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HI5017 Management Accounting Case Studies Analysis Assessment Answer

Assessment Details and Submission Guidelines
Trimester
T1 2019
Unit Code
HI5017
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.

Purpose:

Individual Assignment Specifications

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

Managerial Accounting

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 given case has several types of costs involved which includes  fixed costs, sunk costs, variable costs and also incremental costs . the same is defined and shown in the following table:



Fixed cost 

Fixed costs are the type of costs which remains constant irrespective of the level of activity involved. The license fee which is required to be paid is an example of fixed cost. The same is fixed at $225 FOR THE ENTIRE YEAR. 
Fixed costs 
Fixed costs are the type of costs which remains constant irrespective of the level of activity involved. The insurance fee  which is required to be paid is an example of fixed cost. The same is fixed at $3840.00 FOR THE ENTIRE YEAR.
Fixed cost/Incremental 

Fixed costs are the type of costs which remains constant irrespective of the level of activity involved. The energy costs  for the washer amounting to $120 is an example of incremental fixed costs. The cost would go up one time for the period. 
Fixed cost/Incremental 

Fixed costs are the type of costs which remains constant irrespective of the level of activity involved. The energy costs  for the dryer  amounting to $120 is an example of incremental fixed costs. The cost would go up one time for the period. 
Variable costs 
variable costs are the type of costs which keeps on changing for the period as the volume of work increase or decreases. As activity level increase the cost involved goes on increasing. Cost of the laundry service is $52 per month and the same is completely variable as costs are likely to increase as per the no of variable costs.
Variable costs 
variable costs are the type of costs which keeps on changing for the period as the volume of work increase or decreases. As activity level increase the cost involved goes on increasing. Cost of the mileage or fuel is estimated to be 4.56per miles driven and hence variable cost. The same is completely variable as costs are likely to increase as per the no of  miles driven. 

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? 

Relevant costs for the decision making process in the given scenario is estimated as follows:

1. cost of investment in appliances are relevant costs involved in the decision making process. 

2. delivery costs of the appliance is relevant for the entire decision making process.

3. Appliance  installation costs are also relevant for decision making process.

4. utility expenses related to the purchase of the  appliance is a relevant cost. 

If Frank decides ultimately to evaluate he alternative course of action:

  1. Laundry service pick-up and delivery charges are considered to be relevant. 
  2. Detergent expenses related to laundry is also an relevant cost. 
  3. Mileage or fuel costs are also relevant costs. 

However the following costs can be estimated to be irrelevant costs:

  1. Costs which are already spent on the existing equipment’s are irrelevant. 
  2. Also the expenses related to the detergent is irrelevant for the decision making.  (Atkinson, Kaplan, Matsumura, & Young, 2016). 

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

Different alternatives are estimated for costs involved as shown below: 

1. Purchase of the Appliance (alternative 1)


$
Increase in the  energy costs of washer and dryer (purchase of appliance )  
($120.00+$145.00)
$265.00
Detergent expenses on annual basis 
$140.00
Depreciation cot of the appliance (Straight line method) 
Washer         420.00 
Dryer            380.00 
Installation   43.72 
Delivery       35.00 
Total =          878.72.  
Annual depreciation Expenses  = $878.72/ 8 = $109.84 






$109.84.
Estimated annual expenses 
$514.84

2. Self-service laundry (alternative 2ZZ



$
Driving costs 
6 miles*$.56 / mile *52 w 
$174.72
Clothes laundering cost at self service 

8/ week * 52 weeks = $416.00
$416.00
Detergent 
 $35/quarter *4 =  $140.00 

$140.00
Total costs related to self-service alternative

$730.72

3.  Delivery laundry service (alternative 3)



$
Pick up and delivery expenses  
$52/month *12
$624.00



Total annual cost 

$624.00


From the above analysis its quite apparent that the total expenses under alternative 1 is the lowest cost at $514.84. other alternatives being explored are quite expensive when compared. (Bhimani, 2012). 

