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


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.

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