Managerial Accounting: Analysis and Decision Making

This report analyzes the usage of managerial accounting in quantitative and qualitative situations. It includes case studies on a child care business and two innovative companies. It also explains different types of costs and their relevance in decision making.

Name: Managerial Accounting
Introduction
Managerial accounting or Cost Accounting is an approach to decision making that enables
the same by identifying, measuring, analyzing and interpreting the financial information in a
way that makes decision making for managers easy and effective through the help of
important relevant information on time.
The aim of the managerial accounting reports is to generate important and relevant internal
information that helps the senior leadership team takes business decisions on time readily and
effectively. Here, in this report an attempt is made to analyze the usage of managerial
accounting in two broad fields namely quantitative and qualitative situations.
In this Report, We will be analyzing two different cases:
1. There is a case study of Child care business where we need to analyze the practical
use of accounting information in decision making and achievements of business goals.
2. Secondly, Understanding and analyzing a case study company two giant names in the
field of innovation: Canon,Inc and Apple Computers, Inc.
Part A: Case Study Analysis: Douglas and Pamela Frank
Answer to Question 1:
Cost Accounting can be defined as an approach to accounting which records, collects,
allocates and control the cost of producing goods and services for the firm. The system
assimilates and interprets the income and expenses of the firm for the given time period and
then generate easy to read reports as per prescribed format. These reports help the company
control costs and take necessary timely action on adverse costs.
The different types of costs discussed in the Case Study are mentioned below:
a. Fixed Cost: This is defined as an expense which is fixed in nature and does not
change with the change in activity level of the business in the given period of time.
These costs remain constant and do not vary with level of business operations.
Examples of such costs generally are rent, depreciation, interest, salaries etc. These
costs are irrelevant for decision making as they must be incurred irrespective of the
business operations.
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Name: Managerial Accounting
Examples:
1. Annual license fee of 225$ to maintain the license.
2. Nanna’s house Insurance charges of $3,840 annually.
b. Variable Cost: These can be defined as costs that vary or changes with the level of
activity in the business. These are generally directly related to the level of operation
i.e. greater the activity level, higher will be the variable costs of the firm. These costs
are relevant for decision making as they affect the current costs of the business.
Example:
1. The cost of Meal 7 snack per Child i.e, 3.20 $. It will keep on changing with the
increase/decrease in number of children in the day care facility.
c. Sunk Cost: Sunk cost can be defined as historical costs that has been incurred in the
past and do not now affect the decision making. These costs are already incurred and
can no longer be reversed or recovered by the business and hence irrelevant for any
decision making of the firm.
Example:
The renovation cost of their home for $79,500 is sunk cost as the same has already
been paid for and the renovations have been carried out & the couple believes the
addition has a useful life of 25 years.
We should not consider this cost while making financial decisions for the couple as it
will not be recovered regardless of start/close of the day care facility.
Answer to Question 2:
Costs are expenses that must be incurred to generate revenues. On the basis of their
effectiveness, they can either be relevant or irrelevant.
Relevant costs are those costs which must be considered while making decision as the must
be incurred additionally as contrast to irrelevant cost which has already been incurred and
thus do not affect the current decision making of the firm.
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Name: Managerial Accounting
Following table explains the information relevant and irrelevant to the decision to purchase
the appliances:
Relevant Information Irrelevant Information
Cost of the appliances (both washer and dryer) Cost price of old appliances
Cost of additional accessories Life of Old appliances
Delivery cost of the appliances Information on revenues,
Cost of Installation depreciation, annual fees, etc.
Energy cost of the appliances
Cost of the others alternatives available for
getting the laundry done by the couple.
Answer to Question 3:
There are three options available for the couple to launder clothes. The detailed explanation
and calculation is as mentioned below:
Note: Per month cost for each of the option has been considered.
OPTION 1: RED OAK LAUNDRY AND DRY CLEANING
If the couple considers getting laundry done from Red Oak Laundry, Then:
Total cost involved including pick up & Delivery is $52 per month.
OPTION 2: USING LAUNDROMAT FACILITY
Since,The couple needs to travel 6 miles per week to get the laundry done, first we will
calculate the mileage cost.
