HI5017 Management Accounting: Applying Cost Concepts to Business

This management accounting case study delves into various cost types such as fixed, variable, sunk, and opportunity costs, illustrating their impact on management decisions. It includes a detailed cost analysis for investment decisions, exemplified by advising Frank on relocation options. The analysis reveals no significant cost benefit in relocating. Furthermore, the study examines innovation processes using Canon and Apple as case studies, highlighting key lessons learned. It also addresses whether to hire an additional employee based on incremental analysis, recommending hiring due to increased revenue exceeding costs. The report concludes with insights on performance measurement and decision-making components in management accounting.

RUNNING HEAD: MANAGEMENT ACCOUNTING 1
UNIVERSITY NAME
STUDENT NAME
STUDENT ID
COURSE
DATE

MANAGEMENT ACCOUNTING 2
EXECUTIVE SUMMARY.
The purpose of this report is to analyze different aspect of management accounting and various
elements that affect management decisions such as costs. various types of costs such as fixed,
variable, sunk and opportunity costs are discussed herein with various example. Detailed
calculation that are concerned with some investment decisions are worked out and analyzed to
show how such calculation assist managers to arrive at some key decisions that do not affect
their good results. A good example is a decision that involves advice to frank on whether to
relocate to a larger building in town or remain. Such decision is based on the calculation which
clearly indicated that there will be no cost benefit of relocating although there was no significant
different between relocating and remaining.
Innovation process is also examined which was evident in the case of cannon and apple
computers. Moral lesson learned from that case is also pointed out.

MANAGEMENT ACCOUNTING 3
Table of Contents
INTRODUCTION.......................................................................................................................................4
DIFFERENT TYPES OF COSTS AND EXAPMLES................................................................................4
INFORMATION RELEVANT OR IRRELEVANT TO THE PURCHASE OF APPLIANCE..................7
RELEVANCE OF COSTS......................................................................................................................7
IRRELEVANCE OF COSTS..................................................................................................................7
LAUNDERING COSTS..............................................................................................................................7
OPTION A: PURCHASE OF NEW APPLIANCE.................................................................................7
OPTION B: SELF SERVICE LAUNDRY..............................................................................................8
OPTION C: LAUNDRY SERVICE DELIVERY...................................................................................8
WHETHER AND ADDITIONAL EMPLOYEE SHOULD BE HIRED.....................................................9
LETTER TO FRANK ADVISING THEM ON THEIR SPACE OPTION.................................................9
COMPONENTS OF MANAGEMENT ACCOUNTING..........................................................................11
DECISION MAKING AND PERFORMANCE MEASUREMENT.....................................................11
INNOVATION PROCESS........................................................................................................................14
LESSONS LEARNED..............................................................................................................................14
CONCLUSION.........................................................................................................................................15
REFERENCES..........................................................................................................................................16

MANAGEMENT ACCOUNTING 4
INTRODUCTION
Fixed costs are costs that remain constant throughout the production process and do not change
with the level of output. They include license, insurance fee and installation costs. Variable costs
are those costs that change with the level of an activity such as mileage costs. Sunk costs refers
to the costs that are spent once and are not expected to be spend again such as renovation costs.
Opportunity costs is the costs of an alternative foregone in order to enjoy a service or a good.
DIFFERENT TYPES OF COSTS AND EXAPMLES.
COSTS EXAMPLE
FIXED COSTS  License fee of $ 225 annually is a
fixed cost since it does not change
based on the couple’s activities.
 Annual insurance fee of $ 3840.this is
fixed costs since it doesn’t change
with changes in the couple’s activities.
 Costs of utilities of $50 is fixed. This
case indicates that rise will happen
each month because of having the
daycare.it does not matter about the
number of children.it can also be
referred to as incremental because it
results from having the daycare.
 Grand total value of washer and dryer
of $ 420 and 380 respectively are
fixed costs. These costs will not vary
with the level of activity.
 Installation costs of $43.72 is a fixed
cost. This cost does not vary with the
level of activity.
 Delivery costs of the appliances of $
35 is fixed.it will remain constant
irrespective of the couple’s level of

MANAGEMENT ACCOUNTING 5
activities.
 Rise in energy cost because of the
washer of $ 120 is an annual fixed
costs. This results because of having
the appliance.it doesn’t matter how
many children are there in the
daycare.it can also be seen as
incremental because it is a change in
costs of services because of having the
appliance.
 Rise in the utility costs of the dryer of
$ 145 is a fixed costs(Li, Yang,
Liang& Hua, 2009).
VARIABLE COSTS  It is pointed out that the total costs of
laundry purchases will change
depending on how many times the
orders are placed in a year at a rate of
$ 35 per quarter of the supplies.
 Cost of clothes laundering change
depending on how many times it is
done in a week at a rate of $ 8
 Costs of $0.56 per mile will change
depending on the mileage covered.
 Laundry fee of $ 52 per month is a
variable cost since it will change
based on the number of times they will
utilize the service in a year.
 Snacks expenditure at the rate of $3.20
per each child will vary depending on
the number level of children
registered.

