HI5017 Management Accounting: Case Study Analysis & Critique

This assignment presents a comprehensive management accounting case study focused on Douglas and Pamela Frank's daycare business, involving cost analysis, laundry service options, and profitability assessments for expansion. It includes a journal critique analysis of Nonaka and Kenney's (1991) article on innovation management, comparing Canon and Apple. The analysis covers fixed, variable, and capital costs, relevant vs. irrelevant information for decision-making, and a detailed evaluation of laundry service alternatives. Furthermore, it assesses the financial implications of hiring additional staff and expanding the daycare facility, providing recommendations based on profitability projections. The assignment concludes with a structured recommendation to Mr. and Mrs. Frank on maximizing their daycare business profitability through strategic decisions related to facility size, enrollment numbers, and staffing levels.

Management Accounting Case Studies
Part A – Case Study Analysis for Douglas and Pamela Frank
Case Introduction:
Mr. and Mrs. Frank, a married couple are retired now. They moved to the town of Ovilla,
Texas and wish to open child day care facility at Nanna’s House (their home). They want
to understand the profitability of the business and take decision on number of employees
that they should hire, no. of children that they should enroll and other important business
decision.
Answer 1:
Costs are expenditure that one must pay to generate revenues for the firm. There are
various types of cost mentioned in the case. Three types of cost with one example of each
from the case are listed as below:
a. Fixed Cost: They are fixed in nature and must be paid out or incurred even if the
business is temporarily shut down. They are not affected by the activity level of the
company.
Example: Annual Insurance Cost of $3,840.
b. Variable Cost: They vary or change with the activity level of the company and are
incurred only when the operations of the company are running.
Example: Cost of meals and snack for each child per day at $3.20.
c. Capital Cost: These are costs which are incurred for a long period of time and
create some asset for the concern. They enhance the performance of the company.
Once incurred, it is not possible to reverse the expenses. It is generally one time
lumpsum payment.
Example: Renovation cost of the home @ $79,500. The benefit of this is increase in
useful life of the home by 25 years.
Answer 2:
The couple has an option to purchase some appliances and do the laundry themselves at
their home by the use of these purchased appliances. There are various costs and
information as mentioned in the text, the information that is relevant to the decision of
purchasing the appliances are:
 Purchase price or cost of the appliances
 Cost of the additional accessories which is required for installing the appliances
 Cost of installation of the appliances
 Delivery costs charged by the store for delivery of the appliances
 Increase in energy costs due to the use of appliances
 Life of the appliances
 Information on costs of other available options for laundry to the couple as if some
other options give them a lower cost, the couple might not need to purchase the
appliances.

Management Accounting Case Studies
The information which are irrelevant to the decision to purchase the appliances are:
 Purchase cost of the old appliances
 Life of the old appliances
 Cost of the insurance
 Annual license fee
 Cost of meals and snacks per children
 Cost of the renovation made
The above information is irrelevant as they will not affect the decision. For example, the
information on license fee is of no use when deciding on the appliance purchase.
Answer 3:
The couple once the facility starts running in full swing will definitely need a laundry facility
to launder the spoiled clothes of the children that are enrolled, launder the blankets, bed
sheet and other clothes. The couple after analysis of the market has provided information
about 3 different options that are available to them for the laundry requirement.
These 3 different options are listed as below:
 Using the services of the nearby company by the name of Red Oak Laundry and
dry cleaning. The company has proposed the monthly service at a rate of $52 per
month which includes free pickup and delivery of the clothes.
 The couple can also use the services of a Laundromat which is 3 miles away from
their place. The couple would have to travel to the Laundromat once a week and do
the service at a cost of $8 per week. For this they will have to purchase the
detergent at their own cost.
 The final option for them is to purchase the appliances and do the laundry
themselves at their own place only.
The computation of cost with workings under each of the available alternative is as below:
Alternative 1: Using the services of Red Oak Laundry and dry cleaning
Annual Cost
Proposed charges by the company per month $ 52.00
Multiply by No. of months in a year 12
Total Annual Expense (Monthly Charges * no. of
months in a year) $ 624.00
Alternative 2: Using the services of a Laundromat
Annual Cost
Cost of driving to the facility:
(3 miles one way * 2 ways x $ 0.56/mile per week * 52 weeks $ 174.72
Charges for services of laundering ($8.00 per week x 52
weeks) $ 416.00
Cost of Detergent ($ 35 per quarter x 4 quarters) $ 140.00
Total Annual Cost to the couple $ 730.42

