HI5017: Managerial Accounting-PART A: Case Study Analysis and PART B: Journal Article Critique
Part A: Case Study Analysis (15 Marks)
You are to answer the 5 questions relating to the case study of a childcare 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 childcare 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 day-care 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.
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>.
Solution
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. (3 marks)
Fixed cost is an expense or cost incurred by the company which remains constant throughout the specific financial year for providing good and services to two customers irrespective of increase or decrease in level of production or service. In this case, there are annual license fees of approximately 225 US dollars. This annual licensing fee is a fixed expense. Another fixed expense in this case is the total insurance amount which is paid on an annual basis which is approximately 3840 US dollars. These two amounts will not change for the company irrespective of the business activities or level of operational activities.
Another type of identified cost is sunk cost. It is the type of cost which is incurred by the company, but this cost cannot be recovered by the company. According to the case, the cost related to the old appliances for approximately 440 US dollars has been already spent and it will not be recovered by the company so it can be categorized as sunk cost. Another example of this type of cost according to a case study is renovation of the home which is approximately 79500 US dollars which has been already spent but it will not be recovered in future.
Another type of identified cost from the case study is variable cost. According to the case study, approximately 800 US dollars will be collected for a child. This amount will change proportionally according to the total number of enrolled children in the program. The amount spent for snacks per child is approximately 3.2 $0 and it will change according to the total number of enrolled children in the program.
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)
According to the case study, some of the cost for element for making decisions while some of the cost of our earth element for making decision related to purchasing of the appliances. Some of the relevant cost related to purchasing of appliances includes cost of purchasing new appliances from the market, delivery cost related to purchasing of new appliances from market, cost associated with installation of newly purchased appliances from market and additional cost associated with utilities.
If different alternatives are available in the market related to purchasing of new appliances, then the cost associated with all different alternatives must be evaluated. This evaluation will make some other costs relevant as well. These other costs include the pickup cost as well as delivery cost related to laundry services. It also includes self-service related cost of laundry which includes cost related to mileage, detergent and most importantly laundering.
There are also some costs which are not relevant for making the decision related to the purchase of old appliances. It is important to understand that the cost which have been already incurred is irrelevant for making the future decision related to the purchase of old appliances. This type of cost is also known as sunk cost. Cost which is it relevant for making the decision related to purchase of old appliances is the cost of the old appliances which has been already paid and cost related to detergent is also considered to be a relevant only if from the available alternatives, alternative related to pickup and delivery of the laundry service is excluded.
3-What could it cost the couple to launder clothes? Show your detailed calculations for each option. (3 marks)
Option 1: Purchasing New Appliances
Yearly cost associated with appliances = Washer cost 420 + Dryer Cost 380 + Installation cost 43.72 + Delivery cost 35 = 878.72 US Dollars
Yearly cost associated with appliances = 878.72/8
Yearly cost associated with appliances = 109.84 US Dollars
Energy cost increase on yearly basis = 120 +145 = 265 US Dollars
Yearly expenses related to detergent: 140 US Dollars
Appliances total cost calculated on yearly basis = 109.84 + 265 + 140
Appliances total cost calculated on yearly basis = 514.84 US Dollars
Option 2: Laundry Self Service
Driving related cost = 6 miles distance weekly x 0.56 rate per mile = 3.36 rate weekly
Driving related cost = 3.36 rate weekly x 52 total weeks in year = 174.72 US Dollars
Cost associated with laundry services of clothes: 8 rates weekly x 52 total weeks in year = 416
Cost associated with detergent usage = 35 cost per quarter x 4 quarters in a year = 140
Yearly based cost associated with appliances for self service laundry = 174.72 + 416 + 140
Yearly based cost associated with appliances for self service laundry = 730.72 US Dollars
Option 3: Delivery Services Related to Laundry
Cost for delivery services and pick up services on monthly basis = 52 US Dollars
Total number of months available for laundry services = 12
Total amount of pickup and delivery services of laundry on yearly basis = 52 x 12
Total amount of pickup and delivery services of laundry on yearly basis = 624 US Dollars
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)
In order to answer this question, it is significantly important to calculate increase in amount of revenue by hiring new employee and admitting three more children. Calculation related to incremental change in the revenue and cost is as follows:
Increase in level of revenue by admitting three more children = 3 Children x rate per child
Increase in level of revenue by admitting three more children = 3 x 800 on monthly basis
Increase in level of revenue by admitting three more children = 2400 on monthly basis
Cost of hiring new employee = 9 US dollars per hour rate x 40 hours in week
Cost of hiring new employee = 360 weekly cost
Cost of hiring new employee = 360 x 4.33 number of weeks in one month
Cost of hiring new employee = 1,559 US dollars
Incremental cost related to food = 3.20 US Dollars per child on daily basis
Incremental cost related to food = 3.20 x 3 Children x 5 number of days in week
Incremental cost related to food = 3.20 x 3 x 5 x 4.33 amount of weeks in one month
Incremental cost related to food = 208 US Dollars
Total amount of incremental cost = 1559 + 208
Total amount of incremental cost = 1767 US Dollars
Total amount of incremental revenue which will be generated by an additional 3 children will be approximately $2,400 on a monthly basis. Total increase in cost of adding three more children in the program will be approximately 1767 US dollars on a monthly basis. Analysis clearly suggests that increment in revenue is greater than increment in cost of additional 3 children on monthly basis providing a profit of approximately 633 US dollars on monthly basis. This clearly suggests that this option must be exercised by Franks.
