Chapter 17 Flashcards
Revenue Allocation:
Product Bundle:
-Allocation that occurs when Revenues must be assigned to distinct types of sales, but it is not economically feasible to trace the revenue
-A combination of 2+ products or services sold together for a single price
Two most common revenue allocation methods:
- Stand-Alone ( A weighted average method)
- Incremental (ranks individual products in bundle, and uses ranking to allocate the bundled revenue to each product)
Four common allocation bases for Stand Alone Costing:
1-Selling Price of each unit (Recognizes thedifferent contributions of revenue for each unit, fails to recognize any dif in stand-along pricing policies or strategic classficiation of each product)
2. Manufacturing cost of each unit (Only as reliable as the cost system used, may result in product being over or under costed)
3. Number of physical units (Simple but not sensible, does not work when company offers services)
4. Product revenue for each product line (Good indicator of overall populairty of each product, reasonable way to allocate- may not be approporaite if the products are at different points in the product lifecycles)
Do the exercises for stand alone( all 4 versions please)
Thank you.
Example of way to rank products in incremental revenue allocation
+
How is ranking determined?
First ranked = primary product
Second ranked = first incramental product
Third ranked = Second incremental product
- Survey Customers
- Use internal data on recent stand alone performance
- Top management decides
Try the shapley value method
Thank you.
In the cost hiearchy concept:
Costs are categorized into different cost pools arising from the shared use of common resources (overhead)
The beneficiaries sharing the resources can be distinguished because they do not share equally
The cost allocation base or cost driver for each cost pool measure the amount of benefit received
What are the 5 shared cost classifications:
- Customer output unit-level (Cost of activities to sell each output unit to a customer i.e product handling cost)
- Customer batch-level costs (Cost of activties relates to a group of unit sold to a customer i.e order processing cost)
- Customer-sustaining costs (Cost of activities to support individual customer, regardless of the number of products delivered to the customer i.e cost of displays at customer sites)
- Distribution channel costs (Cost of activities related to a particular distribution channel rather than to each unit, i.e distribution manager salary)
- Facility/corporate sustaining cost (Cost of activties that cannot be traced to an individual customer or distribution channel i.e top management and general administration costs)
Customers ABC costing
Manager find customer profirtbability anaylis useful because:
ABC systems provides a road map to facilitate:
- Frequently highlights how vital a small set of customers is to profitability
-When a customer ranked in the loss category, managers can focus on ways to make future business with the customer more profitable
-less use of cost drivers by a customer to promote cost reductions + highlights cost reduction in each of its own activity areas
Please do customer-level operating income exercise
Thank you.
Contribution Margin analysis=
selling price- variable cost
Two variable explain revenue differences:
1. The volume sold
2. The magnitude of price discounting
Price discounting=
Price dicounts are a function of multiple factors including:
Bonus: Sales discounts are a contra-account to sales (Discount has a debit balance) (sales discount is reflected as a cost of the unit being sold)
The reduction of selling prices below listed levels to encourage an increase in purchases by customers.
- Sales volume purchased
- Describility of attracting a specific customer
- Current Market Conditions
Customer Profitability Analysis:
The reporting and analysis of a customers rev and costs
+high percent contribution by a small number of customers is a common finding (highlights importance of maintaing good relationship with important customers)
+bar charts are helpful way to visuable (cause highly profitable customers clearly stand out)
80-20 rule
Customer profitability analysis is:
Of a total profit, 80% will come from 20% of customers.
attention getting/direct managment attention toward maintaing ideal retention ratio of these customers and turning the others into more profitable customers.
Assessing Customer Value (factors)
- Short run + long run profitability
- Customer retention likelihood
- Customer growth potential
- Increase in overall demand for having well-known customers
- Ability to learn from a customer
- Salesforce/other customer reaction
- Legal requirment and regulations
Do customer profitability exercise
Thank you
