service requirements.
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True or false: The step of attributing activity costs by customer type or segment involves identifying the delivery frequency.
True or false: The step of attributing activity costs by customer type or segment involves identifying the delivery frequency.
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True or false: The basic tenet of activity-based costing (ABC) is that activities generating cost should be defined.
True or false: The basic tenet of activity-based costing (ABC) is that activities generating cost should be defined.
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True or false: The determination of service costs involves considering factors such as product mix and delivery characteristics.
True or false: The determination of service costs involves considering factors such as product mix and delivery characteristics.
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True or false: Identifying the specific resources used to support customer segments is the purpose of mission costing.
True or false: Identifying the specific resources used to support customer segments is the purpose of mission costing.
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Study Notes
Logistics and the Bottom Line
- The costs of satisfying customer demand can be significant, but are not always fully understood by organizations.
- Traditional accounting systems focus on product costs rather than customer costs.
- Logistics costs vary by company and industry, but across the economy, they are estimated to be close to 10% of gross domestic product (GDP) in the USA.
Logistics and Shareholder Value
- One of the key measures of corporate performance is shareholder value.
- Shareholder value is determined by the net present value of future cash flows.
- Logistics performance has a direct impact on shareholder value.
- The five basic drivers of enhanced shareholder value are:
- Revenue growth
- Operating cost reduction
- Fixed capital efficiency
- Working capital efficiency
- Tax minimization
Logistics Cost Analysis
- Logistics cost analysis is necessary to understand the costs and performance of the logistics pipeline.
- The need to manage the total distribution activity as a complete system requires a comprehensive cost accounting system.
- The effects of trade-offs are assessed in terms of their impact on total costs and sales revenue.
The Concept of Total Cost Analysis
- Total cost analysis involves identifying the change in costs brought about by logistics decisions.
- Cost must be viewed in incremental terms, i.e., the change in total costs caused by the change to the system.
Principles of Logistics Costing
- Logistics costing should mirror the materials flow, identifying the costs that result from providing customer service in the marketplace.
- It should be capable of enabling separate cost and revenue analyses to be made by customer type and by market segment or distribution channel.
- The concept of "mission" is useful in defining customer service goals to be achieved by the system within a specific product/market context.
Customer Profitability Analysis
- Customer profitability analysis requires identifying the various costs associated with serving different customers.
- There are many costs that need to be identified if customer profitability is to be accurately measured.### Measuring Logistics Costs and Performance
- The best measure of customer profitability is to consider the costs avoided and revenue lost if the customer were to be lost.
- The concept of "avoidable" costs and incremental revenue helps to circumvent problems that arise when fixed costs are allocated against individual customers.
Customer Profitability Analysis
- A simple customer profitability matrix categorizes customers based on their total net sales value and cost-to-serve.
- There are four categories:
- Build: cheap to service, low net sales value
- Danger zone: high cost-to-serve, low net sales value
- Protect: high net sales value, low cost-to-serve
- Cost engineer: high cost-to-serve, high net sales value
Direct Product Profitability
- Direct product profitability (DPP) is a technique that identifies all costs associated with a product or order as it moves through the distribution channel.
- The goal of DPP is to understand the total cost of ownership, which includes hidden costs that can reduce or eliminate profit.
- Suppliers can benefit from understanding DPP by influencing cost drivers to improve profitability.
Cost Drivers and Activity-Based Costing
- There are four stages in implementing an effective mission costing process:
- Define the customer service set
- ... (other stages not specified)
Logistics and the Bottom Line
- Logistics costs can be significant, but are not always fully understood by organizations.
- Traditional accounting systems focus on product costs rather than customer costs.
- Logistics activity generates both cost and revenue through the provision of availability.
Logistics and Shareholder Value
- One of the key measures of corporate performance is shareholder value.
- Increasing shareholder value is a key goal of senior management.
- Shareholder value is determined by the net present value of future cash flows.
- Economic value added (EVA) is a measure of shareholder value that takes into account the cost of capital employed.
Logistics and Financial Performance
- Logistics decisions have a direct impact on financial performance, including:
- Return on investment (ROI)
- Cash flow
- Balance sheet
- Shareholder value
- Effective logistics management can improve ROI, cash flow, and shareholder value.
Logistics Impact on ROI
- ROI is influenced by two ratios: profit/sales (margin) and sales/capital employed (asset turn).
- Logistics management can improve ROI by increasing profit/sales or sales/capital employed.
Logistics and the Balance Sheet
-
Logistics decisions can affect the balance sheet, including:
- Cash and receivables
- Inventories
- Property, plant, and equipment
- Current liabilities
- Debt/equity
-
Effective logistics management can improve the balance sheet by reducing inventories, property, and current liabilities.### Total Cost Analysis
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Identifies the change in costs brought about by decisions, viewed in incremental terms.
-
Example: adding an extra warehouse to the distribution network affects transport, inventory investment, and communications costs.
Logistics Costing Principles
- The system should mirror the materials flow, identifying costs that result from providing customer service.
- Enables separate cost and revenue analyses by customer type and market segment or distribution channel.
Mission Concept
- A set of customer service goals to be achieved by the system within a specific product/market context.
- Cuts across traditional company lines, involving inputs from various functional areas and activity centers.
Mission Costing
- Determines the total system cost of meeting desired mission objectives.
- Involves identifying the costs associated with providing outputs.
Customer Profitability Analysis
- Identifies costs to be avoided and revenues to be lost if a customer is lost.
- Concept of 'avoidable' costs and incremental revenue.
Customer Profitability Matrix
- Categorizes customers based on total net sales value and cost-to-serve.
- Four categories: Build, Danger Zone, Cost Engineer, and Protect.
Direct Product Profitability (DPP)
- Identifies all costs that attach to a product or order as it moves through the distribution channel.
- Includes costs other than the immediate purchase price of the product.
Cost Drivers and Activity-Based Costing
- Four stages to implement effective mission costing:
- Define customer service requirements.
- Identify factors that produce variation in service costs.
- Identify specific resources used to support customer service.
- Attribute activity costs by customer type or service requirement.
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Description
Test your knowledge on mission costing and its impact on activity center/functional area costs. This quiz will cover the three supply chain missions and how they provide a logical basis for costing within a company.
