Management Accounting Case Study: Cost Analysis and Decision Making

This management accounting case study analyzes a child care business's financial decisions. It explores various cost types, including fixed, variable, and marginal costs, crucial for business operations and production decisions. The case delves into appliance purchase decisions, comparing launderi...Read More

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MANAGEMENT ACCOUNTING CASE STUDIES
By (Name)
The Name of the Class
Professor
The Name of the School
The City and State
Date

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QNS 1: Types of cost
To understand business decision and especially the ones that relate to production
costs, one needs to be able to understand and analyze different types of costs. The
proposed business for the child care will have to incur a number of costs to start and to
remain running. Some of the costs the business is likely to incur are discussed below in
details (Dunning, 2014);
a. Fixed cost. Fixed costs are incurred mostly on a periodic basis say monthly or
yearly. Others are incurred only once in the business lifetime. Such costs which
may be incurred once in the business lifetime are the startup costs and the costs
of purchasing long term assets. For the child care business on our case study,
the startup costs such as costs for purchasing new appliances and costs for
statutory compliance such as licenses and insurance are all examples of fixed
costs. In most cases, fixed costs are not related with the production process and
are therefore not affected by the varying level of the output.
b. Variable costs. The child care will have to incur variables costs in the form of
employee’s salaries, costs of providing meals to the children and the cost of
laundering clothes. All the mention costs will vary depending on the number of
children admitted by the facility. When the number of children increases, the cost
of meals will increase. When the number of employees increase, the salaries
spend on them will also increase. Basically, it means that variable costs are
those costs which increase with the increase in the level of production and
decrease with the decrease in the level of production.
c. Marginal costs. These are defined as the costs of producing an additional unit of
the end product. The Franks will need to analyze the marginal cost element to
determine the cost of admitting an extra child and the cost of employing an extra
employee. Though this type of cost is common in production firms, it is still
applicable in the service industry and is very essential in making a decision
whether or not to increase the production level beyond a certain level
(Wamalarathma, 2011).

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QNS 2: Determinant factors for purchase of new appliances
Decision making is a technical function which requires the decision maker to be well
informed with all the relevant information about the decision he is about to make.
Arriving at an informed decision, one needs to collect data, analyze it, and finally
interpret it in order to derive meaningful information to be used for decision making. The
Franks are faced with a decision of whether to buy new appliances or not. The best
information relevant for this decision is the cost of laundering clothes. There are
different options available for the couple to utilize in laundering the clothes. It is prudent
for the couple to analyze the costs under each option and determine and the cheapest
option.
Out of the information given in the case study, there is some information that may not
be necessary for the decision of whether to buy new appliances or not. The cost of the
old appliances, though is given in the case study, it is not necessary for making this
particular decision. The old appliances are not currently in use and cannot be used as
an alternative and therefore it is not to be considered in the entire decision of
purchasing new appliances.
QNS 3: Cost of laundering clothes
To get their clothes laundered, the couple can choose one of the three options available
to them. According to the case study, there is a laundering company that can do the
laundering for the couple. The other option is for the Franks to do the laundering from
the Laundromat. Alternatively, the couple can purchase the laundering machines and
install them in their facility and do the laundry from the comfort of their facility premises.
The cost under each option is computed below so as to show the most affordable
option.
Option 1:
Here the couple can arrange with the Red Oak Laundry and Dry Cleaning Company to
be picking up the clothes for laundry and deliver them back. This arrangement will cost
the couple $52 per month.

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Option 2:
Under this option, the couple can do the laundering themselves from the Laundromat.
This option will have the transport cost alongside other costs are per the calculation
below.
= U$ 8*4.33 =34.64 per month
Transportation
U$ 0.56 per mile*6 mile (to and fro) = U$ 3.36 per week.
Monthly cost
3.36 Per week × 4.33 weeks = $ 14.55 per month.
Detergent or fabric sheets
$ 35/3 = U$ 11.66 per month.
Total monthly cost will be the summation of the above costs.
$ 34.64
$ 14.55
$ 11.66
U$ 60.85
Option 3
The Franks can decide to invest on the laundry machines once and for all. Here the
couple will have to purchase and install the laundry machines in the facility premises.
There will be costs associated with this option such as transportation of the appliances,
installation and the cost of the power to run the machines. A step by step computation
of the said cost is given below.
Costs
Washer: $420

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Dryer: $380
Carriage: $35.
Installation: $43.72.
Electricity bills costs
The electricity bill is based on the power consumed by the dryer and the washer. The
cost for each is arrived as follows.
Power cost for the dryer,
$ 145 × 8 years = $ 1 160
Power cost for the washer,
$ 120 × 8 years = $ 960
Total power cost is the summation of the two,
= $ 1 160 + $ 960= $ 2 120
The total cost of buying and installing laundry equipment is as below
Washer $ 420
Dryer $ 380
Installation costs $ 43.72
Carriage $ 35
Electrical bills $ 2 120
Total costs $ 2 998.72
The monthly costs will be computed as follows;
Energy consumption for a month = $ 2 998.72/96 months
= $ 22.08 per month.

