Planning And Control Of Marketing Expenses

Introduction

The planning and control of sales are discussed in the preceding chapter. But the relationship between sales and the effort (the marketing effort) to achieve the sales plan is so close, that it is practical to now review the planning and control of marketing expenses.

Definition

In a broad sense, marketing expenses may be defined as the costs relative to all activities from the time goods are produced or from the time of purchase in a nonmanufacturing company until the products reach the customer the cost of marketing or selling. This would include the applicable portion of all costs, including general, administrative, and financial expenses. For our purposes here, however, the discussion is limited to those expenses, exclusive of general, administrative, and financial expenses, that are normally under the control of the marketing or sales executive. They may include, but are not limited to, the following general classification :

-	Direct selling expense. All the direct expense of order-getting costs, including direct expenses of salespersons, sales management and supervision, branch sales offices, and sales service (the expenses generally incident to the solicitation of orders).
-	Advertising and sales promotion expense. All media advertising expenditures, expenses relating to various types of sales promotions, market development, and publicity.
-	Transportation expense. All transportation charges on outbound goods to customers and returned sales and costs of managing and maintaining the operation of outbound transportation facilities.
-	Warehousing and storage expense. Includes all costs of warehousing, storing, inventory handling, order-filling, packaging, and preparation for shipment
-	Market research expense. The expenses of the various project studies, including the expenses of administering the department activity, undertaken to test or obtain information on the various products, markets, channels of distribution, or other distribution segments.
-	General distribution expense. All other expenses related to distribution functions under sales management that are not included in the foregoing items. They may include general sales management expenses, recruitment and training, and staff functions such as accounting, if applicable

Significance

The costs of getting the manufactured products to the customer, consumer, or user have become increasingly more significant in recent years. In fact, for many companies the total costs of distribution of the products are in excess of the production or procurement costs. In general, it may be stated that the manufacturing costs have been decreasing, whereas the costs of selling and distributing the product have been increasing. To some degree, the increase in selling expense that results in increased sales volume has enabled companies to achieve greater efficiency in the manufacturing process.

In most companies, more effort has been directed toward analysis and control of production costs, and the costs of marketing have either not been available in usable form or not communicated to responsible marketing management for decision making. Executives responsible for the selling and distribution of the products must be made aware of the cost components to effectively plan and carry out a proper distribution system effort. The controller must develop the control mechanisms, secure the facts and interpret them, and communicate the information to the marketing executives. To be effective, the marketing executive must understand the accounting control information and use it in developing his marketing plans and resolving any problems that may develop. The increasing costs of marketing can be effectively controlled and even reduced if the controller works with the sales and marketing management to develop the necessary control techniques and thus obviously have a positive impact on the bottom line net profit.

Factors Increasing The Difficulty Of Cost Control

Any controller who tackles the matter of marketing expenses control will find that the problems usually are much more complex than those relating to production costs. First, the psychological factors require more consideration. In selling, the attitude of the buyer as well as the salesman is variable, and competitive reaction cannot be overlooked. This is in sharp contrast to production where the worker is generally the only human element. Moreover, in marketing activities the methods are more flexible and more numerous than in production, and several agencies or channels of distribution may be used. Such conditions make the activities more difficult to standardize than production activities. Also, the constant changes or switches in method of sale or channel of distribution are factors that make it harder to secure basic information. Even when the information is secured, great care must be used in interpretation. Finally, the nature of the activities requires different types of costs than might be needed in production. Where the indirect or allocated costs are significant, the analyses may require a more relative marginal or incremental cost approach under various circumstances. Such conditions create problems that may test the ingenuity of the controller.

