The Sales Process:

As a part of selling activities, if salespeople follow the steps or phases shown below, their chances of success are far better.

The sequence of above steps may change to meet the sales situation in hand. Some of the above steps may not be applicable for selling to the trade We now discuss application of above steps to industrial selling Prospecting It is identifying or finding prospects i.e. prospective or potential customers. Methods of prospecting or sales lead generation are: (1) referrals from existing customers, (2) company sources (website, ads., tradeshow, teleprospecting), (3) external sources (suppliers, intermediaries, trade associations), (4) salespersons networking, (5) industrial directories, (6) cold canvassing Qualifying Companies qualify sales leads by contacting them by mail or phone to find their interests (or needs) and financial capacity. Leads are categorized as: Hot, Warm, and Cool Preapproach Information gathering about the prospect. Sources of information: the Internet, industrial directories, government publications, intermediaries, etc. Precall planning Setting call objectives Tentative planning of sales strategy: which products, features and benefits may meet the customer needs

Approach Make an appointment to meet the prospect Make favourable first impression Select an approach technique: Introductory Customer benefit Product Question Praise The approach takes a few minutes of a call, but it can make or break a sale Presentation and Demonstration There are four components: Understanding the buyers needs Knowing sales presentation methods / strategies Developing an effective presentation Using demonstration as a tool for selling We will examine each of the above points Understanding the buyers needs Firms and consumers buy products / services to satisfy needs To understand buyers needs, ask questions and listen In business situations, problem identification and impact questions are important E.G. Have you experienced any problems on quality and delivery from the existing supplies? What impact the quality and delivery problems will have on your costs and customer satisfaction? Knowing Sales Presentation Methods/Strategies Firms have developed different methods / styles / strategies of sales presentation Stimulus response method / canned approach. It is a memorised sales talk or a prepared sales presentation. The sales person talks without knowing the prospects needs. E.G. Used by tele-marketing people

Formula method / formulated approach. It is also based on stimulus response thinking that all prospects are similar. The salesperson uses a standard formula AIDA (attention, interest, desire, and action). It is used if time is short and prospects are similar. Shortcomings are: prospects needs are not uncovered and uses same standard formula for different prospects. Need satisfaction method Interactive sales presentation First find prospects needs, by asking questions and listening Use FAB approach: Features, Advantages, Benefits Effective method, as it focuses on customers Consultative selling method / Problem-solving approach Salespeople use cross-functional expertise Firms adopt team selling approach It is used by software / consulting firms Developing an Effective Presentation Some of the guidelines are: Plan the sales call Adopt presentation to the situation and person Communicate the benefits of the purchase Present relevant and limited information at a time Use the prospects language Make the presentation convincing give evidence Use technology like multi-media presentation Using Demonstration Sales presentation can be improved by demonstration Demonstration is one of the important selling tools EGs: Test drive of cars; demonstration of industrial products in use Benefits of using demonstration for selling are: Buyers objections are cleared Improves the buyers purchasing interest Helps to find specific benefits of the prospect The prospect can experience the benefit Overcoming Sales Objections / Resistances Objections take place during presentations / when the order is asked Two types of sales objections: Psychological / hidden Logical (real or practical) Methods for handling and overcoming objections: (a) ask questions, (b) turn an objection into a benefit, (c) deny objections tactfully, (d) third-party certificate, (e) compensation Trial close and Closing the sale Trial close checks the attitude or opinion of the prospect, before closing the sale (or asking for the order) If the response to trial close question is favourable, then the salesperson should close the sale Some of the techniques used for closing the sale are: (a) alternative-choice, (b) minor points, (c) assumptive, (d) summary-of-benefits, (e) T-account, (f) special-offer, (g) probability, and (h) negotiation Follow-up and Service Necessary for customer satisfaction Successful salespeople follow-up in different ways: For example, Check order details Follow through delivery schedule Visit when the product is delivered Build long-term relationship Arrange warranty service

THEORIES OF SELLING
Selling is considered as an art by some and a science by others. This has produced two contrasting approaches to the theory of selling. Four Theories of Selling AIDAS Right set of circumstances Buying Formula Behavioral Equation AIDAS and Right Set Of Circumstances are seller oriented theories.

Buying Formula theory of selling is Buyer oriented. The Behavioral Equation theory emphasizes the buyers decision process but also takes the salespersons influence p rocess into account.

