Activity based costing seeks to relate all relevant expenses to the value adding activities performed. For eg.- costs are assigned to a customer or product to reflect all relevant activity costs independent of when and where they occur.


The fundamental concept of activity-based costing is that expenses need to be assigned to the activity that consumes a resource rather than to an organization or budget unit.

For eg.- Two products, produced in the same manufacturing facility, may require different assembly and handling procedures. One product may need an assembly or packaging operation that requires additional equipment or labor. If total labor and equipment costs are allocated to the products on the basis of sales units produced, then both items will be charged for the additional assembly and packaging operations required by only one of them. This unjustly reduces the profitability of the simplified product by forcing that product to pay for the operations it does not need. In a manufacturing sense, identifying and assigning cost factors means that a specific product will be fully assigned its fair share of all overhead and operating costs.


In the case of logistics, the key event is a customer order and the related activities and relevant costs that reflect the work required to fulfill the order. Logistical activities based costing must provide managers the insights needed to determine if a specific customer, order, product or service is profitable. This requires matching specific revenue with specific costs.


Effective costing requires identification of he specific expenses to include in an analysis framework.

A second concern is to specify the relevant cost time frame.

Finally, costs must be allocated or assigned to specific factors that are relevant to assembly alternative actions.

The guiding criteria for effective logistical activity-based costing are relevancy and consistency. Relevancy is important in the sense that the cost assignments help managers to better understand the major factors affecting logistics expenses. Consistency is important in terms of comparing related activities over time. These criteria help in the decision making process where logistical activities are concerned.

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