Managerial Accounting Case Studies: Cost Analysis & Decision Making

This managerial accounting case study analyzes cost concepts and their application in business decision-making. The case study examines cost classifications, including fixed, variable, direct, indirect, product, and period costs, and their relevance to the Franks' laundry business. It explores various options, such as outsourcing laundry services, using a Laundromat, and purchasing appliances, evaluating costs and benefits to determine the most financially sound decision. Furthermore, the case study delves into the implications of hiring an additional employee, assessing the associated costs and revenue generation to determine the profitability of expanding the business. Finally, the case study analyzes the expansion of the facility, considering the costs and regulations of moving to a new location to maximize profit. The analysis includes a critique of a journal article related to management accounting systems.

Managerial Accounting 1
MANAGEMENT ACCOUNTING CASE STUDIES
By (Name)
The Name of the Class
Professor
The Name of the School
The City and State
Date

Managerial Accounting 2
Part A: Case Study Analysis
QNS 1
In business, there are always a lot of expenses incurred to run the day to day activities
of the business. The classification of production cost is done from different point of
views. There is a fixed and variable cost, which is based on the costs responsiveness to
the output level, direct and indirect costs and product and period costs. Although these
classifications of costs may seem to overlap one another, a firm may only use one
approach to classify its production costs. (Chenhall and Moers 2015). These costs are
discussed into details below;
a) Fixed and variable costs. This is a classification of costs based on whether the
costs are constant or they change with the changes in the level of output. Fixed
costs are those costs in the production which remain constant irrespective of
whether the level of output is increased or not. For example the rent of a room
will remain constant whether the firm is producing or not. Variable costs on the
other hand are those costs which change in direct proportion with the output. A
good example of variable cost is the cost of labor or direct materials. To produce
more and more output, one will need to use more and more direct materials and
more labor will also be required.
b) Direct and indirect costs. This method of classifying production costs focuses on
the ability to trace the costs to the end product. Direct costs can be seen as
variable cost as per the above discussion. They are those costs which are
incurred in direct proportion with the output level. They are the ones used in
costing the final product because one can easily determine how much was put
into a particular product. For example one can easily determine how much of the
raw materials were put into each unit of output. Indirect costs, also known as
production overheads, are those types of costs which are not easy to quantify in
the final output. The salary paid to production supervisor is a good example as
such expense cannot be easily traced to the final product.
c) Product and period costs. This classification method divides the costs from the
point of view of the end product. Product costs are those costs which are
incurred direct to the production. Such costs include the cost of raw materials
and the cost of direct labor. They are the same costs used to do the product
costing. Period costs on the other hand are those costs which are not closely
related to the product and they are treated as period expenses. Rent for instant is
seem as a periodic expense to be expensed every month other than a product
cost to be absorbed by the end product.
QNS 2

Managerial Accounting 3
According to Collier (2015), to arrive at a valuable decision, one should be armed with
relevant and reliable information. The power of information in the process of decision
making cannot be under estimated. For the Franks to make a decision of whether to
purchase new appliances or not, first they should put into all the available alternatives
which are at their disposal. As per the case study, the couple can outsource the
laundering services to Red Oak Laundry and Dry Cleaning. The company can do the
laundering for the couple including pick-up and delivery for $ 52 per month.
Alternatively, the couple can do the laundry by themselves from Laundromat once per
week. However, under this arrangement, the couple will have to meet the expenses of
the detergent and fabric sheets.
With all this information, the Franks can the compute the cost for each alternative and
determine the one which is less expensive and more convenient to them. The couple is
in business and therefore they should only be interested in the alternative that
maximizes the value of their business.
Decision making utilizes the most current information which is influential to the possible
actions likely to be taken. The cost of the old appliances is not information current and
influential to the decision the couple is facing. The old appliances are no longer working
and their cost is a sunk cost which does not have an impact in the entire decision
concerning appliances (Zsambok, 2014).
QNS 3
There are three options available for the couple in solving the laundering problem. All
the three options and their related costs are discussed below;
Option one
For this option, the Frank can contract the Red Oak Laundry and Dry Cleaning
Company for all their laundry work. The company will do the laundering for the couple
which will include the pick-up and delivery for the cost of $ 52 per month.
Option two: taking clothes to Laundromat
Here the couple will do the laundry themselves from the Laundromat, three mile away
from their facility. The total cost under this option will include the transport cost and the
cost of buying the washing materials such as detergent and fabric sheets. The total cost
will be;
Laundering cost = U$ 8*4.33 =34.64 per month

