PART A: Case Study Analysis and PART B: Journal Article Critique-HI5017: Managerial Accounting
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.
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.)
- 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)
- 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)
- What could it cost the couple to launder clothes? Show your detailed calculations for each option. (3 marks)
- 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)
- 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)
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:
- 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)
- 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)
- 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)
Solution
Part A: Case Study Analysis
Question 1:
The case consists of an example of costs of Incremental costs, Fixed Costs, Variable Costs, and Sunk Costs. The list of costs and the example of it is shown in the table below:
| Cost Type | Example |
| Fixed Cost | License Fee of the Day Care Centre for $225 is a fixed cost as it does not change regardless of the service activities of the center |
| Variable cost | The Fee Charged for the Day Care Service of $800 per child per month is a variable cost as it changes with the change in the number of months the service is to be rendered or by the number of the children enrolled |
| Sunk Cost | The $79,500 is the sunk costs incurred for the renovation of the house which has been spent and cannot be recovered. |
Question 2:
The information that is relevant to the question of deciding for purchasing of the appliances is based on the two facts. These are whether the cost is going to be incurred in the future following a decision and whether this cost is differing as compared to the other alternative. The cost which fulfills both criteria is going to be relevant to the decision making of the purchase of the appliance.
Relevant information:
In case the Couple decides to purchase the appliance, the costs which are going to be relevant to them would include.
- The costs of the new appliances
- The Delivery cost of the store of the new appliances
- Their installation and other accessories costs
- Their additional cost of the utilities
For deciding on going for the purchase of the appliances, the couple is needed to look at all the alternatives and consider those costs as well. This makes the following costs as relevant as well.
- The cost of the laundry service for pickup and delivery
- The Self service cost of the laundry including the laundry supplies costs
- The Self service cost of the laundry including the mileage costs
Irrelevant Information:
The information which is irrelevant to the decision making of this purchase includes the following costs.
- Cost of the detergent becomes irrelevant if the alternatives do not consider the pickup and delivery services
- The cost of the old appliances are also irrelevant
These costs are irrelevant to the decision of the purchase of the appliances for the very reason that the costs have already been incurred or do not have any effect on the decision among the alternatives. Another important aspect of the relevant costs here is the opportunity costs. The opportunity cost of spending the time for Laundromat or for using the space in the house for new appliances could be relevant to the decision as well. Furthermore, the qualitative considerations, like the cost of the convenience of having the appliances at home or having the laundered clothes delivered, can be relevant to the decision making process as well.
Question 3:
The analysis of the two alternatives and their calculations is shown below:
| Analysis of the Alternatives | |
| For Purchasing the Appliances | |
| Appliances Cost | |
| Washer | $ 420.00 |
| Dryer | $ 380.00 |
| Installation Costs | $ 43.72 |
| Delivery Costs | $ 35.00 |
| Total Cost of Appliances | $ 878.72 |
| Useful Life (Years) | $ 8.00 |
| Cost Allocated Each Year | $ 109.84 |
| Cost of Supplies (Annual) | |
| Cost of Supplies Per Quarter | $ 35.00 |
| Num of Quarters Per Year | $ 4.00 |
| Cost of Supplies (Annual) | $ 140.00 |
| Alternative 1: For Purchasing the Appliances | |
| Cost Allocated Each Year | $ 109.84 |
| Add: | |
| Additional Cost of Utilities from Purchase | $ 265.00 |
| Cost of Supplies (Annual) | $ 140.00 |
| Total Cost of Purchase of Appliance (Annual) | $ 514.84 |
| Alternative 2: Self Service Laundry | |
| Cost of Laundering | $ 416.00 |
| Cost of Driving /Mileage | $ 174.72 |
| Cost of Laundry Supplies | $ 140.00 |
| Total Cost of Self Service Laundry (Annual) | $ 730.72 |
| Cost of Driving | |
| Miles Per Visit | $ 6.00 |
| Cost Per Mile | $ 0.56 |
| Num of Weeks in Year | $ 52.00 |
| Cost of Driving /Mileage | $ 174.72 |
| Cost of Laundering | |
| Per Week Cost | $ 8.00 |
| Num of Weeks in Year | $ 52.00 |
| Cost of Laundering | $ 416.00 |
| Cost of Laundry Supplies | |
| Per Quarter Cost | $ 35.00 |
| Num of Quarters Per Year | $ 4.00 |
| Cost of Laundry Supplies | $ 140.00 |
The analysis shows that the better option for launder is to purchase the appliances.
