Module Three Homework
Answers retrieved directly from required textbook.
Respond with short answers in paragraph form.
1) What are the various methods that can be used to analyze distribution costs?
There are a variety of approaches that can be used to analyze distribution costs. According to the
expense or expenditure object's nature, first and foremost all this information is recorded in the general
ledger and can be easily converted into trends in expense line items or expenses as a percentage of
revenue using spreadsheet software. However, the controller must dig deeper in order to inform the
sales manager of the reasons why certain expenses are excessive, who is responsible for the excessive
costs, and what can be done to improve the overall situation.
Then there's the contribution margin. Calculating the contribution margin is done by subtracting from
sales the direct costs incurred in obtaining the segment of sales under consideration. The expenses that
are not deducted from revenues in the computation of contribution margins are those that are not
altered by the decision under consideration. When making short-term tactical decisions, the
contribution margin is useful; however, it is not useful when making long-term decisions because it does
not consider the recovery of total costs, which includes overhead.
Another is by functions or functional operations performed. This kind of analysis requires five steps:
1. Establish the functional operations to be measured, such as sales calls, shipments from the
warehouse, and circular mailings.
2. Segregate the costs of the functions for measurement, either through specific accounts in the
general ledger or through allocations.
3. Establish units of measurement of functional service. For example, the pounds of shipments
might be the measure of the shipping expense, or the number of the salespeople’s calls might
serve as one measurement of direct field selling expense.
4. Calculate a unit cost of operation by dividing the total controllable functional cost by the
number of units.
5. Take corrective action if significant cost variances occur.
Finally, by allocating revenues to specific functions. Because of this analysis, the controller can show
how a specific distribution effort has produced results by matching expenses with related revenues. Cost
distributions for both direct and indirect costs are required for this type of analysis. Direct costs are
relatively easy to identify, but indirect costs are extremely difficult to distribute across the various cost
object categories. In order to properly allocate indirect costs among cost objects, the controller should
devote a significant amount of time to subdividing indirect costs into smaller pieces and employing a
variety of allocation bases to distribute the costs logically among them. The level of sophistication of the
allocation may vary depending on whether the analysis is conducted over a short or long period. Long-
