Management Accounting Case Studies

This document provides case studies on management accounting, including analysis of costs, decision making, and profitability. It discusses different types of costs, such as variable, fixed, and sunk costs, and their relevance to decision making. It also explores the estimation of costs for laundry services and the hiring of additional employees. Additionally, it analyzes the decision to stay at the current facility or move to a larger one, and the importance of innovation in the success of Canon Inc. and Apple Computer Inc.

Holmes Institute Faculty of Higher Education - Management Accounting Case Studies
Part A: Case Study Analysis
This is a case study where a couple Douglas and Pamela Frank wants to open a child care
facility at their home in Ovilla, Texas after their retirement. They have collected various
costs related to the same and want our help in analyzing the profitability.
Answer to Question 1:
The case study mentions various types of cost including fixed, variable, sunk, capital,
relevant among many others. The 3 distinct types of cost mentioned in the case study
along with one example is as below:
a. Variable Cost: These costs vary in nature and hence the name variable. The cost is
directly related to the changes in the activity level of the organization. These cost
are relevant to decision making
Example: Cost of meals and snacks mentioned as $3.20 per day per child indicating
it is variable with no. of days and no. of children enrolled at the facility.
b. Fixed Cost: These are fixed and do not changes with the changes in the activity
level of the organization. These costs are irrelevant to decision making
Example: Annual insurance cost of $3,840 and state license fee of $225 are fixed
costs and must be paid irrespective of the business level.
c. Sunk Cost: These costs are those which have already been incurred and can no
longer be reversed. They are historical cost and do not affect decision making.
Example: Cost of the old appliances @ $440.
Answer to Question 2:
Costs and information which affect the decision making are relevant costs or information.
They must be considered and accounted for while analyzing the available alternatives. For
Mr. and Mrs. Frank, the information that is relevant to the decision of purchasing the
appliances can be listed as below:
 Estimated cost of purchase of the appliances (washer and dryer)
 Estimated cost of Additional accessories needed for installation of the appliances.
 Installation costs of the appliances (washer and dryer)
 Delivery costs of the appliances (washer and dryer)
 Life of the appliances (washer and dryer)
 Change in energy cost after using the appliances (washer and dryer)
 Cost of other available alternatives for laundering the clothes of the children.
Further, information which is irrelevant to the decision of purchasing the appliances
includes
 Information on purchase price of the old appliances
 Life of the old appliances
 Information on revenues
 Information on cost of annual fees, insurance, depreciation, meals and snacks etc.
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Holmes Institute Faculty of Higher Education - Management Accounting Case Studies
Answer to Question 3:
Here, the couple wants us to help them estimate the cost to launder the clothes of the
children at the child care facility. They have identified three alternatives for the same.
These alternatives are:
1. Hire Red Oak Laundry and Dry Cleaning who will pick up the spoiled clothes and
deliver clean clothes at monthly charges.
2. Avail the facility of the nearest Laundromat by driving there themselves once a
week and do the laundry with the help of purchased detergent.
3. Do the laundry themselves with purchased appliances and detergent at Nanna’s
House
We will now compute the estimated total annual cost under all these 3 alternatives:
Alternative 1: Hire Red Oak Laundry and Dry
Total Annual Cost
Monthly cost for pickup/delivery service (A) $52
Number of months of service (B) 12
Total annual cost (A*B) $62
4
Alternative 2: Avail the facility of the nearest Laundromat
Total Annual Cost
Cost of Driving
Distance travelled per week (3 miles one way) 6
Mileage Rate $0.56
No. of Weeks in a year 52
Cost of Driving $174.7
2
Cost of Laundering Clothes
Cost to launder per week $8.00
No. of Weeks in a year 52
Cost of Laundering Clothes $416.0
0
Cost of Detergent
Purchase cost from Megamart per quarter $35.0
0
No. of Quarter in a year 4
Cost of Detergent $140.0
0
Total Annual Cost $730.7
2
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Holmes Institute Faculty of Higher Education - Management Accounting Case Studies
Alternative 3: Do the laundry themselves – At Nanna’s House
Total Annual Cost
Cost of the appliances
Washer $420.00
Dryer $380.00
Total purchase Cost of the appliances $800.00
Installation cost of accessories $43.72
Delivery charge of the appliance $35.00
Total cost of the appliance $878.72
Expected Life 8
Annual cost of the appliances (A) $109.84
Increase in Energy Cost (B) $265.00
Cost of Detergent
Purchase cost from Megamart per quarter $35.00
No. of Quarter in a year 4
Cost of Detergent (C ) $140.00
Total Annual Cost (A+B+C) $514.84
Summary of estimated costs
1. Hire Red Oak Laundry and Dry Cleaning who will pick up the spoiled clothes and
deliver clean clothes at monthly charges - $624
2. Avail the facility of the nearest Laundromat by driving there themselves once a
week and do the laundry with the help of purchased detergent - $730.72
3. Do the laundry themselves with purchased appliances and detergent at Nanna’s
House - $514.84
Recommendation:
Based on the above estimated annual cost under the 3 available alternatives, the couple
should purchase the appliances and detergent and do the laundry at Nanna’s House only.
