Rosalind Enterprises: A mini-case for ensuring student mastery of cost behavior concepts in short-term decisions

Cost behavior and its use in decision making is a fundamental part of all cost and managerial accounting courses. Yet, our experience is that students often accept treatment of differential costs and revenues, and the related emphasis on contribution margin, based on faith rather than understanding. In many cases, even after solving problems considering fixed costs as irrelevant, they still express a great deal of intellectual conflict and doubts. Statements like: “If the company only considers variable costs, how is it going to cover its fixed costs and make a profit?” and “All products should be made to bear their fair share of all costs” are far from rare occurrences. Such statements reflect a less-than-thorough grasp of the uses and limitations of some key cost concepts and their use in decision making. This is a worrisome state of affairs because as managers, students will mostly see unit costs that lump together variable and fixed costs. Even when given a breakdown of costs by behavior, the information still may not be in a form needed to facilitate effective decision making. The aim of this case is to deepen student understanding of the uses and limitations of unit cost data that include averaged or allocated fixed costs. The case, which is best used as an introductory exercise to the topic area, focuses on a two-product situation where the profitability of both products is affected by changes with respect to one product. The accompanying teaching note shows how different types of questions asked by students can be used as the basis for an exciting and fruitful class discussion. While textbooks are full of problems like this case, their accompanying solutions in manuals typically do not go beyond the provision of the correct computations. Given this background, the contribution of this case is not in the presentation of a novel situation or problem. Rather, it is in showing how the discussion process of a typical, simple end-of-chapter problem can be structured to actively involve the students through layers of complexity to solidify their understanding of some key concepts.