Management Accounting: Types of Costs, Decision Making, and Components of Management Accounting

This document provides a comprehensive guide to management accounting, covering topics such as types of costs, decision making, and components of management accounting. It discusses fixed costs, variable costs, sunk costs, and opportunity costs, along with relevant and irrelevant costs in purchasing appliances. It also explores the question of hiring an additional employee and provides advice on space options. Additionally, it delves into the planning/budgeting process and the role of management in the innovation process. The document concludes with lessons learned from Australian companies.

MANAGEMENT ACCOUNTING 1
UNIVERSITY NAME
STUDENT NAME
STUDENT ID
COURSE
DATE

MANAGEMENT ACCOUNTING 2
EXECUTIVE SUMMARY.
The purpose preparing this report is to determine various facets of management accounting and
different factors may influence decisions of managers like different types of costs. Different
types of costs like fixed, variable, sunk and opportunity costs are analyses in this report including
their examples from the case. Calculations to determine various costs that will assists managers
make critical decisions are solved to see their behaviors given some conditions like relocating to
new areas. example is a decision which entails advising frank on whether to move to town or
remain in the current place. Such a decision majorly made after considering the costs element if
there is benefit of relocation or non. Components of management accounting is also discussed
herein. Innovation process is also discussed as seen from the case of cannon and apple
computers. Moral lesson learned from that case is also pointed out.
Table of Contents

MANAGEMENT ACCOUNTING 3
INTRODUCTION.......................................................................................................................................4
DIFFERENT TYPES OF COSTS AND EXAPMLES................................................................................4
INFORMATION RELEVANT OR IRRELEVANT TO THE PURCHASE OF APPLIANCE..................6
RELEVANCE OF COSTS......................................................................................................................6
IRRELEVANCE OF COSTS..................................................................................................................7
LAUNDERING COSTS..............................................................................................................................7
OPTION A: PURCHASE OF NEW APPLIANCE.................................................................................7
OPTION B: SELF SERVICE LAUNDRY..............................................................................................8
OPTION C: LAUNDRY SERVICE DELIVERY...................................................................................8
WHETHER AN ADDITIONAL EMPLOYEE SHOULD BE HIRED.......................................................8
LETTER TO FRANK ADVISING THEM ON THEIR SPACE OPTION.................................................9
OPTION A: REMAINING IN THE CURRENT LOCATION..................................................................10
OPTION B: MOVING TO THE LARGER FACILITY............................................................................10
COMPONENTS OF MANAGEMENT ACCOUNTING..........................................................................11
PLANNING/BUDGETING......................................................................................................................11
COST CONTROL.....................................................................................................................................12
DECISION MAKING /PERFORMANCE MANAGEMENT...................................................................13
ROLE OF MANAGEMENT IN THE INNOVATION PROCESS...........................................................13
LESSONS LEARNED BY THE AUSTRALIAN COMPANIES.............................................................14
CONCLUSION.........................................................................................................................................15
REFERENCES..............................................................................................................................................16

MANAGEMENT ACCOUNTING 4
INTRODUCTION
Fixed costs refers to costs that do not change with the change in the costs drivers or level of
business activity for instance license, insurance and installation costs. Variable costs on the other
hand vary with change in the level of activity like mileage costs, sunk costs are costs that are
incurred only once for example renovation costs. Opportunity costs refers to costs of an
alternative that is forgone.
DIFFERENT TYPES OF COSTS AND EXAPMLES.
COSTS EXAMPLE
FIXED COSTS  License fee of $ 225 annually is
considered as fixed cost since it does
not change based on the level of
business activities.
 Annual insurance costs of $ 3840 is
fixed costs because it doesn’t change.
 Utility costs of $50 is fixed. This case
points out that rise will happen each
month because of having the daycare.
 Grand total value of washer & dryer of
$ 420 and 380 respectively are
considered fixed costs because they
will not change with changes in the
activity level.
 Costs of Installation of $43.72 is
another fixed cost doesn’t vary after
installation.
 Costs of delivering the appliance
machine of $ 35 is fixed.it will not
change
 increase in cost of energy due to use
of washer machine of $ 120 is an

