essay
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 CategoriesABCDEUnits Sold4,0001,000500400400Unites Purchased6,0001,2001,0001,0001,000Resale Price$4.00$12.00$20.00$45.00$60.00Cost$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$1.50Common 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.
The Serious Reader
C
ompany
| Column1 | A | B | D | E | Column2 | Column3 | |||||||||||||||||
| Unit Sold | 400 | 1000 | 500 | The Serious Reader Company | |||||||||||||||||||
| Income Statement | |||||||||||||||||||||||
| Units Purchased | 600 | 1,200 | Total | ||||||||||||||||||||
| Revenue | $80,000 | ||||||||||||||||||||||
| Resale Price | $4.00 | $12.00 | $20.00 | $45.00 | $60.00 | Variable | Cost | ||||||||||||||||
| Variable Cost | $27,000 | ||||||||||||||||||||||
| $0.50 | $10.00 | Shipping Cost | $9,450 | ||||||||||||||||||||
| $1.50 | Total Variable | Costs | $36,450 | ||||||||||||||||||||
| Total Variable Costs | $2.00 | $5.50 | $11.50 | $21.50 | |||||||||||||||||||
| Contribution Margin | $43,550 | ||||||||||||||||||||||
| Fixed Expenses | |||||||||||||||||||||||
| Fixed Costs | |||||||||||||||||||||||
| Internet-related costs | $10,000 | ||||||||||||||||||||||
| Travel, etc. | $4,000 | ||||||||||||||||||||||
| Advertising | $1,000 | ||||||||||||||||||||||
| Other overhead | $5,000 | ||||||||||||||||||||||
| Total Fixed Costs | $20,000 | ||||||||||||||||||||||
| Net income | $23,550 | ||||||||||||||||||||||
| $16,000 | $12,000 | $18,000 | $24,000 | ||||||||||||||||||||
| Variable costs | |||||||||||||||||||||||
| $2,000 | $8,000 | ||||||||||||||||||||||
| Shipping costs | $6,000 | $1,500 | $750 | $600 | |||||||||||||||||||
| $5,500 | $5,750 | $8,600 | |||||||||||||||||||||
| $6,500 | $4,250 | $9,400 | $15,400 | ||||||||||||||||||||
| Fixed costs | |||||||||||||||||||||||
| $21,600 | $12,960 | $40,500 | $54,000 | $147,060 | |||||||||||||||||||
| $2, | 700 | $4,320 | $9,000 | $52,020 | |||||||||||||||||||
| $8,100 | $1,620 | $1,350 | $13,770 | ||||||||||||||||||||
| $10,800 | $5,940 | $10,350 | $19,350 | $65,790 | |||||||||||||||||||
| $7,020 | $7,650 | $21,150 | $34,650 | $81,270 | |||||||||||||||||||
| $61,270 | |||||||||||||||||||||||
| $15,000 | $36,000 | $120,000 | |||||||||||||||||||||
| $12,500 | $9,250 | $18,400 | $27,400 | $83,550 | |||||||||||||||||||
| Net Income | $63,550 | ||||||||||||||||||||||
| $40,000 | $107,000 | ||||||||||||||||||||||
| $32,000 | $9,500 | $70,550 | |||||||||||||||||||||
| $50,550 | |||||||||||||||||||||||
| 4000 | |||||||||||||||||||||||
| $15.00 | |||||||||||||||||||||||
<<< Segmented variable costing (behavioral) income statement for the company in good format
<<<< Assuming 90% of all the books in each category purchased were actually sold.
<<<< assuming that the price is increased by 50% for all five categories
<<<< To support my idea for the owner of this used-book business to quit their current job and go full time with this venture, I made a couple changes of what I would suggest first starting off with this business. Notice that categories C,D, & E the units sold were significantly low compared to the units purchased. That results in a loss and not making more than the expenses. I suggest buying less of those 3 categories of books and continuing to buy a high amount of A and B category since they sell the most. Later down the road you can raise the price of C,D, or E once the demand for those categories rises. Next thing I would suggest is increasing the price of categories A and B. Category A price change to $10, and B price change to $15.
Running head: memo 1
memo 4
Memo
Student’s Name
Institutional Affiliation
Memo
To:
From:
Date: 12th May 2018.
Re: Accounting systems and Cost Behavior
There is a need to look at how the costs Serious Reader Company incurs are structured and how varying costs affects the economic gains. In essence, evaluating the company’s income statement through the changes in selling price and variable costs will aid to comprehend the impact of various level of costs on the net earnings. The description of different format of income statement used by the organization can make an improvement in their operating profitability.
According to our computation, the contribution margin under three scenarios are different. For the segmented variable costing income statement, the total contribution margin is $43,550, and $81,270 when 90 percent of all the books in each category purchased were actually sold. Also, the total contribution margin is $83,550 if the price of each category was increased by fifty percent. The contribution margin is computed by deducting the total variable costs from the total sales revenues (Weygandt et al., 2018). It offers an indication of profit potential of a certain product provided by a company and also indicates the portion of sales that assist to cover the company’s fixed costs. In addition, any remaining revenue left after covering fixed costs becomes the profit generated. It is used to show the profit levels that can be expected from sales and determine the selling price range of a product.
On the hand, variable costs and fixed costs are the broad category of costs that Serious Reader Company incurs in carrying out its business of selling books. Variable costs vary with the number of books bought and shipped while fixed costs remain the same regardless of how much the company sells (Wiley,2018). In each of the three scenarios, the fixed costs amounted to $20,000 while the variable costs varied with the number of units. As a matter of fact, the relative change in the variable expenses with respect to the change in sales have tremendous impact on net earnings of Serious Reader Company since fixed assets remain the same. This is because if contribution margin significant increases, the net profit also increases. In a nutshell, Serious Reader Company can control the variable costs and fixed costs so as to maximize its profits.
The contribution margin is therefore critical for Serious Reader Company for deciding whether to sell at a price which is lower in special pricing situations. If contribution margin at certain price point excessively low or negative, it would not advisable to contribute selling a product at that price. It is important in determining the profits that will emerge from different sales levels (Weygandt et al., 2018). Furthermore, contribution margin can be used in deciding which of many products to sell if they use a common bottleneck resource, in order the product to give preferences to the product with highest contribution margin.
References
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2018). Managerial accounting: Tools for
business decision making. John Wiley & Sons.
Wiley. (2018). Wiley CPAexcel exam review 2018 study guide: Business environment and
concepts. John Wiley & Sons.
REQUIRED READING AND VIDEOS
CCOUNTING 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.
Walther, L. (2017). Chapter 17:
Introduction to Managerial Accounting
.
LICENSES AND ATTRIBUTIONS