Exercise

This has been defined as the study and evaluation of the relative profitability or costs of different marketing operations in terms of customers marketing units, commodities, territories or services.

As you read earlier in the lesson physical distribution cost in the third largest component in the total cost of business operations. Hence there is good scope for cost reduction in this area as it has not received the attention due to it till recent years.

One feature of distribution costs distinguishing them from other functional costs is that they have to be looked upon as a unit. Indiscriminate cost reduction in any one of the individual cost elements, such as inventory maintenance, warehousing, transportation or clerical services, can have a disastrous effect on the efficiency of the system as a whole e.g., if we cut inventories it will save capital investment and the costs of supplying capital and it may save some expenses in storage, taxes and insurance. On the other hand a cut in inventory levels may seriously affect reliability of the delivery service to customers. As Mr. John F Magee puts it, it saves money but destroys competitive position.

Similarly a cut in transportation costs will result in lack of flexibility and responsiveness to market changes more inventories at more stock points will need more investment and will increase the risk of obsolescence.

Again refusal to allow any cost increase may be equal damaging. It may mean wiping out an opportunity for improving the efficiency of the distribution system as a whole. The use of high speed data processing and communications may increase the cost of distribution. But they will cut down the delays in feeding information back to production and control the lags in the movement of materials into the distribution system in response to customer demand. Thus they may actually cut total distribution costs.

Distribution Costs

The following is meant to be a tentative list of various costs of distribution. They are not exhaustive.

1. Costs of transportation by common carrier, contract carrier or firms own transport equipment.

2. Warehousing costs in public or private facilities

3. Order handling costs

4. Packing costs

5. Inventory costs of

a) Insurance

b) Taxes

c) Handling

d) Obsolescence

e) Capital invested

Ever since marketing managers began to express concern for the distribution function the total cost approach borrowed from logistics and operations research, many firms have achieved tremendous improvement in their performance and profitability.

Even before we can analyze the distribution costs by evolving proper criteria we face a major difficulty. Many concerns do not collect these costs under the separate heading of distribution costs. In actual practice these costs are lost in unlikely cost centers or manipulated to satisfy departmental or individual requirement. In other worth managements, as a matter of policy may not identify distribution costs. In a recent investigation into distribution cost in the U.K. the finding was that most firms contracted were unable to produce a composite breakdown of their distribution costs. In the final analysis the identified distribution costs varied from 3% to 42% of sales.

In some industries especially perishable goods and fashion goods industries distribution costs are critical and may represent the major trading cost.

Major Stumbling blocks is distribution cost analysis

1. Problems is the attempt to break down total distribution costs into specific components of cost.

2. Difficulties in apportioning these costs to different cost centers of cost units. The common bases adopted are product groups, market segments, geographic location, etc or a combination of these.

3. Problems in the measurement of actual cost associated with a particular distribution activity and in the estimation of future cost in the light of a distribution changing environment.

It is generally agreed that the functions of production or manufacturing have been terminated when a product has been placed in a saleable state and that the distribution function has begun.

Distribution costs can broadly classified and accounted for it terms of sales departments, territories, salesmen, lines of products, sales and production orders and customers, or a combination of these.

To provide adequate detail the accounting system provides the following records

1. Controlling accounts in the general Ledger to reflect the total cost of sales division and administrative division.

2. A subsidiary ledger supporting each of the divisional controlling accounts or recording the objects of selling and administrative expenses such as salaries, supplies, taxes, insurance, deprecation etc.

3. Proper procedure for allocating the items of distribution costs among territories products salesman or other desired breakdowns.

4. Budgets and standards for distribution costs.

The Objectives of the accounting system described above are as follows

1. Classification and accounting for distribution costs by channels of distribution, departments, territories, salesman, orders, lines of products and customers comparative statements being submitted to management periodically.

2. Preparation and user of standards for distribution functions to control costs by delegating responsibility, establishing measures of efficiency providing incentives to personnel and supplying predetermined costs as an aid in budget preparation and formulation of pricing policies.

3. Analysis of distribution costs as a guide to management in making current business decisions and setting future policies.