Traditional Costing Method
Under Johnson Beverage’s current system, customer service costs are allocated based on what?
Sales revenue
What does ABC stand for?
Activity-Based Costing
True or False: Johnson Beverage currently allocates customer service costs based on customer revenue.
True
Johnson Beverage's traditional costing method assumes that higher sales automatically lead to ______ service costs.
Higher
ABC assigns costs based on what factor?
Activities that drive the cost.
True or False: In the case, the customer has requested a price increase from Johnson Beverage.
False
True or False: A customer’s revenue is always an accurate reflection of the amount of service work they require.
False
ABC improves costing accuracy by linking costs to ______ instead of revenue.
Operational activities
What major customer of Johnson Beverage requested a price reduction?
Saver Superstore
Johnson Beverage allocated a total of how much in customer service costs?
$1.2 million
What is the term for the measure used to assign activity costs?
"Cost driver"
What is the key decision that Johnson Beverage must make in this case?
Whether to grant Saver’s price reduction request.
What major problem can occur when overhead is allocated solely based on revenue?
It may misrepresent the true cost-to-serve customers.
Why is ABC often considered more accurate than traditional costing?
It allocates costs based on the activities customers actually require, rather than how much product they purchase.
What is the main reason a revenue-based allocation method can be misleading when comparing customer profitability?
Sales revenue doesn’t track service effort. Customers may generate similar revenue but require very different service work, leading to misallocated costs and misleading profitability.