AIDAS theory of selling

A-Securing attention. I-Gaining Interest. D-Kindling desire. A-Inducing Action. S-Building Satisfaction. Securing attention: In order to put the prospect into a receptive state of mind, the first few minutes of the interview are crucial. Gaining Interest: Some sales people develop contagious enthusiasm for the product or a sample. Kindling Desire:: Obstacles must be faced and ways found to get around them. Objections need answering to the prospects satisfaction. Time is saved, and the chance of making a sale improved if objections are anticipated and answered before the prospects raises them Inducing Action: Experienced sales personnel do not close until the prospect is fully convinced of the merits of the proposition. Building Satisfaction:The sales person should reassure the customer that his buying decision is correct and that sales person merely helped in deciding.

Right Set of Circumstances Theory Of Selling

Summed up as Everything Was Right for The Sale. Situation Response Theory This Theory holds that the particular circumstances prevailing in a given selling situation cause the prospect in a predictable way. The more skilled the salesperson is in handling the set of circumstances, the more predictable is the response. The set of circumstances includes factors external & internal to the prospect. The salesperson and the remark are external factors. Proponents of these theory tends to stress external factors and the expense of internal factors. This is a seller oriented theory: it stresses the importance of the salesperson controlling the situation. The Buying Formula Theory The name buying formula has been given by E.K. Strong. It emphasizes the buyers side of the buyer-seller dyad. Reduced to its simplest form, the mental processes involved in a purchase are

Need(or problem)

Solution

Purchase

After adding the fourth element, it becomes

Need

Solution

Purchase

Satisfaction

After modification in the solution and satisfaction, the buying formula becomes

Need

Product/Service and trade name

Purchase

Satisfaction/Dissatisfact ion

After adding adequacy and pleasant feelings, it becomes

Need

Product/Service and trade name

Purchase

Satisfaction/Dissati sfaction

if sales to new prospects are desired, every element in t he formula should be presented. developing new uses is comparable to selling to new prospects.

4: BEHAVIORAL EQUATION THEORY Developed using stimuli-response model.

Sophisticated and advanced version of the Right set of circumstances theory. Requires 4 essential elements1: Drive-A strong internal stimulus. 2: Cues-Weak stimuli when the buyers respond. o Triggering o Non-Triggering (specific product-eg. special discounts) 3: Response- What does the buyer do? 4: Reinforcement- Event that strengthens the buyers response tendency. Equation: B=P*D*K*V B=Response P=Predisposition (inward response tendency) D=Present drive level K=Inventive potential V=Intensity of all cues When a products potential satisfaction to the buyer (K) yields rewards, reinforcement occurs. When P is positive, K is automatically active. When P and K are positive, customers are more loyal to the product.

UNIT III: SALES CONTROL Report & documentation used in sales Management
Sales Management entitles all management of activities related to Customer Sales, such as Sales Orders, Pricing, Shipping, Invoicing and Reporting. It is possible to link documents such as order documents, delivery notes and invoice, in any order required. If considered unnecessary, they can be disregarded. The capacities of the EDI (Electronic Data Interchange) and the integration with PDAs (Personal Digital Assistant) provide access beyond the physical limits of a company.

Above flow is an example of the events for a Standard Sales Order with Delivery terms 'complete order' and Invoice terms 'After order delivered'.

Sales Order:
A Sales Order is a document that specifies products and/or services ordered by a specific c ustomer, as well as the price, terms and conditions.

Document types:
When a Sales Order gets booked, different Document types can be selected to indicate the purpose of the Sales Order:

Standard Order: When booking this type of order, no additional action is taken. The order quantity is reserved in the warehouse until shipment takes place. Point of Sales Order (POS): Upon completion of the Sales Order, the shipment takes place automatically and the invoice is created. Warehouse Order: Upon completion of the Sales Order, the shipment is created automatically. Return Material (Refund): This Document type is used when material is returned. The order quantities are negative to increase stock size. Proposal: This Document type is used to record a potential Customer Sales Order. No stock is reserved for this type of Sales Order. MRP does not include this type of Sales Order in the calculations of the Manufacturing - and Purchase Plans. Quotation: This Document type is also used to record a potential Customer Sales Order, but in this case stock is reserved also. MRP does not include this type of Sales Order in the calculations of the Manufacturing- and Purchase Plans.

Prepay Order: For this type of Sales Order, the invoice is sent out and has to be paid before the goods will be shipped. Note: Please, note that complete flow for this kind of document is not fully implemented (such us next actions, statuses and so on...) On Credit Order: Upon completion of the Sales Order, the system automatically creates a shipment and an invoice. The customer will receive the goods and the invoice together.

