Managerial Accounting: Benefits and Case Studies

This report discusses the benefits of Managerial accounting through two specific cases. The first case involves a retired couple who wishes to open a day care facility and evaluates the profitability of the business. The second case analyzes the role of management accounting systems in promoting innovation in Canon, Inc. and Apple Computer, Inc. The report covers relevant and irrelevant costs, computation of profits, and recommendations for decision making.

Name: Managerial Accounting
Introduction
Managerial accounting can be defined as a modern approach to accounting helps the
management and leaders of the company in effective decision making by providing reports
and documents that present information in a meaningful format. These reports guide the
management and leaders in taking informed decision and improve the efficiency of the
company.
In this report we will see the benefits of Managerial accounting through two specific cases
that are different and uses aspects of managerial accounting in concluding:
Part A: Here, a retired couple wishes to open a day care facility at their home called as
Nanna’s House and wants to evaluate the profitability of the business and make informed
decisions based on the reports. This is a practical use of managerial accounting.
Part B: Here, an attempt will be made to analyze the theoretical aspect of a case from the
perspective of the Management accountant.
Part A: Case Study Analysis: Douglas and Pamela Frank
Douglas and Pamela Frank, a retired couple, decided to start a Child care Business at
their home called Nanna’s House and need some assistance for decision making and
analysis on the profitability of their proposal. The following are the recommendation for the
questions specifically asked:
Answer 1:
Costs are expenses that must be incurred to avail a product/service. They affect the profits
of the organization directly and are inversely proportional to the profits. Thus, higher the
cost, lower the profits and vice-versa. They are relevant to decision making and must be
evaluated for effective decisions. There are various types of cost including Fixed Cost,
variable cost, Semi-variable cost, sunk cost, relevant cost etc.
Below are the 3 types of costs along with examples that have been mentioned in the given
case study:
a. Sunk Cost: These costs have already been incurred by the company and cannot
be recovered. The benefits derived out of expenses which are sunk pertain to a
longer period of time. These are irrelevant cost for decision making.
Example from Case Study: The renovation cost of $79,500 is sunk cost as the
same has been paid and the benefit will be derived for 25 years.
b. Fixed Cost: These costs are those which do not change with the changes in
production volume within a relevant range. In other words, fixed costs are locked as
it is for as long as the operations stay within a certain pre-determined size.
Example from Case Study: Fixed Annual State Fee of $225 to be paid by the couple
to the state is fixed in nature as it will not change with no. of children, no. of
employee or any other factor.
c. Variable Cost: These are costs that changes with the change in the level or activity
of the concern. They are directly related to the activity of the company.
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Name: Managerial Accounting
Example from Case Study: The variable cost of meals and snacks @ $3.20 per
child is variable and directly related to the number of children enrolled at the facility.
Answer 2:
Relevant costs are costs which are avoidable in nature and are incurred when making
business decisions for the company. The identification of relevant cost helps to eliminate
unnecessary information or cost that would otherwise complicate the decision-making
process.
The information here in the given case study that is relevant to the decision of purchasing
the appliances for the couple is:
 Purchase cost of the appliances
 Cost of Additional accessories needed for installation of the appliances,
 Installation & Delivery costs of the appliances
 Life of the appliances
 Variation in energy cost after using the appliances at the facility.
In addition to this, there are irrelevant costs which are unavoidable in nature and generally
include the sunk cost and fixed cost which do not change with activity levels or costs which
have already been incurred.
The information here in the given case study that is irrelevant to the decision of purchasing
the appliances for the couple is:
 Purchase price of the old appliances,
 Life of old appliances.
Answer 3:
The couple will have to make good the clothes of the children that get enrolled at the
facility and will have to launder their clothes. The couple has given information about three
options that the couple have for doing the laundry:
Option 1: Doing “In-House” Laundry at Nanna’s House by purchasing appliances
and detergent.
Option 2: Using the services of Red Oak Laundry and Dry Cleaning who provide
laundry services including pickup and delivery of clothes.
Option 3: Do the laundry themselves at the nearest Laundromat by purchasing
detergent and travelling to the facility.
The couple should select an option which has the minimum cost for the couple annually.
For decision making, the annual cost under all the 3 available options has been computed
to enable couple take an informed decision.
