The two types of accounting systems used by companies are:

  1. The Financial Accounting System
  2. The Managerial Accounting System


Organizations following the Financial Accounting System provide reports such as balance sheet, income statements and cash flow statements to outside parties like investors and stock holders. But this system may fail to meet the needs of managers of the organization.

The second system called the Managerial Accounting System serves the internal company needs. The Logistics Accounting System is a type of Managerial Accounting System. It can help managers to plan, implement and control logistics system. Logistics accounting information is useful for budgeting which is an important part of the logistics planning process. It also helps in allocation of resources for implementing the plans.


Logistics accounting statements are not standardized like financial accounting statements because the integrated information needs of one manager often differ from those of another. Logistics accounting system generally allows the user to analyze decisions, based on Logistical Costing.


Total Cost Approach in Logistics


Today the marketing view point of any organization is that the Customer is the King of the market. Hence at whatever cost, the customer must be satisfied. Thus the importance of customer service has grown day in and day out. Today a customer, well become the reason for a manufacturer’s  downfall.


E.g.: if a customer has received goods which have been damaged in transit and which he is unable to return or if the goods are of very poor and which, too he is unable to return, or which he finds great difficulty in returning, he is likely to remain a one time customer. He may further even publicize his adverse opinion to his colleagues, friends and others and caution them to be careful while purchasing goods from this particular manufacturer. On the other hand, a satisfied customer would recommend a particular product and a manufacturer and even give unsolicited testimonial to prospective customers.


Thus it has become important to keep the customer satisfied through good customer service, which requires an up-to-date logistics system. The logistics system may require huge investments and at times may become a large portion of the total cost incurred by the company.


The various costs involved in developing and maintaining a successful logistics system are:


Inventory cost


Inventory costs are directly affected by such factors as the mode of transport, the number of warehouses planned, the levels of inventory maintained to ensure a certain level of service, etc. The inventory costs are the cost of the money locked-up in the cost of goods, insurance, occupation of space, pilferages, losses, damages, etc., as well as the maintenance of inventory. These costs are increased by the cost of the obsolescence of a product over a period of time, especially when the company makes rapid changes in product models or when products are perishable.


In this connection, the costs of a low inventory must also be taken into account. When the manufacturer is unable to produce goods because of lack of raw materials or is unable to supply goods because of inadequate finished products stock, he loses particular sales.


Warehousing costs


Goods have to be stored for sometime after production, however small that time interval may be. This is done either at the production center, or in the marketing area, or somewhere in between or at all the three locations. The warehousing of raw materials either steps up the cost of their supply or of the cost of distribution of finished product. As a manufacturer wishes to approach the objective of zero stock-out of the finished products or zero loss of production, adequate warehousing capacity becomes essential; and this pushes the firm in higher fixed and operating costs of warehousing. Also, to improve customer service to certain levels, it becomes necessary to increase the number of warehouses. Accordingly, the company management has to arrive at the optimum number of warehouses which is consistent with the minimum total cost of distribution, taking into account the effect on the other elements of cost in the total logistical system.


Production or Supply costs


Production costs tend to decrease with an increase in the volume of production. Also, these costs vary between various production points. If a manufacturer has several plants producing the same product, he has to make a decision to vary the supplies or production from certain plants – a move which inevitably affects the cost of production itself as well as the cost of transportation, transit times, warehouse and inventory costs.


Channels of distribution costs


Various alternatives for distribution are available to a manufacturer. This distribution may be through a sole selling agent at the nation level, Or through regional distributors or through wholesale dealers, or by direct supplies to dealers and retailers and even to customer. Mail order sales or catalogue sales at different retail outlets of a manufacturer are direct sales to the customer, which automatically involve decisions on the establishment of stockiest and storage points or warehouses.


In the traditional marketing concept, the manufacturer is interested in scaling down the discount to the distributor to reduce the total cost. But if the distributor’s discount is low, he may not, perhaps because of his low profit margin, distribute the goods either in sufficient volume or he may not render satisfactory customer service. This may bring about a loss of present and future sales to the manufacturer.


Similarly, changes in the distribution system may take place by alternative use of space, say, for inventory, or for marketing or for production centre. This may also affect customer service in one way or the other. Therefore, a company has to carefully select channels of distribution since it affects decisions relating, ultimately, to customer service and satisfaction.


Communication and Data Processing Costs


An effective distribution system requires continual of order pricing, inventory control, accounts receivable, dispatches, etc. An increased number of distribution points would certainly improve customer service, but would make processing of information more cumbersome and expensive.


the same time, if the time taken to process the information is decreased, it is likely to lead better customer service. A manufacturer has, to decide about the speed and convenience with which information may be processed. One of the ways is use of computers having advanced software.


Transportation Costs


The cost of transport varies generally with the speed with which goods are transported. Water transport is the cheapest, while air transport is the most expensive. Rail transport is cheaper than road transport, beyond a certain distance. Both rail and road transport stand somewhere in between water and air in terms of the cost of transport.


Material Handling Costs


A suitable material handling system should be designed to reduce the cost of material handling to the minimum. This would require the consideration of several possible combinations of manual and mechanized handling of the goods and materials. But material handling operations have an impact on other distribution aspects, such as the cost of packaging as well as damages and losses that results form material handling. The design of the material handling system and the consideration of its cost also affect the selection of the mode of transport to be used and hence the cost of transport gets affected.


Packaging Costs


Decisions on packaging are affected by decisions on such factors as type of product, the mode of transport and type of material handling equipment used. A total cost approach would make it necessary for us to select packaging version, which takes into account other distribution factors as well. Thus it would not be sufficient merely to reduce the cost of packaging to the minimum.


Customer Service Costs


If the manufacturer or supplier guarantees the satisfaction with goods and agrees to give a refund on returned goods or exchange the returned goods, he must arrange for the movement of defective or returned goods from the customer (or retailer) back to the supply warehouse or manufacturing centre. Complaints of defects or of the deficiencies pointed out by the customer in the goods that are returned may therefore be utilized as a management feedback to improve the quality of service. Incidentally, with such a guaranteed service the manufacturer on a permanent basis, would win the customer’s loyalty. Guaranteed customer service, therefore, involves certain costs to the organization but it also leads to certain benefits in the long run. It increases the value of the company in the market.


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