Customer Costing

1. Extension of Job Costing

• Definition:
  Customer costing extends job costing by pooling costs of all jobs executed for a single customer, making the customer itself a cost object.
• Purpose:
  • Determine customer‐level profitability
  • Rank customers by profit contribution

2. Why Customer Profitability Differs

• Order Characteristics:
  • Number of orders
  • Variety of designs
  • Number of deliveries
  • Order size
• Impact:
  More complex orders incur higher indirect costs—even if sales value is similar.

3. United Leather Example

3.1 Background

• Markup Policy:
  100% markup on variable (direct) cost
• Observation:
  • Sales ↑ 10% over two years
  • Profit ↑ only 3%
• Cause:
  Indirect costs rose from ₹3 million to ₹3.8 million (~27% increase)

3.2 Data Collection

• Customers Analyzed:
  • Top 10 large customers individually
  • Remaining ~190 small customers pooled
• Key Metrics per Customer:
  • Jobs executed (e.g., Newport Garments: 86 jobs)
  • Pieces supplied (e.g., 12,000 pieces)
  • Design variants (e.g., Leatherite: 50 designs vs. Radiant: 16 designs)

4. Indirect‑Cost Drivers & Rates

• Order‑Processing Cost:
  ₹4,000 per order
• Design Cost:
  ₹3,000 per design
• Other Operating Expenses:
  ₹16 per piece
• Administrative Expenses:
  3.5% of sales value

5. Revising Customer Profitability

1. Compute Indirect Cost per Customer
   • Multiply rates by customer’s order count, design count, piece count, and sales value.
2. Total Cost = Direct cost + Revised indirect cost
3. Profit Margin = (Sales – Total Cost) ÷ Sales

5.1 Sample Margins

6. Pricing Policy Changes

• Issue: Low‐profit customers demanding high service levels (designs, deliveries, sizes).
• Solution:
  1. Incorporate indirect cost into quotations:
     • Charge extra per order, per design, per delivery
  2. Adjust list prices:
     • Radiant → Price decrease
     • Zenith (high‐service) → Price increase
  3. Communicate logic to customers:
     • Explain cost drivers
     • Negotiate simpler orders or higher fees
• Outcome:
  • Some customers simplify orders
  • Others accept higher prices or switch suppliers
  • Company focuses on more profitable customer relationships

7. Applicability

Customer costing is vital for B‑to‑B firms with customized orders, e.g.:

• Garment manufacturers
• Automobile component suppliers
• Pharmaceutical sub‑contractors
• Machinery/job‑shop operations