Accounting Class

Cost Behavior

Netflix

We will follow one company for the next four SLPs to analyze several managerial accounting concepts. Managerial accounting relies on internal detailed data, something that is not publicly available. However, it is amazing how much information a 10-K filed with the SEC contains. We can use this information with some assumptions to better understand concepts, analyze, and budget.

We will look at Netflix this session. The U.S. is not all about manufacturing, so it is beneficial to look at a variety of businesses. Download the company’s 10-K for the past three years from its website (http://ir.netflix.com/) or the SEC database (http://www.sec.gov/edgar.shtml). It is a good idea to print and save this document since you will use if for several SLPs.

Let's review some information and learn about the company and how we can use the information contained in the 10-K. Don't worry, we will crunch some numbers for the company in future modules.

Required:

Review the background material and do research as needed.

Would you classify Netflix as a service company, a merchandiser, or a manufacturer? Does Netflix have any inventory? Which expenses would you classify as variable and which ones would you consider fixed based on traditional definitions? Identify the segments.

Use the Description of Business and Management Discussion and Analysis in the 10-K to identify costs Netflix incurs in each element of the value chain. Identify some of the company’s other cost objects, if any. Why is this information relevant?

SLP Assignment Expectations

Always include the name of the organization(s), time period covered and source of information. It is important to answer the questions as posed. The document should be 2 - 4 pages and written in a clear and concise manner, or present tables as required. Support your discussion or tables with references in APA format. You are encouraged to use Excel or other compatible spreadsheets when computations are involved. You can turn in the spreadsheet instead. The content should be equivalent to the page length suggested for a word processing document.

2

Fixed Costs

Choice of activity drivers, measurement, implementation, and more.

Computations and analysis are part of the allocation process. So is an organization’s understanding of activities, identification of appropriate activities, a system for tracking, and using the information. Let's try to apply ABC to Netflix and provide the CFO with some advice.

Required:

Provide a list of five of the company’s most important (indirect cost-causing) activities and briefly discuss each item.

Identify drivers of those activities, bearing in mind that it must be easy to measure and record the values of the drivers. Do you see any potential benefit in implementing ABC for Netflix?

What are some common issues that lead to unsuccessful implementation of ABC in an organization?

Prepare a memo to the CFO that identifies the activities and drivers, with brief explanations why these activities are the most critical, and why the drivers are appropriate and measurable.

SLP Assignment Expectations

Always include the name of the organization(s), time period covered and source of information. It is important to answer the questions as posed. The document should be 2 – 4 pages and written in a clear and concise manner or present tables as required. Support your discussion or tables with references in APA format. You are encouraged to use Excel or other compatible spreadsheets when computations are involved. You can turn in the spreadsheet instead. The content should be equivalent to the page length suggested for a word processing document.

3

Target Costing

Cost Volume Profit Analysis

We now have a handle on the difference between variable and fixed costs as well as the basic ideas of possible allocation procedures for fixed costs. The aim of a for-profit venture is to generate profit, and you have both prepared and reviewed income statements.

Break-even is the point where fixed costs equal the total contribution margin. Another way of saying the same thing is that break-even is the point where net income equals zero. The task for this fourth SLP is to further assess Netflix's financial position.

Required:

•Assume that 70% of the company's operating expenses are fixed. ◦What is the trend in the contribution margin ratio over the last three years?

◦What is the trend in the break-even point for operations, measured in sales dollars, over the last three years?

◦What is the trend in the margin of safety?

•How would the results change if the proportion of operating expenses that are fixed increases to 80%? If the proportion of operating expenses that are fixed falls to 60%?

•Assuming that the total dollar amount of fixed costs remains the same as in your computations for the first bullet point above, how would operating income change if sales decline by 10%? How would operating income change if sales increase by 10%?

•Prepare a memo to the CEO interpreting the results of the analyses, including a CVP chart for the most recent year. Discuss your key assumptions and the importance of those assumptions for the analysis.

SLP Assignment Expectations

Always include the name of the organization(s), time period covered and source of information. It is important to answer the questions as posed. The document should be 2 – 4 pages and written in a clear and concise manner, or present tables as required. Support your discussion or tables with references in APA format. You are encouraged to use Excel or other compatible spreadsheets when computations are involved. You can turn in the spreadsheet instead. The content should be equivalent to the page length suggested for a word processing document.

4

Performance Evaluation

Desirable Planning and Decision-Making Tools for Netflix

We don't know what information Netflix has available internally. Here's your opportunity to ask for the information you would like to have to be an effective manager in this organization.

Required:

What kind of information and reports would you like to have as a manager for Netflix?

How would you utilize this information in the decision-making process to help the company grow?

Comment on the costs associated with obtaining, maintaining, preparing, and analyzing the desired data.

SLP Assignment Expectations

Always include the name of the organization(s), time period covered and source of information. It is important to answer the questions as posed. The document should be 2 – 4 pages and written in a clear and concise manner, or present tables as required. Support your discussion or tables with references in APA format. You are encouraged to use Excel or other compatible spreadsheets when computations are involved. You can turn in the spreadsheet instead. The content should be equivalent to the page length suggested for a word processing document.