Ch 14 Flashcards
4 criteria for cost allocation decisions? Which are the best to use?
1 cause and effect (best)
2 benefits received (best)
3 fairness or equity
4 ability to bear
4 purposes of cost allocation?
1 provide info for economic decisions
2 motivate managers and other employees
3 justify costs or compute reimbursement amounts
4 measure income and assets
Criteria for cost allocation decisions: cause and effect
Managers identify variables that cause resources to
Be consumed
Criteria for cost allocation decisions: benefits received
Managers identify beneficiaries of outputs of cost object
Costs of cost object are allocated among beneficiaries
In proportion to benefits each receives
Criteria for cost allocation decisions: fairness or equity
Criterion often cited in government contracts when cost
Allocations are basis for establishing price satisfactory
To gov and suppliers
Based on Matter of judgement
Criteria for cost allocation decisions: ability to bear, ex.
Allocating costs in proportion to cost object’s ability to
Bear costs allocated to it
Ex. Allocate executive income salaries on basis of division of operating income
3 major categories of corporate costs?
1 Treasury costs
2 human resources management costs
3 corporate administration costs
Treasury costs
Financing for construction of new equipment
Human resource management costs
Recruitment, ongoing employee training and development
Corporate administration costs
Executive salaries, rent, general administration costs
Division costs
Direct cost categories and indirect cost categories
Homogenous cost pools
All costs in cost pool have same/similar cause and effect
Ot benefits received relationship with cost allocation base
Customer profitability analysis
Reporting and assessment of revenues earned from
Customers and costs incurred to earn those revenues
Price discount
Reduction in selling price below list selling price to
Encourage customers to purchase more
Customer cost hierarchy
Categorizes costs related to customers into different cost
Pools on basis of different types of cost drivers, cost
Allocation bases or difficulty in determining cause effect rel.
5 categories of indirect costs in customer cost hierarchy?
1 customer output unit level costs 2 customer batch level costs 3 customer sustaining costs 4 distribution channel costs 5 corporate sustaining costs
Customer output unit level costs, ex.
Costs of activity to sell unit to customer
Ex. Product handling costs of each case sold
Customer batch level costs, ex.
Costs of activities related to group of units sold to customer
Ex. Costs incurred to process orders to make deliveries
Customer sustaining costs, ex.
Costs of activities to support individual customers
Regardless of number of units or batches delivered to
Customer
Ex. Costs of visits to customers or costs of displays at customer sites
Distribution channel costs, ex.
Cost of activities related to particular distribution channel
Rather than each unit of product, batch of product,
or specific customers
Ex. Salary of manager of distribution channel
Corporate sustaining costs, ex.
Costs of activities that can’t be traced to individual customers
Or distribution channels
Ex. Top management and general administration costs
Whale curve
Backward bending chart, bending at point where
Customers start to become unprofitable
5 factors managers should consider in deciding to
Allocate resources among customers
1 likelihood of customer retention 2 potential for sales growth 3 long run customer profitability 4 increase in overall demand from having well known customers 5 ability to learn from customers
What are 2 key decisions managers must make when collecting costs in indirect cost pools?
1 # of indirect cost Pools to form
2 individual cost items to be included in each cost pool
To make homogenous cost pools
How can company’s revenues differ across customers?
Differences in quantities purchased
and price discounts given
How can company’s costs differ across customers?
Customers place different demands on company’s
Resources in terms purchase orders, deliveries,
customer support
Customer profitability profiles often highlight that a…
Small percentage of customers contribute a large
Percentage of operating income
