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Chapter 14

Customer-Profitability Analysis

andSales-Variance Analysis

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CCs for chapter 14

14-21 (=11.14-20) 8% 14-23 (=11.14-22) 10% 14-25 (=11.14-24) 10% 14-33 (8%) 14-35 (5%)

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Cost Allocation

Meaning Assigning indirect costs to cost objects These costs are not traced Indirect costs often comprise a large percentage of Total

Overall Costs

Purposes1. To provide information for economic decisions2. To motivate managers and other employees3. To justify costs or compute reimbursement amounts4. To measure income and assets for reporting to tax

authorities

4

Six-Function Value Chain

Research &

DevelopmentDistributionMarketingProductionDesign

Customer Service

TIME

Traditional Life Cycle approach may not yield the costs necessary to meet the four-purpose criteria for cost allocation

Costs necessary for decision making may pull costs from some or all of these six functions

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Criteria for Cost-Allocation Decisions

Cause and Effect – variables are identified that cause resources to be consumed Most credible to operating managers Integral part of ABC

Benefits Received – the beneficiaries of the outputs of the cost object are charged with costs in proportion to the benefits received

Fairness (Equity) – the basis for establishing a price satisfactory to the government and its suppliers Cost allocation here is viewed as a “reasonable” or “fair”

means of establishing selling price Ability to Bear – costs are allocated in proportion to

the cost object’s ability to bear them Generally, larger or more profitable objects receive

proportionally more of the allocated costs

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Customer Revenues and Customer Costs

Customer-Profitability Analysis is the reporting and analysis of revenues earned from customers and costs incurred to earn those revenues An analysis of customer differences in revenues and costs can

provide insight into why differences exist in the operating income earned from different customers

Customer Revenues Price discounting is the reduction of selling prices to encourage

increases in customer purchases Lower sales price is a tradeoff for larger sales volumes

Discounts should be tracked by customer and salesperson Customer Cost Hierarchy categorizes costs related to

customers into different cost pools on the basis of different: types of drivers cost-allocation bases degrees of difficulty in determining cause-and-effect or benefits-

received relationships

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Customer Cost Hierarchy Example

1. Customer output unit-level costs

2. Customer batch-level costs

3. Customer-sustaining costs

4. Distribution-channel costs

5. Corporate-sustaining costs

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Other Factors in Evaluating Customer Profitability

Likelihood of customer retention Potential for sales growth Long-run customer profitability Increases in overall demand from having well-known

customers Ability to learn from customers

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Sales Variances

Level 1: Static-budget variance – the difference between an actual result and the static-budgeted amount

Level 2: Flexible-budget variance – the difference between an actual result and the flexible-budgeted amount

Level 2: Sales-volume variance Level 3: Sales-quantity variance Level 3: Sales-mix variance

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Sales-Mix Variance

Measures shifts between selling more or less of higher or lower profitable products

Budgeted Sales-Mix

Percentage

Actual Sales-Mix Percentage

XBudgeted

Contribution Margin per Unit

Sales-Mix Variance =

Actual Units of

All Products

Sold

X

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Sales-Quantity Variance

Budgeted Units of all

Products Sold

Actual Units of All Products Sold

Budgeted Contribution

Margin per Unit

Sales-Quantity Variance

=

Budgeted Sales-Mix

PercentageX X

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Market-Share Variance

Budgeted Market Share

Actual Market Share

X

Budgeted Contribution Margin per

Composite Unit for Budgeted

Mix

Market-Share

Variance=

Actual Market Size in Units

X

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Market-Size Variance

BudgetedMarket

Size

Actual Market Size

Budgeted Contribution Margin per

Composite Unit for Budgeted

Mix

Market-Size Variance =

Budgeted Market Share

X X

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Market-Share and Market-Size Variances

Limitation: reliable information on the actual size and share of various markets is not always available

These are considered Level 4 variances (a decomposition of the Sales-Quantity variance

