Activity-Based Costing: from logistics costs to profitable decisions
Revenue is visible. Profitability is not always. When logistics costs disappear into averages, even a busy customer or successful transport lane can quietly destroy margin.
MovementsTransport
ActivitiesTime & resources
MarginCustomer & route
Picture a container moving from Rotterdam into the European hinterland. The journey may involve barge, rail or truck, terminal handling, a depot, customs documentation, waiting time and final delivery. The invoice shows the revenue. But how much does each activity cost—and which services actually earn their keep?
This was the central question in Merlyn’s original article. It matters even more today: finance teams are being asked to improve margins, protect cash and assess investment choices while transport and warehousing remain exposed to labour constraints, energy price volatility and shifting trade flows. The 2026 CSCMP State of Logistics report highlights these structural pressures in the US market; its figures should not be treated as European benchmarks.
Why average costs are expensive
Customer complexity
Two customers buying the same service can demand very different numbers of exceptions, updates, invoices and deliveries.
Unseen activities
Rework, detention, empty moves, storage extensions and manual coordination often sit outside the headline freight rate.
Misleading decisions
Uniform overhead allocations can make costly accounts look attractive—and make efficient services seem less profitable than they are.
Activity-Based Costing, without the accounting theatre
Activity-Based Costing (ABC) assigns resource costs to the activities that consume them and then traces those activities to services, orders, routes or customers. It moves finance from arbitrary averages towards a more causal view of cost-to-serve.
Traditional ABC
Define activities, select sensible cost drivers and measure how often each customer or job consumes them. Examples include order lines, kilometres, pallet moves or customs declarations.
Time-Driven ABC
Use the cost per unit of practical capacity and the time required for a transaction. For variable operations, time equations can capture exceptions without creating hundreds of cost pools.
Time-Driven ABC (TDABC) was developed by Robert S. Kaplan and Steven R. Anderson. Their work stresses practical capacity and makes unused capacity visible rather than burying it in unit costs.
What a Rotterdam container movement really earns
Consider a hypothetical intermodal shipment from Rotterdam to an inland destination. The figures below are deliberately simplified and illustrative—not Merlyn client data or market tariffs.
One shipment. One customer. One honest margin calculation.
Direct costs plus activity-based coordination and handling costs, excluding VAT.
| Activity / revenue | Cost driver | Amount |
|---|---|---|
| Customer revenue | Agreed shipment price | € 1,650 |
| Main haulage / intermodal leg | Purchased transport | − € 760 |
| Pre- & on-carriage | Truck legs | − € 280 |
| Terminal & depot | Handling / storage | − € 180 |
| Planning & coordination | 90 min × € 0.80/min | − € 72 |
| Documentation & exceptions | 60 min × € 0.80/min | − € 48 |
| Other shipment-specific cost | Insurance / fees | − € 60 |
| Illustrative contribution | Before unallocated corporate overhead | € 250 |
Reconciliation: total modelled shipment cost € 1,400; contribution € 250. If an additional € 120 in exception cost is incurred, contribution declines to € 130, or 7.9% of revenue. This contribution is not EBIT: central overhead, depreciation, tax and other relevant items may still need reconciliation depending on the reporting scope.
Cost-to-serve is useful only when it changes behaviour
Price the exceptions
Identify customers whose frequent changes, waiting time or documentation needs require a different tariff, surcharge or service agreement.
Design a better network
Compare modal combinations and depot choices using activity-level economics—not only the carrier’s quoted rate.
Make capacity visible
Separate the cost of unused warehouse or planning capacity from the cost of work performed, instead of automatically penalising every shipment.
Choose investments on cash flow
Test whether better TMS/WMS integration, automation or fewer exceptions yield enough incremental cash benefit to justify investment and ongoing costs.
ROI, ROIC, EBIT: related, not interchangeable
Contribution margin
Revenue less costs defined as attributable to the shipment, customer or service. State explicitly which cost layers are included.
Project ROI
A management measure of incremental net benefit relative to investment. Define the calculation and period; use NPV or IRR when timing materially matters.
ROIC
Typically NOPAT divided by average invested capital. Useful for capital discipline, but not the same as per-shipment margin or a project ROI percentage.
An important reporting distinction: internal ABC or cost-to-serve analysis is a management tool. It does not override financial reporting rules. Under IAS 2, for example, many storage costs are recognised as period expenses rather than included in inventory cost unless specific production-related criteria are met. Reconcile management allocations to the general ledger, and keep statutory accounting classifications separate.
What has changed by 2026?
Active warehouse labour management
A 2026 industry study reported that only a quarter of respondents actively manage warehouse labour—illustrating the gap between operational data and actionable cost insight. This is a survey finding, not an economy-wide statistic.
The CFO–COO partnership
Gartner’s 2026 supply chain research emphasises sustained cost management through deeper cost knowledge and process guardrails. Dashboards alone are not a substitute for operational ownership.
Modern ERP, TMS and WMS data can support activity-based models far better than manual spreadsheets alone—but data quality, clear activity definitions and sensible allocation rules remain decisive. AI may help classify exceptions or forecast workload; it does not eliminate the need for financial reconciliation or human judgement.
A practical six-step finance-led pilot
- Choose one decision. Start with customer profitability, intermodal route economics or warehouse handling cost—not the entire company.
- Map the actual process. Sit with operations to identify activities, handovers, exceptions and rework.
- Reconcile the cost base. Tie labour, purchased transport, facilities and systems costs to finance records; flag costs not included.
- Measure a few defensible drivers. Use event data, practical capacity and representative transaction times; challenge averages.
- Validate with real cases. Compare the model to invoices, time records and operational observations, especially atypical shipments.
- Act and review. Test revised prices, service levels or processes, then track realised margin and cash outcomes over time.
Where is your logistics margin really made?
Merlyn helps connect finance insight with operational reality—from process mapping and cost drivers to independent software choices and measurable improvement.
Further reading & sources
- Harvard Business School — Adding Time to Activity-Based Costing (methodology)
- Gartner — Deliver Sustained Cost Excellence (2026)
- MHL News — warehouse labour and cost-to-serve study (September 2026)
- CSCMP / Penske — 2026 State of Logistics Report (US market)
- IFRS Foundation — IAS 2 Inventories (financial reporting distinction)
Editorial update: October 2026. Illustrative model only; not investment, tax or accounting advice. All claims depend on scope, available data and reporting standards.