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 4,000 Unites Purchased 6,000 Units Sold Resale Price C D E 1,000 500 400 400 1,200 1,000 1,000 1,000 $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. Privacy Policy | Contact The Institute of Management Accountants (IMA) has a series of YouTube Videos on Trends in Management Accounting. We will review and discuss some of these trends to learn about developments in this field for discussions in this course. Comment and expand on a topic discussed in the videos and provide a real world example from the news or your own experience. Presence during both weeks of the module and a minimum of three postings are expected, one original posting and two responses to colleagues. Minimum required participation does not guarantee a perfect score. Tammy Shaw posted Nov 5, 2018 7:10 PM Subscribe There were several concepts that the Institute of Management (2014a), provided in the YouTube video which all configures together. I related better to the historical verses predictive category of managerial accounting. Historical accounting practice is taking data and supplying it to the organization, shareholders and in some cases the public via balance sheets and income statements (Brands, & Holtzblatt, 2015). As we are moving forward in today’s society, these types of resources for managers are not enough information to help determine the real time decisions that need to be made. The financial accounting system does not provide the break down for products that managers review for planning purposes. Predictive accounting provides the data to help support production / decisions as well as driving the management into asking the questions such as what if and how (Cokins, n.d.). Improvement programs such as Six Sigma and the Lean Projects can be derivatives based upon cost effective decisions (Cokins, n.d.). The financial department needs to be familiar with the products in order to help determine costs (fixed and variable) for the future of the firm. It’s up to managers to work along with finance to help provide the necessary information to be able to set the long term goals and objectives for costs and profits (Brands, & Holtzblatt, 2015). Both in my past job working in the chemical industry field as well as my current position with healthcare, I’ve experienced both historical analytical practice as well as predictive. At the chemical plant, we often had to make “on demand” type of products for customers. With any of our products, there was a certain amount of time that would be needed to provide the final product to the client. Using historical data for certain customers helped to set a foundation for us to start doing predictive type of decision making based upon trends. This helped us to have the raw materials pre-ordered (which cut down on cycle time for the customer’s final product) and it helped accounting to know when we would be ordering as well as a generalization of amount of raw materials which figured into variable costs. This type of projection helped tremendously for product determination and order for every segment of the operation. As Cokins stated in the Institute of Management video, “there are high maintenance customers and there are low maintenance customers” (2014b). Knowing this type of customer can help establish a more efficient managerial accounting system. Tammy A trend of the Management Accounting is the ability to shift focus from being product centric to customer centric. Customers’ needs and demands have changed. Their expectations are far more developed than just buying a product and the suppliers’ goal is more than just making sales. The management accounting reporting has to tap into knowing what the customer wants, their changing or evolving needs and how to help the supplier be profitable based on trend analysis. In other words, the management accounting reporting has to bridge the gap between what the customer is expecting of the supplier and the profitability expectations of the supplier. The reporting must detail how to make a product profitable independent of the type of customer. As the video indicated some customers are high maintenance and others are low maintenance, you must find a way to meet the needs of either type, in order to keep them buying, and provide the information needed by managers to ensure their products are/profitable. I have observed this in things as simple as fast food chains, catering to the ever-changing pallets and health consciousness of their customers to retail stores (i.e. grocery stores, Amazon, Target, and Walmart) and suppliers providing delivery services, store pickup, and/or curbside pick up. The focus is not so much on the product as it is the “Customer”. The Institute of Management Accountants (IMA) has a series of YouTube Videos on Trends in Management Accounting. We will review and discuss some of these trends to learn about developments in this field for discussions in this course. Comment and expand on a topic discussed in the videos and provide a real world example from the news or your own experience. Presence during both weeks of the module and a minimum of three postings are expected, one original posting and two responses to colleagues. Minimum required participation does not guarantee a perfect score Hello everyone, I hope all is well. I am in the military so please forgive me for having little experience when dealing with accounting tasks. I had to watch the video’s a few times to make it click. Looking over many trends that streamline from Management Accounting let’s not forget about the other terms more commonly used Managerial Accounting or Corporate Accounting. To operate and enterprise one must have knowledge and knowhow in the tasks of financial and accounting to run any organization whether it’s a business or even a Battalion in the military. These managerial accountants are found in companies and institutes where they reside to lead internal financial processes that include monitoring costs, sales, spending in the organization and budgeting. They also conduct audits as well as study past trends to help with what could happen in the future and the needs and they will assist leaders with strategic financial decisions. My current profession in the 75th Ranger Battalion I have little association with the actual accountants. We do have civilian management accountants who get upset when they are called financial accountants. We know each profession provides a valuable service and have different key roles the management accountants primary task are completing important operational plans of instruction that helps are leadership in the decision making process when dealing with financial decisions influenced by each of our companies operations. The financial accounting primary job is keeping the external groups like the chain of command I work for and are definitely high maintenance any other money making agencies involved in are financial status. There are other units as well who do not have the same budget as Special Operations unit and get a lower budget. They do not have the same resources as 75th yet they do continue operations with a dry pool but somehow keep and acceptable readiness. Their managing account reporting is keeping lower maintenance Units profitable. https://www.researchgate.net/publication/309430948_Military_CostBenefit_Analysis_Theory_Practice analyzing results against strategic and operational plans COURSE MATERIALS/BIBLIOGRAPHY Module 1 Edspira. (2014, February 11). Introduction to managerial accounting [Video file]. Retrieved from https://youtu.be/KCyg8zM9bA. Brian Routh TheAccountingDr. (2010, November 25). Cost behavior: Variable costs versus fixed costs - accounting video [Video file]. Retrieved from https://youtu.be/TLYwPogWdEU. Investopedia. (2014, March 20). Investopedia video: Contribution margin [Video file]. Retrieved from https://youtu.be/pm6Eo9qiUIY. Chauvin, C. L. (2014, June 14). Segmented income statements [Video file]. Retrieved from https://youtu.be/q39AzZhpoNQ. Walther, L. (2017). Chapter 17: Introduction to Managerial Accounting. Institute of Management Accountants. (2014, February 18). 7 Trends in Management Accounting Introduction [Video file]. Retrieved from https://youtu.be/gRyW2_Ay2Cw. Institute of Management Accountants. (2014, March 6). 7 Trends in Management Accounting - Trend 1[Video file]. Retrieved from https://youtu.be/lCj4-gvH1WQ. 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. Click on the quiz icon for an ungraded, 20-question true-or-false self-study quiz t check your progress. If you are not satisfied with the score, review some of the m again. For more in-depth information, review materials listed under optional read the bottom of this page. 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. Walther, L. (2017). Chapter 17: Introduction to Managerial Accounting. LICENSES AND ATTRIBUTIONS Privacy Po Module 1 - Outcomes ACCOUNTING COST SYSTEMS AND COST BEHAVIOR • o Case Prepare a behavioral income statement.
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