Marketing Cost and Profitability Analysis

7/30/2019 Marketing Cost and Profitability Analysis

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Group Members



Marketing Cost And

Profitability Analysis



Introduction

Marketing is matching products of acompany with satisfaction of

customers at a reasonable profit for

company. Marketing manager must consider:

◦ Product

◦ Price◦ Advertisement

◦ Distribution





Scope of marketing cost

Managerial decisions and policyformulation.

Information about the market,

customers, brand and promotionalstrategies 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 thechange 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 andsalesperson 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 strategicplanning.

Skills required:

1. Technical skills

2. Analytical ability

3. Industry knowledge



Najeebullah Kalwar



Marketing Cost Control

Classification of marketing cost according tofunctions or activities

1. Selling

2. Advertising

3. Warehousing

4. Packing and shipping5. Credit and collection

6. General accounting (for marketing)



Marketing Function

Homogeneous Unit

Related to specific item cost

Functions depend on the nature, sizeand 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 OfficersUtility Bills

Depreciation Equipment

Supplies



Selection Of Bases For TheAllocation Of Functional Costs

Factory overhead ratese.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

Advertising

Warehousing

Packing and shipping

Credit and collection

General accounting

Cost Allocation Bases

Commission on sale of productsby salesperson

Quantity of product units sold

Size, weight, or number of products shipped

Number of shipping units

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 For Billing

Dept.

Expenses

50000 55000

60000(Normalcapacity)

65000

Clerical salaries 4000 4000 4000 4000

Supervision 3000 3000 3000 3000

Dep.-building 750 750 750 750

Dep. –equipment 1250 1250 1250 1250

Supplies 2500 2750 3000 3250

Total Rs.11500 Rs.11750 Rs. 12000 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 – Budgetedexpense

Actual expense 12500

Budgeted expense

Fixed exp. Rs. 9000

Var. exp. (0.05*63000) 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

Expenses that must be prorated to the territory;

General management

General office General sales manager

Credit and collection

General accounting



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 productlines or brands possessing common characteristics for

purpose of analysis.

E l P d t Cl



Example Product Class

Total Product 1 Product 2 Product 3

Net Sales $3,100,000 $1,540,000 $1,070,000 $490,000

Less V. COGS 1927000 925000 590000 412000

Gross C.M $1,173,000 $615,000 $480,000 $78,000

Less V. Marketing Expense

Selling $243,300 $112,300 $89,000 $42,000

Warehousing 87100 48000 27500 11600

Packing and Shipping 66000 39000 17800 9200

Advertising 38000 20000 12000 6000

Credit collection 19700 12300 4200 3200

General accounting 52200 23000 16800 12400

Total V. Marketing Expense $506,300 $254,600 $167,300 $84,400

Contribution Margin $666,700 $360,400 $312,700 ($6,400)Less Fixed Exp. 120000 40000 60000 20000

Margin available for fixed Exp

and O.I $546,700 $320,400 $252,700 ($26,400)

Less common Fixed Expense 230000

Operating Income $316,700



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 Salesperson Standard Actual Variance Perf: Index

1. Sales calls

(std: 20 days*5 calls/day)

Palmer, K. 100 70 30 unfav. 70

Thomson, J. 100 100 00 100

Miller, O. 100 120 20 fav. 120

2. Travel exp.

(Std: 20 days*$40/day)

Palmer, K. $800 $1,000 $200 unfav. 125

Thomson, J. 800 800 00 100

Miller, O. 800 720 80 fav. 90

3. Sales

(std: 20 days* $400)

Palmer, K. $8,000 $14,000 $6000 fav. 175

Thomson, J. $8,000 8400 400 fav. 105

Miller, O. $8,000 6000 2000 unfav. 75

4. Sales revenue per call (std: $400

sales per day / 5 calls per day)

Palmer, K. $80 $200 $420 fav. 250

Thomson, J. $80 84 4 fav. 105

Miller, O. $80 50 30 unfav. 62.5



Contribution Margin Approach

Influenced the thinking of the volume-minded sales

manager or salesperson.

Better indicator than sales





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Marketing Cost and Profitability Analysis