Question 4:
This analysis can be done by using an incremental analysis if the income statement is already made. The income statement of the Daycare is developed as under.
| Calculation of Net Income | |
| Service Revenue from Childcare | $ 57,600.00 |
| Expenses | |
| Snacks Costs | $ 4,988.16 |
| Utilities Costs | $ 600.00 |
| License Cost | $ 225.00 |
| Insurance Cost | $ 3,840.00 |
| Laundry Costs | $ 514.84 |
| Depreciation Expense | $ 3,180.00 |
| Total Expenses | $ 13,348.00 |
| Net Income | $ 44,252.00 |
| Service Revenue from Childcare | |
| Childcare Fee Per Child Per Month | $ 800.00 |
| Num of Children |
$ 6.00 |
| Num of Months | $ 12.00 |
| Service Revenue from Childcare | $ 57,600.00 |
| Snacks Costs | |
| Snacks Costs per Child Per Day |
$ 3.20 |
| Num of Children |
$ 6.00 |
| Num of Days |
$ 259.80 |
| Snacks Costs | $ 4,988.16 |
| Utilities Costs | |
| Per Month Cost | $ 50.00 |
| Num of Months | $ 12.00 |
|
Utilities Costs |
$ 600.00 |
| Depreciation Expense | |
| Cost of Facility | $ 79,500.00 |
| Useful Life | 25.00 |
| Depreciation Expense | $ 3,180.00 |
For the incremental analysis of the new data, the costs for the additional employee and feeding of the additional children are going to be considered.
The incremental revenue is computed as.
| Incremental Revenue | |
| Additional Children | 3.00 |
| Service Fee | $ 800.00 |
| Incremental Revenue | $ 2,400.00 |
| Incremental Cost of Employee | |
| Cost Per Hour | 9.00 |
| Num of Hours Per Week | $ 40.00 |
| Num of Weeks in Month | 4.33 |
| Incremental Cost of Employee | $ 1,558.80 |
| Incremental Cost for Food | |
| Per Child Per Day Cost of Meal | $ 3.20 |
| Num of Additional Children | 3.00 |
| Num of Days in Month | 21.65 |
| Incremental Cost for Food | $ 207.84 |
| Incremental Revenue | $ 2,400.00 |
| Total Incremental Cost | $ 1,766.64 |
| Net Profit | $ 633.36 |
The incremental revenue yielded from the enrollment of the three more children is $2400, which is more than the total incremental costs of $1766. Thus, it shows that the couple can have a benefit of $633 if they consider this alternative.
Question 5:
For this question, the income statement for each of the alternatives is needed t be developed. The four options available are the current location with 6 children, or 9 children and new location with 12 children or 14 children. The calculations are done below in the income statement. The computations for each of the expenses are also shown in detail.
| Alternative for Locations | ||||
| Alternative 1: Remain in Existing Place | Alternative 2: Move to Larger Place | |||
| With 6 Children | With 9 Children | With 12 Children | With 14 Children | |
| Service Revenue (Monthly) | $ 4,800.00 | 7200 | 9600 | 11200 |
| Expenses | ||||
| Snacks Costs | $ 415.68 | $ 623.52 | $ 831.36 | $ 969.92 |
| Utilities Costs | $ 50.00 | $ 50.00 | $ 125.00 | $ 125.00 |
| License Cost | $ 18.75 | $ 18.75 | $ 18.75 | $ 18.75 |
| Insurance Cost | $ 320.00 | $ 320.00 | $ 416.67 | $ 416.67 |
| Laundry Costs | $ 42.90 | $ 42.90 | $ 42.90 | $ 42.90 |
| Depreciation Expense | $ 265.00 | $ 265.00 | $ – | $ – |
| Rent Expense | $ – | $ – | $ 650.00 | $ 650.00 |
| Employee | $ – | $ 1,558.80 | $ 3,117.60 | $ 4,676.40 |
| Total Expenses | $ 1,112.33 | $ 2,878.97 | $ 5,202.28 | $ 6,899.64 |
| Net Income | $ 3,687.67 | $ 4,321.03 | $ 4,397.72 | $ 4,300.36 |
| Service Revenue (Monthly) | 6 Children | 9 Children | 12 Children | 14 Children |
| Per Child Per Month Fee | $ 800.00 | $ 800.00 | $ 800.00 | $ 800.00 |
| Num of Children | 6.00 | 9.00 | 12.00 | 14.00 |
| Service Revenue (Monthly) | $ 4,800.00 | $ 7,200.00 | $ 9,600.00 | $ 11,200.00 |
| Meals Expense (Monthly) | 6 Children | 9 Children | 12 Children | 14 Children |
| Per Child Per Day | $ 3.20 | $ 3.20 | $ 3.20 | $ 3.20 |
| Num of Children | 6.00 | 9.00 | 12.00 | 14.00 |
| Num of Days in Month | $ 21.65 | $ 21.65 | $ 21.65 | $ 21.65 |
| Meals Expense (Monthly) | $ 415.68 | $ 623.52 | $ 831.36 | $ 969.92 |
| License Cost Monthly | 6 Children | 9 Children | 12 Children | 14 Children |
| Annual License Cost | $ 225.00 | $ 225.00 | $ 225.00 | $ 225.00 |
