Activity-Based Costing Methodology for Third-Party Logistics Companies

CARLES GRFUL-MIQUELA*

This paper will analyze the main costs that third-party logistics companies are facing and develops an activity-based costing methodology useful for this kind of company. It will examine the most important activities carried out by third-party distributors in both warehousing and transporting activities. However, the focus is mainly on the activity of distributing the product to the final receiver when this final receiver is not the customer of the third-party logistics company. (JEL M10; Intl Advances in Econ. Res., 7(1): pp. 133-46, Feb. 01. All Rights Reserved)

Introduction In the last decade, development of third-party logistics companies has been very important. There are several reasons for such development, the most important being the trend to concentrate in the core business by manufacturing companies and new technological advances. In this context, conventional approaches to costing might generate distorted information. This can result in making wrong decisions. When companies realize this potential danger, the use of activity-based costing (ABC) methodologies increases within third-party logistics. Costing Methodology: Definition of the Cost Model and Critique of the Conventional Approach Definition of the Cost Model It is first necessary to define what a cost model is. This can be done through analysis of the main functions that any cost model should perform [Kaplan and Cooper, 1998]: 1) valuation of inventory and measurement of the cost of goods and services sold for financial purposes; 2) estimation of the cost of activities, products, services, and customers; and 3) provide economic feedback to managers and staff in general about process efficiency. From this definition, a cost model might be analyzed as the tool that companies use in order to have a proper understanding about the cost to run their businesses. One of the purposes of a cost model is to gather and analyze data generated in the company in order to gain useful information for making decisions. Therefore, the usefulness of a cost model

Escola Universitria del MaresmeSpain. The author is grateful to Gerard Ryan for his invaluable comments on this paper.

133

134

IAER: FEBRUARY 2001, VOL. 7, NO. 1

may be evaluated depending on its capacity to generate the right information to make the right managerial decisions. Evolution of Cost Models The evolution of cost systems has not been a linear and continuous process [Johnson and Kaplan, 1987]. Indeed, by the 1920s, companies had developed almost all the management accounting procedures that have been used up to the present day. Furthermore, between 1925 and 1980, virtually no new ideas have affected the design and use of cost management systems. The same concepts always appear: break-even analysis, cost-volume-profit analysis, direct costing, and fixed and variable cost estimates. The idea that conventional accounts are only finance oriented and simply describe historical inputs is shared among other authors of costing methodology [Bellis-Jones and Develin, 1995]. Problems with Conventional Approaches As a result of the described evolution of cost models, the situation at the beginning of the 1980s was that the actual management accounting systems provided few benefits to organizations. Normally, the reported information not only inhibited good decision making by managers, but actually encouraged bad decisions [Johnson and Kaplan, 1987]. The main reason was the use of an obsolete tool in an extremely different and more complex and competitive environment. The main problem that conventional cost models faced was the allocation of overhead by products on the basis of either direct labor or machine hour content in the manufacturing environment. This problem was growing at the same time that direct labor and machine hour contents of many products and services fell, while overhead costs increased. Conventional costing ignores important differences between products and services, markets, and customers, which incur different overhead costs.1 This was the starting point in carefully analyzing the conventional cost models and in criticizing them because of their uselessness in accurately explaining the cost of products. Lately, the fact that the same issues apply to the service sector has been noticed. Traditional methods of cost accounting showed some other weaknesses [Bellis-Jones and Develin, 1995]. That is, companies do not know whether their products or services are profitable and they cannot distinguish profitable from unprofitable customers. In addition, traditional methods focus on the short term at the expense of the long term. A Description of ABC Methodology The problems that conventional costing methodologies raised were the main reason for developing a new theoretical approach to this subject. Johnson and Kaplan are considered the inventors of ABC, although they do not use this terminology at the beginning of their studies [Johnson and Kaplan, 1987]. The first time the concept of ABC appears is in a later article [Cooper and Kaplan, 1988]. The analysis of cost and profitability of individual products, services, and customers represents a critical issue that companies were concerned with and one where ABC tries to help. The primary focus was to ask what is important for the organization, and what information is needed for management planning and control functions. Finally, useful information for managerial purposes should not be extracted only from a system designed primarily to satisfy external reporting and auditing requirements