MANAGEMENT ACCOUNTING 5
annual fixed costs.
 Rise in the utility costs of the dryer of
$ 145 is a fixed cost (McAfee, Mialon
& Mialon, 2010, pg. 330).
VARIABLE COSTS  It is pointed out that the total costs of
laundry purchases will change
depending on how many times the
orders are placed in a year at a rate of
$ 35 per quarter of the supplies.
 Cost of clothes laundering change
depending on how many times it is
done in a week at a rate of $ 8
 Costs of $0.56 per mile will change
depending on the mileage covered.
 Laundry fee of $ 52 per month is a
variable cost since it will change
based on the number of times they will
utilize the service in a year.
 Snacks expenditure at the rate of $3.20
per each child will vary depending on
the number level of children
registered.
 Collections for the care of the children
at the rate of $ 15 per child will vary
considerably based on the children
who become late.
 Collection for the care unit at the rate
of $ 800 per child is a variable cost
since it will vary depending on the
number of enrollment (LaFrance

MANAGEMENT ACCOUNTING 6
&Pope, 2010, pg. 760).
SUNK COSTS  Expense of renovating home of $
79,500 is considered sunk cost since it
will not be directly recovered.
 Expenditure of the old appliance of $
440 is also a sunk cost
OPPORTUNITY COSTS  Time spend in going to the
laundromat. this has an alternative
foregone
 Using extra space at home for the
appliance will bring in an opportunity
costs(Sipiläinen & Huhtala, 2012, pg.
444).
CONVENIENCE COSTS  Having the delivery service or having
the new appliance at home results in
convenience costs(McDermott &
Stephens, 2010).
INFORMATION RELEVANT OR IRRELEVANT TO THE PURCHASE OF APPLIANCE.
This question is particularly based on the relevant and irrelevant costs of purchasing the new
appliance. The concept of whether costs will be spending as a results of the decision that is
arrived at in the future and whether the costs differ among the options.
RELEVANCE OF COSTS.
The decision of frank to buy the new appliance, costs that is relevant are:
 Costs of acquiring the new appliance.
 Costs that is incurred in the delivery of the new appliance to the premises.
 Costs used in installing that new appliance.
 Costs of energy that will occur as a results of acquisition of the appliance.

MANAGEMENT ACCOUNTING 7
In the event that frank arrives at a decision to consider all possible option, he must take into
account all costs of that options. These costs will therefore be of important (Sadeghinezhad et al.
2014, pg. 39).
 Delivery costs of the laundry service
 Costs of self-service such as cleaner, cleaning and distance
IRRELEVANCE OF COSTS
Costs that have been already spent such as sunk costs are irrelevant in considering various
options in the future.it does not affect future decisions (Wykowska &Schubö, 2011, pg. 650).
 Old appliance costs are irrelevant to the future decision regarding the purchase of the new
appliance.
 Cleaner costs such as costs of acquiring detergent are irrelevant.
LAUNDERING COSTS.
OPTION A: PURCHASE OF NEW APPLIANCE.
Yearly costs of the new appliance $ 109.84 (W1)
Rise in yearly costs of energy ($120 + 145) $ 265
Yearly detergent costs $ 140
GRAND TOTAL COSTS OF THE NEW
APPLIANCE
$ 514.84
WORKING 1.
washer $ 420.00
Dryer $ 380.00
Installation costs $ 43.72
Costs of delivering the
appliance
$ 35.00
TOTAL COSTS $ 878.72
Useful life 8 years
COSTS PER YEAR $ 109.84

MANAGEMENT ACCOUNTING 8
OPTION B: SELF SERVICE LAUNDRY
Driving costs $ 174.72
Laundering costs $ 416.00
Detergent costs $ 140.00
TOTAL ANNUAL
APPLIANCE COSTS
$ 730.72
WORKING 2.
Driving costs= 6 miles’/week x $ 0.56/mile=$ 3.36/week x 52 weeks= $ 174.72
Laundering costs=$ 8.00/week x 52 weeks = $ 416.00
Detergent costs= $ 35/quarter x 4 quarters= $ 140.00
OPTION C: LAUNDRY SERVICE DELIVERY
Costs pick up service
X number of months of the service
$ 52.00
12.00
TOTAL PICK UP COSTS $ 624.00
WHETHER AN ADDITIONAL EMPLOYEE SHOULD BE HIRED.
This is majorly concerned with the incremental analysis with regard to changes (Jain, Groenevelt
& Rudi, 2010, pg. 121).
This is considered in two fold;
 Variation in costs as a results of additional employee
 Feeding additional children
Added number of children will result in rise of income, rise in revenue= 3 added children in the
month at $ 800/month =$ 2400
Change in the costs as a result of additional employee= $ 9/hr. x 40 hrs./week x 4.33 weeks in a
month= $ 207.84