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Summary of Variances

Static-Budget Varianceactual – budgeted revenue

Level 1

Level 2Flexible-Budget

Varianceactual – flex.budget

Sales-VolumeVariance

static – flexible budget

Level 3Sales-Mix Variance

actual units, actual – budgeted mix

Sales-Quantity Varianceactual – budgeted units

Level 4Market-Share Variance

actual sizeactual – budgeted share

Market-Size Varianceactual – budgeted size

flex. budget = actual units, actual mix, budgeted contribution

Budgeted contribution margin Budgeted Sales Mix

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14-21

1. Customer-level operating income?

2. Profitability Rank order of customers

3. Options for customer relationship management

Avery Okie Wizard Grainger Duran TotalRevenues $260.000 $200.000 $322.000 $122.000 $212.000 $1.116.000Technician and equipment cost 182.000 175.000 225.000 107.000 178.000 867.000 Office overhead allocated 31.859 24.507 39.457 14.949 25.978 136.750 Operating income $ 46.141 $ 493 $ 57.543 $ 51 $ 8.022 $ 112.250

Avery Okie Wizard Grainger DuranNumber of service calls 150 240 40 120 180 Number of web-based parts orders 120 210 60 150 150 Number of bills (or reminders) 30 90 90 60 120

Activity AreaService call handling $75 per service callParts ordering $80 per web-based parts orderBilling and collection $50 per bill (or reminder)Customer database maintenance $10 per service call

Cost Driver Rate

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14-23

sales volume variance for each type of ticket and in total

sales quantity and sales mix variances comment

Lower tier tickets Upper tier tickets

Selling price

Downtown Arena fee

Resevarion network fee

Contribution margin / ticket

$35

10

5

$20

$14

6

3

$5

Budgeted seats sold

Actual seats sold

4 000

3 300

6 000

7 700

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14-25

Total sales volume variance, total sales mix variance, total sales quantity variance

Inferences?

Product

Budget Actual

Selling price

variable cost

units sold Selling price

variable cost

units sold

Kola

Limor

Orlem

$6.00

$4.00

$7.00

$4.00

$2.80

$4.50

400 000

600 000

1 500 000

$6.20

$4.24

$6.80

$4.50

$2.75

$4.60

480 000

900 000

1 620 000

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14-32/33

Selling price Var. cost/unit Sales volume

Budgeted Operating Data

PalmPro

PalmCE

PalmKid

$379

269

149

$182

98

65

12,500

37,500

50,000

Actual Operating Data

PalmPro

PalmCE

PalmKid

$349

285

102

$178

92

73

11,000

44,000

55,000

20

14-34/35

Selling price/pound

Var. cost/pound

Sales volume

Budgeted Operating Data

Chocolate Chip

Oatmeal raisin

Coconut

White choc

Macademia nut

$4.50

5.00

5.50

6.00

6.50

$2.50

2.70

2.90

3.00

3.40

45,000

25,000

10,000

5,000

15,000

Actual Operating Data

Chocolate Chip

Oatmeal raisin

Coconut

White choc

Macademia nut

$4.50

5.20

5.50

6.00

7.00

$2.60

2.90

2.80

3.40

4.00

57,600

18,000

9,600

13,200

21,600

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Natural Nutrients Bakery of Springfield produces three flavors of cat morsels that have budgeted and actual sales data for a bag of a dozen of their cat morsels as follows for December 2005:

Budgeted Data Actual Data

Pheasantries Dairy Dew Sea Shells Pheasantries Dairy Dew Sea Shells Bags 7,200 4,800 4,000 10,800 3,600 7,200Price per bag $2.50 $4.00 $5.00 $2.00 $3.00 $7.50Revenues $18,000 $19,200 $20,000 $21,600 $10,800 $54,000 Total revenue $57,200 $86,400

According to company forecasts, they were budgeting to earn a 25% market share in total units (bags) of specially prepared cat treats sold in December 2005 in Springfield. Reliable industry sources indicate that the total number of bags of cat treats sold for December 2005 in Springfield was 72,000. 1. The amount of Natural Nutrients Bakery’s sales-volume variance for December 2005 isa. $3,600 F. b. $20,200 F. c. $20,020 F. d. $29,200 F.

