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Budgeting as the main controlling tool

to logistical management support
Justyna Dobroszek
Department of Accounting, Faculty of Management
University of Lodz
Lodz, Poland
jdobroszek@uni.lodz.pl
Abstract - Budgeting may be called the language of today's
organizations. It is a fundamental tool used by managers in
decision-making and to establish guidelines for the future of
business. Therefore, it is very important to construct a proper
budget, that will consistent with to the entity specifics as well as
with the needs of managers. Only business entities that
harmoniously combine nature of the business and surroundings
conditions can identify and exploit their opportunities.
There are various forms of the budgeting, but an implementation
of the ABB Activity -based budgeting enables logistics
companies to look at their business from a different perspective.
The budget should give a faithful reflection of the business, not
just a reflection of the collection of the costs that often in
connection with the activities performance is illegible and
ambiguous. Activity-based budgeting can motivate employees
and enable them to stronger identification with both the activities
carried out within the company as well as the entire company.
Analysis of the data in the new approach will allow for a deeper
understanding and the ability of continuous improvement of
processes and identified activities (it is important given the
ongoing development of the sector and the strong competition).
This new system has to show so a relationship of the cause-andeffect in the enterprise, so that decisions will be supported by
relevant calculations and they may be a base to decision making.
Keywords: logistics company, logistics costs, budgeting, Activitybased budgeting (ABB)

I.
INTRODUCTION
Budgeting is one of the most effective tools of
management accounting system, which is used for planning
and control of costs, revenues and results of the business
activities within company.
Budgeting as supporting tool of management is used first
of all to analysis of manufacturing companies. In the recent
years but there has been strong growth in the number of
logistics services providers. On the global market there is a
large number of logistics companies that offer various
logistics services. This diversity of the logistics services
causes an occurrence of different logistics costs, which are
depend on their nature, so these can be called as e.g. transport
costs or storage costs.
Taking into account increased importance of the role of
logistics service providers in the market and the specific
nature of their business, including issue of the logistics costs
structure, the authors want to present the concept of budgeting

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aneta Pietrzak
Department of Accounting, Faculty of Management
University of Lodz
Lodz, Poland
zpietrzak@uni.lodz.pl
within logistics companies, taking into account the traditional
budgeting and activity-based budgeting (ABB).
An aim of this article is to identify the essence of this issue
for both the scientific and as well the practitioners.
Methodology used in this article is mainly based on review of
the selected literature from this scope. It is worth noting that
there are not a lot of empirical studies about an
implementation of the budgeting only within logistics
companies, and also the available literature describes this
problem very superficially. This means that the issue of the
budgeting within logistics companies requires in-depth further
analysis both from practical and as well theoretical point of
view, in order to develop an appropriate and useful model of
budgeting for logistics activities.
II.

THE IDEA OF FUNCTIONING OF THE LOGISTICS

ENTERPRISE AND ITS SUPPORTING SYSTEM

An increasing globalization has led to the emergence of

modern sector that is called: Transport-Shipping-Logistics
(TSL- sector) and to its dynamic development in the recent
years. This trend has a number of sources, which include e.g.:

transfer of production processes to distant countries;

the formation of corporations, what is related to the
decentralization of business activities and to the
emergence branches or subsidiaries;
outsourcing a variety of activities and processes;
new customer needs, for whom an important factor of
purchase is the time, in addition to price and quality.

Above mentioned aspects have contributed to the

emergence of new forms of "product", called logistics service.
Initially, the logistic function, especially transport was
implemented by production companies, but later a lot of
business entities recognized the benefits from the transfer of
logistics processes to companies that specialize in logistics
activity, which are called logistics companies. Outsourcing of
logistics processes let to lower costs and improve the quality
of the logistics process. The logistics services have an effect
on increasing products value supplied to the customers [1].
Nowadays, TSL - sector covers a diverse dimension of the
logistics service providers. The logistics company is defined,
for example, as "an external supplier that performs all or part
of the logistics functions" [2] or as "a company that creates a
variety of logistics concepts and implements them in the form
of the service" [3]. In the literature, there are several

