Selling and Distribution Overheads

Selling and Distribution overheads are also one of the important indirect costs. As such every business unit has to incur this cost, be it a manufacturing concern of a trading concern, and be it a retail shop or wholesale business.

The nature of selling and distribution overheads is different from any manufacturing overheads. Even sometimes selling and distribution overheads are given more importance than any other manufacturing overheads, because whatever is produced cannot be sold unless the promotional efforts are made. Selling and Distribution overheads includes market research expenses, advertisement expenses, salaries and

commission of salesmen, sales office expense, packing and shipping expenses, warehouse expenses etc.

Even before production a business unit which is relatively new has to incur expenses on market research and after production proper advertisement and sales promotion expenses are to be made in order to sell the produce. As every business unit has a objective of profit maximization, it can be achieved only by increasing sales, which can be achieved by making selling and distribution expenses very tactfully. With increased efforts for promoting sales and also due to increase in competition, considerable expenditure is incurred on selling and distribution and this sometimes exceeds even the cost of manufacture.¹¹

Table : 4.6

Table Showing Proportion of Selling & Distribution Overheads to Total Cost of Pharmaceutical Companies under Study [in percentage]

Period: 1997-98 to 2004-05

Co. 97-98 98-99 99-00 00-01 01-02 02-03 03-04 04-05

Aurobindo 3.58 2.6 3.31 2.95 3.05 2.8 3.48 3.83

Cadila 11.13 10.56 11.68 11.23 13.21 11.73 12.3 14.87

Cipla 8.37 8.06 9.04 10.35 10.6 9.58 9.34 9.46

Dr .Reddy 14.87 13.72 16.32 13.37 13.29 13.66 13.03 12.98

IPCA 8.3 8.65 13.02 13.1 11.52 12.15 12.65 14.42

Matrix 3.18 2.75 2.04 3.97 4.24 12.2 7.21 5.27

N. Piramal 4.07 5.92 4.36 6.12 17.39 18.94 18.41 17.65

Sun 16.67 15.33 13.73 13.38 15.47 14.55 14.17 11.25

(Source: Annual Reports of Companies from the year 1997-98 to 2004-05)

From the above Table no. 4.6 it is evident that proportion of Selling and Distribution Overheads to Total cost for Aurobindo Pharma lies between 3.83(2004-05) and 2.6(98-99) with an average of 3.20 which is low as compared to the overall average of 10.16 for the same study period.

It is evident that proportion of Selling and Distribution Overheads to Total cost for Cadila Healthcare lies between 14.87(2004-05) and 10.56(98-99) with an average of 12.09 which is high as compared to the overall average of 10.16 for the same study period.

It is evident that proportion of Selling and Distribution Overheads to Total cost for Cipla Ltd. lies between 10.35(2000-01) and 8.06(98-99) with an average of 9.35 which is low as compared to the overall average of 10.16 for the same study period.

It is evident that proportion of Selling and Distribution Overheads to Total cost for Dr.

Reddy’s Laboratories lies between 16.32(1999-2000) and 12.98(2004-05) with an average of 13.91 which is high as compared to the overall average of 10.16 for the same study period.

It is evident that proportion of Selling and Distribution Overheads to Total cost for IPCA lies between 14.42(2004-05) and 8.3(97-98) with an average of 11.73 which is high as compared to the overall average of 10.16 for the same study period.

It is evident that proportion of Selling and Distribution Overheads to Total cost for Matrix Laboratories lies between 12.2(2002-03) and 2.04(99-00) with an average of

5.11 which is very low as compared to the overall average of 10.16 for the same study period.

It is evident that proportion of Selling and Distribution Overheads to Total cost for Nicholas Piramal lies between 18.94(2002-03) and 4.07(97-98) with an average of 11.61 which is high as compared to the overall average of 10.16 for the same study period.

It is evident that proportion of Selling and Distribution Overheads to Total cost for Sun Pharmaceuticals lies between 16.67(97-98) and 11.25(2004-05) with an average of 14.32 which is high as compared to the overall average of 10.16 for the same study period.

F – Test (ANOVA) Analysis

In order to establish relationship in the ratio of Selling and Distribution Overheads to Total Cost among different Pharmaceutical companies under study during the study period and for establishing relationship in the ratio of Selling and Distribution Overheads to total cost among different years for each (individual) company, F-Test ANOVA is used. The statements of hypothesis for the comparison among different companies and for comparison among different years for individual companies during the study period are as under:

Hypothesis for comparison between different companies:-

Null Hypothesis (H0):- “The ratio of selling and distribution overheads to total cost between different companies under study during the study period is same.”

Alternate Hypothesis (H1):- “The ratio of selling and distribution overheads to total cost between different companies under study during the study period is not same.”

Hypothesis for comparison between different years:-

Null Hypothesis (H0):- “The ratio of selling and distribution overheads to total cost between different years during the study period in each company under study is same.”

Alternate Hypothesis (H₁):- “The ratio of selling and distribution overheads to total cost between different years during the study period in each company under study is not same.”

In the following Table 4.6(a) the calculation of F Test (ANOVA) is shown of Selling and Distribution Overheads to Total Cost ratio for the Pharmaceutical Companies under study, during the study period.

Table : 4.6(a)

Table Showing calculation of F-Test (ANOVA)

S V d f S. S. M. S. S. F cal

Between

Companies 7 913.7126734 130.5303819 16.26002689

Between

Years 7 104.6594734 14.95135335 1.862473731

Error 49 393.3565891 8.027685491

Total 63 1411.728736

The above Table 4.6(a) shows the F value of 16.26 at 5% level of significance and at (7,49) degree of freedom for different Pharmaceutical Companies under study during the study period which is greater than the table value of 2.16 hence the null hypothesis is rejected and the alternate hypothesis is accepted, which means that there is a significant difference among the different companies under study in the ratio of Selling and Distribution Overheads to total cost. F value of 1.86 at 5% level of significance and at (7,49) degree of freedom is lower than the Table value of 2.16 hence null hypothesis is accepted and alternate hypothesis is rejected, which means that there is a no significant difference between different years’ ratios for all the individual companies.

Hence it can be concluded that he selling and distribution overheads to total cost ratio among different companies under study are not same and the selling and distribution overheads to total cost ratio between different years of each company are same.