Managerial Accounting: Case Study Analysis

This report analyzes two case studies in managerial accounting, focusing on cost analysis, decision making, and profitability. It provides recommendations based on the analysis.

Name: Managerial Accounting
Introduction
Managerial accounting is a concept of accounting that helps manager take decisions based on
the accounting information available within the company. The information enables better
decision making and enhances the performance of the organization. This report is an attempt
to understand the benefit of the managerial accounting through two specific cases:
Case A: This deals with the real life situation, where a couple wants to understand the
profitability of running a day care based on the information available.
Case B: This is more of a literature review were we attempt to read the given case and
analyze it from a management accountant’s perspective.
Part A: Case Study Analysis: Douglas and Pamela Frank
Mr and Mrs Frank wish to open a day care facility at their home after their retirement and
want us to help them in decision making based on the information. The following are derived
from the given case:
Answer to Question 1:
There are various types of cost which are given under the case study including Fixed Cost,
variable cost, Semi-variable cost, sunk cost, relevant cost etc. The required 3 types of cost is
as below:
a. Fixed Cost: These are fixed in nature indicating they do not change with change in
activity levels. They are generally irrelevant for any decision making as they will be
incurred irrespective of the volume and capacity of the firm. Here, the license fee of
$225 to be paid to state annually is an example of fixed cost. These won’t change with
any parameter in the case and thus fixed.
b. Variable Cost: These are relevant cost and changes with the change in activity levels
of the firm. They are ongoing cost which must be incurred if the operation of the
company continues. Here, the cost of the meals and snack @$3.20 per child is
variable as it varies with the number of child enrolled in the day care facility.
c. Sunk Cost: These are traditionally historical costs which have already been incurred
and cannot be reversed by the company. They are irrelevant for any decision making
as the same has already been incurred and do not require any additional consideration.
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Name: Managerial Accounting
Here, the renovation cost of $79,500 is sunk cost as the same has already been paid
for and the renovations have been carried out.
Answer to Question 2:
Relevant costs are those costs which affect the decision of the company and must be
considered while evaluating the options. For the couple, the information that is relevant to
the decision of purchasing the appliances is:
 Cost of the appliances
 Cost of Additional accessories needed for installation,
 Installation costs of the appliances
 Delivery costs of the appliances
 Life of the appliances
 Change in energy cost after using the appliances.
Further, there is information which is irrelevant to the decision of purchasing the appliances.
These irrelevant costs include the sunk cost or the fixed cost which will not change with
activity levels or costs which have already been incurred. Examples of the irrelevant cost to
the decision of purchasing the appliances are as below:
 Purchase price of the old appliances
 Life of the old appliances
Answer to Question 3:
The couple will have to launder the clothes of the children that are enrolled in the facility.
The couple currently has 3 options by which they can get the clothes laundered. These
options are listed as below:
A: In house laundry by purchase of appliances
B: Using the services of the service provider by name of Red Oak Laundry and Dry Cleaning
C: Taking the clothes to Laundromat facility themselves
We will now analyze the estimated cost under all these 3 options and then take a decision
based on the lowest cost to the couple.
Option A: In house laundry by purchase of appliances
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Name: Managerial Accounting
For in house laundry, the couple will have to purchase and install the appliances. The cost is
computed as below:
Option A: In house laundry by purchase of appliances
Cost of the appliances
Washer $420.00
Dryer $380.00
Total purchase Cost of the appliances $800.00
Installation cost of accessories $43.72
Delivery charge of the appliance $35.00
Total cost of the appliance $878.72
Expected Life 8
Annual cost of the appliances (A) $109.84
Increase in Energy Cost (B) $265.00
Cost of Detergent
Purchase cost from Megamart per quarter $35.00
No. of Quarter in a year 4
Cost of Detergent (C ) $140.00
Total Annual Cost (A+B+C) $514.84
Thus, purchasing the appliances and laundering the clothes themselves will cost $514.84
annually.
Option B: Using the services of the service provider by name of Red Oak Laundry and
Dry Cleaning
Here, the company can hire Red Oak Laundry and Dry Cleaning who will come and pick up
the clothes, launder them and then deliver them to the couple. The cost to the couple will be
the monthly charges in terms of the service provided by them.
Option B: Using the services of the service provider by name of
Red Oak Laundry and Dry Cleaning
Monthly cost for pickup/delivery service $52
Number of months of service $12
Total annual cost for pickup/delivery service $62
4
Thus, the cost of this service would be $624 annually.