Sales Order Attribute:

Document number: The document number for the Sales Order can be automatically generated or filled out manually if required Order Reference: Any external reference number of the Customer can be displayed in this field for reference purposes. Price List: Per Sales Order a specific pricelist can be selected for the Customer that will apply to all lines on that Sales Order. Document Status: Different statuses can be selected to indicate in what phase of the Order process the Sales Order currently is. Examples of document statuses are Draft, Not Accepted, Underway, Completed, Closed, etc. Form of Payment: Different payment methods can be selected to indicate how the invoice will be paid for. Examples of Form of Payment are Bank Deposit, bank order, bank remittance, cash, credit card, cash shipment,money order, promissory note. Payment terms: Payment terms is defined to indicate when an Sales invoice needs to be paid. For example: immediately, once a month, every two months on the 10th of the month, etc. Warehouse: This field indicates from which warehouse a Sales Order must be shipped. Apart from the above attributes, the Sales Order also specifies many other attributes, for example:

what goods need to be shipped the name of the customer ordered quantity prices of the goods date when the order was booked when they need to be shipped where it needs to ship to what tax needs to be applied

The Sales Order indicates the Summed Line Amount(the sum of the amounts on the Sales Order without taxes being added) and the Grand Total Amount (the sum of the amounts on the Sales Order including taxes)

Invoice Terms: The Invoice Terms indicate when payment needs to take place for a Sales Order.
Different Invoice Terms are:

After order delivered: After delivery Customer Schedule After Delivery Do not invoice Immediate

After order delivered: In this case the customer wants to be invoiced after all lines on the sales order have been delivered. For example, if the customer has ordered 10 units of product A and 5 units of product B, after delivering product A, the customer does not receive an invoice. Only after product B has been delivered, an invoice will be sent. After delivery: In this case the customer will be invoiced for the goods that have been delivered. For example, if the customer has ordered 10 units of product A and 7 units were delivered, an invoice for 7 units of product A will be created and sent to the customer. The invoice for the remaining 3 units will be created and sent, after shipment takes place of those 3 units. Customer Schedule after Delivery: This invoice term is the most commonly used one. Instead of sending out invoices each time a sales order line or complete sales order gets delivered, in this case one invoice is created that is combining the different deliveries for a certain customer.

One of the possible grouping of invoices can be done based on a timeframe. Another possible grouping of invoices can be based on a project.

For example if a customer has received delivery of sales order a, b and c for project X and delivery of sales order d and e for project Y, one invoice for project X (listing sales order a, b and c) and one invoice for project Y (listing sales order d and e) will be generated for that customer. Do not invoice: This invoice term is used for very important customers. The implication is that no invoice gets sent out until the customers give you the go ahead. For example the customer ordered different products and all the products have been delivered to the customer already, yet no invoice gets sent until the customer tells you that it is okay to do so. Immediate: When the invoice term is Immediate, the invoice for the Sales Order gets created instantly, regardless of whether any shipment of ordered products took place or not.

Delivery Terms: The Delivery Terms indicate when a Sales Order should be delivered:

After receipt Availability Complete line Complete Order

Goods Shipment:
A Goods Shipment to the customer can be generated either manually or automatically. The automatic method can generate Good s Shipments based on a Sales Order or a Sales Invoice. A Goods Shipment can be generated for one or more Sales Orders or for all Sales Orders that are pending to be shipped. The number of shipments that get generated per Sales Order will vary depending on the Delivery Terms. Before a Goods Shipment is processed, the system checks the credit limit of the customer and gives a warning if the credit limit is exceeded. However, we can make a decision to ship the goods to the customer regardless. The Goods Shipment indicate an Accounting Date, indicating what date to be used in General Ledger account entries that get generated because of the shipment.

Shipping Companies:
For the delivery of materials, depending on the route, one or many Shipping Companies may be chosen. The Shipping Companies will be registered in the system and when creating a goods shipment, the system can select the best Shipping Company or it can be selected manually.

Sales Invoice:
A Sales Invoice is an itemized statement or written account of goods sold to a customer by a company. It indic ates the quantity and price of each product or service included in the Sales Order. The Sales Invoice contains a lot of information, for example:

Invoice number corresponding Sales Order information corresponding Goods Shipment information the product(s) on the invoice the name of the customer how many product(s) are being invoiced prices of the goods tax amount (generated automatically) invoice amount

Sales Invoices can be generated for one or more Sales Orders or for all Sales Orders that are pe nding to be invoiced. Sales Invoices can be grouped by customer, project, location, etc. with the advantage that the affected parties recei ve the invoices consolidated. With the payment monitor it is possible to track the payment status of the invoice and get valuable information such as the outstanding amount and the days pending till the next due date.