Management Accounting Case Studies
Alternative 3: Purchasing the appliances and doing the laundry themselves
Annual Cost
Cost of the appliances (WN -1) $ 109.84
Incremental Cost on the Energy per year
($120 for washer and $145 for dryer)
$ 265.00
Cost of Detergent ($ 35 per quarter x 4 quarters) $ 140.00
Total Annual Cost to the couple $514.84
Working Note 1
Purchase cost of the Washer $ 420.00
Purchase cost of the dryer $ 380.00
Installation Cost of the accessories $ 43.72
Delivery Cost of the appliances by the store $ 35.00
Total Costs to be incurred $ 878.72
Life of the appliances (in years) 8
Therefore, Annual expenses on the appliances
($ 878.72 / 8) $ 109.84
The cost to the couple for laundering the clothes under each of the above alternatives is as
below:
 Using the services of the nearby company by the name of Red Oak Laundry and
dry cleaning. The company has proposed the monthly service at a rate of $52 per
month which includes free pickup and delivery of the clothes - $624
 The couple can also use the services of a Laundromat which is 3 miles away from
their place. The couple would have to travel to the Laundromat once a week and do
the service at a cost of $8 per week. For this they will have to purchase the
detergent at their own cost - $730.42
 The final option for them is to purchase the appliances and do the laundry
themselves at their own place only - $514.84

Management Accounting Case Studies
Answer 4:
The couple has a successful innings at their business and today they have a waiting list at
their facility, the couple has an option to hire an additional employee and accept three
more children in the facility. The couple wants to know the profitability and feasibility of
hiring the additional employees
The decision on thus can be based on the incremental profit that the couple would
generate from the hiring of the employee and introduction of 3 new children to the facility.
The couple will have an incremental revenue of $2,400 ($800 per month * 3 children)
from the additional enrollment of 3 children.
For, this additional revenue, the couple would also incur additional cost. The cost will be
towards the employee and variable cost of providing meals and snack to the additional
children.
Total Incremental Cost:
Cost of the employee
($9 per hour * 40 hrs per week * 4.33 weeks per month) $1,558.80
Additional Cost of meals and snacks
($3.20 per child per day * 3 children * 5 days a week * 4.33 weeks per month) $207.84
Total Incremental Cost $1,766.64
Thus, Net Incremental Profit = Incremental Revenue - Total Incremental Cost
= $ 2,400 - $ 1766.64
= $ 663.36 per month.
Recommendation: The couple should hire the employee as the couple would be able to
reap in additional profit of $663.36 per month owing to the new hire.
Answer 5:
To,
Mr. and Mrs. Frank
29th May, 2019.
Sub: Recommendation on maximizing the profitability of the day care business.
Dear Mr. Frank,
Greetings for the day.
Based on your request and provided information, we have analyzed the proposal of you
moving to a larger rented facility and enrolling higher children than 6. The summary of the
recommendation is as below:
 You should move to a larger rented space
 You should be accepting 12 children
 You should be hiring 3 additional employees for your purpose.

