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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.
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.
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.
Module 1 – Background
ACCOUNTING 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.
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.
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 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 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.
For further detail refer to Dr. Walther’s accounting text and videos.
Walther, L. (2017). Chapter 17: Introduction to Managerial Accounting.