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H15017 Management Accounting Case Studies and Accounting System Assessment Answer

Assessment Details and Submission Guidelines  
Unit Title Managerial Accounting 
Assessment Type Individual Assignment 
Assessment Title Management Accounting Case Studies 
Purpose of the assessment (with ULO 
Mapping) 
Students are required to develop their understanding of cost concepts, and demonstrate their ability to apply their knowledge of cost concepts to a service-based company. Additionally, students are to critically evaluate a journal article to analyse the practical use of accounting information to real-life companies’ decision-making and achievement of business goals (ULO 1, 5, 6, 7, and 8) 
Weight 30% of the total assessments 
Total Marks 30 
Word limit Not more than 3,000 words. Please use “word count” and include in assignment.  
Submission Guidelines 
  • All work must be submitted on Blackboard by the due date along with a completed Assignment Cover Page.  
  • The assignment must be in MS Word format, no spacing, 12-pt Arial font and 2 cm margins on all four sides of your page with appropriate section headings and page numbers.   
  • Reference sources must be cited in the text of the report, and listed appropriately at the end in a reference list using Harvard referencing style. 
  • It is the responsibility of the student who is submitting the work, to ensure that the work is in fact her/his own work. Incorporating another’s work or ideas into one’s own work without appropriate acknowledgement is an academic offence. Students should submit all assignments for plagiarism checking on Blackboard before final submission in the subject. For further details, please refer to the Unit Outline and Student Handbook.  

Individual Assignment Specifications 

Purpose: 

This assignment aims at developing your understanding of cost concepts, and demonstrate your ability to apply your knowledge of cost concepts to a service-based company. Additionally, you are to critically evaluate a journal article to analyse the practical use of accounting information to real-life companies’ decision-making and achievement of business goals. 

Assignment Structure should be as the following: 

Part A: Case Study Analysis (15 Marks) 

You are to answer the 5 questions relating to the case study of a child care business. It includes both theory and calculation type questions. Do show your working for the calculations.  

Case Background 

Douglas and Pamela Frank are a married couple. They both worked for a railroad company for 30 years. At age 57, Douglas and age 52, Pamela retired and moved to the small town of Ovilla, Texas, which has a population of approximately 3,500 residents. When the Franks moved to the town, they decided to start a child care business in their home called Nanna’s House. Nanna’s House is licensed by the state. The state charges an annual fee of $225 to maintain the license. Insurance is required at a cost of $3,840 annually. The facility is licensed to care for a maximum of six children. The Franks charge a fee of $800 per month for each child. The monthly fee is based on a full day of care, from 8:00 a.m. to 4:00 p.m. If additional time is required beyond 4:00 p.m., parents must pay an additional charge of $15 per hour for each child. The couple provides two meals and a snack for the children. The cost of the meals and snack is $3.20 per child per day. There are six children currently enrolled. 

The facility is very nice. It is an 820 square foot addition to their home that was built in 1964. The Franks purchased the home and completed the renovations for $79,500 and they believe the addition has a useful life of 25 years. The facility has a large open space for play, reading, and other activities. There is a section for sleeping which contains small cots. The facility is equipped with a small kitchen, two bathrooms and a small laundry area. The daycare increased the Franks’ utility cost by $50 each month. 

During the first week of operations, the washer and dryer stopped working. Both appliances were old and had been used by the couple for many years. The old appliances cost a total of $440. While a laundry room was not initially a necessity, it became increasingly important for laundering the soiled clothes of the children, blankets, and sheets. A company nearby, Red Oak Laundry and Dry Cleaning, can launder clothing for the Franks, including pick-up and delivery, for $52 per month. Alternatively, the Franks can take clothes to the laundromat once a week, which is three miles away (one way). The applicable mileage rate is $0.56/mile. They can launder the clothes themselves at a cost of $8 per week. The self-service alternative does not include detergent or fabric sheets. The couple would need to purchase these items in order to use the laundromat. Purchasing laundry supplies in bulk from MegaMart would cost $35 every quarter. The final alternative is for the Franks to purchase a washer and dryer. The cost of the appliances is: washer $420 and dryer $380. The additional accessories for both appliances, needed for installation, cost $43.72. The store will deliver the appliances at a total cost of $35. The cost of installing the appliances is free. Both appliances are expected to last 8 years. According to the manufacturer the washer will increase energy costs by $120 per year. The dryer will increase energy costs by $145 per year.   