Sales "Financial" Invoices

For those cases when a sales invoice do not related to a product, good or service but to a "G/L account" needs to be entered and posted in the system, there is a flag called "Financial Invoice Line" in the Sales Invoice Line, end-user can set as "yes" in order to enter a "G/L Item" linked to a "G/L Account" instead of a Product, Good or Service. G/L items above mentioned, can be created as rest of G/L items but need to be set up as "Enable in Financial Invoices" which means that just those G/L items will be linked to a "Tax Category" and therefore shown in a sales line like a product.

Payment and Payment monitor

The Payment is automatically generated when the Sales Invoice gets completed. The Payment contains the payment and invoice terms information and the amount of the invoice. This way, Accounting is updated automatically. Payment monitor allows to track the invoice payment status. In this section it is possible to know whether invoice is fully paid or not. If not then how much has been receipt, how much is pending, when is the next payment due date and the amount that is expected to be received on that date. The status can be updated automatically by a background process or manually for each invoice. The date when payment status was last time calculated is displayed in the form. Filter Pop-up window allows to filter invoices based on fully paid or not criteria (display all option is also available).

Price Applications
Price Lists: The Price List contains products with their prices, currencies and tax treatment. The prices on the Price List may
include discounts. Only one Pricelist can be assigned to a customer. A different version of the Pricelist may be created for a certain date range, for example for special events or seasonal sales.

All products have three prices:

List price: the Catalog sales price of a product Standard price: Companys sales price Price Limit: the lowest possible price a product may be sold for

Commissions
Commissions set up accommodates defining how and when commissions will be calculated and whom to pay to. It is possible to pay multiple commissions for the same Sales Order or Sales Invoice, for example for different people. The commission is applied for a certain business partner and for the period of time defined. After defining the commission, a new invoice is generated for Accounting Ledger. A selection criteria can be defined for the commission, to apply the commission for specific Business Partners or specific Products.

Volume Discounts
Volume discounts can be configured for when a customer reaches a certain sales volume. The Volume discounts is setup for certain product categories and is defined for certain customers. Volume discounts can be scaled, so that each range of amounts has a different discount. Only during the defined time period the Volume discounts will be applied. A Payment Method can be selected.

Price Adjustments
Price adjustments are special prices for any reason and are applied automatically when a new Sales Order gets booked. Dif ferent Price adjustments can be configured for business partners, products, partner groups and product categories and are valid during a certain time period.

BUDGETARY CONTROL
Budget is a plan which is expressed in terms of definite members: Eg. of a plan Production has to be increased in the next quarter Eg. of a budget Production has to improve by 10000 units from the last quarter to the next quarter. Definitions: According to ICMA budget is a financial & / quantitative statements, prepared & approved prior to a defined period of time of the policy to be pursued during that period for the purpose of attaining a given objective. They may include income, expenditure & the employment of capital. Budgetary Control It is the process of utilizing the various budgets like production budget, sales budget, etc,. for the purpose of internal control. This is done with intention of minimizing the wastage & maximizing the efficiency of various departments. According to ICMA terminology budgetary control as the establishment of budgets relating the responsibilities of executives to the requirements of the policy & the continuous comparison of actual with the budgeted results either to secure by individual actions the objective of that policy to provide basis for its revision. Steps involved in the Budgetary Control Techniques: 1. 2. 3. 4. 5. 6. 7. 8. Fise the objectives clearly. Formulating the necessary plans to ensure that the desired objectives are achieved. Translating the plans into budgets. Relating the responsibilities of executives to the budgets. Continuous comparison of the actual results with that of the budget & the ascertainment of deviations (Positive/negative). Investigating into the deviations & establishing the causes. Presentation of information to the management relating the variances to individual responsibilities. Corrective action of the management to present recurrence of variance

Types of Budget

Based on Functions i.Production Budget ii.Production Cost Budget iii.Materials Budget iv.Materials Cost Budget v.Cash Budget vi.Capital Budget vii.Sales Budget viii.Selling Cost Budget ix.Plant Utilisation Budget x.Labour Budget xi.Labour Cost Budget xii.Research & Development Budget xiii.Administration Cost Budget Master Budget:- It is a budget which summarises all the functional budgets.