Managerial Accounting 4
Transportation
=U$ 0.56 per mile*6 mile (to and fro) = U$ 3.36 per week.
Monthly cost
= 3.36 per week × 4.33 weeks = $ 14.55 per month.
Detergent or fabric sheets per month
= $ 35/3 = U$ 11.66 per month.
Total
Laundry cost =$ 34.64
Transport = $ 14.55
Detergents = $ 11.66
$ 60.85
Option Three: Purchase of appliances.
The last alternative available to Douglas and Pamela Frank is to purchase and install
the laundry machine in their facility. This option comes with a lot of costs associated
with the new appliances. First, the couple has to purchase the appliances, and then
they will incur the transportation cost and the cost of installation. However, some of
these costs will be incurred once and after the laundry machine is up and running, the
monthly costs will be very low. Below is a computation for all the costs under this
arrangement.
Costs
Washer: $420
Dryer: $380
Carriage: $35.
Installation: $43.72.
Power bills costs
Total cost for the dryer will be calculated by considering the cost of energy consumed
per year and then multiplying by the 8 years.
$ 145 × 8 years = $ 1 160
The amount of energy consumed by the washer will be calculated as follows;

Managerial Accounting 5
$ 120 × 8 years = $ 960
The power cost of energy consumption for eight year = sum of energy consumption for
eight years
= $ 1 160 + $ 960= $ 2 120
Total cost of purchasing and installing laundry equipment will be;
Washer $ 420
Dryer $ 380
Installation costs $ 43.72
Carriage $ 35
Power bills $ 2 120
Total costs $ 2 998.72
The cost of energy consumption and the cost for purchasing, fright and installation for
one month will be the total cost for eight years divided by the number of months in eight
years
Energy consumption for one month = $ 2 998.72/96 months
= $ 22.08 per month.
This option seems to be the most favorable for the couple. It is cheap compared to the
other two. Although the Franks will have to spend a lot for the purchase and installation
of the laundry machine, the ultimate benefit is high. With this option, the couple will
exercise independency since they will be using their own machine. Apart from saving on
monthly costs, the couple will also save on time used to go for laundering to
Laundromat which is three miles away from their facility. Such time can be dedicated to
offering more quality care to the children and reducing on the cost of employing more
workers to take care for the children.
QNS 4: Considerations for Hiring an Employee
The franks have the ability to accept more children but only if they employ an additional
employee. The appropriateness of this option will be determined by the cost of
employing an additional employee compared to the revenue generated from the
additional children (Tseng, et al., 2014).
Salary expenses
The salary expense for the week will be calculated as;
= U$ 9*40 hours = U$ 360 per week

Managerial Accounting 6
Monthly wage for the employee will be;
= U$ 360 per week × 4.33 weeks (assuming that there is no overtime)
= Monthly salary expenses = 360*4.33 = 1 558.80
Other expenses include
Maintenance
$ 225/ 12 = $ 18.75
Insurance
$ 3 840/12 = $ 320
Meals and Snack
9 × 3.32 × 5 = $ 149.40
$ 149.40 × 4.33 weeks = $ 646.90
Totals
Salary for employee = $ 1 558.80
Maintenance cost = $ 18.75
Monthly Insurance = $ 320
Monthly cost of snack= $ 646.90
$ 2 544.45
Under this arrangement, the couple will be able to admit three more children and thus
make the number of children in the facility to be nine. The revenue generated by the
facility with the nine children on board will be calculated as follows;
Monthly income
800*9 = $ 7 200
Since we have already calculated the total monthly expenses in the computation above,
it is easy now to determine the net profit realizable by the facility. We will now take the
gross revenue and less the total expenses to arrive at the net profit for the facility.
Net profit = gross revenue – total expenses
$ 7 200 - $ 2 544.45
$ 4 655.55