Sales Manager And Marketing Expenses

The sales manager is responsible for two primary functions in a business: (1) the requisite sales volume of the right products, and (2) the planning and control of marketing expenses. These may seem like two diametrically opposed objectives. However, the situation may be described as a problem of balance: If more money is spent for the distribution effort, what does the business receive in return? Usually, the sales manager will be under continuous pressure to increase sales and yet reduce selling expenses. It is obvious, then, that the sales manager must be in a position to know whether marketing expenses really are too high, and if they are too high, just where what salesperson? what territory? what expense? The sales effort must be wisely guided, and if this is to be done the controller must provide the necessary financial facts. The sales manager must have an intelligent analysis of distribution costs as a basis on which to work. Marketing decisions must be based on adequate knowledge.

Basic Approach In The Planning And Control Of Marketing Expenses

The many variables already mentioned in connection with marketing costs should make it fairly obvious that the problem of control is complex and difficult. In production cost control, a usual procedure is to compare actual and standard or budgeted expenses and exert continuous pressure on actual expenses until they are brought in line with the standard or budget. To an extent this can be done with respect to marketing costs, particularly those of a routine, repetitive, and nonselling nature, such as order handling or warehousing. But by and large, a more positive approach is necessary to avoid an injurious curtailment of necessary distribution services. That approach consists in securing the greatest possible effectiveness in the selling or marketing operations.

As a matter of experience, any controller will find many occasions when suggestions that selling costs be reduced will arouse resentment on the part of the sales force. But almost any sales manager will listen when the approach is that of getting more distribution effort and results for the same money. Unit selling costs can be effectively reduced by getting greater volume from the same sales force, whether by securing larger orders, more customers, or otherwise. This does not obviate the fact that there will be many instances where costs must and will be reduced, but it does emphasize the consideration necessary about the effect on sales volume of reduced marketing expenses.

Since emphasis in the marketing operations is in large measure directed to securing more effective results (more earnings per dollar of distribution cost) it can be seen that much of the study and effort will be applied in a preventive way. Comparative margins and distribution costs may be used in setting future action, in changing plans to secure improved results.

Marketing Expense Analysis

Marketing costs are analyzed for three primary purposes :

1.	Cost determination
2.	Cost control
3.	Planning and direction of the selling and distribution effort

 

Perhaps the least important of these is cost determination. Yet costs must be ascertained to establish selling prices, formulate distribution policies, and prepare various operating statements. However, the most important purpose is to supply the marketing executives with the necessary information in the planning, direction, and control of the marketing effort. Sales

plans must be developed on the basis of those programs or projects that seem to offer a reasonable return. The sales effort must be directed along the most profitable channels, and inefficiencies eliminated. The what, when, and where questions of sales direction must be answered. An analysis of marketing expenses will not provide all the answers to all the sales manager’s problems, but it can play an important part in making decisions. Therefore, since marketing cost analysis is useful in the early stages of both the planning and control of costs, it seems logical to review this function before proceeding to the detailed planning and control procedures.

Types of Analyses

There are three basic methods of analyzing marketing expenses :

 

1.	By nature of the expense or object of expenditure
2.	By functions or functional operations performed
3.	By the manner of application of the distribution effort

The effective direction and control of sales effort usually require all these various types of analyses if the sales manager is to be furnished with the necessary information.

Analysis by Nature of Expense 

Generally, the ledger accounts in even the smallest companies provide for a recording of marketing expenses by nature of expense or object of expenditure. For example, salaries, payroll taxes, supplies, rent, traveling expense, and advertising space are usually set out in separate accounts. This is often the first, and sometimes the only, analysis made of marketing expenses.

Such an analysis does provide some information for cost control purposes, general though it may be. With the type of expense segregated month by month, it is possible to follow trends and compare the expense with the previous month and with the same month last year. The ratio of the expense to net sales can also be determined. But a comparison with other periods serves to perpetuate inefficiency, and weaknesses will be revealed only in extreme instances.

It should be clear that an analysis by nature of the expense is of limited value. The cost of Marketing generally is known. Yet the controller cannot tell the sales manager the traveling expense is too high or that too much is being spent on advertising. It must be known whose selling expenses are too high and how it is known they are too high. The points of high cost must be clearly defined and responsibility placed, and possibly even the solution suggested. The controller cannot expect cooperation from the sales manager or chief executive on the basis of generalities. The excess cost of specific operations or the excess cost of securing particular results must be set out if an intelligent effort is to be made in reducing the cost or improving the effectiveness of the effort.

