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HI5017 Managerial Accounting Assignment - Management Accounting Case Studies, Holmes Institute, Australia

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.

MANAGEMENT ACCOUNTING -

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Part A: Case Study Analysis - Case study of a child care business.

Q1. 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.

Answer - Decision making process is a very critical activity for any individual or an organization. It involves deeply examining and assessing the various qualitative and quantitative aspects of the alternatives present for undertaking the decision. It is thoroughly based on the beliefs and preferences of the decision maker. It can be hence, said toinvolve a definite path of analyzing a finite set of alternatives and rank them in order of results from preferable to least preferred. It is an act of choosing the best suitable and optimum option available to ensure the organizations derive the better financial results. It ensures that the decision maker is well aware about the various advantages and disadvantages associated with the given alternatives. Hence, decision making process enables implementation of proper managerial activities and is pervasive in nature. Without proper decision making process, no further plan or policy can be implemented within the organization. In this error of rapid industrialization and robust growth, every individual or organization faces intense competition in the market. Decision-making process is thus considered to be an effective tool in making sure the entity undertakes successful activities and business operations. It involves using several management accounting techniques like calculation of internal rate of return, net present value, internal rate of return, profitability index, etc. to reach at a conclusion of whether to accept or reject the proposal available before the entity.

There are many costs associated with the decision-making process. These are to be evaluated in depth and entail to make sure that the process so undertaken is effective and efficient. It ensures that no irrelevant costs are considered for comparison amongst the alternatives. These are as follows:

  • Sunk costs: These are irrecoverable costs which have already been occurred in the past generally before undertaking any of the proposals available.Hence; it is usually not considered relevant in decision-making. The expenditure incurred in conducting research and development analysis, for example,is considered to be a sunk cost while undertaking decision making process.
  • Relevant costs: This expenditure tends to influence the decision making process. These costs are incurred exclusively when the proposal is undertaken else it can be avoided. Such cost, whether variable or fixed a relevant in deciding whether to continue with the proposal or not. (Rahman, 2014)
  • Irrelevant costs: as the term suggests, these costs do not affect the decision. For example, advertisement costs incurred exclusively for project 1 and project 2 shall be irrelevant if they are same. All sunk costs are irrelevant but not all irrelevant costs are sunk.
  • Avoidable costs: these are relevant costs that can be avoidable if either of the projects is not undertaken.
  • Unavoidable costs: these are irrelevant to decision making and hence cannot be avoidable irrespective of the fact that the management undertakes the project or not.
  • Opportunity cost: These costs are incurred when an individual or an organization loses the next best alternative available to him. This is usually incurred when there are two or more proposals present for making the optimal choice. (Knight, 2014)

In the given case, a married couple after working for several years in an engineering business organization is now willing to start a private entity of their own. It shall constitute a child care centre in Texas. This institute can undertake a maximum of six children at the go. However, with additional costs and capital expenditures made, this maximum limit can be extended to ensure that they reap additional benefits. They are currently facing a new problem with their washer and dryer machines that had cost them USD 440. Hence, they have evaluated three prospective alternatives that could help them resolve the problem. These need to be evaluated on relevant terms to ensure they reach the most optimum solution for their benefits. Reading the description given in the question, it is quite clear about the aforementioned costs with respect to making decisions about the laundry system. These are as follows:

The fixed cost such as the annual fees to maintain the license for the insurance cost incurred annually are all irrelevant costs. These costs shall be incurred irrespective whether the couple decided to undertake any of the alternators with respect to their laundry services. These are unavoidable cost which will be incurred any house and cannot be avoided with either acceptance or rejection of the proposals. Also, the cost charge per student including the meal and snacks shall be considered irrelevant in deciding whether the couple should buy washer or dryer or provide the services from my company nearby involved in the function of dry cleaning and laundry.

The cost of pickup and delivery, the detergent and fabric sheets including the transportation cost per mileage shall be relevant in deciding whether the couple should buy the appliances or cater services from another organization. Also the cost increase in energy consumption due to buying of the washer machine as well as of the dryer machine shall be considered relevant to the proposal. The increase in the utility cost of the couple during the day time shall also be considered relevant to the decision making process. These are avoidable costs. Hence, they shall tend to affect the decision of the Franks.

The cost of buying the washer and dryer versus the cost of getting clothes, blankets and sheets of children washed shall be considered as the opportunity cost for each other.

The cost incurred to buy the old appliances shall be termed as sunk costs as they have already been entered by the couple since many years in the past.

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Q2. What information is relevant to the decision to purchase the appliances? What information is irrelevant to the decision to purchase the appliances? Why?

