All About the Wholesale Business in Cost Accounting: Logistics (Internal)

Internal logistics as a service that is internal to the company. External logistics services are offered to customers, and they will be covered in the next section. Logistics activities internal to the firm involve organizing the transportation of goods from manufacturer locations to the wholesaler’s warehouse. When wholesale companies purchase goods from manufacturers, they are responsible for picking up the goods at the manufacturer’s facility and bringing them back to the warehouse all on their own. This requirement poses its own challenges, so a large company in the wholesale business employs consultants to arrange these exchanges.

The selection of a cost driver for the internal logistics activity is more difficult to pinpoint because linking the costs incurred in this product-level activity to the goods-delivery cost object is not so clear. The three cost drivers to consider are: number of truck miles, consultant labor hours, and number of pallets in order. The number of miles a wholesaler’s truck must drive to fetch goods from manufacturers and return with them to the warehouse is not important. Different quantities of goods can be loaded onto trucks, and trucks may stop at multiple manufacturer plants as is the case when picking up specialty goods. Therefore, number of truck miles is not a good candidate for cost driver.

Consultants who perform the internal logistics activity incur labor hours that are not directly traceable to customer orders. Because the wholesale company starts with bulk quantities of goods and breaks/sorts them to create specific customer orders, it is not possible to link costs associated with those products before the break/sorting action to those after it. For this reason, ‘consultant labor hours’ is not a compatible cost driver.

Logisticians arrange to have goods brought in to wholesaling warehouses. The purpose of bringing the goods in is to arrange customer orders and send the goods back out, but this time to customers. Assuming a full warehouse, as goods come in, more will leave. Even if this activity happens sporadically with warehouse inventory levels climbing and falling, over time the aggregate amount of goods that come in will be equal to that which leaves. Accordingly, the number of pallets that a customer’s order is comprised of can be matched to the number of pallets that entered the warehouse to make that sale possible, on an aggregate basis. This is how we bridge the gap between direct and indirect labor costs incurred in the breaking/sorting and stocking activities. As a very basic example, 100 pallets of manufacturer goods enter a warehouse where they are rearranged, and two orders of 50 pallets with mixed goods are sent out to Customers A and B. In this most basic example, the input is equal to the aggregate output. Internal logistics costs like consultant salaries (indirect labor), software, and supplies should be allocated to the goods-delivery cost object on the basis of the number of pallets in a customer’s order. The number of pallets in an order is a transaction cost driver.