ACCT6004 Management Accounting: Costing Concepts and Scenario Analysis

This report analyzes the costing concepts applied to the case of J&B Sports, a sports uniform manufacturer. It begins with an executive summary and introduction, then delves into the categorization of different costs, including variable, fixed, step, and mixed costs, within the business. The report then presents a scenario analysis, calculating operating profit, determining the number of units sold, and projecting profits under different scenarios, such as varying sales volumes and the implementation of an advertising campaign. The analysis includes detailed calculations and recommendations for the firm's financial strategies, concluding with a recommendation to undertake the advertising campaign. The report uses references from various accounting texts and journals to support its findings.

Running Head: Costing Concepts
Cost Management Accounting

Costing Concepts 1
Executive summary:
In this report, the case of J&B Sports is being analyzed. The firm is indulged in the business of
manufacturing club soccer uniforms such as jerseys, shorts, socks and jackets. There are different
sort of costs incurred as a part of business. In this report the overall cost is bifurcated among
various categories such as variable cost, fixed cost, step cost and mixed cost. Further, the
analysis of the case has suggested that the firm has sold total of 51975 units in the current year
and has attained a profit of $ 39900.

Costing Concepts 2

Costing Concepts 3
Introduction:
J & B Sports is a sports uniform manufacturing concern. The present case deals with only one
product segment of the firm and i.e. Jerseys. The different scenario cases of sales and costs are
analyzed in the present case.
Part 1
Bifurcation of different costs of the business:
The variable costs are those costs that changes with the change in the level of production units.
In the present case, costs of goods sold and cost of price tags that attached to the Jerseys are
variable costs because of the fact that these costs are easily allocable to each unit manufactured
by the firm (Hansen, Mowen & Guan, 2007). Along with this, the sales commission which is
paid as a certain percentage of sales is also a variable cost as it will vary with the change in the
level of sales quantity of Jerseys. The payroll cost of $ 5000 which is paid on the monthly basis
to the staff of the J&B sports is a fixed amount and it does not change with the change in the
level of production and hence it will be classified as fixed cost (Horngren, 2002). Therefore, the
overall payroll cost must be classified as semi-variable or mixed cost. Further, the rental cost of
credit card processing equipment and website hosting cost is also of fixed nature as it will remain
same irrespective of the quantum of production undertaken by the firm. The inventory insurance
cost of the firm must be classified as the step cost as it will change within the different range of
sales quantity and not with the change in the every single unit (Horngren, 2002).
a) Mixed Cost

Costing Concepts 4
b) Fixed Cost
c) Variable Cost
d) Variable Cost
e) Step Cost
f) Fixed Cost
Part 2): Scenario Analysis
Part a) operating profit equation:
Operating Profit Equation=
Sales * PV Ratio - Fixed Expenses
1039500 * 20% - 168000
$
39,900.00
Workings
PV Ratio = Contribution/ Sales
207900/1039500
20%
Revenue- Cost of goods sold - operating expenses
1039500-769230-(62370+116500+51500)
$

Costing Concepts 5
39,900.00
Part b) Number of units sold and expected to be sold:
The firm has sold total of 51975 units in the current year and at this level it has attained an
operating income of $ 39900. Further, in the present case it has also been determined that if the
firm has attained the above profit by selling only 90% of the total expected units. If 100% of the
expected units are sold then the total number of Jerseys that would have been sold were 57750.
At this level, the operating profit would be $ 63000.
Number of Jerseys sold this year Total Sales
Selling Price Per Unit
$ 1,039,500.00
$ 20.00
Number of Jerseys sold this year 51975
Number of Jerseys sold this year 51975
These units are 10% less than the units that
were originally expected
Units sold = 90% of Total Estimation
Therefore, total units planned 51975/90%
57750

Costing Concepts 6
Number of Jerseys sold 51975 57750
Sales $ 1,039,500.00 $ 1,155,000.00
Less : Variable costs
Cost of goods sold $ 769,230.00 $ 854,700.00
Sales Commission $ 62,370.00 $ 69,300.00
Total Variable Expenses $ 831,600.00 $ 924,000.00
Contribution per unit $ 207,900.00 $ 231,000.00
Less: Fixed Cost
Selling Expenses $ 116,500.00 $ 116,500.00
Administrative Expenses $ 51,500.00 $ 51,500.00
Total Fixed Costs $ 168,000.00 $ 168,000.00
Operating Income $ 39,900.00 $ 63,000.00
Less Tax @ 30% $ 11,970.00 $ 18,900.00
Profit After Tax $ 27,930.00 $ 44,100.00
The more income after tax the extra 10% of
sales would have generated
=$44,100-$27,930
=16,170
Part c) Determination of profits if 55000 jerseys are sold:
Further, as a part of report it has also been analyzed that if 55000 jerseys were sold, the total
expense will increase to the level of $ 1,796,000. This change in the total expenses is due to the

Costing Concepts 7
change in the variable cost per unit manufactured and sold. The fixed cost will remain same
irrespective of the level of manufacturing units due to its core nature.
Total Cost if total number of units sold is
55000
Variable costs Workings
Cost of goods sold $ 814,000.00 (55000*14.80)
Sales Commission $ 66,000.00 (55000*1.20)
Total Variable Expenses $ 1,628,000.00
Fixed Cost
Selling Expenses $ 116,500.00
Administrative Expenses $ 51,500.00
Total Fixed Costs $ 168,000.00
Total Cost @ 55000 units $ 1,796,000.00
Part d) profit equation if ad campaign is taken up:
Sales * PV Ratio - Fixed Expenses
1039500 * 20% - (168000+20000)
$ 19,900.00
Part e: profits if ad campaign is undertaken:

Costing Concepts 8
Furthermore, the proposal of advertisement campaign in the local news-paper by the firm is
being analyzed in the report for the next year. It has been found that if advertisement is taken up,
there will be an increase in the number of Jersey’s to be sold by the firm in the next year, as it
will allow more customers to be attracted towards the firm (Zimmerman & Yahya-Zadeh, 2011).
The operating profit at this level of sales will be $ 52000.
Number of Units 60000.0 Workings
Sales $ 1,200,000.00 (60000*20)
Less : Variable costs
Cost of goods sold $ 888,000.00 (60000*14.8)
Sales Commission $ 72,000.00 (60000*1.20)
Total Variable Expenses $ 960,000.00
Contribution per unit $ 240,000.00
Less: Fixed Cost
Selling Expenses $ 116,500.00
Administrative Expenses $ 51,500.00
Additional Fixed Cost (Advertisement) $ 20,000.00
Total Fixed Costs $ 188,000.00
Operating Income $ 52,000.00
Less Tax @ 30% $ 15,600.00
Profit after tax $ 36,400.00

Costing Concepts 9
Conclusion:
It is recommended to the firm must take up the advertisement campaign as it will increase the
profits after tax by $ 8740 after recovering the cost of advertisement too.

Costing Concepts 10
References:
Hansen, D., Mowen, M., & Guan, L. (2007). Cost management: accounting and control.
Cengage Learning.
Horngren, C. T., Bhimani, A., Datar, S. M., Foster, G., & Horngren, C. T. (2002). Management
and cost accounting. Harlow: Financial Times/Prentice Hall.
Horngren, C. T., Sundem, G. L., Stratton, W. O., Burgstahler, D., & Schatzberg, J.
(2002). Introduction to Management Accounting: Chapters 1-19. Prentice Hall.
Zimmerman, J. L., & Yahya-Zadeh, M. (2011). Accounting for decision making and
control. Issues in Accounting Education, 26(1), 258-259.