14: Chapter Cost Allocation, Customer-Profitability Analysis, and SalesVariance Analysis
Purposes of Cost Allocation To provide information for economic decisions To motivate managers and other employees To justify costs or compute reimbursement amounts To measure income and assets Criteria to Guide Cost-Allocation Decisions Cause and effect is the primary criterion used in Activity-Based Costing applications Managers identify the variables that cause resources to be consumed Benefits Received: managers identify the beneficiaries of the outputs of the cost object Fairness or Equity: often cited in government contracts when cost allocations are the basis for establishing a price satisfactory to the government and its suppliers Ability to Bear: advocates allocating costs in proportion to the cost object's ability to bear costs allocated to it Cost Allocation Decisions Corporate Costs Treasury costs Human Resources Management Corporate Administration Costs Division Costs Each division has two direct-cost categories (direct materials and direct manufacturing labor) Seven indirect cost pools Allocating Corporate Costs to Divisions and Products Homogeneous cost pools so that all of the costs in the cost pool have the same or similar causeand-effect or benefits-received relationship with the cost-allocation base Customer Profitability Analysis Customer-Profitability Analysis: is the reporting and assessment of revenues earned from customer and the costs incurred to earn those revenues Managers use this information to ensure that customers making large contributions to the operating income of a company receive a high level of attention from the company Customer-Revenue Analysis A price discount is the reduction in selling price below list selling price to encourage customers to purchase more Customer-Cost Analysis A customer-cost hierarchy categorizes costs related to customers into different cost pools on the basis of different types of cost drivers, or cost-allocation bases, or different degrees of difficulty in determining cause-and-effect or benefits received relationships categories: Five Customer Output unit-level costs: costs of activities to sell each unit to a customer Customer Batch level costs: costs of activities related to a group of units sold to a customer Customer sustaining costs: costs of activities to support individual customers, regardless of the number of units or batches of product delivered to the customer
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Distribution channel costs: costs of activities related to a particular distribution channel rather than to each unit of product Corporate sustaining costs: costs of activities that cannot be traced to individual customer or distribution channels Customer-Level Costs Interested in analyzing costs incurred in the first three categories of the customer cost hierarchy Customer-Profitability Profiles Customer-Profitability profiles provide a useful tool for managers Usually ranks customers Presenting Profitability Analysis Likelihood of customer retention: if customer will continue business with a company, they are more valuable Potential for sales growth: likely growth of the customer's industry and the customer's sales, the more valuable the customer Long-run customer profitability: depends on first two factors Increase in overall demand from having well-known customers Ability to learn from customers Sales Variances Static-Budget Variance: is the difference between an actual result and the corresponding budgeted amount in the static budget Flexible-budget variance and sales-volume variance: is the difference between an actual result and the corresponding flexible-budget amount based on actual output level in the budget period Sales-volume variance: is the difference between a flexible-budget amount and the corresponding static-budget amount Sales-mix variance: is the difference between Budgeted contribution margin for the actual sales mix and Budgeted contribution margin for the budgeted sales mix Sales-quantity variance: is the difference between Budgeted contribution margin based on actual units sold of all products at the budgeted mix and Contribution margin in the static budget
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