Variance analysis is essential for the appraisal of all aspects of the business, including manufacturing, selling, marketing, and service. Variances should be investigated if the benefits outweigh the costs of analyzing and correcting the source of the variance. Variance analysis identifies trouble spots, highlights opportunities, encourages decision making, and fosters coordination between responsibility units. This post discuss specifically in the area of selling expenses and marketing cost.

Prior to setting a marketing standard in a given trade territory, one examines prior, current, and forecasted conditions for the company itself and that given geographical area. Cost variances for the selling function may pertain to the territory, product, or personnel. Standards will vary, depending on geographical location. In formulating standard costs for the transportation function, minimum cost traffic routes should be selected on the basis of the given distribution pattern. Standards for advertising cost in particular territories will vary depending on the types of advertising media needed, which are in turn based on the type of customers the advertising is intended to reach, as well as the nature of the competition. Some direct selling costs can be standardized, such as product presentations for which a standard time per sales call can be established. Direct selling expenses should be related to distance traveled and frequency of calls made. If sales commissions are based on sales generated, standards can be based on a percentage of net sales. Time and motion studies are usually a better way of establishing standards than prior performance, because the past may include inefficiencies.

Variances in Selling Expenses

The control of selling expenses is not as significant for a company manufacturing a standard line of products with a limited number of established customers as for a manufacturer of custom products in a very competitive market. For the latter, significant advertising and salespeople costs are mandated. The variance in selling costs is equal to the actual cost versus the flexible budgeted cost.

Assume actual cost is \$88,000 and the flexible budget is: \$40,000 + (5% x sales revenue) = (\$.03 per unit shipped). If sales revenue is \$500,000 and 100,000 units are shipped, the flexible budgeted cost is:

\$40,000 + (5% x \$500,000) + (\$.03 x 100,000 units) = \$68,000

The variance is unfavorable by \$20,000. Perhaps advertising and travel should be investigated further. These costs are highly discretionary in that they may easily be altered by marketing managers.

Further refinement of the selling expense variance is possible. Each element of selling expense [i.e., advertising, travel, commissions, shipping costs] could be looked at in terms of the difference between budgeted cost and actual cost.

Sales Personnel Performance

Actual sales may not be the best measure of sales personnel performance. It does not take into account differing territory potentials. Also, a high-volume salesperson may have to absorb high selling cost, making the profit generated low. Profit is what counts, not sales.

The evaluation of sales personnel based on the trend in their sales generated over the years may show signs of improvement. However, not considered here are customer’s market demand, potential markets, product mix, and cost incurrence.

Travel expense standards of salesperson often are formulated on the basis of distance traveled and the frequency of customer calls. Standards for salesperson automobile expense may be in terms of cost per mile traveled and cost per day. Entertainment and gift expenditures can be based on the amount, size, and potential for customers.

The standard might relate to cost per customer or cost per dollar of net sales. Selling expense standards are frowned on by sales managers because they may create ill will among sales personnel. The standards also do not take into account sales volume or product mix.

Profitability per salesperson may be a good measurement yardstick. Sales, less variable product costs, less selling expenses, per salesperson will give the relevant profitability. Not considered here, however, are territory expectations or territory demand.

Standard costing procedures and performance measures should be used to control sales personnel costs and compute earnings generated by salesperson category. Further, revenue, cost, and profit by type of sales solicitation (i.e., personal visit, telephone call, mail) should be determined.

A break-even analysis for individual salespeople also may be performed. Sales commissions should be higher for higher-profit merchandise. Any quotas established should be based on a desired sales mix.

Consideration of fixed versus variable costs for a function is critical in marketing cost control and in deciding whether to add or drop sales regions and product lines. Fixed marketing costs include administrative salaries, wages of warehousing and shipping personnel, rent, and insurance. Variable marketing costs are comprised of processing, storing, and shipping goods, which tend to fluctuate with sales volume. Also of a variable nature are sales personnel salaries and commissions as well as travel and entertainment.

It is difficult to project marketing costs because they may change materially as market conditions are altered. An example is a modification in the channels of distribution. Also, customer brand loyalty is difficult to predict. The point here is that it is more difficult to forecast and analyze marketing costs than manufacturing costs. Thus, standards established in this area are quite tentative and very difficult to manage.

