unit 5 management accounting assignment

Unit 5: Management Accounting Assignment

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University of Sunderland

Programme: BTEC Higher National Diploma in Business

Unit Number and Name: Unit 5 Management Accounting

Level: Level 4

Assignment Title - Management Accounting

LEARNING OUTCOMES

On successful completion of this module, students will have demonstrated:

• Demonstrate an understanding of management accounting systems. • Apply a range of management accounting techniques. • Explain the use of planning tools used in management accounting. • Compare ways in which organizations could use management accounting to respond to financial problems.

Unit Learning Outcomes:

LO1 Demonstrating and understanding of management accounting system. LO2 Appling a range of management accounting techniques.

Assignment Brief Number 1

ABC Co. Ltd. specialises in manufacturing electronic products. The range comprises of 2 products, Personal Computers (‘PC') and Video Players (‘VP'). The company's products have the data shown below.

                    Products                              PC VP

Maximum  monthly demand         Unit 10,000         20,000

    Direct labour hours per unit      hr 2             4

    Selling Price                      $1,200        1,600                   

    Unit variable costs

Direct Material                 $600          800

      Direct Labour                   $200          400

      Other variable O/H          $200          200

The company has adopted the OAR in term of direct labour hour. The total estimated fixed cost and direct hours during the year is $2.4m and 30,000 hours respectively.

The company is planned to manufacture a new product, I-Phone (‘IP') with estimated contribution of $600 per unit.

The manager wants to prepare the budgets for the coming January to March, assuming that the company will manufacture only IP to fulfill a confirmed special order for 3,000, 3,000 and 4,000 units for Jan, Feb and March respectively. The only variable cost is direct raw material. To produce one unit of IP, the standard usage of raw material is 2 units at standard price of $70 per unit of IP.

Noted: The Production Department is responsible for the planning, organising and control of the manufacturing process while the Procurement Department is responsible for the purchase of all raw materials.

You need to advise the manager the following issues: • Explain the meaning of management accounting, the different types of management accounting and role of management accountants (1.1, 1.2) • Explain the classification of costs that would help the managementdecision-making (2.1) • Calculate the unit costs of PC and VP based on absorption costing and marginal costing methods (2.2) • There is a special order for 10,000 units of PC at $1050 per unit: - which costing method should be used for the accept or reject decision (2.2); - calculate the costs using the costing method recommended above (2.2); • given that direct labour available is limited to 60,000 hours per month, advise the optimum production mix of PC and VP to maximise profit (2.3) • calculate the break-even units of IP and if the manager is confident that a target profit of $1,200,000 is achievable, what would be the corresponding target units sold (2.1, 2.3) • evaluate the proposal to spend an additional $600,000 to promote the IP so that selling price can be increased by $60 per unit to sell 6,300 units per month and discuss the corresponding pricing decisions (2.3)

Prepare a proposal to advise the manager who has no management accountingknowledge and background.

To achieve M1, you have to discuss other non-financial factors that may need to be taken into consideration when making the decisions in 2.2 and 2.3.

To achieve D1, you have to discuss other pricing strategies that may need to be taken into consideration when making the decisions in 2.2 and 2.3.

To achieve D2, you have to produce a clear, concise and structured proposal with technical language being accurately used for the manager.

Assignment Brief Number 2

LO3 Explaining the use of planning tools used in management accounting. LO4 Comparing ways in which organisations could use management accounting to respond to financial problems.

Assignment Brief:

Maximum  monthly demand         unit 10,000         20,000

    Selling Price                      $ 1,200        1,600                   

Direct Material                 $ 600          800

      Direct Labour                   $ 200          400

      Other variable O/H             $ 200          200

The manager wants to prepare the budgets for the coming January to March, assuming that the company will manufacture only IP to fulfill a confirmed special order for 3,000, 3,000 and 4,000 units for Jan, Feb and March respectively at $200 each. The only variable cost is direct raw material. To produce one unit of IP, the standard usage of raw material is 2 units at standard price of $70 per unit of IP. The actual sale and material purchase for last December is 2,500 units and 50,000 units respectively.

Give your advice on the following issues:

Part A: Analyse and evaluating ABC's financial performances by using the various management accounting technique, and make the possible recommendations in dealing with the financial problems and the price strategies in revising its price (3.2, 4.1, 4.2)

Part B: Budgeting Process: • the major functions of budgeting process (3.1) • the advantages and disadvantages in operating a budgetary control system (3.1);

Part C: Budgetary Planning: • whether fixed or flexible budgets should be prepared for the coming January to March (3.1) • based on information provided in question, prepare the monthly budgets as follows: (3.1, M3) - sales budget - cash collection budget from sales (assuming 40% of current month sales being paid within the same month with the remaining 60% payable in the following month) - production budget (assuming monthly production units equals to monthly sales units) - raw material purchase budget (assuming the company purchases the exact quantity of raw material in each month to meet the monthly production requirement) - cash payment budget for raw material purchases (assuming payment being made in the month following the month of purchase) • prepare the monthly cash budget (assuming that the only other item is cash payment of $300,000 in January for the purchase of production equipment and that the projected cash andbank balance as at 1 January is $20,000) (3.1, M3)

Part D: Budgetary Control:

• if the actual purchase and usage of raw material amounted to $435,600 in January, calculate the raw material variance (4.1) • it is found that the actual purchase price of raw material is $66 per unit and the actual purchase and usage quantity is 6,600 units to produce 3,000 units of IP in January. Compute the raw material price and usage variances to analyse the raw material variance in question (4.1) • prepare a cost reconciliation statement reconciling budgeted and actual raw material costs for the month of January (4.1) • it is discovered that raw material was purchased in January from a new supplier not on the company's approved vendor list. Report your findings to the manager in accordance with the responsibilities of the relevant departments and recommend possible corrective actions for theidentified variances (4.1, 4.2, M3 and M4).

