Question

The Covid-19 pandemic forced more than a third of the planet's population under some form of restriction resulting in grave impact on manufacturing firms. Due to the severity of the pandemic, many companies are facing significant operational, financial and liquidity challenges”. [1] Analysts have identified the following as some of the key factors that give rise to these challenges: . Collapse of demand due to locked-down imposed by the government. • Supply shortages and increased prices - Until affected factories can resume production, manufacturers will need to rely on inventory stockpiles. However, these resources are limited and will run out eventually. When existing inventory runs dry, shortages and/or price increases will occur throughout supply chains if alternate sources aren't secured.[2] Fulfilment delays - Quarantines, travel restrictions and workforce shortages can make it difficult or impossible for affected manufacturers to fulfil their contractual obligations to their customers. A shortage or delay of products can seriously impact a company's reputation and may result in lost customers or even legal consequences.[3] Fast depletion of cash reserve - as cash inflows from revenue decline, cash reserves may be depleted rapidly when cash outflows to pay for expenses and other commitments are not reduced fast enough. This may severely affect the manufacturer's ability to weather the crisis. While most governments were quick to announce measures to soften the blow, many analysts believe that these measures can bring only temporary relief. [1] PWC (2020), “Covid 19 Managing your cash pressures”, PWC. [2] Pradhan et al (2020), “Navigating COVID 19 impacts on manufacturers and distributors”, AICPA. [3] Kelp et al (2020), “Managing costs in times of COVID 19", Oliver Wyman. [4Deloitte (2020), “COVID 19, Managing cash during a period of crisis”, Deloitte. Required: (a) Define management accounting and describe the key components of the management accounting system. (14 marks) (b) us Explain how the various components of the management accounting systems can be Screenshot turers face the challenges brought about by the pandemic. (28 marks)

Answer 1

a) Management accounting is the use of accounting information for managerial decision making Mangers performs tasks in an organisation on day to day for operational and strategic purpose which needs input from accounting information. Key components of Management accounting system

Planning: This component involves the planning process. Manager need to prepare for the future of the business through regular planning

Controlling: The actual results must be controlled in line with expectations and this is also one of the important components of management accounting

Decision-making: Mangers need to take reliable decisions on day to day basis in performing their role effectively

b) Below is the illustrative example of how management accounting helps in facing the challenges brought about by the Pandemic

i. The use of cost accounting information helps in Product costing and Product pricing. Cost accounting information helps in fixing the price of the products based on various categories of cost incurred for example: Direct cost, indirect cost, etc. It also helps in product pricing .For example: Variable cost pricing, absorption cost pricing, cost plus pricing

ii. The use of Activity based costing method helps in accurate product pricing since product cost is arrived based on actual consumption of activities rather than traditional cost drivers like machine hour or labor hours. ABC method of costing is reliable and helps management in making right decision For example: job bidding, continue or discontinue of product, product pricing, new product launches , give quotations etc

iii. The use of variable costing helps management in cost volume profit analysis (CVP) analysis. CVP analysis helps in understanding relationship of cost with volume and evaluation of profitablity at different levels of activity. It also helps in Break even analysis and margin of safety analysis. Breakeven point is the point at which there is no profit or loss. Margin of safety sales gives profits to the firm. For example : a project having higher margin of safety is preferred over one the having higher breakeven point

iv. Management accounting helps in various operational and strategic decision making like Make vs. buy, Acceptance of special orders, Continue or discontinue of products, segments or divisions, etc, Retain or replace decisions, sell at split off point or process further, etc. For example if the relevant cost to make is lower than purchase cost the component should be made in house. Management accounting is the key to giving cost competitiveness to the firm to attain cost leadership in the industry.

v. Management accounting techniques like Budgeting helps in Cost control and cost reduction. Flexible budgeting technique can be used by the firm to manage cost through. Flexible budget performance reports are widely used by firms to manage costs.

vi. Management accounting techniques like standard costing helps in variance analysis based on comparison of standard cost and actual. Variance analysis can be used as a tool to control and manage costs. For example: Material price variance can be analysed based on market price and actual purchase price

c) 3 examples of management accounting information

· Variable costing Income statement (Internal)

Variable costing income statement helps in cost management through cost control and cost reduction. It helps in analysing cost behaviour and taking decisions like reduce breakeven point by reducing fixed cost and converting as much as cost to variable cost.

· Comparison of Contribution Margin with avoidable cost (Internal)

This helps in taking decision like continue or discontinue division or products. If the Contribution margin is higher than the avoidable costs of the division or product the product should be continued else it should be discontinued.

· Current ratio (External)

Ensure the current ratio is maintained at 2:1. Current ratio is the ratio of current assets to current liabilities. Current ratio is a liquidity measure and it indicates the ability of the firm to meet its short term commitments.