Illustrative Marketing Performance Report

An illustrative format for a marketing performance report designed for the regional sales manager follows:

[ Budget][Percent][Actual][Percent][Variance]

Sales

Less: Standard variable-
cost of sales Manufacturing
margin

Less: Variable distribution-
costs (i.e., sales personnel
commissions, freight out)

Contribution margin

Less: Regional fixed charges
(i.e., salesmen salaries, travel
and entertainment, local

Controllable regional-
contribution margin

An illustrative format for a marketing performance report designed for the marketing manager follows:

[Budget][Percent][Actual][Percent][Variance]
Sales

Less: Standard variable-
cost of sales Manufacturing
margin

Less: Variable distribution-
costs

Contribution margin

Less: Regional fixed charges
controllable regional
contribution margin

Less: Marketing fixed-
charges (i.e., central marketing

Marketing contribution-
margin

The marketing manager should be responsible for standard variable cost of sales, distribution costs [i.e., packing, freight out, marketing administration] and sales. Standard variable cost of sales is used to avoid having the marketing area absorb manufacturing efficiencies and inefficiencies. An illustrative format follows.

Sales
Less: Standard variable cost of sales
Less: Distribution costs
Profitability

The profit figure constitutes the marketing efforts contribution to fixed manufacturing costs and administration costs.

How to Analyze Salesperson Variances

Appraise sales force effectiveness within a territory, including time spent and expenses incurred.

Example-1:

Sales data for the company follow:

Standard cost                                   \$240,000
Standard salesperson days               2,000
Standard rate per salesperson day   \$120
Actual cost                                       \$238,000
Actual salesperson days                   1,700
Actual rate per salesperson day        \$140

Total Cost Variance
Actual cost                                       \$238,000
Standard cost                                    \$240,000
\$2,000

The control variance is broken down into salesperson days and salesperson costs below:

[a]. Variance in Salesperson Days:

Actual days versus standard days times standard rate per day:
(1,700 versus 2,000 x \$120) = \$ 36,000

Conclusion: The variance is favorable because the territory was handled in fewer days than expected.

[b]. Variance in Salesperson Costs:

Actual rate versus standard rate times actual days
(\$140 versus \$120 x 1,700) = \$ 34,000

Conclusion: An unfavorable variance results because the actual rate per day is greater than the expected rate per day.

Next, let’s have a look another example. Move on…

Example-2:

A salesperson called on 55 customers and sold each an average of \$2,800 worth of merchandise. The standard number of calls is 50, and the standard sales is \$2,400. Variance analysis looking at calls and sales follows:

Total Variance
Actual calls x actual sale = 55 x \$2,800      = \$154,000
Standard calls x standard sale 50 x \$2,400  = \$120,000
\$34,000

The elements of the \$34,000 variance are:

Variance in Calls
Actual calls versus standard calls x standard sale
(55 versus 50 x \$2,400) = \$ 12,000

Variance in Sales
Actual calls versus standard sale x standard calls
(\$2,800 versus \$2,400 x 50) = \$ 20,000

Joint Variance
(Actual calls versus standard calls) x (Actual sale versus standard sale)
(55 versus 50) x (\$2,800 versus \$2,400) = \$ 2,000

Therefore the total cost variance is \$12,000 + 20,000 + 2,000 = \$34,000

Additional performance measures of sales force effectiveness include meeting sales quotas, number of orders from existing and new customers, profitability per order, and the relationship between salesperson costs and revenue obtained.

The trend in the ratios of selling expense to sales, selling expense to sales volume, and selling expense to net income should be computed. Are selling expenses realistic in light of revenue generated? Are selling expenses beyond limitations, pointing to possible mismanagement and violation of controls?

Appraisal of Marketing Department

Revenue, cost, and profitability information should be provided by product line, customer, industry segment, geographic area, channel of distribution, type of marketing effort, and average order size. New product evaluations also should be undertaken, balancing risk with profitability. Analysis of competition in terms of strengths and weaknesses should be made. Sales force effectiveness measures also should be employed for income generated by salespeople, call frequency, sales incentives, sales personnel costs, and dollar value of orders generated per hours spent. Promotional effectiveness measures should be employed for revenue, marketing costs, and profits before, during, and after promotional efforts, including a discussion of competitive reactions. Advertising effectiveness measures, such as sales generated based on dollar expenditure per media and media measures (i.e., audience share), are also useful. Reports discussing product warranty complaints and disposition also should be provided.

Marketing costs may be broken down into selling, promotion, credit evaluation, accounting, and administration [i.e., product development, market research]. Another element is physical distribution—inventory management, order processing, packaging, warehousing, shipping outbound transportation, field warehousing, and customer services. Control of marketing cost is initiated when such costs are assigned to functional groups such as geographic area, product line, and industry segment. Budgeted costs and rates should be provided and comparisons made between standard costs and actual costs at the end of the reporting period.