Prepare a proposal to advise the manager. To achieve D3, you have to evaluate how the planning tools respond appropriately to solving the financial problems to lead the organization to sustainable success.

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Management accounting report

ASSIGNMENT BRIEF NUMBER 1

Executive summary

The management accounting is an important tool for assessing the financial position of the business. The management accounting takes into account the qualitative aspect of the business though undertaking correct pricing and other decisions. The unit cost of the product can be calculated differently using different products. The budgets are very important for the business as they help in controlling and evaluating the performance of the company.

Understanding of management accounting systems

Introduction to management accounting

Management accounting is the process that is related with identification, analysis, recording, and the presentation of the information in regard to financial aspects that will be used by the management of the company internally for the purpose of planning, making decisions and controlling the financial aspects.

It is important to integrate management accounting within an organization due to the following reasons: • It helps in formulation of overall strategies. • It helps in taking decisions in regard to resource allocation. • It helps in planning of costing and the control of the different operations and activities. • It helps in evaluation of the performance. • It helps in meeting different external reporting and legal requirements.

Difference between management and financial accounting

Different types of management accounting systems

Job costing system: This system helps in assigning cost of manufacturing to each and every product in the business and thus helps in recording track of the ordering expenses.

Price optimizing system: This system helps in the controlling the price of the resources related to the company. This system helps in making decisions in regard to prices of different products at the same time. It will also help in determining the levels of demand of products at changing levels of prices. Hence this helps in determining the structures of pricing in order to undertake promotion pricing, and discounted pricing.

Cost accounting system: This system helps in estimating the cost of the product and also takes into consideration the profitability of the organization, inventory and the process of controlling cost.

Inventory management system: This system helps in supervising the inventory and also the management of the stock. Thus it also helps in the efficient and effective flow of the inventory within an organization. Thus it helps in cost reduction in the business. (Mariam Nawaz, 2013)

Presenting financial information The management accounting information should provide accurate and true information to the managers of the business as the managers undertake critical business decisions with the management accounting reports.

Different management accounting reports • Budgeting reports: It helps in making plans for the company in order to analyze the performance of the company and also helps in evaluating the performance of the departments and cost controlling. • Accounts receivable aging report: This report helps in better management of the accounts receivables. Thus it helps in reduction of the level of the bad debts and thus maintaining efficient level of liquidity in the business. • Job cost reports: This report helps in proper identification of the cost, profits and the expenses in relation to specific job. Thus it provides indication of the aspect of the earning that is related with one particular job or product. • Performance report: This report helps in comparison of the actual performance with the budgeted performance. • Order information report: This provides information in regard to the operations of the company thus helps in managing the operations of the company in order to reduce the ordering cost of the products.

Apply range of management accounting techniques Cost The cost is the expenditure in monetary terms that is to be incurred in order to purchase different factors of production. Classification of cost • On the basis of nature: 1. Fixed cost: This is the cost that does not change with the level of production. 2. Variable cost: This is the cost that changes with every level of production. 3. Semi variable cost: This is the cost which is partly variable cost and partly fixed cost. This is the cost that does not change with the level of production but changes with the change in the facilities of production. 4. Marginal cost: This is the cost that is incurred by increasing one unit of production. • On the basis of expense: 1. Material cost: It is the cost that is incurred for purchase of raw material. 2. Labor cost: it is the amount paid to workers. 3. Overhead cost: It is the cost incurred for other expense of production. • On the basis of control: 1. Controllable cost 2. Uncontrollable cost • On the basis of relevance to decision making 1. Opportunity cost: It is the cost that is incurred for sacrificing the other best alternative course of action. 2. Sunk cost: It is the cost that is already incurred and is not affected by the new business activity. 3. Replacement cost: It is cost incurred for replacement of plant and machinery. 4. Real cost: It is the cost of the factors of production. 5. Conversion cost: it is the cost that is incurred for the conversion of the raw materials into the finished products. 6. Imputed cost: This is the imaginary cost that is being considered in order to make decision and does not involve outflow of cash. (Hasan, Md, 2015)

Special order for 10000 units of PC

The marginal costing method should be used for accepting decision as unit cost is $1000 and absorption costing method is used for rejecting decision as unit cost is $1160.

Cost of special order

Optimum product mix

The optimum product mix involves 20000 units of both PC and VP.

Computation of break-even point of IP and target units

Evaluation of proposal

The proposal should be accepted but due consideration should be given to the following factors: 1. The acceptance of proposal does not affect the production capacity of the company. 2. It does not affect the market demand of existing products. 3. It does not affect the working conditions in an adverse manner.

