Components of Management Accounting System

MANAGERIAL
ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................4
PART A...........................................................................................................................................4
1. Different types of cost included in the case study...................................................................4
2. Relevant & Irrelevant Information for making decision related to purchase of appliances...5
3. Cost of laundering the clothes and calculation of cost for each laundering option.................6
4. Decision related to hire a new employee.................................................................................7
5. Evaluation of two alternatives rental & home.........................................................................8
PART B..........................................................................................................................................10
1. Explaining the components of management accounting system with relevance in decisions
making........................................................................................................................................10
2. Defining contribution of management accounting to innovation process.............................11
3. Outcomes from research findings..........................................................................................11
CONCLUSION..............................................................................................................................12
.......................................................................................................................................................13
REFERENCES..............................................................................................................................14

INTRODUCTION
Managerial accounting is concerned with the process of preparing internal managerial
reports and statements which assist the management of the company in their decision making. It
also supports in formulation of strategies and plans, performance management and expertise in
financial reporting and control related to the business resources. Management of a business firm
can prepare future financial plan for their business and can make various plans so that cost of
production can be monitored and controlled.
The present report is based on two cases related to the management technique to be
adopted in the business for successful accomplishment of business goals along with high
profitability. The report will discuss about laundry solution to be undertaken by Franks in first
case and in other it will define about new theory of innovation which will benefit Canon, Inc.
and Apple Computer, Inc.
PART A
1. Different types of cost included in the case study
Cost is an essential element without which a business organization is unable to operate its
business. Further, a company set its profit margin by determining price of products with the help
of cost. Internal managers of business firms makes decisions related to managing cost of
products and eliminate unnecessary cost incurred during production process.
A child care business is named as Nanna's House inaugurated by Douglas & Pamela
Frank in their home town and for operation functions of business they have to pay different types
of cost, which are discussed below-
Fixed Cost
Expenses made by any firm or business that does not fluctuate with the change in
production or sales level. It is a type of cost which compulsorily paid by company either it is
offering a service or producing any product at a particular period. Thus, operations of a company
does not have any impact on amount of fixed cost. This cost is a type of indirect cost.
Insurance, Depreciation, Rent, Salary, Utilities, Interest & Taxes all are example of Fixed
Cost. For Example- Nanna's House also making payment of different types of Fixed Cost such as
Insurance cost of $3,840 annually and License Fees of $225 charged by state. Further(Bento,
Mertins and White, 2018).
Variable Cost

Expenses which are directly related to business activities performed by a company thus,
this types of cots vary with the change in output level and sales volume. A company cannot offer
its services with this cost. Cost of Direct Material, Piece Rate Labour, Suppliers and
commissions are types of variable cost.
For Example- Per Child Cost of Meal & Snacks is a type of cost discussed in this case
because this cost may vary with an increase or decrease in number of children in Child Care.
This cost is $3.20 per child per day(Ibarrondo-Dávila, López-Alonso and Rubio-Gámez, 2015).
Semi Variable Cost
A cost does not change up to a predetermined sales volume level and fluctuation in this
cost started above that level. This cost is having characteristics of both fixed cost and variable
cost. In this case Cost of Utility is an example of Semi Variable Cost as this cost remains
constant for a month which is fixed and then increase by $50 each month which is variable.
2. Relevant & Irrelevant Information for making decision related to purchase of appliances
After 1st week of providing services of child care by Nanna's House washer & dryer
stopped working and it is necessary requirement for business as to wash clothes, blankets and
bad sheets of children's. Thus, for making decision related to purchase of appliance below
discussed information are relevant-
 Information related to cost of old appliance as Franks can sell old appliance to the seller
and purchase the new one which in turn reduces cost of new appliance. Like cost of old
appliance is $440 and cost of purchase of new appliance is $843.72. Thus, Franks can
make decision of selling the old appliance to minimise
 Detailed information related to cost of each new appliance such as Value of Dryer,
Washer and Installation cost is the most relevant because on that basis Franks evaluate
availability of funds with them & decide whether company is able to cover this cost or
not.
 Information of cost incurred in different laundry alternatives are also useful because
with these Franks can evaluate an alternative and use them. For Example- less cost is
required in Red Oak Laundry and Dry Cleaning than there is no requirement of purchase
of new appliance(Kaplan and Atkinson, 2015).

 Further, details of different types of cost & income such as license, insurance, meals,
utility and fees are relevant as with these profits of company can be calculated. Thus, if
business is generating sufficient revenue than it can invest in purchase of appliance.
On the other hand, Irrelevant Information for making decision of acquiring appliance
are-
 Information related to purchase of home is irrelevant as it is not related to business and it
does not add any value in business operations.
 Details of population of state and description of age are also not useful.
 Information pertaining to facilities provided by child care is not beneficial(Christ and
Burritt 2015).
3. Cost of laundering the clothes and calculation of cost for each laundering option
Alternative 1
Red Oak Laundry and Dry Cleaning
Cost @ $52 per month $624 annually
Cost incurred in giving the clothes to Red Oak Laundry & Dry Cleaning is $624 per
annum.
Alternative 2
Landormate (Self Service)
Mileage Cost $0.56/mile $174.5856
Cost of Laundry $8 per week $415.68
Laundry Supplies $35 every quarter $140
Total Cost $730.2656 per
annum
From, the above table it is evaluated that if Franks choose this alternative than they have
to pay a cost of $730.2656 per annum.
Alternative 3
Cost of New Appliance (Annually)

