Sales and cost analysis

Six-Function Value Chain

TIME

Research
Customer
& Design Production Marketing Distribution
Development Service

 Traditional Life Cycle approach may not yield the costs

necessary to meet the four-purpose criteria for cost allocation
 Costs necessary for decision making may pull costs from some
or all of these six functions

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 14-2
Criteria for Cost-Allocation Decisions
 Cause and Effect – variables are identified
that cause resources to be consumed
 Most credible to operating managers
 Integral part of ABC
 Benefits Received – the beneficiaries of the
outputs of the cost object are charged with
costs in proportion to the benefits received

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 14-3
Criteria for Cost-Allocation Decisions
 Fairness (Equity) – the basis for establishing a price
satisfactory to the government and its suppliers
 Cost allocation here is viewed as a “reasonable” or
“fair” means of establishing selling price
 Ability to Bear – costs are allocated in proportion to
the cost object’s ability to bear them
 Generally, larger or more profitable objects receive
proportionally more of the allocated costs

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 14-4
Customer Revenues
 Price discounting
 Lower sales price is a tradeoff for larger sales
volumes
 Discounts should be tracked by customer and
salesperson

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 14-5
Customer Cost Analysis
 Customer Cost Hierarchy categorizes costs
related to customers into different cost pools
on the basis of different:
 types of drivers
 cost-allocation bases
 degrees of difficulty in determining cause-and-
effect or benefits-received relationships

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 14-6
Customer-cost analysis; five
categories
1. Customer output unit-level costs – these are per
unit
2. Customer batch-level costs – cost per customer
order, for example, or per delivery
3. Customer-sustaining costs – cost to support
individual customers regardless of number of
units or batches
4. Distribution-channel costs – these costs relate
to the distribution channel rather than to each
unit or customer. For example, we might have a
wholesale distribution manager’s salary and a
retail distribution manager’s salary.
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 14-7
Factors in Evaluating Customer
Profitability
 Likelihood of customer retention
 Potential for sales growth
 Long-run customer profitability
 Increases in overall demand from having well-
known customers
 Ability to learn from customers

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 14-8
1. Sales Analysis by Region

Region S. Quota Actuals Diff. Performan

ce Index
Sales/SQ ×
100
West 10.25 10.20 -0.05 99.51
South 10.00 10.02 +0.02 100.20
North 9.75 9.73 -0.02 99.79
East 8.75 7.01 -1.74 80.11

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 14-9
2. Sales Analysis by Sales Representative

Sales Rep. S. Quota Sales Diff. Perf. Index

Ravi 500.5 475.5 -25 95.00
Rahul 300.5 290.5 -10 96.67
Rishi 500.25 150.25 -350 30.03
Raj 425.75 400.75 -25 94.12

10
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 14-10
3. Sales Analysis by Product for Rishi

Product Quota (Rs.) Actual (Rs.) Diff.

Tooth Paste 400 240 160
Soap 300 180 120
Cosmetics 500 220 280

Rishi has problems of motivation, selling skills.

11
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 14-11
Sales Analysis Territories
Sales Area Quota (Cr.) Actual (Cr.) Difference % of Quota

New Delhi 3400 3640 +240 107.10

Mumbai 3300 2960 -340 89.70

Chennai 2700 2830 +130 104.80

Kolkata 2500 2100 -400 84.0

Total 11900 11530 -370 84.0

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 14-12
Sales Analysis by Sales Personnel
Salesperson Quota (Cr.) Actual (Cr.) Difference %of Quota

Ajay 750 770 +20 103.70

Vijay 660 665 +5 100.8

Vinay 650 410 -240 63.1

Amit 440 225 -185 58

Total 2500 2100 -400 84.0

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 14-13
Sales Analysis Class of Account
Sales
Class of Quota (Cr.) Actual (Cr.) Difference % of Quota
Account

A 350 210 -140 60.0

B 150 95 -55 63.3

C 150 105 -45 70.0

Total 650 410 -240 63.1

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 14-14
Sales Analysis Product Line
Product Quota (Cr.) Actual (Cr.) Difference % of Quota
Line