GRFUL-MIQUELA: COSTING METHODOLOGY

135

(financial information). It is necessary to design systems consistent with the technology of the organization, its product strategy, and its organizational structure. Definition of ABC In literature there are several definitions of ABC. The definition here shows the ABC philosophy [Hicks, 1992] briefly and clearly: "Activity-based costing is a cost accounting concept based on the premise that products (and/or services) require an organization to perform activities and that those activities require an organization to incur costs. In activity-based costing, systems are designed so that any costs that cannot be attributed directly to a product, flow into the activities that make them necessary. The cost of each activity then flows to the product(s) that make the activity necessary based on their respective consumption of that activity." Main Differences Between Conventional Cost Models and ABC 2 The most important difference between conventional cost models and ABC is the treatment of non-volume-related overhead costs. The use of direct labor-based overhead allocation methods were appropriate in the past when direct labor was the principal component of manufacturing cost, but not today. In the ABC approach, many overheads are related to specific activities to avoid distortions in product and service costs. Another difference is the treatment of unused capacity. ABC describes resources that are used by activities, but conventional accounts describe resources that are supplied. The difference between the two is excess capacity. If excess capacity is allocated to products, services, or customers, there is risk of a "dead spiral," as defined by Bellis-Jones and Develin [1995]. This means that the company should be aware of which costs their customers really generate and not allocate the excess of capacity to avoid the risk of overpricing its products or services. Implementation of an ABC Model: Advantages and Disadvantages of the ABC Approach Implementation The main steps to implement this costing approach are:3 1) identify and define relevant activities carried out in the company; 2) identify major elements of cost, which can be viewed as the line items on a budget or as accounts included in the expense ledger; 3) determine relationships between activities and costs; 4) identify cost drivers to assign costs to activities and activities to cost objectives (products, services, or customers), based on the usage of the activity; 5) plan a cost accumulation model; 6) gather the necessary data to drive the cost accumulation model, keeping in mind that the goal is accuracy, not precision; 7) establish the cost accumulation model to simulate the organization's cost structure; 8) determine crucial success factors; and 9) evaluate activity effectiveness and efficiency. One critical step is to select cost drivers. When selecting cost drivers, three factors should be taken into account [Cooper, 1990]: How easy is it to obtain the data required by the cost

136

IAER: FEBRUARY 2001, VOL. 7, NO. 1

driver? How does the actual consumption of the activity correlate with the consumption implied by the cost driver? What behavior does the cost driver induce? Advantages and Benefits of the ABC Approach Several authors have described the main advantages and benefits of using ABC [Innes and Mitchell, 1990; Bellis-Jones and Develin, 1995; Malmi, 1997]. The most important are as follows: 1) ABC provides more accurate product and service costing, particularly where nonvolume-related overheads are significant. 2) By using ABC, it is possible to analyze costs by areas of managerial responsibility and customers. ABC helps to recognize the way in which customers directly affect the cost structure of the business and therefore helps to analyze customer profitability. 3) ABC provides a better understanding of cost behavior as well as identifying the costs of complexity, variety, and change inherent in both the kind of service offered and customer-specific requirements. 4) ABC focuses on the activities that add value, which are those activities that create value from the customer's point of view. On the other hand, the company should focus on those non-value-added activities and try to eliminate them, although some of the non-value-added activities are necessary to enable value-adding activities to occur. 5) ABC is useful in performing capacity analysis. ABC measures the costs of resources used rather than the costs of resources supplied, the difference being excess capacity. It would be wrong to allocate unused capacity to the customers. To perform this analysis, the use of practical capacity is suggested, which means the capacity reflecting the maximum level at which the organization can operate efficiently. 6) ABC reduces uncertainty and provides a more solid basis for strategic decisions. Therefore, the success of ABC might not depend only on the results of the analysis, but on its ability to provide a correct diagnosis of the company's situation. Disadvantages and Problems of the ABC Approach The disadvantages extracted from a study based on the answers of several companies after one year of using ABC [Cobb et al., 1992] regarded the amount of work involved, difficulties in collecting accurate data, and the fact that cost management was difficult because several activities cross department boundaries. Additionally, implementation is very time consuming, requiring not only gathering and processing of data, but also interpreting the results. Even though all of the former problems have been overcome with the development of ABC methodology and the increase in using ABC models by companies in different manufacturing and service industries, it is always necessary to be aware of these problems when developing such a model. ABC for Logistics Even though literature mentions that ABC applies to all types of business organizations in the service industry, including warehousing and distribution providers [Hicks, 1992], the author could not specifically find the case of a third-party logistics provider as far as the transport operations are concerned. The main issue is to properly allocate the transport operations costs to the consignors, which are the real customers of the company.4