The limitation of analysis by the nature of the expense, from a control standpoint, is obvious. And since the information provided is very general, it serves little useful purpose for the direction of the sales effort.

Analysis by Functional Operations

An analysis that has been found useful, particularly for the control of marketing expenses, is that by functions or functional operations. It is of assistance in measuring the performance by individual responsibility, especially in those applications where the organization is complex or large.

Planning and Control of Marketing Expenses

The approach is substantially similar to that used in analyzing production costs and may be outlined as : 

1.	Establish the functional operations to be measured, taking care to see that the functions are properly segregated in terms of individual responsibility. Some illustrative functional operations are :
	a.	Salesperson’s calls on prospects or customers
	b.	Shipments from warehouse
	c.	Circular mailing
2.	Provide for a cost segregation of these functions. In this connection the classification should provide for those costs that are direct in regard to the function. For cost determination, perhaps cost allocations should be made. Generally, however, for cost control, emphasis must be on the direct expenses only. Thus in a small branch warehouse such expenses as the indirect labor, supervisory salaries, and fuel should be known, but these costs should be distinct from the allocated share of the regional sales office expense.
3.	Establish units of measurement of functional service to the extent practicable. For example, the pounds of shipments might be the measure of the shipping expense, or the number of salesperson’s calls might serve as one measurement of direct field selling expense.
4.	Calculate a unit cost of operation by dividing the total controllable functional cost by the number of units.
5.	Take corrective action if out-of-line conditions appear. This situation may become more readily apparent if standards are established and actual performance is measured against them.

It will be appreciated that this method cannot be applied to all marketing costs, but it may extend to a considerable portion. The functional approach is useful in control and also in analysis by manner of application. For example, if an analysis is being made by territories, it is necessary to record the number of functional units of the particular activity used in that territory and then simply multiply this number by the unit cost to arrive at a fair cost of the function for each territory. A specific application of the functional analysis in controlling costs is discussed in the “Marketing Expense Standards” Section.

Analysis by Manner of Application

It is one thing to have an efficient organization from the standpoint of performance of the individual functions and quite another thing to see that the performance is so directed and coordinated that it is productive of the most fruitful results. For example, the controller might well show the sales manager that the cost per call is very reasonable or that the cost per hundredweight of handling material in the New York warehouse is below standard. Yet the controller must go much further in his analysis. It is as important, perhaps even more important, that the controller provide information about income or results achieved in relation

to the effort or cost expended. Sales effort must relate to sales possibilities, and these factors must be brought into proper balance. Analysis by manner of application is primarily for the purpose of providing information in the direction of sales effort. The income from a particular factor is being measured against the cost applied against that factor. This type of analysis indicates the distribution cost of different territories, products, customers, channels of distribution, methods of sale, or salespeople. Depending on the problem, the controller must counsel with the sales manager and decide which ones are most useful. These analyses probably will extend to various subanalyses. For example, the breakdown of territorial costs among different products distributed or expected to be distributed might be necessary.

In making any analysis by manner of application, an important consideration is the proper segregation of costs. The value of the cost study will depend in large part on this factor. For this type of analysis, marketing expenses may be divided into three main groups: direct costs, semidirect costs, and indirect costs. As the name implies, direct costs are those immediately identified with a segment and need no allocation. For example, in an analysis by salesperson, the field expense of salary, traveling expense, and entertainment incurred by that salesperson is direct. However, in an analysis by product these expenses might be semidirect or indirect. Expenses that are direct in one application are usually not in another. Ordinarily, the classification of accounts is such that one application is direct for many of the expenses.

