Deck 14: Cost Allocation, customer-Profitability Analysis, and Sales-Variance Analysis

Question 1

________ categorizes costs related to customers into different cost pools on the basis of either different classes of cost drivers or different degrees of difficulty in determining the cause-and-effect (or benefits-received)relationships.

A)Customer-profitability analysis
B)Customer revenues
C)Customer cost hierarchy
D)Price discounting

Answer 1

C

Question 2

Costs of activities related to a group of units sold to a customer is termed as customer batch-level costs.

Answer 2

True

Question 3

To reduce distribution-channel costs,a company could ________.

A)improve the efficiency of the ordering process
B)make fewer customer visits
C)eliminate distribution to retailers and only service wholesalers
D)reduce product-handling costs

Answer 3

C

Question 4

Which of the following classifications would costs incurred to handle each unit sold fit into?

A)customer output unit-level cost
B)customer batch-level cost
C)customer-sustaining cost
D)corporate-sustaining cost

Question 5

Which purpose of cost allocation is used to encourage sales representatives to push high-margin products or services?

A)to provide information for economic decisions
B)to motivate managers and other employees
C)to justify costs or compute reimbursement
D)to measure income and assets for reporting to external parties

Question 6

Managers use a customer-profitability analysis report to ensure that ________.

A)unpaid invoices are categorized according to age by due date
B)costs related to customers are segmented into different cost pools on the basis of different types of cost drivers or cost-allocation bases
C)customers making large contributions to the operating income of a company receive a high level of attention from the company
D)cost allocation of indirect cost is in place

Question 7

To analyze customer profitability,corporate-sustaining costs should be allocated to customers.

Question 8

Price discounts are influenced by ________.

A)the volume of product purchased
B)the prime cost of production
C)the operational budget
D)the contribution -margin per unit

Question 9

Which of the following classifications would be the most relevant for the costs incurred to process orders?

A)customer output unit-level cost
B)customer batch-level cost
C)customer-sustaining cost
D)corporate-sustaining cost

Question 10

Customers making large contributions to the profitability of the company should ________.

A)be treated the same as other customers because all customers are important
B)receive a higher level of attention from the company than less profitable customers
C)be charged higher prices for the same products than less profitable customers
D)not be offered the volume-based price discounts offered to less profitable customers

Question 11

To improve customer profitability,companies should track which of the following?

A)only the final invoice price of a sale
B)the volume of the products purchased by each customer
C)the location of each customer
D)the customer profile

Question 12

A price discount is the reduction in selling price below list selling price to encourage customers to
purchase more quantities.

Question 13

Which of the following classifications would the cost of visiting customers would most likely fit into?

A)customer output unit-level cost
B)customer batch-level cost
C)customer-sustaining cost
D)corporate-sustaining cost

Question 14

Which of the following classifications of costs in the customer-cost hierarchy would be most appropriate for the costs of activities to sell each unit to a customer?

A)customer-sustaining costs
B)division-sustaining costs
C)customer output unit-level costs
D)distribution-channel costs

Question 15

Which of the following classifications would be the most appropriate for the cost of the manager of a retail distribution channel?

A)customer-sustaining cost
B)distribution-channel cost
C)customer batch-level cost
D)corporate-sustaining cost

Question 16

Which of the following is a reason to gather data,associate revenues with each customer and develop a system of allocating costs to each customer?

A)GAAP requirements for external reporting including 10K disclosures
B)to assure that highly profitable customers get the appropriate level of care and attention
C)ABC systems cannot be implemented without customer-profitability reporting
D)to assure that more resources are committed to loss-making customers in an attempt to retain all customers

Question 17

How is value-engineering relevant to a well done customer profitability analysis,especially when an ABC system is utilized to calculate customer profits (or losses)?

A)ABC will satisfy GAAP and provide input into value-engineering decisions
B)ABC offers the opportunity to analyze the costs of activities assigned to each customer and to determine if improvements can be made to optimize profits
C)customer profitability analysis will reveal that the cost drivers of less profitable customers are the problem and that value-engineering is the solution
D)Only value-added activities will be shown in the cost analysis and thus all other costs will be eliminated via value-engineering

Question 18

Segmenting customers as a result of customer profitability analysis would be done by which of the following groupings?

A)geography such as state or by zip code
B)operating income
C)gross margin
D)total direct costs

Question 19

Which of the following customer related costs are NOT economically feasible to trace but are related to a customer?

A)the additional cost of selling one more unit to a new customer who has never done business with the firm before
B)the direct material costs of a product that a customer has purchased
C)the allocation of the cost of travel,lodgings,and meals that result from visiting customers at their locations
D)the shipping costs that result from shipping a package by Fed Ex to a customer when the technology allows a direct match of that cost to the direct material and direct labor costs of the product

Question 20

Which of the following illustrates a purpose for allocating costs to cost objects?

A)to provide information for cost-control and pricing decisions
B)to provide information to customers
C)to determine marginal cost
D)to measure capital expenditure

Question 21

Costs of displays at customer sites is an example of customer batch-level costs.

Question 22

Companies that only record the invoice price can usually track the magnitude of price discounting.