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)
Option 1: Continuing in the same location
In case of 6 Children:
Total amount of Revenue = 4800 US Dollars
Total amount of Expenses = Meals 416 + License 19 + Insurance 320 + Laundry 43 + Depreciation 265 + Rent 0 + Utilities 50 + Employee 0
Total amount of Expenses = 1,113 US Dollars
Net Income on monthly basis = 3687 US Dollars
In case of 9 Children:
Total amount of Revenue = 7200 US Dollars
Total amount of Expenses = Meals 624 + License 19 + Insurance 320 + Laundry 43 + Depreciation 265 + Rent 0 + Utilities 50 + Employee 1559
Total amount of Expenses = 2,880 US Dollars
Net Income on monthly basis = 4,320 US Dollars
Option 2: Shifting to another larger location
In case of 12 Children:
Total amount of Revenue = 9,600 US Dollars
Total amount of Expenses = Meals 831 + License 19 + Insurance 417 + Laundry 43 + Depreciation 0 + Rent 650 + Utilities 125 + Employee 3118
Total amount of Expenses = 5,203 US Dollars
Net Income on monthly basis = 4,397 US Dollars
In case of 14 Children:
Total amount of Revenue = 11,200 US Dollars
Total amount of Expenses = Meals 970 + License 19 + Insurance 417 + Laundry 43 + Depreciation 0 + Rent 650 + Utilities 125 + Employee 4676
Total amount of Expenses = 6,900 US Dollars
Net Income on monthly basis = 4,300 US Dollars
Results of the calculation suggest that net income level increased significantly when the amounts of children are above 6. The difference between the net income level among 9, 12 and 14 children is very low suggesting data is having concept of diminishing return.
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. Include examples in your answer. (4 marks)
Activity based costing technique is one of the costing methods which is used in order to identify different development activities related to production of goods and services in an organization and specific relevant cost is allocated against each of the identified activities associated with products and services. Activity based costing method has been adopted by Canon Corporation as well as apple incorporation in order to record transactions related to cost accounting. Activity based costing technique usage is increasing significantly with the passage of time because of significant advantages of this costing method (Nonaka & Kenney, 1991).
Activity based costing technique is considered to be one of the most significant elements of Management Accounting which has been implemented at Apple incorporation as well as can incorporation. Activity based costing technique has provided an opportunity to Apple incorporation to improve their overall business operations and business process. Canon Corporation has been supported with the implementation of activity-based costing technique. This costing technique is considered to be tough to implement during the initial stages, but it becomes easy to manage with the passage of time once all the activities and cost drivers are identified and allocated appropriately.
Both the organizations have employees which are able to self organize themselves, which is a positive aspect as per as controlling component of managerial accounting is concerned. Three basic primary components associated with implementation of managerial accounting is planning, decision making and controlling. Both the organization have self-organizing employees show the aspect of controlling business operations and business process is very strong in both organizations from managerial accounting perspective which is a positive sign for the performance of the company and for innovation process as well (Mowen et al., 2016).
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)
Management Accountant can contribute significantly towards the innovation process. One of the most significant contributions of Management Accountant towards increasing the innovation process is to make sure that labor output is frequently compared with the capabilities of the labor in order to analyze the variance between the capabilities and output. It will help the management accountant to identify the techniques which can be implemented in order to remove the variances and improve the labor efficiency at the workplace. Management Accountants are not only responsible for recording the cost accounting related transactions internally, but they are also responsible for providing appropriate and significant solutions related to cost issues and internal issues to top level management (Baker et al., 2014).
