HI5017 Case Study Analysis on Types of Cost using Some Case Laws Assessment Answer
Case Study Analysis
The report has comprised the study of various types of cost with the help of some case laws. It is required for every company to reduce the fixed, variable and other costs to strengthen the return on its capital employed. Initially, the various kinds of costs have been elaborated in the report. With the help of given case studies, the role of these costs has been described. After analyzing the role and effect of different costs, the importance and applicability of management accounting system have been analyzed. The report is entirely focused on different types of costs which are usually occurred in any business and the impacts of types of costing methods on the return in business.
Part A: Case Study Analysis
1. Type of costing and examples
There are several costs has been discussed such as fixed cost, variable cost and other costs which are supported by the given practical example.
|Particular||Description of these fixed with the given examples|
|A cost incurred in business is considered as fixed cost if it does not change with the change in production volume. In the given case the annual licensing fee and annual insurance are considered as a fixed cost because their value does not change with the change in the level of production. The fixed cost remains constant in every year (Horngren, et al. 2012).|
|Incremental fixed cost is a part of fixed cost which enhances eventually once in a year. In the case given in the report, the cost related to the energy related to washer and dryer is considered as an incremental fixed cost. The incremental fixed cost does not increase with the change in the level of production but increases gradually once in a year or two years.|
|Variable costs||The nature of variable cost is not constant. The variable cost changes with the change in the production volume of business. Various factors involved in business environment affect the level of variable cost in every financial year. Here in the given case, the laundry cost is an example of variable cost which changes with the monthly use of laundry service. Also, the cost of mileage incurred will be changed on the basis of total mileage driven (Horngren, et al. 2012).|
2. Detailed information to make the decision to buy an appliance? What information is irrelevant to the decision to purchase the appliances? Why?
Here in the given case, the Frank couple has several options to continue their business. The impact of the adoption of every option is different. If the couple would decide to adopt the option of purchasing the appliances for laundry then it would affect the several relevant costs involved in the business and these costs play a significant role in decision making. All these costs are the following:
- Initial costing incurred to buy a new appliance
- Newly incurred delivery charges for the delivery of the selected appliance.
- Initial costing for the installation of the new appliance.
- The cost incurred for the utility of the appliance.
On the other hand, if the Frank couple will go for other alternative options of getting the clothes clean by Red Oak Laundry then the costs which will be relevant in decision making are the laundry charges, pick-up, and delivery charges. The other alternative available for the Frank couple is the option of self-service. If they will go for such an option then the mileage cost incurred while traveling from and to the laundry provider's place will be considered as relevant for decision making. There are several costs involved in the business which are considered to be irrelevant in decision making i.e. the cost of appliances which already existed, pick-up and delivery and the cost of detergent, etc (Maskell, Baggaley, and Grasso, 2016).
Also, there are some opportunity costs are involved which comprises some significant values. These costs are not expressly determined in the case of Frank couple but these costs can be indirectly considered while making the decision. The time spent in traveling from and to Laundromat is an example of such cost in business (Alcalde, and Guerrero, 2016).
3. Cost the couple to launder clothe and detailed calculations for each option.
The below-given table is being used to assess the different alternatives available for the selection.
1. Purchase for the newly considered appliance
|Details are given for appliance||$ amount|
Chemical costing for the appliance
Depreciation charged by using the straight-line method
The total cost of the appliance to the business $878.72.
Life expectancy of the appliance 8 years
Charged depreciation annually = $878.72/8 = 109.84
|Annual costing for the detergent||140.00|
|Annual total costing||514.84|
2. Alternative-2 Self-service
The self-service laundry cost has been computed as below.
|Driving cost for the self-service||6 miles a week*.56 per mile *52 weeks||174.72|
|Laundry cost for the self-service ||8 per week * total 52 weeks = 416.00||416.00|
|Cost incurred for the detergent|| $35 per quarter *4 = 140.00 ||140.00|
|Total cost for the self-service||730.72|
3. Alternative-3 delivery laundry costing
There is below estimation of the delivery laundry service cost has been given.
|Particular||Detail computation||Amount in $|
|Pick up costing||52 per month *12||624.00|
|The total cost incurred for the laundry costing annually||624.00|
- The cost of the appliance would be annually and would be incurred for the purchasing cost of the material and rental amount for the places is $514.84.
- The total cost which would be incurred for the purchasing the appalling for starting up a business of self-laundry is $730.72.
- The total cost which would be incurred for the purchasing the appalling for starting up a business of delivery of the services is $624.00 (Kranz, Hanelt, and Kolbe, 2016).
