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

The activity of external logistics is a little more straightforward than that of internal. Internal logistics involves moving goods from manufacturer locations to wholesaler warehouses. The external logistics activity is a service provided for customers whereby the wholesaling company determines the most efficient and logical way to deliver customer orders. Essentially, external logistics is the organization of the movement of goods from the wholesaler’s warehouse to the client’s destination site.
Our team gave the most consideration of cost drivers to these three possibilities: number of pallets in a customer’s order, dollar amount of the customer’s order, and consultant direct labor hours. External logistics involves the incurrence of overhead costs such as EDI software, logistics software, and IT equipment, which are aimed at fulfilling the service-providing cost object. Consultants work with these softwares and equipment in order to service the needs of individual customers. The consultants work on one client at a time, and therefore their labor hours are directly traceable to the cost object, which is a customer’s order for services.
First of all, the size of a customer’s order, in terms of dollar amount, does not necessarily dictate the physical size of the goods that fulfilling that order will require. For this reason, an order with a larger dollar amount could actually require fewer pallets to fulfill than an order of a lesser dollar amount. What this means, is that the dollar value of an order can’t really tell a consultant how physically grand the order is, and so no actionable information is delivered that would allow the consultant to plan logistics surrounding the order. Thus, ‘dollar amount of a customer’s order’ cannot accurately enough drive the allocation of external logistics overhead costs.
To say that the number of pallets in an order could drive the application of overhead costs is actually reasonable. So far, the number of pallets in an order has proved a useful cost driver in other activities, and it could be used here as well. Although possible, it is our belief that the number of consultant direct labor hours would be the best cost driver for this activity. External logistics is a matter of working with customers to plan the delivery of goods with very specific details in mind, including the time, place, and frequency of delivery. How precise a customer wants to get about these details will determine the amount of time a consultant must spend with him or her. The consultant’s hours are directly billable to the customer, and increased interaction with a customer will require greater usage of the software and computer products that consultants have available. In essence, customers who engage the logistics services of a wholesaling company pay a fixed rate per hour that includes not only the consultant’s time, but the overhead costs (softwares/computers) associated with making the consultant’s job feasible. With consultant direct labor hours driving the level of external logistics activity that is performed, the best cost driver for this activity is clearly direct labor hours for consultants. ‘Consultant direct labor hours’ is a duration cost driver.