Managerial Accounting Report: Cost Analysis and Decision Making

This report delves into the core concepts of managerial accounting, emphasizing cost analysis, decision-making, and innovation. Part A examines different cost types (fixed, variable, opportunity), relevant and irrelevant information for appliance purchase decisions, and calculations for various option...Read More

MANAGERIAL ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................1
PART A...........................................................................................................................................1
1. Different types of costs discusses in the unit with example....................................................1
2. Relevant information to decision for purchasing the appliance?.............................................2
3. Calculation of cost to be incurred by Franks as to choose different options...........................2
4. Calculation and interpretation of additional cost to be incurred by Franks for employing
additional employees for taking decision regarding whether to employ additional employees or
not................................................................................................................................................3
5. Calculation to be used to take decision regarding number of children to be accepted and
number of employee to be hired..................................................................................................4
PART B............................................................................................................................................5
1. Identification of components of management accounting system...........................................5
2.Explanation of how management accounting contributes to the innovation process...............6
3. Findings from the journal articles that could management accountant...................................7
CONCLUSION ...............................................................................................................................8
REFERENCES................................................................................................................................9

INTRODUCTION
Managerial accounting, most commonly called as cost accounting is the systematic
process of identifying, measuring, examining & analysing, interpreting and communicating the
information to the business managers for the purpose of attainment of organisational goals and
objectives. It is different from the financial accounting as the managerial accounting's main
motive is to help the internal management in its decision making while financial accounting is
more concerned with reporting and communicating the financial information to outside
stakeholders (Chovancova, Krejza and Vankova, 2019).
The present project report will highlight the different types of costs, relevancy and
irrelevancy regarding the purchase decision related to appliance, decision regarding hiring of
new employee. In the other section of the report, it will cover the critical evaluation of role of
management accounting and the provisions and components of the management accounting in
the innovation process of the two different companies based on a journal article.
PART A
1. Different types of costs discusses in the unit with example
Cost can be categorized in different types like fixed costs, variable cost, period cost,
product cost, sunk cost, etc. the present unit includes the following types of costs:
 Fixed cost: Fixed cost can be defined as a cost which is incurred by a business
organisation. In management accounting, these costs does not change with increase or
decrease in the production volume. Although, these remains constant over the period. To
break even the fixed cost, more revenue is needed to generate by the business so that per
unit of fixed cost could be lower down. This is done by the way of economies of scale
(Latan and et.al., 2018).
In the present unit, utility cost of daycare i.e. $ 50 per month can be consider as a fixed cost. This
cost is to be incurred by the Franks on monthly basis rather than on the basis of number of child
cared by them. Therefore it would be consider as a periodic cost or the fixed cost.
 Variable cost: Variable cost are those that keeps changing with the change in number of
volume of production or number of services provided by a company. These cost remains
constant on per unit basis (Horton and de Araujo Wanderley, 2018).
In the present case the cost of meal can be consider as variable cost. The Franks need to incur
$3.2 per child per day on meal. The change in cost would be based on number of child served by
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them. Further, it would remain unchanged on per child basis. Therefore, these will be consider as
variable cost.
 Opportunity cost: Opportunity cost refers to the cost that would need to be incurred by
a business if it chooses the second best alternative. These costs are not actually incurred
by a business. Rather, they would have been incurred if it selects the next best
alternative (Rikhardsson and Yigitbasioglu, 2018).
In the present unit, Franks have 3 options, whether to purchase the equipment, or to select
Red Oak for laundering the clothes or to select Landmark for self laundering the cloths. The cost
of third best alternative would be consider as opportunity cost for Franks. Like if the Frank
chooses option 1 , it would cost 52 for which it will have to forego the benefit of choosing option
2 &3. In all the three cases, the third option seemed to be the most cost effective option as it
would cost the Frank only 31.24 as against the option 2 in which it would cost it 50.39.
2. Relevant information to decision for purchasing the appliance?
Relevant information: Relevant information can be defined as a material information
that are needed to be consider in order to take any decision. In the present unit, information
regarding cost of old washer and dryer, cost to be incurred for launder the cloths through Red
oak, each cost that would needed to be incurred for self service laundering like convenience cost,
cost of purchasing laundry supplies, purchase, installation and energy cost of washer and dryers,
etc. would be relevant cost as they would be taken into account while taking decision about
whether to purchase the appliance or not.