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Name: Managerial Accounting
The computation of cost under three options is as below:
Particulars Rate UOM Annual cost
Option 1: In-House” Laundry at Nanna’s House by
purchasing appliances and detergent
Laundry supplies from Mega mart $35 Per quarter $140.00
Increased Energy cost of washer $120 Per year $120.00
Increased Energy cost of dryer $145 Per year $145.00
Annual Depreciation of appliances (Refer WN:1 ) $109.84
Total: $514.84
Option 2: Using the services of Red Oak Laundry
and Dry Cleaning $52 Per month $624.00
Total: $624.00
Option 3: Taking the clothes to the nearest
Laundromat facility
Laundry cost $8 Per week $415.68
Laundry supplies from Mega mart $35 Per quarter $140.00
Mileage cost (3 miles one way * 2 * 0.56 per mile) $3.36 Per week $174.59
Total: $730.27
Thus, Option 1 - In-House” Laundry at Nanna’s House by purchasing appliances and
detergent is most profitable for the couple
WN : 1
Cost of appliances
Washer $420.00
Dryer $380.00
Delivery cost of appliance $35.00
Additional accessory $43.72
Total cost $878.72
Life of assets (Years) $8.00
Depreciation /month $109.84
Analysis:
Based on the computed annual cost for the couple under all the 3 available options to
them, we see that the couple will incur the lowest cost when they purchase the appliances
and detergent and do the laundry “In-House” and therefore they should be doing the same.
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Name: Managerial Accounting
Answer 4:
The couple has an option to hire an additional employee at a cost of $9 per hours for a 40
hour week. The hiring of the additional employee will enable the couple enroll 3 additional
children to the facility.
The following are the information available:
Expense Information Frequency Rate Annual
cost
No. of Children (6 + 3 additional) No. 9
License Fees Per year $225 $225
Insurance Per year $3,840 $3,840
Meal cost /child Per day $3.2 $832
Increase utility cost Per Month $50 $600
Employee Per hour $9
Working hour /week Per week 40
Employee cost (9 * 40 * 52) Per week $360 $18,720
Income Information
Fees /child Per Month $800 $9,600
Extra charges Per additional hour $15
Based on the above information, the benefit that would accrue to the couple if they hire an
additional employee can be computed as below:
Extra Employee Profitability Frequenc
y Per child 3 child
Extra children allowed 3
Fees /child Per year $9,600 $28,800
Meal cost/child Per year $832 ($2,496)
Cost of Employee Per year ($18,720)
Additional Profit Per year $7,584
Thus, the Net additional profit that the couple would reap annually owing to hiring of the
employee is $7,584 per year
Analysis:
Based on the above analysis it is clear that the couple should consider hiring an additional
employee and enrolling 3 additional children, as that will maximize the profit.
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Name: Managerial Accounting
Answer 5:
Here, the couple has an option to move to a larger rented space in the town, which can
accommodate a maximum of 14 children. The decision regarding remaining at the same
place or moving to the rented space depends on the profit that would accrue to the couple
based on their decision. The options available to the couple are as below:
 Option A & B: Remain at the day care being run at the own house called Nanna’s
House with either 6 or 9 children (by hiring an additional employee)
 Option C & D: Move to a larger new facility which can accommodate a minimum of
12 or maximum of 14 children
Below is the computation of profits for the couple under all the 4 available options:
Option-A Option-B Option-C Option-D
Particulars Existing
house
Existing
house
Rented
house
Rented
house
No. of child
allowed 6 9 12 14
Child fees per
annum/child $9,600.00 $9,600.00 $9,600.00 $9,600.00
Total Child fees $57,600.00 $86,400.00 $115,200.00 $134,400.00
License fees ($225.00) ($225.00) ($225.00) ($225.00)
Insurance ($3,840.00
) ($3,840.00) ($5,000.00) ($5,000.00)
House Rent $0.00 $0.00 ($7,800.00) ($7,800.00)
Employee cost
(working note-1) $0.00 ($18,720.00) ($37,440.00) ($56,160.00)
Utility cost ($600.00) ($600.00) ($1,500.00) ($1,500.00)
Meal cost
(working note-2)
($4,992.00
) ($7,488.00) ($9,984.00) ($11,648.00)
Net profitability $47,943.00 $55,527.00 $53,251.00 $52,067.00
Working note 1:- Existing
house
Existing
house
Rented
house
Rented
house
Employee required 0 1 2 3
Employee cost /week $360 $360 $360 $360
No. of weeks /year 52 52 52 52
Employee cost
/year/employee $18,720 $18,720 $18,720 $18,720
Total Employee cost $0 $18,720 $37,440 $56,160
Working note 2:- Existing
house
Existing
house
Rented
house
Rented
house
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Name: Managerial Accounting
No of Child 6 9 12 14
Meal cost /child /day $3.2 $3.2 $3.2 $3.2
No. of days /week 5 5 5 5
Meal cost /child
/week $16.0 $16.0 $16.0 $16.0
No. of week/year 52 52 52 52
Meal cost /child /year $832 $832 $832 $832
Total Meal cost /year $4,992 $7,488 $9,984 $11,648
Recommendation:
Based on all the above calculation, we can see that the couple has the maximum profit at
the existing house with 9 children and 1 additional hiring of employee. Thus, they should
continue with the same.
Part B: Journal Article Critique
In the journal article two world renowned companies namely Canon, Inc. and Apple
Computer, Inc is used to critically evaluate and analyze the role of management
accounting systems and the provision of how accounting information assist and promotes
the process of innovation in these companies. It was because of the effective management
accountant system that the companies were able to be successful in what they wanted to
innovate.
