COST CONTROL CONTROL Action taken to achieve a conformity of the actual result with the planned result Presupposes effort direct towards a desired result
PRIMARY COST FACTORY COST TOTAL COST COST OF SALES FOUR STAGES OF COSTING MATERIALS LABOUR OVERHEADS THREE ELEMENTS OF COSTS DIRECT COSTS/PRIME COSTS INDIRECT COSTS/OVERHEADS TWO TYPES OF COSTS PRINCIPLES OF COST DETERMINATION
The Product Approach TESTS FOR ASSESSING DISTRIBUTION EFFICIENCY To ensure that the right product is offered for sale since volume of sales and earnings depend upon a firms distribution expenses besides the salesman’s efficiency The Product-line Approach Products suitable for a line should be sold in the same market and should be distributed through the same channel as this will reduce marketing cost The Channels Approach Choice of right channel to control distribution costs & provide more efficient distribution…. Revamp structure of discounts & commissions. The Engineering Approach Managing distribution activities like, transportation & storage to make available goods at proper places & proper quantities .
The Accounting Approach It involves the classification of a firms distribution expenses, volumes & earnings by salesmens’ territories, salesmen, regions, products. Resulting comparison of expenses, volumes & earnings are helpful in indicating comparative profitability The Operations Research Approach Offers many possibilities of alternatives in minimizing efforts & costs in accomplishing a given end The Economic Approach Is concerned with changing market conditions, sales potential of markets, areas & the application of selling, advertising and other such efforts under conditions of diminishing returns to the point of marginal balance between expenditure income and further to the point of maximum total profit or minimum loss.
The Personnel Approach Aims to study the distribution costs from e personnel perspective since the distribution personnel entail costs on selection, training, compensation to compare their productivity with reference to the costs incurred on them. The Organizational Approach Effective organization is a prime requisite in accomplishing efficient distribution. The organization as a whole should be capable of performing the task of distribution efficiently. The Standardization Approach Distribution comprises a multitude of activities in which the human element looms large and there is likelihood of variation in performance because of lack of standardization. Standardization of various activities may be an important contribution to economical distribution.
The Management Approach This includes and employs all the other approaches It uses these approaches & methods in analyzing the results of its past plans and programmes to decide the appropriate course of action. The management approach to accomplishing new distribution efficiency includes a willingness to venture on new paths with risks minimized by a maximum of knowledge gained by the analysis of past experience, but also by scientifically conducted experiments how improved distribution may be successfully obtained .
Physical Distribution Cost Direct costs Indirect costs Overheads Transportation cost Inventory cost Warehousing cost Material handling cost Cost of capital Cost of transport equipment Cost of material handling equipment Salaries &wages Administrative expenses
PHYSIACAL DISTRIBUTION FUNCTION IN AN ORGANIZATION Locational Analysis Trans- portation Material Handling Ware- housing Packaging Customer Service Order Processing Physical Distribution Inventory Control
Cost Identification All costs associated with performance of a distribution function should in the activity based cost classification. The total cost associated with forecasting, order management, transportation, inventory, warehousing and packaging must be isolated.
COST FORMATING Functional grouping Allocated cost formatting Fixed-variance grouping All expenditures for direct and indirect logistical services in a specified operating time are formatted & reported under sub-accounts classification. Overall logistical expenditure is assigned to a measure of physical performance. This will generate logistical cost per tonne, per unit,per product, etc. Assigning costs either fixed or variable cost to the operating expenditure that results from different volumes of logistical activity.
ACTIVITY BASED COSTING The basic purpose of activity based costing is to give managers a better perspective of total costs associated with the performance of a specific activity .
