ACC501 Accounting for Decision Making
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.
ACC501 Accounting for Decision Making
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 Trident Portal through the Online Library > Additional Library Resources > IBISWorld 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.
ACC501 Accounting for Decision Making
Module 2 Case
COST–VOLUME–PROFIT ANALYSIS
Assignment Overview
The Annie Smith Dance Center
The Director of Annie Smith Dance Center is asking for assistance with the financial aspects of running a professional group of performers. She wants financial information presented in an easy to read format and a better understanding of the profitability of the concerts and the organization as a whole.
The Annie Smith professional group features three styles of dance concerts each year. Two of the dance concerts showcase a different genre. The third performance is a Christmas Spectacular, which is the most popular and is therefore scheduled every year. The table below provides information about expected ticket sales for the performances.
Lower Orchestra Section (A) Upper Orchestra Section (B)
Descriptions No. of Seats. Ticket Price Tickets sold per performance No. of seats Ticket Price Tickets sold per performance
Hip-Hop Performance 150 $85 100% 450 $50 90%
Jazz and Tap Dance 150 $85 100% 450 $50 60%
Christmas Spectacular 150 $125 100% 450 $50 100%
Ms. Smith has prepared a tentative schedule for the coming season. The table below also shows the type and number of performances and direct cost per type of concert.
Descriptions Number of Performances Cost per Dance Concert
(direct fixed costs)*
Hip-Hop Concert 10 $48,000
Jazz and Tap Dance 5 86,000
Christmas Spectacular 20 22,000
Total Direct Fixed Costs $156,000
*Examples of direct fixed costs are costumes, rehearsals, royalties, guest artist fees, choreography, and salaries of production staff, music, and wardrobe for each of the concerts. This amount does not change with the number of performances.
Additional costs:
Variable costs associated with each performance are shown below.
Musicians $6,100
Rental of auditorium 2,500
Dancers' compensation 6,700
Annual general administrative and operating costs for the dance center are:
Administrative staff $185,000
Insurance 25,000
Marketing 115,000
General office expenses 90,000
Case Assignment
Required:
Computations (use Excel)
Summarize key financial information in a table as shown below.
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Title
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Name of Dance Concert
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Revenues/
Performance
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Variable Costs/
Performance
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Contribution Margin/
Performance
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Number of Performances
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Total Contribution/
Type of Dance Concert
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Direct Fixed Costs
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Segment Margin/
Type of Concert
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1.
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2.
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3.
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Total
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Use the information in the table you completed to compute the number of performances required to break even for each concert. Do not include general and administrative expenses. These are separate computations for each dance concert.
Compute break even for the organization as a whole (include all fixed expenses) and express the result in revenues instead of the number of performances.
Ms. Smith wants the Dance Center to generate at least $200,000 in operating profit. What level of revenues does the performance group need to achieve to meet this goal? Prepare an income statement in good format to support the computations.
Give a recommendation about changes Ms. Smith can implement to achieve the target profit. Support your idea with computations.
Memo (use Word)
Write a 4- or 5-paragraph memo to the owner of the dance center to assist her in interpreting the financial analysis. Start with an introduction and end with a recommendation. Each of the four or five paragraphs should have a heading.
Short Essay (use Word)
Start with an introduction and end with a summary or conclusion. Use headings.
What are some shortcomings of multi-product even analysis?
How does demand and resource constraints affect this type of analysis.
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.
ACC501 Accounting for Decision Making
Module 2 SLP
COST–VOLUME–PROFIT ANALYSIS
Second part of the presentation. See background information for the Module 1 SLP.
Required:
Include the following items in your presentation:
What about special pricing for some markets or customers?
Determination of customer profitability.
Show effect on revenues and profitability based on stated assumptions.
Potential advantages and disadvantages, both financial and non-financial.
ACC501 Accounting for Decision Making
Module 3 Case
TRANSFER PRICING AND RESPONSIBILITY CENTERS
Assignment Overview
Coffee Maker's Incorporated (CMI)
Three divisions of a CMI are involved in a dispute. Division A purchases Part 101 and Division B purchases Part 201 from a third division, C. Both divisions need the parts for products that they assemble. The intercompany transactions have remained constant for several years.
Recently, outside suppliers have lowered their prices, but Division C refuses to do so. In addition, all division managers are feeling the pressure to increase profit. Managers of divisions A and B would like the flexibility to purchase the parts they need from external parties at a lower cost and increase profitability.
The current pattern is that
Division A purchases 2,700 units of product part 101 from Division C (the supplying division) and another 1,300 units from an external supplier.
Division B purchases 1,100 units of Part 201 from Division C and another 700 units from an external supplier.
Note that both divisions A and B purchase the needed supplies from both the internal source and an external source at the same time.
The managers for divisions A and B are preparing a new proposal for consideration.
Division C will continue to produce Parts 101 and 201. All of its production will be sold to Divisions A and B. No other customers are likely to be found for these products in the short term, given that supply is greater than demand in the market.
Division A will buy 2,000 units of Part 101 from Division C at the existing transfer price; and
2,000 units from an external supplier at the market price of $900 per unit.
