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.

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ACCOUNTING COST SYSTEMS AND COST BEHAVIOR Case Assignment 1 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 (201X). Price Categories 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: 1. 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. 2. 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. ACCOUNTING COST SYSTEMS AND COST BEHAVIOR Case Assignment 1 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 (201X). Price Categories 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: 1. 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. 2. 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. 1. 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. Solution: In the following paragraphs, there will be a discussion regarding the Serious Reader Company to see the impact of changes in the selling units and selling price over the contribution margin and net profitability This memorandum will help to understand the variable costs and fixed costs in the terms of the impact on the net income. It will help to understand the impact of changes in the variable factors for maximizing the profitability of the organization. The Serious Reader Company is a small online retailer that is engaged in the business of selling of books. The company has both variable costs and fixed costs. The company wants to evaluate the income statement through the changes in selling price and variable costs in order to understand the impact of the different level of costs on the income earning. There is also a description regarding the different format of income statement used by the organization for improving their operating profitability. The contribution margin concept is useful for deciding whether to allow a lower price in special pricing situations. If the contribution margin at a particular price point is excessively low or negative, it would be unwise to continue selling a product at that price. It is also useful for determining the profits that will arise from various sales levels (see the example). Further, the concept can be used to decide which of several products to sell if they use a common bottleneck resource, so that the product with the highest contribution margin is given preference. Why do many organizations make the effort to prepare a different type of income statement for internal purposes? Solution: A conceptual framework is a coherent system of interrelated objectives and fundamentals that can lead to consistent standards and that prescribes the nature, function, and limits of financial accounting and financial statements. A conceptual framework is necessary in financial accounting for the following reasons: It will increase financial statement users' understanding of and confidence in financial reporting. New issues will be more quickly soluble by reference to an existing framework of basic theory. It will enhance comparability among companies' financial statements. Variable costing is not just about preparing income statements. Provide at least three scenarios in which understanding how costs behave is useful Solution: Variable costing provides a better understanding of the effect of fixed costs on the net profits It is controlling costs such as standard costing system and flexible budgets have close relation with the variable costing system. Using variable costing system prepare income statement in contribution margin format that provides necessary information for cost volume profit (CVP) analysis. This information cannot be directly obtained from a traditional income statement prepared under absorption costing system. The net operating income figure produced by variable costing is usually close to the flow of cash. It is useful for businesses with a problem of cash flows. Under absorption costing system, income of different periods changes with the change of inventory levels. Sometime income and sales move in opposite directions. But it does not happen under variable costing. 1 A Units sold Units purchased Resale price Cost Shipping Cost Sales Purchases Shipping Cost Contribution Fixed Cost - Internet related cost - Travel - Advertising - Other overhead Net Income B C D E 2000 1000 500 400 400 3000 1200 1000 1000 1000 $4.00 $15.00 $25.00 $45.00 $40.00 $0.50 $5.00 $10.00 $20.00 $20.00 $1.50 $1.50 $1.50 $1.50 $1.50 $8,000.00 $15,000.00 $12,500.00 $18,000.00 $16,000.00 $1,000.00 $5,000.00 $5,000.00 $8,000.00 $8,000.00 $3,000.00 $1,500.00 $750.00 $600.00 $600.00 $4,000.00 $8,500.00 $6,750.00 $9,400.00 $7,400.00 Total $69,500.00 $27,000.00 $6,450.00 $36,050.00 $5,000.00 $2,000.00 $1,000.00 $3,000.00 $25,050.00 2 At 90% A Units sold Units purchased Resale price Cost Shipping Cost Sales Purchases Shipping Cost Contribution Fixed Cost - Internet related cost - Travel - Advertising - Other overhead Net Income B C D E Total 2700 1080 900 900 900 2700 1080 900 900 900 $4.00 $15.00 $25.00 $45.00 $40.00 $0.50 $5.00 $10.00 $20.00 $20.00 $1.50 $1.50 $1.50 $1.50 $1.50 $10,800.00 $16,200.00 $22,500.00 $40,500.00 $36,000.00 $126,000.00 $1,350.00 $5,400.00 $9,000.00 $18,000.00 $18,000.00 $51,750.00 $4,050.00 $1,620.00 $1,350.00 $1,350.00 $1,350.00 $9,720.00 $5,400.00 $9,180.00 $12,150.00 $21,150.00 $16,650.00 $64,530.00 $5,000.00 $2,000.00 $1,000.00 $3,000.00 $53,530.00 3 Price increase by 50% it is resale price A B C D E Total Units sold 2000 1000 500 400 400 Units purchased 3000 1200 1000 1000 1000 Resale price $6.00 $22.50 $37.50 $67.50 $60.00 Cost $0.50 $5.00 $10.00 $20.00 $20.00 Shipping Cost $1.50 $1.50 $1.50 $1.50 $1.50 Sales $12,000.00 $22,500.00 $18,750.00 $27,000.00 $24,000.00 $104,250.00 Purchases $1,000.00 $5,000.00 $5,000.00 $8,000.00 $8,000.00 $27,000.00 Shipping Cost $3,000.00 $1,500.00 $750.00 $600.00 $600.00 $6,450.00 Contribution $8,000.00 $16,000.00 $13,000.00 $18,400.00 $15,400.00 $70,800.00 Fixed Cost - Internet related cost $5,000.00 - Travel $2,000.00 - Advertising $1,000.00 - Other overhead $3,000.00 Net Income $59,800.00 The organisation make different type of income statement so that they may know which combination can give them best results or highest net income. ACCOUNTING COST SYSTEMS AND COST BEHAVIOR Case Assignment 1 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 (201X). Price Categories 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: 1. 