Costing Questions Solutions

You work for an organization that is seeking growth and recently has hired new district managers to assist in this growth. In talking to other regional managers, you have heard that some district managers do not have a thorough understanding of commonly used accounting tools including an income statement and balance sheet. You have a new district manager hire, John, and see the need to do some training with him so he has a solid understanding of income statements, balance sheets, and the elements that go into them including advertising costs, Web development costs, and store opening costs.

In preparing to train your new hire, you have determined that the use of examples (a picture is worth a thousand words) can be a great approach to use. So, you have decided to gather some examples from the company’s summary of significant accounting policies from its latest financial statements.

You may apply this scenario to either Option 1 or Option 2, described in Requirements below.

Your Role

You are a regional manager for Urban Outfitters or your selected organization and oversee a number of districts.  You have recently brought a new district manager on board and want to ensure he has the knowledge and tools needed to effectively do his job.

Requirements

Option 1:

The organization you work for is Urban Outfitters. Use the U.S. Securities and Exchange Commission site linked in Resources to find the Urban Outfitter’s 2016–2017 financial statement’s summary of significant accounting policies. Look at the data for 2015, 2016, and 2017 for the following examples of essential elements you need to cover with John and ensure his understanding.

* Advertising. Examine the criteria used to expense and capitalize advertising costs and where these costs appear in the financial statement.

* Store opening costs. Examine how store opening and organization costs were handled and where these costs appear in the financial statement.

 

 

 

 

* Website development costs. Examine the approaches taken during the application and infrastructure development stage and the planning and operating stage.

A.

Between 1955 and 1972, consumer prices increased by less than one percent a year. The first-in, first-out (FIFO) inventory pricing method was, by a wide margin, the most popular choice. This method assigns the cost of the earliest purchased items as the cost of goods sold and assigns the cost of the most recent purchases to the value of the unsold goods, shown as inventory on the balance sheet. This method of determining cost flow matches the actual physical flow of inventory (selling the oldest items first, keeping the physical goods fresh).

From about 1972 to about 1985, inflation occurred in the United States. In some years, prices increased by more than twelve percent. In some industries, the price increase was much higher than twelve percent. A method of computing the cost flow of inventory called the last-in, first-out (LIFO) method quickly became the most popular choice, again by a wide margin. This method assigns the cost of the earliest (cheapest) purchases to inventory and assigns the cost of the latest (most expensive) purchases as the cost of goods sold. Note that the use of LIFO for cost-flow determination has no effect on the physical flow of inventory, which will continue to sell the oldest items first and maintain a fresh inventory.

For this week’s discussion, prepare 4–5 paragraphs discussing inventory valuations. Consider the following to include in your discussion:

* If prices were steady—no inflation and no deflation—would net income be different depending on whether a company used FIFO or LIFO? Explain.

* If you were the owner of a company, and thus responsible for the payment of income taxes, which inventory method would you prefer if you were operating in an inflationary environment? Explain, using an example.

* If you were the manager of a division of a company, operating in an inflationary environment, and your bonus depended on net income, which inventory method would you prefer? In answering this question, assume that you are concerned only about receiving a high bonus; you are not concerned about the well-being of the company. Explain, using an example.

* The use of LIFO has been described as sacrificing the balance sheet in order to achieve an income statement in which gross profit is determined by matching the current costs of replacing inventory against the current selling prices of the inventory. What is meant by that description?

* How can you find out what inventory cost flow method is being used by a company?

B.

For this week’s discussion, post 4–5 paragraphs discussing the meaning and importance to the business of the contribution margin. Consider as part of your post:

* Is contribution margin part of financial accounting or managerial accounting, or both?

* What kinds of costs, such as packaging, might be easy to forget when calculating production costs and contribution margin? Provide any examples that you may have witnessed in the past.

* Discuss the risk to the company of miscalculating contribution margin.

* Find or create an example of a contribution margin. If the contribution margin per unit increases, how does this affect the break-even point in terms of units sold?

The following article provides details about different aspects of packaging that may need to be considered as part of the accounting approach related to contribution margin:

* Atagan, G., & Yükçü, S. (2013). Effect of packing cost on the sales price and contribution margin. Ege Academic Review, 13(1), 1–9.

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