Direct cost and indirect cost
Direct cost:
- Space cost
- Labor cost
- Equipment cost
Indirect cost:
- overhead, miscellaneous cost
ROI and payback period
ROI: efficiency of the investment
= (saving-cost/ cost) x 100%
Payback period: how long will the investment take to pay for itself
= (cost/gain)x12months
Weakness of using traditional costing method
Using single overhead rate is not sufficient under the proliferation of products and service complexity
Even the volume decrease, the overhead cost will not decrease
Activity-based costing system (def. and drawbacks)
Definition:
charge based on respective consumption of the necessary activities
drawbacks:
- difficult to collect accurate data, need to break down into many steps or areas
- takes time to set up rules and costly even using accounting software
Comparison of Traditional and ABC system
- Who to adopt
Traditional: small WH adopt, since they are not able to invest in large system
ABC system: big WH/Private WH/ 3rd party WH
- Fairness:
Traditional: unfair because overhead cost is evenly allocated to all activities and do not consider the pull-on management
ABC system: fair because overhead cost is separated and charged based on respective consumption. Create competitive advantage to attract customer
- Unused capacity
Traditional: unused capacity’s overhead capacity will be absorbed by used capacity, causing a higher overhead cost for each customer
ABC system: unused capacity is separated from used capacity, can reflect a more accurate cost
Advantages of 3PL / share-user WH service
- share resource: save outbound transportation cost
- create competitive advantage by providing service that the company originally do not have
- Provide tailor-made price list –> Mass customization
Charges of 3PL
- Storage charges:
- minimum charges or
- fixed rental cost:
not fully used –> charge at full rate
exceed usage –> pay additional fee - Handling charges:
= receipt, handling and dispatch charges
= Amount of time to undertake this movement + cost of mechanical handling equipment used - Value-added service
- hourly basis
Logistics charging method
- Open book contract
- disclose actual costs and agreed margin
- increased transparency: good for 3PL to create competitive price
- includes incentives and penalties - Closed book contract
- only disclose final price, based on trust
- Charges based on marketing information and benchmarking - Hybrid pricing
- fixed part = known part –> storage, leasing cost, information technology
- variable part = real volume –> warehouse activities/ physical movement
