The two primary topics in this case study are the matching concept which underlies accrual accounting and types of cost behavior patterns for management decision making. The case is appropriate for upper-level accounting majors. With two sets of discussion questions, it could be used in either the first intermediate accounting course or the upper-level managerial course. Either the financial or managerial approaches to the case can be taught in two class hours. Both approaches will require about three to four hours of outside preparation by students.
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 industry is revealed through a look at the terms of recording contracts, production and promotion costs and pressures, and the music distribution system. Students can listen to several songs and see the artist's promotional video on the Web as part of the background material.
The primary financial accounting issue is how recording studios account for production and promotion costs for albums of new and untested recording artists. Students decide whether such costs should be treated as revenue expenditures and expensed as incurred or capital expenditures to be deferred to future periods. Students will discover that most new releases never approach even a break-even volume of sales which makes the likelihood of future revenues extremely unlikely. Ultimately, a recommendation is required as to when advances to the artist and the sizeable recording and promotional costs for her album should be recognized. Student activities include accessing the corporate Web site, locating corporate accounting policies regarding music promotion and production costs, researching some GAAP rules for the music industry and discovering a practical application of some basic financial accounting theory.
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.
Billboard Magazine (April 7, 2001): Carly Hennessy, "I'm Gonna Blow Your Mind": "Fresh from his work on Rod Stewart's latest album, producer/one-time New Radical Gregg Alexander lends his songwriting/production skills to the other side of the demographic spectrum with teen newcomer Carly Hennessy. ... this track is infused with such rapturous spirit; "I'm Gonna Blow Your Mind (Really Want to Kiss You) is a playful, affection- filled romp; ... accentuated by a rollicking up-tempo beat, organic instrumentation and the impressive, playful vocals of Dublin native Hennessy; ... the most promising debut track we've heard this year". CT (Billboard, April 2001). These were the initial review comments in early 2001 for the song "I'm Gonna Blow Your Mind" by newcomer Carly Hennessy. To promote her first release, MCA Records spent $250,000 on a promotional video, $200,000 for independent promoters, and $100,000 on "imaging" costs for Ms. Hennessy and $150,000 for a four-week promotional tour. [To hear "I'm Gonna Blow Your Mind" and watch the video, go to: http://www.mcarecords.com/.]
In 1999, Ms. Hennessy signed a recording contract with MCA (a subsidiary of the French company Vivendi Universal). In her native Ireland she had enjoyed success as a child singer (releasing a Christmas album at age 10) and actress (performing all over Europe in "Les Miserables" at age 13). At age 16, Ms. Hennessy dropped out of high school and came to Los Angeles with her father. …