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أ.سهام المهيزع أ.مشاعل الدايل أ.مها الحميدي

* A cost object is anything for which a measurement of costs is desired. * The term cost tracing is used to describe the assignment of direct costs to a particular cost object. * The term cost allocation is used to describe the assignment of indirect costs to a particular cost object.

Allocation:Purposes of Cost LO1.

. To provide information for economic decisions. 1

Examples : To decide whether to add a new airline flight ,To

decide whether to manufacture a component part of a television

set or to purchase it from another manufacturer , To decide on the

selling price for a customized product or service , To evaluate the

cost of available capacity used to support different products .

2. To motivate managers and other employees.

Examples: To encourage the design of products that are simpler to

manufacture or less costly to service, To encourage sales

representatives to emphasize high-margin products or services.

3. To justify costs or compute reimbursement amount.

Examples: (To cost products at a “fair” price, often required by law

and government defense contracts , To compute reimbursement

for a consulting firm based on a percentage of the cost savings

resulting from the implementation of its recommendations).

4. To measure income and assets for reporting to external parties .

Examples: (To cost inventories for reporting to external parties ,

To cost inventories for reporting to tax authorities).

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أ.سهام المهيزع أ.مشاعل الدايل أ.مها الحميدي

ing appropriate us decisionsallocation -Guide cost. LO2

for more explanation see slides. criteria

Briefly describe the four criteria used to guide cost-allocation

decisions?

1. Cause and effect - managers identify the variables that cause

resources to be consumed.

2. Benefits received - managers identify the beneficiaries of the

outputs of the cost object.

3. Fairness or equity - establishing a selling price that is deemed

fair by contracting parties.

4. Ability to bear - advocates allocating costs in proportion to the

cost object's ability to bear costs .

cost -indirect Discuss decisions faced when collecting costs in .LO3

and book for more explanations see slides.pools

Q : What are two key decisions managers must make when

collecting costs in indirect cost pools?

Two key decisions related to indirect-cost pools are the number of

indirect-cost pools to form and the individual cost items to be

included in each cost pool to make homogeneous cost pools..

There are three major categories of corporate costs:*

1. Treasury costs .

2. Human resource management costs.

3. Corporate administration costs.

NOTE:

*Allocating all corporate costs motivates division managers to examine how

corporate costs are planned and controlled.

*Costs in a homogeneous cost pools have the same or a similar cause-and-

effect or benefits-received relationship with the cost-allocation base.

*If a cost pool is homogeneous, the cost allocations using that pool will be the

same as they would be if costs of each individual activity in that pool were

allocated separately.

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EX1. Corporate costs: Treasury $600,000 Human resources $1,200,000 Administration $4,800,000

NOTE : * Treasury cost is interest to finance equipment acquisition of $4,000,000 in Canton and $2,000,000 in Dayton. * 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.

Q1: How does Smith Corporation allocate its $600,000 OF Treasury costs AND $1,200,000 of Human resources costs? Q2 : What are Total allocated to divisions (Canton and

Dayton)?

LO4: Discuss why a company’s revenues can differ across customers purchasing the same product.

*To improve customer profitability, companies should track: the volume of the products purchased by each customer and discounts taken by each customer.

*Price discounts are influenced by: A) the volume of product purchased. B) a desire to sell to a customer in an area with high-growth potential C) negotiating skills of the sales person ..

*Price discounts should NEVER be viewed as: A) price discrimination B) predatory pricing C) unethical.

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أ.سهام المهيزع أ.مشاعل الدايل أ.مها الحميدي

EX1. During the first six months of 2003, English Languages Institute expanded its market and sold 200 composition programs to two new customers in Mexico. A B Programs sold 140 60 List selling price $185 $185 Invoice price $175 $180 Total revenues $24,500 $10,800 Q1: What explanation(s) can be given for these revenue

differences?

Assume that English Languages 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 Customer A Customer B Number of: Purchase orders 7 2 Batches 7 2 Q2: What is the cost of servicing each customer?

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LO5. Apply the concept of cost hierarchy to customer costing.

.see slides for explanation

Q: Give examples of five different levels of costs in a customer-

cost hierarchy?

1. Customer output unit-level costs—costs of activities to sell

each unit (case) to a customer.

An example is product-handling costs of each case sold .

2. Customer batch-level costs—costs of activities related to a

group of units (cases) sold to a customer.

costs incurred to process orders or to make Examples are

deliveries.

3. Customer-sustaining costs—costs of activities to support

individual customers, regardless of the number of units or batches

of product delivered to the customer.

costs of visits to customers or costs of displays at Examples are

customer sites.

4. Distribution-channel costs—costs of activities related to a

particular distribution channel rather than to each unit of product,

each batch of product, or specific customers.

is the salary of the manager of Spring’s retail An Example

distribution channel.

5. Corporate-sustaining costs—costs of activities that cannot be

traced to individual customers or distribution channels.

administration costs management and general-are topExamples

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LO6. Discuss why customer-profitability differs across

customers.

A B

Revenues $24,500 $10,800

Cost of good sold ($95 per unit) 13,300 5,700

Contribution margin ????? ?????

Other expenses 1,260 360

Operating income ????? ?????

Q1: Which customer is more profitable, A or B?

Q2 : customer B has a higher gross profit percentage

Why?

