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Cost Allocation,Customer Profitability Analysis,
andSales-Variance Analysis
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Cost AllocationAssigning indirect costs to cost objectsThese costs are not tracedIndirect costs often comprise a large
percentage of Total Overall Costs
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Purposes of Cost Allocation
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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 DecisionsCause and Effect – variables are identified
that cause resources to be consumedMost 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
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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 – cost are allocated in proportion to the cost object’s ability to bear themGenerally, larger or more profitable objects receive
proportionally more of the allocated costs
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Cost Allocation Illustrated
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Corporate and Division Overhead Allocation Illustrated
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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
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Customer RevenuesPrice discounting is the reduction of selling prices
to encourage increases in customer purchasesLower sales price is a tradeoff for larger sales
volumesDiscounts should be tracked by customer and
salesperson
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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
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Customer Cost Hierarchy Example1. Customer output unit-level costs2. Customer batch-level costs3. Customer-sustaining costs4. Distribution-channel costs5. Corporate-sustaining costs
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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
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Customer Profitability Analysis Illustrated
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Customer Profitability Analysis Illustrated
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Customer Profitability Analysis Illustrated
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Customer Profitability Analysis Illustrated
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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
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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
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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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Flexible-Budget and Sales-Volume Variances Illustrated
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Sales-Mix and –Quantity Variances Illustrated
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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 –Size Variances Illustrated
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Market-Share and Market-Size VariancesLimitation: 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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Sales Variances Summarized
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