The Franks need some assistance in decision making and evaluation. They have contacted you, their accountant, to provide some advice.  

 Required:  

Respond to the following questions to help Douglas and Pamela make their decisions. (If necessary, the Franks will use straight line depreciation. For monthly calculations, use 4.33 weeks per month.) 

  1. Consider the different types of costs discussed in this unit. List any three (3) types of costs and provide one specific example of each cost from the case. (3 marks) 
  2. Based on the information provided, what information is relevant to the decision to purchase the appliances? What information is irrelevant to the decision to purchase the appliances? Why? (3 marks) 
  3. What could it cost the couple to launder clothes? Show your detailed calculations for each option. (3 marks) 
  4. The Franks have a waiting list for their day care. They can hire an employee for $9 per hour for 40 hours     each week. With the additional employee, the Franks can accept three additional children. Should the Franks hire the additional employee? Show your detailed calculations. (3 marks) 
  5. The Franks home can accommodate a maximum of nine children. They can move the day care from their home to rented space in town, which can accommodate up to 14 children. The space will cost $650 per month and the utilities will cost $125 per month. Additionally, insurance will now cost the Franks $5,000 per year. Per state regulations, each adult can supervise no more than three children. As their accountant, prepare a letter to the Franks advising them on their space options. Should they continue to operate the facility at home or should they rent space in town? How many children should they accept? How many employees will they need to hire? Show your detailed calculations for each scenario. (3 marks) 

 Part B: Journal Article Critique (12 Marks) 

You are 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.”, Journal of Engineering and Technology Management, 8, p. 67-83. The journal article is attached as a separate file in Blackboard under the folder <Assignment>. 

Required: 

Critically evaluate the role of management accounting systems and the provision of accounting information in the innovation process of these two companies by answering the 3 questions below: 

  1. Identify the components of the management accounting system in each of the two companies, and discuss their relevance in enabling decisions to be made efficiently and effectively. Include examples in your answer. (4 marks) 
  2. The article describes the innovation process in a firm as ‘a process of information creation’, and a firm needs to organise themselves ‘to transmit the new information’. Explain how management accounting contributes to this innovation process. Include in your discussion two (2) specific examples from each of the two companies mentioned in the journal article. (4 marks) 
  3. Provide four (4) specific outcomes or lessons learned from the article’s research findings that will be useful for management accountants in Australian companies to learn from, and justify your answer [i.e. provide 2 outcomes from each company]. (4 marks) 

Answer

Accounting and costing 

Module Number-H15017

Introduction

With the changes in the economic factors, each and every organization needs to analysis the every possible business cost of the process which plays a pivotal role to assess the different business costing. In the starting of this report, case study analysis have been made on the different type of cost incurred in the different with the given specific example. After that the different components of the management accounting system in relation to two companies have been assess and its evolution related to impact of it’s on the decision making have been assessed.

Part A: Case Study Analysis

1. Consider the different types of costs discussed in this unit. List any three (3) types of costs and provide one specific example of each cost from the case.

The current case study involves operation of a Child care business. Every kind of business involves several costs. The given business has also incurred different types of costs being incremental costs, variable costs, fixed costs and sunk costs. However, there are several type of cost which is considered to determine the costing of the business. The main three types of costs are discussed and exemplified as follows:

  1. Fixed costs: fixed costs do no change with the change in output of activity. They remain fixed at a certain amount, even if the operations are providing zero output. 

E.g.: annual license fee of $225 per year and annual insurance fee of $3840 per year.

  1. Incremental fixed costs: incremental fixed cost includes the components of both fixed and variable costs. These costs change with the change in unit, i.e. with addition in unit of measurement, additional in costs is observed. 

E.g. for care of children beyond 4 p.m. Nanna’s House charge $15 per hour for a child. Here hour is the measurement unit and the charge of $15 is the incremental cost. 

  1. Sunk cost: the cost which is already spent by company and is unrecoverable is considered as sunk cost. This kind of cost is not refundable and is lost once spent. 

E.g. cost of old appliances being $440.

  1. Variable costs:  the costs which change with the level of output are referred to as variable costs. When the activity level is zero, the variable costs are also zero.

E.g. cost of meals and snacks per child per day is $3.2.