MANAGEMENT ACCOUNTING 6
 Collections for the care of the children
at the rate of $ 15 per child will vary
considerably based on the children
who become late.
 Collection for the care unit at the rate
of $ 800 per child is a variable cost
since it will vary depending on the
number of enrollment(Yin & Lu,
2009).
SUNK COSTS  Expenditure of home renovation of $
79,500 is a sunk cost since it will not
be directly recovered.
 Expenditure of the old appliance of $
440 is also a sunk cost(McAfee,
Mialon & Mialon, 2010).
OPPORTUNITY COSTS  Time spend in going to the
laundromat. this has an alternative
foregone
 Utilization of extra space at home for
the appliance will results in an
opportunity costs(Frederick,
Novemsky,Wang, Dhar & Nowlis,
2009).
CONVENIENCE COSTS  Having the delivery service or having
the new appliance at home results in
convenience costs(McDermott &
Stephens, 2010).

MANAGEMENT ACCOUNTING 7
INFORMATION RELEVANT OR IRRELEVANT TO THE PURCHASE OF APPLIANCE.
This question is particularly based on the relevant and irrelevant costs of purchasing the new
appliance. The concept of whether costs will be spending as a results of the decision that is
arrived at in the future and whether the costs differ among the options.
RELEVANCE OF COSTS.
The decision of frank to buy the new appliance, costs that is relevant are:
 Costs of acquiring the new appliance.
 Costs that is incurred in the delivery of the new appliance to the premises.
 Costs used in installing that new appliance.
 Costs of energy that will occur as a results of acquisition of the appliance.
In the event that frank arrives at a decision to consider all possible option, he must take into
account all costs of that options. These costs will therefore be of important (Sadeghinezhad et al.
2014).
 Delivery costs of the laundry service
 Costs of self-service such as cleaner, cleaning and distance
IRRELEVANCE OF COSTS
Costs that have been already spent such as sunk costs are irrelevant in considering various
options in the future.it does not affect future decisions (Husak, 2009).
 Old appliance costs are irrelevant to the future decision regarding the purchase of the new
appliance.
 Cleaner costs such as costs of acquiring detergent are irrelevant.
LAUNDERING COSTS.
OPTION A: PURCHASE OF NEW APPLIANCE.
Yearly costs of the new appliance $ 109.84 (W1)
Rise in yearly costs of energy ($120 + 145) $ 265
Yearly detergent costs $ 140
GRAND TOTAL COSTS OF THE NEW
APPLIANCE
$ 514.84

MANAGEMENT ACCOUNTING 8
WORKING 1.
washer $ 420.00
Dryer $ 380.00
Instatalling costs $ 43.72
Costs of delivering the
appliance
$ 35.00
TOTAL COSTS $ 878.72
Useful life 8 years
COSTS PER YEAR $ 109.84
OPTION B: SELF SERVICE LAUNDRY
Driving costs $ 174.72
Laundering costs $ 416.00
Detergent costs $ 140.00
TOTAL ANNUAL
APPLIANCE COSTS
$ 730.72
WORKING 2.
Driving costs= 6 miles’/week x $ 0.56/mile=$ 3.36/week x 52 weeks= $ 174.72
Laundering costs=$ 8.00/week x 52 weeks = $ 416.00
Detergent costs= $ 35/quarter x 4 quarters= $ 140.00
OPTION C: LAUNDRY SERVICE DELIVERY
Costs pick up service
X number of months of the service
$ 52.00
12.00
TOTAL PICK UP COSTS $ 624.00

MANAGEMENT ACCOUNTING 9
WHETHER AND ADDITIONAL EMPLOYEE SHOULD BE HIRED.
This is majorly concerned with the incremental analysis with regard to changes.
This is considered in two fold;
 Variation in costs as a results of additional employee
 Feeding additional children
Added number of children will result in rise of income, rise in revenue= 3 added children in the
month at $ 800/month =$ 2400
Change in the costs as a result of additional employee= $ 9/hr. x 40 hrs./week x 4.33 weeks in a
month= $ 207.84
The additional revenue generated by having 3 more children or students is $ 2,400.00 which is
more than the costs associated with adding an employee and the costs of food for such additional
students, $1766.64, frank will therefore have a benefit of $ 633.36 if he adds an additional
employee. Frank should therefore organize to acquire one more additional employee since it is
clear in the calculation above that he will have net benefit of good amount (Cimera, 2009).
LETTER TO FRANK ADVISING THEM ON THEIR SPACE OPTION
XYZ COMPZNY,
ACCOUNTANT,
P.O BOX, YYY
NEWDELHI
FRANK
ADRESS: [phone]
RE: ADVICE ON SPACE OPTION.