| Months | 12.00 | 12.00 | 12.00 | 12.00 |
| License Cost Monthly | $ 18.75 | $ 18.75 | $ 18.75 | $ 18.75 |
| Insurance Cost Monthly | 6 Children | 9 Children | 12 Children | 14 Children |
| Annual Insurance Cost | $ 3,840.00 | $ 3,840.00 | $ 5,000.00 | $ 5,000.00 |
| Months | 12.00 | 12.00 | 12.00 | 12.00 |
| Insurance Cost Monthly | $ 320.00 | $ 320.00 | $ 416.67 | $ 416.67 |
| Laundry Cost Monthly | 6 Children | 9 Children | 12 Children | 14 Children |
| Annual Laundry Cost | $ 514.84 | $ 514.84 | $ 514.84 | $ 514.84 |
| Months | 12.00 | 12.00 | 12.00 | 12.00 |
| Laundry Cost Monthly | $ 42.90 | $ 42.90 | $ 42.90 | $ 42.90 |
| Depreciation Monthly Cost | 6 Children | 9 Children | 12 Children | 14 Children |
| Annual Depreciation | $ 3,180.00 | $ 3,180.00 | ||
| Months | 12.00 | 12.00 | ||
| Depreciation Monthly Cost | $ 265.00 | $ 265.00 | 0 | 0 |
| 6 Children | 9 Children | 12 Children | 14 Children | |
| Rent Cost | $ – | $ – | $ 650.00 | $ 650.00 |
| Utilities cost | $ 50.00 | $ 50.00 | $ 125.00 | $ 125.00 |
| Employee Cost Monthly | $ – | $ 1,558.80 | $ 3,117.60 | $ 4,676.40 |
| Num of Additional Employees | 0 Employees | 1 Employee | 2 Employee | 3 Employee |
The resulting net income for all four alternatives compared with each other shows that the highest income is generated with more than 6 children. The alternative of using 9 children with one additional employee is also good enough as the alternative of moving to a new place with 12 or 14 children with additional employees. The difference in the net income is not significantly varying for these three options. However, as per the highest net income, the best option is moving to a new location with 12 children with 2 additional employees.
Part B: Journal Article Critique
Question 1:
In terms of the management accounting systems and its components, Canon established a system of constant communication between the leaders of the internal organization for the development of the MC. Setting of the quality standards for the exposure, charging, cleaning, development and fusing of the television sets is another component. The use of the knowledge base of the technology used in the development of the MC was further utilized in the later product developments of laser printers, and facsimile machines. The spontaneous organized camp sessions are one component of such management accounting systems which provided enough information sharing among the individuals and creation of ideas and innovation. Later, the creation of the task force was another such example (Trott, 2008). The task force creation and the established system of communication between the internal organizations of the team enabled them to communicate effectively and work on making informed decisions efficiently. The use of the camp sessions was also another way in which the employees of the task force interacted with each other in a new environment to yield new ideas. An example of the use of cartridge in place of the ink drums came from the beer cans at these camp sessions. In terms of Apple Inc, the team of Macintosh was closely interacting all the time which allowed high information sharing. One such component of management system is visible in the group mania which includes the discussions involving all of the team to raise questions and then answer them. Organized team retreats away from the core office further allowed interactions. The team retreats and the group mania all used the interaction of the company employees and team which is not included in the team to raise questions and then provide solutions for it. The increased interaction of the company helped in making informed decisions and providing efficient results of the goals in terms of product development. In cases, information sharing, and strong interactions are the key and then its later use as the knowledge base in the development of the management system which helps in the decision making of the company. Using the knowledge of the product development of the teams for both cases i.e. Canon’s mini copiers and the Apple Macintosh were used in the later development of the products for the company.