Management Accounting Case Studies
My recommendation is based on your given information which is as below:
1. You have an option to move to a larger rented space in town which can
accommodate 12 or 14 children.
2. You want to know the profitability of moving there or stating at own place and enroll
wither 6 or 9 childe,
3. The incremental cost for moving to a larger space are as below:
a. Rent expenses of $650 of the new space
b. Utilities Cost of $125 per month at the new space
c. Insurance Cost of $5000 annually
4. Other variable cost on meals and snacks, employee cost, laundry are expected to
remain the same.
Based on the above information and factors, the computation of profits if you choose to
stay at the same place which is Nanna’s House is as below:
Particulars Amount Amount
No. of Children 6 9
Revenue: $800 per child
$800 * 6 $4,800.00
$800 * 9 $7,200.00
Expenses:
Meals : $3.20 per child * 5 days/wk *
4.33 wks/ month
$3.20 * 6 * 5 * 4.33 $415.68
$3.20 * 9 * 5 * 4.33 $623.52
License Fee: $225 per year
$225 / 12 $18.75
$225 / 12 $18.75
Insurance Fee: $3,840 per year
$3,840 / 12 $320.00
$3,840 / 12 $320.00
Utilities: $50 per month $50.00 $50.00
Laundry: Option a from solution 3
above
$514.84 / 12 $42.90
$514.84 / 12 $42.90
Depreciation: ($79,500/12/25) $265.00 $265.00
Employee Cost $0.00 $1,558.84
Total Expenses $1,112.33 $2,879.01
Net Income (Revenue - Expenses) $3,687.67 $4,320.99

Management Accounting Case Studies
The computation of profits if you choose to move to a larger rented space is as below:
Particulars Amount Amount
No. of Children 12 14
Revenue: $800 per child
$800 * 12 $9,600.00
$800 * 14 $11,200.00
Expenses:
Meals : $3.20 per child * 5 days/wk * 4.33
wks/ month
$3.20 * 12 * 5 * 4.33 $831.36
$3.20 * 14 * 5 * 4.33 $969.92
License Fee: $225 per year
$225 / 12 $18.75
$225 / 12 $18.75
Insurance Fee: $5,000 per year
$5,000 / 12 $416.67
$5,000 / 12 $416.67
Rent: $650 per month $650.00 $650.00
Utilities: $125 per month $125.00 $125.00
Laundry: Option a from solution 3 above
$514.84 / 12 $42.90
$514.84 / 12 $42.90
Depreciation $0.00 $0.00
Employee Cost
$9/hr * 40 hrs *4.33 wks * 2 employees $3,117.60
$9/hr * 40 hrs *4.33 wks * 3 employees $4,676.40
Total Expenses $5,202.28 $6,899.64
Net Income (Revenue - Expenses) $4,397.72 $4,300.36
Thus, we see that the profits for you are maximized when you enroll 12 children at the new
rented space. You highest profit per year should be $4,398 under this option,
Regards,

Management Accounting Case Studies
Part B – Journal Critique Analysis
Case Introduction: The requirement is to read the journal article by Nonaka and Kenney
(1991), “Towards a new theory of innovation management: A case study comparing
Canon, Inc. and Apple Computer, Inc.
Answer 1:
The components of the management accountancy system in Canon Inc.
The company used concept of team work and team effort to innovate their offerings. The
company worked towards creating alternative to heavy weight copiers that were their
existing offerings. The teams met regularly, interacted, brain stormed and came with an
idea of light, compact Mini Copiers.
The company preached inclusion of all while formulating and implementing policies and do
not have rigid hierarchy at the company. The information flew from all the direction and
even the lowest rank employee was encouraged to innovate and present their ideas freely.
Examples: Components used were team formation, setting up of budgets, performance
management and constraints on cost to control and monitor profitability at each stage of
product development
The components of the management accountancy system in Apple Computer Inc: -
The company followed top-down approach and nominated one “product Champion” from
among themselves who would oversee, supervise and monitor the product development
keeping in mind the cost constraint continuously and regularly. It was Steve Jobs who was
the product champion for development of compact and user friendly Macintosh. He
ensured that the team followed the given cost constraint. The cost constraint was given by
him based on internal information on factory capacity and efficiency.
Examples: Components used were Role of senior leadership, timely internal information;
robust budgeting system and setting up of constraints on target cost and price to ensure
maximum profitability.
Answer 2:
The article state “Innovation as a Process of Information creation” and a firm needs
to organize themselves to be able to transmit information.
The article proved what it stated at the beginning of the article that the innovation is
possible only when the information flows through the organization seamlessly and the
employees create an environment which breeds communication Both the companies
illustrated in the article were able to innovate their offerings for the public at an affordable
cost only because of the timely information availability.
Examples from Canon Inc.
1) Canon Inc. for the development of the Mini Copiers created a team that had
members from each department in the company including Research and
Development, marketing, production, and quality among others. Further, they
created another team with the sole objective of cost assessment for the designed
product. It was the responsibility of the cost team to ensure that the designed

