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 process of preparing reports about business operations to help manages make short term and long term decision. It helps a business pursue it's it's goals by identifying, measuring, analysing, interpreting and communicating information to the managers.

Management Accounting revolves around the three primary components they are: 1)planning, 2) controlling, 3) Decision Making.

Management accounting, in accordance with the Chartered Institute of Management Accountants (CIMA), is the procedure of recognizing, gauging, gathering, studying, researching, analyzing and communicating of information utilized by the management to plan, evaluate and control within body and to ensure proper use of and liability for its resources.

It also includes the preparation of financial reports for non-management groups such as tax authorities and regulatory agencies.

On the other hand, The American Institute of Certified Public Accountants (AICPA) says that management accounting, as a practice extends to three areas such as:

• Risk Management – contributes to practices and frameworks for determining, gauging, managing and reporting risks to the attainment of the objectives and goals of the organization.

• Performance Management – develops the practice of decision-making and managing the organization’s performance.
• Strategic Management – advances the function of the management accountant as a tactical partner in the organization.

An excellent management accounting process also helps in tackling the four major aspects of a business such as:
• Proper planning
• Directing
• Decision-making
• Controlling

The Objectives of Management Accounting
Management accounting has the following core objectives:

• To formulate effective strategies and techniques in reaching the company’s goals quickly but surely
• To plan and construct business activities to ensure the business’ sustained growth and profit
• To help the firm in making the right financial decision by making use of effective strategies
• To use resources optimally
• To support financial reports
• To safeguard asset

How Can Management Accounting Keep Your Business Afloat In Spite of the Recession and Competition?
It is said that the strength and sustainability of a business relies on management accounting. This is the reason why accountants who perform this job are paid higher than those who perform other accounting jobs. So, how can management accounting keep your business afloat in spite of the recession and competition? They are as follows:

• Management accounting provides factual information in relation to the actual and budgeted figures, therefore allowing the business owners and managers to take the right cost controlling measures

• It gives timely feedback in relation to present operational activities, thus helping in re-evaluating the operational decisions and having better control over the business’ activities.

• It also helps in gauging the performance of different departments and sub-units within a company or organization. This information can then be utilized to determine and reward the better performing employees and departments. For example, an employee might be the reason for the company’s higher sales figures. As a result, you may prefer to promote him to manage the other staff.

• Management accounting helps business owners or managers to fully analyze the organization. In this regard, management accounts can give useful information when looking at the plans of an organization and when performing any SWOT analysis. This type of analysis is designed to analyze the strengths, weaknesses, opportunities and threats that a business is faced with.

• Management accounting also determines the profitable and non-profitable services or products. For instance, this can greatly help the company in speeding up the process of discontinuing a product that is making a huge loss. In turn, this will lead to great financial savings.

b)

The rapidly evolving threat around the COVID-19 virus, commonly referred to as coronavirus, is impacting the business and investor community across the world. The global and interconnected nature of today’s business environment poses serious risk of disruption of global supply chains that can result in significant loss of revenue and adversely impact global economies.

The impact on the global economy may increase depending on the extent of geographic spread of the virus. However, the pandemic has already negatively impacted the global economy as a whole.

Enterprise response:

As the event evolves, we are seeing companies take measured approaches to safeguard employees and mitigate financial and operational exposure. For example, at the time of publication of this paper, many multinational businesses have reduced output of facilities and or suspended operations in affected regions, as travel restrictions and mandatory social distancing and homeworking have been invoked. Companies and governments around the world continue to closely monitor the situation.

While cyber risk is a relatively recent consideration in resilience planning, companies have long maintained various resilience plans for business continuity, disaster recovery and crisis management. These plans, while effective for a range of business disruptions, may fall short during a global crisis such as coronavirus or other pandemic events.

Moreover, companies typically have less incentive to invest in distinct pandemic management capabilities since pandemics are lower-probability events (the last major pandemic, H1N1 influenza or swine flu, occurred in 2009). And while firms likely refreshed resilience plans in response to the H1N1 pandemic, it is important to consider differences in today’s environment.

For example, cyber criminals may be more likely to target a situation where security operations centers are largely managed in the affected region. Given the high severity, potential human impacts and greater contagion effect that these events can pose on the ongoing viability of operations, companies must think through the implications to their businesses and develop specific crisis management annexures around pandemic threats. These annexures can serve as critical mechanisms by which companies can coordinate response with federal, state and local authorities, in addition to their own incident response and crisis management framework and protocols, to provide an effective response to these events.

How to plan and respond to the pandemic:

There are significant differences between business disruptions that are caused by natural, human-made, technology or operational failures and those caused by pandemic events. These differences persist due to the potential increased scale, severity and duration of pandemic events, necessitating the need for organizations to expand beyond traditional resilience planning strategies. Companies must incorporate pandemic planning considerations into existing resilience management activities to provide a comprehensive response and to provide continuity for their most critical products and services.

Additionally, companies should consider establishing pandemic-specific policies and procedures, capabilities for employee communications, telecommuting and personal/family leave to minimize disruptions. Due to their duration, impacts on personnel in the regions that absorb additional work cannot be overstated, from the start of the pandemic to several weeks in, when contractor resources can start to meaningfully contribute. Scale can also vary, and to date it has been regionally concentrated with some global impacts; we have not seen a fully global crippling pandemic yet, although this remains a possibility.

Key points for managing pandemic:

Plan for geographical segmentation of functions and activities.
Invest in technology and infrastructure to support remote work and virtual collaboration capabilities.
Consider the systemic nature of pandemics when designing response strategies.
Assess reliance on third parties.
Engage with customers.
Develop a robust communication strategy (including social media).
Team with public sector; national, state and local agencies; and health officials.
Increase rigor and complexity of testing.
Leverage pandemic command center to prioritize and govern effectively.
Establish crisis management exception approval process.

c) key responses to the crisis

Developing a robust supply chain by performing vendor risk assessment

Examples: Check the ability of vendors and their quality of supplies nad time taken to deliver the products.

Ask for more credit period to maintain liquidity.

Ensure financing remains viable by focusing more on working capital management:

Example:To maintain the liquidity and positive working capital collect the receivables as fast as possible and do more sales on cash basis and impose higher interest rate for delay in receipt of payment.

Contain costaby reducing variable costs or by converting fixed costs to variable costs:

This makes company to reduce its outflows and maintain high liquidity.

Consider non traditional revenue streams:

Advertise more and increase revenue on non traditional sources.