Question 23

Consider revenues from three of Megafy's 10 wholesale customers in 2015:

What conclusions can be drawn from the above data? What steps can the manager of the company take?

Question 24

If one of five distribution channels is discontinued,corporate-sustaining costs such as general administration costs will most likely be reduced by 20%.

Question 25

Colise Services is a repair-service company specializing in small household jobs.Each client pays a fixed monthly service fee based on the number of rooms in the house.Records are kept on the time and material costs used for each repair.The following profitability data apply to five customers:

Required:
a.Compute the operating income for each of the five customers.
b.What options should Colise Services consider in light of the customer-profitability results?
c.What problems might Colise Services encounter in accurately estimating the operating costs of each customer?

Question 26

All customers are equally important to a company and should receive equal levels of attention.

Question 27

How can a company's revenues and costs differ across customers?

Question 28

Tracking price discounts by customer and by salesperson helps improve customer profitability.

Question 29

An activity-based costing system may focus on customers rather than products.

Question 30

A customer cost hierarchy categorizes costs related to customers into different cost pools on the basis of different cost drivers.

Question 31

Price discounts must be uniform among all customers.

Question 32

Customer-profitability analysis is the reporting and assessment of revenues earned from customers and the costs incurred to earn those revenues.

Question 33

Customer-sustaining costs is the costs of activities to support individual customers,regardless of the number of units or batches of product delivered to the customer.

Question 34

In general,distribution-channel costs are more easily influenced by customer actions than customer batch-level costs.

Question 35

Corporate-sustaining costs are costs of activities to support individual customers,regardless of the number of units or batches of product delivered to the customer.

Question 36

Explain the importance of customer-profitability analysis.

Question 37

A customer cost hierarchy may include customer-sustaining costs.

Question 38

A customer cost hierarchy may include distribution-channel costs.

Question 39

A financial analyst for Simon Manufacturing prepared the following report:

What is the cumulative customer-level operating income as a percentage of customer level operating income for the top 4 most profitable (operating income)customers?

A)17.4%
B)89.7%
C)85.0%
D)79.1%

Question 40

There are two elements that influence customer profitability - revenues and costs.

Question 41

If deciding whether to eliminate a distribution channel,allocating corporate-sustaining costs to distribution channels ________.

A)helps define cost reduction possibilities
B)gives the misleading impression of potential cost savings
C)identifies administrative inefficiencies
D)evaluates the effectiveness of sales personnel

Question 42

Bar charts and a whale curve are some of the common ways of displaying the results of customer-profitability analysis.

Question 43

When corporate-sustaining costs are fully allocated to distribution channels,then the sum of the operating income from each distribution-channel is ________.

A)greater than company wide operating income
B)equal to company wide operating income
C)equal to customer-level operating income
D)greater than customer-level operating income

Question 44

A financial analyst for Simon Manufacturing prepared the following report:

Which of the following conclusions can be drawn from the report?

A)All profitable customers achieve customer level operating income in excess of 20%
B)Customer B has the second highest operating income margin
C)The cumulative customer-level operating income of the top eight customers represents about 105.0% of operating income
D)All customers provide positive contribution towards profitability

Question 45

Managers who utilize customer profitability charts should drop customers that generate a negative customer operating income,since dropping an unprofitable customer will automatically cause overall income to increase.

Question 46

It is possible that the smallest customer in terms of revenue is the most profitable customer.

Question 47

A company has two distribution channels: wholesale and business sales.Which of the following costs would be allocated as distribution-channel-level costs when analyzing the profitability of customer distribution channels?

A)sales order costs
B)customer visit costs
C)salary of the wholesale distribution channel manager
D)corporate adminstration costs

Question 48

What actions might be taken with an unprofitable customer?

Question 49

For companies in which full allocation is not followed,which of the following is true of corporate sustaining costs?

A)allocated to divisions using cause-and-effect relationship
B)allocated to customers using cause-and-effect relationship
C)added to aggregate operating incomes of the divisions
D)subtracted as a lump-sum amount after aggregating operating incomes of the divisions

Question 50

There is a direct cause-and effect relationship between division-sustaining costs and customer or sales manager's actions.

Question 51

Dropping an unprofitable customer will ________.

A)eliminate long-run costs assigned to that customer
B)eliminate most short-run costs assigned to that customer
C)decrease long-run profitability
D)increase the potential to cross-sell other products that are more desirable

Question 52

Allocation of corporate-sustaining costs is useful for which of the following?

A)evaluating the performance of salespersons with individual customer accounts
B)motivating distribution-channel management
C)focusing on the cause-and-effect relationships with the cost-allocation bases
D)motivating division managers to examine how corporate costs are planned and controlled

Question 53

Which of the following is a corporate-sustaining cost?

A)design costs
B)corporate brand advertising
C)shipment costs
D)research and development costs

Question 54

Discontinuing an unprofitable customer should be solely done on the basis of profitability.

Question 55

Which of the following is an example of division-sustaining costs?

A)research and development cost
B)corporate administration costs
C)corporate brand advertising
D)shipment costs

Question 56

With the use of a bar chart,the number of "unprofitable" customers and the magnitude of their losses are apparent.

