Importance of distribution cost analysis
Answers
More and more firms are using some form of contribution accounting to determine the profitability of products, channel units, and market segments. Such a method assigns first all variable marketing and production costs to a product. Variable production costs are direct labor and materials. The variable marketing costs are due to credit, shipping, sales commissions, merchandising and advertising. Some firms go further and allocate certain fixed joint costs, but this should only be done when one can find a logical relationship between the assigned expenditure and the product sales. All questionable costs should be treated as overheads. While overhead must eventually be absorbed, the contribution method makes it more clear what will be gained or lost by adding or dropping a product or a customer.