Transcript Cost of goods sold

Chapter 15
Marketing
Cost and
Profitability
Analysis
Profit in business comes from
repeat customers, customers that
boast about your project or
service, and that bring friends
with them.
W. Edwards Deming
McGraw-Hill/Irwin
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
A Comparison of Marketing Cost Analysis and
Production Cost Accounting (Fig. 15-1)
Comparison
Factors
Bases for
computing
costs
Marketing Cost
Analysis
Marketing unit:
territory, customer
group, order size, as
well as product
More complex
Source of cost
incurred
Salespeople in the
field
Less exact
Cost-volume
relationship
Production Cost
Accounting
Unit of product
Relatively simple
Machines and closely
supervised workers
More precise
Volume is a function of
cost V=f( C )
Cost is a function of
volume C=f(V)
Difficult to measure
Relatively easy to
measure
15-2
Income and Expense Statement, 2006,
Colorado Ski Company ($000) (Fig. 15-2)
Net sales
Less cost of goods sold
Gross margin
Less operating expenses:
Sales salaries and commissions $3,240
Sales force travel
372
Supplies and telephone
178
Media space
870
Advertising salaries
218
Property taxes
120
Heat and light
168
Insurance
84
Administrative salaries
930
Other expenses
120
Total operating expenses
Net profit
$27,000
18,900
8,100
6,300
$ 1,800
15-3
Expense Distribution Sheet, Colorado Ski
Company, 2006 (Fig. 15-3)
(showing allocation of ledger expense items to activity categories)
Activity Cost Categories
Personal
Ledger expenses
Totals
Sales salaries/commis $3,240,000
Sales force travel
Supplies & telephone
Media space
Advertising salaries
Property taxes
Heat and light
Insurance
Administ. salaries
Other expenses
Totals
372,000
178,000
870,000
218,000
120,000
168,000
84,000
930,000
120,000
$6,300,000
Selling Advertising
$3,240,000
—
372,000
—
43,200
22,200
—
870,000
—
218,000
10,000
14,500
15,300
17,400
12,000
4,200
144,000
62,000
10,500
11,700
3,847,000 1,220,000
Warehousing
Order
and Shipping Processing Administration
—
—
40,900
—
—
66,000
100,500
46,300
168,000
58,300
480,000
—
—
43,500
—
—
14,000
16,200
14,000
126,000
26,300
240,000
—
—
28,200
—
—
15,500
18,600
7,500
430,000
13,200
513,000
15-4
Allocation of Activity Costs to Sales Regions, Colo. Ski Co. 2006 (Fig. 15-4)
Activity
Personal Selling
Advertising
Warehousing &
Shipping
Order
Processing
Administration
Allocation Scheme
Allocation
basis
Direct
expense to
each region
Number of
pages of
advertising
Number of
orders
shipped
Number of
invoice
lines
Equally
among
regions
Total activity
cost
$3,847,000
$1,220,000
$480,000
$240,000
$513,000
Number of
allocation
units
–
61 pages
9,600 orders
120,000 lines
3 regions
Cost per
allocation
unit
–
$20,000 per
page
$50 per order
$2 per line
$171,000 per
region
Region
Allocation of Costs
units
–
21 pages
3,800 orders
39,500 lines
1
cost
$1,070,000
$420,000
$190,000
$79,000
$171,000
units
–
11 pages
2,500 orders
28,000 lines
1
cost
$747,000
$747,000
$125,000
$56,000
$171,000
units
–
29 pages
3,300 orders
52,500 lines
1
Cost
$2,030,000
$2,030,000
$165,000
$105,000
$171,000
Eastern
Midwest
Western
15-5
Income and Expense Statement, by Sales
Region, Col Ski Co. 2006 ($000) (Fig. 15-5)
Net sales
Less cost of goods sold
Gross margin
Less operating expenses:
Personal selling
Advertising
Warehousing/shipping
Order processing
Administration
Total operating expenses
Net profit (loss)
Total EasternMidwestern Western
$27,000 $9,000
$4,500 $13,500
18,900
6,300
3,150
9,450
8,100
2,700
1,350
4,050
3,847
1,220
480
240
513
6,300
$ 1,800
Net profit (loss) as percentage of sales 6.70%
1,070
420
190
79
171
1,930
$ 770
8.60%
802
220
125
56
171
1,374
($24)
(0.53%)
1,975
580
165
105
171
2,996
$ 1,054
7.80%
15-6
Methods Used to Allocate Indirect Costs
(Fig. 15-6)
Method
Evaluation
Divide cost equally among territories or
Easy to do, but inaccurate and usually unfair
whatever market segments are being
to some market segments.
analyzed.
