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Costs, Revenues and Trade-offs

  • Graham Buxton

Abstract

The statement that physical distribution ‘is a cost area and purely a cost area,1’ whilst it does little to further an appreciation of the demand-creating potential of distribution operations, certainly focuses our attention on the need to develop and implement appropriate accounting procedures for efficient logistics systems construction and evaluation. There is a real need to accurately identify and allocate marketing logistics costs within relevant cost centres in order to carry out a full-scale evaluation of alternative logistics systems. We shall be concerned for the most part of this chapter with costs associated with physical distribution activities; however, at the end, we shall introduce the less easily quantifiable but equally important element of channel costs, and relate these to an overall evaluative framework.

Keywords

Variable Cost Logistics System Distribution Cost Cost Centre Physical Distribution 
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Notes and References

  1. 1.
    Peter F. Drucker, ‘Physical Distribution: the Frontier of Modern Management’, a talk presented to the Annual Spring Conference of the National Council of Physical Distribution Management (6 Apr. 1965).Google Scholar
  2. 2.
    Ronald J. Lewis, ‘Strengthening Control of Physical Distribution Costs’, Management Services (Jan.–Feb. 1968) pp. 37–46.Google Scholar
  3. 3.
    Quoted in J. Leslie Livingstone and Vijory Sathe, ‘New Perspectives in Distribution System Costing’, in John R. Grabner and William S. Sargent (eds). Distribution System Costing: Concepts and Procedures (Proceedings of the Fourth Annual James R. Riley Symposium on Business Logistics, Transportation and Logistics Research Foundation, The Ohio State University, Columbus, Ohio, Apr. 1972) pp. 70–1.Google Scholar
  4. 4.
    Michael Schiff, Accounting and Control in Physical Distribution Management (Chicago: The National Council of Physical Distribution Management Inc., 1972).Google Scholar
  5. 5.
    J. Sizer, An Insight into Management Accounting (London: Penguin, 1969) p. 230.Google Scholar
  6. 6.
    R. J. Bull, Accounting in Business (London: Butterworth, 1969) p. 130.Google Scholar
  7. 7.
    Donald R. Longman and Michael Schiff, Practical Distribution Cost Analysis (Homewood, Ill.: Richard D. Irwin Inc., 1955) p. 110.Google Scholar
  8. 8.
    Paul M. Fischer and Frank H. Mossman, ‘Distribution Costing Perspectives: An Industry Overview’, in Grabner and Sargent (eds), Distribution System Costing, p. 55.Google Scholar
  9. 9.
    Nicholas Dopuch and Jacob G. Bernberg, Cost Accounting: Accounting Data for Management Decisions (New York: Harcourt, Brace and World Inc., 1969) p. 42.Google Scholar
  10. 10.
    See also B. J. Mandel, ‘Work Sampling in Financial Management—Cost Determination in a Post Office Department’, Management Science, vol. 17, no. 6 (Feb. 1971) B324–38.CrossRefGoogle Scholar
  11. 11.
    For a detailed examination of the applications, and limitations, of multiple regression analysis, see Norman Draper and Harry Smith, Applied Regression Analysis (New York: John Wiley & Sons Inc., 1967).Google Scholar
  12. A useful summary may be found in Paul E. Green and Donald S. Tull, Research for Marketing Decisions, 2nd ed. (Englewood Cliffs, N.J.: Prentice-Hall Inc., 1970) pp. 343–64.Google Scholar
  13. 12.
    G. Buxton and N. J. T. Quayle, ‘Application of a New Approach to Depot Delivery Areas’, International journal of Physical Distribution, vol. 1, no. 3, (June 1971) pp. 117–21.CrossRefGoogle Scholar
  14. 13.
    Martin G. Christopher, Total Distribution (London: Gower Press, 1971) p. 20.Google Scholar
  15. 14.
    In fact, the cost of total bulk movement may increase or decrease, the direction of the change depending upon the location of additional warehouses in the system.Google Scholar
  16. 15.
    John R. Grabner and James F. Robeson, ‘Distribution System Analysis: A Problem in Capital Budgeting’, in Grabner and Sargent (eds), Distribution System Costing, p. 133.Google Scholar
  17. 16.
    Sensitivity analysis examines the impact on system output of variations in the values of the variables and parameters which represent the inputs to the system. See Richard B. Maffei, ‘Mathematical Models, Values of Parameters, and the Sensitivity Analysis of Management Decision Rules’, Journal of Marketing, vol. 21 (Apr. 1957) pp. 419–27.CrossRefGoogle Scholar
  18. 17.
    For a fuller discussion, see John R. Grabner and James F. Robeson, ‘Distribution System Analysis’, pp. 132–44.Google Scholar
  19. 18.
    Grabner and Robeson, ‘Distribution System Analysis’, p. 142.Google Scholar
  20. 19.
    See Joseph C. Palamountain, Jr., ‘Distribution: Its Economic Conflicts’, in The Marketing Channel, Bruce E. Mallen (ed.), (New York: Wiley, 1967) pp. 116–18.Google Scholar
  21. 20.
    Palamountain, ‘Distribution: Its Economic Conflicts’, in The Marketing Channel, pp. 114–16.Google Scholar
  22. 21.
    Bruce Mallen, ‘Selecting Channels of Distribution: a Multi-Stage Process’, International Journal of Physical Distribution, vol. 1, no. 1 (Oct. 1970) pp. 50–6.CrossRefGoogle Scholar
  23. 22.
    Even in the latter case, the approach developed here is valuable in helping to evaluate the efficiency of each channel.Google Scholar
  24. 23.
    An alternative approach would be to assess the extra costs which the manufacturer would have to incur in order to raise the efficiency rating of Systems I and III to that of the most efficient system, System II. For example, extra costs would be involved in attempting to reduce vertical conflict — perhaps by increasing margins — or to improve the service capabilities of a channel. These incremental costs would then be structured into the analysis, summarised in Table 3.4, as representing additional fixed and/or variable costs. The channel efficiency ratings would, under this approach, be implicitly incorporated into the analysis through an increase in costs rather than through an adjustment in net contribution.Google Scholar

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© Graham Buxton 1975

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  • Graham Buxton

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