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

2. CCs for chapter 14 14-21 (=11.14-20) 8% 14-23 (=11.14-22) 10%
14-21 (= ) 8%
14-23 (= ) 10%
14-25 (= ) 10%
(8%)
(5%)

3. 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

4. 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

5. 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

6. 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

7. Customer Cost Hierarchy Example
Customer output unit-level costs
Customer batch-level costs
Customer-sustaining costs
Distribution-channel costs
Corporate-sustaining costs

8. 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

9. 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

10. Sales-Mix Variance
Measures shifts between selling more or less of higher or lower profitable products

11. Sales-Quantity Variance

12. Market-Share Variance

13. Market-Size Variance

14. 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

15. 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

16. 14-21 Customer-level operating income?
Profitability Rank order of customers
Options for customer relationship management

17. 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

18. 14-25
Product
Budget
Actual
Selling price
variable cost
units sold
Kola
Limor
Orlem
$6.00
$4.00
$7.00
$2.80
$4.50
$6.20
$4.24
$6.80
$2.75
$4.60
Total sales volume variance, total sales mix variance, total sales quantity variance
Inferences?

19. 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

20. 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

21. 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 , , , , ,600 7,200
Price per bag $ $ $ $ $3.00 $7.50
Revenues $18, $19, $20, $21, $10,800 $54,000
Total revenue $57, $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.

22. 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 , , , , ,600 7,200
Price per bag $ $ $ $ $3.00 $7.50
Revenues $18, $19, $20, $21, $10,800 $54,000
Total revenue $57, $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.

23. 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 , , , , ,600 7,200
Price per bag $ $ $ $ $3.00 $7.50
Revenues $18, $19, $20, $21, $10,800 $54,000
Total revenue $57, $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.

24. 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 , , , , ,600 7,200
Price per bag $ $ $ $ $3.00 $7.50
Revenues $18, $19, $20, $21, $10,800 $54,000
Total revenue $57, $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.

25. 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 , , , , ,600 7,200
Price per bag $ $ $ $ $3.00 $7.50
Revenues $18, $19, $20, $21, $10,800 $54,000
Total revenue $57, $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.