4. Should the Franks hire the additional employee? Show your detailed calculations. 

The incremental costs analysis is being shown as below:




Increase in revenue 
3 children *$800
$2400.00
Less:


Employee Expenses 
$9.00 per hour  * 40 hrs* 4.33 weeks 
$1558.80
Food Expenses  
$3.20*3*5*4.33wks
$207.84 
Incremental expenses  

$1,766.64
Increased Profit 

$633.36

 Frank  would be able to generate an additional  profit of $633.36 if three additional children are admitted as a total incremental revenue of $2400 would be generated against an additional  incremental expenses of $1,766.64. this would be beneficial for Franks business (Drury, Cost and Management Accounting: An Introduction, 2010). 

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. 

Alternative 1: Remain in the current Location 


6 children 
9 children 
Revenue  (@ $800.00/ child)
$4800.00
$7200.00
Less: Expenses 


Meal cost
($3.20/child*5 days*6/9* 4.33 weeks)
$415.68
$623.52
License cost / month ($225.00/12)
$18.75
$18.75
Insurance costs per month ($5,000/12)
$416.67
$416.67
Cost of laundry ( alternative 1) ($514.64/12)
$42.90
$42.90
Depreciation Expenses ($79,500.00/25 ) = $3,180.00/12 = $265.00 
$265.00
$265.00
Utilities 
$50.00
$50.00
Rent
$0.00
$0.00
Additional Employee costs 
$0.00
$1,558.80
Total expenses 


Net profit 
$3,687.67
$4,321.03


Having 6 children in the facility would generate a profit of $3687.67 but having 9 children  in the facility would be able to generate a profit of $4,321.03. this is because additional  3 children are able to  generate an additional  profit of $633.36 if three additional children are admitted as a total incremental revenue of $2400 would be generated against an additional  incremental expenses of $1,766.64. this would be beneficial for Franks business (Horngren A. B., 2014). 

Option B: Move to a larger facility 

The 2nd options that is open before Frank is to move the operation to a larger facility. The cost and profit estimations for the larger facility is estimated as follows:


12 children 
14 children 
Revenue  (@ $800.00/ child)
$9600.00
$11,200.00
Less: Expenses 


Meal cost
($3.20/child*5 days*6/9* 4.33 weeks)
$831.36
969.92
License cost / month ($225.00/12)
$18.75
$18.75
Insurance costs per month ($5,000/12)
$416.67
$416.67
Cost of laundry ( alternative 1) ($514.64/12)
42.90
$42.90
Depreciation Expenses ($79,500.00/25 ) = $3,180.00/12 = $265.00 
$0.00
$0.00
Utilities 
$125.00
$125.00
Rent
$650.00
$650.00
Additional Employee costs 
$3,117.60 
$4,676.40 
Total expenses 
$5,202.28
$6,899.64
Net profit 
$4,397.72 
$4,300.36


Having 12 children in the facility would generate a profit of $4,397.72 but having  14 children  in the facility would be able to generate a profit of $4,300.36. this is because additional  2 children are able to  generate an additional  profit of ($97.36).  if three additional children are admitted as a total incremental revenue of $1600 would be generated against an additional  incremental expenses of $1697.36. this would be detrimental  for Franks business (Horngren A. B., 2014). 


Hence it would be beneficial for the Frank to have 12 children and not 14 as 12 children facility would be bale toe generate the highest amount of profit and 14 children facility would be able to decrease the value of the profit. It is advisable  to Frank that additional 2 children in the larger facility is not advisable as incremental revenues not able to cover for additional expenses. (Horngren, et al., 2011)

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. 

Management accounting system  which is being  used in the given article are of  different  types ad the same are described as follows:

1.Risk Management System 

The first and foremost system which is in work is that of risk management system. The risk management system works in a very coordinated manner to develop a framework which can assess the risk involved in a business, gauge the volatility of different decisions being taken by a business and working towards effective dissemination of the risk involved and identified. The risk management system which is in play plays a very crucial role in the reduction of uncertainties involved in the running of a business and help achieving the goals which were predetermined. However the most important aspect of this system is to identify probable risks which can make an adverse impact on the probable outcomes (Horngren, Datar, & Rajan, 2015). 