Semidirect costs are those related in some measurable way with the particular segments under study. The variability factor responsible for the amount of the expense is known and recorded quantitatively, and the costs may be distributed in accordance with the service required. Thus, the cost factor of the warehousing function might be pounds handled. The order-handling costs might relate to the number of item lines. Stated in other terms, the basis of allocation is less arbitrary than a basis selected at random, such as net sales; and the cost results are therefore of more significance. This might be said to be the distinction between the semidirect costs and those other common or joint costs here designated as indirect.

Indirect expenses are a general charge against the business and must be allocated on a more or less arbitrary basis. No simple measure is available to identify the expense with one territory or product, as distinguished from any other. In practice this may be found to be due as much to records kept as to the nature of the expense. Common examples are institutional advertising or the salaries of general sales executives. There perhaps is little relationship between institutional advertising and the sales in the Western territory as contrasted with the Middle Atlantic territory. There might be little relationship between the costs of general sales administration and sales of product X as compared with product Y. Where it is practical for the general sales executive to keep a time record, the allocation of the expense may be less arbitrary and of more significance.

For marketing expense analysis, as for any intelligent analysis, the type of costs most suitable will depend on the purpose of the study. For long-term decisions, total costs should be known; hence allocated costs need to be identified. If, however, decisions are of limited scope and for a short period, such as the sale to a private brand customer for the next year, then perhaps only direct expenses ought to be considered. The advisability of making arbitrary allocations of indirect costs may be questioned. It is most important, however, that those who use the figures are knowledgeable about limitations.

Contribution Margin Approach 

In making a choice between alternative business decisions, usually some costs are unaffected regardless of the conclusions reached. For this reason, among others, it has been found practical to isolate and identify those costs that do change to the exclusion of those costs that do not. The contribution margin approach adopts this concept, although such a segregation may be made in a total cost study as well.

The “contribution margin” is calculated by deducting from sales income those costs incurred in obtaining that segment of the sales income being analyzed. It may be the sales and costs of a given territory or product or customer and need not relate to the company’s entire sales of the period. These costs may be described as costs that would not be incurred if the segment being reported on were not present. Such costs are sometimes known also as “variable costs” or as “direct costs.” As costs are defined in the preceding section, the costs deducted would include all direct costs, plus, in some instances, the semidirect costs. The inclusion of the latter would depend on the extent to which some of the content is fixed or continuing in nature. As an example, if the bulk of warehousing expense is variable, the period expense content, such as the foreman’s salary, might be ignored. In such a case, the entire semidirect costs for the warehousing function might be included. (As a practical matter, the authors assume in all illustrations of semidirect costs that such costs relate basically to an activity factor and would be reduced generally in proportion to volume.)

The costs and expenses not deducted from sales income in computing contribution margins are those not changed in the total amount by the decision under review. The contribution margin, therefore, is the contribution that the activity under question makes toward meeting the fixed or continuing expenses and profit. The use of such an approach does not ignore the period costs. Rather it recognizes that the separation of the common expenses in relation to the business decision at hand serves little useful purpose and emphasis should be placed on the “contribution” or provision made by the segment toward the joint expenses and profit.

Technique of Analysis by Manner of Application 

There has been sufficient experience with marketing expense analysis by manner of application to prove the value of the technique. Although the degree of refinement may vary in different companies, the general approach may be outlined as :

1.	Determine which analysis (or analyses) needs to be made. Determine which might be required in a particular application, such as an analysis by method of delivery Again, some may be recurring and others may be made only as weaknesses are indicated.
2.	Classify marketing expense according to those that are direct, semidirect, and indirect.
3.	Select and apply the allocation bases to the semidirect and indirect expenses. This includes a segregation and proper treatment of variable, as contrasted with fixed, costs where such a segregation is a factor.
4.	Prepare the analysis and commentary for the use of the proper executive. This will involve the following steps in arriving at significant cost and profit relationships:
	a.	Determine the gross profit by segment (e.g., territory, product, size of order).
	b.	Accumulate the direct expense by segment, and deduct this from gross profit to arrive at profit after direct expense.
	c.	Distribute the semidirect expenses, and deduct these to arrive at profit after semidirect expense.
	d.	Prorate the indirect expense to arrive at the final net profit (in some instances steps c and d will be combined).
	e.	Prepare the necessary subanalyses to pinpoint the conditions needing correction.

