All About the Wholesale Business in Cost Accounting: Accounting

The accounting activity is a facility-level activity that is essential to the ongoing operation of any wholesaling company. Accounting for customer orders, warehouse activities, and payroll demands is a multifaceted operation which will require a dynamic cost driver. We considered the following: labor hours of warehouse workers, number of radio-frequency identification (RFID) tags, and dollar value of customer order.

The activities of physically sorting and delivering goods to customers are very labor-intensive. The number of hours that warehouse workers must spend on these activities is directly traceable to individual customer orders. More time spent on these activities implies either more quantity of goods, more miles driven, or both. In the case of driver labor hours, planned overnighters and unpredictable events like traffic jams can boost labor costs in ways that wouldn’t require much extra accounting. For this reason, ‘driver direct labor hours’ is not a good choice for cost driver.

An RFID tag is attached to each customer pallet after it has been prepared, so that goods shipped to customers can be tracked. The number of RFID tags a customer’s order accumulates is merely a count of the number of pallets that the order occupies. This count, unfortunately, does not pay attention to the variety of goods that were loaded onto the pallets. As goods are pulled from the shelves during the sorting process, a larger variety of goods would require more time to collect. With warehouses consisting of several hundred thousand square feet, two orders with the same number of pallets will take considerably different times to compile if one of the orders requests a greater variety of goods.

Using warehouse direct labor hours from the sorting activity as a cost driver is much wiser than using a simple count of RFID tags. Given the number of RFID tags for a particular order, the count of direct labor hours required to physically sort that order will give a good indication as to the variety of goods in that order. More labor hours incurred will imply a level of complication that undoubtedly requires more accounting. As orders gain variety, more time must be spent collecting different items from around the warehouse, and that means more entries to the inventory ledger. An order which uses more of the resources of the company’s accounting computer system should logically accumulate an equally greater share of the overhead costs associated with the accounting activity cost pool, including software, salary, and utilities expenses. Therefore, the number of direct labor hours incurred by the warehouse staff during the sorting function should be used as the cost driver for the accounting activity.