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 12-2

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

12-4 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)

12-5 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

12.1 Differences in perspective between full-cost and contribution margin approaches to marketing cost analysis 12-6

12.2 Profit and loss statement by department using a full-cost approach 12-7

12.3 Profit and loss statement if department 1 were eliminated 12-8

12.4 Contribution margin by departments 12-9

12-10 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 A diagram of activity-based costing 12-11

Source: Robert A. Dwyer and John F. Tanner, Jr., Business Marketing: Connecting Strategy Relationships and Learning (New York: McGraw-Hill, 1999) Comparison of contribution and ABC methods 12-12

12.7 Steps in conducting a marketing profitability analysis 12-13

12.8 Major functional accounts that are useful in marketing cost analysis 12-14

Functional cost groups and bases of allocation 12.9a 12-15

Functional cost groups and bases of allocation 12.9b 12-16

Functional cost groups and bases of allocation 12.9c 12-17

Functional cost groups and bases of allocation 12.9d 12-18

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 ———, “The Enemy Within: Examining Salesperson Deviance and Its Determinants,” The Journal of Personal Selling & Sales Management 26, no. 4 (Fall 2006), p. 327.

12.10 Example profit and loss statement 12-20

12.11 Allocation of natural accounts to functional accounts 12-21

12.12 Basic data used for allocations 12-22

12.13 Profitability analysis by salesperson 12-23

12.14 Activities of Tucker broken down by account 12-24

12.15 Profitability analysis for Tucker broken down by customer 12-25

12-26 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

12-27 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

12.16 Analysis of return on assets managed 12-28

Expanded return on assets managed (ROAM) model

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