ASSIGNMENT BRIEF NUMBER 2

Analysis of financial performance

Marginal costing

Absorption costing

Computation of profit

Part B The major functions of budgeting are: • It helps in undertaking proper planning in the business. • It helps in improving the level of coordination in the business. • It helps in improving communication in regard to aims and objectives of company. • It helps in keeping control over the activities of the business. • It helps in evaluating performance of business. The advantages and disadvantages of operating in a budgetary control system Advantages • It defines aims and objectives of the company. • It helps in controlling the activities. • It helps in maintaining proper coordination • It helps in reducing cost by eliminating wasteful costs. • It helps in maintaining centralized control Disadvantages • It is very difficult under conditions with inflation • Involves high cost • The period for which it is period is not certain • Lack of support from top management may lead to failure. (Godin A.M., 2001)

Part C • Flexible budgets should be prepared for coming Jan to March as the flexible budgets can be changed in accordance with the level of sales and production. • Monthly budgets

Part D • Raw material variance= $435600-420000= $15600A • Computation of variance

• Reconciliation of actual and budgeted cost

• Recommendations for corrective actions and responsibilities of manager 1. The manager should purchase the material from authorized supplier after obtaining proper permission 2. The excess use of raw material should be checked by undertaking the regular check in operations. 3. Wastage should be avoided 4. Operations should be carried efficiently 5. Comparison of actual and expected performance should be done regularly in order to avoid financial loss to business. (Zalevsky V.A., 2009)

Conclusions The management accounting is an important tool in the performance of the business. It had been used effectively in order to improve the financial position of the business. The proposal to spent additional amount of fixed cost in order to sale higher units should be accepted. The budgets should be used as the base for the improvement of the financial position. The variances are calculated for the purpose of evaluation and accordingly corrective actions are taken.

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Unit 5 Management Accounting Assignment

1. Principles of management accounting

Management accounting is a profession that includes integration of financial and non-financial statements to provide useful information to the management so that the management can take effective decision for the organization. Management accounting plays a very major role in providing information to the people of management. The scope of management accounting is very wide as it contains all types of accounting information that are related to the particular organization. The principles of management accounting are as follows.

a) Influence:

Communication provides insight that is influential. The role of management accounting begins as well as ends with communication. The utilization of management accounting is depending upon how well the information has been communicated so the major principle of management accounting is communication as the influence of management is depending upon the communication and better communication leads to good decision making so it is very necessary for every organization to focus on communication of management accounting information in proper way so that it can influence the management.

b) Relevance:

Information is relevant. Management accounting can lead to better decision making when the information provided to the management is relevant. Management accounting includes all type of information that is related to the organization whether they are financial or not, whether they are relating to the social and cultural issues of the organization. In other words all the information that are related to the organization and can affect the decision making must be included in the management accounting as all these information are relevant for the organization (Zaman & Akbar, 2013).

c) Analysis:

This principle is also known as value. Impact on value is analyzed. Management accounting helps the management to analysis the provided information properly so that management can evolve better decision making for the organization so right analysis is very necessary for every organization as analysis of the management accounting information reflects the decision making of the organization. Management should analysis the information properly so that they can understand the environment of the organization and can take better decisions.

Stewardship build trust. This principle focuses on the working of management accountants that these persons must be ethical and accountable to the organization. Management accountants must be trust worthy person that they should analysis the management accounting information in right ways so that they can take effective decisions for the organization. Management accountants must consider the trust of stakeholders and also they should be responsible for betterment of the organization through better decision making. They should fulfill all their responsibilities so that this could have a positive impact on the growth of the organization.

2. Role of management accounting and management accounting systems

Management accounting refers to the effective use of all those information which is related to management and which evolves the efficient decision making of the organization and management accounting systems refers to the process of collection of relevant data from the business operation and then converting them into management accounting information. Role of management accounting and management accounting system is as follows.

a) Planning:

Planning is preparation for the achievement of the objectives in advance. Planning is done with a view to achieve short term as well as long term goals of the organization so management accounting helps in forecasting the budgets so that estimations for the expenses and incomes can be done in advances and through this management accounting systems helps in analyzing the relevant information so that goals of the organization can be achieved.

b) Organizing:

organizing refers to the proper organization of people in the organization so that a proper framework can be established and roles and responsibilities of each department can be assigned. Management accounting helps in taking those decisions in regard to assignment of roles and responsibilities so that a proper hierarchy of the work can be maintained in the organization and in this management accounting systems also plays a very major role in measuring the performance of the people of management so that operations of the organization can be adjusted in proper ways.

c) Controlling:

Control is the process of measuring the actual performance and then comparing it with estimated performance so that control can be established in the organizations so that the overall performance of the organization can be improved and this could be done through management accounting and management accounting systems as management accounting helps in providing relevant information to the organization so that measurement of performance can be done properly and management accounting systemhelps in defining the information which is relevant for this purpose (Yakshibaev, 2011).

d) Decision making:

The main role of management accounting and management accounting system is providing effective decision making to the organization so management accounting helps the management to take better decisions for the organization.

3. Use of techniques and methods used in management accounting

There is various type of management accounting systems such as cost accounting systems, inventory management systems, job costing systems, price-optimizing systems etc.

