HI5017 Understanding Cost Concepts: Case Study Analysis of a Child Care Business Assessment Answer
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:
|The annual license fee required to be paid is an example of fixed cost. Fixed costs don’t change in their value even if there is a change in the volume of production. This costs is fixed at $225 for a year.|
|Fixed costs||The annual insurance fee to be paid is an example of fixed cost. Fixed costs don’t change in their value even if there is a change in the volume of production. This costs is fixed at $3840 for a year.|
The energy costs would increase by $120 (washer) which is an incremental fixed cost. The cost increases one time and for an annual basis and not gradually which means it is an incremental fixed cost.
|The energy costs would increase by $120 (dryer) which is an incremental fixed cost. The cost increases one time and for an annual basis and not gradually which means it is an incremental fixed cost.|
Variable costs are those costs which either increases or decreases at the constant rate per unit. The cost of the laundry service is pegged at $52/per month and it would increase on a per month basis. so the final cost depends upon the use on a monthly basis and hence the same is considered aa variable cost.
|Variable costs||Variable costs are those costs which either increases or decreases at the constant rate per unit. The total cost of mileage at a rate of $0.56/mile will change proportionately with the total 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?
Costs which a relevant for the decision making are as follows:
The following costs are relevant costs if Frank would decide to go on to purchase the long term investing appliance:
- The initial investment which is required to be made for purchase of the appliance.
- The costs which are required to be made for delivery of the appliance.
- Installation costs related to the appliance
- Costs related to use of utilities related to the appliance.
The following costs can also be termed as relevant if the franks decide to evaluate the alternatives:
The costs related to the laundry service pick up and those related to delivery of the same.
Costs related to self-service such as mileage costs, laundering costs and costs of detergent.
In this scenario the following costs can be termed as irrelevant to the issue and for making appropriate decisions:
- Costs of the existing appliances
- Cost of the detergent becomes irrelevant if the franks decide to take up the pick up and delivery alternative.
Some of the costs are also not expressly addressed in the case such as the costs related to spending time in the laundromat and the time required for driving to and from the laundromat. These costs are opportunity costs and can be very crucial in taking the final decision as they might have some very useful value. Qualitative characteristics such as convenience of the clothes being picked up and then delivered might be equally helpful (Atkinson, Kaplan, Matsumura, & Young, 2016).
3. What could it cost the couple to launder clothes? Show your detailed calculations for each option.
Analysis of the Alternatives are determined as shown below:
1. Purchase of the Appliance (alternative 1)
Incremental annual energy costs if appliance is purchased
Depreciation cot of the appliance (SLM)
Total cost (related to appliance ) 878.72.
Life term of the appliance 8 years
Annual depreciation charge = $878.72/8 = 109.84
|Detergent cost (annual)||140.00|
|Total cost (annual)||514.84|
2. Self-service laundry (alternative 2)
In the case of the self-service laundry the following costs are anticipated and shown as below:
|Driving costs for self service||6 miles a week*.56 per mile *52 weeks||174.72|
|Clothes laundering cost at self service ||8 per week * total 52 weeks = 416.00||416.00|
|Detergent costs|| $35 per quarter *4 = 140.00 ||140.00|
|Total costs related to self service||730.72|
3. Delivery laundry service (alternative 3)
The costs related to the delivery and pick u laundry service is estimated as follows:
|Cost of pickup of laundry and its delivery||52 per month *12||624.00|
|Total annual cost pf pickup and delivery||624.00|
As can be seen if the appliance is bought the annual costs related to place and its application was estimated to be $514.84 , the total annual costs required if self-service laundry is applied is estimated at $730.72. the total annual cost of the pickup and delivery of the service is estimated to be $624.00. Thus it can be said that cost would be the lowest if the appliance’s bought and the same is put into service by Frank (Bhimani, 2012).
