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Management Accounting Case Studies, Holmes Institute, Australia

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Introduction: According to American Accounting Association, accounting that helps in choosing effective planning among all the business plan alternative available through methods and concepts that are required for evaluation control and performance interpretation is known as management accounting. In short, accounting that is not regulated by any form of law in comparison to financial accounting, used for internal purposes and helps in internal decision making and strategy formulation is known as management accounting (cleartax.in, 2018). Current assessment is the analysis of different concepts associated with managerial accounting such as the cost concept, accounting information practical use with the help of two different scenarios as an accountant. In the first scenario, Frank couples are advised regarding their queries associated with day care business. The second scenario is related to critical analysis of role of management accounting practical application in two real life companies. The main objective of the assessment is to provide information on importance of managerial accounting in a company for achieving its goals.

Part A: Case Study Analysis

Question 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.

Answer: According to the facts of the case couple names Pamela and Douglas (couple) plan to open a day care centre and fulfil all the needs for opening the same. The current facility if their home which they have developed to accommodate 9 children. As the couple plan to expand their facility, the contact an accountant for advice on certain expenses and different cost concepts. The advice and required calculation for the same have been stated below.

1. Categories of cost associated with specific examples: Every form of business essentially incurs cost at varied categories. Analyses of these cost is very essential. From the facts of the case it can be noted that the couple operate a day care facility and as it is in the initial stages analysis of cost plays a vital role. The three different categories of costs that would assist the business of the couple are:

a. Relevant Cost: The cost the impacts and is impacted in the future by the decision of the organization is relevant cost. As the name goes it is relevant to the management as it focuses on only information that are helpful in decision making and removes any other extraneous information. The relevant cost for couple includes the costs that have been associated with opening the day care, annual fees, facility maintenance expenditure, expenses incurred on staff and children food (Bragg, 2018).

b. Irrelevant Cost: The cost that is never impacted by decision of the management and which is excluded for reaching decisions. However, irrelevant cost in one decision may be relevant in another decision. As the couple are in the day care business already expenses that are incurred due to change of law or annual licence fee will not be relevant for making any managerial decisions (Bragg, 2018).

c. Sunk Cost: Reverse of relevant cost, is the expenditure that cannot be overridden and has been already been incurred. The decision of management has no impact on this cost. The couple have already paid for the past expenses required for establishing day care and nothing can be done with those expenses(Bragg, 2018).

Question 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?

Answer: Advice regarding purchase of appliances - washer and dryer: Considered as an essential appliance to clear laundry the couple seek advice on whether it is affordable to purchase washer and dryer or give laundry for outsource or self-service.

a. Purchase of appliances - Relevant Information: Every form of business requires from analysis of each and every cost that impact the decision making. Thus, while deciding purchase of appliance they have to make thorough research about the washer and dryer, the capacity required for their use, the model and the cost associated. The relevant information from accounting perspective is distribution and apportionment of coast as per the life of the machine, and other associated one-time costs. The recurring costs to be calculated include the energy cost, water bills and laundry supply cost. Based on the calculation of these costs the couple may decide the model and capacity of the appliance they wish to purchase.

b. Purchase of appliances - Irrelevant Information: The information about the cost associated with the energy costs which changes as per government norms or water bill cost are irrelevant because the couple have to incur them and any decision of the management will not change these cost and couple can do nothing about these costs.

c. Additionally, while considering the other two options such as outsourcing the laundry and which amounts to $52 per month and self-service kiosk that incurs $8 in addition to transit and laundry supplies charges it is essential to analyse based on proper calculations which have been made in the next question. The solution regarding which option is effective can be assessed accordingly.

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Question 3: What could it cost the couple to launder clothes?

Answer: Cost-effective laundry option to be considered - Three Options - Calculations.

a. Option 1 Outsourcing - Red Oak Laundry services - While analysing the cost calculated by using the outsourcing service of Red Oak Laundry Services it can be observed that there are no other hidden charges and that the cost is fixed monthly. This option may be considered to be hazel free based on the below calculation.

