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2. McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 12 Cost Analysis

3. McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. 12-3 Learning Objectives Select the appropriate cost allocation method for various sales management situations. Describe how such methods would be implemented. Discuss the importance of return on assets managed (ROAM) and be able to calculate ROAM. Apply financial cost analysis to sales management situations in order to make decisions.

4. McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. 12-4 Full Cost versus Contribution Margin Traditional methods of accounting –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

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9. McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. 12-9 ABC Accounting Activity-based costing 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

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24. McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. 12-24 Prospects and Problems Benefit of marketing cost analysis - isolate most profitable segments of business and those that generate losses Combined with effective sales analysis, cost analysis provides sales managers with a formidable tool for managing the personal selling function Sales analysis requires that data be available and processed into useful reports with adequate detail

25. McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. 12-25 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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29. McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. 12-29 Key Terms full-cost accounting contribution margin accounting activity-based costing (ABC) sales costs –direct selling –advertising –warehousing and shipping –order processing –transportation return on assets managed (ROAM)

30. McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. 12-30 Mark W. Johnston Rollins College Greg W. Marshall Rollins College