Mileage cost per mile: $0.56
Total Distance(to & fro): 3*2= 6 miles
Total mileage cost for a month= 4.33*6*0.56= $ 14.55
Now, Cost of laundering the clothes for a week: $8
Cost of laundering the clothes for a month: $8*4.33= $ 34.64
Cost of purchasing laundry supplies from Megamart per quarter: $35
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Name: Managerial Accounting
Cost of purchasing laundry supplies from Megamart per month: $35/3= $11.67
Total Cost involved in using Laundromat:
$14.55+$34.64+$11.67= $ 60.86
OPTION 3: TO PURCHASE APPLIANCES & DO LAUNDRY AT HOME
Lets calculate the depreciation cost of the Appliances first:
Cost of washer: $420
Cost of Dryer: $380
Cost of Additional appliances needed for installation: $43.72
Delivery cost of Appliances: $35
Total cost of appliances: $878.72
Life expectancy of appliances: 8 years
Depreciation cost per year: 878.72/8= $109.84
Depreciation cost per month; $109.84/12=$9.15
Cost of purchasing laundry supplies per month= $35/3=$11.67
Energy cost of both appliances per year=$120+145= $265
Energy cost of both appliances per month=$22.08
Hence,Total cost of doing in-house laundry=$9.15+$11.67+$22.08=$42.9
Conclusion:
Considering all the three options of laundry, the most reasonable option with lowest possible
monthly cost of laundry is $42.9.Hence,the couple should purchase the appliances and do the
laundry.
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Name: Managerial Accounting
Answer to Question 4:
If the Franks hire an employee for 9$ per hour for 40 hours each week ,They can accept 3
additional children. Let us calculate total Income & Expenditure involved in the same:
Total Income
Monthly Fee charged from one Child $800.00
No.of additional children $3.00
Total Fee charged $2,400.00
Total Expenditure
Meal cost per child per day $3.20
Monthly meal cost per child(5 working days) $69.28
Monthly meal cost for 3 children $207.84
Cost of additional Employee for 40 hours per week $360.00
Cost of additional Employee per month $1,558.80
Total Expenditure $1,766.64
PROFIT PER MONTH $633.36
Thus, the Net Incremental Profit to the couple after the hiring of additional employee is
$633.36 per month. So, they should hire an additional employee.
Answer to Question5:
The Couple has 4 different options:
OPTION A: Stay at Day-Care run at own house with a minimum of 6 children:
Particulars Frequency Amount
No. of child allowed 6
Meal cost per child(5 days a week) per month 69.28
Child fees per month $800.00
Fees from 6 children per month $4,800.00
License fees per month $18.75
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Name: Managerial Accounting
Insurance per month $320.00
Utility cost per month $50.00
Meal cost per month $415.68
Total Cost per month $804.43
Net profitability per month $3,995.57
OPTION B: Stay at Day-Care run at own house with 9 children & extra
Employee:
Particulars
Frequenc
y Amount
No. of child allowed 9
Meal cost per child (5 days a week)
per
month 69.28
Child fees
per
month $800.00
Fees from 9 children
per
month
$7,200.0
0
License fees
per
month $18.75
Insurance
per
month $320.00
Utility cost
per
month $50.00
additional employee cost
per
month
$1,558.8
0
Meal cost
per
month $623.52
Total Cost
per
month
$2,571.0
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Net profitability
per
month
$4,628.9
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OPTION C: Move to a larger new facility to accommodate 12 children
Particulars
Frequenc
y Amount
No. of child allowed 12
Meal cost per child (5 days a week) per month 69.28
Child fees per month $800.00
Fees from 12 children
per
month
$9,600.0
0
Space Rent per month $650.00
Insurance per month $416.67
Utility cost per month $125.00
additional employee cost for 2 employees** per month $3,117.60
Meal cost per month $831.36
Total Cost per month $5,140.63
Net profitability
per
month
$4,459.3
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Name: Managerial Accounting
**since as per state regulations, each adult can supervise no more than 3 children, so they will
need 2 additional employees
OPTION D: Move to a larger new facility to accommodate max 14
children
Particulars
Frequenc
y Amount
No. of child allowed 14
Meal cost per child(5 days a week)
per
month 69.28
Child fees
per
month $800.00
Fees from 12 children
per
month
$11,200.0
0
Space Rent
per
month $650.00
Insurance
per
month $416.67
Utility cost
per
month $125.00
additional employee cost for 3 employees**
per
month $4,676.40
Meal cost
per
month $969.92
Total Cost
per
month $6,837.99
Net profitability
per
month $4,362.01
**since as per state regulations, each adult can supervise no more than 3 children, so they will
need 3 additional employees
CONCLUSION:
The Net profit is maximum when the Couple is continuing its day care facility at Nanna’s
house i.e, their own home with 9 children.
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Name: Managerial Accounting
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Name: Managerial Accounting
Part B: Journal Article Critique
Answer to Question 1:
The most recognized components of Managerial Accounting are budgets, internal
management performance reports that compare actual results to budgets or projections,
reports of income and expenses, reports of the return on investment, and sales analysis. It
consists of the internal systems that an organization uses to measure and evaluate its
processes for the management of the organization.
Following Components have been identified in both the firms for taking decisions efficiently
and effectively:
Canon Inc.
