ACCT 3420

Intermediate Managerial Accounting

Chapter 17

Revenue and Customer

Profitability Analysis

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Learning Objectives
1. Select a method and allocate revenue from a
product bundle to its distinct components.
2. Apply an ABC system to allocate costs when the
customer is the cost object.
3. Calculate and interpret four levels of contribution
margin variance analyses.
4. Generate a customer profitability profile.
5. Analyze relevant profitability data and decide
whether to drop or add customers or branches.
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Revenue Allocation
• Revenue allocation
– When revenues must be assigned to distinct types of
sales (revenue objects — products, services,
customers, etc.) but not economically feasible to trace
the revenue to those individual objects (which would
result in a more accurate assignment of revenues to
products)
• Revenue allocation methods
– Stand alone revenue allocation method
– Incremental revenue allocation method
– Other methods — subjective allocation
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Bundled Products
• Revenue object
– Anything for which a separate measurement of
revenue is desired
• Bundled product:
– A package of two or more products or services sold for
a single price, but individual components of the bundle
also may be sold as separate items at their own “stand-
alone” prices
– Price for bundled product is typically less than if items
are acquired individually

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Stand-Alone Revenue Allocation Method
• Uses product-specific information relating to
products in the bundle to determine the weights
used to allocate the bundled revenues to
individual products
• Possible weights or allocation bases:
– Selling prices
– Unit manufacturing costs
– Number of physical units
– Total product line revenues

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Incremental Revenue-Allocation Method
• Ranks individual products in a bundle according to
criteria determined by management and then uses
this ranking to allocate bundled revenues to individual
products
– The first-ranked product is the primary product
– The second-ranked product is the first incremental product
– The third-ranked product is the second incremental product,
and so on

• Ranking can be decided by customer survey, recent

stand-alone sales performance, or by management

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ABC: The Customer Is the Cost Object (1 of 2)
Shared costs are classified into five categories:
1. Customer output unit level costs:
– Costs to sell each output unit to a customer
2. Customer batch level costs:
– Costs related to a group of units sold to a customer
3. Customer-sustaining costs:
– Costs to support individual customers, regardless of
the number of units or batches delivered to the
customer

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ABC: The Customer Is the Cost Object (2 of 2)
4. Distribution channel costs:
– Costs related to a particular distribution channel
5. Facility/corporate sustaining costs:
– Costs that cannot be traced to individual customers or
distribution channels

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Customer Profitability Analysis (1 of 2)

Exhibit 17-2 Customer Profitability Analysis for Four Customers of Spring Distribution for June

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Customer Revenues
• Price discounting is the reduction of selling prices
to encourage increases in customer purchases.
– Lower sales price is a trade-off for larger sales
volumes.
• Discounts should be tracked by customer and
salesperson.

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Customer Cost Analysis
• Customer cost hierarchy categorizes costs related
to customers into different cost pools on the basis
of different:
– Types of drivers
– Cost-allocation bases
– Degrees of difficulty in determining cause-and-effect or
benefits-received relationships

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Profitability Variances

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Sales Variances
• Level 1: Static-budget variance — the difference
between an actual result and the static-budgeted
amount
• Level 2: Flexible-budget variance — the difference
between an actual result and the flexible-budgeted
amount
• Level 2: Sales-volume variance
• Level 3: Sales-quantity variance
• Level 3: Sales-mix variance
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Static-Budget & Flexible-Budget Variances
• Static-budget variance:
– Difference between actual and budgeted contribution
margin
Static budget Actual Static budget
= −
variance results amount

• Flexible-budget variance:
– Difference between the actual result and the
corresponding flexible-budget amount based on the
actual output level in the budget period
Flexible budget Actual Flexible budget
= −
variance results amount
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Sales-Volume Contribution Margin
Variance
• Effect of the difference between the actual and
budgeted quantity (volume of activity)
– Answers why sales differ from expectations

Sales-volume contribution margin variance =

Budgeted
 Actual sales Static budget sales 
 −   contribution
 quantity in units quantity in units 
margin per unit

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Sales-Mix Contribution Margin Variance
• The difference between the budgeted amount for
the actual sales mix and the budgeted amount for
the budgeted sales mix
• A measure of the impact of a change in sales mix
between products with differing margins

Actual units
Sales  Actual sales Budgeted  Budgeted
of all  
mix =   mix − sales mix   contribution
products  percentage
variance  percentage  margin per unit
sold

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Sales-Quantity Contribution Margin
Variance
• The difference between budgeted contribution
margin of the actual units sold and contribution
margin of the budgeted units sold
– Both at the budgeted sales mix
• A measure of the impact of a change in total sales
quantity, holding the sales mix constant
Sales quantity variance =
 Actual units of Budgeted units  Budgeted Budgeted
 
 all products − of all products   sales mix  contribution
 sold 
 sold  percentage margin per unit

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Market-Share Variance
• Difference between actual market share and
budgeted market share, based on the overall
size of the market and the budgeted contribution
margin for the budgeted mix
• measures the effect on operating income of
changes in the total market size of the firm’s
product.
Market share variance =
Actual  Actual Budgeted  Budgeted contribution
 
market size   market − market   margin per composite
 share 
in units  share  unit for budgeted mix

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Market-Size Contribution Margin Variance
• Difference between actual market size and
budgeted market size, based on budgeted market
share and budgeted contribution margin for the
budgeted mix
• assesses the effect on operating income of
changes of a firm’s proportions of the total market.
Market size variance =
 Actual Budgeted  Budgeted Budgeted contribution
 
 market size − market size   market  margin per composite
 in units 
 in units  share unit for budgeted mix

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Sales Variances Summarized

Exhibit 17-9 Overview of All Levels of Contribution Margin Variances for Spring Distribution for June

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Customer Revenues and Customer Costs
• Customer profitability analysis is the reporting and
analysis of revenues earned from customers and
costs incurred to earn those revenues
– An analysis of customer differences in revenues and
costs can provide insight into why differences in
customer profitability exist
– Lower sales price is a tradeoff for larger sales volumes
– Discounts should be tracked by customer and
salesperson

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Bar Chart of Customer Profitability

Exhibit 17-11 Bar Chart Presentation of Customer Profitability for Spring Distribution

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Customer Profitability Analysis (2 of 2)
• Looks at customers in terms of
– Short-run and long-run profitability
– Likelihood of retention
– Growth potential
– Increases in overall demand from well-known
customers
– Ability to learn from a customer
– Salesforce or other customer’s reaction
– Legal requirements and regulations

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Drop a Customer

Exhibit 17-13 Relevant-Cost Analysis for Allied West Dropping the Wisk Account

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Add a Customer

Exhibit 17-14 Relevant-Cost Analysis for Dropping the Wisk Account and Adding the Loral Account

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Drop or Add Branches

Exhibit 17-15 Relevant-Revenue and Relevant-Cost Analyses for Closing Allied West and Opening Allied
South

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