Based on Rigidity i. Fixed Budget ii. Flexible Budget

According to ICMA, A master budget is the summary budget incorporating its components functional budgets & which is finally approved, adapted & employed. According to ICMA, A budget which is designed to remain unchanged irrespective of the volume of output/turnover attained. Fixed Budget. * According to ICMA, A budget which, by recognizing the difference in behavior between fixed & variable cost in relation to fluctuations in output/turnover, is designed to change appropriately with such fluctuations. BUDGETARY CONTROL Meaning of Budget: According to Brown and Howard, A budget is a pre-determined statement of management policy during a given period which provides a standard for comparison with the results actually achieved. Budgeting: The act of preparing budgets is called budgeting. In the words of Batty, the entire process of preparing the budgets is known as budgeting. Meaning of Budgetary Control: Budgetary control is a system of controlling costs through preparation of budgets. Budgeting is thus only a part of budgetary control. According to CIMA, Budgetary control is the establishment of budgets relating the responsibilities of executives of a policy & the continuous comparison of the actual with the budgeted results, either to secure by individual actions the objective of that policy to provide basis for its revision. Forecast & Budget: It is important to note carefully the distinction between a forecast and a budget. A forecast is a prediction of what may happen as a result of a given set of circumstances. It is an assessment of probable future events. A budget, on other hand, is a planned exercise to achieve a target. It is based on the pros and Cons of a forecast. Forecasting thus precedes the preparation of a budget. Thus the main point of distinction between the two is that forecast is concerned with probable events while budget relates to planned events. Furthermore, forecast can be made by anybody, whereas a budget, being an enterprise objective, can be set o nly by the authorized management. Objectives of Budgetary Control The following are the objectives of a budgetary control system: 1. Planning: A budget provides a detailed plan of action for a business over definite period of time. Detailed plans relating to production, sales, raw material requirements, labour needs, advertising and sales promotion performance, research and development activities, capital additions etc., are drawn up. By planning many problems are anticipated long before they arise and solutions can be sought through careful study. Thus most business emergencies can be avoided by planning. In brief, budgeting forces the management to think ahead, to anticipate and prepare for the anticipated conditions. Co-ordination: Budgeting aids managers in co-ordinating their efforts so that objectives of the organisation as a whole harmonise with the objectives of its divisions. Effective planning and organisation contributes a lot in achieving coordination. There should be coordination in the budgets of various departments. For example, the budget of sales should be in

2.

3.

4. 5.

6.

coordination with the budget of production. Similarly, production budget should be prepared in co-ordination with the purchase budget, and so on. Communication: A budget is a communication device. The approved budget copies are distributed to all management personnel which provides not only adequate understanding and knowledge of the programmes and policies to be followed but also gives knowledge about the restrictions to be adhered to. It is not the budget itself that facilitates communication, but the vital information is communicated in the act of preparing budgets and participation of all responsible individuals in this act. Motivation: A budget is a useful device for motivating managers to perform in line with the company objectives. If individuals have actively participated in the preparation of budgets, it act as a strong motivating force to achieve the targets. Control: Control is necessary to ensure that plans and objectives as laid down in the budgets are being achieved. Control, as applied to budgeting, is a systematized effort to keep the management informed of whether planned performance is being achieved or not. For this purpose, a comparison is made between plans and actual performance. The difference between the two is reported to the management for taking corrective action. Performance Evaluation: A budget provides a useful means of informing managers how well they are performing in meeting targets they have previously helped to set. In many companies, there is a practice of rewarding employees on the basis of their achieving the budget targets or promotion of a manager may be linked to his budget achievement record.

