Total Cost Analysis



The basic work of a logistical network is the analysis of the total cost. By careful integration of various logistical activities, the total cost of the system can be reduced. This is achieved by proper coordination and planning of various activities. In the traditional accounting system, we merely get the figures of the various expenses. But we are not aware to which of the expenses are critical which is required in the logistic analysis.


The two main financial statements that a company has are its Profit & Loss statements (P&L) and the Balance Sheet. The traditional accounting statements are used to prepare a list of assets & liabilities, revenue & costs of the company. These statements are then audited for the purpose of taxation and shareholder’s dividends. Hence, these statements are deficient from the point o view of logistical costing analysis.


The traditional accounting statements do not segregate which are critical activities or critical expenses. The grouping of salaries, rent depreciation, etc. does not identify or assign operational responsibility. If costs are high normally they are attempted to be reduced. For example, if the P&L account statement shows a high inventory cost, the management attempts to reduce the cost by reducing the amount of inventory.


Therefore, in case we have to evaluate the performance of logistical operations, we must identify the costs associated with the performance of specific tasks. This means that we must identify the individual logistical activities and then associate the costs to these activities for analysis purposes. Take for example the transportation cost. In many of the purchases, the transport cost is not shown separately. It is normally included with the cost of the goods purchased. Therefore, it must be ensured that the cost of transportation has to be separated from the purchases for logistical costing analysis.


Again in traditional accounting the details of inventory carrying costs are not given properly. For example, it is not specifically mentioned about the total insurance paid on the inventory, the total financial burden associated with inventory (not just in terms of the purchase cost of the inventory).


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