Managerial Accounting: Cost, Decision Making, and Income Calculation

This document provides insights into Managerial Accounting, covering topics such as cost categorization, relevant and irrelevant cost, decision making, and income calculation. It also identifies the components of the management accounting system. The document includes detailed calculations and explanations for better understanding. The subject, course code, course name, and college/university are not mentioned.

MANAGERIAL ACCOUNTING

Table of Contents
Part A.........................................................................................................................................3
Answer1.................................................................................................................................3
Answer2.................................................................................................................................3
Answer3.................................................................................................................................4
Answer4.................................................................................................................................6
Answer5.................................................................................................................................7
Part B........................................................................................................................................11
Identification of the components of the management accounting system...........................11
Description of the innovation process in a firm as ‘a process of information creation’, and a
firm needs to organize them ‘to transmit the new information.’..........................................12
Learning from the article’s research finding useful for management accountants in
Australian companies...........................................................................................................13
References................................................................................................................................15

Part A
Answer1
A cost does have relationship with output produced by an organization. The manner of
categorization of cost is dependent on the relationship with output as well as the context in
which same is used by the organization (Johnson and Folkes, 2015). Every factor of
production of goods and services is associated with cost. Thus it is necessary to make these
expenditures in order to run business in appropriate manner. Fixed and variable cost is basic
cost which is incurred by any organization. Another cost which is applied in budgets is
controllable and uncontrollable cost for drafting of budgets (Piao and Kleiner, 2015). Further,
sunk cost is the cost which has been incurred and does not have any impact on the decision of
the manager. Explanation relating to three cost have been provided below in detail manner
with examples.
Fixed Cost: It is a cost which does not change or fluctuate with the change in volume of
output (O’Keeffe, Ozuem, and Lancaster, 2016). Further, they are incurred on a regular basis
and they tend to represent little fluctuation from period to period. It is incurred by the
management regardless of the level of production. For example payment relating to rent,
rates, taxes etc (Więcek-Janka., etal. 2017). In present case of Nanna’s House payment made
as license fees i.e. annual fees of $225 is fixed cost.
Variable Cost: The specified cost changes or fluctuates in direct proportion with change in
output (Otley, 2016). In other words it can be stated that variable cost depends on the output
generated by the organization (Bhattacharya, 2016). Thus, increase in output leads to increase
in cost and on the other hand decrease in output leads to decrease in variable cost (Day,
2015). In present cost of meal and snack are variable expenses.
Operating cost: These costs are relating to day to day operations of the business. It could be
fixed as well as variable (Lees, 2017). Thus, operating cot is not relating to production of a
product but are relating to selling, administration and overhead expenses (Chenhall and
Moers, 2015). For example: rent, marketing expenses etc. In present case laundry and washer
expenses can be stated as operating cost.

Answer2
Relevant and Irrelevant cost plays significant role is decision making of managers (Seuring,
and Goldbach, 2013). Relevant cost can be referred as cost which is not same under different
alternatives (Messner, 2016). The cost which affects the decision of manager is referred as
relevant cost and cost which does not affect are irrelevant cost. Irrelevant cost are
independent of various decisions and are not considered while decision making (Maas,
Schaltegger and Crutzen, 2016). Cost which are same for various alternatives are not
considered and treated as irrelevant cost. The difference between irrelevant and relevant cost
can be understood with an example that in case an individual has two choices and he makes
choice for option A instead of option B than it means than the expenses which will affect the
decision will be considered as relevant cost and expenses which make no difference to the
decision will be considered as irrelevant cost (Noreen, Brewer and Garrison, 2014). Further,
additional cost paid is compare with additional income in order to ascertain revenue from
utilizing additional capacity.
Fixed cost can also be part of relevant cost in case they change due to decision (Weygand
Kimmel and Kieso, 2015 ). Sunk cost, overhead cost and historical cost are examples of
irrelevant cost (Plank, 2018). In present case of Nanna’s House, the expenditure which has
been already incurred on old appliances which cost $440 is irrelevant cost. The reason behind
same is that specified expenditure is having characteristic of sunk cost; the cost already spend
by the management and can’t be reversed whether they move ahead or close their operations.
The cost relating to new appliance i.e. $420 and dryer $380 is required to consider before
taking decision relating to purchasing of appliance. Further, additional energy cost is also
relevant cost and to be considered while taking decision relating to choosing option regarding
laundry activity. The expense made under each option relating to pick- up delivery as well as
any other payments made to laundry and wash are relevant cost. The cost to be paid to other
alternatives i.e. to Red Oak Laundry as well as to Laundromat will also be considered while
taking decision relating to purchase of machine. As in case the cost of providing clothes to
both of these alternatives is lower in comparison to cost spend for purchase of machine than
other alternative will be considered.

