MARKETING FINANCE

Presented by:
Junaid Currimbhoy 43
Qasim Abbas Ladiwala 80
Rohan Raveshia 84
Shoaib Shaikh 98
 Cost Object


 A Cost object is any thing for which cost

data is desired including products, product
lines, customers, jobs and organizational
subunits
 Direct and Indirect Costs
 Direct Cost
 A direct cost is a cost that can be easily and
conveniently traced to the particular cost object under
consideration
 E.g.:- Salary


 Indirect Cost
 An indirect cost is a cost that cannot be easily and
conveniently traced to the particular cost object under
consideration


 Common Cost
 A common cost is a cost that is incurred to support
a number of costing objects but cannot be traced to
them individually

 Cost Behaviour
 Cost behaviour refers to how a cost
will react or respond to changes in the
level of business activity


 As the level of activity rises and falls, a

particular cost may rise and fall as well -
or it may remain constant
 Variable Cost
 Variable cost is a cost that varies in
total, in direct proportion to changes in the
level of activity


 Labour Hours can be considered as a good

example of variable cost

 True Variable and
Step Variable Costs
True Variable Costs
 Step Variable Costs


 
 A cost that varies in  A resource that is
direct proportion obtained only in
to the level of large chunks
activity is called (wages of
true variable cost maintenance
 workers) and
whose costs
 Direct material is an increase or
example of true decrease only in
variable cost response to fairly
wide changes in
activity is known
as a step variable
 Fixed Costs
 A fixed cost is a cost that remains
constant, in total, regardless of
changes in the level of activity. Unlike
variable costs, fixed costs are not
affected by changes in activity
 E.g.: Supervisor Salary
Types of Fixed Costs
 Committed Fixed Costs
 Committed fixed costs relate to the
investment in facilities, equipment, and
the basic organisational structure of a
firm.
 E.g.: Purchase of a plant or a building


Key characteristics of committed fixed



costs:
 They are long term in nature

 They cannot be significantly reduced

even for short period of time

Discretionary Fixed Costs
 Discretionary fixed costs usually arise
from annual decisions by management
to spend in certain fixed cost areas


 Often referred to as managed fixed costs

 Mixed or Semi Variable
Cost
 A mixed cost is one that contains both
variable and fixed cost elements. Mixed
cost is also known as semi variable cost


 Examples of mixed costs include electricity

and telephone bills.
 M ixe d or Se m i Va r ia b le Cost
 Y = a + bX
 where,
 Y = The total mixed cost
 a = The total fixed cost
 b = The variable cost per unit
 X = The level of activity


 Y = a + bX
Y = $25,000 + ($3.00 × 800 units)
= $27,400

High and Low Point Method
 Used for Separation of Fixed and Variable
Components of Mixed or Semi-variable
Cost
 Variable Costs = (Y2 − Y1) ÷ (X2 − X1)
 where,
 Y2 = Cost at the high level of activity
 Y1 = Cost at the low level of activity
 X1 = High activity level
 X2 = Low activity level
 Variable cost = Change in cost / Change
in activity

LECTURE 2
 Definitions
Opportunity Cost



 Opportunity cost is the potential benefit that
is given up when one alternative is
selected over another


Sunk Cost



 Sunk cost is a cost that has already been
incurred and that cannot be changed by
any decision made now or in future


 Objectives of Cost Volume
Profit(CVP) Analysis
 Cost volume Profit Analysis (CVP
analysis) is one of the most powerful
tools that managers have at their
command


 It helps them understand the

interrelationship between cost, volume,
and profit in an organization by focusing
on interactions among the following five
elements: 
 Prices of products
 Volume or level of activity
 Per unit variable cost
 Total fixed cost
 Mix of products sold
Contribution Margin

Sales Revenue
(Less) Variable Cost
= Contribution Margin

Contribution Margin
(Less) Fixed Cost
= Net Operating Income / Loss
LECTURE 3
 PROBLEM
GIVEN
Selling Price=$250 (100%)
Variable Expenses=$150 (60%)
Contribution margin=$250-$150=100(40%)
Fixed Expenses=$35000 per month

Problem:
Suppose that a company is currently selling 400
units per month. To increase sales, the sales
manager would like to cut SP by $20 per unit &
increase the advertisement budget by $15000
per month. The sales manager argues that if these 2
steps are taken, units of sales will increase to 50%
to 600 units per month. Should the changes be
done?
 Solution
Particulars Amt Forecasted
Sales (250*400) 100,000 Sales (Amt) (600*230)
1,38,000
Less Variable expenses 60,0000 90,000 (600*150)
Contribution Margin 40,000 48,000
Less Fixes Expenses 35,000 50,000
Net operating profit / -5000 -2000
loss
Particulars Difference % of sales
Sales 38,000 100
Variable Expenses 30,000 60
Contribution 8,000 40
Fixed Expenses 15,000
Net Operating Loss -7,000
The manager should not take up the change
 PROBLEM
GIVEN
Selling Price=$250 (100%)

Variable Expenses=$150 (60%)

Contribution margin=$250-$150=100(40%)

Fixed Expenses=$35000 per month

Selling 400 units

Problem:
 Commission of $15 per unit rather than paying
sales person flat salaries that now total 6000 per
month. Sales manager is confident that the change
will increase monthly sales by 15% to 460 units

