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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 | |||||
| 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.
Module 1 - SLP
Accounting Cost Systems and Cost Behavior
You are applying for a managerial position at an innovative and rapidly growing company. This is a dynamic company that wants an individual who adds value to the organization. Managers at this company wear many hats, so the position requires managing products, people, and financial aspects of running the company.
As part of the interview process, you are required to make a presentation covering four different topics, one per module for this course.
You choose the company and the new product that you want to showcase in your presentation. It can be real or fictitious (based on an industry). This is for background purposes only. The presentation is to showcase your abilities and what you can contribute to the organization.
IBIS World (access on the Portal through the Online Classroom & Library, Additional Library Resources link) and BizStats have estimates of cost of goods sold and some other categories of operating expenses. Information about contribution margins is not available, but adding new products typically mean incurring both fixed and variable costs. Consequently, cost of goods sold is a reasonable estimate. Net operating income as a percentage of sales or some variation thereof may also be relevant if the new product is expected to contribute significantly to the bottom line. As a candidate for a position you would not have internal information available, but being resourceful and being a skilled researcher are desired traits for the position. IBIS World also has a wealth of other market statistics that may be helpful. Use listed background material and other resources as needed.
Required:
Include the following items in your presentation.
Present an idea for a new product.
Describe the product.
Show some cost estimates and pricing suggestion for this product based on research.
What approach would you use to determine selling price (for example cost plus or target costing)? It is important when choosing a design.
Explain your rationale for the pricing approach.
Show expectations of growth and potential profit.
