Step 1: Identifying Functional Expenses Assume that the expenses listed
in Table 6.7 are incurred to sell the product, advertise it, pack and deliver it, and bill
and collect for it. The first task is to measure how much of each expense was incurred
in each activity.
Suppose that most salary expense went to sales representatives and the rest went
to an advertising manager, packing and delivery help, and an office accountant. Let
the breakdown of the $9,300 be $5,100, $1,200, $1,400, and $1,600, respectively. Table
6.8 shows the allocation of the salary expense to these four activities.
Table 6.8 also shows the rent account of $3,000 allocated to the four activities. Be-
cause the sales reps work away from the office, none of the building’s rent expense is
assigned to selling. Most of the expenses for floor space and rented equipment are for
packing and delivery. The supplies account covers promotional materials, packing ma-
terials, fuel purchases for delivery, and home office stationery. The $3,500 in this ac-
count is reassigned to the functional uses made of the supplies.
Step 2: Assigning Functional Expenses to Marketing Entities The next
task is to measure how much functional expense was associated with selling through
each type of channel. Consider the selling effort. The selling effort is indicated by the
number of sales made in each channel. This number is found in the selling column
of Table 6.9. Altogether, 275 sales calls were made during the period. Because the to-
tal selling expense amounted to $5,500 (see Table 6.8), the selling expense per call av-
eraged $20.
Advertising expense can be allocated according to the number of ads addressed to
the different channels. Because there were 100 ads altogether, the average ad cost $31.
The packing and delivery expense is allocated according to the number of orders
placed by each type of channel. This same basis was used for allocating billing and
collection expense.
Step 3: Preparing a Profit-and-Loss Statement for Each Marketing En-
tity A profit-and-loss statement can now be prepared for each type of channel (Table
6.10). Because hardware stores accounted for half of total sales ($30,000 out of
$60,000), this channel is charged with half the cost of goods sold ($19,500 out of
$39,000). This leaves a gross margin from hardware stores of $10,500. From this must
be deducted the proportions of the functional expenses hardware stores consumed.
According to Table 6.9, hardware stores received 200 out of 275 total sales calls. At
an imputed value of $20 a call, hardware stores have to be charged with a $4,000 sell-
ing expense. Table 6.9 also shows that hardware stores were the target of 50 ads. Atpart five
Managing and
Delivering Marketing(^702) Programs
Mapping Natural Expenses into
Functional Expenses
TABLE 6.8
Natural Packing and Billing and
Accounts Total Selling Advertising Delivery Collecting