An evaluation of a standard costing framework to manage transport costs for a South African logistics company

Abstract

Logistics costs form an integral part of costs accumulated through the value chain of any product. Logistics costs can be broken down into various components. One of these components is the transportation cost of products. The component that constitutes the largest part of transportation cost is fuel. As fuel constitutes the largest portion of variable costs and impacts the rate charged to customers for transportation, any overspending in fuel cost will lead to lower profitability for a company. To stay competitive in the market of any industry, not only the logistics industry, companies need to ensure that costs are kept within reason. Standard costing is a model used to allocate overhead costs to products in an environment of repetitive operations. Standard costing requires the setting of standards for input costs and for input quantities to produce one unit of measure. When actual costs are compared to standard costs, the resulting variance is generally onedimensional and is only a monetary value. The variance does not guide management as to why overspending is occurring and that limits their ability to manage the said variance. The main objective of this study was to evaluate a standard costing framework for Company A, a South African logistics company, to establish if standard costing could assist logistics companies in managing fuel cost, and in turn assist in managing product costs. The logistics company, Company A, was investigated under a case study approach. The research was conducted from a pragmatic research paradigm and a mixed method approach was followed. A qualitative method, in the form of a semistructured interview with the management of Company A, was followed to establish the current understanding and application of standard costing in Company A, while quantitative data was collected and utilised in the development of a standard costing framework. The findings of the study included that, in order to address and manage identified standard costing variances, companies need formal structures and accountability centres to assign corrective actions to. To achieve this, a performance management system will guide and assist management with variances in a formal and structured manner. A performance management system was further developed as per the framework put forward by Ferreira and Otley (2009) to assist Company A. The study concluded by illustrating the findings of the standard costing model and by developing a framework whereby identified areas of concern could be managed. Standard costing highlighted areas that required further investigation and illustrated possible savings for Company A