Irrelevant information: Irrelevant information are all those information that would not
be consider while taking any specific decision in a business organisation. These can also be
consider as immaterial information for a specific decision making process (Bedford and Speklé,
2018).
In the present unit for the purpose of taking decision regarding purchase of appliance all
information other than cost to be incurred in various alternatives of purchasing like cost of meal,
purchasing cost of home, information regarding increase in cost, information of annual
subscription fee of license, etc. are irrelevant information regarding the decision making process
of purchasing the appliances.
3. Calculation of cost to be incurred by Franks as to choose different options
Option 1 launder the cloths by Red Oak company
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pick up and delivery cost 52
Option 2 Launder cloths in Laundromat
particular amount amount
Conveyance cost 6.72
cost of launder 32
cost of laundry supplies 11.67
total cost 50.39
Option 3 purchase of appliance
particular amount amount
cost of washer 420
cost of dryer 380
installation cost 43.72
delivery cost 35
total purchase cost 878.72
calculation of per month cost to be incurred for purchasing appliance
Particular Amount
depreciation per month 9.15
energy cost of dryer 12.08
energy cost of washer 10.00
total cost per month 31.24
IInterpretation
From the above calculations, it can be interpret that there are various options for the
company regarding purchase of appliances. The most economic option i.e. option which would
result in incurring the minimum cost to the company, should be selected by the Franks.
From the above calculation, it can be analysed that if the day care service center chooses
option 1 i.e. to launder cloths from Red Oak, it would need to incur a per month cost of $52.
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further, it would need to incur a cost of $50.39 per month if they choose to self launder the cloths
at laundromat. In addition, if they decides to purchase both washer and dryer, they would need to
incur a cost of $31.24 per month.
As the purchase of appliances would result in incurring a minimum amount of cost by the
Franks, it should decide to purchase the appliance rather than launder from Red Oak or
Laundromat.
4. Calculation and interpretation of additional cost to be incurred by Franks for employing
additional employees for taking decision regarding whether to employ additional
employees or not
calculation of net earnings of day care after employing new employees
particular amount amount
fee from day care 7200
less: cost to be incurred
license cost 18.75
cost of new license 18.75
employment cost 1440
cost of meal 864 2341.5
net income 4858.5
calculation of present net income of day care
particular amount amount
fee from day care 4800
less: cost to be incurred
license cost 18.75
cost of meal 576 594.75
net income 4205.25
From the above calculation relating to change in cost of daycare, it can be interpret that if
they employ more employees, they would need to incur an additional cost. Although, with new
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employees, Franks would be able to serve more children, with the same context, it would
increase a license cost of the company.
Furthermore, by netting all the additional incomes and expenses, it can be interpret that
Franks should employ the new employees as it would result in enhancement of total income of
the Franks
5. Calculation to be used to take decision regarding number of children to be accepted and
number of employee to be hired
calculation of net earnings of day care if they cares 6 children
particular amount amount
fee from day care 7200
less: cost to be incurred
license cost 18.75
cost of new license 18.75
employment cost 1440
cost of meal 864
insurance 320 2661.5
net income 4538.5
calculation of present net income of day care if they care for 9 child
particular amount amount
fee from day care 4800
less: cost to be incurred
license cost 18.75
cost of meal 576 594.75
net income 4205.25
calculation of net earnings of day care by caring for 14 children
particular amount amount
fee from day care 11200
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less: cost to be incurred
license cost 18.75
cost of new license 37.5
employment cost 4320
cost of meal 864
utility cost 125
rent 650
insurance 416.66 6431.91
net income 4768.08
Interpretation:
From the interpretation of the above calculation, it can be interpret that with the change
in number of children to be served by the day care, all the variable costs will be change. Further,
with the increase in number of child, the company would need to incur several extra costs like,
cost of employing extra employees, cost of rent, in case, they serves 14 children, cost of taking
more license, etc. further, it would also result in earning extra income from the serving fee of
children. From the interpretation of above calculation, it can be interpret that, the Frank would
earn the maximum income by serving 14 children.