MANAGEMENT ACCOUNTING 9
The additional revenue generated by having 3 more children or students is $ 2,400.00 which is
more than the costs associated with adding an employee and the costs of food for such additional
students, $ 1766.64, frank will therefore have a benefit of $ 633.36 if he adds an additional
employee. Frank should therefore arrange to acquire one more additional employee since it is
clear in the calculation above that he will have net benefit of good amount
LETTER TO FRANK ADVISING THEM ON THEIR SPACE OPTION
KYC COMPZNY,
ACCOUNTANT,
P.O BOX, XXX
NEWDELHI INDIA
FRANK
ADRESS: [phone]
RE: ADVICE ON SPACE OPTION.
Dear frank, I am writing this letter to you to advice on the options raised above concerning
renting space in town, children you should accept and the necessary number of employees that
you must add.my advice will be based on the following analysis (Larsen & Torm, 2011, pg.
545).
OPTION A: REMAINING IN THE CURRENT LOCATION.
6 children 9 children
income $ 4800.00 $ 7200.00
Expenses
meals 415.68 623.52
license 18.75 18.75

MANAGEMENT ACCOUNTING 10
Insurance fee 320.00 320.00
laundry 42.90 42.90
depreciation 265.00 265.00
Rent 0.00 0.00
utilities 50.00 50.00
employee 0.00 0.00
NET INCOME/MONTH $ 3687.67 $ 4321.03
OPTION B: MOVING TO THE LARGER FACILITY.
6 children 9 children
income $ 9600.00 $ 11200.00
Expenses
meals 813.36 969.92
license 18.75 18.75
Insurance fee 416.67 416.67
laundry 42.90 42.90
depreciation 0.00 0.00
Rent 650.00 650.00
utilities 125.00 125.00
employee 3117.60 4676.40
NET INCOME/MONTH $4397.72 $4300.36
WORKINGS 3.
Income= $800 per child/month x 6 children x 12 months
Meals= $ 3.20 /child/day x no. of children x 5 days’/week x 4.33 weeks per month
License =$ 225 yearly/12= $ 18.75
Insurance=$ 5000 yearly/12= $ 416.67
Laundry= $ 514.84/12= $ 42.90

MANAGEMENT ACCOUNTING 11
Depreciation= {79500/25}/12=$ 265.00
Rent=650.00
Utilities=125.00
Employee=$ 9/hr. x 40 hrs. per week x 4.33 weeks per month=$ 1558.80/month per employee.
As shown on the above calculation, I have found out that moving to the large facility in town
does not result in so much difference but instead leads to a slight fall in the income per month. I
therefore recommend that you remain in the current location.
Thanks as you consider my advice.
Yours sincerely
COMPONENTS OF MANAGEMENT ACCOUNTING
PLANNING/BUDGETING
Planning may be defined as the fundamental management role involving formulation of one or
more detailed plans to achieve optimum balance of needs with the available resources. Planning
process involves; identification of goals to be achieved, formulation of strategies to achieve them
and implementing, directing and monitoring the steps necessary to achieve them. Canon
company has put in place the strategies to enter into new markets for the company to widens its
expansions. As a result of this canon company diversifies their operations to include operation in
office machinery through the creation of electronic calculators and copying machines. Canon
originally suffers extreme setbacks especially when the market for its commodities collapsed
forcing the company to shy away from low price market. After several arrangements which
involved organizational restructuring, Canon once again regain the control of the market and
reported an annual income of more than 20% within a period of ten years of its operations. The
shared views among individuals from different backgrounds with distinct abilities offered a
better working environment that boosted the tension required to enable synthesis and new idea
formation. The company enrolled set up a spread team to expand the territory for spawning new
concepts that can actually be realized and put in action by the company (Shaytura et al. 2016).

MANAGEMENT ACCOUNTING 12
COST CONTROL
This is the chief goal oriented function of the management in any organisation. Controlling is the
process of comparing the actual performance with the set standards of the company to make sure
that the activities are executed according to the plans put in place and if not then putting in place
the corrective actions. Canon limited company anticipates to carry out the production process at
a relatively cheaper and economical cost. The company has a plan of beginning to manufacture
and trade in the plain paper copier technology though this comes with ally of resistance from the
industry who are of the view that the company should proceed to deal in the camera production
as it has been doing before. The PPC must produce clear copies, lime weight and compact. Mc
could have been subjected to be use rarely and as a result of this the servicing expenditures could
have been high on the per copy basis. The maintenance price originally was not to be more than
200,000 Japanese Yen, posing a great limitation to the team that designs it. Due to this
overwhelming disadvantage the group faced, a practicable team was set up to look into the basic
necessities required for the proposal to be put into a reality through performance. The doable
group encountered the difficulty of getting into a consensus on the relationship that existed
between reliability and cost. Mitrai, the Managing Director was tasked to undertake the
harmonization process and from this the named "cost Reliability improvement" which aimed at
achieving solution by creating a new concept on how the copier nay be used. The team
eventually settled on decision to keep the cost within the prescribed rates by developing a drum
that will be used in production of several copies after which it us thrown away. As a result of this
concept, the company developed a throw able photoreceptors, a disposable development
equipment and an instant toner-fuser all kept within the approximated rates. The harmonized
relationship that existed between the drum and the beer offered the team several options of
manufacturing the drum at a relatively cheaper cost.
DECISION MAKING /PERFORMANCE MANAGEMENT.
This is the thought process of selecting a logical choice from the available options. For the
decision making process to be effective the outcome of each option as well and all these based
on the items determined which option is the most suitable for a certain situation(Gupta, Pevzner
& Seethamraju, 2010, pg. 890).In the Canon company ,when the design team saw the innovation
process being impossible to go about by introducing the drum idea,Mitirai The managing
director opted to the idea of relating the drum concept with the beer can project and thus

