Cost Allocation, Customer-Profitability Analysis, and Sales-Variance Analysis

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

Six-Function Value Chain

Research &

DevelopmentDistributionMarketingProductionDesign

Customer Service

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

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

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

Business

Transcript of Cost Allocation, Customer-Profitability Analysis, and Sales-Variance Analysis

1 Chapter 14 Customer-Profitability Analysis and Sales-Variance Analysis.

10 - Variance Analysis

14 - 1 Cost Allocation, Customer- Profitability Analysis, and Sales-Variance Analysis Chapter 14.

© 2009 Pearson Prentice Hall. All rights reserved. Cost Allocation, Customer Profitability Analysis, and Sales-Variance Analysis.

Achieving Excellence in Cost Management – Resource ... · variance, capacity measurement, process efficiency etc) • Profitability reporting • Process analysis • Learning &

COST ALLOCATION, CUSTOMER-PROFITABILITY ANALYSIS, AND SALES-VARIANCE ANALYSIS

Variance Analysis

Profitability analysis

Customer Profitability Analysis, Sales Performance ... · Customer Profitability Analysis, Sales Performance Evaluation, ... Examples: Irwin/McGraw-Hill ... Revenue Budget Variance

Cost Allocation, Customer-profitability Analysis, And Sales-Variance Analysis

CHAPTER 14 COST ALLOCATION, CUSTOMER · PDF file14-1 CHAPTER 14 COST ALLOCATION, CUSTOMER-PROFITABILITY ANALYSIS, AND SALES-VARIANCE ANALYSIS 14-1 Disagree. Cost accounting

CHAPTER 11 Standard Costs and Variance Analysis Standard Costs and Variance Analysis.

Analysis of Variance

DOES CORPORATE STRATEGY MATTER? - wiggo. · PDF fileDoes Corporate Strategy Matter? 3 industry effects on the variance of profitability: analysis of variance and variance components.

Multivariate Analysis of Variance (MANOVA) · Multivariate Analysis of Variance (MANOVA) Introduction . This module calculates power for multivariate analysis of variance (MANOVA)

Analysis of Variance (ANOVA) and Multivariate Analysis of Variance (MANOVA)

Variance Analysis Summary

Variance Analysis. Variance analysis Variance analysis is the evaluation of performance by means of variances, whose timely reporting increase the opportunity.

© 2012 Pearson Prentice Hall. All rights reserved. Customer Profitability Analysis and Sales-Variance Analysis.

Profitability Analysis 9 CHAPTER. Analyzing Profitability Focus of Profitability Analysis Profitability analysis is a key part of financial statement.