Transcript Strategic Transfer Pricing, Absorption Costing and

Chapter 14
Customer-Profitability Analysis
and
Sales-Variance Analysis
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CCs for chapter 14
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14-21 (=11.14-20) 8%
14-23 (=11.14-22) 10%
14-25 (=11.14-24) 10%
14-33 (8%)
14-35 (5%)
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Cost Allocation
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Meaning
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Assigning indirect costs to cost objects
These costs are not traced
Indirect costs often comprise a large percentage of Total
Overall Costs
Purposes
1.
2.
3.
4.
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
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Six-Function Value Chain
TIME
Research
&
Development
Design
Production
Marketing
Distribution
Customer
Service
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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 Decisions
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Cause and Effect – variables are identified that
cause resources to be consumed
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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
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Most credible to operating managers
Integral part of ABC
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
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Generally, larger or more profitable objects receive
proportionally more of the allocated costs
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Customer Revenues and
Customer Costs
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Customer-Profitability Analysis is the reporting and analysis of
revenues earned from customers and costs incurred to earn
those revenues
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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
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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
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Customer Cost Hierarchy categorizes costs related to
customers into different cost pools on the basis of different:
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types of drivers
cost-allocation bases
degrees of difficulty in determining cause-and-effect or benefitsreceived relationships
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Customer Cost Hierarchy Example
1.
2.
3.
4.
5.
Customer output unit-level costs
Customer batch-level costs
Customer-sustaining costs
Distribution-channel costs
Corporate-sustaining costs
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Other Factors in Evaluating Customer Profitability
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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
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Sales Variances
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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
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Sales-Mix Variance
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Measures shifts between selling more or less of higher or lower
profitable products
Actual
Actual
Units
of
Sales-Mix
Sales-Mix
=
X
All
Variance
Percentage
Products
Sold
Budgeted
Budgeted
Sales-Mix X
Contribution
Percentage
Margin per Unit
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Sales-Quantity Variance
SalesQuantity =
Variance
Actual
Units of All
Products
Sold
Budgeted
Budgeted
Units of all
Sales-Mix
X
Products
Percentage
Sold
Budgeted
X Contribution
Margin per Unit
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Market-Share Variance
MarketShare =
Variance
Actual
Actual
Market
X Market
Size in
Share
Units
Budgeted
Contribution
Budgeted
Margin per
Market X
Composite Unit
Share
for Budgeted
Mix
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Market-Size Variance
Market-Size
Variance =
Actual
Market
Size
Budgeted
Market X
Size
Budgeted
Market
Share
Budgeted
Contribution
Margin per
X Composite Unit
for Budgeted
Mix
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Market-Share and Market-Size Variances
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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
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flex. budget = actual units, actual mix, budgeted contribution
Summary of Variances
Static-Budget Variance
Level 1
Level 2
Level 3
Level 4
actual – budgeted revenue
Flexible-Budget
Variance
Sales-Volume
Variance
actual – flex.budget
static – flexible budget
Sales-Mix Variance
Sales-Quantity Variance
actual units,
actual – budgeted mix
actual – budgeted units
Market-Share Variance
Market-Size Variance
actual size
actual – budgeted share
actual – budgeted size
Budgeted contribution margin
Budgeted Sales Mix
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14-21
Revenues
Technician and equipment cost
Office overhead allocated
Operating income
Avery
$260.000
182.000
31.859
$ 46.141
Number of service calls
Number of web-based parts orders
Number of bills (or reminders)
Okie
$200.000
175.000
24.507
$
493
Avery
150
120
30
Activity Area
Service call handling
Parts ordering
Billing and collection
Customer database maintenance
1.
2.
3.
Wizard
$322.000
225.000
39.457
$ 57.543
Okie
240
210
90
$75
$80
$50
$10
Grainger
$122.000
107.000
14.949
$
51
Wizard
40
60
90
Duran
$212.000
178.000
25.978
$ 8.022
Grainger
120
150
60
Total
$1.116.000
867.000
136.750
$ 112.250
Duran
180
150
120
Cost Driver Rate
per service call
per web-based parts order
per bill (or reminder)
per service call
Customer-level operating income?
