Cost Accounting (14th Edition)

510 CHAPTER 14 COST ALLOCATION, CUSTOMER-PROFITABILITY ANALYSIS, AND SALES-VARIANCE ANALYSIS
each division. Suppose salary and labor costs are $44,000,000 in the refrigerator division
and $36,000,000 in the clothes dryer division. Then CHRM costs are allocated
to the divisions as follows:
Refrigerator Division: $1,600,000 *
Clothes Dryer Division: $1,600,000 *
Each division reallocates the CHRM costs allocated to it to the indirect-cost
pools—design, machine setup, manufacturing operations, distribution, and division
administration (the allocated-corporate-treasury cost pool and the facility
costs pool have no salary and labor costs, so no CHRM costs are allocated to
them)—on the basis of total salary and labor costs of each indirect-cost pool.
CHRM costs that are added to division indirect-cost pools are then allocated to
products using the cost driver for the respective cost pool. Therefore, CHRM costs
are product-sustaining costs (for the portion of CHRM costs allocated to the
design cost pool), batch-level costs (for the portion of CHRM costs allocated to
the machine-setup cost pool), output unit-level costs (for the portions of CHRM
costs allocated to the manufacturing-operations and distribution cost pools), and
facility-sustaining costs (for the portion of CHRM costs allocated to the divisionadministration
cost pool).
3. CAI allocates corporate administration costs to each division on the basis of divisionadministration
costs (Exhibit 14-3 shows the amounts of division-administration
costs) because corporate administration’s main role is to support division administration.
Refrigerator Division: $5,400,000 *
$44,000,000
$44,000,000 + $36,000,000 = $880,000
$36,000,000
$44,000,000 + $36,000,000 = $720,000
$1,000,000
$1,000,000 + $800,000 = $3,000,000
Decision
Point
What are two key
decisions managers
must make when
collecting costs in
indirect-cost pools?
Learning
Objective 4
Discuss why a
company’s revenues
and costs can differ
across customers
. . . revenues can differ
because of differences
in the quantity
purchased and the
price discounts given,
while costs can differ
because different
customers place
different demands on a
company’s resources
Clothes Dryer Division: $5,400,000 *
Each division adds the allocated corporate-administration costs to the divisionadministration
cost pool. The costs in this cost pool are facility-sustaining costs and
do not have a cause-and-effect relationship with individual products produced and
sold by each division. CAI’s policy, however, is to allocate all costs to products so that
CAI’s division managers become aware of all costs incurred at CAI in their pricing
and other decisions. It allocates the division-administration costs (including allocated
corporate-administration costs) to products on the basis of product revenues (a benefitsreceived
criterion).
The issues discussed in this section regarding divisions and products apply nearly
identically to customers, as we shall show next. Instructors and students who, at this
point, want to explore more-detailed issues in cost allocation rather than focusing on how
activity-based costing extends to customer profitability can skip ahead to Chapter 15.
Customer-Profitability Analysis
$800,000
$1,000,000 + $800,000 = $2,400,000
Customer-profitability analysis is the reporting and assessment of revenues earned from
customers and the costs incurred to earn those revenues. An analysis of customer differences
in revenues and costs can provide insight into why differences exist in the operating
income earned from different customers. Managers use this information to ensure
that customers making large contributions to the operating income of a company receive
a high level of attention from the company.
Consider Spring Distribution Company, which sells bottled water. It has two distribution
channels: (1) a wholesale distribution channel, in which the wholesaler sells to supermarkets,
drugstores, and other stores, and (2) a retail distribution channel for a small
number of business customers. We focus mainly on customer-profitability analysis in
Spring’s retail distribution channel. The list selling price in this channel is $14.40 per case