Costs Analysis

Careful analysis of most marketing costs shows that the money is spent for a specific purpose – for example, to develop or promote a particular product or to serve particular customers. By breaking out and comparing the costs of different sales reps, the marketing manager has a much better idea of what it is costing to implement the strategy in each sales area. Two basic approaches to handling allocating costs are possible – the full-cost approach and the contribution-margin approach.

In the full-cost approach, all costs are allocated to products, customers, or other categories. Because all costs are allocated, we can subtract costs from sales and find the profitability of various customers, products, and so on. The full-cost approach requires that difficult-to-allocate costs to be split on some basis.

When we use the contribution-margin approach, all costs are not allocated in all situations. The contribution-margin approach focuses attention on variable costs – rather than on total costs.

The difference between these two approaches is important. The two approaches may suggest different decisions. Arguments over allocation methods can be deadly serious. The method used may reflect on the performance of various managers – and it may affect their salaries and bonuses.

To avoid these problems, firms often use the contribution-margin approach. It’s especially useful for evaluating alternatives – and for showing operating managers and salespeople how they’re doing. The contribution-margin approach shows what they’ve actually contributed to covering general overhead and profit.

Top managers, on other hand, often find full-cost analysis more useful. In the long run, some products, departments, or customers may pay for the fixed costs.