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Chapter 14. C ustomer-Profitability Analysis and Sales-Variance Analysis. 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%). Cost Allocation. Meaning Assigning indirect costs to cost objects These costs are not traced

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chapter 14

Chapter 14

Customer-Profitability Analysis

andSales-Variance Analysis

ccs for chapter 14
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%)
cost allocation
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
  • Purposes
    • To provide information for economic decisions
    • To motivate managers and other employees
    • To justify costs or compute reimbursement amounts
    • To measure income and assets for reporting to tax authorities
six function value chain
Six-Function Value Chain
  • 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 decisions
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
customer revenues and customer costs
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
customer cost hierarchy example
Customer Cost Hierarchy Example
  • Customer output unit-level costs
  • Customer batch-level costs
  • Customer-sustaining costs
  • Distribution-channel costs
  • Corporate-sustaining costs
other factors in evaluating customer profitability
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
sales variances
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
sales mix variance
Sales-Mix Variance
  • Measures shifts between selling more or less of higher or lower profitable products
market share and market size variances
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
summary of variances

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

Summary of Variances

Level 1

Static-Budget Variance

actual – budgeted revenue

Level 2

Flexible-Budget

Variance

actual – flex.budget

Sales-Volume

Variance

static – flexible budget

Level 3

Sales-MixVariance

actual units,

actual – budgeted mix

Sales-QuantityVariance

actual – budgeted units

Level 4

Market-ShareVariance

actual size

actual – budgeted share

Market-SizeVariance

actual – budgeted size

Budgeted contribution margin

Budgeted Sales Mix

14 21
14-21
  • Customer-level operating income?
  • Profitability Rank order of customers
  • Options for customer relationship management
14 23
14-23
  • sales volume variance for each type of ticket and in total
  • sales quantity and sales mix variances
  • comment
14 25
14-25
  • Total sales volume variance, total sales mix variance, total sales quantity variance
  • Inferences?
slide21

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

PheasantriesDairy DewSea ShellsPheasantriesDairy DewSea Shells

Bags 7,200 4,800 4,000 10,800 3,600 7,200

Price per bag $2.50 $4.00 $5.00 $2.00 $3.00 $7.50

Revenues $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 is

a. $3,600 F. b. $20,200 F. c. $20,020 F. d. $29,200 F.

slide22

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

PheasantriesDairy DewSea ShellsPheasantriesDairy DewSea Shells

Bags 7,200 4,800 4,000 10,800 3,600 7,200

Price per bag $2.50 $4.00 $5.00 $2.00 $3.00 $7.50

Revenues $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 is

a. $3,600 F. b. $20,200 F. c. $20,020 F. d. $29,200 F.

slide23

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

PheasantriesDairy DewSea ShellsPheasantriesDairy DewSea Shells

Bags 7,200 4,800 4,000 10,800 3,600 7,200

Price per bag $2.50 $4.00 $5.00 $2.00 $3.00 $7.50

Revenues $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 is

a. $8,600 F. b. $8,760 F. c. $160 F. d. $180 F.

slide24

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

PheasantriesDairy DewSea ShellsPheasantriesDairy DewSea Shells

Bags 7,200 4,800 4,000 10,800 3,600 7,200

Price per bag $2.50 $4.00 $5.00 $2.00 $3.00 $7.50

Revenues $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 of

a. $7,150 F. b. $8,000 F. c. $11,440 F. d. $11,600 F.

slide25

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

PheasantriesDairy DewSea ShellsPheasantriesDairy DewSea Shells

Bags 7,200 4,800 4,000 10,800 3,600 7,200

Price per bag $2.50 $4.00 $5.00 $2.00 $3.00 $7.50

Revenues $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 is

a. $20,020 F. b. $12,870 F. c. $11,600 F. d. $11,440 F.