The best cost appliance which will lower down the business costing and increase the overall return on capital employed will be selected by the company.
4. Should the Franks hire the additional employee? Show your detailed calculations.
This involves incremental analysis. If the additional employee is hired then they can take 3 more children.
|Details||Computed amount||Total cost or amount|
|Increased output with the increase of the additional 3 employees in the process||3*$800||$2400|
|Additional employees cost||$9.00 / hour * 40 hrs* 4.33 wks||$1558.80|
|Increment total cost||$1,766.64|
|Contribution of the business||$633.36|
Frank would have an increment in his revenue to $ 2400 when he add additional employees costing to $ 1766.64.
With the increasing additional employees, the additional profit would be $ 633.36.
However, with the incremental costing, Frank could easily generate an additional profit of $ 633.36 amount.
Therefore, it could be inferred that additional employees in the process will increase the overall profit of the business.
5. Option to accept rental option and remain in current option. Computation of the employees to have in process, and the number of served children
Remain in the current Location
The costing and contribution computation when the company has 6 children and 9 children in its business process.
|Particular||6 children||9 children|
|Revenue (@ 800 per child)||4800||7200|
($3.20 per child*5 days a week* no of child* 4.33 weeks)
Cost of laundry ( alternative 1)
($79,500/25 years) = $3,180.00/12 = $265.00
Analysis and interpretation
Profit of Frank would be $3,687.67 only when 6 children are taken into consideration to serve. This will give an increase in the profit of 12%.
The revenue of Frank would be increased to $2400 when the additional employees are being hired in the process $1,766.64.
Therefore the profit earning capacity of work would be $633.36.
- Frank needs to have more employees to increase its profit.
- In order to have a process serving 9 children, two additional employees would be required.
- It is analyzed that additional costing of the two employees would be $1,766.64 and it will ultimately increase the profit by $2400.
Option B: Move to a larger facility
In this option effect to move to a larger facility option has been given below.
|Particular||In the case of 12 Children||In the case of 14 children|
|Revenue (@ 800 per child)||9,600||11,200|
($3.20 per child*5 days a week* no of child* 4.33 weeks)
Cost of laundry ( alternative 1)
($9/hour x 40 hours/week x 4.33 weeks/month=1,558.80*2 and *3)
If 12 children are accepted in process total costing would be $4,397.72.
If 14 children are accepted then in this case profit will go down by $4,300.36.
Therefore, Frank should go for adding only 2 additional employees and serve only 12 children if he wants to maintain optimum profit in his business (Joseph, Varghese, and Sebastian, 2016).
It is analyzed that keeping 12 children in the process will require the hiring of one additional employee and profit will be $ 4800.
Additional costing for the same will be $1,766.64*2.
If 9 children are kept in the process then total turnover would be $ 7200 and profit would be $4,321.03.
In the case of 12 children, total revenue would be $ 9600 and profit would be $4,397.72 which is the optimum amount.
Additional cost $ 650 if 12 children are kept in the process.
If 14 children are served then additional costing would be higher than the profit earned. Therefore, 12 children option should also be selected (Eaton, Kortum, Neiman, and Romalis, 2016).
Part B: Journal Article Critique
1. 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.
Management accounting system is popular as a tool of decision making, planning and performance process and of formulation and implementation of strategy in a business unit. The system helps to make decision in favor of business after analyzing the data from existing business. In the given case Canon and Apple have followed the management accounting system which has three major components which are as follows (Bozikova, and Hanak, 2018).
Risk Management System
The risk management system assists the businessman to manage the risk involved in the business. Every organization is doing business to earn a better return from its resources employed in business but every return has some risk involved in it. To avoid or mitigate such risk involved in the business, the risk management system is used. The system helps to mitigate the risk to enhance the operational efficiency of the business and to easily achieve the goal of business. The primary objective of such system is to identify the risk involved in existing business and to collect the more relevant data for analyzing the risk factor. After collecting and analyzing the data, the management finds remedies to mitigate or avoid the risk. In the case given the step of identification is followed while identifying the issue in drums old machine (Vladisavljević, and Vukasović, 2017).
Performance Management system
The system of performance management plays an important role in management accounting system. The system provides assistance in evaluating the real performance of business and in its comparison with estimated performance. The system enables the company’s management to examine the designed structure for achieving the goal and to remove the deficiency out of the structure to prevent the worst performance of the business of company in near future. The market declined the performance of canon due to which the requirement of its new substitute was needed in the market. The small offices had a high demand for similar product on lower prices on which they can afford the product but the similar technology at low cost was not available. The management of company had tried to establish a new technology which can work in more effective manner. The company was planning from future perspective which can work for decades. Such point of view of management of canon depicts their long-run vision to establish a new performance system (Rahma Dewi, 2018).