Answer 1:
For Canon Inc.
The company had set the target for manufacturing the MC’s or the Mini Copiers that would
be light in weight, compact, fast and reliable. The company y achieved it by creating a
team which was diversified, large and combined both technical and managerial skills. The
creation of a vast diversified team created a tensed environment that induced innovation.
The company was able to maximize its operational efficiency because of the selection of
such a diversified team. It was the managing director of the company that identified and
introduced the problems to the team in a sorted manner. The team then worked as a
whole with a common objective of solving the identified problem. The objective was to
solve the problem while maintaining the costs of the company. The focus of the managing
director was on horizontal development of the company.
The team interaction and their difference of opinion fostered a culture of debate and ideas
that lead to product development while adding substantially to the capabilities of the firm.
As an overall view, we see that the efforts of the management accountant along with the
technical team improved the organization’s perspective and direction making it a breed
place of innovation.
For Apple Computer Inc: -
The founding members, who held bureaucratic powers, used their powers to bring
discipline to the company as they largely controlled the management of Apple Computer
Inc. The company believed in “One man” army theory where there was a single controlling
authority who would take all the important decisions, supervise and control the
management of the company.
Mr. Steve Jobs was that “One Man” army for the company and he set out all policies and
programs for the company. He controlled almost everything starting from product ideas,
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Name: Managerial Accounting
product features, details, team selection, powers etc. He was the final arbitrator and not
just a leader of the firm. He was even then respected, as he was a product visionary and
detailed out the requirement to the team in way that was easy for them to understand and
implement.
Answer 2:
It was only “Innovation” that drove both the companies to success and recognition in the
world market. The companies innovated with the help of highly motivated diversified team
and proved that team is what builds the company. The companies had project
development teams that were made of diversified people from all areas of the organization
including R&D, marketing, Finance, technical, quality etc. The companies were able to
innovate what they did based on availability of right information at the right time every time.
Examples for Canon Inc.:
a) The company followed clear levels of hierarchy. The leaders were part of the team
and the structure of the company as well as for the team was clearly defined. The
teams were able to effectively co-ordinate with the counterparts and focused on
results, improvement and advancement. The team succeeded by laying down the
clear, achievable goals that were agreed by everyone. The team met regularly and
worked towards attaining those goals with assistance from everyone.
b) Another critical factor that fostered the success of the company was the regular
team meeting and interactions between the team members. Communication is the
foundation stone for success and the team through effective internal communication
reduced delay in planning and development of the product. The freedom of
communication in the team helped members voice out their opinion and ideas
leading to new ideas, concepts and ways for product development.
Examples for Apple Computer Inc: -
1) Apple computer Inc. is known as the masters of revolution in the personal
computing space. They launched their own highly advanced and sophisticated
operating system known as the Machintosh and became worldwide leaders in this
space. The developed Operating System was user friendly, seamless and highly
efficient. This particular product of the company was efforts of one man and was
developed in isolation with the rest of the company. Later on seeing the success of
the product, others in the company joined hands with them and build the brand, as it
is known today.
2) Apple Computer Inc. adopted the Japanese system of operation, which provided
them a sense of commitment and gave their purpose to chase. The company
leveraged the resources by recruiting talent from outside and then slowly built their
own brand in the global market by making what is known as insanely great
computer.
Answer 3:
The specific outcomes or lessons that we have learnt from the article’s research findings
and ideas that would be useful for management accountants working with Australian
companies are as mentioned below:
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Name: Managerial Accounting
For Canon Inc.
a) Canon Inc.’s policy of making a diversified team by recruiting people from varied
background, culture and race. The company generally hired at mid-level and then
helped the talent to grow within the firm. This developed the talent as well as the
organization as they grew within the company. The company believed in teamwork
rather than single control for the operations of the company.
b) The company followed a top-down approach with horizontal development by
fostering regular communication between all the levels of the company.
For Apple Computer Inc: -
a) Apple Computer Inc. believed in single point of control when it comes to distribution
of powers and authorities. The team leader was responsible for creating an
environment that breed open communication, constant interaction and intense
debates on ideas. The company believed in trusting the leader to formulate policies,
programs and goals for the team members.
b) The management accountant laid emphasis on how Return on Investment (ROI)
was important and crucial for success of the organization. The management
accountant ensured that with development, cost controlling and maintenance of ROI
was equally important. Thus, a team should focus on results that are profitable and
attainable.
Conclusion
In the above report, analysis of two distinct case studies reflected how concepts of
management accountant helped firms in both financial and non-financial decisions and
growth. The concept helped the couple in taking effective decisions for their day care
facilities by making available information on profitability and costs. The concept also
fostered growth and innovation in two world giants while they were working on their
product development.
The concept of the management accountant speed up the process of product development
and helped teams reach their product goals while keeping the financial viability of the
product intact with on-time information on cost and profitability every time.
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Name: Managerial Accounting
References
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