OPTION

 

COST CALCULATION PER MONTH

 

TOTAL COST

 

 

 

 

 

Outsource Laundry - Red Oak Laundry

 

   

 

direct cost

 

$52.00

($52 * 12 Months)*2

$1,248.00

Purchase cost

 

$                             -  

 

$                -  

Energy costs

 

$                             -  

 

$                -  

Depreciation charge

 

$                             -  

 

$                -  

Mileage charge

 

$                             -  

 

$                -  

Laundry supplies

 

$                             -  

 

$                -  

 

 

 

 

 

Total Costs

 

$52.00

 

$1,248.00

By opting to use the outsourcing laundry services couple will incur $1,248 expenditure.

b. Option 2 Self-service units of Laundromat - Based on the direct cost this option sounds cheaper in compared to the above option. However, in comparison this option has three other costs that increase the total cost as calculated below because this service does not include fabric sheet and detergents.

OPTION

 

COST CALCULATION PER MONTH

 

TOTAL COST

 

 

 

 

 

Self-service units of Laundromat

 

 

 

 

direct cost

 

8

$8*4.33*12*2

$831.36

Purchase cost

 

 

 

$                 -  

Energy costs

 

 

 

$                 -  

Depreciation charge

 

 

 

$                 -  

Mileage charge

 

0.56

$(0.56*3*2*7*4.33*12*2)

$2,444.00

Laundry supplies

 

35

$35*4*2

$280.00

 

 

 

 

 

Total Costs

 

 

 

$3,555.36

By opting to use this option couple will incur fixed laundry cost of $831.36 per annum, plus additional charges applicable throughout the year constitute$2,444.00 and $280.00 which constitute a total cost of $3,555.36/- thus this option is expensive(Buchanan, 2018).

c. Option 3 Purchasing a washer and dryer - The third option the couple have been thinking is whether it is feasible to purchase a washer and dryer. The calculation is

OPTION

 

COST CALCULATION PER MONTH

 

TOTAL COST

 

 

 

 

 

Purchase of washer and dryer

 

 

 

 

direct cost

 

 

 

 

Purchase cost

 

$420+380+43.72+35

 

$878.72

Energy costs

 

$(120*3)+(145*3)

 

$795.00

Depreciation charge

 

$(420+380+43.72+35)/8*2

 

$220.00

Mileage charge

 

 

 

 

Laundry supplies

 

 

 

 

 

 

 

 

 

Total Costs

 

 

 

$1,893.72

Based on the calculations the purchase of washer and dryer is affordable in comparison to option 2 but expensive in comparison to option 1. Since the life of the machine is for 8 years with straight line depreciation divided into 8 annual parts. The machine cost also included one-time expenses such as installation and delivery charges. Even though this option is expensive I would suggest the couple to go for this option because the expenses can be segregated among 8 years and secondly, they are fixed expenses. Initially, option 1 my look affordable but if the company giving services changes its costs or other associated expenses then option 3 is best option.

Question 4: Should the Franks hire the additional employee?

Answer: Additional Employee - Hiring: As per the state regulations only three children should be managed by one person and if the couple wish to expand their children count then they have to employee a new teacher. The employment cost is fixed, and meals and cost of additional children is variable. Through the below calculations it is easy to understand these parameters.

Additional employee

 

 

 

 

 

 

 

 

 

 

 

(Montly)

Previous (six children)

Present (nine children)

 

Previous (six children)

Present (nine children)

 

 

 

 

($)

($)

Income per child

800*6

800*9

 

$4,800.00

$7,200.00

Employee fees

 

9*40*4.33

 

nil

-$1,559.00

 

 

 

 

 

 

Profit

 

 

 

$4,800.00

$5,641.00

Cost of hiring new teacher is $1559.00 in comparison to income from 3 additional children that is $7,200.00, thus, the net profit is $5,641.00. However, initially there is certain pressure to attain these profits because not all three children would join on the same day and there may be time lag for the same(Dhurandhar, et al., 2015).

Question 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?

Answer: With intension of expanding their business the couple seek advice on whether to expand their existing place to save on the rent or choose new premises that can accommodate up to 14 children maximum. They also seek advice on how beneficiary it is to join in more children or continue business with only 9 children. Accommodating more children may get more fees but it also increases maintenance, meals and snacks and hiring a new teacher expense. Further, expenses associated with insurance and rent should also be incurred. Therefore, with the help of below table the couple may be advised whether there is need for expansion and if so how many children 12 or 14 children.

