accounting case study

Inglis University LibraryManagerial Accounting case study

Prepared By:

Eman Abukheit Nisreen Haddad

Enaam Albaluli Rand Hadidi

Mais Bsool Rebecca Odeh

Case Summary• Inglis University Library maintains a small book donations

department in the basement section of the library. When the current holdings search reveals that the library already holds the donated item, the items are set aside in a small storage area and offered for sale twice a year during end-of-semester book sales. Books that are not sold during the book sale are donated to charity. In the previous year, the library raised $1,000 from the bi-annual book sales.

• Moreover, the university library has acquired a unique academic reputation due to some of the rare holdings acquired through the donations department’s efforts.

• The Inglis University Library donations department is operated by the head librarian, Senath James, and a graduate assistant, Randolph Carter, a folklore student at Inglis University.

Case Summary• The head librarian is a salaried position ($48,000 per year)

• one-fourth of her contracted annual base salary ($12,000) is allocated to the book donations department.

• The Inglis University Library is also allotted $5,200 per academic\ year in additional funds to support the library donations function.

• Work-study students typically work 20 hours per week and are paid on an hourly basis at a rate of $10 per hour.

• The library allocates a portion of the library’s general facilities costs ($1,200 per year).

• the library has approached the university budget committee with a request to increase the funds allotted to the book donations department by $5,000 per year.

• at the already-high cost of $18.90 per book, the library can hardly afford to accept more than 1,000 books per year; if, for instance, the library were to accept 2,000 books, it would cost the university $37,800. Finally, we have serious doubts as to the value of the donations department; if it were eliminated entirely, the university could save, at the very least $23,900 per year.

• unit cost per book of $18.90, calculated as follows:

Librarian salary allocation $12,000

Graduate assistant stipend $5,200

Facility cost allocation $1,200

Total costs $18,400

Per book (based on 1,000 books) $18.40

RFID tag per book $.50

Total unit cost $18.90

• First, the unit cost of $18.90 per donated book is already too high; an additional $5,000 per year would bring the cost per book to $23.90 per book,




Part-time student help $5,000

Total costs $23,400




These savings could be used to support some other, moreworthwhile function within the library.’’Librarian salary allocation $12,000

Graduate assistant stipend $5,200Facility cost allocation $1,200


RFID tags ($.50 1,000 books) $500Total savings $23,900

Question 1

• “Explain what is meant by an activity measure. • Identify an appropriate activity measure for analyzing the cost structure of the book donations department within the university’s library. Justify your answer. • Is the activity measure you identified a true cost driver? Explain.”

• ACTIVITY MEASURE: A measure of the amount of activity that drives the costs in an activity cost pool

• It is a quantitative measure of how much activity is performed, such as number of books processed.

• A COST DRIVER: is an activity that causes the total cost to change.

• In this case the NUMBER OF BOOKS PROCESSED can be a cost driver

• Since the salary, stipend, and facility costs are essentially fixed that means the number of books processed is not a true cost driver for those costs.

• However, the number of books processed does drive the total cost for the RFID tags and would be considered a true cost driver for this cost.

Question 2•“ Explain what is meant by relevant range. • Based on your chosen activity measure above, identify the current relevant range of activity for the book donations department. Justify your answer. • Explain why the consideration of relevant range is significant to the analysis here.”

• RELEVANT RANGE: Specific activity level within which operations are normally expected to occur

• or, alternatively, the range of activity within which the presumed cost structure and relationships are expected to remain valid.

• IT IS not a single point, and should require both an upper and lower level of activity.

• It is IMPORTANT because the cost structure and cost behavior assumptions are only valid within this expected range of activity. If the activity falls outside the relevant range, one should take into consideration that the assumption made about cost behavior may be invalid

• The relevant range of activity implied in the case is approximately 400 –1,200 processed books..

Tota

l b

ooks’

cost

0 400 1,200 1,900 Number of books

0

$18,400

$23,400

Relevant

Range

Relevant range is significant to the book donations department’s request precisely because the number of books donated to the library has increased, moving the donations department beyond itsnormal range of activity.

$5,000

Additional

fund

Unacceptable

cost of an old

used book

Question 3Cost Analysis

a. “Identify each cost associated with the library’s book donations department.”

• Costs associated with the library’s book donation department:

Salaries: General Facilities and Cost of Books

1) Librarian Salary $48000* per year

2) Library Assistant $5,200 per academic year

* ¼ of $48000 which is $12000 is dedicated towards the work performed by the librarian during the year.

General Facilities cost $1200 per year RFID tag per Book is $.50Total Cost of books (1000 *.50) = $500Or (1200*.50)= $600

Cost Analysisb. “Classify each cost associated with the library’s book donations department asFIXED OR VARIABLE within the relevant range of activity you identified above. Justifyyour classifications. Would your classifications change if the book donations department’sactivity moved outside the relevant range of activity you identified above? Explain.”

Variable Costs If activity moves beyond the

current relevant range,the librarian salary will remain fixed but additional student help is variable; Assuming that the RFID tag cost still varies proportionally with volume, it remains variable; however, the variable costper unit (per book) may change due to increased purchasing power or changes in buyinghabits.

1) RFID tag per book $.50

Fixed Costs1)Librarian Salary $12,000* per year*48,000/4

2) Library Assistant $5,200 per academic year,

3) General Facilities $1200 per year

Cost Analysis

c. “Classify each cost associated with the library’s book donations department asDIRECT OR INDIRECT, assuming that the cost object of interest is the book donations department as a whole. Justify your classifications. Would your classifications change if you were to assume that the cost object of interest were an individual Book processed? Explain.”

