Accounting Cost Systems
Module 1 – Case
ACCOUNTING COST SYSTEMS AND COST BEHAVIOR
Assignment Overview
Preparation of an Income Statement for The Serious Reader Company
The first case of this course provides an opportunity to prepare a segmented variable costing (contribution margin, behavioral) income statement and analyze the information. This is a very small company and the information may seem simplistic at first glance. Don’t forget that numbers and hands-on practice best illustrate many basic accounting concepts.
The Serious Reader Company is a small online retailer operating out of a garage apartment. The owner buys books at garage sales, thrift shops, library sales, and whenever an opportunity arises. The company classifies all books into five categories based on cost of acquisition and estimated sales price. See below for details about books purchased and sold during the last year (20XX).
| Price Categories | |||||
| A | B | C | D | E | |
| Units Sold | 4,000 | 1,000 | 500 | 400 | 400 |
| Unites Purchased | 6,000 | 1,200 | 1,000 | 1,000 | 1,000 |
| Resale Price | $4.00 | $12.00 | $20.00 | $45.00 | $60.00 |
| Cost | $0.50 | $4.00 | $10.00 | $20.00 | $20.00 |
In addition to purchasing inventory (used books), the company incurs some operating expenses.
| Variable Operating Expenses | |
| Shipping per book | $1.50 |
| Common fixed expenses | |
| Internet-related costs | $10,000 |
| Travel, etc. | $4,000 |
| Advertising | $1,000 |
| Other overhead | $5,000 |
Case Assignment
Required:
Computations (use Excel)
- Prepare a segmented variable costing (behavioral) income statement for the company in good format.
- Prepare a second variable costing statement assuming 90% of all the books in each category purchased were actually sold.
- Prepare a third variable costing statement assuming that the price is increased by 50% for all five categories (use original sales information).
- The owner enjoys the used-book business. Any suggestions as how to turn this into a full-time business venture so the owner can quit his other job? Prepare another income statement to support your idea.
Memo (use Word)
Interpret the results from the computations and explain how the information is useful. Write a 4- or 5-paragraph memo to the owner of the business. Start with an introduction and end with a recommendation. Each of the four or five paragraphs should have a heading.
Short essay to comment on the questions below (use Word). Start with an introduction and end with a summary or conclusion. Use headings. Maximum length of two pages.
- Why do many organizations make the effort to prepare a different type of income statement for internal purposes?
- Variable costing is not just about preparing income statements. Provide at least three scenarios in which understanding how costs behave is useful.
Assignment Expectations
Each submission should include two files: (1) An Excel file; and (2) A Word document. The Word document shows the memo first and short essay last. Assume a knowledgeable business audience and use required format and length. Individuals in business are busy and want information presented in an organized and concise manner.
Rubric Name: MBA/MSHRM/MSL Case Grading Rubric for Quantitative Business Courses -Timeliness v1
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Demonstrates mastery covering all key elements of the assignment in a substantive way. |
Demonstrates considerable proficiency covering all key elements of the assignment. |
Demonstrates partial proficiency covering all key elements of the assignment. |
Demonstrates limited or poor proficiency covering all key elements of the assignment. |
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Demonstrates mastery in presenting quantitative information in a format appropriate for the discipline. Supporting computations are relevant and accurate. |
Demonstrates considerable proficiency in presenting quantitative information in a format appropriate for the discipline. Supporting computations are mostly relevant and accurate. |
Demonstrate partial proficiency in presenting quantitative information in a format appropriate for the discipline. Supporting computations are not necessarily relevant and somewhat misleading. |
Demonstrates limited or poor proficiency in presenting quantitative information in a format appropriate for the discipline. Supporting computations are not relevant, misleading or absent. |
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Analyzes quantitative and qualitative information as the basis for deep and thoughtful discussion, drawing insightful, carefully qualified conclusions from this work. |
Analyzes quantitative and qualitative information as the basis for competent and thoughtful discussion, drawing reasonable and appropriately qualified conclusions from this work. |
Analyzes quantitative and qualitative information as the basis for workmanlike (without inspiration or nuance, ordinary) discussion, drawing plausible conclusions from this work. |
Analyzes quantitative and qualitative information as the basis for tentative or limited discussion; and is hesitant or uncertain about drawing conclusions from this work. |
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Demonstrates mastery and proficiency in written communication to an appropriately specialized audience. |
Demonstrates considerable proficiency in written communication to an appropriately specialized audience. |
Demonstrate partial proficiency in written communication to an appropriately specialized audience. |
Demonstrates limited or poor proficiency in written communication to an appropriately specialized audience. |
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Assignment submitted on time or collaborated with professor for an approved extension on due date. |
Assignment submitted 1-2 days after module due date. |
Assignment submitted 3-4 days after module due date. |
Assignment submitted 5 or more days after module due date. |
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| Overall Score | ||||
Module 1 – Background
ACCOUNTING COST SYSTEMS AND COST BEHAVIOR
Modular Learning Objectives
Keep the following objectives in mind as you work through the material in this module:
- Define managerial accounting.
