Warehouse Cost Calculation

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Warehouse cost calculation is needed to decide the costs associated with logistics. Together with transportation costs, warehouse costs are an element of the company's logistics costs.

For companies that manage warehouses internally, it is very important to understand how to properly calculate warehouse costs. Then, how to control warehouse costs to obtain reduced costs in the warehouse.

Meanwhile, for companies that supply logistics services or third-party logistics (3PL), the calculation of warehouse costs is to determine the price of warehousing services to their consumers.

Next, the challenge is how to carry out operational reforms to be able to reduce warehouse costs, so that the selling value of warehouse services borne to consumers is cheaper, or gain an increase in profits.

Assignment of Warehouse Costs

Costs as the use of borne resources to the cost object. This cost object can take the form of what we want to calculate the cost. Examples of cost objects include products, services, departments, and loyal customers. At a minimum, there are three systems of assigning costs to cost objects.

First, is the assignment of direct costs (direct tracing) to the cost object. In this system, costs will be assigned to the same cost object according to the use of resources that can be physically detected and observed.

An example of imposing direct tracing costs is the cost of labor in a warehouse that carries out goods acceptance activities (receiving). Labor costs for goods acceptance activities in the warehouse can be detected and borne directly to the cost object. How many workers are used, how many hours are worked, and how much salary is paid, can be paid directly to the warehouse cost object.

Ideally, all costs should be passed directly to the cost object. But unfortunately, not all costs can be borne directly to the cost object. A number of resources used to carry out warehouse operational activities or processes cannot be accurately detected or observed directly to cost objects.

An example is the cost of electricity to run a conveyor belt. It is not appropriate if we have to pay attention to how much electricity is used from each conveyor belt used in the warehouse, for example by placing a measuring device for electricity usage (energy power meter or watt meter) on each conveyor belt because it will definitely not be accurate.

We only need to calculate the number of kWh (kilowatt hour), which is how many kilo watts in the same hour according to the information on the power number listed on the conveyor belt. In this case, the use of conveyor belt hours is the cause of the cost (cost driver) of electricity.

The system of assigning costs by determining the cause of costs is called driver tracing. This driver tracing system is applied if the imposition of costs using direct tracing cannot be carried out.

The driver tracing system assigns costs to the cost object by determining the cause of the cost (cost driver), namely the cause-effect relationship between the cost and the cost object. In the example conveyor belt electricity costs, hours of use as "cause" and electricity costs as "effect."

The next costing system is the cost allocation system. This system is used if the two costing systems, namely direct tracing and driver tracing, cannot be applied. The cost allocation system is an automatic cost assignment (indirect cost assignment).

Usually indirect costs (indirect costs) are borne to the cost object by using this system. Because the relationship between costs and cost objects cannot be detected directly or there may not be a cause-and-effect relationship, the cost allocation is carried out based on convenience or logical assumptions.

For example, the depreciation cost of a warehouse building is borne by the cost of acceptance of goods based on the area of space (space) used for goods acceptance activities. In this case, the area of space is used as the basis for assigning depreciation costs to the warehouse building.

How to Calculate Warehouse Costs

The costs are calculated based on the cost of using the resources used to produce warehousing products or services. Usually the operational process of warehousing includes acceptance of goods (receiving), placing of goods (put away), storage of goods (storage), picking of goods (picking), and preparation for transporting goods (shipping).

Brian J. Gibson, in Coyle (2017) explains the activities carried out in each warehousing operation process, including:

Acceptance of goods (receiving)

Is the process of receiving goods from the transportation model or receiving goods sent from the factory. In the goods acceptance operation process, the activities that have been carried out are checking the arrival schedule of transport (schedule carriers), confirming orders, checking goods (inspect freight), and dissecting goods (unloading vehicles).

Putting goods (put away)

Each type of goods is detected in the number of stock-keeping units (SKU) and data collection on the number of goods received. Then, sending the goods to the storage area, the goods are sorted and placed in their place (put away).

Storage of goods (storage)

Is the process by which goods are placed in storage and under proper protection until they are needed.

Take goods (order picking)

The type of goods required from stock must be taken from the storage rack and brought to the place of arrangement.

Arrangements for the transportation

Arrangements for the transportation of goods made into one order are brought together and checked if there are omissions or errors. Order records must be kept up to date.

Transportation of goods Ordered goods are wrapped, transport documents are prepared, and goods are loaded in the vehicle correctly and accurately.

To carry out warehousing operational activities, resources are needed. Usually, the resources used in warehousing operations are in the form of warehouse buildings, material handling equipment (MHE), labor, technology, energy, and equipment.

Based on each type of resource used in the warehouse, we can categorize the types of warehouse costs as follows:

a. Storage Costs

Storage costs are derived from the use of warehouse space, which can be divided into:

Building and land rental costs, or building depreciation costs, depending on how the buildings and land were acquired. If the building and land for the warehouse are obtained on a lease basis, it is stated as a rental fee. Meanwhile, if the building and land are acquired by investment or self-construction, it is stated as depreciation expense.
Building insurance.
Land and Building Tax, or levies.
The cost of electricity and telecommunications.
The cost of renting or depreciation of warehouse equipment.
Rental costs or rack depreciation.
Cost of refrigeration equipment.
Repair and maintenance costs.
The cost of cleaning and security of the warehouse.
Cost of waste disposal (waste disposal).

b. Material Handling Costs (Handling Costs)

The costs of handling goods in the warehouse are in the form of:

Direct labor costs, namely salaries, overtime, training, health and labor insurance, and personal protective equipment (PPE).
Material handling equipment (MHE) costs, namely rental costs, depreciation costs, and MHE operational costs (such as costs for using fuel, costs for using batteries, tires, and oil).
Packing fee.

c. Overhead Costs

Usually, warehouse overhead costs are divided into:

The cost of wages for managers and warehouse administrative staff.
The cost of renting or depreciating office vehicles.
Administrative costs.
IT costs, both hardware and software.
The cost of renting or depreciation of office supplies.
Marketing costs, specifically for 3PL companies.

Furthermore, to calculate the cost of the warehouse required information such as the following:

Type of resource.
The amount or volume of use or use of resources.
Cost or cost per unit.

The overall cost of the warehouse is obtained by multiplying the amount or volume of use or use of each resource by the cost or cost per unit.

A warehouse manager requires in-depth knowledge of warehouse costs. This is important, not only in calculating and setting warehouse cost budgets, but for distributing warehouse costs to cost objects and assigning costs for warehouse services delivered to loyal customers.

Furthermore, warehouse costing can identify loyal customers or unprofitable products only if we study the numbers in depth.

References: Richards, Gwynne. Warehouse management: a complete guide to improving efficiency and minimizing costs in the contemporary warehouse, 3rd edition, Kogan Page Limited, CILT, 2018.