Answer3
Three alternatives are available to Nanna’s House organization regarding the laundry services
for clothes of students. Calculation of total cost for all the three methods has been provided
below in detail manner:
Alternative I: Providing clothes to Red Oak Laundry and Dry Cleaning
Statement presenting cost in case clothes are provided to Red Oak Laundry and Dry
Cleaning
Particular Amount in $
Per month payment inclusive of pickup and delivery 52
No. of Months 12
Total cost per annum 624
Alternative II: Providing clothes to Laundromat
Statement presenting total cost in case clothes are provided to Laundromat
Particular Amount in $
Laundry Expenses (Working Note 1) 416
Carriage Expenses (Working Note 2) 174.72
Supplies Expenses (Working Note 2) 140
Total cost 730.72
Working Note 1:
Laundry Expenses
Particular Amount in $
Cost of Laundry per week 8
No. of weeks in a year 52
Laundry cost per annum 416
Working Note 2
Carriage expenses
Particular Amount in $
Expenses per mile 0.56
Travel distance one way 3 miles
Total no. of weeks 52
Total expenses for whole year (both the ways) 174.72

Note : $0.56 is cost of one way per mile; thus in order to calculate the total
cost same has been multiplied with two.
Working Note 3
Cost of utilities
Particular Amount in $
Laundry supplies per quarter 35
No. of quarter in a year 4
Total expenses per annum 140
Alternative III: Purchase of machine
Particular Amount
Purchase cost of washer 420
Purchase cost of dryer 380
Delivery Cost 35
Additional Appliances 43.72
Increase in energy cost due to washer 120
Increase in energy cost due to dryer 145
Total cost 1143.72
Note: The cost relating to old machine of $440 is sunk cost. Thus, same is not considered
while calculating the cost in case new machine is purchased. Further, installation of machine
has been done in free, thus same has not been considered.
Answer4
Relevant cost is affected by managerial decision in specific decision as it is the cost which is
incurred in case of one managerial alternative and neglected in another (Maas, Stefan and
Nathalie 2015). In order to make the decision that whether Frank should accept additional
three students or not along with additional employee, calculation of additional (relevant)
income and expenditure has been done.
Statement presenting additional income from three students
Particular Amount in $
Total fees of three children (W. N. 1) 28800
Cost of meals (W. N. 2) 7008
Payment to additional employee (W. N. 3) 18720
Net Profit 3072

Working Note :1
Total Fees
Particular Amount in $
No. of students 3
Fees per month 800
No. of months 12
Total Fees per annum 28800
Working Note:2
Cost of meals
Particular Amount in $
Cost per meal 3.2
Times meal is provided in a day 2
No. of students 3
No. of days in a year 365
Total cost per annum 7008
Working Note:3
Employment expenses
Particular Amount in $
Salary per hour 9
No. of hours in week 40
No. of weeks per annum 52
Total expenses per annum 18720
From above analysis it can be accessed that company should deploy another employee in
order to accept three additional students as the company will be able to earn additional $
3072.
Answer5
Presently Frank is thinking to move day care from home to rented space so that it can
accommodate up to fourteen children. In case students are increase from 9 to 14 than 2
teaches would be required as one teacher can undertake maximum three students. Thus, the
below calculation has been done by considering same facts:
Alternative I: Move to new place and increase no. of students from nine to fourteen
Statement presenting calculation of net additional income on increase of students

Particular Amount
Additional Income of increased students (working Note 1) 48000
Meal cost (Working Note 2) 11680
Additional insurance 5000
Rental expenses 7800
Utilities cost 1500
Staff expenses (Working Note 3) 37440
Net Income -15420
Working Note: 1
Additional Income
Particular Amount in $
No. of students 5
Fees per month 800
No. of months 12
Total Fees per annum 48000
Working Note:2
Cost of meals
Particular Amount in $
Cost per meal 3.2
Times meal is provided in a day 2
No. of students 5
No. of days in a year 365
Total cost per annum 11680
Working Note:3
Staff Expenses
Particular Amount in $
No. of Staff 2
Salary per hour 9
No. of hours in week 40
No. of weeks per annum 52
Total expenses per annum 37440