Washer $420
Dryer $380
Energy Cost for Dryer $145
Energy Cost for Washer $120
Depreciation $104.375
Delivery Cost $35
Installation Cost -
Total Cost of Purchase $1204.375
Calculation of Depreciation
Straight Line Method= (Cost- Salvage Value)/Useful Life
=(835/8)
=$104.375
From the above calculations it is interpreted that if Franks purchase new appliance than
they have to pay a cost of $1204.375. In which purchase cost & delivery cost is one time and
other than that a cost of $365.375 is to be paid by Nanna's House on a yearly basis.
Thus, after evaluating all the three alternatives and their per annum cost Third Alternative
(Purchase of Appliance) is most effective as in this company is required to pay a one time cost of
$835 and after that expenses of $365.375 incurred annually. Further, cost of purchase can be
minimised by selling old appliance costing $440 which in turn reduces cost to $395.
4. Decision related to hire a new employee
Currently Nanna's House is enrolling maximum 6 children for child care and it can
increase number of children's to earn more profit and for that it is required by business to hire a
new employee so that they can provide child care services to more children's. If a Franks hire an
employees in their business than they can take care of three more services. For making decision
related to giving employment Annual Cost of Hiring an Employee is calculated below-
Cost of Hiring an Employee

$9 per hour for 40 hours
(9*40*4.33 weeks*12 months)
$18705.6
Note- There are 5 working days in a week thus, business dies its operations for 40 hours in a
weeks. Thus, above cost is determined by considering 4.33 weeks(Dizdar, 2018).
From the above calculation it is interpreted that if Franks are thinking to give
employment to one more worker than that will increase its cost by $18705.6. Further, for making
this investment business is also required to assess increment in profit after giving admission to 3
more children.
Income from Enrolling three additional children
Fee $800 per month (800*12 months*3
children's)
$28800
From the above calculation it is evaluated that Child Care is receiving a fee of $28800.
Thus, it is analysed that company is able to earn profit from this investment. ($28800-
$18750.6)= $10049.4 is amount of profit company will after making this decision.
So, Yes business firm should make this decision as cost of salaries and wages of new
workers is being covered by income received from enrolment of three children's. Further, this
decision also beneficial for company as it creates awareness among residents of local area in
which it is situated and with the company is able to enhances its profitability(Jalil, Abar and
Dadashian, 2016).
5. Evaluation of two alternatives rental & home
As an accountant it is advised to Nanna's Home that business can enroll more children's if
Franks acquire a building on rent for accommodation of children's.
Accommodation is given to 9 children's whereas if Franks hire a space on rent than they
can accommodate 14 children's which in turn maximises profits of Child Care but business is
also required to pay rent for that thus, for making this decision calculation of revenue and cost of
both alternatives are discussed below-
Alternative 1
Revenue Generated from 14 Children's (Rent Option)

Fee $800 per month 134400
Less- Cost of Rental Space $650 per
Month 7800
Utilities $125 per month 1500
Insurance 5000
Salary $9 per hour for 40 hours 93528
Cost of Meal $3.20 per child
per day
16128
License 2700 126656
Total Profit 7744
Alternative 2
Revenue Generated from 9 Children's
Fee $800 per month 86400
Less- Utilities $125 per month 1500
Insurance 5000
Salary $9 per hour for 40 hours 18705.6
License 2700
Cost of Meal $3.20 per child per day 10368 38273.6
Total Profit 48126.4
Franks should continue to operate facility at home as this option gives company more
profit. Further, they are note required to pay rent which in turn reduces cost and cost of business
also minimises as less salary is to be paid to employees.
No. of Children's
Nanna's House should give admission to 9 children's at their home as fewer employees
are needed in that case and which also helps Frank's in managing their cost so that they can

achieve high profits and it is the most effective business strategies business can adapt according
to accountant.
No. of Employees Company need to Hire
From the above calculation if Child Care accommodate 9 children's at their home than it
will able to earn more profit as compared to accommodating 14 children's at a rented space.
Further, according to regulations provided by state an adult can take care of maximum 3
children's in a Child Care so if company is adapting rent option than for giving care to 14
children's it has to employee 5 employees which cost 93528 dollars annually. On the other hand,
if accommodation is provided to 9 children's than business is required to hire 3 employees.
From the above table company is required to hire 3 workers as this option is more
profitable(Christ and Burritt, 2015).
PART B
1. Explaining the components of management accounting system with relevance in decisions
making.
Management accounting system is defined as the process of recognizing, gathering,
analysing and communicating of financial as well as statistical information of the company so as
to form internal managerial report. The main aim of management accounting system is to aid the
management of the company to be utilized for making business related plan, strategies. It also
assists in evaluating and measuring the performance level of the company as well as of the
employees as a whole. It ensures that proper use of business and financial resources has been
done for attaining predetermined goals in a cost effective manner. The key components of
management accounting system are as follows:
 Cost Accounting System – Also known as Product costing system. It is defined as a
mechanism which assist the company in making estimates about the cost expense. It
helps Canon, Inc. and Apple Computer, Inc. in determining the cost which is associated
with the production and manufacturing process (Otley, 2016). Also, with the help of cost
accounting system, a company can evaluate its profitability situation by controlling cost
and properly managing inventory. Cost Accounting system has two main components:
Job Order Costing – A method of costing in which cost incurred for undertaking
manufacturing and other operational functions are ascertained for every job work. It provides
detail about cost to customers which has been associated with producing a unique product.