GRFUL-MIQUELA: COSTING METHODOLOGY

137

Furthermore, in the literature about transportation costs [Sussams, 1992], the customer is always the final consignee, and the costs are always an external variable. In recent years and because of the increasing importance of logistics costs within companies, the first studies analyzing the utility of the activity-based approach on logistics were undertaken [Pohlen and LaLonde, 1994; LaLonde and Ginter, 1996; LaLonde and Pohlen, 1996]. The main benefits and difficulties related to the implementation of ABC for logistics departments are almost the same as those described earlier. Methodology for Implementing an ABC Model for Logistics The first step in any ABC model is to get a good understanding of the company and the activities performed by its staff. Therefore, it is necessary to observe all the activities carried out in the warehouse and transport operations, working closely with staff, to work out the times spent in carrying out the various activities. This is one of the data collection methods among others such as interviewing managers and staff. When analyzing activities, it is necessary to not only identify the people who perform them, but identify which people work full- or part-time on these activities. As seen before, it is very important to identify the most relevant cost drivers for each activity. A good guideline for selecting the cost drivers that most accurately reflect the cost of performing an activity is to ask the people who do that work what would increase or decrease the time and effort required to do their job. It is recommended in literature [Hicks, 1992] that the right support for the model is a spreadsheet. This model should be built by linking several worksheets that give as final results, the consignor cost, the company overall cost incurred, and the consignor profitability analysis, as well as an orientation about the used capacity. These worksheets require no complex mathematical calculations and can be built by avoiding an excessive use of high-level spreadsheet functions. For that reason, maintenance of the model as well as its development due to future requirements or changes in the business is very straightforward. In describing these worksheets, it is necessary to distinguish between worksheets where data should be introduced and worksheets that contain results and are therefore generated automatically. It is important that the worksheets containing results are protected to avoid any undesired changes in the formulas. This would result in a lack of consistency in the model. Two types of data should be introduced into the worksheets: consignors' data and general data. The consignors' data worksheet will contain specific data related to each consignor in particular and is useful as a guide for directing relevant questions to potential consignors. The general data worksheet contains all the information related to the company, which applies to all consignors. It is extremely important to be aware of its maintenance, otherwise, there is a high possibility of distorting the results. As far as the worksheets containing results, the most important are the following: 1) Activity performance worksheets show in detail how the different cost concepts are generated. In other words, these worksheets would contain the formulas used to work out each specific cost by using the information introduced in the former worksheets. 2) Total cost is simply a worksheet where the summary of the different concepts of cost worked out is shown.

