Sales Management 14

Cost Analysis

Full Cost Approach(a.k.a. Net Profit)

Sales

Less: Cost of _________Sold

Equal: Gross _________

Less: Operating Expenses

Equal: _________ _________

Costs of Goods Sold

• Direct Costs– Can be specifically identified with a product or

function.– E.g., inventory carrying costs (parts, labor,

materials)

• Indirect Costs– Shared among several products or functions– E.g., travel expenses for sales rep handling

several products in the line

General Administrative & Selling Expenses

• Specific– Can be tied to a specific product– E.g., product manager’s salary

• General– Cannot be directly linked with specific profit

measurement (territory, salesperson, product)– E.g. sales manager’s salary

Contribution Margin Approach

Sales

Less: Cost of Goods Sold

Gross Margin

Less: Direct Selling Expenses

Profit Contribution

Full Cost vs. Contribution Margin

• Full Cost: each unit bears its own direct cost plus its share of company-wide overhead

• Contribution Margin: Argues that costs should not be allocated arbitrarily; makes it difficult to measure success of the segment

• Contribution margin is becoming the more prevalent approach

ABC Accounting

• _________-_________Costing

• Allocate fixed costs to products (or territory, salesperson, etc.) according to the activity that creates or drives the cost.

Costs

• Direct selling• Advertising and sales

promotion• Product and package

design• Technical product

services• Sales discounts and

allowances• Credit extensions• Warranty costs

• Marketing research• Warehouse/Handling• Inventory• Parking, shipping, &

delivery• Order processing• Customer service• Billing and recording

of accounts receivable• Returned merchandise