How costs can be used to mitigate risk
Transportation business involves several risks associated with costs. Inaccurate determination of costs of transportation may lead to the risk of inappropriate pricing. When the price set is lower than the actual cost, the firm will run at a loss. A transportation company must, therefore, consider economic, accounting and social costs in its decisions.
Accounting costs
Accounting cost is the money value of resources utilised in performing an activity (Coyle, Bardi & Novack, 2011). These costs lead to actual cash outflows from the firm. In a transportation business, accounting costs include the cost of fuel, drivers’ salaries, and wear and tear among other costs. It is important for a transportation firm to quantify all the costs incurred in delivering a commodity to ensure accurate determination of price. Some accounting costs such costs of fuel and drivers’ wages are straightforward and easy to determine. These costs are specific to a particular delivery or customer (Coyle, Bardi & Novack, 2011). Accounting costs also include fixed costs which should be allocated to various customers using an appropriate allocation basis. In some cases where there are more than one shipment, costs of fuel and drivers’ wages are allocated to each shipment.
Economic costs
Economic cost is the value of the alternative use of a resource, that is, the opportunity cost of using the resource. Thus, if a resource does not have an alternative use, its value is considered to be zero. Unlike accounting costs, economic costs do not involve cash flows. They are futuristic implying that they ignore costs that have already been incurred. Thus, a transportation firm should not focus on recovering the initial investment since they are sunk costs. Some transportation resources such as railroads are so durable that no replacement is anticipated. Besides, railroads do not have alternative uses hence, they are considered as costless. Thus, a transportation business should not include such costs in competitive pricing.
Social cost
Social cost is the damage the firm causes to the society in the course of performing a given activity. Unlike economic and accounting costs, social costs do not affect the company only but the whole society (Anderson, 2012). Examples of social costs include pollution to the environment, depletion of natural resources, among other costs. Most businesses ignore social costs unless they are forced by regulating agencies. The consequence is that the average cost of production to the firm is normally less than the average total cost to the society (Nicholson & Snyder, 2008). The social cost must be considered in pricing with or without pressure from regulatory agencies. It would be costly for a transportation firm to ignore social costs such as the cost of polluting the environment since the regulator can impose penalties.
Impact of the company’s focus on costs and risks
A company’s focus determines the level of costs and the associated risks. A company may be focused on reducing accounting costs by measures such as improving efficiency, purchasing cost-saving equipment, among other measures. Such companies are likely to have lower accounting costs and face fewer risks. A company focused on putting its resources to the most profitable uses would consider economic costs in its decisions. If a firm is focused on the sustainability of its operation, it is likely to be more concerned about social costs than a company with no focus on sustainable operations.
Recommendations to reduce risks
Accounting costs
The firm can reduce the risks of these costs by using a cost allocation method that ensures accuracy. Direct accounting costs such as the cost of fuel, among others can easily be determined. When there is more than one shipment, the company can use activity-based costing to allocate costs to each shipment. Activity-based costing uses activity drivers to allocate costs between shipments. This will enhance accuracy thus reducing the risk of overpricing and under-pricing. Besides, improving efficiency in operations would also assist in reducing the risk of accounting costs. Transportation companies should adopt lean systems in its operations. Lean systems will ensure continuous quality improvement as well as enhancing efficiency of operations. It involves a study of the firm’s processes to identify and eliminate non-value added activities.
Economic costs
Reducing economic costs can mitigate the risk involved. Economic costs can be reduced by establishing proper forecasting systems. This involves evaluating the business to identify variables that case costs. The business can then use a forecasting model to predict economic costs and create reasonable budgets. For instance, a company can forecast the number of shipments expected in a period and plan on how to handle them. This will reduce cases in which the business is forced to choose between two or more alternative shipments or uses for a single resource.
Social costs
A company can mitigate social costs risks through strategies to reduce pollution such as proper maintenance of the fleet, acquiring modern, cost-efficient and environmentally friendly equipment. Besides, purchasing pollution permits from relevant regulatory agencies can mitigate the risk. Mitigating social costs will prevent government red tape as well as ensuring sustainable operations and a good rapport with the society.
References
Anderson, O. (2012). Social costs and sustainability. Springer.
Coyle, J., Bardi, E., & Novack, R. (2011). Transportation: A Supply Chain Perspective (7th ed.). Mason, Ohio: Thomson/South-Western.
Nicholson, W., & Snyder, C. (2008). Microeconomic theory. Mason, OH: Thomson.