138

IAER: FEBRUARY 2001, VOL. 7, NO. 1

3)

Capacity analysis worksheets give an overall view of how the company's resources are used. On the other hand, it also gives the amount of nonallocated cost to the consignors because of the unused capacity. Collecting data is a crucial task in the development of an ABC model. The main reason for this importance is the fact that depending on the relevance of the data, the model will or will not be useful in analyzing the company's costs. To develop an ABC methodology, it is necessary to collect data from different sources. The development of such a model is not to allocate in a different way the costs that appear in the profit and loss account, but to design a new tool that offers relevant information for better decision making. In the literature about ABC, several data collection techniques are suggested as useful [Innes and Mitchell, 1991; Brimson, 1991]. First, spend time in the observation of the activities and processes carried out by staff in the company. Observation also means performing analytical studies such as the calculation of time spent in different activities, and so on. Second, interview relevant staff and managers in the company to identify the roles and tasks that individuals typically undertake. This technique is also useful to validate the percentage of time spent on the different tasks and to identify the main factors that influence the time spent in each task. Third, using a questionnaire is another technique used to gather data, which might be used as a complementary tool of the interview. Fourth, using a panel of experts (the Delphi study) is probably the most time-consuming technique, and it requires the involvement of several people (experts) in the analysis of each specific activity in order to develop an agreement among them about how this activity works. Main Costs and Activities Performed in Warehousing Main Cost Concepts In order to identify the main cost concepts, several authors [Brimson, 1991; Hicks, 1992; Kaplan and Cooper, 1998] recommend starting this analysis by using the profit and loss account, where actual costs might be viewed. Afterward, it is necessary to use budgeted information in order to use the model as a managerial tool in the future and not simply as a new way to reallocate the costs. Once the main cost concepts have been identified, a small percentage of cost concepts (for example, 10 percent) would normally explain a high percentage of the total warehousing-related costs (around 80 percent). These figures are based on empirical evidence. This also applies to the activities performed in transporting. Suggestion for the Treatment of Nonactivities ABC seems to focus only on activities performed in a company. However, there are always some cost concepts not related to any activity, for example, costs relating to warehouse ownership but not relating to the level of activity developed in this warehouse. Thus, it is necessary to allocate them to consignors in a different way from that proposed by an ABC analysis. For example, by analyzing which is the space occupied per consignor within the warehouse it is possible to allocate the "rent on property" cost. By allocating this cost in such a way, the empty locations will not be allocated to consignors. This fact is coherent with the ABC philosophy in the sense that the model should clearly show the cost of unused capacity (see, for example, LaLonde and Ginter [1996]). This information is very useful for managerial purposes in order to cope with the degree of use and capacity constraints of

GRFUL-MIQUELA: COSTING METHODOLOGY

139

resources. Finally, the other costs not related to any activity can be treated in a very similar way as the example seen in both the warehouse and transport sides of the company. Identification of Activities and Cost Drivers Table 1 shows the typical activities performed in a warehouse as well as their most common cost drivers. Nevertheless, be aware that each company may have its own particular cost drivers. Therefore, a careful analysis should be done when implementing an ABC model. TABLE 1 Main Warehouse Activities and Cost Drivers Activities Order receipt Unload incoming goods Palletize Check incoming goods Put away incoming goods Picking Cost Drivers Order volume and order source (electronic data interchange (EDI), fax, phone, or post) Quantity and packaging (pallets or cartons) Quantity of cartons Quantity and quality of supplier (including returns) Quantity and number of returns Number of visits to pick location and percentage of back orders TABLE 1 (CONT.) Activities Packaging and labeling Replenishment Load outgoing goods Cost Drivers Number of orders picked Quantity Quantity

1)

The following is a brief explanation of these typical activities: Order receipt is carried out when a consignor places an order to deliver its products to the consignees. The third-party logistics company's responsibility is to receive the order and start the process that finishes with the delivery of the product to the consignee's sites. This is a clerical activity related to paperwork. As far as the cost drivers are concerned, when the order is received via fax, phone, or post, data is entered on the computer. Since this is a manual process, the main cost driver is the

140

IAER: FEBRUARY 2001, VOL. 7, NO. 1

2)