COMPONENTS OF DISTRIBUTION COSTS Transportation costs Inventory carrying costs Warehousing costs Production or supply costs Channels of distribution costs Communication & Data Processing Cost Material handling costs Packaging costs Customer service Costs
THE TOTAL COST APPROACH TO DISTRIBUTION COST Warehousing Number Type Location Will affect both service & costs Inventory Carrying Insurance Occupancy Pilferage losses Inventory taxes This group cost may range from 10 to 30 per cent of inventory value Inventory Obsolescence Model changes Style changes Perish ability Important cost for companies
Production or supply alternatives The decision on which plant should serve which customers must give weight not only to transportation but also to supply and production cost. Cost concessions Distribution decisions can affect costs otherwise incurred by suppliers and customers. Channels of distribution The choice of distribution channels profoundly affects its physical distribution facilities and the resultant costs. Transportation A significant part of distribution entailing cost on movement of goods which keep changing because of various factors. Communication & data processing
TOTAL COST APPROACH The total cost approach was used by a division of a large manufacturing company . This division does an annual business of about $45 million, with over 3000 customers located in every state . It has plants and warehouses at five points across the country, shipping to customers via both rail and road. PTO
ANNUAL BUSINESS $ 45 million CUSTOMERS (Located in every state/District) 3000 PLANT/WAREHOUSE LOCATIONS 5 MOVEMENT Rail/Road
PROFIT IMPACT OF DISTRIBUTION - GAINS/(LOSSES) (MILLION $) WAREHOUSING (14.4) TRANSPORTATION 0.5 Total distribution cost (13.9) INVENTORY Carrying costs 1.4 Obsolescence costs 4.3 Value of alternative use facilities 7.8 Total 13.5 PRODUCTION & PURCHASING Production & raw material costs 0.2 Reduced costs of purchased finished goods 6.7 Total 6.9 DATA PROCESSING (0.2) MARKETING Channels of distribution 0.2 Customer service 1.4 Total 1.6 TOTAL PROFIT IMPACT OF 21.8 DISTRIBUTION RELATED ITEMS PRE TAX PROFIT INCREASE 7.9
ISSUES 1. Without any major investment can we increase the profits by changing the distribution system ? 2. Can the total cost be reduced by shifting some of the available equipment from one factory to another ? 3. Can the costs be reduced and profits increased by changing the marketing approach ? 4. Is there any profit advantage in changing the capacity of one or more of the present plants , or perhaps building a new facility at another location ? 5. Could we further improve profitability by changing warehouse capacities or locations ?
PLANT- A Warehouse –1 Warehouse –2 Warehouse –3 Warehouse – 4 Warehouse –5 District District District District District District District District District District District District District District District District District District District PLANT- B PLANT- C PLANT- D PLANT- E
Step-1 Shipment by Rail Shipment by Truck Freight Paid Freight To Pay Freight Paid Freight To Pay Broken Down Into Districts Revealed What percentage of sales came into the 160 districts By Rail By Trucks By Freight Paid By Freight To Pay The Company know where the products were going and how they were going to get there
PLANT - A Warehouse -1 PLANT - B PLANT - C PLANT - D PLANT - E Warehouse -2 Warehouse-3 Warehouse -4 Warehouse -5 WHICH DISTRICTS WHICH DISTRICTS WHICH DISTRICTS WHICH DISTRICTS WHICH DISTRICTS Step-2
Step-3 Arrive at total cost curves for all plants and warehouses 0 300 600 900 1200 1500 1800 2100 2 4 6 8 10 A B C D E
1 Rearrange Company’s distribution pattern and make appropriate shifts in production and production loads 2 Reduce materials cost 3 Transportation overstressed 4 Shifting equipment from one plant to another 5 Shifting from truck delivery to rail delivery 6 Additional capacity to certain warehouses
ACTION PROFITS 1. Rearranging Company’s distribution pattern $ 492,000 2. Reduced material costs $ 126,000 3. Warehousing operations $ 138,000 4. Reduction in direct labour costs in plants $ 57,000 5. Reduction in plant overheads $ 27,000 6. Reduction in transport costs $ 54000 7. Shifting of equipment from $ 180,000 one plant to another 8. Shift from truck to rail delivery $ 447,000 9. Addition capacity to warehouse $ 75,000 TOTAL $ 750,000