Cost Allocation,

Customer Profitability Analysis,

and
Sales-Variance Analysis

1
• Identify four purposes for
allocating costs to cost objects;
• Guide cost-allocation decisions
using appropriate criteria.

2
1. To provide information for economic decisions
2. To motivate managers and other employees
3. To justify costs or compute reimbursement
4. To measure income and assets for reporting
to external parties

3
Purposes of Cost Allocation

4
Six-Function Value Chain
TIME

Research
& Production Marketing Customer
Design Distribution
Development 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

5
Criteria to Guide
Cost-Allocation Decisions
Cause-and-effect: Using this criterion, managers identify
the variable or variables that cause resources to be
consumed
Benefits-received: Using this criterion, managers identify
the beneficiaries of the outputs of the cost object
Fairness or equity:: This criterion is often cited on
government contracts when cost allocations are the basis
for establishing a price satisfactory to the government and
its suppliers
Ability to bear: This criterion advocates allocating costs in
proportion to the cost object’s ability to bear( 承担 )them

6
Customer-Profitability Analysis
Is the reporting and analysis of revenues
earned from customers and the costs
incurred to earn those revenues
Is management accounting’s response to
the notion that “the customer is priority
one” from marketing and management
courses
Customer Revenue Analysis
Customer Cost Analysis

22
During the first six months of 2012, EL Institute
expanded its market and sold 200 composition
programs to two new customers in Mexico.
Customer
A B
Programs sold 140 60
List selling price $185 $185
Invoice price $175 $180
Total revenues $24,500 $10,800

How to explain these revenue differences? 23

Customer Revenue
Analysis Example
The volume of programs purchased
The magnitude of price discounting
Price discounting: the reduction of selling
prices below list selling price to encourage
increases in customer purchases

24
Assume that EL Institute has an activity-based costing
system that focuses on customers rather than
products.
Activity Area Cost Driver and Rate
Order taking $ 80 per purchase
Order set up $100 per batch
Number of: Customer A Customer B
Purchase orders 7 2
Batches 7 2
What is the cost of servicing each customer?
25
 Customer A:
Ordering: 7 × $80/order = $560
Set-up: 7 × $100/batch = 700
Total $1,260
Customer B:
Ordering: 2 × $80/order = $160
Setup: 2 × $100/batch = 200
Total $360
EL Institute can use this information to persuade this
customer to reduce usage of the ordering and setup
cost drivers.
26
1. Enterprise-related activities
2. Market-related activities
3. Channel-related activities
4. Customer-related activities
5. Order-related activities
6. Parts-related activities
7. Direct materials
27
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

13
 Which customer is more profitable, A or B?
A B
Revenues $24,500 $10,800
Cost of good sold ($95 per unit) 13,300 5,700
Contribution margin $11,200 $ 5,100
Other expenses 1,260 360
Operating income $ 9,940 $ 4,740

30
Customer A seems to be more profitable.
However, customer B has a higher gross
profit percentage.
Customer A has a gross profit of 40.6%
($9,940 ÷ $24,500).
Customer B has a gross profit of 43.9%
($4,740 ÷ $10,800).

31
Assessing Customer Value
Customer contribution margin
Likelihood of customer retention
Potential for customer growth
Long-run customer profitability
Increases in overall demand from having
well-known customers
Ability to learn from customers

32
 Provide additional information
about the sales-volume variance by
calculating the sales-mix variance
and the sales-quantity variance.

33
 The following information relates to English
Languages Institute budget for the year 2012.
Product Grammar Trans. Comp.
Selling price per unit $259 $87 $185
Variable cost 189 50 95
Contribution margin per unit $ 70 $37 $ 90

34
 Product Grammar Translation Composition
Cont. margin $70 $37 $90
× Units 3,185 980 735
= Total $222,950 $36,260 $66,150
Sales mix 65% 20% 15%

Total budgeted contribution margin = $325,360

35
 The following are the actual results for
English Languages for the year 2012.

Product Grammar Translation Composition

Selling $/unit $255 $85 $185
Variable cost 180 45 95
Cont. margin
$ 75 $40 $ 90
per unit
36
 Product Grammar Translation Composition
Cont. margin $75 $40 $90

× Units 2,880 990 630

= Total $216,000 $39,600 $56,700

Sales mix 64% 22% 14%

Total actual contribution margin = $312,300

37
 Static- Static-
Actual budget budget
Product results amount variance
Grammar $216,000 $222,950 $ 6,950 U
Translation 39,600 36,260 3,340 F
Composition 56,700 66,150 9,450 U
Total $312,300 $325,360 $13,060 U

