97. Cost Allocation in Logistics
Understanding How to Distribute and Analyze Logistics Expenses Effectively
What Is Cost Allocation in Logistics?
Cost allocation in logistics is the process of assigning logistics-related expenses (such as transportation, warehousing, labor, and packaging) to specific products, departments, customers, or business units. The goal is to understand which activities or outputs generate which costs, and to link them accurately to the areas they impact.
This is essential for:
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Product pricing decisions
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Customer profitability analysis
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Budgeting and performance evaluation
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Cost control and efficiency improvement
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Financial reporting and compliance
Why It Matters
Many logistics costs are shared across multiple products, SKUs, regions, or services. Without proper allocation, companies risk:
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Underpricing products or customers
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Overlooking unprofitable segments
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Mismanaging inventory or warehousing investments
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Misinterpreting financial performance
Correctly allocating logistics costs improves transparency, accuracy, and strategic decision-making.
Types of Costs Allocated in Logistics
| Type of Cost | Description |
|---|
| Transportation | Inbound/outbound freight, fuel, courier fees, driver wages |
| Warehousing | Rent, labor, security, depreciation of racks/equipment |
| Inventory Holding | Insurance, capital cost, spoilage, obsolescence |
| Order Fulfillment | Picking, packing, materials, error handling |
| Technology & Systems | WMS, TMS, barcode scanners, RFID, ERP integration |
| Returns & Reverse Logistics | Return shipping, inspection, reprocessing, waste disposal |
Cost Allocation Methods in Logistics
There is no one-size-fits-all. The method chosen depends on the organization’s goals, systems, and cost structure.
1. Activity-Based Costing (ABC)
Allocates costs based on the activities performed for each product or service line.
Example:
If picking Product A takes twice as long as Product B, Product A gets double the picking labor cost.
Pros: High accuracy
Cons: Complex to implement and maintain
2. Volume-Based Allocation
Costs are distributed based on units shipped, weight, or volume.
Example:
Transportation costs split according to cubic meters used per product type.
Pros: Simple
Cons: May ignore complexity or labor intensity
3. Value-Based Allocation
Allocates based on the value of goods shipped or stored.
Example:
Insurance costs are allocated based on inventory value per SKU.
Pros: Reflects risk exposure
Cons: May not reflect true operational effort
4. Customer-Level Allocation
Logistics costs are assigned per customer or channel (e.g., B2B vs. B2C).
Used to:
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Measure customer profitability
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Support differentiated pricing or service levels
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Evaluate channel performance
5. Fixed vs. Variable Allocation
Split logistics costs into:
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Fixed costs (rent, salaried labor, licenses) → Allocated evenly or by usage
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Variable costs (fuel, packaging, handling time) → Allocated based on actual volume/activity
This hybrid approach balances simplicity and accuracy.
Sample Formulas
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Cost per Unit Shipped (Basic Volume Allocation):
Total Shipping Cost ÷ Total Units Shipped
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Cost per SKU per Month (Warehouse):
(Total Warehouse Cost × SKU Space % × SKU Turnover Rate) ÷ SKU Units
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Fulfillment Cost per Order:
(Total Picking + Packing Labor + Packaging Material Costs) ÷ Number of Orders
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Transportation Cost per Customer:
(Total Freight to Customer X) ÷ Number of Deliveries to X
Common Allocation Challenges
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Shared resource ambiguity: How to split forklift usage, warehouse space, or manager time?
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Data granularity: Lack of SKU-level time tracking or volume measures
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Over-simplification: Allocating everything evenly can distort profitability
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System limitations: ERP or WMS not designed for detailed cost capture
Best Practices
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Use ABC for High-Cost Operations: Especially in multi-product or complex fulfillment environments.
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Align Cost Drivers with Reality: Time, weight, space, frequency—choose what reflects actual usage.
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Automate with Integrated Systems: Link ERP, WMS, and TMS data for seamless allocation.
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Review Regularly: Recalibrate models as product mix, volumes, and customer needs evolve.
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Visualize in Dashboards: Help finance and ops teams see cost distribution by product, channel, or location.
Use Case Example
A company ships two product categories:
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Small, lightweight accessories (high volume, low value)
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Large furniture (low volume, high space use)
Initially, they allocate warehouse rent based on number of SKUs.
→ Result: Accessories seem more expensive than they are.
After switching to space-based allocation:
→ Furniture receives 70% of warehousing cost (due to pallet space use), improving accuracy of gross margin analysis.
Conclusion
Cost allocation in logistics is fundamental for profitability analysis and operational efficiency. By accurately tracing how and where logistics resources are used, businesses can price smarter, optimize operations, and identify opportunities to reduce waste or renegotiate service contracts.
