Holmes Institute HI5017: Managerial Accounting Case Study and Critique

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This assignment analyzes a managerial accounting case study focusing on Franks Day-care, evaluating fixed, variable, and relevant costs associated with various operational decisions. The analysis includes cost comparisons for laundry services, appliance purchases, and hiring additional employees, with revenue-cost analyses to determine optimal choices. Furthermore, the assignment provides a consultancy report offering recommendations on space, employee numbers, and capacity expansion. Part B critically evaluates a journal article, examining the components of management information systems within Canon and Apple, emphasizing innovation and leadership's role in business success. The student applies cost concepts to a service-based company and demonstrates their understanding of accounting information in real-world business scenarios, including cost analysis, relevant and irrelevant costs, and decision-making.
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MANAGERIAL ACCOUNTING 1
MANAGERIAL ACCOUNTING CASE STUDY AND JOURNAL ARTICLE CRITIQUE
By Student’s Name
Name of Class
Professor
University Affiliation
City, State
Date
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MANAGERIAL ACCOUNTING 2
Part A: Case Study Analysis
1. Three types of costs and specific examples for each
Depending on their behaviour various costs are classified into different groups.
According to Crosson and Needles (2013), those costs that do not vary with the quantity of
commodities produced are referred to as fixed costs whereas those that vary either directly or
proportionally with the units of commodities a business produces are called variable costs
(Weygandt, Kieso, Kimmel, and Aly, 2018). In the Franks case study provided in the question,
the fixed costs include the cost of insurance of $3840 and the annual licence costs of
$225.Soem of the costs vary depending on the number of children available at the day-care
facility. For example, the cost of the meals taken by the children at $3.2 per child will be $19.2
when the Franks allow 6 children at their facility. The cost is however at $28.8 and $44.8 per
day when they have 9 and 14 children respectively. The cost varies with time as well. The
total amount paid for mileage ($0.56 per mile) and self-service laundry ($8.0 per week) are
also variable costs as they depend on the number of miles covered and number of weeks,
and the number of children and the number of weeks respectively. However, some other
costs can be classified as fixed and incremental. An example of such includes the expenses
on increasing costs of utilities by $50 because of establishing the day-care and the increasing
cost of energy by $120 and 145$ for owning a washer and a dryer respectively and the rates
do not depend on the number of children at the day-care.
2. Purchase of appliances: Relevant and irrelevant information
The Frank’s decision to purchase new appliances for their facility may be influenced by
certain information. Collier(2015) posits that relevant costs are those that are influential in
making of future decisions and those that change whenever the alternative courses of action
are considered. Therefore, according to that classification, the cost of the new appliances, the
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MANAGERIAL ACCOUNTING 3
cost of delivery and installation of the new appliances and that of the incremental utilities due
to the purchase of the new equipment will be considered relevant. Supposing that the
management of the Franks Day care decide to consider the pick up and delivery services of
the clothes by another laundromat or doing the laundry themselves, then the pick-up and
delivery costs, mileage and cost of detergents as well as laundering cost itself will be relevant
costs. The book value of the old appliances is considered, it will be relevant at disposal of the
old appliances.
Conversely, Brewer, Garrison and Noreen (2015) note that irrelevant costs are those that will
not differ when alternative courses of action are considered. They are simply those
unavoidable costs. Additionally, these costs neither do not affect future decisions nor will they
be incurred because of future decisions. In that light, the sunk costs incurred due to
renovation and those incurred as a result of old appliances identified from the given
information as $79500 and $440 respectively are examples of irrelevant costs. Even though
historical costs are used to estimating future costs of the available alternatives to purchasing
of appliances, the future costs are preferred as they are more accurate than the former and
as such, historical costs such as the sunk costs are irrelevant. Fixed costs that remain
unchanged in the face of differing alternative courses of action by the management are
considered irrelevant. Variable costs that do not change with alternative decisions are also
considered irrelevant.
