Inglis University Library

Managerial Accounting case study

Prepared By:
Eman Abukheit Enaam Albaluli Mais Bsool Nisreen Haddad Rand Hadidi 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 departments 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 librarys 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:

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,

Librarian salary allocation $12,000 Graduate assistant stipend $5,200 Facility cost allocation $1,200

Librarian salary allocation $12,000

These savings could be used to support some other, more worthwhile function within the library. Librarian salary allocation $12,000
Graduate assistant stipend $5,200 Facility cost allocation $1,200 Part-time student help $5,000

Graduate assistant stipend $5,200

Facility cost allocation $1,200 Part-time student help $5,000

Total costs $18,400

Per book (based on 1,000 books) $18.40 RFID tag per book $.50 Total unit cost $18.90

Total costs $23,400

Per book (based on 1,000 books) $23.40 RFID tag per book $.50

Total unit cost $23.90

RFID tags ($.50 1,000 books) $500 Total 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 universitys 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..

Unacceptable

Total books cost

Additional

cost of an old used book

$5,000

fund

$23,400

Relevant Range

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

$18,400

400

1,200

1,900

Number of books

Question 3 Cost Analysis

a. Identify each cost associated with the librarys book donations department.

 Costs associated with the librarys book donation department: Salaries: 1) Librarian Salary $48000* per year 2) Library Assistant $5,200 per academic year * of $48000 which is $12000 is dedicated towards the work performed by the librarian during the year. General Facilities and Cost of Books General Facilities cost $1200 per year RFID tag per Book is $.50 Total Cost of books (1000 *.50) = $500 Or (1200*.50)= $600

Cost Analysis
b. Classify each cost associated with the librarys book donations department as FIXED OR VARIABLE within the relevant range of activity you identified above. Justify your classifications. Would your classifications change if the book donations departments activity moved outside the relevant range of activity you identified above? Explain.

Variable Costs
1) RFID tag per book $.50

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

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

3) General Facilities $1200 per year

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 cost per unit (per book) may change due to increased purchasing power or changes in buying habits.

Cost Analysis
c. Classify each cost associated with the librarys book donations department as DIRECT 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 Object

Can be traced directly to the cost object

Direct Costs

Indirect Costs
Allocations

Department the graduate assistants stipend RFID tags Unit Book RFID tags

The salary of the librarian facility costs The salary of the librarian facility costs the graduate assistants stipend

Cost Analysis
d. Classify each cost associated with the librarys book donations department as COMMITTED OR FLEXIBLE. Justify your classifications. Would your classification of the graduate students stipend change if you were told that the stipend was guaranteed only 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

acquired in advance of when they are used, are contractually fixed, or otherwise cannot be changed in the short term

Committed or flexible costs

Inventory tags

Flexible

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

the student stipend, the librarian salary, the facility costs These costs are not dependent on the existence of the donations department.

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

If the graduate assistants 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 departments 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 departments 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 computations correct? 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.

Librarian salary allocation Graduate assistant stipend Facility cost allocation

$12,000 $5,200 $1,200

Librarian salary allocation Graduate assistant stipend Facility cost allocation Part-time student help Sales of duplicate books Total costs

$12,000 $5,200 $1,200 $5,000 ($1000) $22,400

Part-time student help

Total costs

$5,000
$23,400

Per book (based on 1,000 books) $23.40

Per book (based on 1,900 books) $11.8

RFID tag per book

Total unit cost

$.50
$23.90

RFID tag per book

Total unit cost

$.50
$12.13

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

Librarian salary allocation Graduate assistant stipend Facility cost allocation Total costs

$12,000 $5,200 $1,200 $18,400

Librarian salary allocation Graduate assistant stipend Facility cost allocation

$12,000 $5,200 $1,200

Part-time student help

Revenue from sales Total costs

$5,000
($1000) $22,400

Per book (based on 1,000 books) $18.40 RFID tag per book Total unit cost Total costs of 2000 books $.50 $18.90 $37,800

Per book (based on 2000 books) $11.20 RFID tag per book Total unit cost $.50 $11.70

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.

Thank You

Questions?