The firm focused on product costing. The feasibility team formed initially identified the
actual direct costs, profits and cash flow of products and services. This was done on
individual product which was MC (Mini Copier). This information became the basis for
allocating overhead expenses to arrive at the true cost of a product or service. With the data
provided by them, Management determine if the product (MC) was profitable and what price
and volume of sales was needed to break even. The Managing Director of Canon Inc, named
it as “cost-reliability Improvement”. The major focus was low cost with high reliability. The
Team focused both on Quality and cost assessment.
Examples: Theory of constraints to control costs, Budgeting system
For Apple Computer Inc: -
A unique benefit of Managerial Accounting is the ability to analyze workflow in a production
process or activities in the sales process. Steve Jobs’ major objective was to find any
obstacles or constraints in these processes that slowed down or prevented his team from
functioning effectively. His team designed information systems to reach their goals. Steve
Jobs worked with his team to meet the specific need of developing a low-cost computer for
the public. He set some difficult challenges for the project team that demanded complete re-
thinking of the personal computers features. In this process, Incredible goals for product
introduction were created and slipped and these encouraged extreme efforts from the team.
The entire focus was given on product-development process.
Examples: Setting up of target costs, performance management.
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Name: Managerial Accounting
Answer to Question 2:
For Canon Inc.
1.Management Style: The top-down-bottom-up iterative management process and concept
development phase, reflects the stage of innovation. The leaders focused on Organizational
restructuring and accumulating a large and diverse staff. Focus was put on improving
technology and monitoring every step to check progress of the task.
2.Planning and control: In the early stage of concept development phase, the emphasis was
on planning in order to avoid the cost of delays and errors. The organizational arrangements
for vertical communication and simultaneous engineering approach to activities in Canon
meant that control was more with Top Management
For Apple Computer Inc: -
1.The Information System: It was under the direct responsibility of Steve Jobs. All the
activities, i.e, risk management, cost and value management were conducted in a mostly
simultaneous manner under his supervision. A development group was created named
“Group Mania” which tried to expand the limits of what everyone thought possible. Apple’s
operating system was developed in isolation and in destructive relation to the rest of the
company.
2.Japanese Culture: In terms of behavior or, ‘the way things are done, multi-disciplinary
project teams Of Apple Inc. play a big part in organizing themselves “to transmit new
information”. The firm believed that engineering and design excellence do not automatically
lead to Innovation. The Team followed Japanese culture which provided a sense of
commitment and purpose in Mac development project.
Answer to Question 3:
Following are some of the specific outcomes or lessons learned from the article’s research
findings:
a) Canon took an established product and redesigned for a larger Market. The Top
Management was very much united with the team in the whole process. However,
Mac proved to be a fundamental step forward in personal computing without much
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Name: Managerial Accounting
support from the Top Management during initial stage. But Both the firms succeeded
in their task.
b) Canon believed in the idea of team work to achieve its objective through joint efforts
of multiple teams who were experts in their own field. It had the policy of hiring mid-
career personnel from other firms to create ‘counter-cultures’ or diversity within the
company to increase potential for new information creation. In Apple, it was the
personnel of the team9Steve Jobs) who created an environment of intense & constant
interaction. He established a factor as to how crucial is the ROI ratio and how the
same benefits the organization and the resultant perspective.
c) Canon appealed to an internal goal reproducing its success in Cameras in a new field.
To the Contrast, Apple had a more universal goal at furthering the PC revolution.
Thus, the case study focusses that the task of the company is to provide an
environment in which innovation can occur irrespective of the goal to be achieved.
Conclusion
The Strategy of both the companies was usually confined to being Number one in every
business they were in and keeping the ROI above some arbitrary number. The role of the
leader in both the corporation was to maximize information within the team as a catalyst. The
report clearly helps in evaluating the Management accounting systems in both the case
studies both practically & theoretically taking live examples of the Corporations. The basic
key is to create an environment in which new information can emerge from chaos. In both the
firms, the innovation process was not deductive, but rather emergent.
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Name: Managerial Accounting
References
Chen, S.S., Huang, C.W., Hwang, C.Y. and Wang, Y., (2019) Voluntary Disclosure and
Corporate Innovation. Available at SSRN 3311932.
Landry, L. (2017). THE INNOVATION PROCESS: A STEP-BY-STEP GUIDE. [Blog]
Retrieved from https://www.northeastern.edu/graduate/blog/innovation-process/ on 15 May
2019.
Nonala, I. and Kenney, M. (1991). Towards a new theory of innovation management: A case
study comparing Canon, Inc. and Apple Computer, Inc. Journal of Engineering and
Technology Management, 8(1), pp.67-83.
Otley, D., (2016) The contingency theory of management accounting and control: 1980–
2014. Management accounting research, 31, pp.45-62.
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