Alternative II: Move to new place and increase no. of students from nine to eleven
In these alternative no. of students has been increased from nine to twelve and thus the no.
of additional teachers will be one. The below calculation has been done with same
consideration:
Statement presenting net income if increased is made to twelve students in total
Particular Amount in $
Additional Income of increased students (working note 1) 28800
Meal cost (working note 2) 7008
Additional insurance 5000
Rental expenses 7800
Utilities cost 1500
Staff expenses (working note 3) 18720
Net Income -11228
Working Note: 1
Additional Income
Particular Amount in $
No. of students 3
Fees per month 800
No. of months 12
Total Fees per annum 28800
Working Note:2
Cost of meals
Particular Amount in $
Cost per meal 3.2
Times meal is provided in a day 2
No. of students 3
No. of days in a year 365
Total cost per annum 7008
Working Note:3
Staff Expenses
Particular Amount in $
No. of Staff 1
Salary per hour 9
No. of working hours in a week 40
No. of weeks per annum 52

Total expenses per annum 18720
From above calculations it can be accessed that there is loss in case Frank moves the day
house to rented property. In order to take the decision additional cost which is to be incurred
by the company in case it moves to the rent space in town has been considered only. Thus, it
would be more appropriate for him to operate the facility from house and should not rent
space in town. Further, they can accept three additional students and same will require one
additional staff for their management. The reason behind same is that it will not have to pay
any rent if it accepts additional three students and even the additional expenditure are higher
in comparison to expenses relating to same. The calculations have been provided below for
better explanation.
Statement presenting additional income from three students
Particular Amount in $
Total fees of three children (W. N. 1) 28800
Cost of meals (W. N. 2) 7008
Payment to additional employee (W. N. 3) 18720
Net Profit 3072
Working Note :1
Total Fees
Particular Amount in $
No. of students 3
Fees per month 800
No. of months 12
Total Fees per annum 28800
Working Note:2
Cost of meals
Particular Amount in $
Cost per meal 3.2
Times meal is provided in a day 2
No. of students 3
No. of days in a year 365
Total cost per annum 7008
Working Note:3
Employment expenses

Particular Amount in $
Salary per hour 9
No. of hours in a week 40
No. of weeks per annum 52
Total expenses per annum 18720
It can be concluded from the above analysis that it is more appropriate for Frank to operate
day care house from home and accept an additional three students to attain higher profits.
Part B
Identification of the components of the management accounting system
Management accounting system is the process related to building the decision, planning, and
put the control to help the management and application of strategies of the organization
(Butler and Ghosh, 2015). The success of the company is based on the productive
management of innovation. Innovation can be refers to as a process on which the new
information is created, by which the consumer demand can be satisfied. With this aspect,
Cannon Company and Apple Inc. applied the management accounting system in their
organizations, which enables the management to take the efficient and effective decision.
Cannon Company
This company was established in the year 1933, with the main objective of the production of
the camera. Although, the company has expanded its operations throughout the world and
growth of the company was satisfactory. Instead of this, in the 1960, management of the
company thinks that only through the diversification company can maintain their growth.
Therefore, the management makes the strategies related with the diversification of the
product of the company. With this aspect, the company produced the electronic calculators
and copying machines. The company faced several difficulties, and therefore, management
has to suspend the dividend payment of its shareholders. Company has made the policy of
hiring the mid-career employees from the other firms, to build the counter culture, which
assists in the building of the new information. Moreover, the company has developed the
Mini Copier, for which the company make plans for a feasibility study. In this, cost reliability
approach has been implemented by the company. For addressing the problems, the company
developed camp session and encouraged participation by the other department to discuss the