2. Based on the information provided, what information is relevant to the decision to purchase the appliances? What information is irrelevant to the decision to purchase the appliances? Why?

  • To make the decision of purchasing the appliances the information related to the required costs that might be incurred is very important. This includes the following:
Cost of washer$420
Cost of dryer$380
Cost of additional appliances$43.72
Delivery cost$35
Expected life8 years
Increase in energy cost by washer$120 per year
Increase in energy cost by dryer$145 per year

 All these costs are compulsorily accumulated to achieve the cost attached with purchase of appliance.

Also, the purchase decision cannot be made standalone, without comparing the cost incurred on other three alternatives, which makes the below information relevant too:

Pick and delivery costs$52 per month
Mileage rate$0.56 per mile
Cost of self-laundering$8 per week
Purchase of laundry supplies$35 every quarter


  • The costs which are irrelevant if the company wants to purchase the appliances are related to the cost of old appliances of $440. 

3. What could it cost the couple to launder clothes? Show your detailed calculations for each option.

To calculate the cost incurred by the couple to launder the clothes, the different alternatives available to the couple are required to be analysed to decide upon the best options which shall lead to lowest possible cost. The analysis of different analysis is as follows:

Alternative 1
Using services of Red Oak Laundry and Dry Cleaning
Pick-up and delivery by Red Oak Laundry and Dry Cleaning
PARTICULARSANNUAL COST
cost of laundry and pickup: $52 per month624


Alternative 2
Self-laundering
PARTICULARSDETAILSANNUAL COST
mileage rate (0.56 per mile, 3 mile one way, once in a week required to launder, 4.33 week per month)3 mile * 2 * 4.33 * 12 months * 0.56 per mile174.59
self-laundering cost$8 per week * 4.33 * 12 months415.68
cost of detergent$35 per quarter * 4140
total costs 730.27


Alternative 3
Purchase of appliance
PARTICULARSDETAILSANNUAL COST
depreciation expense  
total cost:  
washer                                                      420  
dryer                                                         380  
installation cost                                   43.72       
delivery expenses                                   35878.72 
expected life8 
annual depreciation charge 109.84
cost of detergent$35 per quarter * 4140
rise in energy cost due to washer 120
rise in energy cost due to dryer 145
total cost: 514.84


The analysis of the costs incurred in all the three alternatives suggests the owners of Nanna’s House to opt for the option of purchase of appliances and undertake laundering themselves. This is because the cost incurred on this alternative is least, i.e. $514.84. 

4. The Franks have a waiting list for their day care. They can hire an employee for $9 per hour for 40 hours each week. With the additional employee, the Franks can accept three additional children. Should the Franks hire the additional employee? Show your detailed calculations.

Whether or not additional employees should be hired can be decided only on looking at the incremental cost of benefit added to the concern by hiring additional employees. This is computed as follows:

incremental costs or benefits
ParticularsDetailsincremental cost/ benefit
incremental revenue  
revenue from additional 3 children$800 * 3 children2400
incremental costs   
cost of food$3.2 * 3* 4.33*5 days207.84
employee cost$9 * 40 hours*4.331558.8
total incremental benefit 633.36

Note: the number of days in a week is taken as 5 days.

As the incremental benefit to the day care increases by $633.36 by employing additional labour, the additional labour must be hired. 

5.  Should they continue to operate the facility at home or should they rent space in town? How many children should they accept? How many employees will they need to hire? Show your detailed calculations for each scenario.

All these questions can be answered by analysing the business costs in two alternatives, i.e. operating at Nanna’s House and renting larger facility. Also in both these alternatives two options are present. While operating at Nanna’s house, the day care can either continue with 6 children and no employees, or could take 9 children by hiring 1 additional employee. Also, while choosing the larger facility two options are there, either having 12 children by hiring 2 employees, or having 14 children by hiring 14 employees. Both the scenarios are presented as follows (Komala, 2012).

