Martin Packaging Company, Inc.: Manufacturer of Packaging Products and Systems – Use of Standard Costs

George Hannibal, manager of the Sales Department of the Martin Pack­aging Company, Inc., faced the task of evaluating the marketing and sales strategy imputations of the proposed new method of using standard costs in budgeting sales costs. Because the averaging method currently in use provided very poor estimates for budgeting purposes, Grady Winkler, the Marketing Controller, proposed the adoption of standard costs.


Because of the very strong competition in the packaging and bottling indus­tries, Martin management had found that careful cost control provided !For background information, see Case 1-10 Martin Packaging Company, Inc., the difference between competitiveness and noncompetitiveness. To keep costs in line Martin had operated under fairly rigid budgets for the past decade. A continuing problem in the budgetary process had been the dif­ficulty in estimating the various elements in selling costs. In the past, the accounting department had estimated selling costs by adding up the total selling costs in past months and dividing the total by the number of units of the product being sold. The resulting budgeted selling expenses bore lit­tle relationship to the actual expenses incurred and provided a continuing source of friction between George Hannibal and Grady Winkler. Winkler claimed that Hannibal and his sales force made little effort to stay within budgetary guidelines; Hannibal claimed that actual costs varied widely between salespeople in different regions. He argued that too rigid confor­mance to budget limits would reduce the ability of some of the salespeople to achieve sales goals.

Hannibal pointed out that he really had two sales forces, one sell­ing in major urban areas to soft drink bottlers only, and another selling in all other markets to a broader group of bottlers. The selling expenses per dollar of sales for the thirty people in the nonurban sales force were higher than for the ten urban salespeople. Costs also varied with the size of the accounts being solicited. For these reasons variation from the budgeted averages was so great that the budget was of little value.

Winkler admitted that average costs had proven to be unsuitable for budgeting selling expenses. As an alternative he suggested using standard costs. Hannibal was highly suspicious of standard costs because of their apparent inflexibility in times of changing costs. However, he agreed to a test. After carefully observing the various tasks of salespeople in different markets, Winkler developed a set of standard costs that allowed for varia­tions according to degree of urbanization and size of customer. The result­ing budgeted expenses provided figures that were, in some cases, widely in variance from past performance of salespeople. As a consequence, Hannibal was doubtful of his ability to secure sales force cooperation and acceptance.

Source: Richard R. Still, Edward W. Cundliff, Normal A. P Govoni, Sandeep Puri (2017), Sales and Distribution Management: Decisions, Strategies, and Cases, Pearson; Sixth edition.

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