Profitability Rank order of customers
Options for customer relationship management
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14-23
Lower tier tickets
Upper tier tickets
Selling price
Downtown Arena fee
Resevarion network fee
Contribution margin / ticket
$35
10
5
$20
$14
6
3
$5
Budgeted seats sold
Actual seats sold
4 000
3 300
6 000
7 700
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sales volume variance for each type of ticket and in
total
sales quantity and sales mix variances
comment
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14-25
Budget
Actual
Selling variable units sold Selling variable units sold
cost
price
cost
Product price
Kola
Limor
Orlem
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$6.00
$4.00
$7.00
$4.00
$2.80
$4.50
400 000
600 000
1 500 000
$6.20
$4.24
$6.80
$4.50
$2.75
$4.60
480 000
900 000
1 620 000
Total sales volume variance, total sales mix variance,
total sales quantity variance
Inferences?
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14-32/33
Selling price
Var. cost/unit
Sales volume
Budgeted Operating Data
PalmPro
PalmCE
PalmKid
$379
269
149
$182
98
65
12,500
37,500
50,000
$349
285
102
$178
92
73
11,000
44,000
55,000
Actual Operating Data
PalmPro
PalmCE
PalmKid
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14-34/35
Selling
price/pound
Var.
cost/pound
Sales volume
Budgeted Operating Data
Chocolate Chip
Oatmeal raisin
Coconut
White choc
Macademia nut
$4.50
5.00
5.50
6.00
6.50
$2.50
2.70
2.90
3.00
3.40
45,000
25,000
10,000
5,000
15,000
$4.50
5.20
5.50
6.00
7.00
$2.60
2.90
2.80
3.40
4.00
57,600
18,000
9,600
13,200
21,600
Actual Operating Data
Chocolate Chip
Oatmeal raisin
Coconut
White choc
Macademia nut
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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
Pheasantries Dairy Dew
Bags
7,200
Price per bag $2.50
Revenues $18,000
Total revenue
4,800
$4.00
$19,200
Actual Data
Sea Shells
Pheasantries
Dairy Dew
4,000
$5.00
$20,000
10,800
$2.00
$21,600
3,600
$3.00
$10,800
$57,200
Sea Shells
7,200
$7.50
$54,000
$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.
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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
Pheasantries Dairy Dew
Bags
7,200
Price per bag $2.50
Revenues $18,000
Total revenue
4,800
$4.00
$19,200
Actual Data
Sea Shells
Pheasantries
Dairy Dew
4,000
$5.00
$20,000
10,800
$2.00
$21,600
3,600
$3.00
$10,800
$57,200
Sea Shells
7,200
$7.50
$54,000
$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.
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$29,200
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
Pheasantries Dairy Dew
Bags
7,200
Price per bag $2.50
Revenues $18,000
Total revenue
4,800
$4.00
$19,200
Actual Data
Sea Shells
Pheasantries
Dairy Dew
4,000
$5.00
$20,000
10,800
$2.00
$21,600
3,600
$3.00
$10,800
$57,200
Sea Shells
7,200
$7.50
$54,000
$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.
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d. $180 F.
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
Pheasantries Dairy Dew
Bags
7,200
Price per bag $2.50
Revenues $18,000
Total revenue
4,800
$4.00
$19,200
Actual Data
Sea Shells
Pheasantries
Dairy Dew
4,000
$5.00
$20,000
10,800
$2.00
$21,600
3,600
$3.00
$10,800
$57,200
Sea Shells
7,200
$7.50
$54,000
$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.
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$11,600
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
Pheasantries Dairy Dew
Bags
7,200
Price per bag $2.50
Revenues $18,000
Total revenue
4,800
$4.00
$19,200
Actual Data
Sea Shells
Pheasantries
Dairy Dew
4,000
$5.00
$20,000
10,800
$2.00
$21,600
3,600
$3.00
$10,800
$57,200
Sea Shells
7,200
$7.50
$54,000
$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.
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