MARKETING COST CONTROL

MARKETING FINANCE

CONTROL ANALYSIS EVALUATION

COST CONTROL

CONTROL

Action taken to achieve a conformity of the

actual result with the planned result

Presupposes effort direct towards a

desired result

PRIMARY COST

FACTORY COST

TOTAL COST

COST OF SALES

FOUR STAGES OF COSTING

MATERIALS LABOUR OVERHEADS

THREE ELEMENTS OF COSTS

DIRECT COSTS/PRIME COSTS

INDIRECT COSTS/OVERHEADS

TWO TYPES OF COSTS

PRINCIPLES OF COST DETERMINATION

DISTRIBUTION COST CONTROL

The Product Approach

TESTS FOR ASSESSING DISTRIBUTION EFFICIENCY

To ensure that the right product is offered for sale since volume of sales and earnings depend upon a firms distribution expenses besides the salesman’s efficiency

The Product-line Approach

Products suitable for a line should be sold in the same market and should be distributed through the same channel as this will reduce marketing cost

The Channels Approach

Choice of right channel to control distribution costs & provide more efficient distribution…. Revamp structure of discounts & commissions.

The Engineering Approach

Managing distribution activities like, transportation & storage to make available goods at proper places & proper quantities.

The Accounting Approach

It involves the classification of a firms distribution expenses, volumes & earnings by salesmens’ territories, salesmen, regions, products. Resulting comparison of expenses, volumes & earnings are helpful in indicating comparative profitability

The Operations Research Approach

Offers many possibilities of alternatives in minimizing efforts & costs in accomplishing a given end

The Economic Approach

Is concerned with changing market conditions, sales potential of markets, areas & the application of selling, advertising and other such efforts under conditions of diminishing returns to the point of marginal balance between expenditure income and further to the point of maximum total profit or minimum loss.

The Personnel Approach

Aims to study the distribution costs from e personnel perspective since the distribution personnel entail costs on selection, training, compensation to compare their productivity with reference to the costs incurred on them.

The Organizational Approach

Effective organization is a prime requisite in accomplishing efficient distribution. The organization as a whole should be capable of performing the task of distribution efficiently.

The Standardization Approach

Distribution comprises a multitude of activities in which the human element looms large and there is likelihood of variation in performance because of lack of standardization. Standardization of various activities may be an important contribution to economical distribution.

The Management Approach

This includes and employs all the other approaches It uses these approaches & methods in analyzing the results of its past plans and programmes to decide the appropriate course of action.

The management approach to accomplishing new distribution efficiency includes a willingness to venture on new paths with risks minimized by a maximum of knowledge gained by the analysis of past experience, but also by scientifically conducted experiments how improved distribution may be successfully obtained.

Physical Distribution Cost

Direct costs Indirect costs Overheads

Transportation cost

Inventory cost

Warehousing cost

Material handling cost

Cost of capital

Cost of transport equipment

Cost of material handling equipment

Salaries &wages

Administrative expenses

PHYSIACAL DISTRIBUTION FUNCTION IN AN ORGANIZATION

LocationalAnalysis Trans-

portation

MaterialHandling

Ware-housing

Packaging

CustomerService

OrderProcessing

PhysicalDistribution

Inventory Control

Cost Identification

All costs associated with performance of a distribution function should in the activity based cost classification. The total cost associated with forecasting, order management, transportation, inventory, warehousing and packaging must be isolated.

COST FORMATING

Functional grouping

Allocated cost formatting

Fixed-variance grouping

All expenditures for direct and indirect logistical services in a specified operating time are formatted & reported under sub-accounts classification.

Overall logistical expenditure is assigned to a measure of physical performance. This will generate logistical cost per tonne, per unit,per product, etc.

Assigning costs either fixed or variable cost to the operating expenditure that results from different volumes of logistical activity.

ACTIVITY BASED COSTING

The basic purpose of activity based costing is to give

managers a better perspective of total costs associated with

the performance of a specific activity.

