How can you use standard costing to optimize transportation industry profits?

Standard costing is easiest for the transportation industry since the costs of most of the drivers are predictable and changes infrequently. So it is very easy to set standards. In a company where I worked, we identified that the standard time taken for our freight to travel from one place to another was 21 hours. Our current time was 32 hours !. We could easily bring down the time to 21 hours and reduced saved 5 million rupees per month straightaway ! By refining the standards, we brought down the standard to 16 hours leading to significant cost reduction.

Standard costing is a technique used in cost accounting that helps businesses plan and control their costs. It involves setting predetermined cost estimates for direct materials, direct labor, and overhead, and then comparing these standards to actual costs incurred during production or operations. In the transportation industry, standard costing can be used to optimize profits in several ways: Setting Cost Standards: Variance Analysis: Continuous Improvement: Budgeting and Forecasting: Performance Evaluation: Incentive Programs: Cost Control: Product and Service Pricing: Supplier Management: Capacity Utilization: Risk Management: Benchmarking and Best Practices:

Standard costing is a cost accounting method that helps transporter to determine the estimated production costs, including materials, labor, and overhead costs, before the transporter process is complete. By having a clear picture of the estimated production costs, companies can accurately price their products to make profits without overpricing them. However, it is very clear that standard costing can be used to optimize transportation industry profits. About the accounting in the transportation industry. It covers common accounting and finance-related challenges faced by freight and haulage companies, accounting essentials for transport businesses, and best practices in accounting in the transportation industry.

Standard costing is very analysis intensive. It expects discipline and knowledge from the Organization to make it work. Variance analysis is one such. The organization should analyse the variances quite regularly and keep refining the standards. This will lead to significant cost improvement for the company. It calls for work.

For a company, actual histrorical data are must to estimate the most accepted standard cost. Here digitization helps to the industry. If a transporation company is new, the basic cost data of the company and the industry's standard cost data may aid the company to set their own standards.

With the advent of ERP systems this step has become very easy. It can be made easier by integrating ERP Systems with QR Codes so that the data entry can become easier. It is imperative that you need an ERP system to record and track the actual transactions.

I completely agree with Ramaswamy. A business management system (ERP) is extremely important for detailed cost control. After the configuration, installation and monitoring project, costs can be controlled precisely and, with the ERP integrated with other systems, the cost can be determined in real time.

This step is very effort intensive, but if you get it right, your organization can become a 'Perpetually Improving Machine'. Standard costing can provide mind blowing understanding about your company that no other 'Lazy' costing systems can provide. But it is work

As the question included with the word 'optimize', it is good to use Transportation model from Operations Research. Transportation model using Linear Programming Problem (LPP) will help to minimize the total cost of transportation from sources to destinations. The transportation industry should use the technology with the calculatd standard cost factors to improve their profitability.

There are certain drawbacks to standard costing. 1. It takes a lot of effort to keep it running. Without that effort, Organization will become weak quite quickly since they no longer have the support of 'Lazy' costing methods. Variances can impact your P&L drammatically. 2. Think of the incentive structure. For example, the procurement team can place bulk orders to benefit from volume discount, but the inventory carrying costs will shoot up. In this case the Purchase manager will claim the benefit of favourable variance and the inventory manager will be punished for the unfavourable variance. 3. It is important that every cost driver has standard cost. Practically that may not be feasible. 4. This method may not work for a startup.