cost allocation, customer-profitability analysis, and sales-variance analysis

© 2012 Pearson Prentice Hall. All rights reserved.

Cost Allocation,Customer Profitability Analysis,

andSales-Variance Analysis


Cost AllocationAssigning indirect costs to cost objects.Indirect costs can not be traced to the cost

object in a cost-effective way.Indirect costs often comprise a large

percentage of total overall costs.


Purposes of Cost Allocation

(c) 2012 Pearson Prentice Hall. All rights reserved.

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.


Criteria for Cost-Allocation DecisionsCause-and-effect—variables are identified

that cause resources to be consumed.Most credible to operating managersIntegral part of ABC

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


Criteria for Cost-Allocation DecisionsFairness (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.


Cost Allocation Illustrated


Corporate and Division Overhead Allocation Illustrated


Customer Revenues and Customer CostsCustomer-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 RevenuesPrice discounting is the reduction of selling prices

to encourage increases in customer purchases.Lower sales price is a trade-off for larger sales

volumes.Discounts should be tracked by customer and

salesperson.


Customer Cost AnalysisCustomer 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


Customer Cost Hierarchy Example1. Customer output unit-level costs2. Customer batch-level costs3. Customer-sustaining costs4. Distribution-channel costs5. Corporate-sustaining costs


Other Factors in Evaluating Customer ProfitabilityLikelihood of customer retentionPotential for sales growthLong-run customer profitabilityIncreases in overall demand from having

well-known customersAbility to learn from customers


Customer Profitability Analysis Illustrated


Sales VariancesLevel 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 varianceLevel 3: Sales-quantity varianceLevel 3: Sales-mix variance

(c) 2012 Pearson Prentice Hall. All rights reserved.

Sales-Mix VarianceMeasures 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


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


Flexible-Budget and Sales-Volume Variances Illustrated


Sales-Mix and Sales–Quantity Variances Illustrated


Sales Variances Summarized

cost allocation, customer-profitability analysis, and sales-variance analysis

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customer purchases

customer andsalesperson

costallocation decisionscause

purposes of cost allocation

customersustaining costs4

sales growthlong

sales varianceslevel