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Natural Nutrients Bakery of Springfield produces three flavors of cat morsels that have budgeted and actual sales data for a bag of a dozen of their cat morsels as follows for December 2005:

Budgeted Data Actual Data

Pheasantries Dairy Dew Sea Shells Pheasantries Dairy Dew Sea Shells Bags 7,200 4,800 4,000 10,800 3,600 7,200Price per bag $2.50 $4.00 $5.00 $2.00 $3.00 $7.50Revenues $18,000 $19,200 $20,000 $21,600 $10,800 $54,000 Total revenue $57,200 $86,400

According to company forecasts, they were budgeting to earn a 25% market share in total units (bags) of specially prepared cat treats sold in December 2005 in Springfield. Reliable industry sources indicate that the total number of bags of cat treats sold for December 2005 in Springfield was 72,000.

2.       The sales-quantity variance for December 2005 for Natural Nutrients Bakery isa. $3,600 F. b. $20,200 F. c. $20,020 F. d. $29,200 F.

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Natural Nutrients Bakery of Springfield produces three flavors of cat morsels that have budgeted and actual sales data for a bag of a dozen of their cat morsels as follows for December 2005:

Budgeted Data Actual Data

Pheasantries Dairy Dew Sea Shells Pheasantries Dairy Dew Sea Shells Bags 7,200 4,800 4,000 10,800 3,600 7,200Price per bag $2.50 $4.00 $5.00 $2.00 $3.00 $7.50Revenues $18,000 $19,200 $20,000 $21,600 $10,800 $54,000 Total revenue $57,200 $86,400

According to company forecasts, they were budgeting to earn a 25% market share in total units (bags) of specially prepared cat treats sold in December 2005 in Springfield. Reliable industry sources indicate that the total number of bags of cat treats sold for December 2005 in Springfield was 72,000. 3.       The sales-mix variance for December 2005 for Natural Nutrients Bakery isa. $8,600 F. b. $8,760 F. c. $160 F. d. $180 F.

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Natural Nutrients Bakery of Springfield produces three flavors of cat morsels that have budgeted and actual sales data for a bag of a dozen of their cat morsels as follows for December 2005:

Budgeted Data Actual Data

Pheasantries Dairy Dew Sea Shells Pheasantries Dairy Dew Sea Shells Bags 7,200 4,800 4,000 10,800 3,600 7,200Price per bag $2.50 $4.00 $5.00 $2.00 $3.00 $7.50Revenues $18,000 $19,200 $20,000 $21,600 $10,800 $54,000 Total revenue $57,200 $86,400

According to company forecasts, they were budgeting to earn a 25% market share in total units (bags) of specially prepared cat treats sold in December 2005 in Springfield. Reliable industry sources indicate that the total number of bags of cat treats sold for December 2005 in Springfield was 72,000. 4.      Natural Nutrients Bakery experienced a market-size variance for December 2005 ofa. $7,150 F. b. $8,000 F. c. $11,440 F. d. $11,600 F.

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Natural Nutrients Bakery of Springfield produces three flavors of cat morsels that have budgeted and actual sales data for a bag of a dozen of their cat morsels as follows for December 2005:

Budgeted Data Actual Data

Pheasantries Dairy Dew Sea Shells Pheasantries Dairy Dew Sea Shells Bags 7,200 4,800 4,000 10,800 3,600 7,200Price per bag $2.50 $4.00 $5.00 $2.00 $3.00 $7.50Revenues $18,000 $19,200 $20,000 $21,600 $10,800 $54,000 Total revenue $57,200 $86,400

According to company forecasts, they were budgeting to earn a 25% market share in total units (bags) of specially prepared cat treats sold in December 2005 in Springfield. Reliable industry sources indicate that the total number of bags of cat treats sold for December 2005 in Springfield was 72,000. 5.       The market-share variance for December 2003 for Natural Nutrients Bakery isa. $20,020 F. b. $12,870 F. c. $11,600 F. d. $11,440 F.