Option A: renting a larger facility

OPERATE FROM LARGER FACILITY: COST ONLY FOR A MONTH
PARTICULARS14 CHILDREN12 CHILDREN
revenue  
$800 * 14 children11200 
$800 * 12 children 9600
total revenue112009600
costs  
cost of license ($225/12)18.7518.75
insurance cost (5000/12)416.67416.67
cost of meal ($3.20 per child* 4.33 weeks*5 days a week* no of child)  
3.2*4.33*5*14969.92 
3.2*4.33*5*12 831.36
depreciation expenses00
cost of laundry (self-asset purchase, 514.64/12)42.8942.89
rent expense650650
employee cost   
for 2 employees 3117.6
 4676.4 
utilities expense125125
total costs6899.625202.26
profits4300.384397.74


Option B: operating from Nanna’s house

OPERATE FROM NANNA'S HOUSE: COST ONLY FOR A MONTH
PARTICULARS9 CHILDREN6 CHILDREN
revenue  
$800 * 9 children7200 
$800 * 6 children 4800
total revenue72004800
costs  
cost of license ($225/12)18.7518.75
insurance cost (3840/12)320.00320.00
cost of meal ($3.20 per child* 4.33 weeks*5 days a week* no of child)  
3.2*4.33*5*9623.52 
3.2*4.33*5*6 415.68
depreciation expenses (79500/25/12)265265
cost of laundry (self-asset purchase, 514.64/12)42.8942.89
rent expense00
employee cost (calculated earlier, only 1 employee)1558.80
utilities expense5050
total costs2878.961112.32
Profits4321.043687.68


Recommendation

From the analysis of both the alternatives from two options studied above, the day care shall be able to earn highest profits by renting a larger facility and working with 12 children there and employing 2 employees. The profits in that case are $4,397.74 for a month. This is $76.69 higher than the profits earned under the second best alternative of working from Nanna’s House with 9 children and employing 1 additional employee. The least profitable alternative is working from Nanna’s House with just 6 children. It will provide profits of $3687.68 to the business. Hence the most profitable alternative can be summarised in the following table (Namazi, 2013).

Operation fromRented facility
Number of children 12 children
Number of employees2
Total revenue
9,600

Total costs$5,202.26
Net income $4397.74


Part B: Journal Article Critique

1. Identify the components of the management accounting system in each of the two companies, and discuss their relevance in enabling decisions to be made efficiently and effectively. Include examples in your answer.

Management accounting system helps the managers in the organisation to set a process by which the information about the organisation’s economic activities can be measured and reported. The management accounting system is used by the managers to undertake planning in a better manner, evaluate the performance, manage the risks, control the operations and etc. The several components of management accounting system identified from the case study are:

Cost management system: this management accounting system helps the organisations to achieve cost effectiveness by analysing the root cause behind the costs incurred in business. The management systems works in a dual manner by helping the organisations to control the costs as well as to reduce them (Noe, Hollenbeck, Gerhart, and Wright, 2017).

E.g. in Canon, the development of mini copier was undertaken by setting a target cost beforehand. This helped the team to analyse every component required for manufacturing by considering the cost also with other qualitative factors. The root cause behind the expensiveness of drums, required to be periodically replaced from the manufactured Mini copiers, was identified and resolved by the team to keep the total costs within the target.

Risk management system: this management accounting system helps the managers to identify the problems that might hamper the operation or disturb the budgets or in any manner can prove to be a hindrance in successful operations beforehand. After identification, this system also works towards helping in mitigating and managing the risk to either totally prevents it from shaping or to reduce the effects, if it shapes reality (Tupa, Simota, and Steiner, 2017).

E.g. the feasibility study conduct at Canon resulted in identification of one factor, i.e. the drums which if not periodically replaced could add high to the maintenance costs and would appear costly to the customers. To achieve reliable end product performance either a periodic replacement or a continuous maintenance shall be required. This early assessment of risk helped the organisation to devise replaceable and cheap drums with same quality levels (Agbejule, 2011)

Performance management system:  this management system help in monitoring the performance results obtained by business and compares them with the set targets. Certain goals are set pre-determined for business, and the purpose of adoption of this accounting system is checking whether the actual performance results comply with the set goals or do lack from them. The variance in actual performance as compared with the target is identified which helps the management to bring changes in the programmes to reach the targeted level of performance (Buckingham, and Goodall, 2015).

e.g. As seen from the case of Apple Computers, the company saw a setback in achievement of goals set with the market introduction of both Apple III and Lisa in the early 1980s. The business had to devise something which can help in overcoming the lack of performance shown by two consecutive releases. A new performance system was to be devised which could return the losses faced. The management with a futuristic perspective was trying to develop a low cost computer to be released in market. 

e.g. Also from Canon’s case it is very much clear that the downfall faced in 1970 and huge competitive threat from rivals urged the need in the management of Canon to define into market a product which is extremely different and trend setter. At the same time, profitability was kept in mind and targeted costs are set to measure the actual costs with them (Boland Jr,  and Pondy, 2013).

