Managerial Accounting: Analysis and 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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