4 Calculation of income statements

A) comparative absorption income statement.

b) The differences in the profits is due the method that is used for the costing as both the profits are calculated with different methods of costing as in absorption costing method all the expenses are segregated and then are deducted from sales so this leads to increase of expenses and thus it lowers the profits where in marginal costing method expenses are deducted into two categories which is into fixed and variable expenses. In this method first of all fixed costs are deducted from the sales which gives the contribution and then variable costs are divided from the contribution which provides the profit and through this the expenses are segregated into two heads (Schmidlin, 2014).

c) FIFO refers to first in first out system of inventory valuation where the inventory is valued in such way that the first come inventory must be sold first and the records of inventory are made in such a way that inventory first come are recorded first and they are recorded for the sale first. The main focus of FIFO system is that the oldest inventory must be sol first without considering any other inventory. This method is the most used method of inventory valuation s it provides a clear picture of inventory. AVCO refers to Average cost or weighted cost method where inventory valuation is done by dividing the total cost of good that are available with sum of total purchases and inventory. This method is also applied in periodic inventory system and perpetual inventory system. Both the methods FIFO and AVCO are used for inventory valuation.

5. Integration of management accounting to the organization and its benefits.

Management accounting plays a very major role in an organization management accounting helps in supporting controlling, planning, organizing, decision making of the organization. Management accounting is a process of evaluating the information relating to the organization so that they can use that information in effective decision making of the business. Management accounting integrates in each and every level of the organization as all the information which are related to the organization whether they are financial or not, they are related to internal environment of the organization or external environment of the organization, whether the information are related to the social and cultural issues of the organization. In short all the information that is related to the organization and can affect the decision making is included in management accounting (Robnson. et al, 2012).

Management accounting is very useful for the organization as it impacts the decision making and decision making of the organization leads to the success of the organization so there is a direct link between management accounting and growth of the organization so the benefits of management accounting in an organization are as follows.

• Management accounting helps in increasing the efficiency of the functions of management.
• Management accounting helps in fixing the target, fixing the prices of the products.
• Management accounting helps in forecasting and preparing the budgets so organization can estimate its income and expenses.
• Management accounting helps in providing tools and techniques that increases the reliability of functions of business.
• Management accounting helps in establishing the planning and control in all the levels of organization.
• Management accounting helps in evolving better decision making for the business.
• Management accounting helps in finding ways to reduce the cost of production so that higher profits can be generated.
• Management accounting helps in establishing proper communication among all the levels of the organization.
• Management accounting helps in identifying the overall performance of the organization.
• Management accounting helps in cutting the extra costs of the organization so that the benefits could be earned by the organization.
• Management accounting helps in integrating the individual efforts of the people of the organization towards the achievement of organizational goals and objectives.
• Management accounting helps in implementing the expansion plans in the organization.
• Management accounting helps in defining the process for achieving the goals of the business.

There are several abovementioned benefits of management accounting in an organization so an organization needs to utilize its management information in right ways in order to achieve its long term as well as short term goals.

A) A budget is a forecast of what is expected to happen in a business during the next year.’

Budget is a statement which is prepared with a view to estimate the income and expenses of future year on the basis of present financial performance of any organization. One of the director of Nero Limited has raised a query with regard to this statement so this statement of director is partially right as the budget is prepared to estimate the income and expenses of Nero Limited for upcoming years but it cannot be determined what is expected to happen in next year as the budget only considers the financial values so the cash flows of Nero Limited can be forecasted so that the company can estimate its incomes and expenses but except financial terms what is doing to happen in next year cannot be forecasted through budget. The main purpose of preparing is the budget is to estimate the cash inflows and cash outflows of Nero Limited for next year.

b) ‘Activity-based budgeting is an approach that takes account of the planned volume of activity to .deduce the figures to go into the budget.’

Activity based budgeting is a type of budgeting where budgets are prepared on the basis of each activity. As the comment raised by the director of Nero Limited Activity-based budgeting is an approach that takes account of the planned volume of activity to deduce the figures to go into the budget is right as the main aim of activity based costing is to prepare budgets on the basis of the activities as well as the overall cost is also deducted from each activity. The approach which is used for activity based budgeting is that the planned volume of activity is deducted from the particular activity and through this the budget is prepared. In activity based budgeting overhead costs plays a significant role in total costs. In activity based budgeting activities and their costs are identified and then the cost from that particular activity is deducted (Morana, 2014).

Scenario 2 (i)

A. cash budget is a plan that shows the inflows and outflows during the period for which it is calculated. it helps in evaluating if the business has sufficient cash to operate its day to day activities or not. it includes revenues and expenses paid by the business and reflects the position as surplus or deficit..

Cash budget is significant for a business.

• Opportunities – By evaluating the business’s liquidity position opportunities of expansion, acquisition or merger can be known.
• Strategy – If the business is planning launch of a new product or expansion but it has insufficient funds then it can make plans or strategies for borrowing money and the source as well.
• Decision making – It helps the management make decisions.
• Tax planning – It helps in estimating the profit that will be earned by the business for the period for which it is calculated thus making it easier to plan for taxes and penalties, fines and additional payment of tax can be stopped (Hall & Westerman, 2013).

b. The cash budget is as follows:

C .information required by the banker for granting overdraft for further expansion:-.

