Management Accounting Case Study Analysis

Management Accounting Case Study Analysis
Introduction
This report is a case study based analysis of how management accounting helps in
deciding on the best course of action. The passage of relevant information from the
management accountancy helps individuals take decision on business operations
related to costs and profitability.
Business around the world exists for profit and this profit comes from sales and
estimation of costs. Cost reduction is one way of increasing or maximizing the
profits. Decision on relevant costs is where the concept of management accountancy
comes handy.
Here, we have analyzed the role of management accountancy under two completely
different situations:
1. A retired old couple planning to open a child care business at their home in
Texas needs help on decision related to costs and profitability by using Cost
Benefit Analysis.
2. Literature review of innovation by two industry giants namely Canon Inc. and
Apple Computer Inc. to identify how management accountancy has helped
them achieve what they wanted to.
Management accountancy is a continuous process of information flow (Information
on costs, budgets, revenues, etc.)
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Solution to Part A: Case Study Analysis
In the first part a case study on a retired couple is given. They want to open a child
care facility at their home called Nanna’s House in Olliva, Texas. The couple has
collected information on costs, alternatives and wants us to guide them on the best
course of action.
Solution to Question 1:
The couple has information on various costs that they must incur for running the
business of the child care. These costs are of varied nature. The 3 different types of
costs which have been mentioned in the unit are as below:
Sl
No.
Type of
Cost Cost Description Example from
the case
1 Fixed
Cost
These costs are fixed in nature indicating they do not
change with the level of operation or activity level of the
company. They must be paid at fixed intervals by the
company and generally irrelevant for any decision
making as they are unavoidable and must be paid.
Annual State
License fee of
$255
2 Variable
Cost
These costs are variable in nature indicating they do
change with the level of operation or activity level of the
company. They are paid based on the activity level and
changes with each change in the activity of the
company. These costs are relevant for decision making
as they are avoidable.
Cost of meals
and snacks
per child per
day - $3.20
3 Sunk
Cost
These are costs which have incurred in the past and
now cannot be reversed. They are irrelevant for any
decision making as they have already been paid. They
are generally one time lumpsum payment, the benefits
of which are reaped for a longer period of time.
Cost of the old
appliances -
$440
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Solution to Question 2:
The couple has an alternative of purchasing the appliances from the market and do
the laundry themselves at their home. All the information as given in the case study
is not relevant to the couple.
The information which seems to be relevant to the decision related to purchasing of
the appliances is:
a. Information on costs of other alternatives available for laundry services which
includes hiring of services of Red Oak Laundry and Dry Cleaning or going to
the Laundromat once a week.
b. Information on costs associated with purchasing of appliances:
a. Purchase price of the appliances
b. Cost of Additional accessories needed for installation of the purchased
appliances
c. Installation costs of the appliances
d. Delivery costs of the appliances
c. Useful life of the appliances as that will enable the couple compute the
expense on depreciation.
d. Increase in energy cost by the use of appliances at home
e. Purchase cost of the detergent.
On the other hand, information which is not relevant to the decision are:
a. Purchase price of the old appliances
b. Useful Life of the old appliances
c. Information on renovation cost
d. Information on revenue from each child
e. Information on costs of meals and snacks
f. Information on costs of utilities
These are irrelevant as they are either sunk cost or the fixed cost which will not
change with the decision.
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Solution to Question 3:
The couple at their child care will need to take care of the spoiled clothes of the
children along with blankets and sheets. The couple has identified three alternatives
for the laundry services which are:
Alternative 1: Use the services provided by Red Oak Laundry and Dry
Cleaning at a cost of $52 per month, which includes pickup and delivery of the
clothes.
Alternative 2: Travel to the Laundromat which is 3 miles away from their place
and do the laundry themselves. For this they will have to purchase detergent.
Alternative 3: Purchase the appliances and detergent and do the laundry
themselves at their home only.
The total annual cost to the couple under all the 3 alternatives is computed as below:
Alternative 1: Use the services provided by Red Oak Laundry and Dry Cleaning
Computation of Total Annual Cost
Monthly charges for pickup and delivery
(A)
$52
Number of months in a year (B) $12
Total annual cost (A*B) $624
Alternative 2: Travel to the Laundromat and do the laundry themselves
Computation of Total Annual Cost
Driving Costs
Distance travelled per week in miles (3 miles one way) 6
Mileage Rate as given in the problem $0.56
No. of Weeks in a year 52
Cost of Driving (Distance * Mileage * Weeks) (A) $174.72
Cost of Laundering Clothes
Cost to launder per week $8.00
No. of Weeks in a year 52
Cost of Laundering Clothes (B) $416.00
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) $730.72
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