Advantages of Budgetary Control: Budgetary control provides the following advantages: 1. Budgeting compels managers to think ahead i.e. to anticipate and prepare for changing conditions. 2. Budgeting co-ordinates the activities of various departments and functions of the business. 3. It increase production efficiency, eliminates waste and controls the costs. 4. It pinpoints efficiency or lack of it. 5. Budgetary control aims at maximization of profits through careful planning and control. 6. It provides a yardstick against which actual results can be compared. 7. It shows management where action is needed to remedy a situation. 8. It ensures that working capital is available for the efficient operation of the business. 9. It directs capital expenditure in the most profitable direction. 10. It instills into all levels of management a timely, careful and adequate consideration of all factors before reaching important decisions. 11. A budget motivates executives to attain the given goals. 12. Budgetary also aids in obtaining bank credit. 13. Budgeting also aids in obtaining bank credit. 14. A budgetary control system assists in delegation of authority and assignment of responsibility. 15. Budgeting creates cost consciousness and introduces an attitude of mind in which waste and efficiency cannot thrive. Limitations of Budgetary Control The list of advantages given above is impressive, but a budget is not a cure all for organisational ills. Budgetary control system suffers from certain limitations and those using the system should be fully aware of them. 1. The budget plan is based on estimates: Budgets are based on forecasting cannot be an exact science. Absolute accuracy, therefore, is not possible in forecasting and budgeting. The strength or weakness of the budgetary control system depends to a large extent, on the accuracy with which estimates are made. Thus, while using the system, the fact that budget is based on estimates must be kept in view. 2. Danger of rigidity: A budget programme must be dynamic and continuously deal with the changing business conditions. Budgets will lose much of their usefulness if they acquire rigidity and are not revised with the changing circumstances. 3. Budgeting is only a tool of management: Budgeting cannot take the place of management but is only a tool of management. The budget should be regarded not as a master, but as a servant. Sometimes it is believed that introduction of a budg et programme alone is sufficient to ensure its success. Execution of a budget will not occur automatically. It is necessary that the entire organisation must participate enthusiastically in the programme for the realisation of the budgetary goals. 4. Expensive Technique: The installation and operation of a budgetary control system is a costly affair as it requires the employment of specialised staff and involves other expenditure which small concerns may find difficult to incur. However, it is essential that the cost of introducing and operating a budgetary control system should not exceed the benefits derived therefrom. Essentials of Effective Budgeting: A budgetary control system can prove successful only when certain conditions and attitudes exist, absence of which will negate to a large extent the value of a budget system in any business. Such conditions and attitudes which are essential for effective budgeting are as follows: 1. Support of Top Management: If the budget system is to be successful, it must be fully supported by every member of the management and the impetus and direction must come from the very top management. No control system can be effective unless the organisation is convinced that the top management considers the system to be import. 2. Participation by Responsible Executives: Those entrusted with the performance of the budgets should participate in the process of setting the budget figures. This will ensure proper implementation of budget programmes. 3. Reasonable Goals: The budget figures should be realistic and represent reasonably attainable goals. The responsible executives should agree that the budget goals are reasonable and attainable.

4.

Clearly Defined Organisation: In order to derive maximum benefits from the budget system, well defined responsibility centres should be built up within the organisation. The controllable costs for each responsibility centres should be separately shown. 5. Continuous Budget Education: The best way to ensure the active interest of the responsible supervisors is continuous budget education in respect of objectives, potentials & techniques of budgeting. This may be accomplished through written manuals, meetings etc., whereby preparation of budgets, actual results achieved etc., may be discussed. 6. Adequate Accounting System: There is close relationship between budgeting and accounting. For the preparation of budgets, one has to depend on the accounting department for reliable historical data which primarily forms the basis for many estimates. The accounting system should be so designed so as to set up accounts in terms of areas of managerial responsibility. In other words, responsibility accounting is essential for successful budgetary control. 7. Constant Vigilance: Reports comparing budget and actual results should be promptly prepared and special attention focused on significant exceptions i.e. figures that are significantly different from those expected. 8. Maximum Profit: The ultimate object of realizing the maximum profit should always be kept uppermost. 9. Cost of the System: The budget system should not cost more than it is worth. Since it is not practicable to calculate exactly what a budget system is worth, it only implies a caution against adding expensive refinements unless their value clearly justifies them. 10. Integration with Standard Costing System: Where standard costing system is also used, it should be completely integrated with the budget programme, in respect of both budget preparation and variance analysis. Standard Costing VS. Budgetary Control Standard costing and budgetary control have the common objective of cost control by establishing pre-determined targets. The actual performances are measured and compared with the pre-determined targets for control purposes. Both the techniques are of importance in their respective fields and are complementary to each other. Points of Similarity: There are certain basic principles which are common to both standard costing and budgetary control. These are: 1. The establishment of pre-determined targets of performance 2. The measurement of actual performance 3. The comparison of actual performance with the pre-determined targets. 4. The analysis of variances between the actual and the standard performance 5. To take corrective measures, where necessary. Points of Difference: In spite of so much similarity between standard costing and budgetary control, there are some important differences between the two, which are as follows: Standard Costing Standard costs are developed mainly for the manufacturing function and sometimes also for making and administration functions Standard costing is intensive in application as it calls for detailed analysis of variances In standard costing, variances are usually revealed through accounts Budgetary Control Budgets are compiled functions of the business such as sales, purchase, production, cash, capital expenditure, research & development, etc., Budgetary control is extensive in nature and the intensity of analysis tends to be much less than that in standard costing. In budgetary control, variances are normally not revealed through accounts and control is exercised by statistically putting budgets and actuals side by side. Budgets usually represent an upper limit on spending without considering the effectiveness of the expenditure in terms for output. Budgets may be based on previous years costs without any attention being paid to efficiency.

