What is warehousing costs?
The basic concepts of costs in general and warehousing costs in particular with reference to the warehouse management. It tells about the various costs and its cumulative effects for an organization, especially with respect to the warehousing operations.
Table of Content
- 1 What is warehousing costs?
- 2 Types of Warehousing Costs
- 2.1 Direct Cost
- 2.2 Indirect Costs
- 2.3 Fixed Cost
- 2.4 Variable Cost
- 2.5 Average Cost
- 2.6 Marginal Cost
- 2.7 Opportunity cost
- 2.8 Money Cost
- 2.9 Real Cost
- 2.10 Accounting Cost
- 2.11 Private Cost
- 2.12 Social Cost
- 2.13 Actual Cost
- 2.14 Sunk Cost
- 2.15 Incremental Cost
- 2.16 Explicit Cost
- 2.17 Implicit Cost
- 2.18 Book Cost
- 2.19 Out Of Pocket Costs
In case of manufacturing activity, warehousing is required to maintain sufficient stock of materials so that manufacturing process will run continuously. Such types of warehouses are called manufacturing support warehouses.
In case of physical distribution of finished goods, warehousing is required so that the distribution channel members can be supplied on time to satisfy market demand. Such types of warehouses are called distribution support warehouses.
Types of Warehousing Costs
it is generally understood that the economic efficiency of any firm operating in the market is determined by the ability of the firm to minimize its costs and maximize its profits. Therefore there is also a need to understand that cost is a function of Output. As the output of a firm changes, the cost pattern of a firm also undergoes change. Thus, given above discussion,
We need to understand the following costs of the firms to know its business operations better:
- Direct Cost
- Indirect Costs
- Fixed Cost
- Variable Cost
- Average Cost
- Marginal Cost
- Opportunity cost
- Money Cost
- Real Cost
- Accounting Cost
- Private Cost
- Social Cost
- Actual Cost
- Sunk Cost
- Incremental Cost
- Explicit Cost
- Implicit Cost
- Book Cost
- Out Of Pocket Costs
Direct costs are those which have direct relationship with a unit of operation like manufacturing a product, organizing a process or an activity etc. In other words, direct costs are those which are directly and definitely identifiable. The nature of the direct costs is related with a particular product/process, they vary with variations in them.
Therefore all direct costs are variable in nature. It is also called as “Traceable Costs”. However, direct cost is defined as the financial costs that are incurred as the result of purchasing factor services from the market.
Indirect costs are those which cannot be easily and definitely identifiable in relation to a plant, a product, a process or a department. Like the direct costs indirect costs, do not vary i.e. they may or may not be variable in nature.
However, the nature of indirect costs depends upon the costing under consideration. Indirect costs are both the fixed and the variable type as they may or may not vary as a result of the proposed changes in the production process etc. Indirect costs are also called as Non-traceable costs.
Fixed Cost is that cost which does not change (that is either goes up or goes down) irrespective of whether the firm is operating or not. For example on account of the Strike and Lockout in Maruti-Suzuki’s Manesar plant (India), the production process came to a stand still. Even then the Firm still had to bear some expenses which are indirect in nature.
Another example of a fixed cost in warehouse management is the monthly cost to lease a warehouse space itself during the contracted period. Regardless of other factors, the leaseholder is required to pay the fixed warehouse lease price per month. On average in the US, warehouse lease costs are around $7.96 per square feet, equating to a gross monthly fixed payment of $6,634 per month for a 10,000 square foot warehouse.
Variable Cost on the Other hand is directly proportional to the production operations. As the size of production at any business grows, the variable expenses also grow. As the name suggests, the variable expenses vary with the business operations. When the firm is not operating on account of Strike/Lockout etc, then the variable cost of the firm is Zero.
It is the cost that is obtained after dividing Total Cost with the number of units produced.
- Total Cost = Fixed Cost + Variable Cost
- Average Cost = Total Cost / Units of Good produced
Marginal cost is the change in the Total cost when an additional unit of good is produced. In other words Marginal cost is difference between total Cost of producing ‘N + 1’ units of good and ‘N’ units of good.
Marginal Cost = TC (n+1) – TC(n)
The resources of any firm operating in the market are limited and investment options are many. The firm therefore has to decide or select only those investment opportunities/options which provide the firm with the best return or best income on investment.
Money Cost of production is the actual monetary expenditure made by company in the production process. Money cost thus includes all the business expenses which involve outlay of money to support business operations.