3. The cost of cloth laundering
For the Franks to determine which way to launder the clothes of the children at the
facility, they may consider three options: laundering the clothes by themselves, purchasing
new appliances to help them with the process or relying on a third-party pick-up & delivery
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MANAGERIAL ACCOUNTING 4
laundry service. Depending on the costs incurred they will choose the most suitable
course of action. Here below is a computation of the effects of those three possibilities:
Self-laundry
Self-service
Cost of detergent $140a
Cost of driving
$174.2
b
The laundry service $416c
Total cost
$730.7
2
Notes
a Cost of detergent = $35×4= $140
b Cost of driving =3 miles ×2 times a week ×0.56 per mile×52 weeks a year
= 174.72
c Cost of laundry $8 per week × 52 weeks= $416
Pick-up and delivery to third-party
Purchase of new appliances
Purchase of new appliances
Cost of
appliance(annual)a
$109.8
4a
Pick-up and delivery to third-party
The monthly service $52
× 12
$ 624
Total cost $624
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MANAGERIAL ACCOUNTING 5
Cost of energy
(incremental) $265b
Cost of detergent c $140
Total cost $514.8
4
Notes
a Cost of appliances(annual)
Item Cost
Washer $420
Add Dryer $380
Delivery $32
Installati
on
$43.7
2
Total
cost
$878.
2
Given that the appliances have a useful life of 8 years, divide 878.2 by 8= $109.84
b Cost of energy(incremental)
Cost due to dryer + cost due to washer= 145+120
Cost of energy = 265
From the foregoing analysis, it is evident that the best option for the Franks Day-care is
to buy new appliances as it is $109.16 and $215.88 cheaper than self- service and, pick-
up and delivery to a third-party laundromat respectively.
4. Decision to hire more employees
Deciding to employ more workers in the day-care facility will cost the Franks more
money in terms of meals and wages paid to their new employees. A revenue-cost analysis
can be helpful in determining the effect of this decision as shown below.
First calculate the revenue
3 additional children × $800 per head
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MANAGERIAL ACCOUNTING 6
=$ 2400
Calculate the costs in terms of meals, and employee wages
Marginal costs of meals
$3.2per child× 3 children×5 days/week×4.33 weeks/month =
$207.84
Marginal cost of employee wages
$9/hour×40 hours/ week ×4.33 weeks/month = $1558.8
Total additional gains = Total additional revenue- Total additional cost
Total additional gains=$2400-$ 1558.8= $633.36
The Franks will gain $633.36 more by increasing the number of employees and number of
children at their facility and therefore they are advised to go ahead with their plan.
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MANAGERIAL ACCOUNTING 7
5. Space of options, number of employees and increasing capacity
Student Accountants,
32 Wolf Street,
Perth.
23/05/2019.
The manager,
The Franks Children Day-care,
989 South Melbourne.
Dear sir/madam,
RE: CONSULTANCY ON SPACE, EMPLOYEES AND CAPACITY
I write in response to your letter ref/06/05/2019 indicating that I provide my advice on
the matter above referred. It is our understanding that currently the Franks Day-care facility
can accommodate up to 9 children and an extra employee. Further, it is your wish to move to
a rented space outside your home facility if it is tenable paying a rent amounting to $650 and
increasing the utilities of the company by $125 per year. Further, it is our understanding that
the insurance expense in the new rented space will be $5000 and that your organisation will
not violate the maximum number of children that an adult can take care of, currently at three
children. All other factors mentioned in your correspondence to me taken into consideration, I
here below provide my analysis of the situation and a recommendation for your business.
If your business stays at its current home, the following revenue and expenses are
expected:
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MANAGERIAL ACCOUNTING 8
Beginning with staying at the same location and possibly allowing 3more children as well as
employing an extra employee.
