Executive Briefings

The ABC's of Transportation Costing

Activity-based costing (ABC) is an important financial tool for trucking companies, says Paul Dugent, vice president of pricing and traffic at Estes Express Lines. The cost elements allocated to customers through ABC are used to help determine the price of services, though pricing "is more art than science."

"A lot more goes into pricing than the costs," says Dugent, "but we do use these costs as a basis for understanding the profitability of our services to customers."

Less-than-truckload carriers like Estes measure and cost several transportation activities in the life of a shipment. These are pickup, linehaul, intermediate dock handling and delivery. "For each of these we look at what influences those activities," he says. "In the case of pickup, for instance, that includes the time we spent running from our terminal to customer's location, which we call variable running time; the amount of time spent at the customer's location, or stop time; and stem time, or the amount of time it takes to get from the last customer back to the terminal." Dock handling time, billing and collection costs, and propensity for damage also are considered, he says.

Dugent explains that freight classification plays a major role in linehaul cost allocation. "In LTL we co-mingle shipments and products of various types, shapes and sizes and the way we determine how to equitably distribute costs among those many shipments is by looking at the freight's density." He explains that there are two forms of capacity, cube and weight, and the one unit that measures both is density or pounds per cubic foot. "Each freight classification, which can range from class 50 to class 500, has a density range associated with it that helps us allocate that shipment against all other shipments in a linehaul vehicle."

To view this video in its entirety, click here.

"A lot more goes into pricing than the costs," says Dugent, "but we do use these costs as a basis for understanding the profitability of our services to customers."

Less-than-truckload carriers like Estes measure and cost several transportation activities in the life of a shipment. These are pickup, linehaul, intermediate dock handling and delivery. "For each of these we look at what influences those activities," he says. "In the case of pickup, for instance, that includes the time we spent running from our terminal to customer's location, which we call variable running time; the amount of time spent at the customer's location, or stop time; and stem time, or the amount of time it takes to get from the last customer back to the terminal." Dock handling time, billing and collection costs, and propensity for damage also are considered, he says.

Dugent explains that freight classification plays a major role in linehaul cost allocation. "In LTL we co-mingle shipments and products of various types, shapes and sizes and the way we determine how to equitably distribute costs among those many shipments is by looking at the freight's density." He explains that there are two forms of capacity, cube and weight, and the one unit that measures both is density or pounds per cubic foot. "Each freight classification, which can range from class 50 to class 500, has a density range associated with it that helps us allocate that shipment against all other shipments in a linehaul vehicle."

To view this video in its entirety, click here.