Further, the in case if they serves 14 children, they would need to employ 3 more
employees. In addition, it would also need to incur additional rental expenses and insurance
expenses as well.
PART B
1. Identification of components of management accounting system
Managerial accounting primarily revolves around three basic components that are:
 planning,
 controlling
 decision making
Almost all the companies around the world have their requirement based on these
components right from the very beginning (Nartey, 2018). The Cannon applied the components
of managerial accounting it decided to venture into different business other then camera industry
which was mini copier machines. For example, the top management of the company consisted
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a team of 8 people belonging to different department for determining the cost and reliability
relationship of mini copier. At this stage, management accounting helped the company in
deciding what would be the best process of producing and designing the mini copier which is
cost effective, requires less service and maintenance. Management accounting helped it in
undertaking its one of the most revolutionised program called as cost reliability improvement
which has made the organisation as one of the most popular innovator of all time.
Another company Apple Computer, Inc. after the failures of its two products Lisa and
Apple II , it came with a product called as Macintosh, a low cost personal computer for the
public. Although, the company did not use completely original technology for the new product
but it made the product available to the public at insanely lower prices. This was achieved with
the help of management accounting within the organization. The cost accounting helped the
company in analysing and interpreting the cost and benefits of producing personal computer at
the most competitive prices and selling them in the market. This made Apple extremely popular
in the world and is now of the big 4 technology company of the world (Towards a new theory of
innovation management: A case study comparing Canon, Inc. and Apple Computer, Inc., 1991).
According to Kothari (2019) management accounting is based on the intuitive decision
making and is subject to personal bias of the managers. This means that analysis and
interpretation of the information depends completely upon the capability of interpreted and
business analyst which could affect the effectiveness of the management accounting as a
decision making tool. For example, Steve jobs took decisions based on personal bias when he
decided against providing the expansion slots on the Mac- original which would have allowed
third party vendors to develop an add on equipment.
2.Explanation of how management accounting contributes to the innovation process
In the article, innovation has been described as the information creation process that
develops due to the social interactions. Management accounting is of utmost significance to the
innovation process because whenever a new process or product is developed or any idea has
been conceived of developing new product, then various costs are incurred related to research,
designing, feasibilities studies, etc., for which budgets are prepared and according to which the
activities are undertaken.
Above all, the problem solving and decision making is done by the help of management
accounting. This field of accounting helps an organisation in determining what amount of
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resources should be funnelled in a particular project. Innovation by the both the companies
along with the application of management accounting which helped them in surviving for so
long in the market. The decisions regarding the production and selling of mini copier and
Macintosh personal computers was formed explicitly by considering their costs and profits that
would be generated by incurring those costs. For example, Apple's CEO decided that most of its
resources should be put into development and production of Macintosh while the top
management of Cannon were of view that homogeneous structure should be maintained in
organisation. The innovation in Cannon in the form of new version of established product for a
larger market whereas Apple took forward the technology in terms of personal computers.
Thus, it can be said that management accounting helped both the company in taking
rationale decisions for their respective businesses which in turn made them cost effective and
cost efficient. Management accounting helps managers right from the planning stage of
developing new product till the controlling stage where it is monitored by the way of estimated
figures and budgets.
According to Quinn and Hiebl, (2018) undertaking innovation process is not as smooth
as it seems. It involves great expenditure for conducting decisions, various studies are to be
conducted, numerous trial and errors occur before mangers decides to launch a new process or
product. The information creating process is insanely time consuming process which could have
serious effects on the other core operations of an organisation. It may result into vanishing up
scare resources for developing something which could not be sell in the market. Business risk
and financial risk are two things which are kept at stake for producing new innovative products.
3. Findings from the journal articles that could management accountant
One thing that management accountant can learn from the Apple company is that clear
and well defined leadership of Steve Jobs who had the vision of creating something insanely
new. The CEO was convinced and analysed the market the situations perfectly which allowed
him to invest more of company's resources in Mac project.
This quality could be adopted by the management accountant while analysing and
interpreting the cost related data with more precision which could help it in drawing more
effective conclusions. This means that reports communicated by the management accountant
would help the management in taking more rationale and optimum decisions for the business.
