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

Question 1

Managers use 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

Answer 1

C

Question 2

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

Answer 2

B

Question 3

The reporting and assessment of revenues earned from customers and the costs incurred to earn those revenues is ________.

A) creditor-age analysis
B) customer-profitability analysis
C) debtor-cost analysis
D) customer-turnover analysis

Answer 3

B

Question 4

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 5

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

Question 6

Costs which are NOT economically feasible to trace but which are related to a cost object are known as ________.

A) incremental costs
B) marginal costs
C) indirect costs
D) variable costs

Question 7

The cost of the manager of a retail distribution channel would most likely be classified as a ________.

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

Question 8

Costs of activities to sell each unit to a customer is an example of ________.

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

Question 9

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

Question 10

Customer revenues and ________ are the determinants of customer profitability.

A) customer profile
B) customer costs
C) customer location
D) customer industry

Question 11

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

Question 12

Costs incurred to handle each unit sold would most likely be classified as a ________.

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

Question 13

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

Question 14

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 15

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 16

To improve customer profitability,companies should track ________.

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 17

________ 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

Question 18

Costs incurred to process orders would most likely be classified as a ________.

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

Question 19

The costs of all six value-chain functions should be included when determining ________.

A) the prime cost of a product
B) the selling price of a product
C) the contribution margin per unit
D) the cost of capital

Question 20

The cost of visiting customers would most likely be classified as a ________.

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

Question 21

A customer cost hierarchy may include distribution-channel costs.

Question 22

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

Question 23

An advantage of using a bar chart to visualize customer profitability is that ________.

A) differences in commissions paid to sales persons stand out
B) the number of "unprofitable" customers stand out
C) trends in the volume of purchases become apparent
D) company can get ideas about new products or improved methods

Question 24

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

Question 25

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 26

Price discounts must be uniform among all customers.

Question 27

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

Question 28

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

Question 29

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

Question 30

A customer cost hierarchy may include customer-sustaining costs.

Question 31

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

Question 32

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

Question 33

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

Question 34

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 35

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

Question 36

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

Question 37

Consider revenues from three of Megafy's 10 wholesale customers in 2015:
What conclusion can be drawn from the above data? Which steps the manager of the company can take?

Question 38

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

Question 39

Explain the importance of customer-profitability analysis.

Question 40

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 41

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 42

It is common to find that a small number of customers generate a high percentage of operating income.

Question 43

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 44

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

Question 45

Allocation of corporate-sustaining costs is useful for ________.

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 46

For companies in which full allocation is not followed,corporate sustaining costs are ________.

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 47

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

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

Question 48

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 49

The chart used to express customer profitability is called the whale curve because ________.

A) it is forward-bending at the point where customers start to become profitable and thus resembles a humpback whale
B) it is forward-bending at the point where customers start to become unprofitable and thus resembles a humpback whale
C) it is backward-bending at the point where customers start to become profitable and thus resembles a humpback whale
D) it is backward-bending at the point where customers start to become unprofitable and thus resembles a humpback whale

Question 50

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

Question 51

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

Question 52

Corporate-sustaining costs should be allocated to ________.

A) motivate changes in customer behavior
B) evaluate distribution-channel managers
C) determine the selling price that will cover all costs
D) find the cause-and-effect relationship

Question 53

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 54

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 55

What actions might be taken with an unprofitable customer?

Question 56

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 57

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

Question 58

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 59

Salary of top management and general-administration costs is an example of ________.

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

Question 60

Why would a manager perform customer-profitability analysis?

Question 61

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 62

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

Question 63

When the purpose of cost allocation is to provide information for economic decisions or to motivate managers and employees,the best criteria are ________.

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 64

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 65

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 66

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

Question 67

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 68

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

Question 69

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 70

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

Question 71

Costs in the cost pool having the same or a similar cause-and-effect or benefits-receiving relationship with the cost-allocation base can be achieved in adopting ________.

A) indirect cost pools
B) homogeneous cost pools
C) hetrogeneous cost pools
D) direct cost pools

Question 72

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 73

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

Question 74

ABC systems use the concept of a ________ to identify the cost drivers that best demonstrate the cause-and-effect relationship between each activity and the costs in the related cost pool.

A) cost hierarchy
B) customer -cost analysis
C) cost allocation
D) variance analysis

Question 75

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

Question 76

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 77

A challenge to using cost-benefit criteria for allocating costs is that ________.

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 78

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 79

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

Question 80

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