mba - krajewski
TRANSCRIPT
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14 - 12003 Prentice Hall Business Publishing, Cost Accounting11/e,Horngren/Datar/Foster
Cost Allocation, Customer-
Profitability Analysis, andSales-Variance Analysis
Chapter 14
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Learning Objective 1
Identify four purposes
for allocating costs to
cost objects.
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Purposes of Cost Allocation
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 reportingto external parties
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Learning Objective 2
Guide cost-allocation decisions
using appropriate criteria.
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Criteria to Guide
Cost-Allocation Decisions
Cause-and-effect:
Using this criterion, managers identify thevariable or variables that cause resources
to be consumed.
Benefits-received:Using this criterion, managers identify the
beneficiaries of the outputs of the cost object.
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Criteria to Guide
Cost-Allocation DecisionsFairness 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 objects ability to bear them.
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Role of Dominant CriteriaThe cause-and-effect
and the benefits-
received criteriaguide most
decisions related
to cost allocations.
Fairness and abilityto bear are less
frequently used.
Why?
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Role of Dominant Criteria
Fairness is an especially difficult criterion
to obtain agreement on.The ability to bear criterion raises issues
related to cross-subsidization across users
of resources in an organization.
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Learning Objective 3
Discuss decisions faced
when collecting costs in
indirect-cost pools.
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Cost Allocation and
Costing Systems Example
Smith Corporation manufactures clothes
washers and dryers in two divisions:Clothes Washer Division in Canton (CWD)
Clothes Dryer Division in Dayton (CDD)
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Cost Allocation and
Costing Systems Example
Corporate costs:
Treasury $ 600,000Human resources $1,200,000
Administration $4,800,000
Treasury cost is interest to financeequipment acquisition of $4,000,000
in Canton and $2,000,000 in Dayton.
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Cost Allocation and
Costing Systems Example
Division costs: Canton Dayton
Direct costs $2,200,000 $4,000,000Indirect costs 1,980,000 2,500,000
Total $4,180,000 $6,500,000
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Cost Allocation and
Costing Systems Example
If Smith Corporation allocates corporate
costs to divisions, how many cost pools
should it use to allocate corporate costs?One single cost pool?
Numerous individual corporate cost pools?
A key factor is the concept of homogeneity.
Which allocation basis should Smith
Corporation use to allocate treasury costs?
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Cost Allocation and
Costing Systems Example
Treasury costs: $600,000
Canton Division:$600,000 ($4,000,000 $6,000,000) = $400,000
Dayton Division:
$600,000 ($2,000,000 $6,000,000) = $200,000
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Cost Allocation and
Costing Systems Example
Smith Corporation allocates human
resources on the basis of total direct
labor costs incurred in each division.
Suppose direct labor costs in Canton are
$1,200,000 and $1,800,000 in Dayton.
How does Smith Corporation allocate its
$1,200,000 of human resources costs?
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Cost Allocation and
Costing Systems Example
Canton Division:
$1,200,000 ($1,200,000 $3,000,000)
= $480,000Dayton Division:
$1,200,000 ($1,800,000 $3,000,000)
= $720,000Smith does not allocate corporate
administration costs to the divisions.
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Cost Allocation and
Costing Systems Example
77
Toledo Cleveland
AkronCanton
Columbus
Cincinnati
Dayton
G re a t Mia m i
Rive r
Muskingum
River
Ohio
River
Ohio
River
OHIO
70
75
80
90
90
71
76
Treasury costs are
reallocated by the
divisions to Assembly.
Human resources costs
are reallocated by thedivisions to the Dept.
of Human Resources.
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Cost Allocation and
Costing Systems Example
Canton Division
Finishing
direct costs:
$900,000
Assembly
direct costs $1,300,000Corporate costs 400,000
Total costs $1,700,000
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Cost Allocation and
Costing Systems Example
Canton Division
Maintenance
direct costs:
$300,000
Human Resources
direct costs: $1,680,000Corporate costs: 480,000
Total costs $2,160,000
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Cost Allocation and
Costing Systems Example
Canton Division
$5,060,000
Assembly Dept.
$1,700,000
Finishing Dept.
$900,000
Maintenance Dept.
$300,000
Human Resources Dept.
$2,160,000
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Learning Objective 4
Discuss why a companys
revenues can differ across
customers purchasing
the same product.
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Customer Revenue
Analysis Example
During the first six months of 2003,
English Languages Institute expandedits market and sold 200 composition
programs to two new customers in Mexico.
Customer A is in Tijuana andcustomer B is in Guadalajara.
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Customer Revenue
Analysis Example
Customer
A B
Programs sold 140 60List selling price $185 $185
Invoice price $175 $180
Total revenues $24,500 $10,800What explanation(s) can be given for
these revenue differences?
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Customer Revenue
Analysis Example
1. The volume of programs purchased
2. The magnitude of price discounting
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Customer Cost Analysis Example
Assume that English Languages Institute
has an activity-based costing system thatfocuses on customers rather than products.
Activity Area Cost Driver and Rate
Order taking $ 80 per purchaseOrder set up $100 per batch
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Customer Cost Analysis Example
Customer A Customer B
Number of:Purchase orders 7 2
Batches 7 2
What is the cost of servicing each customer?
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Customer Cost Analysis Example
Customer A:
Ordering: 7 $80/order = $ 560Set-up: 7 $100/batch = 700
Total $1,260
English can use this information to persuadethis customer to reduce usage of the
ordering and setup cost drivers.
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Customer Cost Analysis Example
Customer B:
Ordering: 2 $80/order = $160Setup: 2 $100/batch = 200
Total $360
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Learning Objective 5
Apply the concept of cost
hierarchy to customer costing.