4. Should the Franks hire the additional employee? Show your detailed calculations.
This involves the incremental analysis. If the additional employee is hired then they can take 3 more children.
|Incremental revenue form addl 3 children||3*$800||$2400|
|Cost of the additional employee||$9.00 / hour * 40 hrs* 4.33 wks||$1558.80|
|Cost of food||$3.20*3*5*4.33|
|Total incremental cost||$1,766.64|
|Incremental contribution (profit)||$633.36|
As can be seen from the above estimations , Frank can generate an incremental revenue equal to $2400 if an addl employee is taken and the incremental costs related to the same is estimated to be $1,766.64. thus after accounting for the incremental costs, Frank can generate an additional profit of $633.36. thus frank must be advised to employ the additional employee as the same would be able to enhance the existing profits for Frank (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.
Remain in the current Location
This option involves either providing services to 6 children or 9 children by extending their operation.
|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
As can be seen from the above calculations if only6 children are accepted then the profit of the company would be $3,687.67 but the same would increase by $633.36 to $4,321.03. Frank can generate an incremental revenue equal to $2400 if an addl employee is taken and the incremental costs related to the same is estimated to be $1,766.64. thus after accounting for the incremental costs, Frank can generate an additional profit of $633.36. thus frank must be advised to employ the additional employee as the same would be able to enhance the existing profits for Frank (Horngren A. B., 2014).
For having 9 children frank would need to hire one additional employee and one additional employee would be able to generate $2400 in addl revenue and $1,766.64 of additional costs.
Option B: Move to a larger facility
This option involves either providing services to larger no of children by moving to a much larger facility. The effect of the move is shown as follows:
|12 children||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)
As can be seen from the above calculations if only 12 children are accepted then the profit of the company would be $4,397.72 . however if 14 children are kept in the center then the profit gets reduced to $4,300.36. Thus frank must be advised to employ the 2 additional employee and keep 12 children in the center as the same is able to increase and maximize the profitability of the Franks business.
For having 12 children frank would need to hire one additional employee and one additional employee would be able to generate $4,800 in addl revenue and $1,766.64*2 of additional costs. When franks center has 9 children it is able to generate a total revenue of $7,200 and generate a profit of $4,321.03. However as they take a decision to have a larger facility and have 12 children the center is able to generate a total revenue of $9,600 and a profit of $4,397.72. Having 12 children means frank would need to employ 2 additional workers and also pay a higher rent of $650. For taking the higher risk the incremental profit between having 9 children and 12 children is just $76 approx. However if frank decides to have 14 children then the total revenue generates is $11,200 and profit is only $4,300. 36. This means if 14 children are their incremental costs are higher then incremental revenue. Hence profit is even lower than the profits which was generated when there were 9 children. All these things considered it is advisable that frank takes 12 children only for maximizing profits (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 involves drawing data form the existing business, analysis of the same and following up to make decision which suits the business resources and manpower of the organization in the long term. The management accounting system of Canon and Apple comprises of the following three components:
- Risk Management System
The risk management system in practice effectively contributes towards practices and development of a framework which works towards the determination of , gauging of , and managing the risks which has the potential to reduce the operational efficiency and make sure the business attains its predetermined goals (Horngren, Datar, & Rajan, 2015).
Identification of the possible disruptions in the existing business system is one of the primary components of the management accounting system and once it identifies the probable disruptions it would further needs to collect the larger data pertaining to these risks. If the data is identified and collected in time the management would makes sure the data is analyzed in the best possible manner as to what might hinder the company’s possible progress and thus would help in the framing of a possible alternative resources. The identification of the issues involved in the drums of the machines related to identification of risks which can disrupt the business and can be extremely costly in the long run in the case of Canon.
- Performance Management system
Performance Management system which is an inherent part of the overall management accounting system helps in the assessment of actual performance of the given period and the same involves making an effective comparison as to whether the actual performance of the business exceeded the pre-determined goals and whether the actual performance has lagged. It allows the business managers to pin point any possible structural deficiencies that is present in the system and which would allow the to devise effective variance mitigation programs (M.Datar & Horngren, 2012).