These comments should indicate the principles and technique involved so that any controller can proceed to prepare the facts necessary in his particular situation. Comments on the need and use of certain analyses by manner of application are made hereafter.

Analysis by Territory 

A territory may be defined, for this purpose, as any geographical area, whether city, trading area, county, state, or sales district, used by a company for sales planning, direction, or analysis. Where, or in which territory, goods are sold has a great effect on the net profit. There are striking variations between territories in terms of sales potentials, net profit, and gross margins. If goods are sold free on board (F.O.B.) a central point and at the same price, the gross profit, of course, is unchanged. But if the product is sold on a delivered price basis, the gross margin is different because of transportation charges. In different areas the consumers' wants and needs are different, and this factor affects the total gross margins. Even aside from these considerations, experience has shown that the costs to sell and distribute are different in different territories. The cost to sell in densely populated New York is much different from the cost to sell in Western Texas. Because of all these dissimilar conditions, executives must have an analysis of distribution costs by territory. Such information permits the sales manager to rearrange sales effort where necessary and direct sales effort into the most profitable areas. Control of marketing costs is facilitated through this same analysis, perhaps with the aid of cost standards. Sales planning, of course, with respect to new territories and new markets is affected by distribution cost considerations.

Not every concern will find analysis by territory necessary. Such an analysis applies largely in those instances where a large geographical area is covered. Thus a manufacturer covering a national market would greatly benefit from such an analysis, whereas a retail store probably would not. Exactly what type of territorial analysis needs to be made depends on the problem and type of organization. If a territorial sales executive is largely responsible for costs and results, a complete analysis by this responsibility area is desirable. Or if the problem is one of costs to sell in small towns versus cities, such a segregation is to be made.

Once the points of weakness are discovered through analysis, corrective action needs to be taken. Some of the possibilities for such are: 

-	Reorganization of territories to permit effort more nearly in line with potentials
-	Rearrangement of territorial boundaries to reduce selling expense, secure better coverage, and so forth
-	Shifting of salespersons
-	Increased emphasis on neglected lines or customers in territory
-	Change in method of sale or channel of distribution (shift from salesperson to agent, etc.)
-	Changes in physical facilities (warehouses, etc.) in territory
-	Elimination of unprofitable territories (potentials of area and out-of-pocket costs vs. allocated costs considered)
-	Change in advertising policy or expenditure in territory

Analysis by Product

In our dynamic and competitive economy, the design or style or type of product a firm sells may change constantly. The tremendous strides of research, among other factors, are repeatedly bringing new products into the market. Hence, every company is sooner or later faced with the problem of what products it should sell. Will the firm sell the best or the cheapest line? Will it promote the use of a new plastic? Should it introduce a silent airplane motor? The answer to questions like these are twofold. First, through market analysis a determination must be made about what the consumers want and what price they will pay. Then, through cost analysis it must be determined whether the company can make and sell the article at a profit. Therefore, an analysis by products is desirable.

Many firms, in their urge to increase sales volume to better utilize facilities and personnel, often add new products to the line. Sometimes these new products “fit” into the line and permit certain economies. Often, however, the different products require services in varying degree. For this reason, too, an analysis by product is necessary to determine the cost to sell, as well as the net profit.

Generally speaking, sales effort should be directed toward those products with the greatest net profit possibilities, and cost analysis is necessary to know just which products these are. This is not to say that a company should drop a low-margin item; it may be contributing more than out-of-pocket costs, or it may be necessary for customer convenience. Furthermore, there may be little possibility of selling a high-margin item to a customer. For example, there may be no chance of selling to a paint manufacturer any quantity of a high-profit glue instead of a low-margin paint vehicle. There are more factors than merely cost considerations in selling. But such conditions must be watched and held within reasonable limits. Marketing expense analyses by commodity, then, are of use in the direction of the sales effort.