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classifications of logistics providers, but generally they can be

classified as a single party logistics service providers, such as
e.g. repackaging companies, storing companies or transport
companies (specialised on air transport, rail transport or road
transport). The second type of business entities are called as a
system service providers which offer a comprehensive suite of
services, e.g. contract logistics. This kind of the logistics
companies create also the supply chains and management
them. The system logistics service providers includes, among
others Third Party Logistics Provider (3PL) or Lead Logistics
Provider (LLP) [4].
Logistics sector despite the fact that achieves high turnover
and is called as a barometer of the national economies, this
however, within his structure occur various transformations
that affect activities of logistics service providers. The
growing demand for logistics services has contributed to the
emergence of strong competition in this sector. Therefore,
within the logistics market will survive those companies that
offer innovative logistics services and are able to adequately
manage their logistics processes and, above all costs,
including the logistics costs. Thus, the logistics companies
should implement a special system used to support the
logistics management, which is called a system of the logistics
controlling, with properly chosen and implemented tools.
One of the most popular and most effective tools to
support the management of the company is budgeting. In
business practice, budgeting is defined as a process that
involves specific phases and steps that, are performed in
sequence, but the number of the separate phases and stages is
a matter of individual approach to the concept [5]. As has been
described by A. Karmanska, the budgeting is an instrument
that gives the efficiency to the implemented strategy and
supports the strategic planning for the diagnosis of the reality
of strategic tasks [6]. As budgeting plays an important role in
supporting of the management of production processes, so this
tool also has an importance in the context of planning and
control the logistics processes, including the logistics costs.
The budget may take the form e.g. of the traditional budget
and activity-based budget (ABB). Budgeting logistics costs in
the form of the traditional approach will be characterized in
the following paragraph.
III.

TRADITONAL BUDGETING OF LOGISTICS

COSTS

Logistics companies achieve revenues by offering logistics

services such as e.g. mainly transportation or storage. At the
same time the provision of the logistics services generates
different kind of the logistics costs. In view of the fact that the
statutory activity of these business entities is based on logistics
activities, this means that the majority of the basic costs
incurred in the logistics company, they will be logistics costs.
Logistics costs are a detailed category of costs indicating a
consumption reflection of the company's assets, resulting from
planning and control of flow of goods, materials in space and
time [7]. Consequently that the logistics processes are so
varied and they may include for example: transportation,
storage and other logistics services, ,it not possible to include
all logistics costs in one universal model. Logistics costs have
a complex structure and are dependent on the capabilities of

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registration systems and the size of the company. If the service

provider performs only transport service, the scope of the
planned logistics costs will be only limited to the costs of
transport. However this, if the logistics company proves more
and different logistics services, the scope of logistics costs for
planning and control is more complex and wider.
Budget of the logistics costs can be defined as a picture of
planned costs of logistics processes with their breakdown on
among others types, forming departments and periods. The
budget is a kind of limiter for the costs [8]. The traditional
budget of logistics costs determines the generic range of
logistics costs recognized in the budget, specifies the locations
(areas of their origin) and sets the periods which limits of costs
have been fixed for.
Budgeting of the logistics costs is a complex
organizational and economic undertaking, due to implemented
by the companies a variety of logistic processes, but also
because of adopted the different strategies. Many modern
logistics operators do not use its own resources, but they
transfer the processes to the business partners. For example
they can move transport to the contractors or rent the
transportation or the warehouses. This means that the structure
of logistics costs will systematically vary, depending on the
form of the action accepted by the logistics provider. The
overall scope of budgeting within logistics activates shows
Figure 1.
Traditional budgeting of the logistics costs is mainly based
on costs by nature and it also is focused on the costs approach
to place (function). These kind of the cost accounting systems
have used by the logistics companies. Below the authors show
an example of costs by nature for the transport service.
Assuming that the division X within logistics company
ABC, specializes in transport service undertaken mainly by
its own means of transport (e.g. trucks) and supplemented by
the use of transport subcontractors, sample the range of costs
that should be included in the budget of logistics costs
(transport costs) are presented in Figure 2. It is worth
emphasizing that in this case the budget can be divided into
an area that is associated with a purely "physical" process of
transport and into an area that is associated with support of
implementation of logistics services. On the one hand detailed
structure of logistics costs may increase the accuracy of
analysis and information about costs for the purposes of their
control, on the other hand, the acquisition of such dimension
of the data, it is difficult to implement in business practice.
forecast of services sales

