Managerial Accounting – Case Study Analysis

Managerial Accounting – Case Study Analysis
Introduction
The report is an analysis on the perspective of managerial accounting in
terms of how it helps in financial analysis and non-financial analysis in real life
situations. The managerial accounting helps individuals take decisions pertaining to
problems in real life. Here, we have used the concepts of managerial accounting in
two distinct situations:
Situation 1: A couple by the name of Douglas and Pamela Frank wish to open a day
care at their home in the town after their retirement. They want to analyze the
profitability of the venture using the concepts of managerial accounting.
Situation 2: A case study analysis of how two companies Canon Inc. and Apple
Computer Inc. created innovative products by combining their internal capabilities
and information from management accounting. This is more of a literature review to
understand the application of the concepts of management accounting.
Part A – Case Study Analysis
The couple who wishes to open a day care for children at their home “Nanna’s
House” has given information on estimated costs and revenues and wants us to
analyze the profitability of the idea based on facts and figures. We will use the
concepts of managerial accounting to assist them in taking effective decisions.
Solution to Question 1:
The 3 different types of cost described in the case study are as under: -
a) Cost – fixed in Nature – These are costs which are lumpsum, generally
onetime payment in a year. They are pre-determined and must be paid on
the specified date to avoid penalties. These are stagnant and do not
changes with the change in the activity level of the firm. As far as decision
making is considered, these costs are irrelevant as they have been
incurred and thus unavoidable. For Frank couple, the annual license fee of
$225 to be paid to the state for running the day care facility is an example
of fixed cost. This will not change with change in number of children and is
fixed annual payment to the state for running the business.
b) Cost – variable in nature– These are recurring expenses for the business
based on the actual activity level of the concern. These are costs which
are paid on the basis of change in some variable on which the cost are
dependent. As far as decision making is considered, these costs are
relevant as they will be incurred based on the decision made. For Frank
couple, the cost of the meal and snack @ $3.20 per child is variable on the
number of children enrolled at the facility run by them.
c) Cost – Sunk in nature–Sunk costs are those costs which have already
been incurred in the past and cannot be reversed now by the concern.
They have been paid historically. These costs generally are large
payments whose benefits are derived by the firm for a larger span of time.
For any decision making, these costs are irrelevant as they have been

Managerial Accounting – Case Study Analysis
incurred and will not change now with any decisions. For the Frank couple,
the renovation cost of $79,500 that has been paid to enhance the life of
the house by 25 years is a perfect example of sunk cost. This has been
incurred, is a large payment, benefits for 25 years will be accrued and
irrelevant for any decision making.
Solution to Question 2:
In context to purchase of the appliances by the couple, the analysis of the cost is as
below:
The couple wishes to purchase appliances for doing laundry in house themselves.
The information or costs that are relevant to the purchase of appliances are costs
which are variable or semi variable in nature as these will be affected by the decision
of the couple. Here, for the couple the following costs or information will be relevant
for effective decision making:
 Cost of the appliances
 Installation cost of the appliances
 Cost of the accessories required for the appliances
 Increase in energy costs due to the use of appliances
 Life of the appliances to understand the implication of depreciation
 Annual cost outlay when availing other available options for doing laundry,
including using the services of Red Oak @ $52 per month or doing the
laundry at the nearest Laundromat.
Further, the information or costs which are irrelevant for the decision on purchasing
the appliances are:
 Cost of the old appliances
 Life of the old appliances
 Insurance Cost
 Cost of the renovation made
 Cost of the meals and snacks
 Utilities cost for the children.
Solution to Question 3:
At the day care facility that the couple wishes to open, they will have to arrange for
the laundry of the spoiled clothes of the children enrolled at the facility. The couple
has three different options to this effect and the decision on the same will be based
on the lowest cost outlay to the couple.
The three available options to the couple are as below:
a. Purchase appliances (washer and dryer), purchase detergent and do in
house laundry by them at the day care facility only.
b. Hire the services of red Oak laundry services that will pick up the stained
clothes and deliver the washed clothes at a charge of $52 per month.
c. Do the laundry themselves by purchasing detergent and availing the
service of the Laundromat which is 3 miles away from their home.

Managerial Accounting – Case Study Analysis
We will now compute the total annual cost for the couple under all the 3 options.
Option a: Purchase appliances (washer and dryer), purchase detergent and do
in house laundry by them at the day care facility only.
Computation of Total Annual Cost
Cost of the Washer $ 420.00
Add Cost of the dryer $ 380.00
Add Installation Cost of the accessories $ 43.72
Add Delivery Cost of the appliances $ 35.00
Total Costs $ 878.72
Life of the appliances (in years) 8
Annual expenses on the appliances $ 109.84
($ 878.72 / 8) = $ 109. 84
Add Incremental Yearly Cost on the Energy $ 265.00
($120 + $ 145) = $ 265
Add Annual Expense of the detergent ($35 per qtr * 4) $ 140.00
Total Yearly Cost for the Equipment $514.84
Option b: Hire the services of red Oak laundry services that will pick up the
stained clothes and deliver the washed clothes at a charge of $52 per month.
Computation of Total Annual Cost
Pick Up Charges per Delivery Service per month $ 52.00
Multiple Number of months in a year 12
Total Annual Expense to pick up charges per delivery service $ 624.00
Option c: Do the laundry themselves by purchasing detergent and availing the
service of the Laundromat which is 3 miles away from their home.
Computation of Total Annual Cost
Driving Cost (6 m/wk. x $ 0.56/mile = $3.36/week x 52 weeks $ 174.42
Add Laundering expense ($8.00 per week x 52 weeks) $ 416.00
Add Expense On detergent ($ 35 per quarter x 4 quarters) $ 140.00
Total Annual Cost to the couple $ 730.42
From the above computation, we see that the couple has the lowest possible cost of
$514.84) in option “a” which is “Purchase appliances (washer and dryer), purchase
detergent and do in house laundry by them at the day care facility only”, hence the
couple should go for purchasing the appliances and do the laundry themselves at
their facility only.