Process Costing – This method determines the cost incurred separately related to every
work process for producing products of similar nature.
 Inventory Management System – This method of accounting helps Canon, Inc. and
Apple Computer, Inc. in managing the inventory by making proper valuation. It helps the
company in determining the current level of inventory and its reorder for minimizing the
stock out situation thereby resulting in business loss. This method improves the accuracy
of inventory and ensures proper workflow in the company.
 Job Costing System – This method is related with process of accumulating of
information about cost incurred for carrying on specific production or job work.
Information accumulated is provided to customer under the specific contract in which
cost is reimbursed.
2. Defining contribution of management accounting to innovation process.
The term Innovation in management accounting is considered as ideas, thoughts,
practices and objects which are recognized as new and better improved way by the business
organization adopting the innovations. One of the most fundamental perception related to
Innovation is that all innovations involve some change but all changes doesn't involve
innovations in the company (Chenhall and Moers, 2015).
Management accounting is defined as the practice of measuring, evaluating and reporting
financial as well as non financial information which are needed by the managers for making
decisions essential for the achievement of organizations goal and objectives. Innovation on the
other hand, is a process with the help of which new information is created and such information
is then embodied in the product of the company.
In the present case scenario of Canon, Inc. and Apple Computer, Inc. the innovation
process is defined as the problem creation moment which is related with the positing of correct
problem and discovering of its solution or creation of information. Creation process basically
deals with information selection which is divided into two parts viz. syntactic and semantic.
Syntactic information is reduced to digital form having no meaning illustrated with the help of
discrete type of information as used in computers and can be manipulated by logical operation.
By making proper and correct interpretation of information, its accurate value and meaning can
be identified. On the other hand, Semantic information is of qualitative nature which focuses on
the meaning or content of the information.

Development of new process innovations within the quality control circles is one of the
main aspect of information creation. For surviving in this competitive world, Canon, Inc. and
Apple Computer, Inc. is focus is on constantly creating new strategies & plans, new products and
manufacturing ways, distributing and selling factors (Jalil, Abar and Dadashian, 2016). By
continuous examination this has helped in re-conceptualization and reorganization process by
making creation of new meanings.
For example - Canon decided to redesigned its established product for a larger market
whereas Apple Inc. for its Mac project has made step related to personal computing.
3. Outcomes from research findings.
As per the research made, following outcomes has been made:
 Canon Inc. - Canon started diversifying its business operations into office machinery by
development of electronic calculators and copying machines after its first product viz.
Camera for remaining competitive in the market. In the mid of 1970 Canon faced
difficulties related to declined demand for existing products as a result Canon has to
retreat from the low priced calculator market. Canon has made a policy of hiring mid
career personnel from other firms with the aim of creating counter cultures values or
diversity to increase the potential for new information creation. Canon's employees has
participated in deep interaction and work with high motivation and commitment for
increasing sales and revenue. Also, use of analogies and metaphors has been made for
creating new understanding and concept for information creation.
 Apple Computer Inc. - It starts its business operation by selling of personal computers.
Wit introduction of Apple II, company has increase it sales. But by introducing Apple III
and the Lisa in the market, it has to face failure. At that time Apple was having dilemma
about what R&D activities to be used for improving the performance level. For
overcoming this dilemma, Macintosh group was formed with the aim of ascertaining the
feasibility level related to production of low cost computer for public at large. For Apple,
Mac has become the base line with the help of which company is able to grow and has
achieved the point of self renewal.
In both cases the innovation process adopted was of emergent nature and not deductive
one.

CONCLUSION
The above report outlined two cases associated with different types of techniques used in
management accounting which in turn helps business in achieving their long term sustainable
growth by meeting goals which in turn maximises profitability, Brand image and Market Share
of company. Further, this report calculate cost incurred in different alternatives of laundry so that
business can make a decision related to selection of an alternative with less cost which in turn
enhance profit. Furthermore, different decisions related to investment in employees or space are
taken by Franks in first case. Moreover, in 2nd case different types of cost components of
management accounting are summarised in the present report. Further, innovation process in
different firms are outlined in above report. At last, this report concluded about different theories
of innovation which will benefit Canon, Inc. and Apple Computer, Inc. in 2nd case study.

REFERENCES
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breeding. Asian Social Science. 11(11). p.308.
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distortions, and gains trading. The Journal of Finance. 70(6). pp.2489-2538.
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Dizdar, D., 2018. Two-sided Investment and Matching with Multidimensional Cost Types and
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Online

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