forecast of logistics costs

forecasting
of transport
costs

forecasting
of storage
costs

physical costs of logistics

processes

forecasting of other logistics

costs and non-logistics costs
associated with the provision
of logistics services
the costs of the implementation
of logistics services

Figure 1. Budgeting of the costs of logistics processes.

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Planned type of costs - the physical area of the process

Fuel (e.g. natural gas, gasoline. diesel)
Wages and salaries (e.g. drivers, mechanics)
Other costs of materials needed to repair and maintenance of transport
Spare parts (e.g. tires and other tools used to improve and maintain the
vehicles)
Taxes and other charges (e.g. transport charges, toll roads, rents, fines)
Insurance costs for e.g. drivers, vehicles
Energy
Depreciation of transport
External services (e.g. service, car washing, transportation subcontractors)
Insurance and other benefits to employees serving transport (e.g. the costs of
protective clothing, equipment drivers)
Other costs by nature
Planned types of costs - administrative area that support the process
Salaries of employees serving transport orders
Third-party services costs (e.g. phone related to the transport orders)
Raw materials (e.g. paper, toner, software, etc.)
Other costs (e.g. travel expenses, training)
Depreciation (e.g. hardware)
Taxes and fees (e.g. authorization of the order)
Planned types of costs - the general level of the business entity
Figure 2. Sample view of costs in the unit responsible for drawing up the
budget for the area of transport cost.

As shown in the Figure 2, the cost of logistics from area

of transport should divided into two main areas of planning
costs. The first area is focused first of all on the transport
process, dividing it into subarea of physical transport
(physically approach) and subarea of supporting for the
implementation of transport service (organizational approach).
The second main area is concentrated on the overall costs of
the logistics company.
Another example for budgeting of transport costs was
presented by M. Biernacki, R. Kowalak (see Figure 3).
Authors have focused mainly on planning cost of the transport
process taking into account the types of costs by nature,
breakdown cost into fixed and variable costs and also simple
and complex costs.
Type of cost

Unit

Number
of units

Rate
per
unit

Variable
costs,
containing
rate of
variations

Fixed
costs

Total
costs

Simple costs:
5 000
4,00
20 000
20 000
Fuel
litre
1 000
1 000
Cost of
plan
materials and
energy
30
10
60
540
600
Cost of
hour
service
500
20
8 000
2 000
10 000
Wages and
hour
salaries
20
1 600
400
2 000
Insurance and
%
other benefits
2 000
2 000
Taxes and fees plan
10 000
10 000
Depreciation
plan
100
400
500
Other costs by plan
nature
3 000
4 000
7 000
Complex
costs:
Figure 3. Budget of transport costs. Source: Adapted from M. Biernacki, R.
Kowalak [9].

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There are several approaches to creating budgets of

logistics costs, However, it is important in this process that the
budget is readable and enables the correct current costs
(logistics costs) control. If a business entity cannot plan
properly costs (logistics costs), this will have a bad impact on
the financial results and also on other costs analysis, which are
needed to make management decisions.
Analysis of logistics activities (logistics processes) should
base on an wide analysis that contains different issues, e.g.
analysis of the involved resources needed for logistics,
analysis of the, implemented logistics processes, analysis of
the processes related to the general operation within
enterprise. In this case, the costs drivers are determined
directly by the kind of services and used resources. Therefore,
the logistics cost budgeting should be accomplished better
using the activity-based budget. By implementing of the
activity-based budgeting the logistics companies may better
reflect the nature of the logistics activities. Another point of
the article will describe wider this aspect.
IV.

