Customer level cost

Customer level costs are costs that are incurred for the activities that are carried out to support customers but that are not related to any specific product. The customer level costs of an activity aim at activities required to support a specific customer. Some of the examples of customer level costs are accounts receivable, special packaging, distribution or shipping requirements and certain types of non-routine customer services.     

A customer level activity is related to a specific customer and not to a specific product. The activity costs are linked to the customer level costs and hence managers are able to quickly and easily see what components of the assigned costs vary in the short run with the changes in the production and the sales volume which will relatively remain the same. This information is useful for pricing of incremental orders, detailed production scheduling and other short-term decisions.  

The service companies have an advantage over the manufacturing companies. The advantage begins with the activity based costing hierarchy. The difference between the traditional accounting and activity based costing is found in the ABC hierarchy. The customer level cost activities are found in the middle category in the hierarchy and these activities do not vary with the unit volume production.

A company that makes products to order for a customer will have more of a product-level or customer level costs. Many managers can find opportunities to reduce the costs in the middle categories of product/customer level costs and the batch related costs. The customer level costs may include costs for special promotions to attract customers in order to purchase the company’s products or services.

The customer level cost activities includes the total cost of serving to the customers i.e. the cost of the product plus the customer-level costs. The system therefore provides information on the relative profitability by customer or customer segments not just by product. These costs include activities unique to serving specific customers or customer segments.

Questions

• What are customer-level costs?
• What are the advantages of allocating customer-level costs?