3) 4)

5)

6)

7)

8) 9)

quantity of orders treated. If there is an EDI link between the consignors and the thirdparty logistics company, there is no manual data entry. For this reason, quantity is not a cost driver anymore, so it is necessary to work out the estimated time saving due to the EDI link. Unloading incoming goods is carried out when the goods from the consignor manufacturing plant arrive at the third-party logistics company's warehouse. A very common difference exists between the cases in which the unloaded unit is a pallet or loose cartons. The time spent in each case should be worked out by observation and interviewing relevant personnel performing this activity. Palletizing involves coping with the need to palletize the cartons before putting them away, when the consignor delivers in loose cartons. Checking incoming goods involves checking if the actual product unloaded is the same as the figure on the invoice. So this depends on the quantity of product received as well as the quality of the consignor, normally based on historical performance of each consignor, including percentage of returns. Putting away incoming goods involves moving the pallets from the unloading bay to the storage location. The main cost driver is the quantity to be put away, which determines the time spent in this activity. The number of pallets returned is also important because they need to be placed in the right location in the warehouse. Picking is carried out in order to collect the exact quantities of each product to be delivered to a specific consignee. In this case, the main cost drivers normally are the number of visits to the pick location and the percentage of back orders. Nevertheless, it is necessary to carefully analyze each third-party logistics company where such a model is going to be implemented because, in some cases, quantity may also have a great influence. Packaging and labeling involves packaging each order and putting on the label with the information about consignee, delivery route, and so on. The two main costs involved are the time of the staff responsible for packaging, and the material used in this activity. On the other hand, the main cost driver is the number of orders picked because each order normally should be packed individually. Replenishment involves replenishing the picking locations with pallets stored in the storage locations. The main cost driver in this case is quantity. Loading outgoing goods is the opposite of unloading incoming goods. The main cost driver is also quantity, supposing the entire product loaded is palletized.

Analysis of Overheads The analysis of overheads is the least obvious and the most complicated to perform. Normally, overheads are related to several activities (or nonactivities), and it is necessary to carry out in-depth studies during long periods of time in order to find out the right links between overheads and products, services, or customers. For this reason, the recommendation is to be as accurate as possible in order to link overheads with consignors, avoiding the traditional approach to link, in the first instance, overheads with activities. This is very important when there is an important lack of time for developing such a costing methodology, despite the fact that this is not a pure ABC approach. The need to cope with overheads appears on both the warehouse and transport side of the model.

GRFUL-MIQUELA: COSTING METHODOLOGY

141

Capacity Analysis: Treatment of Unused Capacity and Constraints It is very useful to build a table indicating the degree of utilization of all those concepts for which it is possible to analyze their rate of usage. The most common concepts for which it is necessary to perform a capacity analysis are the space occupied in the warehouse, the use of forklift trucks, and time spent by staff in performing the different activities. This analysis is carried out because in an ABC environment, costs of excess capacity should not be charged to individual consignors, but they should be treated as a cost of the period. Otherwise, there is risk of a dead spiral as mentioned earlier. No full capacity implies an increase in unit cost. This implies an increase in price per customer which, in turn, implies a decrease in sales and a decrease in capacity utilization, and so on. Each time unused capacity appears, it is necessary to analyze the reasons leading to this situation. Depending on the reasons, the actions to be undertaken may differ. For instance, the degree of unused capacity could be an indicator of how the employees are allocated among the different activities. It is possible to reallocate some of them with this information. It is also necessary to analyze when a constraint appears. This might indicate the need for a new investment in the short term or risk being unable to cope with future requirements if no action is taken. Main Costs and Activities Performed in Transporting Identification of Activities and Cost Drivers Table 2 describes the most common activities carried out for transporting in third-party logistics companies and their cost drivers. Again, bear in mind that each company may have its own particular cost drivers. TABLE 2 Main Transport Activities and Cost Drivers Activities Delivery to consignee sites Empty pallets and container returns Unloading in consignees' sites Collection at consignor locations Sortation Trunking Booking in Proof of delivery Invoicing Cost Drivers Distance and square meters of pallets throughput Space occupied and time required Number of consignments and kind of consignee Distance and number of collections Number of consignments and number of cartons per consignment Distance and square meters of pallets throughput Number of consignments to specific consignees Number of consignments Number of consignments

