Budgeting Basics and Beyond

10.5. Analysis and Evaluation of Distribution Costs

Distribution cost analysis has as its objective obtaining the optimum distribution policy. Costs should be appraised by activity or function to promote planning and control. Cost analysis may be made by product or service, segment (department, store, branch), territory (state, city, district, county), customer type, order size, distribution channel (manufacturer, wholesaler, retailer, direct to customer), sales terms (cash, installment), salesperson, method of delivery (store delivery, over-the-counter), and method of sale (mail order, company store, salesperson, house solicitation).

There should be a comparison of each individual distribution cost to sales, such as transportation to sales. A higher ratio is unfavorable because a larger distribution expense is required for each sales dollar. Higher ratios mean less productivity. When distribution efforts are recurring and routine, it is useful to compare actual to budgeted costs for variance determination.

The variances are then investigated as to cause and appropriate action taken, if needed. In addition, a comparison should be made between the distribution costs in the company to those of competing companies. The differences should be analyzed.