Strategic management system
One more significant and major component which represents the management accounting system is the Strategic management system. In such a system the company prepares a strategy for taking all crucial decisions under business. The strategy is made by the management after the proper study of past trends and technologies of business. The strategic decision making helps the company to develop the business for the long run. The innovation of low-cost computers by Apple was a famous example of management's working to achieve the vision. This could be possible only by making high level of commitment by management of the company and their strong strategic management system (Maskell, Baggaley, and Grasso, 2016).
2. The article describes the innovation process in a firm as ‘a process of information creation’, and a firm needs to organize themselves ‘to transmit the new information’. Explain how management accounting contributes to this innovation process.
Innovation is ultimately the result of the process of information creation which can be done by great social interaction. A great social interaction process helps to create information. The contribution of management accounting system in the innovation procedure can be elaborated in following manner (Dale, and Plunkett, 2017).
- It helps to collect the data relevant to the existing processes, products and technologies etc.
- It also assists to find out the issues regarding
- It also helps the management to identify the issues which help them to solve the issues on time
- It helps the management to recognize the trends which suggest them to have some new ideas for interaction
- It assists the management to proceed further the idea or thought suggested by social interaction (Kaplan, and Atkinson, 2015).
The social interaction provides the ideas or information to management of the company but for further proceeding or execution of such idea, the management is needed to evaluate the cost and expenses relevant to the idea (Heikal, Khaddafi, and Ummah, 2014).
Hence the contribution of management accounting system is required from generation of idea or technology to the final execution of such idea or innovation. The participation of management accounting system is needed for the proper execution of the process of innovation (Lakis, and Masiulevičius, 2017).
3 Found 4 lessons learned from the article and useful for management accountants in Australian companies to learn from, and justify your answer [i.e. provide 2 outcomes from each company.
The results emerged from the research are as follows:
- Various Japanese existing firms are there before the Silicon Valley Revolution. These firms were well established and already had a better product line. The staff working there was also familiar with the working pattern and technologies engaged in the firms. All these firms required some new technologies, ideas and innovations to continue their business for a further period and for obtaining better profits. A business which is running without any new technologies and ideas has no sense. The above-given example of the canon was the example that shows that business in chaos can also be continued as a profitable business by introducing new ideas and technologies in the business which promises for more better product than the existing. The source of social interaction was used by the Canon to find the new ideas and technologies (Lopez-Valeiras, Gomez-Conde, and Naranjo-Gil, 2015).
- The main objective behind introducing such process is to set up the situation where the common people can participate to provide new ideas and technologies for the upcoming product. The people can provide better ideas to develop the new product in comparison to the existing product. An idea can emerge from any argument or it can be the combination of several ideas. While performing the task of social interaction, the management team of company shall consider the point that the company has the capacity to convert the idea into reality. If the new idea or technology is the result of several ideas then there should be proper coordination between the entire management team of the company (Loughran, and McDonald, 2016).
- The analysis of the report also reflects the issues chased by the management leaders in the condition of chaos (Maas, Schaltegger, and Crutzen, 2016). In the condition where the management has the responsibility to develop a new product or technology, the management leaders should behave as a system catalyst. To perform in an autocratic manner is nor favorable for the management team if they are under the pressure to introduce new product in the market. Also the management of company should be more effective in decision-making process. As the situation provided under the case of Canon, the management should have proper knowledge of the situation to overcome from the crucial conditions (Maskell, Baggaley, and Grasso, 2016).
- In the current business environment, companies are required to form several groups for taking part in the function of social interaction. By this the company can get the better and new ideas and technologies for the development of new products. To meet the requirement of rapidly changing competitive edge, the management of companies should be more self-organized as it helps them to make the effective and emergent interactions (Noreen, Brewer , and Garrison, 2014).
The entire analysis of the report states that the total cost involved in the business of any organization is the result or combination of various kinds of costs. All these costs have a different impact on the business. Also, it has been discussed that a new emerging project needs a full evaluation of existing data and past trends of the relevant business. Such analysis helps the individual to avoid the pre-found issues and problems so that the project will perform profitably. The report also reflected the role of social interaction in the emergence of new technologies and ideas to develop new products in the business of an organization.