MANAGEMENT ACCOUNTING 13
provoking discussion between his team and finally the group settled on the concept of
developing the drum as the best suitable decision. In the Apple company decision making has
been introduced after intense interactions among the Mac and his team which saw the growth of
new concepts and ideas. The group that resisted the innovation process went into a closed
meeting to help them reach a general agreement to adopt the project (Marques, Gourc & Lauras,
2011, pg. 1060).
ROLE OF MANAGEMENT IN THE INNOVATION PROCESS.
From the study of the Canon and Apple limited companies ,it is of clear view that that the
innovation is the process of creating, inventing or improving a new or an existing idea or a
concept and it is only attainable with the support of the management in any organisation(Zona,
Zattoni & Minichilli, 2013, pg. 299).The administration in the organisation provides an
environment necessary for the innovation process to take place .The management functions that
includes planning ,controlling and decision making are the key in the innovation process.
Planning involves setting up of detailed plans under which the innovation process will take
place. Controlling an art of management involves keeping the costs of production by the
company within the prescribed economical cost for the entity. Decision making by management
involves the selection of the best suitable option from several options. In order for the innovation
process to be successful, the management of the entity must be working in unison at all the levels
of the execution like for the case of Canon company, the management were united (Brennan &
Merkl, 2013, pg. 140). For the case of Apple company it was until after the administration
worked in favour of the innovation process that the company functioned as one i.e. Mac was
established in an isolated environment and with a tainted relationship with the rest of the
company and this delayed the innovation process of the company when compared to the Canon
the management was united .For the case of Apple company it was not until that the management
became united than the work in favour of the innovation process i.e. the Mac project was
established in an isolated environment and with a taunted relationship with the rest of the
company and this widely delayed the innovation process of the Apple company when compared
to the Canon. Canon administration was a largely a uniform structure with clearly defined
hierarchy and excess ability to coordinate different branches of the entity. The goals and
objectives were given into by the taskforce which was able to assist the entire company. In the
Apple company Steve Jobs was mandated to command the resources to be pumped into the Mac

MANAGEMENT ACCOUNTING 14
project. Steve important role was to establish the vision of the project and Mac was tasked to
translate this into a reality through commodity making. In my own view in this largely varying
economy, the whole firms must set an environment where new ideas which are meaningful and
distributed within the firm. The project of Mac undertook this by launching chaos into Canon's
Research and Development wing. This needs a careful and involving execution team (Suharno &
Ratule, 2012).
LESSONS LEARNED BY THE AUSTRALIAN COMPANIES.
The companies that are domiciled in Australia and any other company that have read this article
learns the following lessons. Decision making in a large organisation should involve all the
Performers in the institutions i.e. a single person should not be left to make out decisions in their
own capacities (Fernandez, 2016, pg. 5). In the Apple company, the decision making was
mandated to Steve Jobs who made decisions on his own capacity while ignoring the most
important considerations in which in his capacity was not important. Steve rejected the concept
of using 5.25 inch instead of3.5 inch in flopping disk. Since Steve was using anarchical
leadership style he lead the Mac in launching some key characteristics to individual computing
which was necessary in the year nineteen ninety-eight. Steve Jobs set up several challenging
input for the team to finalise rethinking of the personal computers characteristics. This helped the
company to select on the leadership choice needed for the company though largely the
democratic is considered more convenient running of the organisations as the views of all the
participants in the industry are taken into consideration and this leads to an adaption of a decision
that is widely accepted in the industry, Steve Jobs and The Apple limited company must learn
this to avoid locking out important considerations in the innovation process by entrusting
decision making to just a single person(Robert, Shepherd& Sharfman, 2011, pg. 685).The
companies in Australia must also understand that to avoid conflicts in the decision making
process each decision making unit and its role in the process be identified and clearly outline to
avoid conflicts as a result of bureaucracy in the decision making processe.Furthermore the
companies should learn that the administration should demonstrate effective leadership that will
facilitate informed decision making and the management should be oriented to the innovation
process which will result in the success of the innovation process(Drucker, 2014).

