The quick spread of COVID -19 is disrupting millions of lives, and the economic damage will be far-reaching. In the business world, it presents specific challenges and a set of risks to businesses (Evans, 2020). Business managers are concerned about how this uncertainty would impact their corporate performance and what to do next. Efficient accounting management practices can enhance decision-making in companies that require sound principles but also pace when determining which strategic paths to pursue. This business report explains how companies can use management accounting principles to prepare for the uncertain period amid the spread of the COVID-19 pandemic.
Management accounting is one of the essential organizational components that are used by management accountants to analyze the overall business strategy. Management accounting principles were established to prepare the business for uncertain events. Borker (2016) asserts that management accounting is the center of effective decision-making. It gets to the fore relevant analysis and information that generates and preserves the value of a business.
The management accounting principles entail best practices that companies can use to make difficult business decisions to drive sustainable value. Management accounting emphasizes the importance of principles, such as the objectives of management accounting about Budgeting, Cost Volume Profit Analysis, Break-Even Analysis, Special order pricing, Relevant Costs, and Department Overhead Costing.
One of the key managerial accounting functions is the creation of budgets and forecasting for future reservations. Ideally, budgeting is the main component used by organizations to quantify their future action plans in various areas, such as production figures, sales, and expenses. An entity’s cash inflow and outgoing costs can be through budgeting. Dynamic organizations can use internal budgets to make adjustments. If the performance of the business’ products or services is not doing well in comparison to its forecast, it would be vital for the management team to make necessary changes or scale back their operations until such a time when the economy or market trends change (Gilliland et al., 2015). Therefore, budgeting would help businesses plan or make decisions for future profitability, throughout this period of COVID-19 epidemic dispensation.
Cost Volume Profit Analysis
The next management accounting principle that can be used to counter uncertain events is the Cost Volume Profit (CVP) analysis. Analysis of cost-volume-profit (CVP) is often used to assess how the expense and volume adjustments impact the operating revenue and net profits of a business. To put it simply, a cost volume profit analysis is a useful accounting technique that can be used by managerial accountants in an organization to determine the breakeven point of the cost and quantity of goods. Lulaj and Iseni (2018) illustrate that the analysis of CVP determines an organization’s performance, control, evaluation of stock, costs that require planning for services or products, and the creation of sales prices.
If CVP analysis is not included during the decision-making process, it will result in low business performance and reduced profitability. During the analysis, cost, volume, and profit would help identify and analyze the operating activity levels needed for a particular business to earn profits at specific manufacturing costs (Lulaj & Iseni, 2018). The analysis would be crucial in helping a company avoid incurring huge losses and help plan its operations to attain the targeted profitability. Thus, in the event of uncertainty, businesses can use the information of CVP analysis for planning and making effective business decisions, such as identifying sales problems and production expansion of narrowing during an economic recession.
Break-even analysis is another way that can address a variety of fundamental questions regarding the viability of the goods or services of a business efficiently in times of uncertainty. Analysis of the breakeven may be used for a good or service. Break-even analysis can be used to provide answers to questions such as “what is the required minimum amount of sales to ensure the business does not suffer loss” or “how much production can be reduced, and the business still be sustainable”. Nevertheless, Ionescu and Dumitru (2015) argue that a simple approach will not support a position on a business venture.
Therefore, the analysis will calculate the fixed costs and variable costs as effectively as possible and contribute to market-dependent turnover (selling prices in terms of product quality). Break-even analysis is critical in the preparation and optimization of the company’s revenue and costs in the short, medium, and long term.
Special order pricing
In times of uncertainty, an organization can obtain a particular order at a price that varies drastically from the usual pricing model. Special order pricing is a method used to determine the lowest possible price of a good or service in which a particular order should be approved and which can be declined. A company typically accepts special orders from clients at a lower than expected price. Under such instances, whether it can sell its entire inventory at a regular price, the company will not approve the special order. The issue regarding the right cost information for purposes of making pricing decisions has resulted in a considerable debate among economists, researchers, and practitioners over the years. On the other hand, empirical evidence on business pricing practices indicates that organizations frequently use full-cost data for purposes of product pricing.
Special orders should be approved when sales are small or when there is unused manufacturing capacity if the additional income from special requests is higher than marginal costs. According to OSCRice University (2019), such an approach of pricing special orders is termed as a contribution technique to special order pricing, by which price is determined below regular price; however, the price still produces some contribution per product.