Many controllers may find, in making product cost analyses, that the net profit on an entire line of products is not great enough or even that losses are being sustained. When such conditions are revealed, steps are usually taken to increase that margin because the firm may not be in a position to drop an entire line. This is but another way of saying that analysis is a means of controlling costs, because the manufacturing costs or marketing costs may be too high.

Finally, product cost analyses are helpful in setting selling prices when the company is in a position to use costs as a major guide. Such analyses are desirable in conjunction with determining maximum price differentials to particular customers.

It is probably self-evident to most controllers or accountants that a product analysis of distribution costs should be made when the characteristics of the commodity or their methods of marketing are such that a uniform basis of allocation is not indicative of the effort or cost to sell. Thus, pounds or units of sale or sales dollars may be a fair measure of selling expense. There are numerous circumstances when such an apportionment is inaccurate or misleading:
-	If there are differences in the time or amount of sales effort required. Thus product A that sells at $0.60 each may require about three times the effort of product V which sells at $0.30 each. Neither sales dollar nor units would be a fair basis. Perhaps one product would require a high degree of technical assistance with frequent callbacks as compared with another. Again, specialty salespeople may merchandise one product, and a general-line salesperson may handle another. All such circumstances result in different costs to sell, and should be so reflected in the analyses.
-	If there are differences in the method of sale. Obviously, if one product is sold exclusively by mail order and another by salespeople, the selling cost cannot be prorated on a sales dollar or unit basis.
-	If there are differences in the method of sale. Obviously, if one product is sold exclusively by mail order and another by salespeople, the selling cost cannot be prorated on a sales dollar or unit basis.
-	If there are differences in the size of the order. When one product is sold in 10 pound lots and another is sold in tank cars, many of the distribution costs can be different.
-	If there are differences in channels of distribution. One product may be sold directly to retailers, whereas another is distributed through wholesalers. Here, also, there is a difference in distribution cost.

The analysis by product ordinarily will reveal areas of weakness about which corrective action can be taken in some degree, such as :
-	Shifting emphasis of the sales effort to more profitable lines or bringing effort in line with sales potential
-	Adjusting sales prices
-	Eliminating certain unprofitable lines, package sizes, colors, and so forth
-	Adding product lines related to the “family,” with consequent sharing of fixed distribution expense
-	Changing the method of sale or channel of distribution
-	Changing the type, amount, and emphasis of advertising
-	Revising packages, design, quality, and the like

Analysis by Customer 

It is no secret that many manufacturers or distributors carry unprofitable accounts or customers. Such a condition may result from a philosophy of “get the volume,” or from insufficient effort to do something about the status quo, or probably because the sales executive just does not have sufficient knowledge about marketing costs.

Yet it costs more to sell to some types of customers than to others and more to one customer within a type than another. Some customers require more services than others, such as warehousing, delivery, or financing. Some customers insist on different prices, particularly where different size orders or annual purchases are factors. Again, the types of products sold to some classes differ from others. All these are reasons why analyses by customers are necessary to measure the difference in net profit. Aside from use in the direction of sales effort, these analyses serve in setting prices and controlling distribution costs.

In most firms, the analyses by customers will not be continuous. Perhaps the sales manager will be interested in whether money is being made on a particular account, or changes may be contemplated only on certain groups of accounts. On these occasions special analyses can be made.