Cost

ObjectDirect Costs

Can be traced directly to the cost object

Indirect CostsAllocations

Department •the graduate assistant’s stipend•RFID tags

•The salary of the librarian•facility costs

Unit Book •RFID tags •The salary of the librarian•facility costs •the graduate assistant’s stipend

Cost Analysisd. “Classify each cost associated with the library’s book donations department asCOMMITTED OR FLEXIBLE. Justify your classifications. Would your classification ofthe graduate student’s stipend change if you were told that the stipend was guaranteedonly for the current academic year? Explain. Would your classification of the RFID tag cost change if you were told that the library is contracted to purchase the inventory tags in lots of a hundred tags at a time? Explain.”

Committed or flexible costsCommittedacquired in advance of when they areused, are contractually fixed, or otherwise cannot be changed in the short term

Flexibleacquired as used or needed; their acquisition does not require a long-term commitment

the student stipend, the librarian salary,the facility costs

Inventory tags

These costs are not dependent on the existence of the donations department.

they can reducethe amount of tags purchased and used in the short term;

If the graduate assistant’s stipend is only guaranteed for the current year, the university is only committed to incurring this cost for the current academic period, beyond which the cost would be classified as flexible since the library could eliminate it for the next budget period.If the RFID tags are purchased in 100 lots in advance of the need for them they will still be considered flexible because of the small lot purchases which lead to small-step variable costs.

Cost Analysis

e. “Explain how the analysis of cost behavior, cost traceability, and cost flexibility is relevant to the analysis of the book donations department’s request for additional funds.”

• Cost behavior addresses the way costs react to changes in activity

both within and beyond the relevant range of activity.

• The request for additional funds is based on a significant increase in activity which changes the relevant range for the book donations department, altering the structure of the costs incurred.

• Cost traceability is relevant to the assignment of costs to both cost objects of interest (department & unit book)

• Costs that cannot be directly traced are estimated, must be allocated, and as such can be inaccurate or misleading.

• Cost flexibility is relevant in that some costs are incurred independent of the department’s existence.

• In this respect, the existence of the department absorbs some of the common committed costs of the university. Alternatively, in the absence of the department, these costs would not be saved.

Question 4“ Explain what is meant by a UNIT COST. Is the initial unit cost used by the budget committee computationally appropriate? Explain. Does the inclusion of fixed costs as a component of the unit cost make it problematic for managerial analysis purposes? Explain.”

• UNIT COST: The cost incurred by a company to produce,

store and sell one unit of a particular product.

Computing the unit cost would be appropriate if:

• Only 1000 books were processed (not 1200 with the increased activity level)

• All books consume the same amount of resources (otherwise using the average unit cost calculation would be inaccurate)

The committee on the other hand neglects the revenue of $1000 made by selling duplicate books which overstates the total costs. The revenue made proportionally to each book should be considered or costs may be over/underestimated.

The use of unit cost to predict total costs assumes all costs are variable, when this is not the case, which leads to inaccurate assesment

Question 5

“ Examine and discuss the use of cost data in each of the three statements made by the budget committee justifying their decision to deny the request for additional funds.In your discussion, address the following for each statement: Are their computationscorrect? What assumptions did they make? What errors in logic did they make?Prepare a revised cost computation.”

‘‘the unit cost of $18.90 per donated book is already too high; an additional $5,000 per year would bring the cost per book to $23.90 per book, an entirely unacceptable cost for the processing of an old used book.’’

•The cost computations are incorrect, they are based on the false assumption that the library capacity will remain at 1000 units even when new staff are hired•the committee neglected to consider the potential revenue gained from selling duplicate copies or unwanted used books as a way to offset some of these costs. •there are also potential cost savings when a book is donated that would otherwise have to be purchased.





Total costs $23,400




.





Sales of duplicate books ($1000)

Total costs $22,400




‘‘Second, at the already-high cost of $18.90 per book, the library can hardly afford to accept more than 1,000 books per year; if, for instance, the library were to accept 2,000 books, it would cost the university $37,800.’’

The cost computations are incorrect, they ignore the cost structure which is based on fixed costs, this means that as number of units increases the unit cost falls. It also ignores that the maximum capacity under the current conditions is 1200, to reach approximately 1900 capacity the additional part-time workers are needed




Total costs $18,400




Total costs of 2000 books $37,800

.





Revenue from sales ($1000)

Total costs $22,400

Per book (based on 2000 books) $11.20



‘‘Finally, we have serious doubts as to the value of the donations department; if it were eliminated entirely, the university could save, at the very least,$23,900 per year.’’

The computation of potential savings is incorrect:

1- the budget committee included the cost of the student help in the total costs. This cost has not yet been incurred.

2- they assume that all of these costs are flexible and can be eliminated if the department is eliminated. The salary of the librarian, the stipend for the graduate assistant, and the facility costs will still be incurred even if the department is eliminated (cost savings should equal RFID tags * books )

3- the many benefits associated with the department are ignored:

• Book sales revenue

• The University library has acquired a unique academic reputation due to some of the rare holdings acquired through the donation department.

• Both academics and graduate students from other universities make use of its resources.

• The number of students seeking specialized graduate studies at Inglis has increased significantly.

Questions?Thank You

accounting case study

Documents

rare holdings

true cost

graduate assistants

booktotal

current relevant

book donations

librarian

donations