Managerial Accounting 7
The profit from this option is more compared to when the facility has only six children on
board. The Franks are advised to consider employing one employee and admitting
more children since this arrangement will bring more profit to the facility. Although the
expenses will increase due to salaries of the additional employee and the cost of meals
for the three additional children, the gross revenue collected from the additional children
will be able to cover those expenses and still give a margin of profit more than the one
has been realized before.
QNS 5
The Franks are now thinking of expanding the facility in order admits as many children
as possible. The couple can move to town and rent a space which can accommodate
more children. Since the facility will be located in the town, the couple has to comply
with the requirements of the local authorities which include the recommended ratio of
the adult to kids, insurance costs and licenses. The cost for the whole plan is calculated
below and a recommendation made on the best action for the couple to take.
Contribution under scenario 1
Revenue 800*9= $7,200
Expenses
Meals 3.2*30*9=$864
License 225/12 =$18.75
Insurance 3840/12=$320
1 employee =$1,558.8
Total contribution $4,438.45
Contribution under scenario 2
Revenue 800*12 =$9,600
Less expense
Meals 3.2*30*12=$1152
Rent $650
Utilities $125
Insurance 5000/12=$416.67
2 employees $3117.6

Managerial Accounting 8
Total contribution $4,138.73
According to (Moschuris 2015) the above calculations are necessary for the Franks to
arrive at a decision about the two options. From the calculation above, it can be seen
that the Franks will raise more profit by running the facility from home and accepting an
additional three children and employing one additional employee. The second option of
moving to town comes with additional costs and strict regulation from the state
authorities and this makes the operating costs to increase and thus reduce the net
profit.
Part B: Journal Article Critique
QNS 1
In both companies, there are four components of management accounting system as
discussed below (Bobryshev et al 2015);
a. People. People are the most important component for any system. They ensure
all other components are put in place and in the correct order necessary to work
effectively and efficiently to give the desired results. Unlike other components
which are programmed, people use brain and intelligence and thus the most
vulnerable component. In both companies in the case study, we have Keizo
Yamaji and Stephen Jobs who are the key personnel and the main decision
makers.
b. Way of doing things. Both companies have their own procedures and guidelines
on how operations are supposed to be coordinated within the organization. This
component includes the standard operating procedures which are laid down to
be followed by the staff so as to ensure that there is a uniform way of doing
things in an organization.
c. Data. Data is raw information which has not been analyzed and interpreted into
valuable information for decision making. This is therefore the component in
which all other components work on in order to create value out of it.
d. Data management and enhancement software. This is the soft component and is
used to make operations fast and easy by automating the company’s operations.
This software is used to manipulate data by analyzing it and interpreting it in
relation to the decision making.
QNS 2
Management accounting is defined as the practice of collecting, measuring and
reporting both financial and non-financial information to the relevant people for decision
making. On the other hand, innovation process is the information creation and
management of change. It can be seen that management accounting has a big role to

Managerial Accounting 9
play in the innovation process. While innovation is all about managing change and
taking the necessary response towards that change, management accounting will be
responsible to collect and analyze all the necessary information to justify the need to
make changes on the various management processes (Busco, Caglio and Scapens
2015).
In the Canon Company, management accounting has been used to measure and report
all the costs associated with the Mini Copier and an innovation has been initiated to
minimize such costs in order to maximize on the profits. For Apple Company,
management accounting has been used to provide information about quality and sizes
of the computers. As a results, an innovation is undertaken which reduced the size and
improved the efficiency of computers for the company (Nonaka and Kenney ,1991).
QNS 3
From the Canon Company, it is seen that it is necessary to diversify activities of the
company to achieve growth. In order to diversify the activities of any company,
management accountants need to be in the front line and provide the relevant
information about the products. Information about product cost of production, product
profit contribution and the market demand will be the key in deciding whether or not to
diversify company products. Canon also keeps on improving the existing products to
increase its efficiency and reduce the operation costs. All the relevant information to
make these decisions is provided by the management accountants.
For Apple Company, most of the improvements made in their products are as a result of
team work and brain storming. Although management accounting information is
indispensable in such improvements, the key emphasis is placed on the ability to work
as a team and share various ideas and acting on them. Also for Apple Company, its
success is associated with the strong leadership from Stephen Jobs. The lesson to be
learned from both companies is that management accountants should provide accurate
and reliable information which is going to be relevant in making company’s decisions.
They also need to embrace team work and always be open to taking ideas from other
stakeholders of the company and above all exercise good leadership skills to their
juniors (Nonaka and Kenney ,1991).