38
 Actual
contribution Unit Actual
Product margin/unit volume results
Grammar $75 2,880 $216,000
Translation $40 990 $ 39,600
Composition $90 630 $ 56,700

39
 Budgeted Actual
contribution unit Flexible
Product margin/unit volume budget
Grammar $70 2,880 $201,600
Translation $37 990 $ 36,630
Composition $90 630 $ 56,700

40
 Flexible- Flexible-
Actual budget budget
Product results amount variance
Grammar $216,000 $201,600 $14,400 F
Translation $39,600 $ 36,630 $ 2,970 F
Composition $56,700 $ 56,700 0__
Total flexible-budget variance $17,370 F

41
 Budgeted
contribution
Product Actual Budget margin
Grammar (2,880 – 3,185) ×$70 = $21,350 U
Translation (990 – 980) ×$37 = 370 F
Composition (630 – 735) ×$90 = 9,450 U
Total sales-volume variance $30,430 U

42
 Sales-mix variance
= Actual units of all products sold
Actual sales-mix percentage
× – Budgeted sales-mix percentage

× Budgeted contribution margin per unit

43
Grammar: 4,500(0.64 – 0.65) × $70 = $3,150 U
Translation: 4,500(0.22 – 0.20) × $37 = $3,330 F
Composition: 4,500(0.14 – 0.15) × $90 = $4,050 U
Total sales-mix variance = $3,870 U

44
 Sales-quantity variance
Actual units of all products sold
= – Budgeted units of all products sold

× Budgeted sales-mix percentage

× Budgeted contribution margin per unit

45
 Grammar:
(4,500 – 4,900) × 0.65 × $70 = $18,200 U
Translation:
(4,500 – 4,900) × 0.20 × $37 = $ 2,960 U
Composition:
(4,500 – 4,900) × 0.15 × $90 = $ 5,400 U
Total sales-quantity variance = $26,560 U

46
 Provide additional information
about the sales-quantity variance
by calculating the market-share
variance and the
market-size variance.

47
Market-share Variance
Market-share variance is the difference in
budgeted contribution margin for actual market
size in units caused by actual market share being
different from budgeted market share

Budgeted
Actual contribution
Market- market
-
Actual Budgeted margin per
share = share  market market 
composite
variance in share share unit for
units budgeted
mix
48
Assume that EL Institute derives
its total unit sales budget for 2012 from a
management estimate of a 20% market share
and a total industry sales forecast by Desert
Services of 24,500 units in the region.

In 2012, Desert Services reported actual

industry sales of 28,125 units.

49
 What is EL’s actual market share?
4,500 ÷ 28,125 = 0.16
Budgeted total contribution margin is $325,360.
Budgeted number of units is 4,900.
What is the budgeted average
contribution margin per unit?
$325,360 ÷ 4,900 = $66.40
50
 What is the market-share variance?

= Actual market size in units

Actual market share
× – Budgeted market share
Budgeted contribution margin per
× composite unit for budgeted mix

28,125 ×(0.16 – 0.20) × $66.40 = $74,700 U

51
 Actual Market Size × Actual Market Share
× Budgeted Average Contribution Margin Per Unit
28,125 × 0.16 × $66.40 = $298,800
Actual Market Size × Budgeted Market Share
× Budgeted Average Contribution Margin Per Unit
28,125 × 0.20 × $66.40 = $373,500
$373,500 – $298,800 = $74,700 U

52
Market-Size Variance
Market-size variance is the difference in
budgeted margin at the budgeted market share
caused solely by actual market size in units
being different from budgeted market size in
units
Budgeted
Actual Budgeted contribution
Market-
size =
market
size in - market
size in

Budgeted
market
share

margin per
composite
variance units units unit for
budgeted
mix
53
 Market-size variance
Actual market size in units
= – Budgeted market size in units

× Budgeted market share

Budgeted contribution margin per
× composite unit for budgeted mix

(28,125 – 24,500) × 0.20 × $66.40 = $48,140 F

54
 Actual Market Size × Budgeted Market Share
× Budgeted Average Contribution Margin Per Unit
28,125 × 0.20 × $66.40 = $373,500
Static Budget: Budgeted Market Size
× Budgeted market share
× Budgeted Average Contribution Margin Per Unit
24,500 × 0.20 × $66.40 = $325,360
$373,500 – $325,360 = $48,140 F
55
 Static-Budget Variance
Level 1 13,060 U

Level 2 Flexible-Budget Variance Sales-Volume Variance

$17,370 F $30,430 U

Sales-Mix Variance Sales-Quantity Variance

Level 3 $3,870 U $26,560 U

Market-Share Variance Market-Size Variance

Level 4
$74,700 U $48,140 F
56
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