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. 2. 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. 1. 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. Solution: In the following paragraphs, there will be a discussion regarding the Serious Reader Company to see the impact of changes in the selling units and selling price over the contribution margin and net profitability This memorandum will help to understand the variable costs and fixed costs in the terms of the impact on the net income. It will help to understand the impact of changes in the variable factors for maximizing the profitability of the organization. The Serious Reader Company is a small online retailer that is engaged in the business of selling of books. The company has both variable costs and fixed costs. The company wants to evaluate the income statement through the changes in selling price and variable costs in order to understand the impact of the different level of costs on the income earning. There is also a description regarding the different format of income statement used by the organization for improving their operating profitability. The contribution margin concept is useful for deciding whether to allow a lower price in special pricing situations. If the contribution margin at a particular price point is excessively low or negative, it would be unwise to continue selling a product at that price. It is also useful for determining the profits that will arise from various sales levels (see the example). Further, the concept can be used to decide which of several products to sell if they use a common bottleneck resource, so that the product with the highest contribution margin is given preference. Why do many organizations make the effort to prepare a different type of income statement for internal purposes? Solution: A conceptual framework is a coherent system of interrelated objectives and fundamentals that can lead to consistent standards and that prescribes the nature, function, and limits of financial accounting and financial statements. A conceptual framework is necessary in financial accounting for the following reasons: It will increase financial statement users' understanding of and confidence in financial reporting. New issues will be more quickly soluble by reference to an existing framework of basic theory. It will enhance comparability among companies' financial statements. Variable costing is not just about preparing income statements. Provide at least three scenarios in which understanding how costs behave is useful Solution: Variable costing provides a better understanding of the effect of fixed costs on the net profits It is controlling costs such as standard costing system and flexible budgets have close relation with the variable costing system. Using variable costing system prepare income statement in contribution margin format that provides necessary information for cost volume profit (CVP) analysis. This information cannot be directly obtained from a traditional income statement prepared under absorption costing system. The net operating income figure produced by variable costing is usually close to the flow of cash. It is useful for businesses with a problem of cash flows. Under absorption costing system, income of different periods changes with the change of inventory levels. Sometime income and sales move in opposite directions. But it does not happen under variable costing. 1 A Units sold Units purchased Resale price Cost Shipping Cost Sales Purchases Shipping Cost Contribution Fixed Cost - Internet related cost - Travel - Advertising - Other overhead Net Income B C D E 2000 1000 500 400 400 3000 1200 1000 1000 1000 $4.00 $15.00 $25.00 $45.00 $40.00 $0.50 $5.00 $10.00 $20.00 $20.00 $1.50 $1.50 $1.50 $1.50 $1.50 $8,000.00 $15,000.00 $12,500.00 $18,000.00 $16,000.00 $1,000.00 $5,000.00 $5,000.00 $8,000.00 $8,000.00 $3,000.00 $1,500.00 $750.00 $600.00 $600.00 $4,000.00 $8,500.00 $6,750.00 $9,400.00 $7,400.00 Total $69,500.00 $27,000.00 $6,450.00 $36,050.00 $5,000.00 $2,000.00 $1,000.00 $3,000.00 $25,050.00 2 At 90% A Units sold Units purchased Resale price Cost Shipping Cost Sales Purchases Shipping Cost Contribution Fixed Cost - Internet related cost - Travel - Advertising - Other overhead Net Income B C D E Total 2700 1080 900 900 900 2700 1080 900 900 900 $4.00 $15.00 $25.00 $45.00 $40.00 $0.50 $5.00 $10.00 $20.00 $20.00 $1.50 $1.50 $1.50 $1.50 $1.50 $10,800.00 $16,200.00 $22,500.00 $40,500.00 $36,000.00 $126,000.00 $1,350.00 $5,400.00 $9,000.00 $18,000.00 $18,000.00 $51,750.00 $4,050.00 $1,620.00 $1,350.00 $1,350.00 $1,350.00 $9,720.00 $5,400.00 $9,180.00 $12,150.00 $21,150.00 $16,650.00 $64,530.00 $5,000.00 $2,000.00 $1,000.00 $3,000.00 $53,530.00 3 Price increase by 50% it is resale price A B C D E Total Units sold 2000 1000 500 400 400 Units purchased 3000 1200 1000 1000 1000 Resale price $6.00 $22.50 $37.50 $67.50 $60.00 Cost $0.50 $5.00 $10.00 $20.00 $20.00 Shipping Cost $1.50 $1.50 $1.50 $1.50 $1.50 Sales $12,000.00 $22,500.00 $18,750.00 $27,000.00 $24,000.00 $104,250.00 Purchases $1,000.00 $5,000.00 $5,000.00 $8,000.00 $8,000.00 $27,000.00 Shipping Cost $3,000.00 $1,500.00 $750.00 $600.00 $600.00 $6,450.00 Contribution $8,000.00 $16,000.00 $13,000.00 $18,400.00 $15,400.00 $70,800.00 Fixed Cost - Internet related cost $5,000.00 - Travel $2,000.00 - Advertising $1,000.00 - Other overhead $3,000.00 Net Income $59,800.00 The organisation make different type of income statement so that they may know which combination can give them best results or highest net income