• The amount to be granted – The banker will consider the amount that is to be granted. In case a huge sum is involved it will affect the standing of the bank.
• Purpose – The banker will analyses the purpose for which the loan is to be granted and will further analyses if the expansion program to be carried out by the organization is profitable or not as that will affect the repayment of the loan amount.
• Security and mortgage – The banker will consider if the security that is offered or mortgaged is easily saleable or not and its worth is more than the loan amount or not.
• Repayment tenure – The banker will also consider the tenure of repayment as the bank would want the repayment in easy and quick installments.

Scenario 2 (ii)

• If the quantity of other two services cannot be expanded to use the spare capacity, the fixed costs allocated on the standards services will be a sunk cost and thus it is not relevant for decision making since even of the standard services are not offered, the fixed costs will be incurred. Hus the report prepared by accountant includes fixed cost which cannot be used for identifying the profit from standard service for decision making. There is a contribution of £15 (90 -75) from standard services and therefore it is advisable to offer these services next year also.
• If the spare capacity can be used to render a new service Nova, then standards services shall not be rendered net year since the contribution from Nova services will be £25 (85 – 60) which is higher than the contribution from standard services.
• In such case the opportunity cost of not offering the standard service will also be added to the variable cost. Thus, the minimum price acceptable will be £35 + £15 = £50.
• If a resource is scarce ad restricting sales then in such case profit can be maximized by utilizing the resource for selling only those products or services which results in maximum contribution. The ranking shall be given to each category on the basis of contribution per unit from each category since fixed cost is a sunk cost and therefore in this case highest contribution will result in maximum profits.

i) ‘Afavorable direct labor rate variance can only be caused by staff working more efficiently than budgeted.’

Direct laborrate variance includes elements of rate of labor wages and time consumed by labor. Thus a favorablelabor rate variance occurs when either he staff works more efficiently than planned or the staff is replaced with cheaper labor force with low wage rates. Thu the above statement is partially correct.

ii) ‘When calculating variances, we ignore differences of volume of output, between original budget and actual, by flexing the budget. If there were a volume difference, it is water under the bridge by the time that the variances come to be calculated.’

While calculating variances, the differences of volume of output are ignored between actual and budget by flexing the budget. The variances in the volume or output are calculated separately. Thus, this helps in the estimation of effect on the level of activity and is not the water under the bridge by the time variances are calculated.

iii)‘ Most businesses do not have feedforward controls of any type, just feedback controls through budgets.’

Feedback controls refer to as the implementation of controls after performance whereas feed forward controls are those which are implemented before the performance of business operations. Budgets are not the feedback controls but are feed forward controls since they help in controlling the business operations before their performance. However variance analysis is conducted afterwards to monitor the deviations.

a) Cash flows are used in the IRR, NPV and payback back period as all these theories includes the present value of cash. In all those theories cash is included and also during consideration of the expansion plans all these theories are to be considered as this provides a fair view of choosing any project as well as it calculates the present value for a future cash so through this the present value of the project is also considered.

These theories helps in selecting the project as the project with positive NPV is beneficial for the business and the project having negative NPV is not beneficial for the business so if a project has to choose any project on the basis of NPV then it should go with the project which is having higher NPV. IRR refers to the internal rate of return which helps in choosing the suitable project for the business on the basis of IRR so if a project is to be chosen on the basis of IRR then the project having higher IRR must be choose.Payback period refers to the present value of future cash. Profit flows of the business are circulated within the profit and loss statement of thee business and cash flows are used in these theories because these theories includes the value of cash.

(I) Calculation of NPV, IRR and payback period

Payback period: There is no payback period in the projects as the payback period defines the time period in which the investment of the whole project will be recovered or can be said as the time period in which the amount that is invested in the project is equal to the inflows that are achieved from the project so in both these projects the cash inflows of the year 2 are negative that represents that both the projects have earned loss in this year and also both the projects have not earned much profits in the year so that the initial investment of the projects can be covered. So there is no payback period of both the projects.

ii) Selection of a project

If Nero limited want to choose one project on the basis of calculation of NPV and IRR then if Nero limited chooses a project on the basis of NPV then none of the project is profitable for the company as both the projects are having negative NPV but if Nero limited has to choose one project between both projects then Nero limited should go for the project 2 has it is having higher NPV in comparison to project 2 and if Nero limited has to choose a project between both the projects on the basis of IRR then Nero limited can choose both the projects as the IRR of both the projects are same so overall Nero limited should go for the project 2 on the basis of NPV and IRR.

Cost plus pricing is a strategic tool for determining the price of a product by adding fixed costs, variable costs and a markup percentage to arrive at a final cost of the product.

The drawbacks of using cost plus pricing approach are:-

• Limits innovation – This approach limits creativity or distinctive features that can be added to the product as keeping a low price is difficult.
• Low satisfaction to value for money – This pricing technique is quite unrealistic and the target group might not find the price of the product satisfactory or they may find it to be overpriced.
• Loss of revenue – By adopting cost plus pricing method, competitive aspect is lost.
• Decrease in gross profit – Suppose if the cost of a product is coming down to 40 per unit and after markup it comes to 50 per unit, gross profit of 10 per unit is earned, but if the material cost increases causing the product to cost 42 per unit then the gross margin will be significantly reduced.
• Overpricing - This method takes into consideration sunk cost and historical cost also which increases the price of the product thus makes it overpriced (Grimm, 2016).

