ISSUES IN ACCOUNTING EDUCATION

Vol. 24, No. 4

November 2009
pp. 531538

An Instructional Case:
Cost Concepts and Managerial Analysis
L. Melissa Walters and Teresa M. Pergola
ABSTRACT: This case is designed to help you develop a working understanding of
fundamental cost concepts (cost behavior, cost traceability, cost flexibility, and unit
costs) and the proper use of cost data for managerial analysis purposes. The case
narrative describes a business scenario and a problematic managerial analysis based
on certain cost data. The case requirements ask you to apply basic cost concepts to
analyze the cost data, evaluate the use of cost data in the analysis described in the
case narrative, and then effectively communicate the results of your analysis and evaluation in the form of a professional written memo.
Keywords: instructional case; cost analysis.

CASE MATERIALSINGLIS UNIVERSITY LIBRARY

Case Narrative
nglis University Library maintains a small book donations department in the basement
section of the library. The process for accepting the typical donated book includes
searching the current holdings to determine if the book is already held by the library,
placing a small inventory tracking device (a radio frequency identification [RFID] tag) in
the book, assigning the book a card catalog number, and finally entering the book into the
librarys online computer database/card catalog system. The process of accepting a collection of periodicals involves a similar process. When the current holdings search reveals
that the library already holds the donated item, and when there is no need for duplicate
copies, 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.
In recent years, the librarys donations department has been quite active. Asenath James,
the librarian responsible for the donations department, has become exceedingly effective at
soliciting donations from alumni, retiring academics, eccentric collectors, and estates all
over the world. Many of the items are in-print texts that the library would otherwise have
had to purchase at full price. However, some of the donated books are extremely rare or
out of print and would be quite expensive if purchased by the library; some of her more
recent acquisitions include obscure books on non-Euclidean mathematics, a first edition
copy of Robert A. Heinleins Stranger In A Strange Land, a first edition copy of William
Blakes Songs of Innocence and Experience, an almost complete historic collection of the

L. Melissa Walters is an Associate Professor and Teresa M. Pergola is an Assistant Professor, both at The University of Tampa.
The authors thank the anonymous reviewers for Issues in Accounting Education as well as the participants of the
2007 Academy of Business Disciplines Conference for their insightful comments on improving earlier drafts of
this manuscript.

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Walters and Pergola

pulp magazine Weird Tales, several rare manuscripts on ancient folklore, and a handwritten
manuscript containing what experts have authenticated to be the writings of Percy Bysshe
Shelley. Her effort has, to some extent, compensated for the dwindling library budget and
allowed the library to create and maintain an exceptional, albeit unusual, library offering.
Moreover, the university library has acquired a unique academic reputation due to some of
the rare holdings acquired through the donations departments efforts. Both academics and
graduate students from other universities make use of Inglis Universitys peculiar library
resources. Perhaps more importantly, the number of students seeking specialized graduate
studies at Inglis (especially in the areas of literature, mathematics, and ancient folklore)
has increased significantly. There is some evidence to suggest that this is due, at least in
part, to the increased visibility of the university, along with the research potential afforded
by the unique resources accumulating at the universitys library (due almost entirely to the
success of the donations departments activities).
The Inglis University Library donations department is operated by the head librarian,
Asenath James, and a graduate assistant, Randolph Carter, a folklore student at Inglis University. The head librarian is a salaried position ($48,000 per year), and since Asenath
currently spends approximately one-quarter of her time soliciting and processing book donations, 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. This meager sum is used
to provide a graduate work-study student a stipend to assist Asenath in the donations
department during the fall and spring semesters. Work-study students typically work 20
hours per week and are paid on an hourly basis at a rate of $10 per hour. A typical semester
is 13 weeks long.1 Currently, Randolph is working all his allotted hours in the book donations department. If he were not fully utilized by the book donations department, he
would work elsewhere in the university, as his work hours and stipend are guaranteed as a
part of his financial aid program. In addition, the library has allotted a small space in the
basement of its main building for donations activities. The library allocates a portion of
the librarys general facilities costs ($1,200 per year). General facility costs include depreciation on the building, property taxes, insurance, general maintenance costs, and utilities.
Since the librarys catalog system is computerized, the only other applicable cost is for
the RFID inventory tags, which are relatively minimal and run about $0.50 per book; these
RFID tags are purchased by the library as needed.
Typically, Asenath and her assistant solicit and process an average of 1,000 books per
academic year and can, without too much difficulty, solicit and process up to 1,200 books
per academic year. However, each year for the past five years, the number of books donated
and processed for the library has increased noticeably. Unfortunately, Asenath, as head
librarian, has library duties other than donations and cannot devote any additional time to
the donations department. Randolphs current work-study contract is restricted to only 20
hours per week and only applies to the fall and spring semester. Asenath has no additional
help during the summer months, which creates quite a backlog of unprocessed books going
into the fall semester. Of late, Asenath and Randolph have begun to experience difficulty
processing the increasing number of book donations, and some recent acquisitions are still
sitting in boxes on the floor of the donations departments basement space. Consequently,
the library has approached the university budget committee with a request to increase the
1