MANAGEMENT ACCOUNTING 15
CONCLUSION
In conclusion management accounting is a vital tool in planning the resources of the entity in a
more efficient and effective way. Computations of various costs is necessary for the management
to put in place measures that aims at reducing the operating cost expenses. Analysing the
expenditure that relates to certain activities the administration will be able to make an informed
decision pertaining particular issues. Innovation and creativity also play an important role for a
business to succeed. Innovation is the process of creating or inventing a new product or making
adjustments on an existing commodity by including new features. creativity is the use of original
ideas to make a commodity. For both innovation and creativity to dominate in an organisation it
requires a goal oriented management to fully advance this process. However, some management
levels are not working in the favour of the innovation process and this has delayed their
implementation.
REFERENCES.
Brennan, N. M., & Merkl-Davies, D. M. (2013). Accounting narratives and impression
management. The Routledge companion to accounting communication, 109-132.
Drucker, P., 2014. Innovation and entrepreneurship. Routledge.

MANAGEMENT ACCOUNTING 16
Fernandez-Rio, J., 2016. Implementing cooperative learning: A proposal. Journal of Physical
Education, Recreation & Dance, 87(5), pp.5-6.
Gupta, M., Pevzner, M. and Seethamraju, C., 2010. The implications of absorption cost
accounting and production decisions for future firm performance and valuation. Contemporary
Accounting Research, 27(3), pp.889-922.
Jain, A., Groenevelt, H. and Rudi, N., 2010. Continuous review inventory model with dynamic
choice of two freight modes with fixed costs. Manufacturing & Service Operations
Management, 12(1), pp.120-139.
LaFrance, J.T. and Pope, R.D., 2010. Duality theory for variable costs in joint
production. American Journal of Agricultural Economics, 92(3), pp.755-762.
Larsen, A.F., Rand, J. and Torm, N., 2011. Do recruitment ties affect wages? An analysis using
matched employer–employee data from Vietnam. Review of Development Economics, 15(3),
pp.541-555.
Marques, G., Gourc, D., & Lauras, M. (2011). Multi-criteria performance analysis for decision
making in project management. International Journal of Project Management, 29(8), 1057-1069.
McAfee, R. P., Mialon, H. M., & Mialon, S. H. (2010). Do sunk costs matter? Economic
Inquiry, 48(2), 323-336.
McDermott, A. J., & Stephens, M. B. (2010). Cost of eating: whole foods versus convenience
foods in a low-income model. Family medicine, 42(4), 280.
Robert Mitchell, J., Shepherd, D. A., & Sharfman, M. P. (2011). Erratic strategic decisions:
when and why managers are inconsistent in strategic decision making. Strategic Management
Journal, 32(7), 683-704.
Sadeghinezhad, E., Kazi, S. N., Sadeghinejad, F., Badarudin, A., Mehrali, M., Sadri, R., &
Safaei, M. R. (2014). A comprehensive literature review of bio-fuel performance in internal
combustion engine and relevant costs involvement. Renewable and Sustainable Energy
Reviews, 30, 29-44.

MANAGEMENT ACCOUNTING 17
Shaytura, S.V., Stepanova, M.G., Shaytura, A.S., Ordov, K.V. and Galkin, N.A., 2016.
Application of information-analytical systems in management. Journal of Theoretical & Applied
Information Technology, 90(2).
Sipiläinen, T. and Huhtala, A., 2012. Opportunity costs of providing crop diversity in organic
and conventional farming: would targeted environmental policies make economic
sense?. European Review of Agricultural Economics, 40(3), pp.441-462.
Suharno, R., & Ratule, M. T. (2012). The analysis of inovation technology implementation of
hybrid corn in Alebo Southeast Sulawesi. Forest, 1(5), 0-45.
Wykowska, A. and Schubö, A., 2011. Irrelevant singletons in visual search do not capture
attention but can produce nonspatial filtering costs. Journal of Cognitive Neuroscience, 23(3),
pp.645-660.
Zona, F., Zattoni, A. and Minichilli, A., 2013. A contingency model of boards of directors and
firm innovation: The moderating role of firm size. British Journal of Management, 24(3),
pp.299-315.