Group Members

Marketing Cost And Profitability Analysis

Introduction
Marketing is matching products of a company with satisfaction of customers at a reasonable profit for company. Marketing manager must consider:

Product Price Advertisement Distribution

Continued. . . . .
Marketing activities are mostly divided on boundary basis. This will be easy for management to analysis cost and profitability of the firm. Control the cost at functional or departmental level. Financial reports must be prepared on monthly basis which will show performance of departments at initial stage.

Scope of marketing cost

Managerial decisions and policy formulation. Information about the market, customers, brand and promotional strategies by salespersons. Predetermining costs of the marketing Establishing cost standards. Creation of new demands for the product.

Marketing vs. Manufacturing cost

Raw material is same but different use of promotions and distribution of same product. Standards of marketing are changed with the change of customers or change distribution channels. Manufacturing techniques are not easy to change. Factor of psychology is involved I marketing to capture the mind of customers. Efficiency of factory managers is measured in terms of reduction in cost per unit and salesperson with sale.

Cont

The effects of marketing are predictable for

future but manufacturing effects give quick

response.

Marketing cost is charged when it is occurred while manufacturing cost is charged with inventory.

In marketing decisions for future are made on

the past performance.

Profit Planning and Control

Marketing study supports to strategic planning. Skills required: 1. Technical skills 2. Analytical ability 3. Industry knowledge

Najeebullah Kalwar

Marketing Cost Control

Classification of marketing cost according to functions or activities
1. 2. 3. 4.

5.
6.

Selling Advertising Warehousing Packing and shipping Credit and collection General accounting (for marketing)

Marketing Function
Homogeneous Unit Related to specific item cost Functions depend on the nature, size and methods of operations of an organization E.g: Salaries, Light, Supplies and so on

Two broad categories of functional classification

1. Order getting costs

Selling and Advertising

2. Order filling costs

Warehousing Packing Shipping Credit and Collection General accounting (for marketing)

Direct and Indirect Expenses

Direct Expenses Directly identifiable E.g.

Depreciation of Delivery Truck Salary of Departmental Manager or According to Territory According to Customer

Cont
Indirect Expenses
Occur for more than one function E.g. Salaries of Selling Officers Utility Bills Depreciation Equipment Supplies

Selection Of Bases For The Allocation Of Functional Costs Factory overhead rates e.g. Labor hours, machine hours Marketing Expenses e.g. Unit Cost= Total Cost of Function / Units of Functional Service (Base selected)

Example:
Billing Department
Invoice lines (Normal capacity)= 60,000 Total cost = 12,000

Rs 0.5= 12,000 / 60,000

Some Of The Bases For Each Function

Function Selling Cost Allocation Bases

Commission on sale of products by salesperson Quantity of product units sold Size, weight, or number of products shipped Number of shipping units

Advertising Warehousing

Packing and shipping

Credit and collection

General accounting

Number of customers orders

Transactions

Determination of Functional Unit Cost

Functional Unit Cost = Total Cost of Function / Base Selected

Fixed and Variable Costs

Main Purposes
Control Marketing Cost Decision Making e.g. Opening or closing of territory Adding or dropping of product line

Fixed Costs or Capacity Costs

To get the order Permanent Facilities E.g. Salaries of Executives Administration Sales Staff Salaries of Warehouse

Variable Costs Or Volume Cost

Vary with sales volume Expenses to fill the order E.g. Expenses of Warehousing Shipping and so on

Syed Kashif Shah

Flexible budget
Sales estimates Determine functional expenses Static budget portrays unrealistic figures

FLEXIBLE BUDGET

Flexible Budget For Billing Dept. 50000 55000

60000
(Normal capacity)

65000

Expenses Clerical salaries 4000 4000

4000

4000

Supervision
Dep.-building Dep. equipment Supplies Total

3000
750 1250 2500 Rs. 11500

3000
750 1250 2750 Rs. 11750

3000
750 1250 3000 Rs. 12000

3000
750 1250 3250 Rs. 12250

Cont
Standard billing rate = total factory overhead / unit of
production

= 12000 / 60000

= Rs. 0.20 / invoice line

Var. OH rate = 3000 / 60000 = Rs. 0.05 / invoice line

Cont
Spending Variance = Actual expense Budgeted

expense Actual expense Budgeted expense Fixed exp. Var. exp. (0.05*63000) 12500

Rs. 9000 Rs. 3150 12150 Rs. 350 U

Cont
Idle capacity variance = budgeted expense overhead charged to production

Budgeted expense

12150

Overhead charged to production (0.2 * 63000) 12600 Rs. 450 F

Marketing Profitability Analysis

Analyze costs and determine the profitability of ;
Territories,

Customers, Products, and Salespersons.

Analysis by Territories

Expenses assigned directly to a territory;

Salespersons salaries Commissions Traveling expenses Transportation cost Packing and shipping costs Advertising General management General office General sales manager Credit and collection General accounting

Expenses that must be prorated to the territory;

Analysis by Customers
Customers are grouped according to certain characteristics to make the analysis meaningful. The grouping may be by; 1. Territories, 2. Amount of average order, 3. Customer-volume groups, or 4. Kinds of customers

Sarfraz Nawaz

Analysis by Product

Products sold can be grouped according to product lines or brands possessing common characteristics for purpose of analysis.

Example Total Net Sales Less V. COGS Gross C.M Less V. Marketing Expense Selling Warehousing Packing and Shipping Advertising Credit collection General accounting Total V. Marketing Expense Contribution Margin Less Fixed Exp. Margin available for fixed Exp and O.I Less common Fixed Expense Operating Income $243,300 87100 66000 38000 19700 52200 $506,300 $666,700 120000 $546,700 230000 $316,700 $112,300 48000 39000 20000 12300 23000 $254,600 $360,400 40000 $320,400 Product 1

Product Class Product 2 $1,070,000 590000 $480,000 $89,000 27500 17800 12000 4200 16800 $167,300 $312,700 60000 $252,700 Product 3 $490,000 412000 $78,000 $42,000 11600 9200 6000 3200 12400 $84,400 ($6,400) 20000 ($26,400)

$3,100,000 $1,540,000 1927000 $1,173,000 925000 $615,000

Analysis by Salesperson

Selling function includes costs such as salaries, travel, and other expenses connected with the work of sales representatives. For control of cost and analysis profitability of sales made by salespersons, the standard costs and performance standards should be established.

Exercise no. 6 1. Sales calls (std: 20 days*5 calls/day)

Salesperson

Standard

Actual

Variance

Perf: Index

Palmer, K. Thomson, J.

100 100

70 100

30 unfav. 00

70 100

Miller, O.
2. Travel exp. (Std: 20 days*$40/day) Palmer, K. Thomson, J. Miller, O.
3. Sales

100

120

20 fav.

120

$800 800 800

$1,000 $200 unfav. 800 720 00 80 fav.

125 100 90

(std: 20 days* $400) Palmer, K. Thomson, J. Miller, O. $8,000 $14,000 $8,000 $8,000 8400 $6000 fav. 400 fav. 175 105 75

6000 2000 unfav.

4. Sales revenue per call (std: $400 sales per day / 5 calls per day)
Palmer, K. Thomson, J. Miller, O. $80 $80 $80 $200 84 50 $420 fav. 4 fav. 30 unfav. 250 105 62.5

Contribution Margin Approach

Influenced the thinking of the volume-minded sales manager or salesperson. Better indicator than sales

THANK YOU