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8/18/2019 6 Distribution Costs, Control and Customer Service
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Distribution Costs,
Control
and Customer
Service
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IntroductionSelling and distribution costs, no doubt, broadly represent marketing cost. Selling
costs seek to create and stimulate demand, secure orders and retain customers.
Distribution costs cover the sequence of operations from where the packed
product is made available for dispatch ending with marketing the reconditioned
returned empty package available for reuse. These could be subdivided into the
following:
1. Transportation such as freight and insurance, operating expenses,
depreciation of delivery vehicles, etc.
2. Warehousing and storage rent, insurance and depreciation of warehouses,loss in warehouse, stock record – keeping costs, etc.
3. Administrative costs such as cost of carrying and buying of supplies,
administration overheads apportioned to distribution costs.
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Need for a Proper Analysis of Distribution CostsThe necessity for a proper classification and analysis of distribution costs
arises due to the following reasons
To determine cost of sales of different jobs and products, and the extent of
profitability of each of them.
To help in fixation of optimum sales level.
To control costs of efforts in different areas of distribution activities, to
determine the profitability of various sales outlets under different conditions
in different markets and by different methods.
To help in guiding marketing policy both in the short and in the long-term.
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Cont….
Allocation of Distribution Costs
Allocation of Selling and Distribution Costs to Products
Functional Cost Group Bases of Allocation
1. Inventory investment charge such as
insurance and taxes
Average inventory value
2. Storage of finished goods handling Floor space occupied
3. Inventory record-keeping Number of invoices made/requisitions/orders
handled
4. Finished goods handling Number of standard units handled
5. acking and shipping Number of standard shipping units! time studies
. "ransportation #eight! number of standard shipping units
!. Sales promotion programmes $irect %here possible! analysis of promotion
". Sales solicitation "ime studies& analysis of sales efforts
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Cont….
#. 'rder entry ( processing of orders and
preparing invoices
Numbers of invoices& number of orders
1$. )illing ( time spent in processing orders and
preparing orders
Number of invoices& number of orders
11. *redit extension ( costs related to numbers
of handled customers! orders processed!
posting! invoices
Not allocated to products
12. Accounts receivable record-keeping+ Not allocated to products+
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Allocation of Selling and Distribution Costs to Custo%ers
Functional Cost Group Bases of Allocation
,+ Inventory investment charges enerally not allocated to customers
.+ Storage of finished goods enerally not allocated to customers
+ Inventory record-keeping enerally not allocated to customers
0+ Finished goods handling Number of invoices& number of orders& standard unitshandled
1+ acking and shipping Number of standard shipping units
2+ "ransportation referably direct& %eight handled
3+ Sales promotion Analysis of promotion programmes
4+ Sales solicitation "ime studies& number of sales calls& analysis of salesefforts
5+ 'rder entry Number of invoices& number of orders
,6+ )illing Number of invoices& number of orders
,,+ *redit extension Average amount outstanding& number of orders
,.+ Accounts receivable record-keeping+ Number of posting& number of invoice+
Source: Crowningshied Gerald R and Gorman, Kenneth A. Cost Accounting: Principles and
Managerial Applications (Boston: Houghton Mifflin Company, 1974), R 486.
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Analysis of Distribution Costs
The analysis of distribution costs can be discussed on the following lines:
Product or products lines
Individual customers or groups of customers
Channels of distribution
Salesmen
Geographical area or territories
Terms of sales
Order sizes.
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Elements of Total Cost in Physical Distribution System Transportation costs Railway Cost
Freight Rate Structure in Road Transport
Cost of Airways
Costing of Seaways
Inventory Costs
Ordering Cost
Cost of Materials
Carrying Cost
Warehouse Costs
Material Costs
Packaging Costs
Customer Service Costs
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Cont….
Control System for Efficiency
Logistics system should function efficiently. Efficiency is the ratio of output
to input. A logistics system requires the following efficiencies:
Operating efficiency
Financial efficiency
Service level efficiency
Marketing efficiency
Personnel efficiency
Organisational efficiency.
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Inputs
7uman 8esources
Financial 8esources
Information
8esources
Process
9anagement Actions
lanning! :xecution&
*ontrol
;endors
8a% materials! In
rocess< Final oods
=ogistics Activities
Inventory! 'rder
processing! #are-housing!
"ransporting!
ackaging!
*ommunication!
8eturns& "racking
Outputs
*onsumer
"ime >tility
lace >tility
:fficient
9ovement
*ompetitive:dge
*onsumer
Satisfaction
&utput of 'ogistic S(ste%
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Cont….
Productivity Aspects and Logistics Management
The following ratios are suggested by the Asian Productivity Organisation
(APO) for physical and financial productivity measures
No. of deliveries on time/year1. Right Delivery Ratio =
Total no. of deliveries/year
Tonne kilometre run/route2. Route Potential Ratio =Tonne kilometre capacity/route
No. of accidents/year3. Accidents Ratio =
No. of trips operated/year
No. of consignments booked/year4. Service Ratio =
No. of consignments planned/year
Vehicle kilometre actually run/day5. Vehicle Utilisation Ratio =
Vehicle kilometre planned/day
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No. of consignments damaged in transit6. Breakages Ratio =Total no. of consignments
Tonne kilometre achieved/year7. Business Efficiency Ratio =
Tonne kilometre planned/day
Total operating expenses8. Operating Express Ratio =
Total earnings
Net profit9. Net Profit Ratio =
Total earnings
No. of prompt deliveries/year10. Promptness Ratio =
Total no. of deliveries/year
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Cont….
Distribution and Customer Satisfaction
In customer services, there are three elements, which are important for themarketer, in decision making.
)le%ents of Custo%er Ser*ice
P+),-+ASAC-/&A')')0)-S
-+ASAC-/&A')')0)-S
P&S-,-+ASAC-/&A')')0)-S
( Statement of policy'rganisation
( #orking 8elations Installation! %arranty
( Staff "raining in handlingcustomers
8epairs!
( System $evelopment Spare parts! customer claimsand complaints
( "echnical services
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Hopkins and Bailey have very precisely described the functions involved in
service after sales. These functions are:
Information service to customer
Warranty administration
Maintenance repair
Preventive inspection
In-warranty repair
Out-of-warranty repair
Repair service centres
Maintenance contract
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