Management Accounting Case Studies
product is financially feasible and profitable for the company as any innovation
which is not bringing in cash for the company is worthless.
2) The two different team product development and cost assessment had an open free
communication protocol which helped them pass on information freely and
transparently to each other. This helped them create a product that was affordable
for public and profitable for the company.
Examples from Apple Computer Inc.
1) The company was able to bring in the most advanced operating system called as
the Macintosh within the affordable range as the leader of the team Mr. jobs had
relevant internal information on costs. He was aware that Apple has access to a
fully automated large factory which would reduce the cost of production and thus
can be sold at a lower target price thus bringing a product that is affordable to a
larger section of people.
2) The company was able to get timely relevant information on costs, development
stage and thus was better able to control the quality and costs of the product. The
team placed trust, confidence and loyalty to each other.
Answer 3:
The case study on Apple Computer Inc, and Canon Inc. have lessons which if
implemented can help the management accountant grow and learn. The specific lessons
or outcomes that according to me will be useful to the management accountants in
Australia are:
1. Team Formation from Canon Inc.: Canon Inc. created a successful strategy of
developing low cost Mini Copiers by use of efficient product development team and
sound cost assessment team. The cost team supported the product development
team in their information needs regarding costs. This educated us on how crucial
teamwork is for the success of the company.
2. Setting of target price and cost by Apple Computer Inc. The company set a target
price based on the relevant internal information on target costs to the company. The
set targets gave direction to the team on moving forward and developing products
within the given constraints so as to ensure that the innovation ideas are
implemented and brought to the market.
3. Cost reliability improvement from Canon Inc. – The Company while working on the
Mini Copiers always kept in mind the cost factor. They knew that none of the
innovation of the company is going to work if it is not within the profitable range for
the company. They worked in cohesive teams and interacted openly.
4. The ROI concept of Apple Computer Inc. helped the team at the company
continuously monitor the progress on the product development. With respect to the
targeted ROI of the business. The important information on financials of the
company kept the team hooked to ultimately focus on increasing profitability.

Management Accounting Case Studies
Conclusion
The above report analyzed and discussed two different case studies focusing on concepts
and components of management accountancy. The first one enable us analyze the
decision making in a real life situation. The couple used the concepts of management
accountancy on taking decisions on running their day care business. The objective was to
maximize the profitability to the couple from their business.
The second part involved analyzing a case study to understand management accounting
concepts by literature review on innovation approaches by two companies namely Canon
Inc. and Apple Computer Inc.

Management Accounting Case Studies
References
Askarany, D., 2016. Attributes of innovation and management accounting changes.
Contemporary Management Research, pp.455-466.
Breuer, A., Frumusanu, M.L. and Manciu, A., 2013. The role of management accounting in
the decision making process: Case study Caras Severin county. Annales Universitatis
Apulensis: Series Oeconomica, 15(2), p.355.
Chen, S.S., Huang, C.W., Hwang, C.Y. and Wang, Y., 2019. Voluntary Disclosure and
Corporate Innovation. Available at SSRN 3311932.
Quinn, W., 1985. Managing innovation: Controlled chaos. Harv. Bus. Rev., (May-June): 73
80.
Zanin, F., Comuzzi, E. and Costantini, A., 2019. Management Control Systems: Concepts
and Approaches. In Human Performance Technology: Concepts, Methodologies, Tools,
and Applications (pp. 455-473). IGI Global.