CHAPTER 16

Financial Control of
Logistics Performance
 Questions Accounting System 16-2 a

Must be Capable of Answering

• How do logistics costs affect contribution by product, by
territory, by customer, and by salesperson?
• What are the costs associated with providing additional
levels of customer service? What trade-offs are necessary,
and what are the incremental benefits or losses?
• What is the optimal amount of inventory? How sensitive is
the inventory level to changes in warehousing patterns or
to changes in customer service levels? How much does it
cost to hold inventory?
• What mix of transport modes/carriers should be used?

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 Questions Accounting System Must 16-3
16-2bb

be Capable of Answering (cont.)

• How many field warehouses should be used and where
should they be located?
• How many production setups are required? Which plants
will be used to produce each product? What are the
optimum manufacturing plant capacities based on
alternative product mixes and volumes?
• What product packaging alternatives should be used?
• To what extent should the order processing system be
automated?
• What distribution channels should be used?

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
 Assigning Costs To Segments 16-4
16-3

Is cost Charge
Variable dependent on Applicable
unit volume? YES Segment

NO
Is
resource
dedicated to a Charge
Non-Variable specific
YES
Applicable
Segment
product
line?

NO

Place in
Indirect contribution
pool

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 Contribution Approach with a 16-5
16-4

Charge For Assets Employed

Total Company Segment A Segment B
Net sales
Segment C
Cost of goods sold (variable manufacturing
costs) ____________ ________ ________
Manufacturing contribution ________
Variable marketing and logistics costs
____________ ________ ________
Sales commissions
________
Transportation
Warehousing (handling in and out)
Order processing
Charge for investment in accounts
receivable
Segment contribution margin
Assignable nonvariable costs ____________ ________ ________
Salaries ________
Segment-related advertising
____________ ________ ________
Bad debts
________
Inventory carrying costs
Segment controllable margin
Charge for assets used by segment
Net segment margin
McGraw-Hill/Irwin ____________ ________
Copyright © 2001 ________
by The McGraw-Hill Companies, Inc. All rights reserved.
 Profitability by Type Of Account: 16-6
16-5

A Contribution Approach
Type of Account
Total Department Grocery Drug Discount
Company Stores Chains Stores Stores
Sales $42,500 $6,250 $10,500 $19,750 $6,000
Less discounts, returns and allowances 2,500 250 500 1,750 ---------

Net Sales 40,000 6,000 10,000 18,000 6,000

Cost of goods sold (variable manufacturing costs) 20,000 2,500 4,800 9,200 3,500

Manufacturing contribution 20,000 3,500 5,200 8,800 2,500

Variable selling and distribution costs:
Sales commissions 800 120 200 360 120
Transportation costs 2,500 310 225 1,795 170
Warehouse handling 600 150 --- 450 ---
Order-processing costs 400 60 35 280 25
Charge for investment in accounts receivable 700 20 50 615 15

Contribution margin 15,000 2,840 4,690 5,300 2,170

Assignable nonvariable costs
(costs incurred specifically for the segment
during the period):
Sales promotion and slotting allowances 1,250 60 620 400 170
Advertising 500 --- --- 500 ---
Bad debts 300 --- --- 300 ---
Display racks 200 --- --- 200 ---
Inventory carrying costs 1,250 150 200 800 100

Segment controllable margin $11,500 $2,630 $3,870 $3,100 $1,900

Segment controllable margin-to-sales ratio 27.1% 42.1% 36.9% 15.7% 31.7%

Note: This approach could be modified to include a charge for the assets employed by each of the segments, as well as a deduction for
the change in market value of these assets. The result would be referred to as the net segment margin (residual income).
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 Profitability By Type of Account: 16-7
16-6

A Contribution Approach ($000)

