Module 1 case
ACCOUNTING COST SYSTEMS AND COST BEHAVIOR
Case Assignment
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. Dont 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 (201X).
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A
B
C
D
E
Units Sold
2,000
1,000
500
400
400
Units Purchased
3,000
1,200
1,000
1,000
1,000
Resale Price
$4.00
$15.00
$25.00
$45.00
$40.00
Cost
$0.50
$5.00
$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
Fixed expenses
Internet-related costs
$5,000
Travel, etc.
2,000
Advertising
1,000
Other overhead
3,000
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 four or five 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.
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