The aim is to earn something above variable costs, rather than getting none at all. Organizations must ensure that profits will not be affected by special orders during this period of COVID -19 uncertainty periods. It would be necessary for the business to ensure that the customer seeking the special order will not clash with current customers or even with the organization itself, resulting in a reduction in regular price sales. Limited orders will also cause existing customers to be upset if they find out about the specific offer you offered someone else.
Relevant costing is a concept in management accounting that businesses could consider applying in the event of uncertainty. It refers to concentrating only on the costs related to a particular decision being taken. Irrelevant costs are removed from any incremental decision-making issue because they should have equivalent effects on all options applicable. Future cash flows that occur as a direct result of the decision under consideration are related costs.
The fixed costs for each of the alternatives being discussed remain constant in several short-term situations, and therefore, the marginal costing method showing revenue, marginal cost, and expenditure is especially relevant. Differentiating between important and irrelevant costs and benefits is crucial for two justifications. First, it is possible to disregard irrelevant data-saving decision-makers considerable time and energy. Second, poor decisions may result easily from the mistaken inclusion of irrelevant costs and benefits when evaluating alternatives
Making a decision can be a challenging process that may be compounded by multiple choices and vast amounts of information, but some of which can be relevant. Every decision requires deciding between two choices. While concluding, the cost and advantages of one option should be contrasted to both the benefits and risks of other alternatives. Costs that vary from one alternative become relevant. Management-oriented accounting should always be able to identify the effective execution of actions showing the actual values that are relative to standard costs.
Additionally, relevant costs and profits are potential costs and revenues that a decision will impact, while irrelevant costs and revenues are those that will not be changed by a decision. Any cost could be an advantage if it has a positive economic impact on anticipated future costs or cash flows.
In specific terms, if a specified cost reflects a potential financial gain in the iota of reducing the overall projected future costs in addition to the total estimated future profits in the ordinary course of business, it is a relevant cost and must be treated as unrealized. Moreover, relevant costing provides a precious way to determine whether a business that reports a net marginal loss is still sustainable in the short run. Customers are highly competitive, and they are searching for anything at a very attractive price. For a business to make a profit there is a greater need for careful management of sales and expenses. The cost of each company can vary depending on the circumstances.
Department Overhead Costing
Intensified volatility and inflation, in cruel cash and income crunch, would most probably capture many businesses unaware. A rising number of businesses must struggle for survival in an attempt to cut costs by embracing departmental overhead costing. In several businesses, inventory raising and all-out assaults on content and direct labor costs would be the order of the day. The departmental overhead costing is a rate of expenditure measured in a company’s production cycle for any department. As various departments conduct specified measures to complete the final cycle, the departmental overhead rate would differ at each point of the production cycle. Thus, management will more effectively evaluate organizational inefficiencies and undertake more practical interventions.
Overall, management and accounting principles, as discussed above, are significant and innovative tools and techniques that can be used to boost management efficiency and effectiveness in times of business uncertainty. An efficient accounting management feature facilitates decision-making within organizations. It is because, while being alert to the social and environmental responsibilities of a company, the staff conveys decision-relevant perspective and feedback to any decision-maker within an organization. Nevertheless, re-examining the basic structure of business management and accounting concerning uncertainty seems to be of the utmost importance in the wake of the COVID-19 pandemic, which has resulted in a highly unpredictable global society.
Borker, D. R. (2016). Global management accounting principles and the worldwide proliferation of IFRS. The Business & Management Review, 7(3), 258-266.
Evans, O. (2020). Socio-economic impacts of novel coronavirus: The policy solutions. BizEcons Quarterly, 7, 3-12.
OSCRice University. (2019). Explain why accounting is important to business stakeholders. In Franklin, M., Graybeal, P., & Cooper, D (Eds.), Principles of accounting: Financial. accounting, (Chapter 5). OpenStax.
Gilliland, M., Tashman, L., & Sglavo, U. (2015). Business forecasting: Practical problems and solutions. John Wiley & Sons.
Ionescu, A. M., & Dumitru, C. E. (Eds.). (2015). Break-even in the decision-making process. Challenges of the Knowledge Society. Web.
Lulaj, E., & Iseni, E. (2018). Role of analysis CVP (Cost-Volume-Profit) as an important indicator for planning and making decisions in the business environment. European Journal of Economics and Business Studies, 4(2), 99-114.