Chapter 12

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Cost Analysis

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 Learning Objectives
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management situations.
Describe how such methods would be implemented.

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Select the appropriate cost allocation method for various sales

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.
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 Key Terms
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• 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)
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 Key Terms
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• Full cost accounting (pg. 383)
– The full cost approach (also known as net profit) takes SALES – COST OF
GOODS SOLD = GROSS MARGIN - OPERATING EXPENSES =
SEGMENT NET INCOME.
• Contribution margin accounting (pg. 383)
– Contribution margin approach takes SALES – VARIABLE
MANUFACTURING COSTS – OTHER VARIABLES COSTS =
CONTRIBUTION MARGIN – FIXED COSTS = SEGMENT NET INCOME.
• Activity-based costing (ABC) accounting (pg. 387)
– This approach allocates fixed costs to products or other unites according to
the activity that creates or drives the cost. 4
 Key Terms
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• Sales costs (pg. 388)
– All costs associated with the selling function (direct and indirect).
– Direct selling (pg. 395)
• Costs directly connected to the sales function and include personal
calls on customers and prospects, sales salaries, incentive
compensation, travel and other expenses.
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Advertising (pg. 396)
• Media costs such as TV, radio, billboards, newspapers, and
magazines, advertising production costs and advertising department
salaries.
– Warehousing and shipping (pg. 397)
• Costs associated with the storage of finished goods inventories in 5
warehouses. Physical handling, assembling, and loading of goods on
to trucks, rail cars, etc.
 Key Terms
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– Order processing (pg. 397)
• Costs related to checking and processing of orders from customers.
– Transportation (pg. 397)
• Costs associated with the movement of products through the channel
of distribution to the final user.
• Return on assets managed (ROAM) (pg. 399)
– A formula that indicates the return to a business segment on assets and
reflects both the contribution margin associated with a given level of sales
as well as asset turnover. It is calculated as ROAM = (Contribution as a
percentage of sales) X (asset turnover rate).
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 Full Cost versus Contribution Margin
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• Traditional methods of accounting

the basis of a demonstrable cost relationship

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– Full-cost (net profit) - many of the indirect costs can be assigned on

– Contribution margin - direct product costs identified associated with

revenue to yield a true Gross Profit

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 ABC Accounting
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• 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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Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved.
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 Prospects and Problems
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• 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
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 Return on Assets Managed
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• 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 by sales
• Asset turnover rate = sales divided by the assets needed to produce those sales

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 Summary
• Marketing cost analysis attempts to isolate the costs
incurred in producing various levels of sales to
determine the profitability of sales by segment of the
business.
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advantage by sales managers to investigate the
profitability of regions, branches, territories,
customers, or various channels of distribution.

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• Most firms have been slower to embrace cost analysis

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than sales analysis for studying their marketing
activities. Part of this lag can be explained by the fact

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that many costs associated with doing business are not
entered in the firm’s accounting system in their most
useful form for decision making. Thus, it is necessary
to rework these costs so they are more useful. The
adoption of activity-based cost (ABC) accounting
systems is helping to increase the use of cost analysis.
• A marketing cost analysis can be conducted using
either a full cost, a contribution margin, or an activity-
based cost approach. The full-cost approach allocates
all the costs of doing business, even fixed costs, to one
of the operating segments. The contribution margin 32
approach holds that only those costs that can be
 Summary
• There are four steps in conducting a marketing cost
analysis.
1. The purpose of the study must be specified.
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natural account cost be be3 spread to
functional cost centers.
3. The functional costs must be allocated to

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appropriate operating segments using some

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reasonable bases. Here, one looks for those factors
that bear a cause-and-effect relationship with the

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cost.
4. The allocated costs are summ3ed so the
contribution of the segment can be determined.
• Return on assets managed provides the sales
manager with still another financial tool for
controlling the personal selling function. Return on
assets managed is the product of contribution to
profit as a percentage of sales multiplied by asset
turnover. Asset turnover is found by dividing sales
by the assets needed to produced those sales. The
formula recognizes that the sales manager has only33
limited assets with which to work. He or she can