B. It is important to hold inventories.

• To meet unexpected demand – The business is considered to be successful when the demand is easily met by the supply. In times of crises when the demand suddenly increases the supply can be made smoother if sufficient stock of inventory is held.
• Seasons – Holding inventory based on seasonal changes is generally followed in businesses which are on boom seasonally. For instance, holding inventory of woolens in winters, raincoats and umbrellas in rainy season.
• Discounts – When inventory is purchased in larger quantity more discounts is offered which is lucrative as it will have a direct impact on reduction of cost and rise in profit margin.
• Hedging – If rise in price is expected then more quantity of inventory is held for deriving benefits from increased price and in case taxes are to be levied in future those could be saved and hedging can also be done.
• Saving of freight and transportation expenses – If large quantities of inventories areordered at once, transportation cost can be saved.

c. (i) Calculation of ratios to measure efficiency of working capital management for two years

Current Ratio = Current assets/ current liabilities             2015    = 579/195 = 2.97             2014   = 732/225 = 3.25 Acid test ratio = Current assets – Prepaid expenses – inventory/ current liabilities             2015    = 579 - 200/195 = 1.94             2014   = 732 – 250/225 = 2.14

(ii) The method which can be used by the management of this company to exercise control over its inventories and receivables includes inventory management tools such as ABC method of Inventory Valuation, factoring of receivables, controlling bad debts etc.

(iii) Operating cycle provides the information to the management accountants about the period in which the funds invested in the business operations will be recovered from passing through all the stages of operating cycle. The operating cycle of the company for two years can be calculated as follows:

Operating cycle = Days Inventory outstanding + Days Sales Outstanding + Days Payable Outstanding 2015 = (200+160/2)/ (1,080/365) + (375/1,800)*365 – (195/1,120)*365             = 60.83 + 76.04 – 63.55 = 73.32 2014 = (200+250/2)/ (1,125/365) + (480/1,920)*365 – (225/1,175)*365             = 73 + 91.25 – 69.89 = 94.36

• Abazari, Y., Hosseini, S.E., Mohemi, M., Goldani, H. & Shakiba, H. 2013, "Analytical study of application of capital budgeting techniques in the food industrial of Mashhad Tous industrial units and to identify existing bottlenecks",Advances in Environmental Biology, , pp. 2048.
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• Grimm, S.D. & Blazovich, J.L. 2016, "Developing student competencies: An integrated approach to a financial statement analysis project", Journal of Accounting Education, vol. 35, pp. 69.
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Introduction: Management Accounting Assignment

Principle of management accounting:, role of management accounting:, integration of management accounting in the company:, critically analyse the application of management accounting:.

• Planning tools used in management accounting are: Company – BHP

Effectiveness of Management accounting in the organization:

Unit 5 – management accounting assignment sample.

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This report develops an understanding of management accounting and the implementation of management accounting systems in manufacturing companies. The principle and role of management accounting will be discussed in this report. Variable costing information will also be provided in this report and calculate variable cost incurred in Rio Tinto company in 2020. How management accounting systems are implemented in business will be discussed and at the end of the report critically discuss the application of management accounting in an organization.

• Compiling and designing: Accounting information, statements, report, records and other financial evidence must be developed and compiled for meeting the need of the business. The system of management accounting should provide relevant information.
• MBE (Management by exception): This principle is followed when information is presented to management. Budgetary control and standard costing method are used to find the unfavourable variances by comparing the actual performance with budgetary performance.
• Inflation accounting: The inflation rate is considered in accounting. Profit of company cannot be correct if capital is not valued properly so capital contributed by the owner of the company is valued through the revaluation accounting and consider the real value of capital.
• Control at source Account: Cost control is very important in every organization so the performance of the employee, information of purchase and sale of stock, maintenance, repair etc. all are prepared quantitatively and qualitatively so that control could be possible.
• Usage of Return on Investment: Return on investment is used in the business as it shows the efficiency of the business.
• Utility: Utility is also a principle of management accounting. This principle state that things should be used if it is useful for business purpose. It means there should be a utility of that thing for business purpose.
• Overhead cost absorption: Overhead cost means indirect expenses, which is incurred in the business. So suitable method must be used for overhead cost calculation.
• Resource utilization: This principle state that the resource of the company must be utilized properly.
• Uncontrollable and controllable cost: Management accounting system provide a method to control the cost (Tappura et al, 2015)
• Management account assists the manager in making an important decision for the company.
• Management accounting also called cost accounting. It is a process of analysing, identifying, interpreting and communicating the information to management, which helps in attaining the goals of the company.
• Cost analysis in the main role of management accounting helps the manager in ascertaining the expenses and the Manager will provide a suggestion for decreasing the expenses of the company.
• Management accounting system helps in forecasting for the future as all the data related to income and expenses analysed by the manager so that they can do forecasting for the future.
• Management accounting system helps in make and buy decisions. Management accounting includes all the data related to the production of a product like cost, profit etc. so the manager analyse all the data to decide to make and buy a product.
• Another role of management accounting is preparing a budget of sale, purchase, etc. So that manager can identify any variations that occurred by comparing the actual data with budgeted data. It helps in planning and decision-making. If it is unfavourable, variations occur then the manager will take corrective steps for that.
• The management accounting role is planning for the business operations. It is a bit different from financial accounting. The financial accounting role is to collect information for making a financial statement and the management accounting role is to do internal processing of business and plan for business operations.
• The management accounting role is using the cost information of goods and services so that manager can decide the procurement of raw material.
• Management accounting system focuses on every accounting and has a role to provide all information to management about business operations (Kastberg & Siverbo, 2016)