Answer to Question 4:
Here, we will analyze whether or not should the couple hire extra employee for running the
day care facilities.
The following are the information available:
Cost of extra employee: $9
No. of hours worked : 40 hours per week
Additional children that can be enrolled: 3
Based on above, the incremental revenue due to additional of 3 children is as below:
Incremental Revenue = 3 children * $800 per child = $2,400
To analyze, we will now evaluate the incremental cost:
1. Cost of the employee that is hired
$9 per hour * 40 hours per week * 4.33 weeks/month = $1,558.80
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Holmes Institute Faculty of Higher Education - Management Accounting Case Studies
2. Cost for meal and snacks = $3.20/child/day * 3 children * 5 days per week * 4.33
weeks per month = $207.84
Total incremental cost = $207.84 + $1,558.80 = $1,766.64
Net Incremental Profit = Incremental revenue – Incremental cost
= $2,400 - $1,776.64
= $633.36 per month.
Thus, the Net Incremental Profit to the couple that the couple will get after the
hirimg of additional employee is $633.36 per month
Recommendation:
Based on the above analysis it is clear that Mr. and Mrs. Frank should consider hiring an
additional employee as the incremental revenue of $2,400 exceeds the incremental cost of
$1,766.64, resulting into a net profit of $633.36 per month.
.
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Holmes Institute Faculty of Higher Education - Management Accounting Case Studies
Answer to Question5:
Here, the couple has an option to move to a rented space which can accommodate more
children subject to a maximum of 14 children. The decision revolves around choosing
either to stay at their own home or shift to the new larger facility.
The same can be concluded based on the maximum profit from all the options available.
 Option A: Stay at the day care being run at the own house with a minimum of 6 or
maximum of 9 children (by hiring an additional employee)
 Option B: Move to a larger new facility which can accommodate a minimum of 12 or
maximum of 14 children
Information available for the analysis:
Rent of the new facility : $650
Cost of utilities at the new facility : $125
Additional insurance : $5,000
Other costs including meals and snacks, laundry, employee hiring, revenue per child will
all remain the same.
Computation of the Revenues and Costs under Option A
Option A: Stay at the day care being run at the own house
Particulars Formulae Amount Amount
No. of Children 6 9
Revenues No. of child * Fee/child $4,800.00 $7,200.00
Less: Expenses
Cost of Meal No. of child * cost fo
meal/child * 5 days a week *
4.33 weeks in a month
$415.68 $623.52
License Fee License Fee/12 months $18.75 $18.75
Insurance Insurance Cost/12 months $320.00 $320.00
Laundry Cost Laundry Cost/12 months $42.90 $42.90
Depreciation (Cost / life)/12 months $265.00 $265.00
Rent Own house - NIL $0.00 $0.00
Utilities Given $50.00 $50.00
Employee Cost As in 4 above $0.00 $1,558.80
Total Expenses $1,112.33 $2,878.97
Net Monthly Income $3,687.67 $4,321.03
Computation of the Revenues and Costs under Option B
Option B: Move to a larger new facility
Particulars Formulae Amount Amount
No. of Children 12 14
Revenues No. of child * Fee/child $9,600.00 $11,200.00
Less: Expenses
Cost of Meal No. of child * cost fo $831.36 $969.92
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Holmes Institute Faculty of Higher Education - Management Accounting Case Studies
meal/child * 5 days a week *
4.33 weeks in a month
License Fee License Fee/12 months $18.75 $18.75
Insurance Insurance Cost/12 months $416.67 $416.67
Laundry Cost Laundry Cost/12 months $42.90 $42.90
Depreciation (Cost / life)/12 months $0.00 $0.00
Rent Given $650.00 $650.00
Utlities Given $125.00 $125.00
Employee Cost Refer Working Note 1 $3,117.60 $4,676.40
Total Expenses $5,202.28 $6,899.64
Net Monthly Income $4,397.72 $4,300.36
Recommendation:
Based on all the above computation, we see that the couple has a maximum profit of
$4,397 when it operates at a new larger facility with 12 children. Further, if the couple
wishes to operate at the day care only, they should accommodate 9 children by hiring an
additional employee as the couple will maximize the profit from $3,687 to $4,320 per
month.