142

IAER: FEBRUARY 2001, VOL. 7, NO. 1

The following is a brief explanation of the typical activities: Delivery to consignee sites is often the main activity performed in the transport operations of any third-party distribution company. Due to its importance and the difficulty in developing the right treatment for an ABC model, the activity is analyzed thoroughly afterward. The two main cost drivers are distance and square meters of pallets throughput. This second cost driver is related to the quantity, defined as the floor space occupied by the number of pallets throughput. Floor space is a critical constraint because consignors do not normally accept double stacking. Thus, volume is irrelevant when calculating the cost in many cases. 2) Emptying pallets and container returns is carried out when some of the consignors require the collection of the empty pallets or containers once the product has been delivered. The main cost drivers are the time spent by the driver in loading the empty pallets and the space occupied by these empty containers or pallets (otherwise, this space would be used to collect more product from consignor locations). 3) Unloading in consignees' sites involves the time spent in unloading. Depending on the kind of consignee, the time spent is commonly quite different. Therefore, it is necessary to analyze the kind of consignee that a specific consignor has in order to cope with the different requirements and time spent in unloading. 4) Collection at consignor locations involves collecting the product from consignor locations, which will be delivered to the final consignees afterward. The main cost drivers are the distance between the consignor location and the closest third-party depot, as well as the number of collections. 5) Sortation involves preparing the final consignments for the consignees. To do this, it is necessary to split the product collected in the consignor locations into the different consignments. The main cost drivers are the number of consignments and the number of cartons per consignment. It is assumed that as more cartons are delivered per consignment, more time is required to prepare this consignment. 6) Regarding trunking, every third-party logistics company works by using a web of depots distributed in a geographical area. The purpose of trunking is to transport the different consignments from the depot where they have been sorted to the closest depot to the consignee. This activity is normally carried out during the night shift. The main cost drivers in this activity are distance and the floor space occupied by the number of pallets throughput (assuming again that double stacking is not permitted). The trunking activity is easier to analyze because the number of possible routes is limited and perfectly known. 7) Booking in is a clerical activity that confirms with the consignee the time when the delivery will be made. This service is not always required by all consignees but for some of them. Therefore, it is very important to identify which consignee requires this service and identify the percentage of this type of consignee for every consignor. On the other hand, another type of consignee does not require this service because they have a wide delivery window (for example, seven or eight hours per day). 1)

GRFUL-MIQUELA: COSTING METHODOLOGY

143

8)

9)

Proof of delivery is a clerical activity that involves entering computer data related to the delivery of products to the final consignees. The most common data entered are the name of the person who physically signed the document and the time and day when the delivery was made. To allocate this cost, the main cost driver is the total number of consignments. Invoicing involves preparing the invoice to be sent to the consignor. Again, the main cost driver is the number of consignments because the more consignments there are, the larger the number of invoices to be prepared and sent to the consignors.

