Managerial Accounting: A Cost Analysis of Frank's Child Care Center

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Managerial Accounting

Table of Contents
Introduction...................................................................................................................... 3
Part A............................................................................................................................... 4
(1)................................................................................................................................. 4
(2)................................................................................................................................. 5
(3)................................................................................................................................. 6
(4)................................................................................................................................. 9
(5)............................................................................................................................... 11
Part B............................................................................................................................. 13
(1)............................................................................................................................... 13
(2)............................................................................................................................... 15
(3)............................................................................................................................... 16
Conclusion..................................................................................................................... 17
References.....................................................................................................................18

Introduction
Costing is a technique of determination in which a company measure expanses of particular
product or job such cost of raw material, machinery, and labor. The cost structure of a product
should be made in way that both company and customers remain happy with that because if
cost of product is set high than the customers cannot afford it and if the price is not set as per
the requirements of the company than the company suffer from loss so the price of the
product must be determined in the favor of both company as well as customer. The case
study provided in the study includes a business case of frank, who wants to open a child care
center business in Ovilla, taxes. The child care center is a new segment of business in which
different types of cost involved so this case study will be precisely elaborate different types of
cost involved in the child care center business and cost calculation also provided to know
about cost associated with the business of child care center. The article of the second part of
the study will be briefly elaborate management accounting and techniques of management
accounting.

Part A
The franks are a married couple and want to start a child care center business in Texas. The
child care center business is a new segment of business and the franks never entered into
any business so they started a business the first time. The franks also don't know the cost
that involved in the business so they use a proper method to calculate to cost of business that
includes different type of costs such as appliances cost, insurance cost, licensing fees cost
and another cost that involved in the business.
(1)
When the business started, there is a lot of costs associated with that because the cost is
considered as an expanse of a business and without investing in the operations, a business
cannot run. The three different types of cost used in the business of frank as follows:
 Fixed cost: fixed cost is cannot change according to the sales revenue of the company,
the sales revenue of a company is dependent on the output and level of production of
a company if the level of production increases and sales revenue of the company also
increases but the cost of company cannot increase that cost is called fixed cost of a
business. the concept of fixed cost remains for a short period of time because in the
long period of time every cost would be changed according to the output of the
company, for example of this case, the insurance cost of the children's in the child care
center which is around $ 3480 would be remaining unchanged in the upcoming months
of business so that cost can be called fixed cost for the business (Thomas and Gilbert,
2014).
 Variable cost: the variable cost is always dependent on the sales revenue of the
company if the sales revenue of the company increases than the variable cost also
increases with the same proportion and if the sales decline than the variable cost also
decline with the same proportion so it's a game of output and the cost associated with
it for example if commission paid on the sales to salesperson and if the sales of the
company increases than the commission also increases so its called variable cost for a
company. In this given case, Frank paid the cost of a meal to a supplier that is around
$3.20 and if a frank admit any new member in the child care center than the cost of a
meal also increases so this is called variable cost for the business of frank.
 Semi-variable cost: the semi-variable cost is a compound cost of variable cost and
fixed cost in which cost of production or cost of something else remain stage for a fixed
period of output if company further increases output than the cost associated with
business is also increase with same proportion of sales revenue so this cost is
completely a mixture of two different cost. The cost incurred on the licensing fees of
children's that is paid to state authorities of taxes is around $225 for the at least six
children's if frank admit any new child or want to take permission for the more than six
children's that the cost also increases so this cost can be called semi-variable cost for
the business of frank.
So the above cost is associated with the franks business of the child care center.

(2)
The relevancy of information is dependent on the requirement of that information in the
company because every information is relevant but the relevancy of information is dependent
on the requirement of the business.
 Relevant information: Relevant information improves the decision-making process of a
company because most of the manager's decisions are dependent on the quality of
information if the quality of information is not good than the managers face obstacles in
the decision making. In this given case, the information about the expenses of the
business is very crucial to take an idea about the estimation of cost. The information
which is related to licensing fees is very useful in the given scenario because through
this information the owner can easily take an idea about the admission of children's in
the child care center.
 Irrelevant information: the irrelevant information is time-consuming for the managers of
a company because after getting irrelevant information managers to need to determine
which information is useful for decision making so this takes some extra time as
compare to normal decision-making time. Information is given in the case study which
is related to the equipment purchase that information is not necessary to into account
for decision making so that information is completely irrelevant from a given case study
perspective.
The above information about the business provides a complete view of relevant and irrelevant
information.

