Segmental, Productivity & Ratio Analysis

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SEGMENTAL , PRODUCTIVITY & RATIO ANALYSIS

Learning Objectives :

1) Understand how cost analysis can be applied to market segments 2) Appreciate role of marketing experimentation in improving the allocation of marketing effort 3) Recognize the value of segmental productivity analysis 4) Critically perceive how ratio analysis can be used to understand the current position 5) Appreciate the relevance of strategic benchmarking

How are resources utilized and with what returns needs to be understood by all companies – “Where are we now ?”

For doing this consider the company as a bundle of projects or activities , for example

▪ Reformulation and relaunch of product X
▪ Continued market service Y
▪ Successful development and launch of project Z

Projects and activities can be further defined in terms of missions and this mix of projects and missions will be constantly changing with resource implications and profit consequences.

Which to add and which to delete ? Ration available resources among competing activities. Establish the cost of each activity of the company to start with.

Cost Categories need to be defined. Traditional focus puts product costing as the centre of costing systems. This could impede the ability to recognize the patterns of consumer preference and competitive positioning by market segment.

Attributes of market segments are different from attributes of production processes – Direct costs are traceable to Labor, Material, and salary but Indirect Costs cannot be directly traced to cost objects. The assigning of a ‘fair share’ of indirect costs, along with direct costs, is the heart of Absorption Costing (Full Costing). Deciding the full cost of a cost object in every company is thus worked out by adding an allowance usually on hourly rate for use of all indirect factors (power, equipment, rent, insurance, salaries of reception/supervisory/staff etc.)

MARKETING COST ANALYSIS

Most companies do not know what part of their total marketing outlay is spent on each product, sales territory , or customer group is because they do not have a refined system of cost analysis.

Vagueness of costs like packaging – is it a promotional, production, or a distribution expense ?

Need exists for planning and control techniques to indicate levels of performance required and achieved, as well as outcome of shifting marketing efforts from one segment to another.

Cost Data could be inaccurate for some of the following reasons :-

• Marketing costs on products, territories being allocated on the basis of sales value or sales volume instead of causal factors like order-getting marketing expenditure thus missing out on the concept of opportunity cost of alternatives • Indirect and administrative costs are arbitrarily allocated to segments on the basis of sales volume • Some costs are not identified clearly

Marketing Cost Analysis overcomes these problems and aims to

❖ Analyze costs incurred in order-getting and order-filling aspects so that overall profits can be determined after combining with product cost data ❖ Determine Profit by product line
❖ Costs involved in serving different classes of customers, territories and other segments to find the relative profit performance ❖ Compute figures like cost per sales call, cost per order, cost to acquire new customer, cost of holding inventory for a year etc. ❖ Evaluate managers as per their actual controllable cost responsibilities ❖ Evaluate alternate strategies or plans with full cost

Marketing segments may be one or a combination of the following

▪ Product line or range
▪ Channel of distribution
▪ Sales representative or territory
▪ Customer or Industry group
▪ Size of order

When selecting the segment of interest, the approach to costing should be selected from alternatives such as (a) Absorption (Full ) costing (b) Variable (...
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