Cost Allocation, Customer-Profitability Analysis, and Sales Variance Analysis

Cost Allocation

The process of assigning indirect costs to cost objects like departments or products

Cause and Effect Method

Allocating costs based on what causes the cost to be incurred (e.g., machine hours for power cost)

Benefits Received Method

Allocate costs based on the proportion of benefits gained by each segment

Fairness or Equity Method

Costs are allocated to ensure fairness, often used in government contracts

Ability to Bear Method

Costs are allocated to those best able to absorb them, like high-income divisions

Customer Profitability Analysis

Evaluating the revenues earned from and costs incurred for serving a customer

Customer Unit-Level Cost

Cost incurred per product or service delivered to a customer (e.g., shipping per item)

Customer Batch-Level Cost

Cost of servicing a customer per batch/order regardless of units (e.g., order processing)

Customer-Sustaining Cost

Costs to maintain customer relationship (e.g., account management)

Distribution Channel Cost

Costs of operating channels that serve different customers (e.g., retail vs. online)

Sales-Sustaining Cost

Costs that promote the brand or support sales overall (e.g., national ads)

Sales Mix Variance

Effect on profit from actual sales mix differing from the budgeted sales mix

Sales Quantity Variance

Effect of actual sales volume differing from budgeted quantity