MANAGEMENT ACCOUNTING 10
Dear frank, I am writing this letter to you to advice on the options raised above concerning
renting space in town, children you should accept and the necessary number of employees that
you must add.my advice will be based on the following analysis.
OPTION A: REMAINING IN THE CURRENT LOCATION.
6 children 9 children
income $ 4800.00 $ 7200.00
Expenses
meals 415.68 623.52
license 18.75 18.75
Insurance fee 320.00 320.00
laundry 42.90 42.90
depreciation 265.00 265.00
Rent 0.00 0.00
utilities 50.00 50.00
employee 0.00 0.00
NET INCOME/MONTH $ 3687.67 $ 4321.03
OPTION B: MOVING TO THE LARGER FACILITY.
6 children 9 children
income $ 9600.00 $ 11200.00
Expenses
meals 813.36 969.92
license 18.75 18.75
Insurance fee 416.67 416.67
laundry 42.90 42.90
depreciation 0.00 0.00
Rent 650.00 650.00
utilities 125.00 125.00

MANAGEMENT ACCOUNTING 11
employee 3117.60 4676.40
NET INCOME/MONTH $4397.72 $4300.36
WORKINGS 3.
Income= $800 per child/month x 6 children x 12 months
Meals= $ 3.20 /child/day x no. of children x 5 days’/week x 4.33 weeks per month
License =$ 225 yearly/12= $ 18.75
Insurance=$ 5000 yearly/12= $ 416.67
Laundry= $ 514.84/12= $ 42.90
Depreciation= {79500/25}/12=$ 265.00
Rent=650.00
Utilities=125.00
Employee=$ 9/hr. x 40 hrs. per week x 4.33 weeks per month=$ 1558.80/month per employee.
Based on the above calculation, I have found out that moving to the large facility in town does
not result in so much difference but instead leads to a slight fall in the income per month. I
therefore recommend that you remain in the current location.
Thanks as you consider my advice.
Yours sincerely
COMPONENTS OF MANAGEMENT ACCOUNTING.
DECISION MAKING AND PERFORMANCE MEASUREMENT.
The components of management accounting stated on this article is that of performance
management which established the practice of decision making and managing organizations
performance (Marques, Gourc & Lauras, 2011). In canon, which was established in 1933 with.

MANAGEMENT ACCOUNTING 12
The components of management accounting stated on this article is that of performance
management which established the practice of decision making and managing organizations
performance (Marques, Gourc & Lauras, 2011). In canon, which was established ithe year 19333
its aim being development and manufacture of a 35 millimetre canon cameras.by 1960 canon
was to extend its manufacturing to office machineries by developing calculators and copying
machines which are electronic in nature. After a restructuring its organization, it succeeded by
attaining averagely 20% expansion between the year 1975 to 1985.this is because it was
equipped with able technical staffs who pursued technical projects with ease.it had the strategy
of employing mid-career personnel of other firms to establish diversity expanding the potential
for new information creation. Canon had commenced internal development plan paper copier
which was made with a lot of resistance.by 1969 it had launched PPC which its technology did
not go against any of the Xerox’s more than 600 patents even though the demand declined the
year 1982. Canon commenced a step of reconceptualising the all PPC market. It thought of the
copier market not in firm’s form but in terms of individual faces. The minicomputer needed very
distinct characteristics from the initial PPC's as the copier had to produce clear copies. The
difficulty was that the copier may be used infrequently and hence the cost of often servicing will
be high. A team was established specifically to conduct the feasibility and to scrutinize all that
was needed for the actualization of the MC.the challenge faced by the team was how to establish
varying relationships between reliability and cost (Casello, Nour & Hellinga, 2009).to overcome
the misunderstandings that that were created by developers in the process of establishing
obstructions on how the copier functions. The conventional technique of dealing with this
limitation was to identify techniques of improving the permanency of the drum and the cleaners.
To overcome the contradiction, the feasibility members engaged in heated discussions in" camp”
sessions. The outcome of this was to dispose of the upon making a given number of copies. A
drum was reconceptualised as cartridge with a low life span. It was now possible to make
disposable photo receptors and apparatus for development and tuner fuser at the actual budgeted
cost. The taskforce team declined and their section leader (Hiroshi Tanaka) ordered some beer
with disposable cans which were given to them and they had a drink. He then went ahead and
asked the prices of the beer and what actually made it so cheap. Therefore, the conceptual
connecting the drum and the beer granted the unit members an insight on possible technique of
developing drum at the budgeted cost hence making it relevant for the firm to make the decision