Question 57

The chart used to express customer profitability is called the whale curve because it is backward-bending at the point where customers start to become unprofitable and thus resembles a humpback.

Question 58

Salary of top management and general-administration costs is an example of which of the following?

A)customer output unit-level costs
B)customer batch-level costs
C)distribution-channel costs
D)corporate-sustaining costs

Question 59

Which of the following is true about discontinuing an unprofitable customer?

A)will eliminate all corporate costs assigned to and may result in losing more revenues relative to costs saved
B)will eliminate all costs assigned to and may result in gaining more revenues relative to costs saved
C)will not eliminate all costs assigned to and may result in losing more revenues relative to costs saved
D)will not eliminate all corporate costs assigned to and may result in gaining more revenues relative to costs saved

Question 60

Why would a manager perform customer-profitability analysis?

Question 61

Why do managers prepare cost-hierarchy-based operating incomes statements?

Question 62

The benefits of implementing a more-complex cost allocation system are relatively easy to quantify for application of the cost-benefit approach.

Question 63

To guide cost allocation decisions,the cause-and-effect criterion ________.

A)is used less frequently than the other criteria
B)is the primary criterion used in activity-based costing
C)considers fairness as a matter of judgment rather than an operational criterion
D)advocates allocating costs in proportion to the cost object's ability to bear costs allocated to it

Question 64

To guide cost allocation decisions,the benefits-received criterion ________.

A)generally uses the cost driver as the cost allocation base
B)advocates allocating costs in proportion to the cost object's ability to bear costs allocated to it
C)is the primarily used criterion in activity-based costing
D)may use an allocation base of division revenues to allocate advertising costs

Question 65

A company sets up cost pools for indirect cost allocation.Management sees clear cause-and-effect relationships between the incurrence of costs and the chosen the cost-allocation base.What other common relationships or basis with a cost allocation base might management utilize to allocate costs?

A)R&D expenses
B)benefits -received
C)Capital investment in a related process
D)gross profit proportions

Question 66

When using the cause-and-effect criterion,cost drivers are selected as the cost allocation bases.

Question 67

Which cost-allocation criterion is most likely to subsidize poor performers at the expense of the best performers?

A)the fairness or equity criterion
B)the benefits-received criterion
C)the ability to bear criterion
D)the cause-and-effect criterion

Question 68

Which of the following is true of corporate-sustaining costs?

A)are common to all individual customers
B)have a clear cause-and-effect relationship with several cost-allocation bases
C)should be allocated for decisions regarding reducing customer costs
D)evaluates the effectiveness of sales personnel

Question 69

Which of the following is a challenge to using cost-benefit criteria for allocating costs?

A)the costs of designing and implementing complex cost allocations are not readily apparent
B)the benefits of making better-informed pricing decisions are difficult to measure
C)cost systems are being simplified and fewer multiple cost-allocation bases are being used
D)the costs of collecting and processing information keep spiraling upward

Question 70

Under the cause and effect criterion,reasonableness is a matter of judgment rather than an operational
criterion.

Question 71

When the purpose of cost allocation is to provide information for economic decisions or to motivate managers and employees,which of the following would be the best criteria?

A)the cause-and-effect and the ability-to bear criteria
B)the cause-and-effect and the benefits-received criteria
C)the benefits-received and the fairness criteria
D)the fairness and the ability-to-bear criteria

Question 72

Today,companies are simplifying their cost systems and moving toward less-detailed and less-complex cost allocation bases.

Question 73

A customer cost hierarchy categorizes costs related to customers into different cost pools on the basis of different ________.

A)contribution-margin ratios of products
B)distribution-channel costs
C)levels of cause-and-effect relationships
D)division-sustaining costs

Question 74

Which of the following criteria has the presumption that the more-profitable divisions have a greater ability to absorb corporate administration costs?

A)the fairness or equity criterion
B)the ability to bear criterion
C)the cause-and-effect criterion
D)the benefits-received criterion

Question 75

Briefly describe the four criteria used to guide cost-allocation decisions.

Question 76

What might explain why some managers advocate fully allocating all costs,including corporate costs to distribution channels and to customers?

A)all costs are incurred to support sales of products to customers
B)division managers can influence and control corporate costs
C)distribution channel managers can control corporate costs
D)all costs need to be considered to conduct adequate variance analysis

Question 77

To guide cost allocation decisions,the ability to bear criterion ________.

A)is the primary criterion used in activity-based costing
B)allocates cost among the beneficiaries in proportion to the benefits each receives.
C)results in subsidizing products that are not profitable
D)is used more frequently than any other criteria

Question 78

To guide cost allocation decisions,the fairness or equity criterion ________.

A)considers reasonableness as a matter of judgment rather than an operational criterion
B)allocates cost among the beneficiaries in proportion to the benefits each receives
C)is used more frequently than any other criteria
D)is the primary criterion used in activity-based costing

Question 79

Using the fairness criterion,the costs are allocated among the beneficiaries in proportion to the benefits each receives.

Question 80

The ability-to-bear criterion is considered superior when the purpose of cost allocation is motivation.