Managerial Accounting 10
References
Bobryshev, A.N., Yakovenko, V.S., Tunin, S.A., Germanova, V.S. and Glushko, A.Y.,
2015. The Concept of Management Accounting in Crisis Conditions. Journal of
Advanced Research in Law and Economics, 6(3 (13)), p.520.
Busco, C., Caglio, A. and Scapens, R.W., 2015. Management and accounting
innovations: reflecting on what they are and why they are adopted. Journal of
Management & Governance, 19(3), pp.495-524
Chenhall, R.H. and Moers, F., 2015. The role of innovation in the evolution of
management accounting and its integration into management control. Accounting,
organizations and society, 47, pp.1-13.
Collier, P.M., 2015. Accounting for managers: Interpreting accounting information for
decision making. John Wiley & Sons.
Moschuris, S.J., 2015. Decision-making criteria in tactical make-or-buy issues: an
empirical analysis. EuroMed Journal of Business, 10(1), pp.2-20.
Nonaka and Kenney ,1991. “Towards a new theory of innovation management: A case
study comparing Canon, Inc. and Apple Computer, Inc.”, Journal of Engineering and
Technology Management, 8, p. 67-83.
Zsambok, C.E., 2014. Naturalistic decision making: where are we now?. In Naturalistic
decision making (pp. 23-36). Psychology Press
Abernathy, W., 1978. The Productivity Dilemma: Roadblock
to Innovation in the Automobile Industry. Johns Hopkins,
Baltimore, MD.

Managerial Accounting 11
Aoki, M., 1989. Information, Incentives and Bargaining in the
Japanese Economy. Cambridge University Press,
Cambridge.
Baumol, W. and Benhabib, J., 1989. Chaos, sign)ficance, mechanisms, and economic
applications. J. Econ. Perspect., 3(1): 77-105.
.
Daft, R. and Weick, K., 1984. Toward a model of organizations as interpretation
systems.
Acad. Manage. Rev., 9(2): 284-295.
Florida, R. and Kenney, M., 1990. The Breakthrough Illusion:
Corporate America'.s Inability to Link Production and
Innovation. Basic, New York.
Nonaka, 1. and Takeuchi, H., 1985. Managing the new
product development process:
Kenney, M., 1986. Some observations on the structure of
the U.S. and Japanese biotechnology industries.
Hitotsubashi Bus. Rev., 34 (December): 20 37 (in
Japanese).
Kodama, F., 1988. Japanese innovation in mechatronics
technology. Sci. Public Policy, 13 (1): 44 51.
Nonaka, 1., 1987. Managing the firm as an information
creation process. Working paper, Institute of Business
Research, Hitotsubashi University, January.
Nonaka, 1., 1988a. Creating organizational order out of chaos: Self-renewal in
Japanese firms.
Calif Manage. Rev., 30(3).

Managerial Accounting 12
Nonaka, 1., 1988b. Toward middle-up-down management: Accelerating information
creation.
Sloan Manage. Rev., (Spring): 9-18.
Prigogine, l., 1980. From Being to Becoming. Freeman, San Francisco, CA.
Prigogine, l. and Stengers, I., 1984. Order Out of Chaos. New
Science Library, Boulder, CO. Quinn, W., 1985. Managing
innovation: Controlled chaos. Harv. Bus. Rev., (May-June):
73 80
Rose, H. and Rose, S. (Eds.), 1976. The Political Economy of
Science. Macmillan, London. Saito, K., 1984. Personal
interview by I. Nonaka (November 28).
Simon, H., 1969. The Science of the Artificial. Free Press, New York.
Takeuchi, H. and Nonaka, I., 1986. The new product
development game. Harv. Bus. Rev., 64 (1): 1.17 146