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 |
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.)
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:
HI5017
Managerial Accounting
Part A: Case Study Analysis1. 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 | 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. |
Fixed cost/Incremental | 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. |
Fixed cost/Incremental | 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 | 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. |
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 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:
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:
$ | |
Incremental annual energy costs if appliance is purchased (120.00+145.00) | 265.00 |
Depreciation cot of the appliance (SLM) Washer 420.00 Dryer 380.00 Installation 43.72 Delivery 35.00 Total cost (related to appliance ) 878.72. Life term of the appliance 8 years Annual depreciation charge = $878.72/8 = 109.84 | 109.84. |
Detergent cost (annual) | 140.00 |
Total cost (annual) | 514.84 |
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 |
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 |
Less: | ||
Cost of the additional employee | $9.00 / hour * 40 hrs* 4.33 wks | $1558.80 |
Cost of food | $3.20*3*5*4.33 | 207.84 |
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.
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 |
Less: Expenses | ||
Meals cost ($3.20 per child*5 days a week* no of child* 4.33 weeks) | 415.68 | 623.52 |
License costs ($225.00/12) | 18.75 | 18.75 |
Insurance costs (5,000/12) | 416.67 | 416.67 |
Cost of laundry ( alternative 1) (514.64/12) | 42.90 | 42.90 |
Depreciation Expenses ($79,500/25 years) = $3,180.00/12 = $265.00 | 265.00 | 265.00 |
Utilities expenses | 50.00 | 50.00 |
Rent expenses | 0.00 | 0.00 |
Employee costs | 0.00 | 1,558.80 |
Total costs | ||
Net income | 3,687.67 | 4,321.03 |
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 |
Less: Expenses | ||
Meals cost ($3.20 per child*5 days a week* no of child* 4.33 weeks) | 831.36 | 969.92 |
License costs ($225.00/12) | 18.75 | 18.75 |
Insurance costs (5,000/12) | 416.67 | 416.67 |
Cost of laundry ( alternative 1) (514.64/12) | 42.90 | 42.90 |
Depreciation Expenses | 0.00 | 0.00 |
Utilities expenses | 125.00 | 125.00 |
Rent expenses | 650.00 | 650.00 |
Employee costs ($9/hour x 40 hours/week x 4.33 weeks/month=1,558.80*2 and *3) | 3,117.60 | 4,676.40 |
Total costs | 5,202.28 | 6,899.64 |
Net income | 4,397.72 | 4,300.36 |
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:
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 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.
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).
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 :
The specific outcomes of this research is summarized as follows: