IDENTIFYING, UNDERSTANDING & USING COST ACCOUNTING to

CREATE NEW TRANSPORTATION PERSPECTIVES and ACTIONABLE OPPORTUNITIES

 

Executive Summary

For the most part, the industrial world has perfected the science of cost accounting.  Assigning a cost to, at least every description in the general ledger, creates a new perspective and offers new dimensions and dynamics for the micrologistics component, transportation. These dimensions and dynamics will provide fresh insights and actionable opportunities.

 

In our previous white paper, “Convergence, the Combined Power of Micrologistics and Wireless Technology” we identified that, “Convergence is the coming together of like and disparate knowledgebases, skill sets and disciplines”.  Additionally, two of our other white papers, “The Dichotomy of Logistics” and “Logistics is not a Chain” specifically demonstrated that economics and logistics could be considered essential partners; they are the most likely candidates capable of solving business equations with the intended results of creating new paradigms and achievements that would be otherwise unachievable. 

 

An adjunct to the logistics/economics convergence is “accounting”.  “Accounting” is described as the science that manages money and other assets. Amongst its many capabilities, accounting delivers the fundamental key concepts and those specialized techniques that are uniquely capable of identifying, examining, analyzing, and presenting transportation’s finance potential.  “Cost accounting” is that specific accounting activity that applies a “cost” to every detail of any kind that could possibly appear in a general ledger.  As used in this white paper, the cost accounting principles and methods will be considered as a tool for freight transportation.

 

“Selecting a Freight Audit Vendor”, discussed the recognition of managements’ attention to the commercial freight auditing and payment functions and traced its beginnings back to the 1920’s.  Therefore, at least some attention has been devoted to the management and control of freight transportation costs. However, the attention devoted to understanding, managing, analyzing, and controlling the cost of freight and its potential impact across the entire organization has been minimal at best.  For this reason, freight transportation cost and expense remains one of the least understood of all business disciplines.  Cost accounting is a tool, that when applied to transportation it will significantly improve industry’s understanding of this important discipline.

 

Notwithstanding the foregoing, senior management, across worldwide commerce and industry has been developing an awareness of and sensitivity to freight transportation.  The culmination of specific events of “transportation importance” and the current global economy have highlighted the magnitude of the potential opportunities and risks associated with freight transportation.  Senior management’s recognition of the importance of freight transportation’s cost and expense has opened the path for many of the accounting tools and devices previously employed by all areas of business other than transportation, to now be considered for freight transportation. 

 

This white paper will discuss cost accounting as a tool for freight transportation regarding “freight cost negotiations”. It will identify and speak to cost accounting techniques and methods.

 

Click here to read the entire paper

 

 

Cost Accounting and Relevant Accounting Definitions

Cost accounting is a complex process that requires specific in-depth education, knowledge, understanding, experience and skills that can only be superficially treated in this white paper. However, there are certain aspects of cost accounting that can be immediately understood thereby allowing industry to consider “freight transportation cost accounting” as a tool for exploiting negotiations. 

 

In order to communicate effectively, it is imperative that definitions be shared.  In consideration thereof and for the purpose of establising a common understanding of those pertinent aspects of cost accounting, this white paper has relied on Wikipedia, an on-line free encyclopedia.  Addionally, the links in the chosen references have been retained for your further review and consideration.

Cost Accounting: The process of tracking, recording and analyzing costs associated with the activity of an organization. Costs are by convention measured in units of currency.

Full cost accounting (FCA) embodies several key concepts that distinguish it from standard accounting techniques. The following list highlights the basic tenets of FCA.

1.      Accounting for costs rather than outlays (an amount spent)

2.      Accounting for hidden costs and externalities

3.      Accounting for overhead and indirect costs

4.      Accounting for past and future outlays

5.      Accounting for costs according to lifecycle of the product

Another important distinction is between private cost and social cost; the former is the part of the cost paid by the purchaser of a good or service, while the latter is the part of the same cost paid by society at large. (From Wikipedia)

 

Historical Relationship between Cost Accounting and Transportation

In TransportGistics’ development of the micrologistics and macrologistics concept and principles, it found that economics and logistics had a great deal in common.  Consequently, it is reasonable, where appropriate and justifiable, to invoke those relevant microeconomics and macroeconomics techniques and principles for the benefit of micrologistics and macrologistics strategies. There are many cost accounting techniques used by economics, as an example, one technique in microeconomics is to analyze various costs incurred by consumers and others by type and category.  By substituting “product” for “consumer” the door is easily opened for transportation’s use.

 

Freight Cost Management and Freight Cost Accounting

Freight Cost Management (FCM) is a planned and structured process; one of its purposes is to identify all of the business areas that are impacted by transportation costs, and to manage those costs effectively.  Once those areas are identified, a value should be assigned to each respective cost area.  Such value is then used as a quantifiable cost performance indicator.   Through this process, management by objective (MBO), realistic benchmarking and budgeting are achievable and the collateral job performance standards can be set and pursued as any other business performance issue.

 

The above five tenets of FCA should serve as a guide to facilitate the identification of relevant business areas that are impacted or can be impacted by transportation. In pursuit of effectively applying cost accounting principles and techniques to transportation, another distinction should be made early on.  Transportation is a “conveyance” and “freight” describes the goods to be carried or transported.  Consequently, when considering the application of the five (5) tenets, both a detailed and overall view of the processes, functions, services and tasks along with the relationship of transportation and freight to those other business activities impacted by transportation must also be considered.  Some examples of the relationship items to be considered are: the micrologistics components, sales, accounting, packaging, supplies, R&D, HR, purchasing, and macrologistics strategies but not limited hereto.  The primary selection criteria demands that the item must be directly associated with transportation or be associated with the freight.