Division B will buy 900 units of Part 201 from Division C at the existing transfer price; and
900 units from an external supplier at $1,800 per unit.
Division C Data Based on the Current Agreement
Part 101 201
Annual volume (units) 2,700 1,100
Transfer price/unit $1,000 $2,000
Variable expenses/unit $700 $1,200
The fixed overhead for Division C is $1,200,000.
Case Assignment
Required:
Computations (use Excel)
Set up a table similar the one below to compute the difference between the current situation and the proposal for Divisions A and B.
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Division A
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Current Situation
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Proposal
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No. of Units
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Purchase Price
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Total Purchases
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No. of Units
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Purchase Price
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Total Purchases
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Internal purchases
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2,700
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$
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2,000
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$
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External purchases
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1,300
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2,000
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Total cost for Part 101
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$
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$
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Savings to Div. A
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$
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Compute the operating income for Division C under the current agreement and the proposed agreement.
Is the revised agreement a good idea? Support your answer with computations.
Memo (use Word)
Write a 4- or 5-paragraph memo to the division manager explaining the analysis performed. Start with an introduction and end with a recommendation. Each of the four or five paragraphs should have a heading.
Short Essay (use Word)
Start with an introduction and end with a summary or conclusion. Use headings.
Evaluate and discuss the implications of the following transfer pricing policies:
Transfer price = cost plus a mark-up for the selling division
Transfer price = fair market value
Transfer price = price negotiated by the managers
Why is transfer pricing such a significant issue both from a financial and managerial perspective?
ACC501 Accounting for Decision Making
Module 3 SLP
TRANSFER PRICING AND RESPONSIBILITY CENTERS
Third part of the presentation. See background information for the Module 1 SLP.
Required:
Include the following items in your presentation.
The organization is currently centralized, but is reviewing options to put a decentralized structure in place.
You are asked to comment on responsibility centers and their functions.
Cost centers can be a drain on an organization. Could internal charge backs be implemented? Present specific ideas.
Comment on the role of business analytics in a growing decentralized organization.
SLP Assignment Expectations
Submit a PowerPoint presentation or a Word Document. A PowerPoint presentation should have no more than six slides and a Word document cannot exceed two pages. Use words, tables, and graphs to make a succinct presentation. Document all sources and provide links at the end. It is acceptable to add another slide or page to list the sources.
Combine the submissions from prior module(s) into one file before uploading to the SLP 3 Dropbox.
ACC501 Accounting for Decision Making
Module 4 Case
BUDGETING, VARIANCE ANALYSIS, AND PERFORMANCE EVALUATIONS
Assignment Overview
T&P Fashion Shops
T&P Fashion Shops is a new chain that operates 10 stores in major malls throughout the United States. Each store manager is responsible for preparing a flexible budget for the store. T&P headquarters accumulates and analyzes the information for each store and in the aggregate.
Below is the forecast (budgeted income statement) for the Houston store showing the breakdown of fixed and variable expenses in columns two through four. The last column shows the actual results.
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T&P Fashions - Houston Store
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Breakdown of Expenses (Forecast)
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Forecast
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Fixed
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Variable
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Actual
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Revenues
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$1,400,000
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$1,260,000
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Cost of Sales
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790,000
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790,000
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760,000
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Gross Profit
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$610,000
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$500,000
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Management
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182,000
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154,700
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27,300
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182,000
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Shop assistants
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258,000
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154,800
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103,200
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262,000
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Rent
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23,200
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18,560
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4,640
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22,000
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Utilities
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34,800
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34,800
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31,000
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Misc. expenses
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24,500
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12,250
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12,250
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29,000
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Total expenses
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$522,500
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$526,000
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Net income
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$87,500
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$(26,000)
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Additional Information
Variable expenses are based on revenues and we assume that the percentage remains constant for flexible budgeting purposes.
Fixed costs are all within the relevant range.
Other expenses are all specific to this store. Headquarters pay for marketing and corporate overhead expenses.
Case Assignment
Required:
Computations (use Excel)
Prepare a flexible budget and show variances for the year that passed. Indicate whether the flexible budget variances are favorable or unfavorable.
Headquarters are contemplating charging each store a 5% marketing expense based on sales. How will that affect the operating profit of the store and the money available for managerial bonuses based on actual results for the past year? Summarize the information in a table.
Memo (use Word)
Write a 4- or 5-paragraph memo to the division manager explaining the flexible budget variances; how to interpret the information and what action, if any to take. Comment on the 5% marketing proposal too. Start with an introduction and end with a recommendation. Each of the four or five paragraphs should have a heading.
Short Essay (use Word)
Start with an introduction and end with a summary or conclusion. Use headings.
Discuss how to interpret static and flexible budget variances.
What are the benefits of variance analysis? How can such analysis be detrimental rather than beneficial to the organization?
ACC501 Accounting for Decision Making
Module 4 SLP
BUDGETING, VARIANCE ANALYSIS, AND PERFORMANCE EVALUATIONS
Fourth and final part of the presentation. See background information for the module one SLP.
Required:
Make comments and suggestions on the following topics in your presentation.
Enterprise and corporate performance management.
Behavioral change management.
The balanced score card.
How to foster goal congruence for the organization and employees.
