Essay About Variable Costs And Broad Categories

Strategic Marketing Problems
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Marketing managers are accountable for the impact of their actions on
profit and cash flow. Therefore, they need a working knowledge of basic
accounting and finance concepts. This chapter provides an overview of
several concepts from accounting and finance that are useful in marketing
management:(1) variable and fixed costs, (2) relevant and sunk costs, (3) margins,
(4) contribution analysis, (5) liquidity, (6) operating leverage, (7) discounted cash
flow, and (8) customer lifetime value analysis. In addition, considerations when
preparing pro forma income statements are described.
■ VARIABLE AND FIXED COSTS
An organizations costs divide into two broad categories: variable costs and fixed
costs.
Variable Costs
Variable costs are expenses that are uniform per unit of output within a relevant time
period (usually defined as a budget year); yet total variable costs fluctuate in direct
proportion to the output volume of units produced. In other words, as volume
increases, total variable costs increase.
Variable costs are divided into two categories, one of which is cost of goods sold.
For a manufacturer or a provider of a service, cost of goods sold covers materials,
labor, and factory overhead applied directly to production. For a reseller (wholesaler
or retailer), cost of goods sold consists primarily of the cost of merchandise. The second
category of variable costs consists of expenses that are not directly tied to production
but that nevertheless vary directly with volume. Examples include sales
commissions, discounts, and delivery expenses.
Fixed Costs
Fixed costs are expenses that do not fluctuate with output volume within a relevant
time period (the budget year) but become progressively smaller per unit of output as
volume increases. The decrease in per-unit fixed cost results from the increase in the
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Strategic Marketing Problems: Cases and Comments, Eleventh Edition, by Roger A. Kerin and Robert A. Peterson.
Published by Prentice Hall. Copyright © 2007 by Pearson Education, Inc.
number of output units over which fixed costs are allocated. Note, however, that no
matter how large volume becomes, the absolute size of fixed costs remains unchanged.
Fixed costs divide into two categories: programmed costs and committed costs.
Programmed costs result from attempts to generate sales volume. Marketing expenditures
are generally classified as programmed costs. Examples include advertising,
sales promotion, and sales salaries. Committed costs are those required to maintain
the organization. They are usually nonmarketing expenditures such as rent and
administrative