Option C: Taking the clothes to Laundromat facility themselves
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Name: Managerial Accounting
Here, the couple decides to travel to the nearest Laundromat, launder the clothes themselves
in the facility and then travel back to the day care. They want to do this once per week. The
annual cost under this option is as below:
Option C: Taking the clothes to Laundromat facility themselves
Cost of Driving
Distance travelled per week (3 miles one way) 6
Mileage Rate $0.56
No. of Weeks in a year 52
Cost of Driving $174.72
Cost of Laundering Clothes
Cost to launder per week $8.00
No. of Weeks in a year 52
Cost of Laundering Clothes $416.00
Cost of Detergent
Purchase cost from Megamart per quarter $35.00
No. of Quarter in a year 4
Cost of Detergent $140.00
Total Annual Cost $730.72
Thus, the annual cost to visit Laundromat and get the clothes laundered themselves in
$730.72 annually.
Recommendation:
Based on the annual cost under all the 3 available options, the couple should purchase the
appliances and do the laundry at the facility itself as that would have the lowest possible
annual cost of $514.84.
Answer to Question 4:
Here, we will analyze whether or not should the couple hire extra employee for running the
day care facilities.
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Name: Managerial Accounting
The following are the information available:
Cost of extra employee: $9
No. of hours worked : 40 hours per week
Additional children that can be enrolled: 3
Based on above, the incremental revenue due to additional of 3 children is as below:
Incremental Revenue = 3 children * $800 per child = $2,400
To analyze, we will now evaluate the incremental cost:
1. Cost of the employee that is hired
$9 per hour * 40 hours per week * 4.33 weeks/month = $1,558.80
2. Cost for meal and snacks = $3.20/child/day * 3 children * 5 days per week * 4.33
weeks per month = $207.84
Total incremental cost = $207.84 + $1,558.80 = $1,766.64
Net Incremental Profit = Incremental revenue – Incremental cost
= $2,400 - $1,776.64
= $633.36 per month.
Thus, the Net Incremental Profit to the couple that the couple will get after the hirimg of
additional employee is $633.36 per month
Recommendation:
Based on the above analysis it is clear that Mr. and Mrs. Frank should consider hiring an
additional employee as the incremental revenue of $2,400 exceeds the incremental cost of
$1,766.64, resulting into a net profit of $633.36 per month.
.
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Name: Managerial Accounting
Answer to Question5:
Here, the couple has an option to move to a rented space which can accommodate more
children subject to a maximum of 14 children. The decision revolves around choosing either
to stay at their own home or shift to the new larger facility.
The same can be concluded based on the maximum profit from all the options available.
 Option A: Stay at the day care being run at the own house with a minimum of 6 or
maximum of 9 children (by hiring an additional employee)
 Option B: Move to a larger new facility which can accommodate a minimum of 12 or
maximum of 14 children
Information available for the analysis:
Rent of the new facility : $650
Cost of utilities at the new facility : $125
Additional insurance : $5,000
Other costs including meals and snacks, laundry, employee hiring, revenue per child will all
remain the same.
Computation of the Revenues and Costs under Option A
Option A: Stay at the day care being run at the own house
Particulars Formulae Amount Amount
No. of
Children
6 9
Revenues No. of child * Fee/child $4,800.0
0
$7,200.0
0
Less: Expenses
Cost of Meal No. of child * cost fo
meal/child * 5 days a
week * 4.33 weeks in a
month
$415.68 $623.52
License Fee License Fee/12 months $18.75 $18.75
Insurance Insurance Cost/12 months $320.00 $320.00
Laundry Cost Laundry Cost/12 months $42.90 $42.90
Depreciation (Cost / life)/12 months $265.00 $265.00
Rent Own house - NIL $0.00 $0.00
Utilities Given $50.00 $50.00
Employee
Cost
As in 4 above $0.00 $1,558.80
Total Expenses $1,112.33 $2,878.97
Net Monthly Income $3,687.6 $4,321.0
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Name: Managerial Accounting
7 3
Computation of the Revenues and Costs under Option B
Option B: Move to a larger new facility
Particulars Formulae Amount Amount
No. of
Children
12 14
Revenues No. of child * Fee/child $9,600.0
0
$11,200.0
0
Less: Expenses
Cost of Meal No. of child * cost fo
meal/child * 5 days a
week * 4.33 weeks in a
month
$831.36 $969.92
License Fee License Fee/12 months $18.75 $18.75
Insurance Insurance Cost/12 months $416.67 $416.67
Laundry Cost Laundry Cost/12 months $42.90 $42.90
Depreciation (Cost / life)/12 months $0.00 $0.00
Rent Given $650.00 $650.00
Utlities Given $125.00 $125.00
Employee
Cost
Refer Working Note 1 $3,117.60 $4,676.40
Total Expenses $5,202.28 $6,899.64
Net Monthly Income $4,397.7
2
$4,300.36
Recommendation:
Based on all the above computation, we see that the couple has a maximum profit of $4,397
when it operates at a new larger facility with 12 children. Further, if the couple wishes to
operate at the day care only, they should accommodate 9 children by hiring an additional
employee as the couple will maximize the profit from $3,687 to $4,320 per month.