solutions. From the earlier stage, quality assessment and cost assessment group was engaged
in the task forces. Several strategies are applied by the company for boosting the sale of
product (Bromiler et al.,2015).
Apple Computer
Apple Company is one of the leading organizations of the world.At the time of development
of Mac, only the basic principles set out by the leader. The team member can freely discuss
with each other. Further, they are responsible for the design of the product. The company
makes the plan of inclusion of experienced engineers, hackers, and industrial artist. Further,
the team of Mac occupied a separate building from the remaining department of the
company; however, this idea leads to the conflict among the team and other members of the
corporations. The management has provided the team with an opportunity to set the future
objective; this will motivate the members of the team (Mouritsen and Kreiner, 2016).
By considering both case studies, it has been drawn that the success of the company is based
on the proper management accounting system. The company made various plans, policies,
and strategies for the growth and improvising its performance.
Description of the innovation process in a firm as ‘a process of information
creation’, and a firm needs to organize them ‘to transmit the new
information.’
For the cope up with the competitive environment, modern organization engaged in the
innovative technique, by which they can sustain in the environment. Further, innovation in
management accounting refers as a latest idea, practices, technique that is documented as
modern by the company accepting the innovations. It is considered as a crucial component of
the entity. Further, by considering the case studies of the Apple Company and Cannon
company, it has been identified that innovation assists in the information creation process that
rose through social interactions. It is significantly interactive as the members of the team
belong to a distinct group, background, and culture.
Cannon has made the plan for the adoption of the old product and makes the necessary
changes with the intention to launch it in a new market. Further, in this, the top management
of the company provided great assistance to the development team of Mini Copier. In the
case of Canon, it could be assessed that the company was facing issues relating to drum. The
specified issues were resolved through accepting innovation by accepting the solution from

project team outside the work place. It means the traditional methods of attaining solution
have been replaced by brainstorming new solution by experts’ outsider the organization.
Another example relating to the contribution of management accounting to innovation is the
adoption of new design technologies in order to facilitate miniaturization and automated
assembly. Apart from this, Apple Company developed the Mac as a step ahead in the
personal computer. Initially, the management of the Apple Company did not provide the full
support to the Mac team. It has been already discussed in the above problem, that department
of Max team was separate from the rest of organization, therefore the product was developed
in an isolation and therefore the value creation in the design process was not transferred to the
other division of the company. In the case of Apple, initially, small teams were developed in
order to access the adopted innovative techniques in detail. Thus, the significant innovations
team developed by the management would not reverberate throughout the company.
Moreover, the constant interaction within the team resulted in the optimization of hardware as
well as the management of the company (Uyar and Kuzey, 2016). The same can be
considered as significant example of the contribution of management to the innovation
process. It can be concluded from the above discussion that by considering the changing
requirement in the environment due to the complex business transaction; there is a need of an
appropriate innovative system to mitigate the same.
Learning from the article’s research finding useful for management
accountants in Australian companies
It can be accessed from the strategies applied by the management of Apple Inc that it is
appropriate to develop small teams while adopting any new technique or accepting any
innovative method. The same would assist the team members in sharing ideas with other
members of the team. Further, intense interaction between the member's interaction between
hardware and software members, which eventually optimized the efficiency level of the
whole team. However, it is also necessary for the team to align with remaining teams or
management as separation from the rest of the environment of the corporation could lead to
lack of coordination within the whole organization. The slogan of Canon ‘It’s better to be a
pirate rather than joining a Navy. Let’s be pirates’ (Nonala and Kenney, 1991). It represents
the great exertion of management as top management of Canon was having more unity to
support the development of MC. As, the homogenous structure was followed in the company
which coordinated different parts of the corporation in order to attain the objectives of the
company. The main learning which can be adopted from the strategies adopted by Canon is

that in case adequate unity exists in top management than ease is attained in encouraging
employees and maintaining a positive environment in the organization. Further, the main
focus was made on vision so that same could be translated into a real product. In other words,
attempt should be made to create a reality in order to satisfy the vision. Thus, management
accountant should make emphasis on vision mainly so that expected results could be attained.
Further, the appropriate opportunity should also be provided to outside talent so that optimum
utilization of available opportunity could be attained by the management (Wolf, et al. 2016).
Management accountant requires emphasizing on external as well as internal environment
variants so that the necessity of organization relating to coordination could be assessed in an
appropriate manner. The stable work force environment in Canon can be stated as the main
lesson as stability in work force assist in continuing the operations with smoothness. Above
stated lesson is useful for management accountants as it will support and guide them in
accomplish their obligations with efficiency and in an adequate manner.

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