Management Accounting and Decision Making at Best Buy Inc.

This essay analyzes how management accounting information supports decision-making at Best Buy. It identifies and elaborates on variable costs, fixed costs, sunk costs, opportunity costs, avoidable costs, direct costs, indirect costs, and cost driver levels within the company. It also discusses the applicability of the balanced scorecard for Best Buy and differentiates between management accounting and financial accounting. Key terms such as contribution margin, break-even point, incremental cost, mixed cost, and finished goods inventory are defined, providing a comprehensive overview of essential management accounting concepts in the context of a real-world business.

TITLE: Accounting for Decision Making
5. Best buy
a. Variable Costs for best buy
As per the financials given for best buy following are the variable costs for best
buy inc.
 Costs of consumer electronics
 Costs of computing and mobile phones
 Costs of providing entertainment services like, gaming, music and movies
 Costs of warranty services attached to the products sold
 Costs of appliances.
 Refurbishing costs
All of the above costs are the costs of goods sold by best buy, the total COGS of bust
buy for the year ended on Feb 3 2018 amounts to $32,275 million.
 The inward delivery costs directly attributable to the goods are also to be
considered as a variable cost.
 Labor costs for services offered will also fall under the category of variable
costs.
 Selling expenses that are relatable to the products and services
 Ordering costs
b. Fixed Costs and Sunk Costs
The following will be the fixed costs for best buy
 Electricity Expenses
 Store rents (where properties are not owned)
 Employee costs (Salaries and other allowances offered)
 Annual Maintenance Charges
 Fixed Selling expenses like advertisement costs
 Depreciation on furniture and fixtures owned
 Administrative Expenses
 Annual website charges

 Borrowing Costs
 Software costs
c. Opportunity cots and avoidable costs
Opportunity costs are the opportunities lost, for best buy the following costs can
be said to be the opportunity costs:
 The costs if the properties owned would have been rented, or utilized for
some other person, rent being a measurable mode is considered to be a
better measurement of the opportunity costs of operating on the owned
properties.
 Other opportunity costs would include opportunity costs of funds; the
income opportunities forgone by not investing the funds available
elsewhere
Avoidable costs are the costs that can be avoided and/or eliminated if the course
of the operations, project or business is altered. For best buy the avoidable costs
would consist of the following:
 Rental costs
 Employee costs
 Warranty costs incurred
 Electricity and other utility expenses
 Costs of goods sold
 Costs of services offered
 Selling and distribution expenses
 Other hidden costs that can be eliminated if an activity is not performed.
d. Direct and Indirect Costs
Direct costs are the costs that are directly attributable to the provision of a
product or a service, these costs include costs such as costs of direct labor, direct
material costs, cost of manufacturing supplies, costs of services provided etc.
However, indirect costs are the costs that are incurred to keep the business
running, these costs are not directly attributable to the product or services offered

but are incurred in general, these include costs such as rental expenses, costs of
utilities, legal expenses, maintenance costs etc.
e. Cost driver level is the level of activity affected due to any changes in the identified
activity cost drivers. These are calculating by dividing the total costs of the activity
by the volume of cost driver that gives the driver rates.
6.
a) Management accounting
The Institute of Cost and Management Accountants, London, has defined
Management Accounting as: “The application of professional knowledge and skill
in the preparation of accounting information in such a way as to assist
management in the formulation of policies and in the planning and control of the
operation of the undertakings.
Management accounting is used for the purposes of planning, decision-making,
identifying problems, and strategic management. By preparation of budgets,
break-even forecasts, capital budgeting, valuations and other tools management
accounting aids its purposes.
b) Balanced scorecard (BSC) is a strategic planning and management system that is
used by the organizations to:
 Align all the day-to-day work done by everybody within the organization
 Prioritize projects, products, and services
 Monitor progress towards the achieving of the said targets and objectives
 Communicate their proposed accomplishments and objectives
Best buy being a retail giant can very well use the balanced score card techniques,
To maximize its profitability and align the objectives in an increasing priority of
requirements of the Company. The company can monitor its progresses towards
individual product segments and other incidental areas for a balanced and
monitored growth towards the objective accomplishments.
c) Management accounting and financial accounting have a reasonable difference in
their uses and the tools they use, where on one hand management accounting is
used for the budgeting and decision making, financial accounting is used for the
decision making purposes. Management accounting is the preliminary step and
financial accounting the final stage. Management accounting aids financial
accounting.
Management accounting is used to evaluate the profitability, viability, costing and
identifying other costs and expenses. Whereas financial accounting puts all the
costs incurred in place to show the actual position once the financial period is
over. While management accounting might miss some costs, financial accounting

considers every penny spent and shows the actual position unlike management
accounting that is purely based on forecasts.
Definition of the given terms:
a) Contribution Margin: This measured by deducting variable expenses from the
sales revenue earned. Contribution margin is the incremental profit earned for
each unit of product or service sold.
b) Break Even point: This is the point where there is an indifference between the
total contribution margin and the total fixed costs incurred. This is the point
where the company/the product or service is in a no profit no loss situation.
c) Contribution Margin per unit: This is the per unit contribution earned this is
calculated by deducting all the associated variable costs for one unit sold from the
selling price of the product.
d) Fixed and variable costs: Fixed Costs are the costs that do not change with any
changes in the volume of products or services, sold and/or manufactured and/or
procured.
e) Incremental costs: These are also known as marginal costs, these costs are defined
to be the total costs incurred due to production/procurement or sale of one
additional unit of product or service.
f) Mixed costs: Also known as semi variable costs, consist of both fixed and variable
elements, these could be costs like operating license, depreciation and
amortization etc, that would be charged even if there is no activity but increase
with any rise in the activity levels.
g) Direct Costs: These are costs that directly relate to the production of any
particular product, these include direct labor, direct expenses and direct material.

h) Indirect costs: These are also known as overhead expenses, these are not directly
attributable to the production but are incurred as an overhead expenditure,
salaries, accounting charges, depreciation etc are a few examples of indirect costs.
i) Finished Goods inventory: This is the stock of finished goods held at any specific
time. Like, inventory of finished goods at the beginning or end of any particular
period.
j) Direct Material: These are the material that needs to be procured for production.
One unit of product might need a fixed unit of direct material input, these account
for a major direct expenditures in most cases.

References
 Quick links. (no date). Retrieved January 20, 2019, from
http://investors.bestbuy.com/investor-relations/financial-info/annual-reports-
and-proxy-statements/default.aspx
 ClearTax. (2018, September 21). Management Accounting – Meaning, Advantages
& Functions. Retrieved January 20, 2019, from https://cleartax.in/s/management-
accounting
 Fiscal 2018 Annual report [Pdf]. (n.d.). Best Buy.
 Tools and techniques of Management Accounting. (2017, November 12). Retrieved
January 19, 2019, from https://accountlearning.com/tools-and-techniques-of-
management-accounting/