Variable costing calculation:

Portfolio of income statement:

Variable cost means that expenses changes as per the production unit produced. It increases when the production unit increases and vice-versa. Some variable costs in the manufacturing business are:

• Raw material
• Transportation fees etc.

Variable cost can be calculated by multiplying the total quantity with per unit variable cost.

Rio Tinto, which is a mining company. In the income statement, 2020 of Rio Tinto shows the operating cost that includes variable cost and fixed cost both.

Variable costs are:

• Raw materials, repairs and maintenance,>

The total quantity produced by company is $100000

Variable quantity* Per unit variable cost

per unit variable cost

Variable costing calculation is very important as it informs about the cost per unit and how much quantity produces and sold by the company. It helps in managing the production activity. It also helps in forecasting the demand for the product so that production of the product will be resume. It also helps in cost management, reducing wastage. If correct data is available regarding production activity then the manager can manage it easily. It helps the manager in planning about procurement of raw material, labour so that production will never stop. It increases the profitability of the company and reduction in the cost. Variable costing used by the company to analyse the break-even point of the product. It helps in evaluating the profit and cost of the company. An investor uses the income statement report to identify the operating efficiency of the manufacturing business so it helps the same (Riotinto.com, 2020)

Management accounting deals with preparing the business operations report which helps the manager in taking a long term and short term decision. Management accounting system facilitates in achieving the goal of business by identifying issues, measuring them, analysing them, interpreting them and information to managers. The main objective of management accounting is to provide non-financial and financial information to the management of the company and other members who take decisions in business. The main role of a manager in the organization is planning, controlling & evaluating.

The management accounting system can be integrated into business by using the different accounting techniques in business for decision-making like budgeting, cost accounting, variable analysing, cash budget etc. Managers monitor all the data provided by using these techniques and decide on a business. It helps in improving the efficiency of production by analysing all the cost and budget information. The incorporation of management accounting is very important for every manufacturing business. Management accounting is different from financial accounting. Financial accounting is done for preparing financial statements of the company. It provides all the financial data to managers and management accounting provides financial and non-financial data to the manager. The manager takes decisions in financial and non-financial matters. The manager plans for the business operations and mostly manages the operating activities. Management accounting consist budget report, cost management report. This report shows all the details related to costing and performance of employees and company so manager uses this report for evaluation purpose (Oboh & Ajibolade, 2017)

• Benefits of the management accounting function:
• Management accounting helps in deciding on business operation.
• Management accounting helps the manager in planning for procurement of resources like inventory, human resource and other material used in business.
• Management accounting helps the manager in cost analysis. Analysing the cost helps in controlling and saving the cost of production.
• Management accounting helps in reducing the wastage of resources by monitoring them from time to time.
• Management accounting helps the manager in inventory management, human resource management by reviewing the data.
• Management accounting helps the manager to strong internal control of the business.
• Management accounting helps the manager in finding the problem areas of business so that they can take corrective measure or make a plan for reducing these business problems.
• Management accounting helps the manager in controlling the operation of the business.
• Management accounting help manager in analysing and evaluating the performance of the business by monitoring the performance of employees and cost accounting data (Abdusalomova, 2019)
• Management accounting helps the manager in making policy and procedure regarding business.
• Management accounting helps the manager in internal audit.
• Management accounting helps the manager in improving the efficiency of the business by eliminating the wastage in production activity.
• Management accounting helps in deciding on promoting and demoting the employees. It maintains the morale of employees as the business report is prepared monthly and it will submit to the top management team and then will make a decision regarding demotion and promotion of employees.
• Management accounting helps in increasing the profit of a business. The manager set the standard of production and these standards compare with the actual performance and identify unfavourable variances. If these variances in controllable then corrective action will take by the manager so that it will help in increasing the profit of the company.

Management accounting can be implemented in every business whether it is manufacturing, service, retail, and restaurant. It provides a piece of information about business operations. So it assists managers in making important business decisions. Planning and decision-making are very important for every business growth. It helps in running the business activity effectively.

Importance of Management accounting in business:

• Cost analysis: Analysis of cost is possible by implementing management accounting in business. It helps in determining the expenses of production and provide suggestions about future activities.
• Budgeting: Budgeting helps in identifying the unfavourable variations so that corrective action can be taken for that. It can be possible by implementing management accounting in business.
• Controlling: Controlling is also a part of management accounting. It helps in evaluating the financial performance of the company. If there is a loss that occurred then it can identify and control it ASAP.
• Planning: Management accounting helps in identifying financial and non-financial patterns so that prediction for the future will get easy.
• Buy and make a decision: Management accounting helps in make and buy decision by evaluating the data regarding production activity.

