The following question-and-answer format summarizes the chapter’s learning objectives. Each decision presents a key question related to a learning objective. The guidelines are the answer to that question.
| Decision | Guidelines |
1. How can a company’s revenues and costs differ across customers? | Revenues differ because of differences in the quantity purchased and price discounts. Costs differ because different customers place different demands on a company’s resources in terms of processing sales orders, making deliveries, and customer support. |
2. How do customer-profitability profiles help managers? | Companies should be aware of and devote sufficient resources to maintaining and expanding relationships with customers who contribute significantly to operating income and design incentives to change behavior patterns of unprofitable customers. Customer-profitability profiles often highlight that a small percentage of customers contributes a large percentage of operating income. |
| 3. Why do managers prepare Cost-hierarchy-based operating income statements? | Cost-hierarchy-based operating income statements allocate only those costs that will be affected by actions at a particular hierarchical level. For example, costs such as sales-order costs and shipment costs are allocated to customers because customer actions can affect these costs, but costs of managing the wholesale channel are not allocated to customers because changes in customer behavior will have no effect on these costs. |
| 4. What criteria should managers use to guide cost-allocation decisions? | Managers should use the cause-and-effect and the benefits-received criteria to guide most cost-allocation decisions. Other criteria are fairness or equity and ability to bear. |
| 5. What are two key decisions managers must make when collecting and allocating costs in indirect-cost pools? | Two key decisions related to indirect-cost pools are the number of indirect-cost pools to form and the individual cost items to be included in each cost pool to make homogeneous cost pools. Generally, cost pools include both variable costs and allocated fixed costs. |
| 6. What are the two components of the sales-volume variance and the two components of the sales-quantity variance? | The two components of sales-volume variance are (a) the difference between actual sales mix and budgeted sales mix (the sales-mix variance) and (b) the difference between actual unit sales and budgeted unit sales (the sales-quantity variance). The two components of the sales-quantity variance are (a) the difference between the actual market share and the budgeted market share (the market-share variance) and (b) the difference between the actual market size in units and the budgeted market size in units (the market-size variance). |