Management Accounting Case Studies, Holmes Institute, Australia

HI5017 Managerial Accounting

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PART A:

Question 1: List any three (3) types of costs and provide one specific example of each cost from the case.

Answer: The process of Decision making is a very important activity for any organization or individual. It involves examining and assessing in depth the aspects (qualitative and quantitative) of the various alternatives present beforean undertaking, and then making the decision by selecting any alternative it thinks to be feasible for them. It is a subjective process, thoroughly based on the preferences and circumstances 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 from amongst the alternatives, the best suitable and optimum option available, to ensure that the organisationincreases its own value. This process ensures that the decision maker is well aware about the various advantages and disadvantages associated with the given alternatives. Hence, decision making process assists in the implementation of proper managerial activities and is pervasive in nature. Without a proper process, no further plan or policy can be implemented properly within anorganization. In this era of rapid industrialization and 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.

There are many costs associated with the decision-making process. 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 considered irrelevant in decision-making. The expenditure incurred in conducting theR&D 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, as these costs are the cost which are to be incurred if a decision is implemented, else it can be avoided. Such cost, whether variable or fixed, are relevant in deciding whether to continue with the proposal or not.

• 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.

In the given case, a married couple, after working for several years in a business organization now are 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. 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 are to be considered relevant in deciding whether the couple should purchase the appliances or outsource services from another organization. Also the additional electricity cost due to buying the washer machine as well as 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.

Question 2: What information is relevant and 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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Question 3: What could it cost the couple to launder clothes?

Answer: The couple has three options to consider:

a. Option 1: Red out laundry and dry cleaning

b. Option 2: Taking services from the Laundromat

c. Option 3: buying the appliances

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.

Question 4: Should the Franks hire the additional employee?

Answer: The brief details are as follows:

HIRING ADDITIONAL EMPLOYEE

Question 5: 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?

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

CHILD CARE CENTRE FROM THEIR OWN SPACE:

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

RENTING NEW SPACE IN TOWN

The above facts are clear in explaining that the couple should stick to adopting 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:

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: Management accounting is the procedural aspect taken care of by the managers of an organization for providing useful data which is of relevance in undertaking any business decisions. It involves strategic planning and performance of managerial personnel in providing expertise and development related suggestions. (Business Dictionary) It is supposed to provide the company with useful assistance in implementation and formulation of strategies for the growth and development of the organization in the long run. It is necessary 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 personnel and workforce for allowing talents with differing levels of creativity to create new information. The focus was to develop a cost reliable product that would provide remedy for all the challenges faced internally by the management. The product they wanted to develop should be a smaller version of the big Xerox machine with zero maintenance costs or service charges. Since their decision was to design a product for the households, they desired a lightweight machine that would be attractive and yet cheap 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 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 would allow the members of the group to bring forward their suggestions more honestly 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 ready for constant communication taking place throughout 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 organisation thereby enabling the mini copier to meet the desired requirements. Also, several quality and cost assessments were performed 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, strategic planning & management and sales forecasting as the major components of management accounting within the organization (HR & Marketing Ideas), 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 have realised that in order to sustain and grow in the industry, it is essential that they bring in innovation in their offerings through their products and/or services. The management of Apple INC went through a state of confusion, where a series of ongoing research and development program went 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 through ways that would work much faster than the computers in the market. 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 teamwork on the principle of crystallizing and analyzing the problems improved in the due course and also started suggesting ways to resolve it simultaneously. The management tend to organize themselves into a 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 (formal as well as informal) 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. (Pondicherry University)
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. (Askarany, 2014)

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

Answer: Both the organizations seemed to focus on the process of information creation which they termed as innovation to be born out of social commitment and continuous communication. Both of them extracted diverse pool of personnel from various sectors so as to ensure that 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 chose different ways 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 their objectives clearly in introducing a product that would provide satisfaction to the public at large through its innovation, creativity and a hard- working team putting continuous efforts towards the same. They were associated with the project with a sense of attachment and dedication through their activities and responsibilities. The repeated efforts in hiring employees from different background ensured that knowledge and experience flowed within their company and helped them achieve their desired output. Canon also worked towards the same goal. But the team invested more in 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.

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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 cases of the above mentor 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 implement new and innovative ideas through their offerings and in their operations to deliver a product satisfying the twin objectives of meeting the ever- changing demands of their customers and fostering versatility through their business operations and managerial activities. They believe in setting up sound management accounting components like decision making analysis, carrying out budgets and conducting several management techniques like risk management and strategic planning with sound 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 a general organisation would do. For triumph, it is essential to think and work on a diversified platform ensuring talents to breed & grow 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 (Adrian, 2018). It helps the management controlling the entity in an effective and efficient manner. (Takshila Learning) (James, 2012)

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