Another significant technique which can be implemented by the Management Accountant is true formulating standards regarding labor productivity and machine productivity and other related productive elements. The actual production rate can be compared with formulated standard rates in order to identify the prevailing various. After identification of prevailing variance, appropriate and relevant solutions and techniques can be suggested to the top-level management in order to implement those techniques. With implementation of those techniques, management will be able to improve the labor efficiency as well as machine efficiency which will ultimately improve the innovation level and innovation process prevailing in the organization (Huefner & Largay, 2009).
One of the most significant examples in Apple Corporation is the style of self-organization in the employees working in the organization as compared to Canon Corporation. As most of the employees working in Apple incorporation are self-organizing, it significantly reduces the cost related to communication and it helps the top level managers to save their time which can be utilized for other efficient activities. If the subordinate employees are able to organize themselves then it saves significant time of top level managers and helps to improve the performance of the company. It will also provide free time to managers to discuss enhancement of innovation in the organization. This will ultimately provide opportunity to top level management to improve the innovation process prevailing in the organization (Nonaka & Kenney, 1991).
Examples of Apple incorporation and can incorporation clearly suggest that both organizations have properly implemented the financial as well as cost accounting Principles in order to formulate their financial reporting and manage their internal operations. This has significantly helped Management Accountant to support innovation process prevailing in the organization by making sure that all the cost and finance related transactions are being recorded according to the relevant formulated principles.
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)
Results of the study suggest that both companies Apple incorporation and Canon Incorporation management has decided to increase the level of innovation in order to improve information processing. Due to an increase in the level of information processing, decision making process has been improved for both the organizations for top level management. Management accounting is associated with providing information internally to management in order to help them for decision making process. Increase in level of innovation will definitely help management of Apple incorporation and Canon incorporation to improve their decision-making level.
Results of the study suggest that employees working in can incorporation are provided employment contracts for long-term due to which the workforce available in Canon Corporation is comparatively stable and this helps the cost Accountants to make sure that they could reduce their cost and expenses by significantly increasing their production level. At this stage, concept economies of scales can be easily implemented by the management as they have consistent and table workforce which can help the management to easily increase the production amount in order to reduce the production cost and related expenses (Warren et al., 2016).
Another significant result identified in this study is the implementation of integrated capabilities at Canon incorporation. Due to integrated capabilities, the cost of management has significantly reduced. Due to this significant reduction in cost of management, cost of internal operations has significantly reduced providing opportunity to the managerial level employees to take better decisions related to competition in order to compete with competitors in same industry.
With the passage of time, the number of companies related to mobile phones and photography is significantly increasing due to increase in usage for these types of products and services. This has significantly increased the level of competition in this industry and current companies are required to formulate policies and strategies accordingly in order to make sure that they can compete with competitors in same industry (Nonaka & Kenney, 1991).
Results of this study also suggested that both companies have a common aspect of commitment by the employees working in respective organizations. Due to an increase in level of efforts and commitment, production efficiency and effectiveness is being positively influenced. This is positively influencing the chances of both companies to effectively compete with their competitors in the same industry to increase their market share.
New process implemented in both companies responsible for enhancing the process related to Information creation instead of just modifying the human activity-based elements. Due to this type of innovation, information availability with managers have significantly increased, providing them with a chance to take better decisions regarding the policies and future of the company.
References
Baker, R.C., Bedard, J. & Hauret, C.P., 2014. The regulation of statutory auditing: an institutional theory approach. Managerial Auditing Journal, 29(5), pp.371-94.
Huefner, R.J. & Largay, J.A., 2009. Consolidated Financial Reporting: Accounting Issues, Financial Reporting Choices, And Managerial Implications. Journal of Managerial Issues, 2(1), pp.26-40.
Mowen, M.M., Hansen, D.R. & Heitger, D.L., 2016. Managerial Accounting: The Cornerstone of Business Decision-Making. 7th ed. Cengage Learning.
Nonaka, I. & Kenney, M., 1991. Towards a new theory of innovation management: A case study comparing Canon, Inc. and Apple A case study comparing Canon, Inc. and Apple. Journal of Engineering and Technology Management, 8(1991), pp.67-83.
Warren, C., Reeve, J.M. & Duchac, J., 2016. Financial & Managerial Accounting. 14th ed. Cengage Learning.