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In this option, the Franks will incur a high cost for purchasing and installing the
machines. However, this is a onetime cost which is capital in nature and the couple
needs not to necessarily include it in the evaluation process. Considering the recurring
cost only, this option will be the most appropriate for the couple. It is worth noting that
after installing the laundry machines, the couple will only have to incur the cost of power
for running the machines. As an accountant, I will advise the couple to consider
investing in the laundry machines because it will add more value to the business in the
long run.
QNS 4: Considerations for hiring an employee.
The Franks have a potential of admitting more children. This will be possible only if the
couple employ an additional employee. We are going to evaluate the feasibility of this
option and determine how much the couple will gain by accepting more children and
employing one extra employee.
The weekly pay to the employee is $ 9*40 hours = $ 360 every week.
Monthly salary is given by, $ 360 per week × 4.33 weeks
360*4.33 = 1 558.80
Apart from the salaries, there are other costs of operation as listed below,
Maintenance cost, $ 225/ 12 = $ 18.75
Insurance cost, $ 3 840/12 = $ 320
Cost of meals and snacks will be, $ 149.40 × 4.33 weeks = $ 646.90
The total cost to be incurred by the facility will be the summation of the following;
Salary for employee = $ 1 558.80
Maintenance cost = $ 18.75
Monthly Insurance = $ 320
Monthly cost of snack= $ 646.90

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$ 2 544.45
After employing an additional employee, the Franks are to accept three more children.
That will increase the number of children in facility to nine. The total revenue collected
from the nine children will be calculated as follows,
800*9 = $ 7 200
Total expenses have already been computed above. To determine the profit to be made
by the facility under this arrangement, we take the total revenue minus the total
expenses,
Net profit = $ 7 200 - $ 2 544.45
$ 4 655.55
From the above calculation, it is evidenced that the Franks will make more profit by
accepting more children and employing an extra worker. This is a good application of
the marginal cost as discussed in question one. In the computation, we have calculated
the cost associated with accepting additional children to the facility. It has seen that the
cost of the additional children is less that the revenue collected from such children. The
obvious decision is therefore to accept as many children as the facility can
accommodate and employ the required number of employees to take care of the
children.
QNS 5: The insight consideration before relocating the day care.
This is yet another decision which requires the analysis of costs. Due to the continuous
demand for the child care services, the Franks are now thinking of relocating to the
nearest town and establish their facility there. However, this decision needs a close
evaluation of the cost for running the facility from the town. From the case study given,
we are able to see that this alternative comes with additional costs and restriction from
the state authorities. If in any case the couple finds that relocating to town will yield
more profit to the business, then they will have all the reasons to relocate. If it turns out
to be that operating from their home is the one that brings in more profit, the couple will

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continue to operate from home. The following detailed computation will enable the
couple in reaching to the conclusion of this decision.
Case One
In this option we will explore the net profit if the facility was to remain operating from the
Franks home. Here we will assume the facility admits nine children and employs one
employee. The computation will be;
Salary will be,
$ 9 per hour × 40 hours × 4.33 weeks
$ 1 558.80
Cost of meals
9 × 149.40 × 4.33 = $ 646.90.
Other expense will still remain as calculated in our previous illustration,
Maintenance cost = $ 18.75
Monthly Insurance = $ 320
Total monthly expenses will be,
$ 1 558.80 + $ 646.90 + $ 18.75 + $ 320
$ 2 544.45
Revenue collected from the nine children per month will be;
9 children × $ 800
= $ 7 200
Profit for the month is,
$ 7 200 – $ 2 544.45
= $ 4 655.55

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Case 2
The other alternative will be to relocate the facility to town. This option will require the
couple to make some adjustment in order to meet the full compliance with the state
regulations. In addition to that, the couple will have to incur more cost on the insurance
and rent. The computation below takes into consideration all the related costs;
Insurance cost will now be,
= $ 5 000 per year/ 12 months = $ 416.70
Cost of utilities per month = $ 125
Cost for renting per month = $ 650
Salaries and wages
Operating from town, the Franks will now be able to accommodate up to 14 children.
The state regulates the supervision of the children to be restricted to three children per
each adult. This is to say that the facility will need at least three employees.
As calculated earlier, the monthly salary for one employee is $ 1 558.80
The total wages for 3 workers will be:
1 558.80 × 3 = $ 4 676.40
The sum total of the monthly expenses will be given by,
Salaries + Cost of letting + Cost of utilities per month + Insurance cost
= 4 676.40 + 650 + 125 + 416.70
= $ 5 868.10
Income generated
Assuming the facility admits the maximum number of children, the monthly revenue will
be,
14 × 800 = $ 11 200

