Handling costs definition

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What are Handling Costs?

Handling costs are incurred when a business moves goods from storage and prepares them for delivery to a customer. Thus, these are costs incurred during the time period from when goods leave storage to when they are delivered to the shipper. When services are being provided instead of goods, handling costs can refer to the administrative costs associated with an order. Handling costs may be absorbed by the seller, or they may be included in the shipping and handling costs line item on customer billings. When handling costs are charged to the customer, they are charged once per order, and not for each line item on the order.

What is Included in Handling Costs?

There are several costs that can be included in the overall category of handling costs. They are as follows:

  • Wages. The compensation cost of materials handlers is the primary handling cost incurred by a business. This expense includes the wages of warehouse staff, as well as pickers, packers, and the shipping department.

  • Overhead costs. There are several items in the overhead classification, including the depreciation on any equipment used in the handling process, a portion of the depreciation on the facility in which handling activities are conducted, and any insurance expense that applies to damage that packages may incur while they are on the premises.

Example of Handling Costs

A company, Aardvark Electronics, operates an online store that sells smartphones. When a customer places an order, the company incurs various handling costs before shipping the product. A breakdown of these costs is as follows:

  • Labor costs. Employees at the warehouse pick, pack, and prepare the smartphone for shipping. If a worker earns $15 per hour and spends 10 minutes handling one order, the handling cost per order is $2.50.

  • Warehouse operations. This includes the costs for storing and retrieving products from inventory. Pro-rated warehouse costs per order amount to $0.75.

  • Quality checks and labeling. Employees verify that the correct product is packed and attach shipping labels. This process costs $1.00 per order in labor and materials.

The total handling cost of this order is $2.50 labor + $0.75 for warehouse storage + $1.00 for quality checks and labeling, for a total handling cost of $4.25 per order.