CLASSIFICATION OF COSTS

Classification of Costs

Classification of Costs

Introduction

Marketing costs are an important component of the cost structures of many organizations. To date, the literature on cost management (CM) has given relatively minor consideration to marketing costs. The related literature on management accounting (MA) also has not focused on the planning or analysis of marketing costs. The marketing literature likewise has not made CM/MA topics an integral part of its debate. The result is minimal integration between several literatures.

The major themes developed in this paper arise from the existence of this minimal integration between the marketing and CM/MA literatures and the gaps arising in the issues addressed in each literature. These major themes include:

1. The marketing and CM/MA literatures contain substantial differences in focus. Traditionally, marketing has emphasized sales volume and sales revenue while the CM/MA literature has emphasized cost and more specifically cost of goods sold. While many decisions facing managers require integration of issues covered in both literatures, there are few published examples of such integration.

2. Marketing has traditionally focused on revenues and the attraction of customers. In recent years, however, the emphasis has been shifting from revenues to profits. Moreover, retention as well as attraction of profitable customers has become a top priority. 1 The analysis of customer profitability is enhanced by an understanding of the behavior and drivers of customer-related revenues and costs.

3. Differences between marketing and manufacturing costs make it difficult to simply import techniques developed for manufacturing costs when analyzing and estimating marketing costs. Two key characteristics that make marketing costs different from manufacturing costs are: a. Many manufacturing costs are committed in manufacturing infrastructure (e.g., plants and machinery) or in products (e.g., product designs). In contrast, many marketing costs are discretionary even just prior to their incurrence.

b. There is greater flexibility to tailor marketing costs in a relatively short period to respond to changes in the market environment. In contrast, it is often difficult to change manufacturing costs in the short run except those driven only by output units.

* 4. Determining the effectiveness and efficiency of marketing cost outlays remains a major challenge. For some marketing costs (such as advertising) there is often a sizable lag between the incurrence of marketing costs and the receipt of benefits. This lag increases the difficulty of identifying causal relationships between marketing costs and marketing cost objects (e.g., products and customers).

* 5. Most marketing assets are intangible (e.g., brand names, and customer base). Significant resources are often spent to maintain and enhance the value of such assets. Developing performance measures to reflect changes in the values of marketing assets requires significant departures from existing GAAP models. While most marketing costs are treated as period costs, for a cost-benefit analysis of resources used for brand or customer development a time horizon much longer than one year is appropriate. Efforts to capitalize marketing outlays will require greater reliance on external factors (e.g., market shares of competitive brands) than has occurred with the capitalization of many manufacturing ...