OCEAN SHIPPING COMPANY OPERATING COSTS

This chapter is concerned with the concepts and theory that explain the factors that affect the variations in the operating costs in ocean shipping companies. The concepts and theories considered in this chapter apply to both the classification of operating costs and to those factors which may be reasonably expected to affect the level of such costs. Issues and concerns addressed specifically in this chapter are (1) factors affecting shipping costs, (2) the significance of operating costs, (3) cost allocation procedures, and (4) analyses of major operations cost elements.

A number of factors hold the potential to affect the level of operating costs for ocean shipping companies. As an example, the speed at which vessels ply the oceans affect the level of operating costs. One study found that a fleet operating at an average speed of 22 knots was far more costly to operate than was a fleet operating at an average speed of 18 knots.1 Fuel costs for the 22knot fleet were 83 percent higher than for the 18knot fleet, while other operating costs were ninepercent higher for the 22knot fleet than for the 18knot fleet.

Another factor exerting a major impact on the level of operating costs for ocean shipping companies is general price

1Gunnar K. Sletmo, and Ernest W. Williams, Jr., Liner Conferences in the Container Age, 3rd ed. (

Thus, its application would be theoretically satisfactory in any production environment. The cost burden associated with application of the process, however, dictates against its widespread use. The fourth approach to costing is the twostage activitybased cost accounting procedure. This costing approach combines the direct labor and supervision costs associated with each product, and then divides this combined cost total by the total number of direct labor hours consumed in the manufacture of each product. This procedure derives separate labor burden rates for each product. Costs are then traced to specific products by multiplying the combined total of direct labor and supervision hours consumed in the manufacture of a product by the labor burden rate for that specific product. The assumption (that, for each cost pool, the ratio of resource quantity consumed in the manufacturing process to the number of cost driver units consumed does not depend upon product specificity) underlying this approach to costing creates a procedure which "frequently reports adequately accurate product costs."27 This twostage procedure is theoretically inferior to the highly accurate third approach to costing, which provides productspecific