Although analyses may be made by individual customers, particularly when there are a few high volume accounts, by and large the analyses will relate to certain groups or categories. The two basic factors in selecting the classification to be used are the amount of marketing services required, for this is the primary reason for differences in marketing costs, and the practicability of segregating the marketing costs. Classifications that have proved useful are :
-	Amount of annual purchases
-	Size of orders
-	Location
-	Frequency of salespersons' calls
-	Type of agent (retailer, wholesaler, or jobber)
-	Credit rating of customers

Although analyses may be made by individual customers, particularly when there are a few high volume accounts, by and large the analyses will relate to certain groups or categories. The two basic factors in selecting the classification to be used are the amount of marketing services required, for this is the primary reason for differences in marketing costs, and the practicability of segregating the marketing costs. Classifications that have proved useful are :
-	Amount of annual purchases
-	Size of orders
-	Location
-	Frequency of salespersons' calls
-	Type of agent (retailer, wholesaler, or jobber)
-	Credit rating of customers

In making an analysis by classification of customer, one approach is to segregate all customers in the applicable group and determine total costs for each group. This may often be time consuming. Another method involves a sampling procedure, wherein representative customers in each category are selected and the cost of servicing them is determined. A modification of this approach is to make a thoroughly detailed analysis in some areas and a sample run in other areas.

It will be appreciated that relatively few marketing expense items can be charged directly to customers and that allocations must be made. Statistical data from various reports will be found necessary, namely, the number of calls made to customers or customer classes and the time spent with customers or the number of orders.

An analysis by customers will provide information of great value to the sales manager. It will give a clear view of the number of accounts in various volume brackets and the average value of orders. In using this information for corrective action, consideration must be given to potential volume and the absorption of fixed production costs. But it will furnish facts for executive discussion regarding :
-	Discontinuance of certain customer groups
-	Price adjustments
-	The need for higher margin for certain groups
-	Change in method of sale

Analysis by Size of Order

Another analysis that may be made advantageously in many business concerns is that by size of orders. It has been recognized for some time that one of the causes of both high marketing

expense and unprofitable sales is the small order—generally not because it is small in itself but because the prices are not high enough to cover the costs and leave a profit. There are many instances where small orders cannot be discontinued. But again, the problem can be solved. Corrective action can be taken; it can be brought under control. Obviously, the first step a controller must take is to get the facts through an analysis of marketing costs by size of order.

The problem is naturally more important in some concerns than in others, particularly where the order handling costs are relatively large or fixed.

By and large, the procedure for analyzing marketing expense by size of order is similar to that for other analyses. It involves segregating costs by factor of variability and applying the factors. In this case, certain costs will be recognized as fixed for all sizes or orders, others will vary with the money volume, and still others will vary with physical volume. By way of general suggestion, the steps to be followed might be :
1.	Determine the size of the order groups to be studied (e.g., below $25, $25 to $50).
2.	Classify the costs according to (a) those that vary with the size of the order (e.g., packing); (b) those uniform for orders of all sizes (e.g., accounts receivable bookkeeping); and (c) those that must be considered as general overhead with no direct relation to orders (e.g., certain advertising and supervision costs).
3.	Identify the factors that appear to govern the amount of the variable expense (expense that varies with the size of the order) applicable to orders of different sizes (e.g., dollar value, weight, or handling time).
4.	Apply the factors of variability to the variable expenses and add the uniform costs, thereby arriving at a direct cost of orders by sizes.
5.	Apply the overhead costs by some suitable factor, such as hundredweight or dollar value, to arrive at the total order cost.

Other Analyses

There are other analyses that may prove useful in a particular concern, for example :
-	By channel of distribution. Useful where a choice in channel of distribution may be made in order to direct sales into the most profitable channel. The analysis needs to be made from time to time as cost trends change.
-	By method of sale. The same comments are applicable as in the case of analysis by channels of distribution.
-	By salesperson. For the purpose of measuring the salesperson's performance in terms of profit and to better direct salespeople in their activity.
-	By organization or operating division. Useful where there are separate and distinct selling divisions. Such an analysis is used to measure performance of the divisional executive. Examples are analyses by departments in a department store, by stores in a retail chain store company, or by branches in a manufacturing organization.

