Customer-Cost Analysis

We apply to customers the cost hierarchy discussed in Chapter 5. A customer-cost hierarchy categorizes costs related to customers into different cost pools on the basis of different types of cost drivers, or cost-allocation bases, or different degrees of difficulty in determining cause-and-effect or benefits-received relationships. The Provalue Division customer costs are composed of (1) marketing and administration costs, $15,000,000; (2) distribution costs, $9,000,000; and (3) customer-service costs, $3,600,000 (see Exhibit 15-1). Managers identify five categories of indirect costs in its customer-cost hierarchy:

  1. CUSTOMER OUTPUT UNIT-LEVEL COSTS—costs of activities to sell each unit (computer) to a customer. An example is product-handling costs of each computer sold.
  2. CUSTOMER BATCH-LEVEL COSTS—costs of activities related to a group of units (computers) sold to a customer. Examples are costs incurred to process orders or to make deliveries.
  3. CUSTOMER-SUSTAINING COSTS—costs of activities to support individual customers, regardless of the number of units or batches of product delivered to the customer. Examples are costs of visits to customers or costs of displays at customer sites.
  4. DISTRIBUTION-CHANNEL COSTS—costs of activities related to a particular distribution channel rather than to each unit of product, each batch of product, or specific customers. An example is the salary of the manager of the Provalue Division’s wholesale distribution channel.
  5. DIVISION-SUSTAINING COSTS—costs of division activities that cannot be traced to individual customers or distribution channels. An example is the salary of the Provalue Division manager.

Note from these descriptions that four of the five levels of Provalue Division’s cost hierarchy closely parallel the cost hierarchy described in Chapter 5 except that the Provalue Division focuses on customers whereas the cost hierarchy in Chapter 5 focused on products. The Provalue Division has one additional cost-hierarchy category, ­distribution-channel costs, for the costs it incurs to support its wholesale and business-sales channels.