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Another lesson that could help a management accountant is to avoid personal biasses
while taking decisions. Apple's former CEO Steve Jobs when decided against providing
expansion slots in his products which could allow other to produce an add on equipment. Thus, a
management accountant should not allow its personal judgement and biasses that could affect the
decisions adversely as such actions can significantly affect the growth of the business (Towards
a new theory of innovation management: A case study comparing Canon, Inc. and Apple
Computer, Inc. 1991).
There are certain things from he Cannon which could help a management accountant in
its professional life. One of the thing is Cannon's top management was more concerned with the
clear and well defined structure should prevail in the organisation. This is necessary for effective
communication within the company as well such well defined structure increases the efficiency
of operations of firm.
Another impressive thing that Cannon applied while undertaking the project of Mini
Copier MC is its comprehensive problem solving approach. For producing a cost effective MC it
formed a team of 8 people belonging to different department from the inputs of which , the
company was able take more rationale decision. The problem of producing the MC with lowest
cost was able to be solved when the inputs were taken in which it was said that entire drum could
be discarded. This thought was processed further by design team which helped the company in
producing inexpensive MC.
From this, two things can be learned by a management accountant. First, is that it should
always use different ways of solving the problem by involving people from different level in the
department so that better decision could be taken by the management accountant. Another thing
which could be learned by the management accountant is that it should be creative in its
approach as well as it should promote the same while working with the people in an
organisation. The ability to work in a team could be learned by the management accountant by
watching how Cannon's top management involved people in their decision making regarding the
development of new product called as Mini Copier.
CONCLUSION
From the above project report, it can be summarised as that management accounting is
the system where managers uses the accounting information to facilitate themselves for the better
decision making. The main objective of management accounting is to help the managers in
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planning, decision making and controlling by identifying early signs of problems. The report
also concluded that there are different types of costs in a business such as fixed costs, variable
costs, opportunity cost which means the cost of next best possible alternative, direct and indirect
costs. All these costs are taken into consideration while forming a rationale decisions for the
business. Further, in the report it was also concluded that there are some information which is
relevant and some which is irrelevant. Irrelevant information should be ignored for reaching
more effective conclusions. In other section of the report, it was summarised that management
accountant shall have problem solving skills, it must analyse and interprets cost related data with
highest precision, shall avoid personal biasses in taking decisions.
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REFERENCES
Books and Journals
Latan, H. and et.al., 2018. Effects of environmental strategy, environmental uncertainty and top
management's commitment on corporate environmental performance: The role of
environmental management accounting. Journal of cleaner production. 180. pp.297-306.
Horton, K. E. and de Araujo Wanderley, C., 2018. Identity conflict and the paradox of embedded
agency in the management accounting profession: adding a new piece to the theoretical
jigsaw. Management Accounting Research. 38. pp.39-50.
Rikhardsson, P. and Yigitbasioglu, O., 2018. Business intelligence & analytics in management
accounting research: Status and future focus. International Journal of Accounting
Information Systems. 29. pp.37-58.
Bedford, D. S. and Speklé, R. F., 2018. Construct validity in survey-based management
accounting and control research. Journal of Management Accounting Research. 30(2).
pp.23-58.
Nartey, E., 2018. Determinants of carbon management accounting adoption in Ghanaian
firms. Meditari Accountancy Research. 26(1). pp.88-121.
Kothari, S. P., 2019. Accounting Information in Corporate Governance: Implications for
Standard Setting. The Accounting Review. 94(2). pp.357-361.
Carlsson-Wall, M., Håkansson, H. and Kraus, K., 2018. Introduction: Accounting, Innovation
and Inter-Organisational Relationships. In Accounting, Innovation and Inter-
Organisational Relationships (pp. 7-17). Routledge.
Chovancova, J., Krejza, Z. and Vankova, L., 2019, February. Bank Guarantees of Construction
Projects, their Concept in Management Accounting and Role in Regional Development.
In IOP Conference Series: Materials Science and Engineering (Vol. 471, No. 2, p.
022017). IOP Publishing.
Quinn, M. and Hiebl, M. R., 2018. Management accounting routines: a framework on their
foundations. Qualitative Research in Accounting & Management. 15(4). pp.535-562.
Online
Towards a new theory of innovation management: A case study comparing Canon, Inc. and
Apple Computer, Inc. 1991.[Online] Available through :
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