All About the Wholesale Business in Cost Accounting: Physical Sorting

The physical sorting activity takes place after a customer’s order has been transmitted to the wholesaler, and the date of delivery for that order comes near. The warehouse workers review the customer order, and begin to move around the warehouse collecting a variety of goods. Since products come in bulk from manufacturers, that is how they are stored on the warehouse shelves. Therefore, when customers request pallet-size or smaller quantities of these items, the warehouse workers must collect the appropriate quantities of many different goods from around the warehouse. Once a customer’s order contents have been collected, the workers place the goods onto wooden pallets and sometimes wrap them in plastic. At this point, the sorting activity has been completed, and the customer’s order is ready to be loaded onto trucks for delivery.

There are four cost drivers that should be reviewed for the sorting activity: direct labor hours of warehouse staff, amount of packaging, dollar amount of an order, and number of pallets prepared. Warehouse workers in the wholesaling industry work to fill orders in a fast and directed manner. It is not difficult for managers to record the amount of time it takes to assemble a particular customer’s order. For this reason, the wages paid to warehouse workers are a direct labor cost.
Wooden pallets and plastic wrap gets used in the process of preparing customer orders. These costs, it turns out, are directly traceable to individual orders because it is quite clear how much packaging is used in assembling an order, and the quantity used can be recorded before orders are loaded onto trucks. Regardless, customer orders are different sizes, and different types of products may require a number of alternative packaging materials which can range in cost. For these reasons, the amount of packaging used is not a suitable cost driver.

The dollar amount of a customer’s order is also negligible. In the frozen food industry, often there are not many products of varying sizes with radically different prices. However, a premium microwave meal could cost double a simple microwave meal, even though these two items occupy the same space. Accordingly, twice as many pallets would be used in a $1m order of simple meals versus premium ones. It follows, therefore, that ‘dollar amount of order’ would be a bad cost driver to use.

A customer’s order, if large, will require the warehouse staff to prepare more pallets during sorting. Pallets are roughly the same size, meaning that a very similar level of expense will be incurred in the preparation of each one. Overhead costs related to the physical sorting activity include the use of forklifts and safety materials, and these costs will not vary per pallet. This means that the overhead costs related to the physical sorting activity can be most accurately assigned to customer orders based on the number of pallets that are prepared to meet that order. This is a transaction cost driver.