Answer - If the couple wishes to buy the appliances the following costs shall be considered as relevant to influence their decision:

  • Laundering charges including pickup and delivery of $52 per month charged buy red Oak laundry and dry-cleaning.
  • The per mile cost incurred to take the clothes to the Laundromat.
  • The weekly expenses incurred for getting the clothes laundered from the Laundromat.
  • Purchase costs of detergent and fabric sheets.
  • The purchase cost of the washer and the dryer.
  • Additional accessories purchased for installing the washer and the dryer.
  • Increase in energy costs you do purchase of the washer and dryer.

Other irrelevant costs are as follows:

  • Annual license and insurance fees.
  • Childcare charges including meal and snacks.
  • Charges including its depreciation.
  • The utility cost of $50 per month due to day care.

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Q3. What could it cost the couple to launder clothes? Show your detailed calculations for each option.

The couple has three options to consider:

Option 1: Red out laundry and dry cleaning

PARTICULARS

DETAILS

AMOUNT (annual)

Cost incurred to get clothes laundered

$ 52 per month

$ 52*12 = $ 624

Option 2: Taking services from the Laundromat

PARTICULARS

DETAILS

AMOUNT (annual)

Transportation costs

$ 0.56/mile

$ 0.56*3*2*52=174.72

Laundering costs

$ 8 per week

$ 8*52= 416

Detergents

$ 35 per quarter

$ 35*4=140

Total costs


$ 730.72

Option 3: buying the appliances

PARTICULARS

DETAILS

AMOUNT (annual)

Depreciation per annum

$ [(420+380+35+43.72)/8]

$ 109.84

Increase in energy costs due to washer


$ 120

Increase in energy costs due to dryer


$ 145

Total costs


$ 374.84

Thus, the couple is advised to buy the appliance in newest form and distribute the cost of appliances over its life. This shall provide the couple with best benefit in undertaking the laundry services.

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Q4. 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?

Answer - The brief details are as follows:

HIRING ADDITIONAL EMPLOYEE



Additional revenue per year


28800

less: additional variable costs



costs of meal and snacks

3504


utility costs

0


employee costs

18720

22224

additional contribution per employee hired


6576

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Q5. 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.

Answer - The details of the couple without renting the space are as follows:

CHILD CARE CENTRE FROM THEIR OWN SPACE:

Revenue from fees charged from children


57600

less: variable charges



cost of meal and snacks

7008


utility costs

6050

13058

CONTRIBUTION


44542

less: fixed charges



depreciation on renovations

3180


insurance

3840


license fees

225

7245



37297

The details of hiring five new adults to take care of the needs of 14 children as follows:

RENTING NEW SPACE IN TOWN




Revenue raised for 14 children


134400

less: variable costs



cost for meal and snacks

16352


utilities costs

125


employee costs

93600

110077

CONTRIBUTION


24323

license fees

225


insurance fees

5000


rent charges

650

5875

NET INCOME


18448

The above facts are clear to state that the couple should stick to adoption of 9 children in total without renting out the space. It shall provide better profits to them in the long run. Hence, if they continue with their expansion needs of adding more children to centre along with extra adults to take care of their needs, it would be feasible only if they enroll a maximum of nine children in their centre and not more than this. This shall be the maximum point of their profit earning along with not renting the space for more children. 

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Part B: Journal Article Critique -

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.

Q1. 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.

Answer - Management accounting is the process conducted by the managers of the organization for providing useful data that is relevant in undertaking any business decisions. It involves strategic planning and performance of managerial personnel in providing expertise and development related suggestions. It is supposed to be providing the company with useful assistance in formulating and implementation strategies for the growth and development of the organization in the long run. It is suitable for sustainable business development and success.

Going to several ups and downs, Canon emerged as one of the biggest examples in using several management accounting techniques for producing a good quality sustainable product at a minimum cost. This strategy involves forming a group of diverse person and workforce for allowing different technical talent to drive creativity and foster new information creation. The focus was to develop a cost reliable product that would bring solution to all the challenges faced internally by the management. The product they wanted to develop should be a smaller version of the big Xerox machine without any maintenance costs or service charges that it would likely to attract. Since, their decision was to design a product for the households, they desired for a lightweight machine that would be cheaper and attractive for them to buy along with lesser replacement cycles of the drum of the copier. Hence, their aim was to put forward a machine that was compact portable and low-cost to the potential section of their buyers. Keeping this in mind, the company went through several methods that would help this innovation creep and flourish. The core reason of producing a low cost product was found out to be the drum that was supposed to be costing high and needing repair or replacement very soon. Resolving this problem involved organizing several Camp sessions that would necessitate gatherings outside the workplace as well. Informal meetings like such would allow the members of the group to bring forward their suggestions and dynamics for a revised solution in developing the mini copier. This session proved to be effective as it provided a solution of treating the entire drum as a small module that can be easily replaced after a given number of copies produced. This introduced cartridge as a new drum with a known life period. Along with the planning and development of this mini copier, with top managers also in for sized on constant communication taking place throughout all the internal organization of the brand. The team consisted of several members from different departments to ensure that diverse pool of suggestions flowed from every corner of the organization thereby enabling the mini copier to meet the desired requirements. Also, several quality assessment and cost assessment were formed to ensure that the desired sales revenue was achieved. Moreover, the new technology used shall be further utilized in production of other advanced and innovative goods. Thus, the organization seem to undertake sales management scorecards, strategicplanning and management; and sales forecasting as the major components of management accounting within the organization, Canon INC.This increases their revenue from 24% to 35% initially, which later on witnessed and revealed the magnificent increase of 75% per annum.