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Analysis Sales Varience

is the difference between actual sales and budget Sales variance

sales. It is used to measure the performance of a sales function,

and/or analyze business results to better understand market

conditions.

An English Language Institute operates three different functions

Grammer, Translation and Composition

The following information shows the company's actual and budgeted results for 2003

Budgeted information

1 2 3 4 5 6

Product

selling price

per unit

V.C per unit

Contribution per unit

(2-1 column)

Sales units

Sales mix

percentage column 4total

4*100

Total contribution

(column 3*4)

Grammer 259 189 70$ 3,185 65% $222,950

Translation 87 50 37$ 980 20% $36,260

composition 185 95 90$ 735 15% $66,150

Total 4,900 100% $325,360

informationActual

1 2 3 4 5 6

Product

Selling price per unit

V.C per unit

Contribution per unit

2)-1 column)

Sales units

Sales mix

percentage

Total contribution

(column 3*4)

Grammer 255 180 75$ 2,880 64% $216,000

Translation 85 45 40$ 990 22% $39,600

composition 185 95 90$ 630 14% $56,700

Total 4,500 100% $312,300

* Note: the cells that are in blue should be calculated, while the information in the white cells will be given in the question.

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* Finding the Satic-Budget Variance:

The static-budget variance is the difference between an actual result and the corresponding budgeted amount in the static budget. * The variance is favorable when actual results exceed budgeted results. * Managers can gain more insight about the static-budget variance by Subdividing it into the flexible-budget variance and the sales-volume variance. (Actual total contribution – Budgeted total contribution)

1 2 3

Product Budgeted total

contribution

Actual total

contribution

Static-budget

variance (column2-1)

Grammar 222,950 216,000 6,950 U

Translation 36,260 39,600 3,340 F

Composition 66,150 56,700 9,450 U

Total 325,360 312,300 13,060 U

Flexible-Budget

Variance

Sales-volume

Variance

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* Finding Flexible-Budget Variance:

The flexible-budget variance is the difference between an actual result and the corresponding flexible-budget amount based on actual output level in the budget period.

* The flexible budget contribution margin is equal to budgeted contribution

margin per unit times actual units sold of each product.

Firstly we should find the flexible-budget.

1 2 3

Product Actual Units

Budgeted

contribution per

unit

Flexible budget

(column 1*2)

Grammar 2,280 70 201,600

Translation 990 37 36,630

Composition 630 90 56,700

To find the flexible-budget variance:

1 2 3

Product Actual total

contribution Flexible budget

Variance

(column 1-2)

Grammar 216,000 201,600 14,400 F

Translation 39,600 36,630 2,970 F

Composition 56,700 56,700 0

Total 17,370 F

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* Finding Sales-Volume Variance:

The sales-volume variance is the difference between a flexible-budget amount and the corresponding static-budget amount.

1 2 3 4 5

Product Actual

units

Budgeted

units

Difference

between

actual and

budgeted

(column 1-2)

Budgeted

contribution

margin per

unit

Variance

(column 3*4)

Grammar 2,880 3,185 305 U 70 21,350 U

Translation 990 980 10 F 37 370 F

Composition 630 735 105 U 90 9,450 U

Total 30,430 U

Sales-Mix Variance Sales-quantity Variance

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* Finding Sales-Mix Variance:

The sales-mix variance is the difference between (1) budgeted contribution margin for the actual sales mix and (2) budgeted contribution margin for the budgeted sales mix.

* Finding Sales-quantity Variance:

The sales-quantity variance is the difference between (1) budgeted contribution margin based on actual units sold of all products at the budgeted mix and (2) contribution margin in the static budget (which is based on budgeted units of all products to be sold at budgeted mix).

1 2 3 4

Product Total actual

sales units

Actual sales-mix –

Budgeted sales-mix

Budgeted

contribution

per unit

Variance

(column 1*2*3)

Grammar 4,500 0.64-0.65=0.01 U 70 3,150 U

Translation 4,500 0.22-0.20=0.02 F 37 3.330 F

Composition 4,500 0.14-0.15=0.01 U 90 4,050 U

Total 3,870 U

1 2 3 4

Product Total actual units sold

– Total budgeted units

Budgeted

sales-mix

percentage

Budgeted

contribution

per unit

Variance

(column 1*2*3)

Grammar 4,500-4900= 400U 0.65 70 18,200 U

Translation 4,500-4900= 400U 0.20 37 2,960 U

Composition 4,500-4900= 400U 0.15 90 5,400 U

Total 26,560 U

Market-share

variance Market-size

variance

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a) Finding Market-share variance

= Actual industry size in units * (Actual market share –

Budgeted market share) * Budgeted average

contribution margin

Assume that English Languages Institute derives its total unit

sales budget for 2003 from a management estimate of a 20%

market-share and total industry sales forecasted by Desert

Services of 24,500 units in the region.

In 2003, Desert Services reported actual industry sales of

28,125 units.

We should find the actual market share

= total actual units / actual industry sales

= 4,500 / 28,125 = 0.16 = 16%

we also should find the budgeted average contribution

margin per unit

= budgeted contribution margin / total budgeted units

= 325,360 / 4,900 = 66.40 $ per unit

Market share variance=

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

b) Finding Market-Size Variance

= Budgeted average contribution margin * Budgeted

market share * (actual industry size in units – budgeted

industry size in units)

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

Study )-very important EX . ( Problem for Self*

in the book 523 And 524 spage