Managerial Accounting: Benefits and Case Studies

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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