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Cost Hierarchy
General Motors uses a seven-level cost
hierarchy to analyze profitability.The aim of this cost hierarchy is to assign
costs to the lowest level of the hierarchy
at which they can be identified.
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Cost Hierarchy
1. Enterprise-related activities
2. Market-related activities
3. Channel-related activities
4. Customer-related activities
5. Order-related activities6. Parts-related activities
7. Direct materials
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Learning Objective 6
Discuss why customer-profitability
differs across customers.
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Customer-Profitability Profiles
Which customer is more profitable, A or B?
A BRevenues $24,500 $10,800
Cost of good sold ($95 per unit) 13,300 5,700
Contribution margin $11,200 $ 5,100Other expenses 1,260 360
Operating income $ 9,940 $ 4,740
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Customer-Profitability Profiles
Customer A seems to be more profitable.
However, customer B has a higher grossprofit 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).
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Learning Objective 7
Provide additional information
about the sales-volume variance by
calculating the sales-mix variance
and the sales-quantity variance.
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Sales-Volume
Variance Components
The following information relates to English
Languages Institute budgetfor the year 2003.Product Grammar Trans. Comp.
Selling price per unit $259 $87 $185
Variable cost 189 50 95Contribution margin per unit $ 70 $37 $ 90
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Sales-Volume
Variance Components
Product Grammar Translation Composition
Cont. margin $70 $37 $90Units 3,185 980 735
= Total $222,950 $36,260 $66,150
Sales mix 65% 20% 15%
Total budgeted contribution margin = $325,360
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Sales-Volume
Variance Components
Product Grammar Translation Composition
Selling $/unit $255 $85 $185
Variable cost 180 45 95
Cont. margin
per unit$ 75 $40 $ 90
The following are the actual results for
English Languages for the year 2003.
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Sales-Volume
Variance Components
Product Grammar Translation Composition
Cont. margin $75 $40 $90Units 2,880 990 630
= Total $216,000 $39,600 $56,700
Sales mix 64% 22% 14%
Total actual contribution margin = $312,300
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Static-Budget Variance
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 UTotal $312,300 $325,360 $13,060 U
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Flexible-Budget Variance
Actualcontribution Unit Actual
Product margin/unit volume results
Grammar $75 2,880 $216,000
Translation $40 990 $ 39,600
Composition $90 630 $ 56,700
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Flexible-Budget Variance
Budgeted Actualcontribution unit Flexible
Product margin/unit volume budgetGrammar $70 2,880 $201,600
Translation $37 990 $ 36,630
Composition $90 630 $ 56,700
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Flexible-Budget Variance
Flexible- Flexible-Actual budget budget
Product results amount varianceGrammar $216,000 $201,600 $14,400 F
Translation $39,600 $ 36,630 $ 2,970 F
Composition $56,700 $ 56,700 0Total flexible-budget variance $17,370 F
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Sales-Volume Variance
Budgetedcontribution
Product Actual Budget marginGrammar (2,8803,185) $70 = $21,350 U
Translation (990 980) $37 = 370 F
Composition (630 735) $90 = 9,450 UTotal sales-volume variance $30,430 U
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Sales-Mix Variance
Sales-mix variance
Actual units of all products sold
Actual sales-mix percentage
Budgeted sales-mix percentage
Budgeted contribution margin per unit
=
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Sales-Mix Variance
Grammar: 4,500(0.640.65) $70 = $3,150 U
Translation: 4,500(0.220.20) $37 = $3,330 F
Composition: 4,500(0.140.15) $90 = $4,050 U
Total sales-mix variance = $3,870 U
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Sales-Quantity Variance
Sales-quantity variance
Actual units of all products soldBudgeted units of all products sold
Budgeted sales-mix percentage
Budgeted contribution margin per unit
=
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Sales-Quantity Variance
Grammar:
(4,5004,900) 0.65 $70 = $18,200 U
Translation:
(4,5004,900) 0.20 $37 = $ 2,960 U
Composition:(4,5004,900) 0.15 $90 = $ 5,400 U
Total sales-quantity variance = $26,560 U
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Learning Objective 8
Provide additional information
about the sales-quantity varianceby calculating the market-share
variance and themarket-size variance.
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Market-Share Variance Example
Assume that English Languages Institute derives
its total unit sales budget for 2003 from amanagement estimate of a 20% market share
and a total industry sales forecast by Desert
Services of 24,500 units in the region.
In 2003, Desert Services reported actual
industry sales of 28,125 units.
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Market-Share Variance Example
What is Englishs 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 averagecontribution margin per unit?
$325,360 4,900 = $66.40
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Market-Share Variance Example
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(0.160.20) $66.40 = $74,700 U
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Market-Share Variance Example
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
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Market-Size Variance Example
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
=
(28,12524,500) 0.20 $66.40 = $48,140 F
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Market-Size Variance Example
Actual Market Size Budgeted Market Share
Budgeted Average Contribution Margin Per Unit
28,125 0.20 $66.40 = $373,500Static Budget:Budgeted Market Size
Budgeted market share
Budgeted Average Contribution Margin Per Unit24,500 0.20 $66.40 = $325,360
$373,500$325,360 = $48,140 F
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Summary of Variances
Static-Budget Variance
13,060 U
Level 1
Level 2
Flexible-Budget
Variance$17,370 F
Sales-Volume
Variance$30,430 U
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Summary of Variances
Sales-Volume Variance
$30,430 U
Level 2
Level 3
Sales-Mix
Variance$3,870 U
Sales-Quantity
Variance$26,560 U
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Summary of Variances
Sales-Quantity Variance
$26,560 U
Level 3
Level 4
Market-Share
Variance$74,700 U
Market-Size
Variance$48,140 F
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End of Chapter 14