Chapter No.

3
Marketing Cost and
Profitability Analysis

Lecture No. 13
Marketing

Marketing is matching products of a company with satisfaction

of customers at a reasonable profit for company.

Marketing Cost and Profitability Analysis

The study and evaluation of the relative profitability or costs of

different marketing operations in terms of customers,
salespersons, Products, territories, or marketing activities. Cost
accounting is typically used for this purpose.
A. Classification of Marketing Cost

Classification of marketing cost according to functions or

activities:
a. Selling
b. Advertising
c. Warehousing
d. Packing & Shipping
e. Credit & Collection
f. General Accounting (for Marketing)
B. Marketing Cost Allocation

Some of the basis for allocating marketing expenses are:

Function Cost Allocation Basis

Commission Sale of product by salesperson

Advertising Quantity of product units sold

Warehousing Size or weight

Packing & Shipping Number of shipping units

Credit & Collection Number of customer orders

General Accounting Transactions

C. Marketing Profitability Analysis

Under this, cost is analyzed and profitability of each territory,

customer, product and sales person is determined.

a. Analysis by Territories

Expenses assigned directly to a territory include:

(i) salespersons’ salaries, (ii) commissions, (iii) travelling
expenses, (iv) transportation cost, (v) packing & shipping cost,
and (vi) advertising
Expenses that must be prorated to the territory include:
(i) General management, (ii) general sales manager, (iii) credit
& Collection, and (iv) general accounting.
b. Analysis by Customers

Customers are grouped according to certain characteristics to

make the analysis meaningful. The grouping may be by:
(i) amount of average order (10, 20, 30, etc.), (ii) customer
volume (High or low), and (iv) kind of customer.

c. Analysis by Product

Products sold can be grouped according to product line or

brand.
d. Analysis by Salesperson

Selling function includes cost such as salaries, commission,

travel and other expenses connected with the work of sales
representatives.
For control of cost and analysis of profitability of sales made by
salespersons, the standard costs and performance standards
should be established.
Students please consult Exercise Number 1 of Chapter Number
23 ‘Marketing Cost and Profitability Analysis’ of your book.
Solution

The King Air Freshener Company

Marketing Cost Analysis
For the Year 19…
Territory
Waco Dallas Total
Sales Salaries $30,400 $45,600 $76,000
Salespersons’ expenses 6,000 10,200 16,200
Advertising 4,000 20,000 24,000
Delivery expenses 9,450 15,750 25,200
Credit investigation expenses 2,800 4,000 6,800
Collection expenses 2,850 8,550 11,400
Total $55,500 $104,100 $159,600