All About the Wholesale Business in Cost Accounting: Stocking

The stocking activity occurs after purchasing, but before sorting. When the purchasers place orders with manufacturers, the goods must be picked up and brought to the warehouse. This process of transporting goods to the wholesaler’s warehouse and stocking them on the shelves therein is called “stocking.” Once goods are stocked, the sorting function can be undertaken to assemble customer orders. In real wholesaler warehouses, the stocking and sorting functions happen simultaneously as goods are constantly being moved in and out to meet customer needs in a hurry.

We identified three possible cost drivers for the stocking activity: number of pallets stocked, labor hours of warehouse stocking workers, and number of pallets in individual customer orders. Pallets that are stocked in the warehouse have arrived straight from manufacturers, and therefore have not yet undergone any bulk-breaking or sorting service activity yet. Because of this, the pallets of incoming goods have no relationship with any customer order yet, and it is likely that many pallets of goods will be disassembled to provide the bulk-breaking service to customers who order smaller quantities. The incoming pallets of goods, which bear no relation to the outgoing pallets of customer orders, cannot be connected to the goods-purchasing cost object. Therefore, the number of pallets stocked is not a suitable cost driver.

It takes a considerable amount of time for warehouse workers to stock the shelves with incoming goods. While wages paid to warehouse workers who sort goods and assemble customer orders is directly traceable to orders, the labor wages paid to warehouse stockers is an indirect labor cost. Labor hours put toward stocking shelves only involves placing whole pallets onto racks inside the warehouse. The sorting activity, on the contrary, involves handling smaller quantities of goods. Because the two separate activities involve a different level of goods-handling, they are not linkable enough to use warehouse labor hours as a cost driver.
In theory, the number of pallets that come into the warehouse should be the same as that which leaves. Although both the stocking and sorting functions are occurring simultaneously in a real-life warehouse, the aggregate number of pallets that come in versus go out should be equal. As an example, if 500 pallets come into the warehouse, and Customer A gets 300 pallets delivered containing a mix of goods from the 500 original pallets, that customer order should be allocated 60% (300/500) of the stocking cost incurred. Operating under these conditions, the number of pallets in a customer’s order should dictate what proportion of stocking overhead costs their order gets assigned. Overhead costs for the stocking activity include forklifts, software, industrial equipment, tools, and safety materials. All these items receive use by the pallets that enter the warehouse and the workers that move them. For the frozen food industry, goods do not vary greatly in size and shape, and therefore will not incur wildly different handling costs during the stocking process. For this reason, the number of pallets in a customer’s order should be used as the cost driver for the stocking activity, as the aggregate number of pallets stocked and prepared is in relative equilibrium. This is a transaction cost driver.