COMPONENTS OF DISTRIBUTION COSTS

Transportation costs

Inventory carrying costs

Warehousing costs

Production or supply costs

Channels of distribution costs

Communication & Data Processing Cost

Material handling costs

Packaging costs

Customer service Costs

THE TOTAL COST APPROACH TO DISTRIBUTION COST

WarehousingNumber Type Location

Will affect both service & costs

Inventory Carrying

Insurance Occupancy Pilferage losses Inventory taxes

This group cost may range from 10 to 30 per cent of inventory value

Inventory Obsolescence

Model changes Style changes Perish ability

Important cost for companies

Production or supply alternatives

The decision on which plant should serve which customers must give weight not only to transportation but also to supply and production cost.

Cost concessions

Distribution decisions can affect costs otherwise incurred by suppliers and customers.

Channels of distribution

The choice of distribution channels profoundly affects its physical distribution facilities and the resultant costs.

TransportationA significant part of distribution entailing cost on movement of goods which keep changing because of various factors.

Communication & data processing

TOTAL COST APPROACH

The total cost approach was used by a division of a large

manufacturing company . This division does an annual

business of about $45 million, with over 3000 customers

located in every state . It has plants and warehouses at five

points across the country, shipping to customers via both

rail and road.

PTO

ANNUAL BUSINESS $ 45 million

CUSTOMERS (Located in every state/District) 3000

PLANT/WAREHOUSE LOCATIONS 5

MOVEMENT Rail/Road

PROFIT IMPACT OF DISTRIBUTION - GAINS/(LOSSES) (MILLION $) WAREHOUSING (14.4) TRANSPORTATION 0.5 Total distribution cost (13.9) INVENTORY Carrying costs 1.4

Obsolescence costs 4.3 Value of alternative use facilities 7.8 Total 13.5 PRODUCTION & PURCHASING

Production & raw material costs 0.2 Reduced costs of purchased finished goods 6.7 Total 6.9 DATA PROCESSING (0.2) MARKETING Channels of distribution 0.2 Customer service 1.4 Total 1.6 TOTAL PROFIT IMPACT OF 21.8 DISTRIBUTION RELATED ITEMS

PRE TAX PROFIT INCREASE 7.9

ISSUES

1. Without any major investment can we increase the profits by changing the distribution system ?

2. Can the total cost be reduced by shifting some of the available equipment from one factory to another ?

3. Can the costs be reduced and profits increased by changing the marketing approach ?

4. Is there any profit advantage in changing the capacity of one or more of the present plants , or perhaps building a new facility at another location ?

5. Could we further improve profitability by changing warehouse capacities or locations ?

PLANT- A

Warehouse –1

Warehouse –2

Warehouse –3

Warehouse – 4

Warehouse –5

District

District

District

District

District

District

District

District

District

District

District

District

DistrictDistrict

District

District

District

District

District

PLANT- B

PLANT- C

PLANT- D PLANT- E

Step-1

Shipment by Rail

Shipment by Truck

Freight Paid

Freight To Pay

Freight Paid

Freight To Pay

Broken Down Into Districts

Revealed

What percentage of sales came into the 160 districts By Rail By Trucks

By Freight Paid By Freight To Pay

The Company know where the products were going and how they were going to get there

PLANT - A Warehouse -1

PLANT - B

PLANT - C

PLANT - D

PLANT - E

Warehouse -2

Warehouse-3

Warehouse -4

Warehouse -5

WHICH DISTRICTS

WHICH DISTRICTS

WHICH DISTRICTS

WHICH DISTRICTS

WHICH DISTRICTS

Step-2

Step-3

Arrive at total cost curves for all plants and warehouses

0 300 600 900 1200 1500 1800 2100

2

4

6

8

10A B C D E

1Rearrange Company’s distribution pattern and make appropriate shifts in production and production loads

2 Reduce materials cost

3 Transportation overstressed

4 Shifting equipment from one plant to another

5 Shifting from truck delivery to rail delivery

6 Additional capacity to certain warehouses

ACTION PROFITS

1. Rearranging Company’s distribution pattern $ 492,000 2. Reduced material costs $ 126,000 3. Warehousing operations $ 138,000 4. Reduction in direct labour costs in plants $ 57,000 5. Reduction in plant overheads $ 27,000 6. Reduction in transport costs $ 54000 7. Shifting of equipment from $ 180,000 one plant to another 8. Shift from truck to rail delivery $ 447,000 9. Addition capacity to warehouse $ 75,000

TOTAL $ 750,000