Case Teaching Package
A case teaching package is available for this case. It includes strategies for case presentation, key concepts, solutions to the assignment questions in the case, and suggestions for the most effective ways to work this case into your course.

Length
This case is 10 pages in length and its case teaching package is 8 pages.

Abstract

This case is a "timeless" exercise in the logic of product costing systems for profit determination. The problem is easy to see, difficult to explain and analyze, and impossible to resolve!

This short case involves no business issues regarding the product, the market, the competition, the value chain, or the company’s operating practices. In this sense, the case is very shallow.

The case deals with only one issue—choice of an accounting system for manufacturing overhead. Upon first reflection, most managers consider this to be a rather trivial issue which should be easily resolved. Ha! Little do they know!

The case and accompanying technical note present a carefully designed exercise to work students through the calculational and conceptual aspects of the age-old controversy between direct costing and absorption costing.

Linkages to Textbooks or Journal Articles/Fit Within a Course

I use this case as part of the sequence on choosing a cost system in the required managerial accounting course at Tuck. It can be covered in one 90-minute class session. But the instructor must make a choice.

If the purpose of the class is primarily drill on the basic calculational issues, most of the time can be devoted to questions 1, 2, 3, and 4, with some attention at the end to questions 5 and 6. My experience is that students will take all the class time you allow them on calculational issues.

If the instructor really wants to push on the managerial choice question, it is necessary to cover questions 1-4 in no more than 45 minutes. This forces more of the work of understanding the calculations onto the student, using the technical note. I prefer this approach.

Under either teaching approach, the basic idea is just to follow the six assigned questions in order. The teaching issue is the relative time allocation between questions 1-4 and questions 5 and 6. As a reading after class, I assign the article by Shank and Constantinides in the September 1994 issue of Management Accounting.

Study Questions

1. Approximately how busy (relative to a normal month) was the factory in August?
2. Can you construct an income statement for a "normal" month under both absorption costing and direct costing? Analyze the profit variance for August versus a normal month.
3. Be prepared to explain the profit differences shown in Exhibits 1 and 2 of the case ($-22,928 vs. $+34,272) and in Exhibit 3 of the case ($+14,036 vs. $-59,432).
4. Could the problem in the case ever arise with respect to annual income statements?
5. From a managerial perspective, how does Graham, Inc. earn a profit? Which costing system best reflects the basic economics of the business?
6. What do you recommend?

The downloadable file for this case is in Microsoft® Word 7.0 for Windows®.

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