MKTG473 Ch. 15: Marketing Cost and Profitability Analysis

Marketing cost analysis
– a marketing cost study is not usually a part of a company’s regular accounting system
– to do an effective cost analysis, the company must maintain a detailed system of account classification
types of marketing cost analysis
A company’s marketing costs may be analyzed in three ways:
(1) as they appear in the ledger accounts and on the income and expense statement
(2) after they are grouped into functional (also called activity) categories
(3) after they have been allocated to territories, products, or other marketing units
analysis of ledger expenses
– simplest and least expensive marketing cost analysis is based on studying the object-of-expenditure costs as they are recorded in the company’s accounting ledgers
– take the totals for each cost item from the ledger accounts and then analyze these figures in some detail
– of limited value, because it provides only general information
analysis of activity expenses
– group ledger expenses into various activity classifications

Two step procedure:
(1) select the appropriate activity categories
Ex:
– personal selling expenses
– advertising and sales promotion expenses
– warehousing and shipping expenses
– order processing expenses
– administration expenses

(2) take each ledger expense, and allocate it among the various activity categories

*not only shows which ledger costs have increased or decreased, but also the activities responsible for these changes*

analysis of activity costs by market segments
divide the market by territories, products, customer groups, or order sizes
– enables management to pinpoint trouble spots or areas of satisfactory performance much more effectively than with an analysis of either ledger expenses or total activity costs

*what happened*
*why it happened*
*what to do to fix the situation*

Problems in Marketing Cost analysis
– marketing cost analyses can be expensive in time, money, and personnel (computers have helped lower the cost and time used in marketing cost analyses)

Difficulty of allocating costs

Direct costs
costs incurred in connection with a single unit of sales operations
– can readily be allocated in total to a specific marketing unit, whether it is a territory, product, or customer group
– expenses that can be separated from other costs
indirect costs
costs shared by more than one market segment
– most marketing costs are totally or partially indirect
overhead costs
a body of expenses that cannot be identified solely with individual product lines, territories, or other market segments
– sometimes referred to as fixed costs (more so *indirect*)