With six children:
Capacity 6
Children
Revenue
a
$4800
Expenses
:
Utilities b 50
Licence costs c 18.75
Meals d 415.68
Laundry
expenses e
42.9
Insurance f 320
Depreciation f 265
Employee wages
g
0
Rent i 0
Net
Profits
$
3,687.67
Notes
a Revenue
$800 per head × 6 children = $4800
b Utilities -Given
c Licence costs $225÷12= $18.75
d Meals= $3.20 per child/day x 6children x 5 d/w x 4.33 w/m= 415.68
e Laundry expenses= $514.84 ÷12 months = $42.90
f Insurance = annual $3840 ÷12= $416.67/month
g Depreciation= 79500÷25÷12=$265/ month
h Wages= 0
i Rent -0
Adding three children and an employee:
Capacity 9
Children
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MANAGERIAL ACCOUNTING 9
Revenue
a
$7200
Expenses
:
Utilities b 50
Licence costs c 18.75
Meals d 623.52
Laundry
expenses e
42.9
Insurance f 320
Depreciation f 265
Employee wages
g
1558.8
Rent i 0
Net
profits
$ 4,321
Notes
a Revenue
$800 per head × 6 children = $7200
b Utilities -Given
c Licence costs $225÷12= $18.75
d Meals= $3.20 per child/day x 6children x 5 d/w x 4.33 w/m=623.52
e Laundry expenses= $514.84 ÷12 months = $42.90
f Insurance = annual $3840 ÷12= $ 320/month
g Depreciation= 79500÷25÷12=$265/ month
h Wages= $1558.8
i Rent -0
Third option: Move to rented space and increase the children in the facility to 12
Capacity
12
Children
Revenue $9,600a
Expenses
Utilities 125b
License
costs 18.75c
Meals
831.
36d
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MANAGERIAL ACCOUNTING 10
Laundry
expenses 42.9e
Insurance 416.67f
Depreciation 0g
Employee wages 3117.6h
Rent 650 i
Net monthly gain $4397. 72
Notes
a. Revenue
$800 per child × 12 children = $9600
b Utilities -Given in the question
c Licence costs $225÷12= $18.75
d Meals= $3.20 per child/day x 12 children x 5 d/w x 4.33 w/m= 831.36
e Laundry expenses= $514.84 ÷12 months = $42.90
f Insurance = annual $5000 ÷12 months = $416.67
g Depreciation= 0
h Wages= $9/h x 40h/w x 4.33 w/m = $1,558.80/month x2 workers=3117.6
i Rent -provided as $650
The fourth option is to move to the rented space and increase the number of children
to 14 and add an extra worker
The following are the possible revenue and expenses
Capacity 14 children
Revenue $11,200a
Expenses
Utilities 125b
License costs 18.75c
Meals 969.92d
Laundry
expenses
42.9e
Insurance 416.67f
Depreciation 0g
Employee wages 4676.4h
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MANAGERIAL ACCOUNTING 11
Rent 650i
Net monthly
gains $4300.36
Notes
a. Revenue
$800 per child ×14 children =$11200
b Utilities -provided in the question
c Licence costs $225÷12= $18.75
d Food= $3.20 per child/day x 14 x 5 days/w x 4.33 w/month=969.92
e Laundry= $514.84 ÷12 months = $42.90
f Insurance = annual $5000 ÷12 months = $416.67
gDepreciation0
h Wages= $9/hour x 40 hours/week x 4.33 weeks/month = $1,558.80 x3 workers= $4676.4
i Rent -Given
It is observable that any increase in the number of children and workers can be
associated with an increase in additional returns. However, it establishes a trend that seems
to exhibit diminishing marginal returns. At first the revenue rises by $633.33 from $3687.67 to
$4321 after an additional worker was added onto the existing workforce and an increment of 3
children. The incremental effect of one more worker and 3 more children leads is an increase
in the revenue from $4321 to $4397.72 Looking at the marginal revenue earned by adding
one more worker at this point shows that the revenue is increasing at a decreasing rate. That
is so because the next rise in revenue ($76.72) is lower than the first increase of 633.33. A
third attempt to increase the workers by 2 children and an extra worker, the revenue is
$4300.36 which shows a decline of the revenue by $97.36 which is a negative result.
According to Samuelson and Marks (2012), any increase in the labour units after the 9th child
exhibits diminishing returns.
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MANAGERIAL ACCOUNTING 12
Given the above analysis, it is clear that increasing the number of children and workers
is a practical idea in an attempt to gain more revenue. However, the decision to increase the
variables in question any further is not tenable as its returns start reducing progressively. As
such, my recommendation is that your management maintains your location but add an extra
worker and three more children. An attempt to increase these variables any further will lead to
lower additional revenue as the costs will be higher than the revenues.
Yours faithfully,
Student Accountants
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