ACTIVITY BASED BUDGETING FOR LOGISTICS

COMPANY

Activity-based budgeting is an extension of activity- and

capacity-based concepts into the budgeting realm [10]. The
development of activity-based costing and management led to
an immediate desire to extend the methodology into planning
and budgeting [11].
ABB method requires the costs determination of the
planned activities based on their expected size and resources
which they use. This allows to create a budget based on
operational activities that are necessary to sale services offered
by the company. Activity-based budgeting procedure includes
the basic principles of traditional approach such as: reliance on
a long-term business strategy, consolidation of budgets of
individual responsibility centres into one global budget,
coordination and communication process and later monitoring
and analysis of occurring deviations. However, the basis for
the ABB is ABC. Therefore, necessary for this concept of
budgeting is understanding and correct implementation of the
objectives of ABC. The basic categories that must be defined
for each company who want to implement ABC and then ABB
are among others: resources, activities and cost objects.
Examples of these categories for a logistics company are
shown in Figure 4 (the direction of the flow of information
is consistent with the ABC).
Activity-based costing is an accounting methodology
which link the following elements:
Resources all the components of economic, which the
company uses in the course of carrying out activities,
Activity a set of repeatable, homogeneous or similar
events and operations performed order to achieve a
specific business function, as a result, costs are
generated,
Costs objects - the cause of the actions, this can be a
product, the whole consignment, contract, order,
customer group or even part of the company.

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RESOURCES
RESOURC
ES
Information system
Logistic
s

balance

Storage area
Forklifts

Means of
transport

Storage rocks

adjust capacity

RESOURCES

adjust
consumption

ACTIVITIES

adjust demand

COSTS OBJECTS

demand
requirements

ACTIVITIES
ACTIVITIES
Receiving, entering
and confirming orders

Processing inquiries
Planning vehicle routes
Acceptance, inspection
and assembly of products

Reserve stocks
and determine the
delivery date

COSTS
OBJECTS

Group
C

financial resoults

target results
YES

strategic plan
Stage 1 - The Operational Loop

Loading of vehicles

Group
B

adjust
price

NO
NO

Planning shipments

Completing products

Transport to the customer

Group
A

adjust
resources
cost

financial balance

Storage of products

Invoicing

resources capaity

shortage or excess

operational adjust

Drivers

financial adjust

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Group
D

Figure 5. Overview of the ABB-Approach. Source: Adapted from

Consortium for Advanced Manufacturing-International, Cost Management
System, Activity-Based Planning and Budgeting Group [12]

The basic condition for the application of this method is the

use activity-based costing method in the company

Group

..
Group
E

Figure 4. Sample view of resources, activities and cost objects in logistics

company.

Activity-based budgeting is the preparation and use in the

management of the budget based on activities performed
within the business entity, which is important for the creation
of value, rather than as it is in the traditional approach,
focusing on resources. Budgeting procedure is presented in
Figure 5.
Budgeting procedure is closely connected with the
strategy, so the budget includes actions in the long term, in
order to achieve long-term goals. Activity-based budgeting
refers to the actual processes taking place within the company
in all its areas (generally business is divided into the process
by which consists of the specified activities). This method,
however, allows managers in the process of negotiations based
on actual data, rather than the power and negotiating skills of
individual managers. This is due to the direction
of information flow. Budgeting process begins by identifying
the requirement demand for the products or services. This
becomes the basis, at first, for calculation the number of
needed actions and then, allows determine their cost (by
assigning the resources used for activities).

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Stage 2 - The Financial Loop

ABB is the reverse process of activity based costing in

which information flowed from resources, through activities,
in order to ultimately be settled for the costs objects.
Budgeting based on activity based costing indicates a change
in the direction of the flow of information. Starting with the
requirements demand for the products or services is
determined the amount of necessary actions, which then
allows to calculate the cost based on the expected resource
consumption.
The budgetary procedure can be divided into two stages:
the operational and financial. The first is to determine the
predicted demand the amount of necessary actions and
resources, and to compare them with established potential,
while the second translates adopted operating arrangements on
the financial results (the financial budget is drawn up last,
after the approval of the operating budget which must, on the
one hand, be possible to achieve, on the other hand allow the
objectives of the company). According to R. S. Kaplan and R.
Cooper [13] the stage of the operational loop procedure may
be as follows:
1. Estimation of key-factors of the budget (estimations
regarding the total value of the quantities of products
obtained and the sales to customers);
2. Establishment of the organizational activities
(elaboration and execution of the activity-based
budget);
3. Determination of the necessary resources (quantity and
type) in order to perform the organizational activities;
4. Identification of the total of necessary resources in
order to satisfy the demand;
5. Determination of the capacities at the level of activities
and at the level of resources.