Cost of home & rent space

 

 

 

 

 

Home (9 children)

Rent space (14 children)

Rent space (12 children)

 

(Yearly)

($)

($)

($)

 

Income

$86,400.00

$1,34,400.00

$1,15,200.00

 

Cost of space

-$3,900.00

-$9,300.00

-$9,300.00

 

Insurance

-$ 3,840.00

-$5,000.00

-$5,000.00

 

Employee fees

-$18,706.00

-$56,117.00

-$37,411.20

 

 

 

 

 

 

Profit

$59,954.00

$63,983.00

$63,488.80

 

9 Children

14 Children

12 Children

 

 

 

800*9*12

800*14*12

800*12*12

$50+100+150+200+250+300+350+400+450+500+550+600

$(650+125)*12

$(650+125)*12

 

 

 

9*40*4.33*12*1

9*40*4.33*12*3

9*40*4.33*12*2

From the given calculations it can be noted that employee fees is an unavoidable expense as it is compulsory according to the norms of state regulations which requires employing a teacher for every three kids. Other unavoidable expenses include rent of space, and insurance (Haslam, et al., 2016). Yet the income they are gaining shows that it is advisable to join in more children and expand the day care to fit in 14 children. However, as all children will not join on the same day it is essential to maintain these expenses accordingly to overcome the time lag. But once all children join it incurs more profit. Thus, accommodating 14 children on new premises is most advisable option.

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Part B: Journal Article Critique

Question 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.

Answer: Analysing the work of Nonaka and Kenney's (1991) research it can observed that effective innovation is being hinged in the success of corporation due to increase in the competition in the market. Innovation through various perspectives is considered as an objective for academic study. It is used further as metaphors and analogies and does not proceed through logical deductions. The current assessment illustrates the importance of innovation as a problem-solving technique with the help of case study of two very different firms Canon Inc. and Apple Computer Inc.(Simon, 1969 and elaborated by Abernathy 1978). It is understood mostly as the process that creates new information which further used to concretized into the product. Human beings here are creators of information but not just processors of information(Galbraith, 1973).

Innovation as analysed by Simon (1969) and elaborated by Abernathy (1978) is a problem-solving technique. It is the professional collaboration of management with its members who are involved in performance management, decision making and company planning.

1. System components in both the companies - Management Accounting; effective and efficient role in decision making.

Management or managerial accounting is that technical accounting tool that enables the top-level management in making decision for the organization. It is a shift from the traditional accounting process to a innovative and efficient accounting process, that is, the shift is from collection of information from only financial pieces to collection of information from different categories such as future policies, marketing trends, and secondary resources among others. The need for the shift is to provide the organization an idea on the varied options available and their suitability in making decisions.

The silicon innovation model of Cannon Inc. guides the managerial team of the organization in making decision based on the timely changing industry trends. This helps the organization in moving ahead successfully by giving thoughts of diversification and maintain their position in the competitive world (Hiramatsu, 2016). The fall in demand for Cannon products that is the camera manufacturing and sales in the market and growing competition guided the organization to diversify their work based on their abilities. One of the possible outcomes considered here was the designing a cost-effective photocopier by targeting offices. For the purpose of attainting this goal the management team relied completely on their diverse team who with their varied capabilities and skills let to the innovation and designing of mini copier. The organization in this process did face hinges but it did not give up. Cooperation and collaboration within the management was string enough to take the challenging task of designing and producing the product with minimal production cost.

With its own Silicon Valley Innovation Model Apple Inc. planned to move ahead and gain back its position in the competitive market to overcome the shock it incurred due to failure of Apple III and Lisa. It began its planning by looking around for the reason why the product received negative responses. Based on the managerial data it analysed that high price has been the main reason for failure of Apple III. Thus, to attain success again the management appointed a team of new young professionals with varied skills with the aim to develop a computer with low-cost and that which will compete with the other market players with its uniqueness of Apple products and superior technology. This planning led to the launch of Mac Book which attracted the market and helped Apple Inc. to survive in the market competition. Therefore, it can be noted that management accounting with the help of innovation will help the organization in reaping good benefits.