 

Cost Accounting and General Ledger Coding

Transitioning from abstract considerations to specifics can only be addressed individually because of unique corporate structures, cultures, philosophies, operating styles, goals and objectives.  The ideas and thoughts presented, together with the five (5) key cost accounting concepts, should allow the reader to exercise their respective imagination and knowledge so that they can identify the specific cost sensitive items that they deem appropriate.  In order to facilitate this process, familiar points of reference have proven to be a viable method. In this regard, “the general ledger process should suffice.

 

Accounting for freight costs rather than outlays—in our discussion about the general ledger, it was identified that expense can be used to expose and identify costs.   The method of approach used to develop the general ledger can also be used to identify transportation cost sensitive items. 

 

Assigning freight expense across the general ledger could be considered a preliminary or simplified version of freight cost accounting. The critical difference however is that the G/L is designed to treat expense, and cost accounting is designed to treat a cost.  The general ledger is a list of cost sensitive expenses that accumulate all of the “spend” on the appropriate line in the G/L.  As an example, a general ledger item could be “promotional material”.  Therefore, at the end of a given accounting period, the accumulated freight expense for all shipments or products identified as “promotional material” will present the total accumulated expense for this identification.  Another example would track all transportation sensitive actions, processes, tasks and events that have been assigned the “R&D” description in the G/L.  Assigning  an “sku” part number to this G/L reference will allow the respective freight expense to be recognized and understood.  Tracking this “sku’s” freight expense could demonstrate that the expense components within the finished product are an assembly of multiple sku’s because of the identical code. 

 

The above examples, however, are better described as using “standard accounting” practices because they address an expense rather than a cost.   The critical difference between cost accounting and standard accounting is that cost accounting demands that the cost be identified prior to it becoming an expense.  Using the G/L as a list of probable costs and validing that belief with historical information is an effective method for identifying costs.  Qualification of those items as costs can be achieved by invoking the five (5) key concepts of cost accounting and using them as selection criteria.  The historical approach for identifying “cost sensitive transportation items” is an understandable and acceptable method for developing and implementing cost accounting principles and methods applicable for transportation.

 

Freight Cost Accounting and Knowledge Based Freight Cost Negotiations

Negotiating freight costs is an element of the micrologistics component, transportation.  Utilizing the cost accounting principles and assigning the appropriate and relevant cost will facilitate “freight cost negotiations” and satisfy the need for meaningful and proper freight rates and charges.  Cost accounting provides an understandable basis for decisions and actions as well as properly supporting ongoing needs.

 

Meaningful and proper freight rates and charges, whose platform resides on sound cost accounting principles, that are driven by “knowledge based freight cost negotiations”, are portrayed by the following example.    Sales commissions may be impacted by freight expense because of how they are understood and corporately digested.  Justification for inclusion of sales commisions could be based upon, (using the historical method of approach)  “wanting to know” the impact of a particular sales persons sales activity on the overall freight budget.  It is possible that an excellent salesperson may consume an inordinate freight expense.  Cost accounting can prevent or reduce this inordinate expense, either by business rule or education.  This objective can be achieved by including a “sales commision cost line” in the cost accounting ledger.  The value assigned to this respective cost would determine the influence it would have on the overall negotiations.   Standard accounting could only report the expense, but cost accounting would prevent the expense. 

 

Once the freight cost negotiations are concluded, the result of “cost accounting” will significantly improve the accuracy and timeliness of decisions; assure cost avoidance and satisfy the promise for new perspectives, dimensions and dynamics.   Realistic benchmarking and effective budget performance monitoring are additional incidental advantages of  cost accounting. 

 

Conclusion

Cost accounting can be a highly effective tool for creating the required results from freight cost negotiations.  Establishing, implementing and managing the process is dependent upon the unique character and culture of each company.  Cost accounting for transportation and freight is not yet prevalent and its potential holds out a great deal of promise.  Because cost accounting is a well accepted industrial practice and tool, applying it to transportation should not impose any unusual barriers.  Utilizing the “historical” method of approach and the general ledger as a proven model, should allow this tool to be functional within a reasonbly short time frame.  Many of the obstacles that had previously existed continue to disappear.  The opportunity for viewing transportation generally and freight negotiations specifically from a new perspective is an effective driving force.   The skills, knowledge and imagination of the the transportation and logistics professional should allow “transportation cost accounting” to become another influential tool for driving corporate performance and success.

 

About TransportGistics, Inc.

TransportGistics is a global, multi-product and services company that provides market leading, simple, incremental solutions for transportation management and logistics functions within the supply chain.

 

TransportGistics commitment to education is portrayed through its advancement of professional logistics and transportation programs.  Its white paper site presents important and timely transportation and logistics subjects each month, and is regularly visited by more than 30,000 companies in the private and public sectors, universities and governments, worldwide. It is an active partner at the Center of Excellence in Wireless Internet and Information Technology at the State University of New York-Stony Brook.

 

Continuation

Please consider this white paper as a continuum in this subject area, succeeding white papers will address common issues and address them with common solutions.  We encourage our readers to direct any specific questions or comments to papers@transportgistics.com.

 

Disclaimer

The information presented herein represents the opinion of the author, but not necessarily the opinion of TransportGistics, Inc. This white paper is not presented as a legal position or opinion.

 

“Freight Cost Management”(sm) is a sales mark of TransportGistics, Inc.

 

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