- Describe the role of managerial accounting.
- Differentiate between variable and fixed costs.
- Prepare a contribution margin (variable costing) income statement.
- Recognize various approaches to categorizing costs.
- Prepare and analyze a segmented income statement.
Required Reading
Begin this module by familiarizing yourself with the following sections pertaining to managerial accounting while keeping the above six objectives in mind. Click on the three arrows to explore each topic in more detail.
Check Your Understanding
Check your understanding to make sure that you have a good grasp of the background material. If you are not comfortable with the concepts, review some of the material again or go to the optional resource for more examples.
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Click on the quiz icon for an ungraded, 20-question true-or-false self-study quiz to check your progress. If you are not satisfied with the score, review some of the material again. For more in-depth information, review materials listed under optional reading at the bottom of this page. |
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Final Thoughts Contribution margin income and absorption income are two distinct approaches to assess operating profit. Many companies use both approaches. The two approaches have benefits and limitations. Multiple descriptive names exist for the two methods of costing and computation of income. For example, the contribution margin approach is also known as variable costing, direct costing. or marginal costing. Absorption income and costing are also known as full costing, GAAP income, financial accounting income, or traditional costing. Management mostly uses the information provided by variable costing method for estimates and internal decision-making purposes. Variable costing is appropriate for detailed analysis of a product or service. GAAP is required for publicly released and audited financial statements. Management uses both approaches for internal decision-making. Cost behavior refers to the way different types of production costs change when there is a change in level of production. There are two main types of costs according to their behavior: Fixed Costs: Fixed costs are those, which do not change with the level of activity within the relevant range. These costs will incur even if no units are produced. For example rent expense, straight-line depreciation expense, etc. Fixed cost per unit decreases with increase in production. Variable Costs: Variable costs change in direct proportion to the level of production. This means that total variable cost increase when more units are produced and decreases when less units are produced. Although variable in total, these costs are constant per unit. |
Optional Reading
For further detail refer to Dr. Walther’s accounting text and videos.
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Walther, L. (2017). Chapter 17: Introduction to Managerial Accounting. |
Websites which are not acceptable:
There are many websites with information available however; everything on the Internet is not “true”. Furthermore, some information may be written by those with far less experience than what you have. In short, it is better to deal with the University library. Reference resources you should consider as meaningful and pertinent will be from academics and professional practitioners. In short, know your author!
The following resources are not acceptable for this course, keep in mind, there are many others:
- Wikipedia.com
- Ehow.com
- About.com
- Smallbusiness.chron.com
- Diffen.com
- Yourbusiness.azcentral.com
- Investopedia.com
- Boundless.com and Lumen
- Course hero
- Chegg
- Answers.com
Again, APA referencing and in-text citations are part of the discussion as well as the case and signature assignments. If you have questions, please let me know. I am here to help you succeed.