Innovation is the need of the hour. The management of both the companies has realized that in order to stabilize and survive in the industry it is essential that they bring in innovation in their offerings through either products or services. The management of Apple INC initially went through a state of confusion through a series of ongoing research and development program is going on between the management. This was majorly for developing a computer that would meet the needs of the public along with low-cost lines. Steve Jobs, One of the cofounders of the company started taking keen interest in developing such a computer that he termed as insanely great. This would basically mean that the computer would be developed on a smaller scale and in cost effective manner that would work much faster than the computers in the market. Hence, the concept behind the new product was the innovation in designing a mini computer that would be eco friendly and cost effective for their prospective clients to ensure that they meet the requisites well in advance. It would trigger their growth potential and hence, a room for their extensive sales would evolve manifold. Since the idea generated was from one of the popular machines named Xerox Parc, Steve Jobs attracted many of the participants into his team to gain an undue advantage from the knowledge exploited in earlier iterations. The team works on the principle of crystallizing and analyzing the problems raised in the due course and suggesting ways to resolve it simultaneously. The management tends to organize them into concrete yet innovative shape for generating better output for their trusted consumers. The internal management of this department ensured to include trained hackers as well. This allowed intense communication within and across several departments of the organization. This intense interaction created a room for several ideas and opportunities to breed. It institutionalized a sense of responsibility both formal and informal and towards the development of the machine. Each team was supposed to draw the life cycle of the project including their goals and objectives. Hence, the management accounting components used in this organization is strategic planning, life cycle costing, decision-making analysis, risk management and strategic management.

Therefore, it can be said that the innovation in Canon Inc. was in production of a low cost reliable mini copier, while Apple was in the process to produce a small compact computer at lowest possible costs ever. This innovation was termed as a creation of new information by its respective management for their potential buyers. They both seek to target households and invidiual clients this time and not big companies. Their new product launch for the consumers and not for production of further goods and services. (Askarany, 2014)

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Q2. 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.

Answer - Both the organizations seem to focus on information creation process and they term this as innovation to be born out of social commitment and continuous communication. Both of them extracted diverse pool of personnel from various sectors to ensure they bring in new ideas for growth and development. Though the actual product and the prices they had offered were completely different from one another, the concrete pillar that is based on the ground of innovation and uniqueness was the same. Notably the product was different, their internal management and simple accounting techniques deferred from one another on the large-scale. Their goal was the same but they choose different paths to achieve it.

Mac on one hand worked under the self-control of Steve Jobs, Canon on the other hand worked as a team completely. Apple team translated they clear objectives in introducing a product that would satisfy the public at large through its innovation and a devoted team putting continuous efforts towards the same. They were associated with the project with a sense of dedication and attachment through their activities and responsibilities. The repeated effort in hiring employees from different background ensured to flow knowledge and experience in their company and helped them achieve their desired output. Canon also worked towards the same goal. But the team invested in more general ideas and suggestions rather than personal orders like in the case of Apple Inc. They both seem to use metaphors and analogies in creating better comprehension and self-control for an organized working environment.

Q3. Provide four 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.

Answer - The above mentor cases provide a deep insight into how management activities and certain actions tend to impose significant impact on the results of their operations. These seem to work on the principle of communication completely with the objective of producing the most effective output in terms of their product offered for sale. They both try to foster innovation through their offerings and in their operations to deliver a product based on twin objectives of meeting the ever changing demands of their customers and fostering versatility through their business operations and managerial activities. They believe in instilling sound management accounting components like decision making analysis, carrying out budgets and conducting several management techniques like risk management and strategic planning with intense communication. It can be learnt after studying and critically examining both the cases that no organization can taste success if it walks on the path as general organization do. For triumph, it is essential to think and work on a diversified platform ensuring talents to breed by providing an open and encouraging environment for their workforce. This shall enable to work in a progressive manner by better achieving the financial and reputational results. Management accounting has hence proved its extreme importance because it acts as a bridge that connects the finance function of the organization with other parts of the business to help meet its objectives in a better fashion. It helps the management controlling the entity in an effective and efficient manner. (Takshila Learning) (James, 2012).

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