Summary
In this case, students examine financial and managerial accounting concepts in an identifiable setting, the pop music industry. As background to the accounting issues, students get an introduction to the pop music industry through a brief look at two years in the recording life of a sixteen-year old newcomer artist. The primary financial accounting issue is how recording studios account for production and promotion costs for albums of new and untested recording artists. The managerial accounting issues revolve around cost behavior patterns and break-even analysis. The issues of fixed, variable, mixed, and discretionary fixed costs are introduced. Using the industry's average break-even level of sales, students are asked to approximate the variable costs for CDs and project what happens to variable costs and record company revenues as sales exceed the break-even level.
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Extract
The Brief Career of Carly Hennessey: A Look at the Economics of Pop Music
INSTRUCTORS' NOTES
FINANCIAL ACCOUNTING ISSUESFinancial Accounting Question 1Question: In light of trends in popular music industry over the past few years, briefly discuss the likelihood of any new artist generating at least a break even level of sales for a debut album.Students should conclude from the background material in the case that it is extremely unlikely that any one new artist will be a "success". In fact, based on the sales figures for new titles in 2001, it is considerably unlikely that new releases would even make a profit. Less than 2 percent (112 / 6455) even reached break-even.The focus here is to get students to think about the concept of materiality (as a prelude to Question 4) as it relates to expected future recoverability of deferred costs. It really isn't necessary that students assign an exact probability to this question as long as they realize that in this industry, profitability only comes to a very few big-name artists. Most albums never even recover the upfront promotion and production costs or cash advances to the artists.Financial Accounting Question 2Question...See the full content of this document
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