Assigment SCM

1. Assignment # 01
Supply Chain Management
SUBMITTED TO: Ma’am Dr. Fatima
SUBMITTED BY : Muhammad Asim Shahzad (2019-EMBA-20)
IB&M
UNIVERSITY OF ENGINEERING AND TECHNOLOGY LAHORE
Date: Oct 08, 2021

2. Contents
Question........................................................................................................................................................ 2
What you understand from the article “Activity Based Costing (ABC) used in Logistics & Supply Chain
Management as cost optimization & it's benefits by Antariksh Joshi”........................................................ 2
Types of cost in logistics:............................................................................................................................. 2
Traditional Cost:....................................................................................................................................... 2
Activity Based Cost .................................................................................................................................. 2
Importance of cost optimization?................................................................................................................. 3
Application of Activity Based Costing in Logistics &................................................................................. 3
Supply Chain ................................................................................................................................................ 3
Operating phases of ABC in Logistics: .................................................................................................... 3
Cost Drivers in Acitivity Based Costing-ABC?....................................................................................... 4
Trade-off Identifications............................................................................................................................... 4
Benefits / Advantages of ABC ..................................................................................................................... 5
Drawbacks/ Dis-advantages of ABC............................................................................................................ 5

3. Question
What you understand from the article “Activity Based Costing (ABC) used in
Logistics & Supply Chain Management as cost optimization & it's benefits by
Antariksh Joshi”
Types of cost in logistics:
There are two types of cost used in logistics which are discussed in this articles, these types are;
1. Traditional Cost
2. Activity Based Cost
Traditional Cost:
The traditional method takes one pool of a company's total overhead costs to allocate universally to all
products. Traditional cost assigns costs to product/ service average overhead rate. This method pools all
indirect costs of Product/ Service and applies those cost equally across the board using one appropriate
cost driver such as machine hours.
Activity Based Cost
Activity-based costing is a costing method that identifies activities in an organization and assigns the cost
of each activity to all products and services according to the actual consumption by each.
Or
Determines all activities associated with product/ service, assigns a cost to those activities
and then determines cost of the product.
The difference between traditional costing and ABC costing is clearly shown in below fig.

4. Importance of cost optimization?
The ultimate goal of every organization is to increase its profitability. And to increase the profitability an
organization may increase its revenue by increasing its sale or to reduce the cost of its product or service.
By increased revenue one can make themselves profitable but reduced cost will always be more profitable
as you need not to work on product's price/ revenue part and customer is satisfied. By reducing the cost of
the product an organization can offer more competitive price in market than its competitors.
Application of Activity Based Costing in Logistics &
Supply Chain
Logistics activities are oriented to create value to all the entities or stake holders involved in process by
supplying right quantity of material, at the right time, on the right place in right price. For realization of
required customer service at the lowest total cost, it is fundamental to analyses the logistics activities
presents in the organization and the cost that these activities generate. Many logistics operations require
cooperation among companies. The costs that the companies incur depend on the decisions that they take
about the realization methods of their logistics activities. The cost recording and analysis system has to
help the companies to identify the best collaboration methods, to correctly define economic advantage.
To reduce logistics costs and provide the level of customer service demanded, it is important to know the
resources used in every activity through an efficient logistics cost analysis system.
Operating phases of ABC in Logistics:
ABC introduction to Logistics can be subdivided in below operating phases -

5. Cost Drivers in Acitivity Based Costing-ABC?
To correctly analyze the logistics cost, it is necessary to break down the processes down into activities,
creating a map of the logistics activities for the company. An analysis of the resources consumed in each
activity will identify inefficiencies caused by poor logistics activities planning that generate an excessive
consumption of the resources. To define for each activity, the utilization of resources, ABC uses the concept
of resource driver. For a specific activity the resource driver is simply a factor that causes or influences
costs. Once the resources for the activities have been imputed, it is necessary to identify the factors that
generate the demand for that activity from each cost object. The activity drivers measure the frequency and
intensity of activity arising from each cost object. Through ABC for each activity, it is possible to identify
at least one activity driver. Some costs may have numerous drivers, but only the most relevant should be
used. The selection of cost driver is an important phase because it influences the level of accuracy of the
final object cost assessment. The most relevant drivers can often be determined by questioning those
employees who are most familiar with the activity to indicate which factor causes an increase or decrease
in the time and effort they spend on the activity. The cost drivers should have direct relationship with the
amount of effort required by the activity. A cost driver is usually expressed on a cost per unit basis. To
assess the total cost of an activity for an individual cost object, the ABC multiplies the usage amount of a
cost driver in performing that activity by the unit cost of the driver.
Allocating resources directly to activities and specific cost objects that utilize those activities are the most
important phases of the ABC system. Through the identification of the costs sustained for each operation,
connected to specific cost objects, it is possible to value the cost differential between customers,
products, market segments or distribution channels. The ability to trace the costs to specific cost objects
has immeasurable benefits in corporate decision-making roles. To face up to important management
decisions, it could be necessary to determine the costs sustained from all of the companies in the supply
chain to fully understand the logistics activities and the variations that these costs undergone in relation
to changes in the collaboration relationship.
Trade-off Identifications
There are following identified trade off factors:
1. Identifying cost drivers or the structural determinants of the company’s logistics activities and their
behavior
2. Measuring cost drivers in sufficient detail so as to understand causes and effect activities
3. Measuring the interaction of cost drivers (determining whether they reinforce or counteract each
other)
4. Identifying the specific service levels that matter to customers and measuring their value
5. Recognizing the correct trade-offs among the logistics and service criteria
6. Evaluating these, both as a whole and incrementally, to contain costs without undermining needed
differentiation in the distribution function.

6. Benefits / Advantages of ABC
1. To solve the problem of traditional costing.
2. It gives you a realistic and more accurate production cost of specific items.
3. It allows you to assign specific overhead costs to more expensive products
4. Provides managers with useful information about labor and other resources, and control of the
overheads present in the company.
5. It allows you to evaluate the efficiency of productions and make improvements
Drawbacks/ Dis-advantages of ABC
1. Collection and preparation of data is time-consuming.
2. Source data isn't always readily available from normal accounting reports.
3. Reports from ABC don't always conform to generally accepted accounting principles and can't be
used for external reporting.
4. Data produced by ABC may conflict with managerial performance standards previously established
from traditional costing methods.
5. May not be as useful for companies where overhead is small in proportion to total operating costs