Canons performance was declining in the early 1970s and it was required to bring something new to the market to counter growing threats from Xerox and also at the same time faced the situation of bringing something which would be valuable for small offices and be less costly. Both there was hardly any technology available to that effect. This showed that the management team of the company was thinking of the future performance and tried to bring in something which would be able to alter the entire market structure for decades to come in the form of Mini Copper copiers. This showed that the management leaders at canon were committed to create a new performing system which matches their long term goals and vision.
- Strategic management system
The third component of the system is the strategic system which prepares a blueprint for making tactical decisions which would enhance the qualitative and quantitative aspects of the business and ensure the business brings sin the benefit of benchmarking into play. The job of the system is to study the existing trends and technologies etc which is in development to make decisions which would impact the business in the long term and which would be difficult to imitate.
The development of low cost Mac computers project undertaken by Apple was an instance of working toward achievement of a visionary goal and bringing the low cost universal computers to the masses. The success of the project could be pinned down to not only strategic vision displayed by the leaders of the company but by high level of commitment shown by the team members engaged in the design and development process (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 in the given example was the end result of the social interaction process which created new information. Without the increased social interaction the innovations would not have been possible. Management accounting contributes to the process of innovation through analysis of the followings :
- It gathers data regarding existing processes and products and helps in the finding out of issues and problems.
- It helps the management in the early recognition of issues which might prompt the management team to be alert and start defining and analyzing various issues which might crop up and which might lead to disruptions.
- These reports and data presented by the management accounting system would also include economic trends and industry trends and which can be effectively used by the management to start new interactions and find meaningful new ideas.
- Ideas developed by the new interactive process would also require the management accounting system to validate in the form of costs and a decision can be only be taken with the help of these inputs.
- Thus management accounting system helps in the new idea generation and settlement and implementation of the innovation process and without management accounting system in deep collaboration the development new tech and new benchmarking would not be possible.
- Whether the innovation involves the redesign of the product as in the case of canon or the development of an entirely new product as demonstrated in the case of Apple, the management accounting system remains involved at each step.
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.
The specific outcomes of this research is summarized as follows:
- Japanese firms were in existence before silicon valley revolution took place and they have already developed good and profitable existing product lines. The manpower employed by the firms were also quite formalized. However to grow rapidly these firms needed to innovate and bring in new technology on a consistent basis. this required a renewed interest in the innovation process and new ideas were given preference by analyzing them thoroughly if they make business sense or not. The canon example showed that even if there is chaos, the same can turn out to be beneficial if the aim is to argue for the finalization of a better idea than what already exists. The MC project put into practice by the canon company is an example how increasing social interaction can lead to effective research.
- However it must be remembered that creating chaos is not the motive. This involves setting up of an environment in which people can take part and it can be chaotic but the same might be a precursor to better ideas. Ideas can be creative and come out of arguments. Sometimes ideas can be a combination of different ideas. However the management and the participants of the social process would need to recognize the fact that chaos cant be allowed to take precedence and the company management must have integrative ability to convert these ideas into reality. Companies would need to work whole heartedly into developing and giving the ideas a shape. However if different ideas are being worked upon by different teams then it must be ensured they don’t overlap and if this not avoided the same would not result in any form of synergy (Nonaka & Kenney, 1991).
- The current research further highlights the position taken by the leaders in chaotic situations and particularly where the company’s management is under tremendous pressure to brig down costs and new processes and products are introduced. The leader must not act in an autocratic manner but he must act as a system catalyst. Leaders would need to be innovative in managing chaotic situations and taking decisions which are critical. Their understanding of the exact situation is very important for companies to come out of their deep slumber as demonstrated by Canon.
- Companies would need to develop smaller but capable core groups which would be required to take part in intense social interactive sessions to bring out new ideas and new meanings. They also need to develop and demonstrate high level of commitment. Also most organization would also be required to self organized. Self organizing requirements very high in todays environment as their interactions would be more emergent and they would be able to develop new meanings from any situations.