Type of Account
Drug Store National Regional Independent
Channel Drug Chains Drug Chains Pharmacies
Sales $19,750 $4,250 $5,500 $10,000
Less discounts, returns and allowances 1,750 250 500 1,000
Net Sales 18,000 4,000 5,000 9,000
Cost of goods sold (variable manufacturing costs) 9,200 2,100 2,600 4,500
Manufacturing contribution 8,800 1,900 2,400 4,500
Variable selling and distribution costs:
Sales commissions 360 80 100 180
Transportation costs 1,795 120 200 1,475
Warehouse handling 450 --- 100 350
Order-processing costs 280 25 55 200
Charge for investment in accounts receivable 615 20 35 560
Contribution margin 5,300 1,655 1,910 1,735
Assignable nonvariable costs
(costs incurred specifically for the segment
during the period):
Sales promotion and slotting allowances 400 90 110 200
Advertising 500 --- --- 500
Bad debts 300 --- --- 300
Display racks 200 --- --- 200
Inventory carrying costs 800 80 100 620
Segment controllable margin $3,100 $1,485 $1,700 ($85)
Segment controllable margin-to-sales ratio 15.7% 34.9% 30.9% ---
Note: This approach could be modified to include a charge for the assets employed by each of the segments, as well as a deduction
for the change in market value of these assets. The result would be referred to as the net segment margin (residual income).

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
 Shortcomings for Corporate 16-8aa
16-7

Profitability Reports
1. Full manufactured costs (which sometimes include a profit
for the plant) were used in calculating costs.
2. Operating costs such as development, selling, and
administration were fully allocated to products often on a
percentage-of-sales basis.
3. Costs such as transportation, warehousing, sales
commissions, and sales promotions were not reported as
separate line items.
4. When marketing and logistics costs were identified
explicitly as expenses, they usually were allocated to
products on a percentage-of-sales basis.

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
 Shortcomings for Corporate 16-9bb
16-7

Profitability Reports (cont.)

5. Inconsistencies in terminology were common. When

executives referred to contribution margins, often the
numbers used were actually manufacturing contribution.
6. Opportunity costs such as inventory carrying costs, a
charge of accounts receivable, and a charge for other
assets employed did not appear on profitability reports.
7. Reports that covered more than one year were not adjusted
for inflation.
8. Reports were not adjusted to reflect replacement costs.

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
 Profitability By Type Of Account: 16-10
16-8

A Full Cost Approach ($000)

Type of Account

Total Dept. Grocery Drug Discount

Company Stores Chains Stores Stores
Net Sales $40,000 $6,000 $10,000 $18,000 $6,000
Cost of goods sold (Full manufacturing costs) 25,000 3,750 6,250 11,250 3,750

Manufacturing Margin 15,000 2,250 3,750 6,750 2,250

Less Expenses:
Sales commissions 800 120 200 360 120
Transportation costs ($/case) 2,500 375 625 1,125 375
Warehouse handling ($/cu. ft) 600 90 150 270 90
Order-processing costs ($/order) 400 30 50 300 20
Sales promotion (% of sales) 1,250 187 312 563 188
Advertising (% of sales) 500 75 125 225 75
Bad debts (% of sales) 300 45 75 135 45
General Overhead and Administrative
Expense (% of sales) 6,150 922 1,538 2,768 922

Net Profit (before taxes) $2,500 $406 $675 $1,004 $415

Profit-to-sales ratio 6.3% 6.8% 6.8% 5.6% 6.9%

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 Controlling Logistics Activities 16-11
16-9

Standard costs

Control over Budgets

logistics costs can
be accomplished
by
Productivity
standards

Statistical process
control

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 A Modular Database System for 16-12
16-10

Reporting Cost and Revenue Flows

Non-financial
data Accounts for
Actual costs External
external
reports
reporting
Standard costs
Revenues

Source Modular
documents database
Functional cost reports
Revenue flow Charges Credit
Actual recorded cost flow
Standard estimated cost Marketing segment
applied to actual activity analysis

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 Report Generating Capabilities 16-13
16-11

of the Modular Base

Revenue and
expense items
External
Product
Financial
profitability Coded
statements

Cost by
Channel Modular
cost center
profitability databased
and function

Customer Salesperson Geographical

profitability performance profitability

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