Allocate costs in proportion to sales
Underlying philosophy: apply cost burden
volume obtained from each territory (or
where it can best be borne. That is, charge a
product or customer group).
high-volume market segment with a large
share of the indirect cost. This method is
simple and easy to do, but may be very
inaccurate. Tells very little about a segment’
Allocate indirect costs in same proportion
Again, easy to do but can be inaccurate and
as the total direct costs. Thus if product A
misleading. Falsely assumes a close
accounted for 25 percent of the total
relationship between direct and indirect
direct costs, then A would also be
expenses.
charged with 25 percent of the
indirect
expenses.
15-7
Contribution-Margin vs. Full-Cost
Contribution-Margin
Method
Full-Cost
Method
Sales volume
-Cost of goods sold
Gross margin
Sales volume
-Cost of goods sold
Gross margin
-Direct expenses
Contribution margin*
-Direct expenses
-Indirect expenses
Net profit
*The amount available to cover
overhead expenses plus a profit.
15-8
Income and Expense Statement by Sales Region, Colo. Ski Co.
2006, in $000, Using Contribution-Margin Approach (Fig. 15-7)
Total EasternMidwestern Western
$27,000 $9,000
$4,500 $13,500
18,900
6,300
3,150
9,450
8,100
2,700
1,350
4,050
Net sales
Less cost of goods sold
Gross margin
Less direct operating expenses:
Personal selling
3,082
845
Advertising
732
254
Warehousing/shipping
160
64
Order processing
130
43
Total direct expenses
4,104
1,206
Contribution margin
$ 3,996 $1,494
Less indirect operating expenses:
Personal selling
Advertising
Warehousing/shipping
Order processing
Administration
Total indirect expenses
Net profit
595
127
42
30
794
$ 556
1,642
351
54
57
2,104
$1,946
765
488
320
110
513
$2,196
$1,800
15-9
Fig. 15-8 Ways to Increase Order Size and
Reduce Small Order Marketing Costs
• Educate customers who buy from several different suppliers. Stress the advantages of
purchasing from one supplier.
• For customers who purchase large total quantities in frequent small orders, stress the
advantages of ordering once a month instead of once a week. Point out that the buyer
eliminates all handling, billing, and accounting expenses connected with three of the four
orders. Note further that the buyer writes only one check and one purchase order. In
addition, stress that there will be only one bill to process and one shipment to put into
inventory instead of three or four.
• Educate the sales force as well as customers. In fact, it may be necessary to change the
compensation plan to discourage acceptance of smaller orders.
• Substitute direct mail or telephone selling for sales calls or unprofitable or small-order
accounts; or continue to call on these accounts, but less frequently.
• Shift an account to a wholesaler or some other type of middleman rather than dealing
directly, even by mail or telephone.
• Drop a mass-distribution policy and adopt a selective one. This new policy may actually
increase sales because sales reps can spend more time with profitable accounts.
• Establish a minimum-order size.
• Establish a minimum charge or a service charge to combat small orders
15-10
Return on Assets Managed (ROAM)
Sales
Cost of goods sold
Gross margin
Salaries
Commission
Travel
District office expense
$ 10,000,000
7,000,000
3,000,000
150,000
850,000
150,000
400,000
Total direct expenses
Contribution margin
150,000
$ 1,450,000
Accounts receivable
Inventories
2,200,000
2,000,000
Total assets
$ 4,200,000
Profit on sales % =
Asset turnover
=
Contribution margin
Sales volume
=
1,450,000
10,000,000
Sales volume
Accounts receivable + Inventories
=
x
100
=
14.5%
$10,000,000
$ 4,200,000
=
2.38
ROAM = Profit on sales % x Asset turnover
=
1,450,000
10,000,000
x
10,000,000
4,200,000
=
14.5%
x
2.38
=
34.5%
15-11