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

CCs for chapter 14 14-21 (=11.14-20) 8% 14-23 (=11.14-22) 10% 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 Purposes 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 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 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-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 output unit-level costs Customer batch-level costs Customer-sustaining costs Distribution-channel costs Corporate-sustaining costs

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 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 Measures shifts between selling more or less of higher or lower profitable products

Sales-Quantity Variance

Market-Share Variance

Market-Size Variance

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 Level 1 Static-Budget Variance Level 2 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-Mix Variance actual units, actual – budgeted mix Sales-Quantity Variance actual – budgeted units Level 4 Market-Share Variance actual size actual – budgeted share Market-Size Variance actual – budgeted size Budgeted contribution margin Budgeted Sales Mix

14-21 Customer-level operating income? Profitability Rank order of customers Options for customer relationship management

14-23 sales volume variance for each type of ticket and in total 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 sales volume variance for each type of ticket and in total sales quantity and sales mix variances comment

14-25 Product Budget Actual Selling price variable cost units sold Kola Limor Orlem $6.00 $4.00 $7.00 $2.80 $4.50 400 000 600 000 1 500 000 $6.20 $4.24 $6.80 $2.75 $4.60 480 000 900 000 1 620 000 Total sales volume variance, total sales mix variance, total sales quantity variance Inferences?

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 Actual Operating Data $349 285 102 $178 92 73 11,000 44,000 55,000

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 Actual Operating Data 5.20 7.00 $2.60 2.80 4.00 57,600 18,000 9,600 13,200 21,600

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 Actual Data Pheasantries Dairy Dew Sea Shells Pheasantries Dairy Dew Sea 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.

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 Pheasantries Dairy Dew Sea Shells Pheasantries Dairy Dew Sea 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.

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 Pheasantries Dairy Dew Sea Shells Pheasantries Dairy Dew Sea 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.

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 Pheasantries Dairy Dew Sea Shells Pheasantries Dairy Dew Sea 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.

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 Pheasantries Dairy Dew Sea Shells Pheasantries Dairy Dew Sea 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.