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Net profit will be given by,
$ 11 200 - $ 5 868.10
= $ 5 331.90.
Comparing the two cases, we see that the profit in case two is $ 5 331.90 and profit for
case one is $4 655.55. A close look will indicate that option two exceed option one with
$(5 331.90-4 655.55), which is $ 676.35. This is the value to be created if the couple
decides to relocate their business to the town. Because the option of relocating to town
seems to yield more benefits, the couple needs to consider that option and relocate
their business to town.
Part B: Journal Article Critique
QNS 1: Components of Management Accounting
Management accounting is a very important function in any business setting. This
function is critical in providing financial and non-financial information to the entire
management for decision making (Nurhayati and Mulyani, 2015). The major
components of management accounting are discussed below;
a. People. People are the most important resource in all the organizations. This is
one of the components of management accounting and of course the most
important. They are responsible for assembling all the other components and
communicating all the reports arising from the accounting department. In both
companies we have the main decision being made by Keizo Yamaji and Stephen
Jobs.
b. Way of doing things. These are the company’s standard operating procedures
which stipulate the guideline on how the company’s activities are to be executed.
This component is to ensure that the accounting activities are undertaken in a
standardized way. It is the same component that ensures that accounting reports
are consistent from one period to another.

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c. Data. Data is defined as information which is not yet valuable for decision
making. Data is supposed to be analyzed and interpreted in order to add value in
decision making. Most decisions in an organization are based on past and future
statistics. Data is therefore a very important component in management
accounting.
d. Data management and enhancement software. This is the component which
deals with the translation of data from one form to another. Data need to be
analyzed in order to extract meaningful information from it. This component is
used to make the whole process of data manipulation effective and efficient.
QNS 2
Management accounting and innovation are related in one way or the other.
Management accountants are supposed to gather all the relevant information about
costs and present it to the top management for decision making. The accountants are
the ones who make comparison between business performance and the industry
performance and recommend the necessary changes to be made in order to cope with
the industry trend (Van, 2010). The moment a problem is identified in any section of an
organization, the organization makes effort of combating it. In the former case Canon
had to carry out an assessment in order to identify the problem with it copier machine.
During the assessment, experts were employed to assist the company in assessing the
situation.
The regular meetings by the staff of Apple helped group to conceive the most brilliant
idea of all time. From the many meetings between the staff and the management, an
idea was conceived which made Apple develop the most advanced processors.
Surprisingly, the ides was brought up by an employee with no skill in technical field.
What the employees thought as a mere suggestion turned into a profitable idea (Van,
2010).
QNS 3: Lesson the Australian Companies can emulate.
The Australian companies need to appreciate the power of team work. When
employees work together in a coordinated manner, the value of their output is much

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greater. Frequent meetings and braining storming on new ideas is also a good way to
go. Canon came to realize the need of shifting its line of operations when in one
meeting it was proposed so.
More intensified research involving the external and internal environment of the
company. Canon Company reckoned the problems of its copier after a very involving
research (Revellino and Mouritse, 2015)
Companies in Australia need to acknowledge the contribution of their employees and
give credit where it is needed. There is a need to motivate employees and to support
their ideas. An idea of a nontechnical worker is what made Apple the tech giant of today
(Ikujiro & Martin , 1991). Conclusively, Australian companies need to realize the need of
hiring knowledgeable employees who understands what it is like to do business. Canon
was able to regain its glory after bringing in employees who had skills that were required
for the tasks.
References

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Ikujiro , N. & Martin , K., 1991. Towards a new theory of innovation management:A case
study comparing Canon, Inc. and AppleComputer, Inc. Journal of Engineering and
Technology Management, 8(2), pp. 67-83.
Tillman, K. & Goddard, A., 2008. Strategic Management Accounting and sense-making
in a Maltination company. Management Accounting Research, Volume 21, pp. 293-316.
Van, V.-D., 2010. Difference uses of Performance measures: The Evaluation versus
reward of production managers. Accounting, Organizations and Society, 35(2), pp. 141-
164.
Wamalarathma, M. B., 2011. Classification of Costs. Journal of Business and
Accounting, 12(4), pp. 2-22.
Dunning, J.H., 2014. Explaining International Production (Routledge Revivals).
Routledge.
Nebl, T., 2018. Production Management. Produktionswirtschaft. Walter de Gruyter
GmbH & Co KG.
Tseng, S.C. and Hung, S.W., 2014. A strategic decision-making model considering the
social costs of carbon dioxide emissions for sustainable supply chain
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Strantzali, E. and Aravossis, K., 2016. Decision making in renewable energy
investments: A review. Renewable and Sustainable Energy Reviews, 55, pp.885-898.
Nurhayati, N. and Mulyani, S., 2015. User participation on system development, user
competence and top management commitment and their effect on the success of the

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implementation of accounting information systems. European Journal of Business and
Innovation Research, 3(2), pp.22-35.
Revellino, S. and Mouritsen, J., 2015. Accounting as an engine: The performativity of
calculative practices and the dynamics of innovation. Management Accounting
Research, 28, pp.31-49.
Collier, P.M., 2015. Accounting for managers: Interpreting accounting information for
decision making. John Wiley & Sons.
Chenhall, R.H. and Moers, F., 2015. The role of innovation in the evolution of
management accounting and its integration into management control. Accounting,
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Zsambok, C.E., 2014. Naturalistic decision making: where are we now?. In Naturalistic
decision making (pp. 23-36). Psychology Press.

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