Scope

Intensity

Relation to accounts

Usefulness

Basis

Projection

Standard costs represent realistic yardsticks and, are therefore, more useful for controlling and reducing costs. Standard cost are usually established after considering such vital matters as production capacity, methods employed and other factors which require attention when determining an acceptable level of efficiency. Standard cost is a projection of cost accounts

Budget is a projection of financial accounts.

SALES VARIANCE ANALYSIS

Sales variance can be defined as the difference between the actual sales made by an organization and the budgeted sales expected by them. It is an effective measure to analyze the performance of the sales function which further helps to analyze the performance of an entity in the present market conditions & helps in forecasting future growth & profitability. There are various reasons for the sales variance but the most important technical reasons are: The actual volume sold is more or less than the budgeted volume Sales are made at a price which is higher or lower than the price mentioned in the budget Sales Price variance happens because of sales volume variance which can be because of the following two reasons: 1. Sales Mix Variance 2. Sales Quantity Variance

TYPES OF SALES VARIANCES:

Methods of analyzing the sales variance:

1. 2. 3. 4. 5. 6. Purchase price variance. Labor rate variance Material yield variance Variable overhead spending variance Fixed overhead spending variance Selling price variance

They can be further explained as mentioned below: Purchase price variance: This arises when more cost is incurred in procuring the raw material which is further used in the production. Thus, this is the actual cost incurred less the standard cost to be incurred for such materials multiplied by the total number of units. Labor rate variance: This can increase or decrease the total revenue of less / more cost is incurred in procuring the labour required for production. Thus, this is the actual price paid to the labor less the planned standard cost which is further multiplied by the total number of units used for the production of goods. Material yield variance: This is the variance in respect of the material to be used for the production of goods. This is difference of actual cost & the standard cost. Variable overhead spending variance: This is the variance in respect of the overhead cost of variable nature incurred in the production of goods. This is difference of actual cost & the standard cost. Fixed overhead spending variance: This is the variance in respect of the overhead cost of fixed nature incurred in the production of goods. This is difference of actual cost & the standard cost. Selling price variance: This is actual variance which arises due to difference in the actual price & the standard price at which the goods are actually sold multiplied by the total number of goods sold. Thus, as we can see variance analysis is an effective tool for measuring the actual performance of an entity with respect to the standards set by the management of the organization. This is also important for benchmarking the growth factors in the concerned industry.

Advantages of variance analysis:

Variance analysis helps in determining the objective & evaluating such objectives by doing a comparison between the actual & budgeted figures. Achieving the standards & achieving the targets boost the employee morale & motivates them for further growth.

Variance analysis is an important tool for effective decision making as variance analysis helps in identifying the areas of inefficiency. Variance analysis helps in formulating the price of goods sold because if there is a favorable variance then, there is a scope of further increase in the price which can be planned strategically by the company. In case of unfavorable variances, it is essential to identify the factors which are increasing the cost. This helps in identifying the areas of inefficiencies. The principle of Management by Exception can be evaluated. Variance analysis effectively helps to identify the factors responsible for undesirable performance. This further extends the scope for taking the corrective actions to reduce such variances in future. There is free flow of communication within the organisation between the management and the supervisors as everyone in the organisation is fully aware of the standards which are set by the management & are required to be accomplished. Variance analysis helps in procedures related to planning by making a summary of forecasting needs It helps in establishing the bid prices on the contracts to be entered in future so that expected & desired profit targets can be determined & in turn achieved effectively. It further helps in simplifying the procedure of bookkeeping by maintaining the records at the cost which is specifically mentioned as the standard cost.

Drawbacks of variance analysis:

Delay in timing: The variances are compiled by the accounting staff generally at the end of the month before finalizing & issuing the results to the management. This increases the timing errors & as a result no step could have been taken in respect of that particular period. Thus, variances should be reported on a daily basis to optimize the results in the most effective manner. Information source: At times it is very difficult to analyse the reasons for the variance. Setting of standards - Variance analysis is basically because of the difference between the actual & standards. Thus, standards should be set on the basis of logical factors & it should be possible to achieve such standards.

