Chapter (4)

Cost Allocation, Customer-Profitability Analysis, and

Sales-Variance Analysis

 Customer—profitability analysis is the reporting and

analysis of revenues earned from customers and the
costs associated in earning those revenues. This will
enable management to determine which customers are
the most profitable and should be receiving a high level
of attention from the company.

 An analysis of customer differences in revenues and

costs can provide insight into why differences exist in
the operating income earned from different customers.

Two variables can be identified to explain revenue

differences across customers:-

(1) The quantity purchased.

(2) The amount of discount received. A price discount

is the reduction of selling price below list price to
encourage customers to purchase more.

 Customer Cost Hierarchy categorizes costs related to

customers into different cost pools on the basis of
different:-
o Types of drivers.
o Cost-allocation bases.

Mr .Kareem Abozeed 22
Degrees of difficulty in determining cause-and-effect or
benefits-received relationships
Customer Cost Hierarchy Example
1) Customer output unit-level costs.
2) Customer batch-level costs.
3) Customer-sustaining costs.
4) Distribution-channel costs.
5) Corporate-sustaining costs.

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 – the difference between
the flexible-budgeted amount and the static-
budgeted amount
- Level 3: Sales Quantity variance
- Level 3: Sales Mix variance
Sales-Mix Variance
Actual
Actual Budgeted Budgeted
Sales-Mix Units of
X Sales-Mix Sales-Mix X Contribution
Variance = All
Products Percentage Percentage Margin per Unit
Sold

Sales-Quantity Variance

Actual Budgeted Budgeted Budgeted

Sales-
Units of All Units of all Sales-Mix Contribution
Quantity = Products Products X X
ExVaarm
ianpl e 1: Sold
ce
Sold
Percentage Margin per Unit

Mr .Kareem Abozeed 23
 Budgeted & actual operating data for June 2012 are as
follows:-

Mr .Kareem Abozeed 24
 Market-Share Variance
Budgeted
Market- Actual Actual Budgeted Contribution
Market Margin per
Share = X Market Market X
Variance Size in Share Share Composite Unit
Units for Budgeted
Mix

Market-Size Variance
Budgeted
Contribution
Actual Budgeted Budgeted Margin per
Market-Size Market
Market Market X X
Variance = Size Share
Composite Unit
Size for Budgeted
Mix
Example 2:
The Payne Company manufactures two types of vinyl
flooring. Budgeted and actual operating data for 2012 are
as follows:

In late 2011, a marketing research firm estimated industry

2012 at for
volume 800,000 rolls. Actual
commercial industry vinyl
and residential volume for 2012
flooring for
was 700,000 rolls.

Required
(1) Compute the sales-mix variance and the sales-
quantity variance by type of vinyl flooring and in
total.
(2) Compute the market-share variance and the
market-size variance.
Answers
1. Actual sales-mix percentage:
Commercial = 25,200 ÷ 84,000 = 0.30, or 30%
Residential = 58,800 ÷ 84,000 = 0.70, or 70%
Budgeted sales-mix percentage:
Commercial = 20,000 ÷ 80,000 = 0.25, or 25%
Residential = 60,000 ÷ 80,000 = 0.75, or 75%
Budgeted contribution margin per unit:
Commercial = $10,000,000 ÷ 20,000 units = $500
per unit
Residential = $24,000,000 ÷ 60,000 units = $400
per unit

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