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Holmes Institute Faculty of Higher Education - Management Accounting Case Studies
Part B Analysis
Here, the attempt is to analyze the given case of Canon, Inc. and Apple Computer, Inc.
The case describes how the two companies have brought in innovation in the market and
succeeded. The approach that they have followed is drastically different, but the end result
is same: Innovation.
Answer to Question 1:
For Canon Inc.
At Canon Inc. the approach used was top-down approach of working, where the top
management of the company made all the decisions and policies and the same was
passed to the bottom for implementation and execution.
The company was earlier not driven by the similar force and was mismanaged or
misguided due to lack of ownership and authority. After the implementation of the top
down approach, the direction in the organization improved giving employee’s guidance on
moving forward. Because of this, the operational efficiency of the company improved. It
was the management accountant who identified the problem and introduced the system in
a sorted manner thus balancing the needs and costs of the organization. Overall, the
efforts of the management accountant improved the perspective and direction in the
organization making it a more secure place for the employees.
Examples: Budgeting, Constraint establishment
For Apple Computer Inc: -
Here, the management accountant has promoted equality where both the top
management and middle and lower levels are at the same level with same level of
authority and responsibility towards organization success. But the crux of the idea was
selection of one man to monitor the entire team and thus becoming focused on one single
man to oversee, supervise and control the affairs and dealings of the company. That one
person in the team was Steve jobs. Mr. Jobs helps the organization immensely giving
them direction and guidance on moving forward. Everything in the organization including
product features, product details, team selection were all controlled by him and he was
subjective and restrictive in his approach with the team. It is only because of him that the
company has managed to outperform all its competitors both in terms of market share and
profitability.
Example: Performance management
Answer to Question 2:
Innovation is what has driven both the companies towards success and prosperity. Both
the companies took major drastic and strategic steps to promote innovation and bring
something innovative for the public and expand their business. The innovation process is
indeed ‘a process of information creation”. Both the companies have been able to create
their mark at the innovation based on availability of right information at the right time.
For Canon Inc.
a) This particular company focused on improving the technology and monitored the
progress regularly on the prescribed format identified. The team ensured that the
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Holmes Institute Faculty of Higher Education - Management Accounting Case Studies
company is driven by progress and runs on a high energy mode which enabled the
company get the best and optimal outcome.
b) The other thing which the company laid emphasis on was open communication
which proved out to be highly useful as it promulgated the idea of interactive
behavior. Tis would lead to products that would be robust and appealing to a major
audience thus increasing the market share and ultimately higher profitability.
For Apple Computer Inc: -
1) Here, the company launched its own sophisticated and customized operating
system which helped the user worldwide operate in a seamless environment. The
company was able to build its own brand and create a significant mark in the globe.
2) The other aspect was that the company rolled into the segment of the Japanese
system and adopted their working culture. This innovation format helped the
company in leveraging the resources and builds their own distinct brand and name.
Answer to Question 3:
The specific outcomes or lessons learned from the article’s research findings that will be
useful for management accountants in Australian companies to learn from as a stepping
stone for the accountants are:
For Canon Inc.
a) Canon promoted the idea of group work, team effort and team building as a tool for
the company’s growth in terms of revenues, profits and goodwill. The company
proved that working in silos is not an option for any company and it is the team
effort that helps the company grow and not one single individual.
b) The top down approach ensured that the top management guides the middle or
lower level manager. But the organization policy is such that the suggestions of the
middle or lower level manager are respected, reviewed and adhered to if they
provide excellent ideas for innovation.
For Apple Computer Inc: -
a) This organization believed in faith and confidence of the employees. The company
believed that the vision and mission of the company should be aligned to reflect the
working environment of the company. Trust was the most important factor for the
management to formulate policies and goals for the managers from top to bottom.
b) Back in the era of 1991, the management accountant established a factor as to how
crucial is the ROI ratio and how the same benefits the organization and the
resultant perspective. It explained the factor as to how the company must at each
and every implementation of ideas must compute the ROI so that the level of
security is maintained.
Conclusion
The report concludes and presents all the aspect of managerial accounting be it financial
decision making for the couple starting a day care facility at their place or the literature
review of the article to understand how different approaches helps the organization grow.
The paper presents the importance of managerial accountants in every field be it financial
decision or non-financial qualitative decisions. Both the case study analyses the role of the
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management accountant from two different angles which are operational and qualitative
perspective on the costing of the products and ideas.
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Holmes Institute Faculty of Higher Education - Management Accounting Case Studies
References
Chen, S.S., Huang, C.W., Hwang, C.Y. and Wang, Y., (2019) Voluntary Disclosure and
Corporate Innovation. Available at SSRN 3311932.
Otley, D., (2016) The contingency theory of management accounting and control: 1980–
2014. Management accounting research, 31, pp.45-62.
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