Capacity Analysis: Treatment of Unused Capacity and Constraints In the transport operations model, it is also possible to analyze the utilization of the capacity. In this case, it is possible to perform this analysis for the depots forming the web and for the use of trucks and drivers (assuming that trucks are the company's property and the drivers are regular workers of the company). Final Delivery Probably the biggest issue when developing ABC for a third-party logistics provider is the fact that the final consignee who receives the products delivered by the logistics provider is not its customer. On the other hand, the final delivery (or delivery to consignee sites) is probably the main activity carried out by third-party logistics companies as far as the transport operations are concerned. The costs associated with this activity are also the most important, and they normally include concepts such as drivers' salaries, commercial vehicle fuel, commercial vehicle hire for contract, agency drivers, and employer's national insurance. In all the reviewed literature concerning costing methodology in the third-party industry, no attempts have been found to cope with this particular scenario. Remember the inherent difficulties of such a situation: Each consignor delivers its product to several consignees and, similarly, different consignors share several consignees. As mentioned before, in order to analyze this activity, the main issue is that the final consignee is not the company's customer. The customer is the consignor, which requires delivery of its product to different consignees around a specific geographical area. Therefore, the effect of consolidation means the fleet is used to deliver products of different consignors in the same journey. Literature about ABC analysis and transport costing does not take into account this issue. Several studies cover costing when a multi-delivery trip is carried out but always considers that the final consignee is also the customer. This paper suggests the following approach. First, it is necessary to work out the total number of deliveries per consignor and per postcode area for any given period of time. To simplify the amount of data used in the model, it is recommended to define different areas (10, for example), depending on the distance between the main city of each postcode and the depot from which this city gets deliveries. As a result, the company gains knowledge about how many deliveries per consignor are made in each of the 10 areas. With this information, an important assumption

144

IAER: FEBRUARY 2001, VOL. 7, NO. 1

should be made: Each consignment that a single consignor sends to each consignee requires a single journey. By doing this, it is possible to work out a figure of theoretical mileage driven for each consignor and, thus, for the overall company. This theoretical mileage is a huge and unrealistic figure because of the assumption made. For this reason, the next step is to divide the total actual mileage (information normally known by every third-party logistics company) over the total theoretical mileage. This calculation gives a factor between zero and 1, which is used to multiply each consignor's theoretical mileage by the factor, and gives a very accurate distribution of the actual mileage among the total number of third-party company's consignors. Once the actual mileage is allocated to the different consignors, this figure is used to work out the cost of fuel and the cost of drivers' time among them. This author is fully aware of the unrealistic approach taken by using this method. However, the main purpose when analyzing this activity is to allocate as accurately as possible the mileage driven per consignor because distance is the main cost driver as far as the delivery to consignee sites (or final delivery) activity is concerned, which means the consignee location has critical influence. Conclusion It is very difficult (and not always recommended) to develop a pure ABC model because the particular characteristics of a single third-party logistics company entailed the use of slightly different ways to allocate several costs in some instances, which a purely ABC approach would not be able to do. Despite this fact, the final model for both sides of the third-party company operations (warehouse and transport operations) has been mainly described by taking ABC analysis into account. Only when ABC does not present an answer to a specific problem should another way be considered to allocate the costs. It is recommended that such a model should be developed by using a spreadsheet because it fulfills the needs of the company, it is a very powerful tool, and it is also very user-friendly. Furthermore, the model developed may be capable of performing what-if analysis in order to simulate actual or potential situations the third-party company might face. These what-if analyses may be used in different ways such as in the analysis of potential consignors, in the requirement of different service levels by the current consignors, and to perform the analysis of structural changes in the third-party logistics company. Finally, note that the costs of the model should not exceed its benefits. In other words, it is necessary to cope with the trade-off between a model that is so simple that it fails to provide enough information to support the company's decisions and a model that is excessively costly to design, implement, and operate [Brimson, 1991]. This should always be taken into account, trying to achieve a happy medium between simplicity and excessive sophistication.

GRFUL-MIQUELA: COSTING METHODOLOGY

145

Footnotes
1. This problem is widely analyzed in the literature about costing methodology in the 1980s and early 1990s. For example, see Kaplan [1984], Miller and Vollmann [1985], Kaplan [1986], Johnson and Kaplan [1987], Turney and Anderson [1989], Jeans and Morrow [1989], Innes and Mitchell [1990], and Brimson [1991]. Analyses of the main differences are widely found in Kaplan [1988], Cooper [1988], Drury [1989], and Collins and Werner [1991]. The implementation is very well described in Brimson [1991] and Hicks [1992], who focus on small and midsized companies. In this paper, "company" is used to identify the third-party logistics provider. Furthermore, "consignor" is used to identify the company's customers. This is to differentiate and avoid confusion with the clients of the consignors: consignees.

