Management Accounting Case Studies: Analysis, Costs, and Decisions

MANAGEMENT ACCOUNTING 1
MANAGEMENT ACCOUNTING CASE STUDIES
By Student’s Name
Class
Professor
University
City, State
Date

MANAGEMENT ACCOUNTING 2
Part A: Case Study Analysis
1. Three types of costs and specific examples for each
When accountants consider the behaviour of costs, various types of costs can be
identified from the case study in question. Fixed costs are those costs that do not change
regardless of the units of goods or services produced. An example of such a cost in the
childcare business is the annual license fee of $225. According to Weygandt, Kimmel and
Kieso (2015); Ainsworth & Deines (2019); Brewer, Garrison, and Noreen (2015), variable
costs involve those costs that change in total depending on the level of activity in the
business; they may vary proportionately or directly. An example of variable costs in this case
study is the total amount spent on snacks at $3.2 per child. It will change provided that the
number of children changes. Additionally, the mileage costs going at $0.56 per mile
constitutes a variable cost as it will change depending on the number of miles covered and so
does the total cost of the couple doing the laundry themselves at $8 per week as it varies
proportionately with the number of weeks in which the couple could have done laundry
activities.
Another type of cost identified in this case study is the sunk costs. These are costs that
have already been incurred, and they are irrecoverable (Kaplan and Atkinson, 2015). That
includes the amounts spent on the renovation activities in the firm, which is $79,500. There is
an additional sunk cost in the cost of old appliances totalling to $440.
2. Information relevant or irrelevant to the decision of purchasing appliances
When the Franks make their decisions, they must consider whether information on
individual costs is important. For them to consider purchasing costs, the Franks may need
to determine whether the decisions may be incurred because of future decisions or
whether the costs are differing from alternative costs that are available to them. If costs
can be incurred because of decisions the Franks may make in future or they are any

MANAGEMENT ACCOUNTING 3
different from the available options, then they are relevant costs (Crosson and
Needles,2013). Therefore, information on the costs of new appliances, their installation
and any additional costs on utilities incurred by the Franks will be relevant to their
decisions on making purchases of new appliances. The opportunity cost of buying new
appliances is also a relevant cost as related with what van Baal, Meltzer, and Brouwer
(2016) note. In any project, the opportunity cost is used in the analysis because it
considers the cost of acquiring the equipment and the expected return of buying the
appliances. If the Franks decide to consider using another laundromat, the cost of pick-up
and delivery will be a relevant cost. Finally, a decision to do the laundry themselves would
make the cost of detergents significant for consideration.
In case the costs in consideration do not meet any of the two above discussed
criteria, they are considered to be irrelevant costs. For example, the sunk costs identified
in renovation and cost of old appliances are not pertinent to the decision-making at hand.
Sunk costs do not play a role in the decision (Roth, Robbert, and Straus, 2015). Secondly,
the future variable costs that may not differ under different courses of action by the
managers are irrelevant. The fixed cost of a yearly license fee ($225) is also irrelevant in
this case. The book value of the old equipment or its disposal thereof will be considered
irrelevant as they are sunk costs and that they contribute to the arising cashflow of the
current decisions respectively (Board of Studies the Institute of Chartered Accountants of
India, n.d). If the Franks do not choose to do the laundry themselves or transport it to
another laundry, then both transport cost incurred due to pick up and delivery of clothes,
and the cost of detergents will be irrelevant to the decision at hand.

MANAGEMENT ACCOUNTING 4
3. The cost of cloth laundering
There are three possible options to consider, depending on the relevance of the costs
considered above. Therefore, it proves crucial to consider the computation of the cost of
the Franks trying to launder the clothes by themselves, purchasing new equipment.
Alternatively, they may decide to deliver the children’s clothes to another laundromat.
The working for three options listed above are shown below:
Option 1: Purchasing appliances
Step 1
Compute the cost of appliances annually:
Sum the costs of:
The washer= $420, Dryer = $380, Installation = $43.72 Delivery = $35
The sum = 420+380+43.72+35= $878.2
However, appliances have an expected life of 8 years. Divide the sum by eight years
The resultant average annual appliance cost is $ 109.84
Step 2
Add an increase in energy costs
Find the annual cost of energy
Sum increases in costs due to washer and dryer (120+ 145) = $265