Cost Accounting (14th Edition)

14
Cost Allocation, Customer-Profitability
Analysis, and Sales-Variance Analysis
Learning Objectives
1. Identify four purposes for allocating
costs to cost objects
2. Understand criteria to guide costallocation
decisions
3. Discuss decisions faced when collecting
costs in indirect-cost pools
4. Discuss why a company’s revenues
and costs can differ across
customers
5. Identify the importance of
customer-profitability profiles
6. Subdivide the sales-volume variance
into the sales-mix variance
and the sales-quantity variance
502
Companies desperately want to make their
customers happy.
But how far should they go to please them, and at what price? At what
point are you better off not doing business with some customers at
all? The following article explains why it’s so important for managers to
be able to figure out how profitable each of their customers is.
Minding the Store: Analyzing Customers, Best
Buy Decides Not All Are Welcome 1
As the former CEO of Best Buy, Brad Anderson decided to implement
a rather unorthodox approach to retail: to separate his 1.5 million daily
customers into “angels” and “devils.”
The angels, customers who increase profits by purchasing highdefinition
televisions, portable electronics, and newly released DVDs
without waiting for markdowns or rebates, are favored over the
devils, who buy products, apply for rebates, return the purchases,
and then buy them back at returned-merchandise discounts. These
devils focus their spending on “loss leaders,” discounted merchandise
designed to encourage store traffic, but then flip the goods at a profit
on sites like eBay.com.
Best Buy found that its most desirable customers fell into five
distinct groups: upper-income men, suburban mothers, smallbusiness
owners, young family men, and technology enthusiasts. Male
technology enthusiasts, nicknamed Buzzes, are early adopters,
interested in buying and showing off the latest gadgets. Each store
analyzes the demographics of its local market, and then focuses on
two of these groups. For example, at stores popular with Buzzes, Best
Buy sets up videogame areas with leather chairs and game players
hooked to mammoth, plasma-screen televisions.
Best Buy also began working on ways to deter customers who
drove profits down. It couldn’t bar them from its stores. Starting in
2004, however, it began taking steps to put a stop to their most
damaging practices by enforcing a restocking fee of 15% of the
purchase price on returned merchandise. To discourage customers
who return items with the intention of repurchasing them at an
“open-box” discount, Best Buy started reselling the returned items
1 Sources: Bustillo, Miguel. 2009. Best Buy confronts newer nemesis. Wall Street Journal, March 16;
McWilliams, Gary. 2004. Minding the store: Analyzing customers, Best Buy decides not all are welcome. Wall
Street Journal, November 8.