(3)
The below calculation show the cost of the business in two different scenarios and the franks
need to select one from these two scenarios to operate their childcare business. the below
calculation is providing a detailed overview of the expenses of business like – delivery cost,
cost of launders and other costs of business.
Option 1st
Costs Amount (Per month)
For pick-up and Deliver 52
Launders cost 32
Detergent 11.66
Total 95.66
Amount of 8 years 9183.36
Second available option
Option 2 Amount (Per month)
From Frank carrying 13.44
Launders cost 32
Detergent 11.66
Total 57.1
Amount of 8 years 5481.6
Working Notes:
Cost of miles as per month
Miles (two way) 6
Per mile 0.56
Total per week 3.36
Weeks in month 4
Month 13.44

Cost of landers
Per week 8
Weeks in month 4
Month calculation 32
Detergent cost
Per quarter 35
Months in quarter 3
Months calculation 11.66667
Cost of washer and dryer purchase
Washer and dryer purchase
Particular Amount
Washer cost 420
Dryer cost 380
installation cost 43.72
delivery cost 35
installing appliances -
Washer energy cost 960
Dryer energy cost 1160
Total cost 2998.72
Working notes
Washer energy cost
Per year 120
Months 12

Per month 10
Eight years cost 960
Dryer energy cost
Per year 145
Months 12
Per month 12.08333
Cost Eight years 1160
The franks must select that option which is more profitable for their business and the second
option is much better than first as per the comparison of revenue and expenses of a business.
if frank select first option than they cost of business increases which again lowers the
profitability of business so Frank must choose that option which provides more profit (Van den
Bossche et. al., 2013).

(4)
The below calculation provide a complete idea about the other expenses which is related to
the business of frank such as insurance cost, meal cost, employee cost and cost of utility.
Cost per children
Particular Day Year Month
State charges 225 18.75
Insurance charges 3840 320
Franks Utility cost 600 50
Meals and snack 19.2 7008 584
Total 11673 972.75
Per children 1945.5 162.125
Frank’s profit statement:
Frank Profit per children
Particular Amount
Charges from parents 800
Cost 162.125
Profit 637.875
Employee cost
Particular Amount
Per hour 9
per week cost 360
per month 1440
Comparison as per children and employee

Particular children Amount
employee cost -1440
Extra children charges from parents 9 7200
cost of children 9 -1459.13
Profit 4300.875
Per children 477.875
Effects on profit
Effects upon profit
Particular children Amount
employee cost -1440
Extra children charges from parents 3 2400
cost of children -162.125
Profit 797.875
Per children 265.9583
$265.95 of additional benefit gets if franks hire an employee from outside and its quite better
for franks to hire an employee from outside as compared to run the entire business by own
(Chen et. al., 2012).

(5)
Cost per children
Particular Amount Year
Space cost 650 7800
Utility cost 125 1500
Insurance 416.6667 5000
Total 1191.667 14300
Per children 99.30556 1191.667
Meals and snack 19.2 230.4
Total per children 118.5056 1422.067
Employees needed
Particular Amount
Total children 12
Handle children 3
Per working member 4
Frank Profit per children
Particular Amount
Charges from parents 800
Cost 118.5056
Profit 681.4944
Employee cost
Particular Amount
Per hour 9

Per week cost 360
Per month 1440
Employee cost 4320
Profit
Particular Children Amount
Employee cost -4320
Charges from parents 12 9600
Cost of children 12 1422.067
Profit 6702.067
Per children 12 478.719
A rented house is always a good choice in the business as compare to do operations of the
business in own house so it's better for franks to opt for a rented house. The franks must hire
at least three employees to run business and admit only 12 children's into care centers rather
than 14 children's than the actual capacity of the house (Hill et. al., 2013).