Managerial Accounting: Case Study 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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