Once the problem is identified, the management accountants and the system works in a coordinated manner collects thorough data from both internal sources and also from external sources. These data once collected is then summarized into various reports and presented to the management for effective analysis and making suitable decisions for remedial measures.  For example the issues which were confronted by Canon relate d to the drum were potentially threatening  for the company’s growth of business and related data was compiled and presented by the management accounting system.

2. Performance Management system 

The second component  is that of performance measurement and the same helps in making effective comparison between performance achieved in a given period and the desired performance in the same period. It was the performance management mechanisms which detected lags in the efficiency of business of both canon and Apple and the same led to effective situations under which the management worked towards getting some kind of solution. A negative performance measurement would propel management’s attention towards it and management must work to reduce such discrepancies to achieve desired results (M.Datar & Horngren, 2012). Thus it can be said when the results of both APPLE AND CANON were declining and less than what was desired , management accounting system worked towards getting the right kind of impetus towards effective dissemination of those barriers responsible for such variances. 

3.Strategic management  system 

The third component  of the management accounting system that gets involved in the decision making and use of strategic thinking. Long term goals are identified and pursued. However for the strategic glass to be identified , the management needs total data and its analysis. In this scenario the management accountants are required to provide host of data which were derived from both internal and external sources. 

The strategic management objectives were both evident in the working of Apple and canon. While Apple Inc was aiming to bringing  in the Mac computers at a reasonable prices to the market , canon was trying to bring in low cost replaceable drums. The success of these two projects undertaken by two different companies highly important for future success orientation by both these companies. The same was evident in the way the companies workers were committed towards the cause (Horngren, et al., 2011). 

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 key to creation of industry leading bench mark for firms existing in the market and they are bale to differentiate themselves on the basis of the innovations they make. However apart from the core group of designers and engineers the management accounting system and the accountants play a very important role in the management of innovations:

  1. Management accounting process is responsible  for generation data of the current process and the same can be used to take effective decisions regarding new products and prices etc. 
  2. Recognition of issues are very important for managers and the same is often ofund by the management accounting reports prepared and presented to the management. The same leads to refining of ideas and working upon a particular idea which can become industry leading benchmark as demonstrated by apples Mac computer program. 
  3. Core groups often create and come up with new ideas but the same needs to eb validated by the management accountants for a go ahead in terms of feasibility and costs involved. Effective commercialization of a product can be very possible if a go ahead is given by management accountants. 

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.

Specific outcomes pf the processes followed by both canon and Apple Inc are described as follows:

  1. The situations which were faced by canon and apple required high level commitment form top leaders. The situation faced by both these companies were found to be chaotic and the leaders of these organizations were under severe pressure to find a way out. Leaders int this situation were needed to act in a manner which are both efficient and also at the same time acting as system catalysts. Critical decision were required to be taken up by the leaders and led the others to believe they can find a way out of the mess through systematic arguments and work commitments. Leaders needed to show the way and they did.
  2. In the situation which were faced by the apple Inc. and canon , they both were required to show high level of commitment and undergo social commitment. Communication was key and they also were required to form core groups which would work in a cohesive manner along with the top leaders. They also needed the core groups to be self-organized and did not require too much intervention form the management leaders of the company. 
  3. The other outcome of the discussion was how the companies under analysis were able to regroup and innovate. The core groups  were very formal and self-organized. Social interactions were given preference by the management and such interactions led to germination of new ideas and new products. The MC project was a reflection of how the management of the canon were able to organize more formally and how the effective channelization of social interaction would lead to better ideas and better product outcomes. 
  4. The situations which were analyzed in the article discused pointed towards the fact that brilliant ideas can be generated form chaotic situations if the same is analyzed and channelized through formal social interaction. Ideas can also be a product of different ideas provided by core group members. However the chaotic situations can’t be created deliberately to be socially efficient. However it must be ensured that ideas don’t overlap and management leaders must remain impartial toward s ideas generated by different team leaders (Nonaka & Kenney, 1991). 
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