Welingkar’s Distance Learning Division

CHAPTER-3

Activities Cost Planning & Control

We Learn – A Continuous Learning Forum

Activities costs planning & control

• The budget having set the tasks and the expenses norms, the distribution department can now use the same to periodically review and control the expenses, as well as monitor the efficiency and effectiveness of the operation

Activities Costs Planning and Control

Ratios

Key Ratios

Intermediate RatiosIntermediate Ratios

GrassRootsRatios

GrassRootsRatios

GrassRootsRatios

Activities Costs Planning and Control

Transportation Intermediate Ratio

• This primarily will be transportation cost as a percentage of sales/gross margin/cost of production the grass roots ratios can be– Transportation cost per unit of movement at

different stages of the chain– Transportation task performance, which can be

ratios to determine tonnage/km movement in days.

Activities Costs Planning and Control

Warehouse Facility intermediate ratio

• Main ratio will be warehousing cost as a percentage of sales/gross margin/cost of production

• Grass root ratio can be– Warehousing rental rate per cu. ft.– Warehouse cu. Ft. utilization against available space– Percentage of orders served within 24 hrs– Documentation costs such as invoicing– Mechanized facilities cost

Activities Costs Planning and Control

Inventory intermediate ratio

• Prime point of focus would be the amount of inventory held in number of days of sales, since holding inventory means blocking that much amount of capital, improper inventory management can also mean stock outs, which can mean loss of profits

Activities Costs Planning and Control

• Typical grass roots ratio– Inventory carrying costs– The stock turnover velocity– Rate of stock shrinkage– Average no. of days of stock out– Value of dames as a percentage of sales

Inventory intermediate ratio

Activities Costs Planning and Control

Distribution Function Audit

• Standards– Reviewing existing performances and procedures

and cost accounting techniques, which is zero based

– Attempting to gain some competitor's standards/industry benchmarks

– Use internal data over a period of time and select own best average performance figures as benchmark

Activities Costs Planning and Control

Return or Assets -ROA

• The logistics function should use return on assets or return on investments as measure of financial performance

• It is important that return is calculated on logistical assts

• Should not have over emphasis on reduced cost

Activities Costs Planning and Control

The audit process should address

• Where the organization stands at that point of time in terms of physical material flow

• How the same matches with information flow• How cost effective the existing logistics system

is

Activities Costs Planning and Control

The external environment factors would be

• Source market– The sources from which inputs to the

manufacturing process are procured• User market– Where the products are going to be sold,

consumed• Competition• Channel– Channel of distribution impacts strategy, costs and

efficiencyActivities Costs Planning and Control

• Product Related– Seasonality– New products , modifications– Special handlings– Special requirements

The internal environment factors would be

Activities Costs Planning and Control

• Distribution Pattern– Organization structure– Product characteristics– Shipment characteristics– Purchasing characteristics– Warehouse utilization– Transport utilization– Stocking requirements

The internal environment factors would be

Activities Costs Planning and Control

• Systems– Purchasing system– Production scheduling– Data warehousing facility– Warehouse facility– Transport facility– Material handling facility

The internal environment factors would be

Activities Costs Planning and Control

Materials and Communication Flow

Customer

Central Warehouse

Factory

C & FA

Information Flow

Order Flow

Materials Flow

Activities Costs Planning and Control

The Audit should now cover

1. Customer service perception audit2. Competitor audit3. Channels audit4. Materials supply audit5. Finished goods distribution audit

Activities Costs Planning and Control

When Evaluation is needed

• Organization makes significant change in its marketing strategy

• Size of the organization changes significantly• Inventory turns very slow• Poor customer service• Inter warehouse shipments stock transfers

between various locations

Activities Costs Planning and Control

When Evaluation is needed

• Premium freight charges i.e. extra charges paid to a transporter to ferry cargo fast

• Signs of mal-distribution which would be most critical ,can be suspected if

Activities Costs Planning and Control

Typical audit findings

a. Why equal volume base discounts are given to intermediary

b. Levels of delivery servicec. 15% customers account for 90% of sales. Is

this pattern healthy?d. Analysis reveal 12 % deliveries were at drop

sizese. Should distribution for appliances and spares

should be different?

Activities Costs Planning and Control

Recording audit observations & follow up

• Any distribution audit task would not be complete unless the findings are discussed with the responsible managers, and their agreements are obtained, noted and recorded in the audit report

• Compliance follow up meeting should be agreed upon, and form part of the regular distribution audit procedure

Activities Costs Planning and Control

Summary• The expenses norms, the distribution

department can now use the same to periodically review and control the expenses, as well as monitor the efficiency and effectiveness of the operation

• Key ration includes intermediary ratios and grass root ration for transportation costs, warehouse utilization etc.

Activities Costs Planning and Control

• Effective distribution audit of external and internal factor should aim at rationalizing distribution costs

• Compliance follow up meeting should be agreed upon, and form part of the regular distribution audit procedure

Summary

Activities Costs Planning and Control