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If the initial financial plan is not balanced, i.e. it does not

allow the achievement of the objectives in the strategy or is
unsatisfactory in other respects, the ABB method allows to
make some adjustments, such as the rate of resource
consumption and utilization activity rate, resources capacity,
their costs, the demand for the products and products prices.
The procedure ends when the budget is adopted (it ensures
satisfactory financial results).
V.

COMPARISON OF TRADITONAL APPROACH

AND ACTIVITY BASED BUDGETING

Both analysed approaches in different ways allow for the

preparation of the budget and its subsequent analysis, they put
pressure on other aspects: traditional budgeting - the cost,
ABB - activities. Hence, due to differences within such a
budget in the traditional sense and based on activities (see
Figure 6).
Activity-based budgeting
focus on the work volume and of
the costs of processes
measure the effects, determine
and identify the unused capacities
identify the necessary resources
for the planned production and not
in order to set out expenditure
limits
ensure the management, with the
possible of transformation of the
organizational thinking regarding
the fixed costs
focus on the used capacity versus
the unused capacity
represent a possible solution for
the budget process by increasing
the real participation of the
employees
represent a tangible solution for
the short term planning of strategic
objectives, as they focus on the
basic processes of the work place
for customers satisfaction
unify the efforts made by various
functions, such as: processes reengineering or processes revolution
in a single effort directed toward
the strategic objectives planned by
the entity for a short or long term

Traditional budgets
focus on workers and on
departmental costs
measure the effects, but do not
determine and do not identify the
unused capacities
do not fulfil the purpose of a
global budget, representing only
analytical and control
they are based on a iterative
negotiation process between the
managers of responsibility centers and
the senior management
focus on the fixed costs versus
variable costs

In this article authors only pointed out the essence of this

concept and the need for its further analysis.
REFERENCES
[1]
[2]

[4]
[5]
[6]
[7]

[8]

The first five points shows the difference in the two

approaches and their different orientation, the concept ABB is
strongly focused on long-term business plan and reflected
them in the forthcoming budget, it allows for deeper analysis
of information. Another three points relating to ABB approach
emphasize the opportunities created by it, which are not
present in the traditional budgets.
CONCLUSION

[9]
[10]

[11]
[12]

[13]

The authors have presented in the paper the issue of

budgeting in the logistics companies. They have also pointed
out that the role of logistics companies is increasing on the
global market and it affects the growing competition.
Therefore, logistics provides should implement a system of
controlling/system of management accounting with the tool

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Business entities can choose between traditional budgeting

and activity-based budgeting. Both types of budgets have to
considering the costs of logistics processes and their different
nature. However, taking into account the specific of logistics
activities, which is based on the logistics processes and flows
of resources, the best tool for planning and control of costs,
including the logistics costs is activity-based budgeting
(ABB). This approach is better suited to the activities carried
out in the unit, and thus its importance as a tool for business
management is greater. But not be forgotten that the ABB
approach based on the ABC system. This both methods
require to the implementation first of all financial capital and
time. This could mean also that only the biggest logistics
companies as e.g. 3PL or LLP can consider its use. Smaller
logistics companies will not plan logistics costs or they may
only remain with the traditional approach, which can be
detached from reality.

[3]

Figure 6. Analogy between ABB and traditional budgeting. Source:

Capusneanu [14].

VI.

such as the logistics budget, which allows for the planning and
control of logistics costs and also promote coordination and
evaluation of activities, help to motivate and evaluate the staff
performance and support the internal control system of the
organization.

[14]

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