 Particulars Forecasted Sales

Sales (250*400) 100,000 1,15,000 -15,000

Less Variable expenses 60,0000 75,900 15,900

Contribution Margin40,000 39,100 900

Less Fixes Expenses 35,000 29,000 35,000-6000

Net operating loss -5000 10,100 5,100

The Manager should take up the change

LECTURE 4
 Two stages of Marketing
Costs Analysis
 Stage 1


 Costsare initially reclassified from

accounting headings into functional
cost groups


 Costgroup brings together all costs

associated with a marketing activity
 Two stages of Marketing
Costs Analysis
 Stage 2


 These functional cost groups are then

allocated to control units using
reasonable basis


 E.g.
 Products
 Customer Groups
 Channels of distribution



 Examples of Functional
Analysis of Marketing costs
 Direct Selling Cost
 Salesmen's Salary, Sales Commission, Traveling,
Entertainment etc


 Advertisement and Sales Promotion Cost

 Media, Advertisement, catalogues and brochures etc


 Marketing Research
 Cost of in-house research, Cost of external research
agencies etc


 Distribution Cost
 Transportation, Warehousing & Storage, Insurance etc


 Credit and Collection

 Cost of Collection staff, bad debts, Cash discount etc


 Financial and General Admin

 Reason for proper Analysis
of Marketing Costs
 Determination of Product wise profitability
 Product Cost & Production wise cost data is
used to evaluate product wise profitability


 Control of Marketing Costs

 Establishing budgets
 Evaluation of managers according to cost
responsibility


 Analysis of Cost
 Cost serving different class of customers
 Cost for serving different areas/regions to
determine relative profitability

 Reason for proper Analysis
of Marketing Costs
 Computation of different parameters
 Cost per sales call
 Cost per order
 Cost to include new customer


 Decision Making
 Selling through different channels of
distribution
 Selling in different market/regions
 Determining product profitability

Problem to understand second
stage of Marketing Cost
Analysis
 A company produces a single product in 3
sizes A,B & C
Expenses Amount
Sales Salaries 10000
Sales Commission 6000
Sales Office Expenses 2096
Advertising: General 5000
Advertising: Specific Packing 22000
Packing 3000
Delivery Expenses 4000
Warehouse Expenses 1000
Credit Collection Expense 1296
Total 54392
 The following data is also
available:
Total Size A Size B Size C

No. of Salesman 10 4 5 1

Units Sold 10400 3400 4000 3000

No. of orders 1600 700 800 100

Percentages of 100% 30% 40% 30%

specific advertising

Sales Turnover 2,00,000 58000 80000 62000

Volume of cft per 5 8 17

unit of finished
product
Problem to understand second
stage of Marketing Cost
Analysis
Expenses Amount Basis
Sales Salaries 10000 Direct Charge
Sales Commission 6000 Sales Turnover
Sales Office Expenses 2096 No. of orders
Advertising: General 5000 Sales Turnover
Advertising: Specific Packing 22000 Direct Charge
Packing 3000 Total Volume in cft of
products sold
Delivery Expenses 4000 Total Volume in cft of
products sold
Warehouse Expenses 1000 Total Volume in cft of
products sold
Credit Collection Expense 1296 No. of orders
Total 54392
LECTURE 5
Alternative Methods of Cost
Analysis
 Order Getting Cost
 Order Filling

 Order Getting Cost
 Cost incurred to have the first order
 Examples
 Advertising Cost
 Marketing Cost
 Market Research
 Promotion Cost

 Order Filling Cost
 Cost incurred to cater to the order
 The cost will increase or decrease as per
the number of units of output
 Dropping a Product Line?
Status Quo
A B C Total
Sales 50 60 40 150

Contribution 25 24 8 57

Direct Relatable Fixed 4 5 3 12

Cost

General Fixed Cost 10 12 8 30

Approportioned in Ratio
of Sales

Profit 11 7 -3 15

All figures in Rs.Lakhs

 Dropping a Product Line?
Status Quo
A B C Total Changed
for C
Sales 50 60 40 150 0 110

Contribution 25 24 8 57 0 49

Direct Relatable 4 5 3 12 0 9
Fixed Cost

General Fixed 10 12 8 30 8 30
Cost
Approportioned in
Ratio of Sales

Profit 11 7 -3 15 10

All figures in Rs.Lakhs

LECTURE 6
 Pricing Policies and
High
Decisions
Medium Low
Price
High 1) Premium Strategy 2) High Value 3) Super Value
Strategy Strategy
Quality

Medi 4) Over-Charging 5) Medium Value 6) Good Value

um
Low 7) Rip-Off 8) False Economy 9) Economy

1Rolls Royce
2BMW / Merc
3 Wal-Mart
5 Maruti
Steps in setting up of Pricing
Policies
 Setting up of Pricing Objective
 Determining Demand
 Estimating Cost
 Analysing Competitors Cost, Price &
Offers
 Setting a Pricing Method
 Setting the final price
Selecting Pricing Objective
 Survival
 Maximum Current Profit
 Maximum Current Revenue
 Maximum Sales Growth
 Product Market Skimming
 Product Quality leadership



 Determining Demand
 Understanding factors affecting price
sensitivity
 Unique Value Effect
 Blackberry (less PS)

 Substitute Awareness Effect (high PS)

 Difficult Comparison Effect (less PS)

 Sunk Investment Effect
 Spare Parts (less PS)

 Price Quality Effect (less PS)

THANK YOU