CHAPTER 14
COST ALLOCATION, CUSTOMER-PROFITABILITY
ANALYSIS, AND SALES-VARIANCE ANALYSIS
14-1Disagree. Cost accounting data plays a key role in many management planning and
control decisions. The division president will be able to make better operating and strategy
decisions by being involved in key decisions about cost pools and cost allocation bases. Such an
understanding, for example, can help the division president evaluate the profitability of different
customers.
14-2The salary of a plant security guard would be a direct cost when the cost object is the
security departmentof the plant. It would be an indirect cost when the cost object is a product.
14-3 Exhibit 14-1 outlines four purposes for allocating costs:
1. To provide information for economic decisions.
2. To motivate managers and employees.
3. To justify costs or compute reimbursement.
4. To measure income and assets for reporting to external parties.
14-4Exhibit 14-2 lists four criteria used to guide cost allocation decisions:
1. Cause and effect.
2. Benefits received.
3. Fairness or equity.
4.Ability to bear.
The cause-and-effect criterion and the benefits-received criterion are the dominant criteria when
the purpose of the allocation is related to the economic decision purpose or the motivation
purpose.
14-5Using the levels approach introduced in Chapter 7, the sales-volume variance is a Level
2 variance. By sequencing through Level 3 [sales-mix and sales-quantity variances] and then
Level 4 [market-size and market-share variances], managers can gain insight into the causes of a
specific sales-volume variance caused by changes in the mix and quantity of the products sold as
well as changes in market size and market share.
14-6The total sales-mix variance arises from differences in the budgeted contribution
margin of the actual and budgeted sales mix. The composite unit concept enables the effect of
individual product changes to be summarized in a single intuitive number by using weights based
on the mix of individual units in the actual and budgeted mix of products sold.
14-7A favorable sales-quantity variance arises because the actual units of all products sold
exceed the budgeted units of all products sold.
14-8The sales-quantity variance can be decomposed into [a] a market-size variance [because
the actual total market size in units is different from the budgeted market size in units], and [b] a
market share variance [because the actual market share of a company is different from the
budgeted market share of a company]. Both variances use the budgeted average contribution
margin per unit.
14-1