Question 2: Explain how management accounting contributes to this innovation process.

Answer: Management accounting is a tool that provides the organization with management reports considering the data received through external and internal information and nonfinancial data. Through this tool the organization can have market requirements overview and take decisions as per the circumstances.

Cannon Inc. to overcome the failure of its camera business decided to enter the market with fax and photocopier business. Initially, the thought has been challenging and resulted in a failure because the team failed to develop a design according to required parameters such as size of the product and minimal manufacturing cost. This failure was spreading negativity among the organization which led to failure of the project. Yet, the decision of the management to maintain diversified workforce that is skilled from various specialization, helped the Canon team to design a new model ‘drum' which after many brain-storming sessions in the camps emerged as a model with specific life expectancy, that is, it could be discarded upon printing of certain number of copies. This cooperation and trust and innovative though did help the organization in launching the product and increasing its demand for the product.

Under the supervision of Mr. Steven Jobs, Apple Inc. had a phenomenal growth until the failure of Lisa and Apple III, which came as great shock for both Mr. Jobs and the organization. The Apple foundation removed Mr. Jobs from the Lisa project. This move led Mr. Jobs to get attracted to a small Macintosh group. This move helped him understanding the reasons behind failure of Apple III and Lisa and also understand the sentiments of public. With the appointment of young and small skilled team to work on designing Macintosh computers that were insanely great, Apple Inc., took a major leap in the personal computers area and also a new information for the company was also created. Yet this leap did not help the organization in reaping exceptional benefits because the disputes in the management that led to many leaving the company leaving the newly created information embodiment. The young team crystallised the problem and solution simultaneously, they were self-organizing and lack cooperation with other areas of the company as in the case of Canon, Inc. where cooperation was key to success. The disputes in the management did impact the decision-making process of the company.

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Question 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.

Answer: The innovative way both giants have launched their products prove that management accounting is very helpful in gathering information that helps in making decisions and plan according in comparison to other market competitors. These examples help the Australian in understanding how a management and accounting should perform and the strategies they need to use to improve their benefits against their competitors. It also advises them how a management should work internally based on the innovation implemented.
Innovation that is information creation process can be improved through social interaction. A highly interactive team with composed and skilled professionals helps in developing projects and achieve daily targeted production goals (Nonaka and Kenney, 1991). Although the developments of the products in these two companies is different, it can noted that than giving up due to the lossthe companies in their own respective manners adopted innovative ways to innovate new products and gain their position in the market. It is also essential to analyse the way management relationship has been maintained in both the companies. While Canon followed a homogeneous structure which required coordination in the corporation, Apple adopted self-organizing team that lacked any form of cooperation with the other sections of the organization. The top management of Apple lacked unity in comparison to Cannon which also had the policy to retain staff and recognise their skills (Kaplan and Atkinson, 2015).

Apple Inc. lacked this integration and it was managed differently. They adopted a autocratic system that ignored many innovative ideas. The Mac group was separated from rest of the company because initially the management was completely ambivalent towards the project and it was developed on isolation. This destructed the relation of Mac with rest of the company and lost embodiment of newly created information. Thus, proper support of management is essential for managerial accounting.

Conclusion: Therefore, based on the above examination it can be noted that under the first scenario as per the calculations and understanding of various categories of costs, couple have been advised to expand their business by increasing their business to accommodate 14 children and rent a new premises to accommodate the new premises for the same. Further, the analysis also advices the couple regarding one-time investment associated with expenses related to laundry. The second scenario analysis the importance of innovation and management accounting and states that an organization is successful only when the management adapts technology according to the need of the consumer and the market by stepping aside from stereotype and traditional management. For effective implementation of innovative ideas and gain better profit the management should take decisions and maintain collaboration between all the areas of management. Hence, it can be concluded that effective use of management accounting helps in increasing business efficiency and also provide opportunity to the management to gain both external and internal data that would help in increasing profits, and lead to organizational growth and efficiency.

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