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Name: Managerial Accounting
Part B Analysis
Here, the attempt is to analyze the given case of Canon, Inc. and Apple Computer, Inc. The
case describes how the two companies have brought in innovation in the market and
succeeded. The approach that they have followed is drastically different, but the end result is
same: Innovation.
Answer to Question 1:
For Canon Inc.
At Canon Inc. the approach used was top-down approach of working, where the top
management of the company made all the decisions and policies and the same was passed to
the bottom for implementation and execution.
The company was earlier not driven by the similar force and was mismanaged or misguided
due to lack of ownership and authority. After the implementation of the top down approach,
the direction in the organization improved giving employee’s guidance on moving forward.
Because of this, the operational efficiency of the company improved. It was the management
accountant who identified the problem and introduced the system in a sorted manner thus
balancing the needs and costs of the organization. Overall, the efforts of the management
accountant improved the perspective and direction in the organization making it a more
secure place for the employees.
For Apple Computer Inc: -
Here, the management accountant has promoted equality where both the top management and
middle and lower levels are at the same level with same level of authority and responsibility
towards organization success. But the crux of the idea was selection of one man to monitor
the entire team and thus becoming focused on one single man to oversee, supervise and
control the affairs and dealings of the company. That one person in the team was Steve jobs.
Mr. Jobs helps the organization immensely giving them direction and guidance on moving
forward. Everything in the organization including product features, product details, team
selection were all controlled by him and he was subjective and restrictive in his approach
with the team. It is only because of him that the company has managed to outperform all its
competitors both in terms of market share and profitability.
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Name: Managerial Accounting
Answer to Question 2:
Innovation is what has driven both the companies towards success and prosperity. Both the
companies took major drastic and strategic steps to promote innovation and bring something
innovative for the public and expand their business. The innovation process is indeed ‘a
process of information creation”. Both the companies have been able to create their mark at
the innovation based on availability of right information at the right time.
For Canon Inc.
a) This particular company focused on improving the technology and monitored the
progress regularly on the prescribed format identified. The team ensured that the
company is driven by progress and runs on a high energy mode which enabled the
company get the best and optimal outcome.
b) The other thing which the company laid emphasis on was open communication which
proved out to be highly useful as it promulgated the idea of interactive behavior. Tis
would lead to products that would be robust and appealing to a major audience thus
increasing the market share and ultimately higher profitability.
For Apple Computer Inc: -
1) Here, the company launched its own sophisticated and customized operating system
which helped the user worldwide operate in a seamless environment. The company
was able to build its own brand and create a significant mark in the globe.
2) The other aspect was that the company rolled into the segment of the Japanese system
and adopted their working culture. This innovation format helped the company in
leveraging the resources and builds their own distinct brand and name.
Answer to Question 3:
The specific outcomes or lessons learned from the article’s research findings that will be
useful for management accountants in Australian companies to learn from as a stepping stone
for the accountants are:
For Canon Inc.
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Name: Managerial Accounting
a) Canon promoted the idea of group work, team effort and team building as a tool for
the company’s growth in terms of revenues, profits and goodwill. The company
proved that working in silos is not an option for any company and it is the team effort
that helps the company grow and not one single individual.
b) The top down approach ensured that the top management guides the middle or lower
level manager. But the organization policy is such that the suggestions of the middle
or lower level manager are respected, reviewed and adhered to if they provide
excellent ideas for innovation.
For Apple Computer Inc: -
a) This organization believed in faith and confidence of the employees. The company
believed that the vision and mission of the company should be aligned to reflect the
working environment of the company. Trust was the most important factor for the
management to formulate policies and goals for the managers from top to bottom.
b) Back in the era of 1991, the management accountant established a factor as to how
crucial is the ROI ratio and how the same benefits the organization and the resultant
perspective. It explained the factor as to how the company must at each and every
implementation of ideas must compute the ROI so that the level of security is
maintained.
Conclusion
The report concludes and presents all the aspect of managerial accounting be it financial
decision making for the couple starting a day care facility at their place or the literature
review of the article to understand how different approaches helps the organization grow.
The paper presents the importance of managerial accountants in every field be it financial
decision or non-financial qualitative decisions. Both the case study analyses the role of the
management accountant from two different angles which are operational and qualitative
perspective on the costing of the products and ideas.
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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.
Otley, D., (2016) The contingency theory of management accounting and control: 1980–
2014. Management accounting research, 31, pp.45-62.
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