12

Cost Analysis

Real Cost Analysis Lead to Real Benefits

Source: HR Chally Group (2009)

Greater customer

satisfaction

Operational excellence/ improved

performance

Effective cost analysis

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12.1 Customer Lifetime Value Analysis

Determine real costs associated with each customer Some portion of overhead Salesperson’s time Customer service contact Sales terms Payment schedules

Largest customers may not be most profitable

Allows companies to assign resources strategically

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Cost Analysis Development

Sales managers need accurate knowledge of profitability of Customers Geographic areas Products Markets

Three approaches Full costing Contribution analysis Activity-based costing (ABC)

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Full Cost vs. Contribution Margin

Full-cost (net profit) - many of the indirect costs can be assigned on the basis of a demonstrable cost relationship

Contribution margin - direct product costs identified associated with revenue to yield a true Gross Profit

12.1Differences in perspective between full-cost and contribution margin approaches to marketing cost analysis

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12.2Profit and loss statement by department using a full-cost

approach

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12.3Profit and loss statement if department 1 were eliminated

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12.4Contribution margin by departments

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ABC Accounting

Activity-based costing (ABC) Allocates costs to activities Identifies fixed cost

components for production and sales and associates them with the products sold

Costs once assumed to be fixed in the short-run can be associated with operating units such as a sales office

Source: Adapted from James M. Reeve, “Activity-Based Cost Systems for Functional Integration and Customer Value,” in Competing Globally through Customer Value: The Management of Strategic Suprasystems, eds. Michael J. Stahl and Gregory M. Bounds (New York: Quorum Books, 1991), p. 501.

12.5

A diagram of activity-based costing

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Source: Robert A. Dwyer and John F. Tanner, Jr., Business Marketing: Connecting Strategy Relationships and Learning (New York: McGraw-Hill, 1999).

12.6 Comparison of contribution and ABC methods

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12.7

Steps in conducting a marketing profitability analysis 12-13

12.8 Major functional accounts that are useful in marketing cost analysis

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Functional cost groups and bases of allocation

12.9a

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Functional cost groups and bases of allocation

12.9b

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Functional cost groups and bases of allocation

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Functional cost groups and bases of allocation

12.9d

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12.2 The T&E Expense Account

Travel and entertainment account

Fraud related to T&E has increased

Two common frauds Mischaracterized expenses Overstated expenses

Sources: Jay Boehmer, “Expense Fraud Explodes,” Business Traveler News, August 11, 2003, pp. 1, 68–69. Ronald Jelinek and Michael Ahearne, “The ABC’s of ACB: Unveiling a Clear and Present Danger in the Sales Force,” Industrial Marketing Management 35, no. 4 (May 2006), p. 457. ———, “The Enemy Within: Examining Salesperson Deviance and Its Determinants,” The Journal of Personal Selling & Sales Management 26, no. 4 (Fall 2006), p. 327.

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Example profit and loss statement

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12.11

Allocation of natural accounts to functional accounts

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12.12

Basic data used for allocations

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12.13

Profitability analysis by salesperson

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12.14Activities of Tucker broken down by account

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12.15

Profitability analysis for Tucker broken down by customer

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Marketing Cost Analyses +/-

Benefit - isolates most/least profitable segments of business

Combined with effective sales analysis, provides a formidable tool for managing personal selling

Improves planning and control Required data may be costly to

acquire, maintain Cost allocation decisions can be

difficult

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Return on Assets Managed

Sales analysis - measures the results achieved by the sales force.

Cost analysis - measures the cost of producing those results.

ROAM = Contribution as a percentage of sales x Asset turnover rate

Contribution as percentage of sales = ratio of net contribution divided be sales

Asset turnover rate = sales divided by the assets needed to produce those sales

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Analysis of return on assets managed

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Expanded return on assets managed (ROAM) model

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Impact of a reduction in accounts receivable to $250,000 in branch A

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