Using Mathematical Techniques

The analyses indicated herein are only illustrative. The many variables and alternatives in the distribution or marketing function can indeed make the task of analyzing seem overwhelming. Problems to be solved include warehouse locations, transportation routes, most economical shipment patterns, and a host of others. To perform the needed review, and to effect economies in these functions, use of mathematical formulas or “models” in conjunction with a personal computer can be most helpful. By using mathematical symbolization and techniques, the many relationships and quantities can be expressed and dealt with.

Interpreting the Results of Analysis

It has already been stated that the primary purpose of distribution cost analysis is to supply the marketing executives with the necessary information for the planning, direction, and control of marketing effort. The preceding section has suggested the technique and purpose or use of various analyses. It is clear, however, that these methods and studies will be varied as the controller finds necessary.

The controller must be alert to the pitfalls or limitations of any figures prepared. Perhaps the problem will be attacked from several sides. In some cases only the variable marketing expenses (or even production costs) will be used, whereas in others both the fixed and variable will be included. Again, in making recommendations based on the marketing expense analysis, the decisions reached must consider every possible effect on every activity of the business. For example, the conclusion that a certain territory must be dropped must consider the net effect on profit the change in factory volume with the same fixed expense and resulting differences in unit costs

Planning Marketing Expenses

Just as sales must be planned in attempting to reach the annual profit objective, so also must marketing expenses. It is usually the task of the controller or the budget director to develop the procedures for estimating the expense levels, and to provide the proper format and supporting data so that the chief marketing executive can furnish the financial data for consolidating the annual business plan.

But marketing costs differ in nature especially as to how the costs vary, or should vary, with volume and how they are best planned and controlled. Depending on industry practice and company experience, budgetary control of distribution costs may be achieved through one of these types of budgets :

-	Administrative
-	Project
-	Volume variable
-	Competitive service

Administrative Type Budget

Probably the most commonly used budget for planning and controlling marketing expenses is what is described here as an “administrative type” budget. The circumstances when this kind of planning and control device is most applicable include :

-	The expense level is not, and should not be, influenced by the day-to-day variations in the sales level. To be sure, expenses must bear a certain relationship to sales, but this is accomplished over a longer time span, say from year to year.
-	The output is not necessarily or easily quantified over very short periods, but rather over months if then. Moreover, often the function is subjective in nature and relates to planning and controlling sales or to some other distribution effort.
-	The number of routine and recurring functions is limited.
-	Most of the expense is in the form of “people costs,” represented largely by the expense of salaries, fringe benefits, occupancy, and travel and entertainment.
-	The function is such that it cannot be planned and controlled on a project or program basis (as discussed in the next section).

Project Type Budget

Probably the second most widely used budget in the planning and control of marketing expenses is the project type. This is so designated because many of the cost elements are best planned on a project basis; that is, certain tasks or programs or projects are planned, then executed, and then the results are measured sometime in the future. The level of planned expense is not directly related to the immediate sales, but rather future sales over perhaps a year or two. The project is completed and the expense largely stops until another project is undertaken. The expense level bears a necessary relationship to sales, but only indirectly and over a period of time. Emphasis is on getting a certain task done within a certain time and within cost constraints. Typical activities handled largely on a project basis are advertising and sales promotion expense or market research.

 

The budgetary procedure for a project type budget is essentially :
1.	The marketing executives agree or decide what projects of a given departmental type are necessary to attain the planned sales objective or are otherwise desirable
2.	The department manager (e.g., advertising or market research) estimates the cost for each project by type of expense, if applicable—usually in a format suggested by the controller. In some instances, budget limits are set based on estimated unit sales, or as related to prior year expenses (e.g., advertising).
3.	The various projects are summarized and included in the departmental budget for the planning period. (See Exhibit 3.8.)

      

4.	After appropriate review and change, if necessary, the budget is approved as part of the annual plan. (In many companies the advertising budget is approved by the board of directors as a special budget.)
5.	Periodically, perhaps monthly, the actual expenses and commitments are updated and compared with the project budget and corrective action taken if necessary or possible. (See Exhibit 3.9.)