13 weeks @ 20 hours per week equals 260 hours per semester at $10 per hour equates to $2,600 each semester
for a total of $5,200 per year.

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An Instructional Case: Cost Concepts and Managerial Analysis

funds allotted to the book donations department by $5,000 per year. These additional funds
would be used to employ part-time students to work an additional ten hours per week
during the fall and spring semester, and to work 20 hours per week during the summer
months2 to compensate for the increasing number of donated books. This would increase
the departments annual capacity to approximately 1,900 books. Asenath can handle the
workload between semesters and during the holiday breaks herself with no additional help.
Using the cost information provided by the library, the budget committee computed a
unit cost per book of $18.90, calculated as follows:
Librarian salary allocation
Graduate assistant stipend
Facility cost allocation
Total costs
Per book (based on 1,000 books)
RFID tag per book
Total unit cost

$12,000
$5,200
$1,200
$18,400
$18.40
$.50
$18.90

The committee has since denied the request for additional funds and expressed the
following sentiments. 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, an entirely
unacceptable cost for the processing of an old used book.
Librarian salary allocation
Graduate assistant stipend
Facility cost allocation
Part-time student help
Total costs
Per book (based on 1,000 books)
RFID tag per book
Total unit cost

$12,000
$5,200
$1,200
$5,000
$23,400
$23.40
$.50
$23.90

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. 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 $23,900 per year. These savings could be used to support some other, more
worthwhile function within the library.
Librarian salary allocation
Graduate assistant stipend
Facility cost allocation
Part-time student help
RFID tags ($.50 ! 1,000 books)
Total savings
2

$12,000
$5,200
$1,200
$5,000
$500
$23,900

Ten hours per week ! 13 weeks " 130 hours per semester for the fall and spring semesters; 20 hours per week
for 12 weeks in the summer " 240 hours; total additional hours are 130 # 130 # 240 " 500 hours times $10
per hour for a total of $5,000.

Issues in Accounting Education, November 2009

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Walters and Pergola

Case Requirements
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.
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.
3. Cost Analysis:3
a. Identify each cost associated with the librarys book donations department.
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.
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.
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.
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.
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 costs make it problematic for managerial analysis purposes?
Explain.
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 cost computations
correct? What assumptions did they make? What errors in logic did they make? Prepare
a revised cost computation.
6. In a professional memo (use proper headings and formatting) directed to the Chair of
the Budget Committee: (1) summarize (do not reiterate all of the details) your evaluation of the budget committees analysis (in Part 5), and (2) based on your analysis,
present a succinct, logical argument in support of the librarys request for additional
funds for the book donations department. Limit your logical argument to three or four
key points.
3

You may want to present your classifications for this requirement in table format.

Issues in Accounting Education, November 2009