Deluxe 240 105 -135 43.8

Standard 300 150 -150 50.0

Economy 110 155 +45 140.90

Total 650 410 -240 63.1

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 14-15
Marketing Cost Analysis
Territory A Territory B
Confectioner Soaps Total Confectioner Soaps Total
y y
Sales in 24000 17000 41000 20000 20000 40000
units

Sales in Rs 288000 323000 611000 240000 380000 620000

Cost of 144000 255000 399000 120000 300000 420000
goods sold
Gross 144000 68000 212000 120000 80000 200000
Margin
Separable 42280 45590
expenses
Allocation of 49200 51867
common
expenses
Contribution 120520
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
102543
14-16
Margin
Profitability Analysis
Full Cost Approach Branch A Branch B Branch C
Western Region
Sales 400 150 130 120
Cost of goods sold 300 112.5 97.5 90
Gross margin 100 37.5 32.5 30
Branch selling 12.7 4.5 4.2 4
expenses
W Region direct 12.0 - - -
selling expenses
Profit contribution 75.3 33.00 28.3 26
Allocated indirect 36.3
expenses
Net profit 39.0

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 14-17
Sales Variances
 Static-budget variance

 Flexible-budget variance

 Sales-volume variance

 Sales-quantity variance

 Sales-mix variance

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 14-18
Marketing Audit
 Marketing environment audit
 Marketing strategy audit
 Marketing organization audit
 Marketing systems audit
 Marketing productivity audit
 Marketing function audit

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 14-19
Profitability Analysis
 Break-even- Analysis

 Capital Budgeting Tools

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 14-20
Principles of Analysis
 Iceberg Principle

 80-20 Principal

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 14-21
Sales Control
 sales control requires the establishment of
standards, the evaluation of actual performance
and the correction of deviation in performance.
 Sales control implies not only managerial action
with regard to actual sales, but it also embraces
all other marketing functions required for the
even flow of products or services form producers
to consumers.

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 14-22
Circulatory Nature of Sales
Management Function

Planning Organizing

Sales
Management
Process

Controlling Coordinating
Controlling Sales Force Performance –
Input-Output Based Approach
Analyze market situation, competition to set performance
evaluation and control policy

Decide the criteria for salespeople’s performance evaluation

Set performance standards (both qualitative & quantitative )

Compare and contrast actual performance with set standards

Review and communicate performance evaluation

Decide sales management action

Sales force performance evaluation and control process

Controlling Sales Force Performance –
Input-Output Based Approach
Analysis of market situation and competition to set
performance evaluation and control policy
 Who will evaluate sales people?
 How frequently sales people will be evaluated

 What sources of information should be used for

evaluation
 What should be the degree of evaluation
Controlling Sales Force Performance –
Input-Output Based Approach
Criteria for Sales Performance Evaluation
 Input based criteria
 Output based criteria
 Behavioral criteria

 Efforts expended criteria

Controlling Sales Force Performance –
Input-Output Based Approach
Setting Up Performance Standards
 Sales quota
 Call frequency ratio
 Calls per day

 Order call ratio

 Average cost per call
 Average order size
Controlling Sales Force Performance –
Input-Output Based Approach
Compare and contrast actual performance with set standards
 Define the information need
 Determine the source of information
 Collect the desired information

Call reports
 Call progress report
 Expense reports
 Sales work plan
Controlling Sales Force Performance –
Input-Output Based Approach
Review and Communicate Performance Evaluation Reports
with sales people
 Open system of performance evaluation
 Formal system of performance evaluation

 Informal system of performance evaluation

 Communicate through
 Verbal channels
 Formal channels
 Human resource channel
Controlling Sales Force Performance –
Input-Output Based Approach
Decide Sales Management Action
 Positive actions  Negative Actions
 Incentives  Demotion
 Promotion  Withdrawal

 Higher job responsibility  Transfer

 Job enrichment  Termination
Goals of Sales Control
 Optimize number of sales
 Maximize profit
 Control revenue

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 14-31
Systematic View

Sales Control

Behavioral Aspects Cost Aspects

Sales Effort Allocation of Performance Sales-function

Selling-Time Expenses Administration
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 14-32