The Application of Activity-Based Costing to Marketing Costs in a Food Manufacturer
Purpose of the case:
This case illustrates the application of Activity-based costing to marketing costs in a food manufacturer. While the purpose of analyzing product costs is to identify costs per unit of product, the purpose of analyzing marketing costs is to identify costs per customer or customer group. This case illustrates how cost drivers are identified and used to compare two separate customer groups based on the channels of distribution. These cost drivers could also be used to analyze marketing costs for individual customers. This information is very useful for understanding profitability in the two channels and for decisions about how to service the two channels.
Suggested Strategy for Use:
About 60 to 90 minutes are needed to discuss the case thoroughly. This fits well in a 90 minute class with some lecture about Activity-based costing. I suggest starting with a short background about marketing in the food business followed by a discussion of the critical issues in the case. Then, discuss the activity-based costing analysis of the marketing costs. During this phase, discuss the development of cost drivers, how the firm might have identified them, whether other cost drivers might be applicable, how to measure the cost drivers and how to collect data about the cost drivers. Finally, discuss the suggestions for changes in strategy.
Background for the Case Analysis
Food Industry Structure:
There are two distinct channels of distribution in the food business. Grocery and Foodservice. Grocery is defined as food purchased for later assembly, preparation and consumption in the local Grocery store. Foodservice is defined as meals prepared for the consumer away from home. While most are familiar with the local grocery store, foodservice includes any location a consumer may venture to purchase