2. 3. 4.

References
Bellis-Jones, R.; Develin, N. No Customer, No Business: The True Value of ABCM, London, United Kingdom: The Chartered Institute of Management Accountants, 1995. Brimson, J. A. Activity Accounting: An Activity-Based Costing Approach, New York, NY: John Wiley and Sons, 1991. Cobb, I.; Innes, J.; Mitchell, F. Activity-Based Costing: Problems in Practice, London, United Kingdom: The Chartered Institute of Management Accountants, 1992. Collins, F.; Werner, M. "Benefits of Activity Based Costing," in F. Collins, ed., Strategic Cost Analysis: Implementing Activity-Based Costing, New York, NY: Executive Enterprises, 1991. Cooper, R. "The Rise of Activity-Based Costing. Part One: What Is an Activity-Based Cost System?," Journal of Cost Management, Summer 1988, pp. 45-54. . "Five Steps to ABC System Design," Accountancy, November 1990, pp. 78-81. Cooper, R.; Kaplan, R. S. "Measure Costs Right: Make the Right Decisions," Harvard Business Review, September-October 1988, pp. 96-103. Drury, C. "Activity-Based Costing," Management Accounting, September 1989, pp. 60-3, 66. Hicks, D. T. Activity-Based Costing for Small and Midsized Businesses, New York, NY: John Wiley and Sons, 1992. Innes, J.; Mitchell, F. Activity-Based Costing: A Review with Case Studies, London, United Kingdom: The Chartered Institute of Management Accountants, 1990. . Activity-Based Cost Management: A Case Study of Development and Implementation, London, United Kingdom: The Chartered Institute of Management Accountants, 1991. Jeans, M.; Morrow, M. "The Practicalities of Using Activity-Based Costing," Management Accounting, November 1989, pp. 42-4. Johnson, H. T.; Kaplan, R. S. Relevance Lost: The Rise and Fall of Management Accounting, Boston, MA: Harvard Business School Press, 1987. Kaplan, R. S. "Yesterday's Accounting Undermines Production," Harvard Business Review, JulyAugust 1984, pp. 95-101. . "Accounting Lag: The Obsolescence of Cost Accounting Systems," California Management Review, XXVIII, 2, 1986, pp. 174-99.

146

IAER: FEBRUARY 2001, VOL. 7, NO. 1

. "One Cost System Isn't Enough," Harvard Business Review, January-February 1988, pp. 61-6. Kaplan, R. S.; Cooper, R. Cost and Effect: Using Integrated Cost Systems to Drive Profitability and Performance, Boston, MA: Harvard Business School Press, 1998. LaLonde, B. J.; Ginter, J. L. A Summary of Activity-Based Costing Best Practices, research paper, 606, Ohio State University's Supply Chain Management Research Group, September 1996. LaLonde, B. J.; Pohlen, T. L. "Issues in Supply Chain Costing," International Journal of Logistics Management, 7, 1, 1996, pp. 1-12. Malmi, T. "Toward Explaining Activity-Based Costing Failure: Accounting and Control in a Decentralized Organization," Management Accounting Research, 8, 1997, pp. 459-80. Miller, J. G.; Vollmann, T. E. "The Hidden Factory," Harvard Business Review, September-October 1985, pp. 142-50. Pohlen, T. L.; LaLonde, B. J. "Implementing Activity-Based Costing (ABC) in Logistics," Journal of Business Logistics, 15, 2, 1994, pp. 1-23. Sussams, J. E. Logistics Modeling, London, United Kingdom: Pitman Publishing, 1992. Turney, P. B. B.; Anderson, B. "Accounting for Continuous Improvement," Sloan Management Review, Winter 1989, pp. 37-47.