UNIT:5 PHYSICAL DISTRIBUTION MANAGEMENT

A customer is served by: (1) identifying an existing or potential need of the customer, giving concrete expression and shape to the need through advertising, designing the product and pricing it; (2) Manufacturing the product; and (3) Making the product available to the customer at the right place and time, by a proper arrangement of the movements and local storages of the product. Physical Distribution Management function (also called Logistics) is concerned with item. In some cases, it also includes the movement of raw materials from the supply source to the manufacturing facility. PDM is the function that helps in a big way, to provide the time and place utility to the customer. Thus, marketing functions and PDM function are closely related to one another. PDM has to provide the desired level of product availability to the customer at lowest cost. In fact, PDM is efficient management of materials, their movement. storage and control outside the manufacturing plant which activity concerns the marketing objectives of meeting customer demand. The major job elements or decisions made in PDM are: 1. Optimal location and arrangement of fixed storage facilities such as the warehouses, depots, or supply centers so as to provide the customer/s with the desired product/s. 2. How should different customers be supplied from the different depots/supply centers? 3. Inventory Control Systems and policies in these depots/ supply centers. 4. Optimal management of the transport/ shipment of the product/s. All above decisions are to be taken so that the desired level of service to the customers is provided at the lowest total cost. The expression for the total cost of a distribution system may be written as: TDC = TFC + TVC + SFC + SVC + IC + PC where TDC: Total distribution cost TFC: Fixed costs of transportation TVC: Variable costs of transportation SFC: Fixed costs of supply centers SVC: Variable costs of supply centers IC: Inventory related costs PC: Packaging costs PDM function has to be viewed in its totality. For instance, if speedy transport is used at higher costs, one may be able to manage with less number of distribution points or depots. If the transport is slow, then one would need more number of depots. If transport is fast, the lead times are small, and consequently the inventory carrying costs are low. In short each component of PDM interacts with another. However, in what follows, analytical techniques will be presented independently for the following major areas of PDM: 1. Warehouse/Distribution center location 2. Allocation of warehouse capacities to customers demands 3. Vehicle route scheduling Once again it may be emphasized that all the components of Physical Distribution System interact with another. As long as the reader is aware of this, the independent presentation of the above mentioned areas of decision making in PDM will help in understanding the implications of each one of them thoroughly. Optimal Location of Warehouse: There are analytical methods available for deciding upon warehouse location, with the objective of minimizing cost. This cost depends upon the distance between the warehouse and the customers (being supplied by the warehouse) as also in the frequency or the number of loads carried to the customers. The warehouse location problems could be modeled an analogue to a situation where a number of strings are tied to a number of rings and different weights are attached to the strings. These are all placed on a table in which a number of holes are drilled and strings passed through these holes. The holes correspond to customers; location and the weights correspond to the number of loads carried to the customers (or the weight age given to each customer). Due to different weights the ring will experience pulls in different directions and will stabilize at one point. This is the point of minimum potential energy which is analogous to optimal depot location.

What is Physical Distribution?

Comprises all the activities that help to ensure that the right amount of product is delivered to the right place at the right time. Physical Distribution is a part of logistics. It includes order processing, transportation, storage, stock handling, and inventory control Physical Distribution

The activities associated with the movement of material, usually finished goods or service parts, from the manufacturer to the customer APICS 11th Edition Dictionary Physical Distribution Physical Supply goods moving from supplier to manufacturer inbound Physical Distribution goods moving from manufacturer to customers outbound

The physical distribution components: Packing and unitization Warehousing Inventory Transportation Order processing Packaging of export cargo is an important logistics activity as it facilities safe and smooth shipment of goods. Packaging is a silent salesman. Packaging according to grading. Prevents pilferage and theft. Storage of goods. Breaking of bulk. Mixing or assembly. To maintain uninterrupted supply. To optimize buying cost. To economize production cost. To take advantage of quantity discount. To cope up with seasonal fluctuations. In international trade 3 types of modes are used. Air freight. Water carriers. Pipeline transport. Verifying customers credibility Checking for any outstanding payment Monitoring stock level Preparing invoice Arranging transporter Sending the consignment and information

Packing and unitization

Warehousing

Inventory

Transport

Order Processing