For example the monetary expenditure on purchase of raw material, payment of wages and salaries, payment of rent and other charges of business etc. can be termed as Money Cost.
Real Cost of production or business operation on the other hand includes all such expenses/costs of business which may or may not involve actual monetary expenditure.
For example if owner of a business venture uses his personal land and building for running the business venture and he/she does not charge any rent for the same then such head will not be considered/included while computing the Money Cost but this head will be part of Real Cost computation.
Accounting Cost includes all such business expenses that are recorded in the book of accounts of a business firm as acceptable business expenses. Such expenses include expenses like Cost of Raw Material, Wages and Salaries, Various Direct and Indirect business Overheads, Depreciation, Taxes etc.
When such business expenses or accounting expenses are deducted from the Sales income of any firm the accounting profit is obtained. Such Accounting/Business expenses or costs are also termed as Explicit Costs. Economic Cost on the other hand includes all the accounting expenses as well as the Opportunity cost of a business firm.
The actual expenses of individuals/ firms which are borne or paid out by the individual or a firm can be termed as Private Cost. Thus for a business firm this may include expenses like Cost of Raw Material, Salaries and Wages, Rent, Various Overhead Expenses etc.
On the other hand Private Cost for an individual will be his or her private expenses such as expense on food, rent of house, expenses on clothing, expenses on travel, expenses on entertainment etc.
Social Cost on the other hand includes Private Cost and also such costs which are not borne by the firm but by the society at large. For example the cost of damage or disutility caused by the operations of a firm in an economy may not be borne by the firm in question but it impacts the society at large and thus such cost is added to the Private Cost to find the Social Cost of producing the product.
Such Cost (that is cost not borne or paid out by the firm) is also known as External Cost. Another example of external cost can be the cost of providing the basic infrastructure facilities like good roads, sewage system or network, street lights etc.
Cost of such facilities is not borne by a business firm even though the firm is benefits from such facilities. Such costs (External Costs) are thus added to the Private Cost to find the Social Cost of producing a product or good.
Actual cost is defined as the cost or expenditure which a firm incurs for producing or acquiring a good or service. The actual costs or expenditures are recorded in the books of accounts of a business unit. Actual costs are also called as “Outlay Costs” or “Absolute Costs” or “Acquisition Costs”. Examples: Cost of raw materials, Wage Bill.
Sunk costs are those do not alter by varying the nature or level of business activity. Sunk costs are generally not taken into consideration in decision – making as they do not vary with the changes in the future. Sunk costs are a part of the outlay/actual costs. Sunk costs are also called as “Non-Avoidable costs” or “Inescapable costs”.
Incremental costs are addition to costs resulting from a change in the nature of level of business activity. As the costs can be avoided by not bringing any variation in the activity in the activity, they are also called as “Avoidable Costs” or “Escapable Costs”.
More ever incremental costs resulting from a contemplated change is the Future, they are also called as “Differential Costs” Example: Change in distribution channels adding or deleting a product in the product line.
Explicit costs are those expenses/expenditures that are actually paid by the firm. These costs are recorded in the books of accounts. Explicit costs are important for calculating the profit and loss accounts and guide in economic decision-making. Explicit costs are also called as “Paid out costs” Example: Interest payment on borrowed funds, rent payment, wages, utility expenses etc.
Implicit costs are a part of opportunity cost. They are the theoretical costs ie, they are not recognized by the accounting system and are not recorded in the books of accounts but are very important in certain decisions. They are also called as the earnings of those employed resources which belong to the owner himself. Implicit costs are also called as “Imputed costs”.
Examples: Rent on idle land, depreciation on dully depreciated property still in use, interest on equity capital etc.
Book costs are those business costs which don’t involve any cash payments but a provision is made in the books of accounts in order to include them in the profit and loss account and take tax advantages, like provision for depreciation and for unpaid amount of the interest on the owner’s capital.
Out Of Pocket Costs
Out of pocket costs are those costs are expenses which are current payments to the outsiders of the firm. All the explicit costs fall into the category of out of pocket costs. Examples: Rent Paid, wages, salaries, interest etc.
However, the elements of warehousing costs normally accounted for are transportation, storage and administration. The warehousing cost includes fixed and variable cost elements. The fixed cost covers rental, capital cost, salary wages of the employees and utilities while the variable cost covers repair and maintenance, material handling, transportation and packaging which are related to the load on the warehouse etc.