2. The article describes the innovation process in a firm as ‘a process of information creation’, and a firm needs to organise themselves ‘to transmit the new information’. Explain how management accounting contributes to this innovation process.

The management accounting system contributes actively in the innovation process in the following manner:

  • Interaction is required among people of different minds to bring a real feasible innovation in any field. To enable innovation as a process of information creation an environment is required to be provided to people where this creation can happen. It is the responsibility of the organisation, or say the managers to help in achieving it. 

At Canon, the management allowed an interaction between personnel with diverse technical capabilities by accumulating them in an environment which led to creation of new information (Lopez-Valeiras, Gonzalez-Sanchez, and Gomez-Conde, 2016).

  • Creation of any new information comes with many problems which are to be handled as early as possible.

Had the management system at Canon was not responsive as a risk management system, the root problem with the copiers dealing with the drums could have never been identified, let resolving it stand far alone (Nielsen, Mitchell, and Nørreklit, 2015). 

  • Management system helps the managers to evaluate their existing performance and look strategically into the future to identify the unexploited opportunities and even technological advancements. This knowledge can then be trapped to create newer information which can be synthesised and used in entire organisation (Chenhall, and Moers, 2015).

Apple identified the performance drawbacks with Apple III and Lisa, along with identification of untapped market demand of such a computer that does have the features as were prevalent in the then higher-priced machines, the Xerox Star and Apple Lisa, but at the same time would cost less, is fast and small in size.

  • The creation or transmission of any new information does not happen all merrier. There are several disputes which happen in between to let a successful innovation happen. The management accounting system helps the management to effectively resolve these disputes by overweighing the benefits against the costs and understanding the benefits of working together (Obeidat, Al-Suradi, Masa’deh, and Tarhini, 2016).

At Apple, the team of Macintosh consists of people with different calibre and backgrounds plus difference of opinion. Several hot issues burned, but Steve Jobs as a responsible head handled them all and let collaboration prevail (Lord,  and Lawrence, 2011).

3. Provide four (4) specific outcomes or lessons learned from the article’s research findings that will be useful for management accountants in Australian companies to learn from.

  • It is important in every organisation to bring innovative practices to stand out in the highly competitive and dynamic environment. Growth comes from creation of new ideas and transmitting them in entire organisation. Canon’s step to create a separate RandD department for the Mini Copier project supports this argument. The new department was focused only to bring an innovation which has never been delivered (Revellino, and Mouritsen, 2015). 
  • The object is to end all the chaos and bring up an environment where innovative ideas can flow and turn into a creative information. In the stream disputes are inevitable, yet are required to be effectively managed. The leaders have to stand like seen in the case of Apple where Steve Jobs set aside all the disputes by continuously encouraging the team to bring something “insanely great”.
  • Motivation is the key. There are low times and efforts are huge. The team has to be motivated to reach their full potential to realise big and innovative results. At Apple the Mac group was kept motivated by using the two Canon Slogans being, “It’s better to be a pirate than to join the Navy. Let’s be pirates” and “the journey is the reward" (Awori, Namada, and Linge, 2018).
  • The size of the group is immaterial, but the quality and effort is. Like at Canon, the feasibility team constructed for Mini Copier just had 14 members but they all put their highest efforts and knowledge into the project to turn it out in real world (Gerdin, 2015).

Conclusion 

After evaluating the both cases, it is analysed that the management accounting system is used by the managers to undertake planning in a better manner, evaluate the performance, manage the risks, and control the operations and reducing the overall costing.  Nonetheless. The given business has also incurred different types of costs being incremental costs, variable costs, fixed costs and sunk costs which is used by company to determine the business costing. It is analysed that company needs to focus on lower down the overall costing if it wants to sustain in market. The management accounting system contributes actively in the innovation process and helps organization to strengthen the overall business outcomes. After assessing the part-1 case, it is found that the day care would be the best option and it would make company to earn highest profits by renting a larger facility and working with 12 children there and employing 2 employees. The crux of this report is that if company want to strengthen its overall outcomes then it will have to strengthen the return on capital employed.

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