Question 2:
The case study shows that both companies of Apple and Canon have used the information creation process for innovation, which has risen from the social interaction of the teams of the companies. The innovation process is based on the creation of the structure, which uses information sharing among the employees. The highly interactive system helps the project development teams in getting involved in the intensive daily communication causing the share of knowledge (Burgelman & Maidique, 2018). The products which are developed through this process in both cases are different. The innovation at Cannon and Apple Inc is both showing differences in innovation. Apple Inc shows the chaos of Silicon Valley represented in its company environment. The Japanese company, on the other hand, had a very stable environment in terms of workforce. However, the market of Japanese was dependent on the constant growth of the innovations. The key is, therefore, in the creation of an environment in both cases, which helps foster information from chaos. Thus, chaos creation is not the aim here. However, this also involves the careful involvement of the management as well. The chaos is needed not to be overwhelming, and the abilities of the employees are not to be completely undermined by the chaos. IT needs only to be instigative of the employees to create new ideas. Thus, Chaos can be created by introducing merger or acquisition; however, it would be completely decisive for the company as a wrong decision of acquisition can go a long way from the actual desired result. The system is therefore needed to create new meanings of the chaos for the creation of the meaningful accounting management systems for innovation process (Johnson et al., 2012). Example of Apple using the group mania and Canon using Camp sessions is one such example.
Question 3:
The findings of the journal article show that innovation is an information creation process. This shows that the companies in Australia should work on creating an information sharing environment where social interactions are easy and comfortable. The personnel from varying backgrounds and operating in an atmosphere for intense routine communication can help in bringing up of this environment of high interactions. Secondly, the companies of Australia can also learn from this article that they need to use to identify their current system of information. The finding shows that a system that does not create any new meanings is considered stagnant. These are the companies whose system is based on profit analysis and ROI rather than on innovative ideas (Nonaka, 2014). The innovation in these companies is considered a product which needs to be developed rather than an idea or information sharing environment. The channels of communications used in these companies are not suitable for the sharing of semantic data sharing. The Australian companies can look and identify if their companies are using the bureaucratic systems and profit centric approach to know how they need to change it to innovative management systems. Third learning from this article is the use of leadership for the cause of establishment of the environment that encourages the growth of ideas, even contrasting and aggressive between the employees. This can help in motivating the employees to share theory views and become open to criticism as well. Fourth learning from the article could be the use of the slogans for the sake of creating a commitment, and common goals among the team. The Macintosh was named as the pirates of the ship, and they propelled at this thought. It was also considered as the bicycle of Personal Computers. The MC was considered as the AK-1 of the Copiers (Shibata, 2006). These types of metaphors help the company to raise a sense of common goal and commitment in the team. It also helps in motivating the employees to move forward together to achieve a common goal. The use of slogans and metaphors can be utilized by the Australian companies for the sake of motivating their employees and bringing them together. Furthermore, another important learning can be the use of the team camps, impromptu discussions, group meetings and use of the outside personnel are on the team discussions for raising the questions that could not have been raised from within the team and within the routine environment of the group (Nonaka & Kenney, 1991). Thus, using these strategies, the Australian companies can work for developing innovative management systems.
References:
Burgelman, R.A. & Maidique, M.A., 2018. Strategic management of technology and innovation. Irwin.
Johnson, K. et al., 2012. The Innovative Success that is Apple, Inc. Marshall University.
Nonaka, I., 2014. The Knowledge-Creating Company. HBR, 1(1), pp.1-9.
Nonaka, I. & Kenney, M., 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(1991), pp.67-83.
Shibata, T., 2006. Japan, Moving Toward a More Advanced Knowledge Economy, 1: Assessment and Lessons. World Bank.
Trott, 2015. Innovation Management and New Product Development. Pearson Education India.
