Supply Chain Costing and Performance Management, 2nd Edition

CHAPTER 7Indirect Costs, the Influence of Cost Allocation, and the Need to Understand Activities

SUPPLY CHAIN PROCESSES ARE supported by many different activities and require a variety of resources. Cost structures for these processes vary because firms operate in diverse environments, emphasize different strategies, and use a variety of production methods. Identifying what costs are directly or indirectly associated with a supply chain process is an essential element of supply chain costing.

Only certain costs are directly associated with supply chain processes or process segments. Other costs are indirect, making cost allocations an inherent part of measuring supply chain costs. Improving supply chain costing means that firms must pay more attention to the indirect costs, which are a growing part of supply chain costs relative to the direct costs, because the increasing complexity of supply chains requires more indirect costs to manage the complexity. There is an increasing emphasis on carefully managing how costs are assigned or allocated. Executives strongly stress that cost allocation decisions drive people's behavior and influence the resulting performance measurements. Cost allocations send critical signals to management regarding how costs are assumed to be consumed in the performance of different activities in the firm or supply chain. This information directly affects how operations are managed and how individuals at various levels in the firm and supply chain behave. ...