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Group Members
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Marketing Cost And
Profitability Analysis
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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
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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.
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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.
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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.
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Profit Planning and Control
Marketing study supports to strategicplanning.
Skills required:
1. Technical skills
2. Analytical ability
3. Industry knowledge
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Najeebullah Kalwar
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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)
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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
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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)
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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
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Cont…
Indirect Expenses Occur for more than one function
E.g.
Salaries of Selling OfficersUtility Bills
Depreciation Equipment
Supplies
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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)
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Example:
Billing Department
Invoice lines (Normal capacity)=
60,000
Total cost = 12,000
Rs 0.5= 12,000 / 60,000
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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
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Determination of Functional
Unit Cost
Functional Unit Cost = Total Cost of
Function / Base Selected
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Fixed and Variable Costs
Main Purposes
Control Marketing Cost
Decision Making
e.g. Opening or closing of territory
Adding or dropping of product
line
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Fixed Costs or Capacity Costs
To get the order
Permanent Facilities
E.g.
Salaries of Executives
Administration Sales Staff
Salaries of Warehouse
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Variable Costs Or Volume Cost
Vary with sales volume
Expenses to fill the order
E.g.
Expenses of Warehousing
Shipping and so on
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Syed Kashif Shah
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Flexible budget
Sales estimates
Determine functional expenses
Static budget portrays unrealistic
figures
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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
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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
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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
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Cont…
Idle capacity variance = budgeted expense – overhead charged to
production
Budgeted expense 12150
Overhead charged to production (0.2 * 63000) 12600
Rs. 450 F
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Marketing Profitability Analysis
Analyze costs and determine the profitability of ;
• Territories,
• Customers,
• Products, and
• Salespersons.
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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
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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
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Sarfraz Nawaz
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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
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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
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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.
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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
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Contribution Margin Approach
Influenced the thinking of the volume-minded sales
manager or salesperson.
Better indicator than sales
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