Chapter 15

problems in marketing cost analysis (MCA)

-can be expensive in time, money, and personnel -difficult to determine how to allocate indirect costs, especially with full cost analysis

3. analysis of activity costs by market segments (territories, products, customer groups)

-most beneficial -pinpoint trouble spots more effectively -Analysis not only costs, but also profitability of each segment of the market

1. analysis of ledger expenses

-simplest and least expensive -Examines costs as they are recorded in the company's accounting ledgers -limited value because general info

use of findings

1. adjust territorial boundaries 2. Eliminate certain territories 3. Closer supervision of select salespeople 4. Eliminate, or redesign certain products 5. Eliminate unprofitable customers, or perhaps direct them to buy product through the website and/or telemarketers (instead of having a salesperson call on them) 6. Take steps to increase average order size

types of MCAs

1. analysis of ledger expenses 2. analysis of activity expenses 3. analysis of activity costs by market segments(territories, products, customer groups)

Comparison of Marketing Cost Analysis and Production Cost Accounting

1. sales execs want to know marketing costs by product in addition to costs for other marketing units 2. costs are incurred by salespeople not under direct supervision and whose job is not routine 3. production mgrs know the exact cost-volume relationship between an increase in output and decrease in cost -sales mgr wants to know what the effect on volume will be if a cost is changed

1. Divide cost equally among territories or whatever market segments are being analyzed

Easy to do, but inaccurate and usually unfair to some market segments

Nature and Scope of Marketing Cost Analysis (MCA)

MCA is a detailed study of a firm's marketing costs -finds profitable and efficient areas -discovers unprofitable segments & inefficient performing functions -Not usually a part of a company's regular accounting system

MCA v Accounting system

MCA-future operations Accounting-happened in past, but provides all data needed for MCA

2. Allocate costs in proportion to sales volume obtained from each territory (or product or customer group). Thus if product A accounted for 25% of sales, then A would be charged with 25% of indirect expenses

Underlying philosophy is to apply cost burden where it can best be borne -charges a high-volume market segment with a large share of the indirect cost -simple and easy to do but may be very inaccurate -Tells very little about a segment's profitability and may even be misleading

full cost method

all expenses are allocated among the marketing unites -mgmt determining net profit of each territory, product, or other unit

8 ways to increase order size

and reduce small order marketing costs 1. educate and stress adv of purchasing from 1 supplier 2. stress the advantages of ordering once a month instead of once a week (eliminates handing, billing, accounting expenses) 3. Educate the sales force as well as customers, change compensation plan to discourage smaller orders 4. substitute mail/telephone selling for small orders or call on less frequently 5. shift account to wholesaler 6. Drop a mass-distribution policy and adopt a selective one, increase sales 7. establish min order size 8. Establish a minimum charge or a service charge to combat small orders

3. Allocate indirect costs in same proportion as the total direct costs. Thus if product A accounted for 25% of the total direct costs, then A also would be charged with 25% of the indirect expenses

easy to do but can be inaccurate and misleading. -Falsely assumes a close relationship between direct and indirect expenses

direct costs

incurred in connection with a single unit of sales operations -readily allocated in total to a specific marketing unit

contribution margin method

only the direct expenses are allocated to each marketing unit(territory, product) being analyzed -after subtracting direct costs from gross margin, the remaining is indirect -doesn't determine net profitability -ST

small order problem

orders are so small that they result in a loss to the company

sales person compsensation

partially indirect -direct when analyzing the profitability of salespeople -indirect when analyzing the profitability of products or customers

2. analysis of activity expenses

sales execs regroup ledger expenses into activity classifications 1. selecting appropriate activity categories 2. take each ledger expense and allocate among the categories -use expense distribution sheet

indirect costs

shared by more than one market segment -most marketing costs

CEO compensation

totally indirect