Limitations of Management Accounting :

• Personal Biasness: The analysis of financial accounts depends on the interpreter and the interpreter can be biased. So it may be subjective.
• Less knowledge: Management accountant must know financial accounts, cost accounts and others. Sometimes there is a lack of understanding so it produces the wrong result.
• Installation is costly: The implementation cost of management accounting could be very high.

Conclusion:

This report has been discussed the management accounting system in a manufacturing company. It is concluded that management accounting is very important to implement in every business for planning and decision-making purpose. This report discussed the role, principle and importance of the management accounting method. Variable costing and limitations of management accounting have also been discussed in this report.

Introduction:

This report develops an understanding of planning tools used in management accounting as planning tools is very helpful in every business for planning and decision-making. Three planning will be discussed with advantages, disadvantages and effectiveness of these planning tools in the business. A case study will also analyse the application of management accounting for solving business problems. At the end of this report, recommendations will be provided about the best method of management accounting used in an organization.

Planning tools used in management accounting are: Company – BHP

Getting the best free sample was written by a Subject expert for talking Accounting assignment help .

• Budget of cash flow: Cash plays a very important role in running a business. Without cash to run a business is not possible. The manager needs to know about the inflow and outflow of cash in the business and they prepare a budget for that and compare it with actual cash flow in the business. So that they can identify variations. It helps in planning for working capital and in other matters of business.

Effectiveness of Cash budget:

A cash budget is effective to prepare for the management of cash. Cash budget provides details related to inflow, the outflow of cash, availability of cash, allocation details etc. This budget informs the manager about cash needs and the availability of funds in future. It helps in cash management and reduces the issues in business.

• Cost Variance analysis: Cost variance analysis is also an important planning tool in business. The manager can identify deviation in cost by comparing the budget cost with actual cost. It helps in reducing the cost of production. The manager does planning about cost allocation and cost reduction techniques by analysing the cost.

Effectiveness of cost variance analysis:

The manager found it a very important planning tool because it informs about the business operations efficiency by monitoring the variances of cost. Cost management is very important in every business. It helps in increasing profitability.

• Investment technique: It is also a very important planning tool in business. The manager decides on investment of funds so investment techniques help the manager in identifying the best investment option, which provides high returns and has less risk. Some investment techniques are NPV, Payback method, IRR etc.

Effectiveness of Investment technique:

It is useful for managers because it helps in selecting the best investment plan for projects. It indicates high returns from investment and has less risk. If the manager considers the time value of money then it will be effective more (Ismail et al, 2018)

As per the case study management accounting has applied in the business for making an important business decision. Management accounting plays a significant role in solving business-related problems and take future decisions. Management accounting information provides insight for forecasting about future. It shows the growth of the business. As it is manufacturing business and management accounting techniques and planning tools helps in solving business problems. Like inefficiency in production, inefficient workforce, fewer resources. So these issues can be solved in business by implementing a management accounting system and by using best planning tools like budgeting, cost accounting, marginal costing, standard costing, financial planning, Return of investment etc. If these planning tools of management accounting is not used in the business then management of the company is not possible. It reduces the profit of the company and increasing the cost and value of the company will get down.

There is four main part of management accounting that is Budgeting, cost management, performance management and risk management.

• Budgeting helps in identifying unfavourable variations in the business so that it is easy to take a corrective step without any delay.
• Cost management helps in saving the cost of production. A cost accounting technique is implemented in the business that is standard costing. A standard is set by the company and it compares with the actual cost of production so that variations in cost can be found out so the manager will take decisions by analysing the cost variations.
• Performance management: Performance management states the performance of business and performance of management and employees. The performance report is prepared in the business and it is evaluated by the manager for taking decisions.
• Risk Management: Risk is also identified by implementing the management accounting system in the business as a manager have to take day to day decision against working capital and also have to take the long-term decision of investment so there is a risk in short term and long term investment of funds. Management accounting helps in taking effective decision regarding investment which have less risk and greater returns (Fullerton et al, 2014)

Recommendations of application of methods for business success:

As per the findings, it is recommended that organization should apply modern management accounting method as it is designed according to today’s era. As in this modern era, competition is very high so every organization wants to reduce their cost and increase their profit so the best method should adopt by an organization that allocates the cost correctly and provide correct information so that it helps the manager in taking important business decisions. The modern technique of costing is Activity-based costing. It is suitable for manufacturing and service organization. It provides reliable information to manager and it is very easy to implement in the organization so the company should adopt this method of cost calculation. Cost is playing a very important role in every business as profit is dependent on the management of cost. So management accounting best tools and techniques help in reducing the cost and increasing the profit (Drury, 2018)

This report has been discussed planning tools that are used in management accounting. It is concluded that it is very important to apply in every business. Three important tools are cash flow budget, variance analysis and investment technique has been discussed in this report. Its advantages, disadvantages and effectiveness have also been discussed. The case study has been analysed about management accounting method implemented in an organization. Lastly, it is recommended that organization should use modern management accounting method to compete in this modern era.

References:

Abdusalomova, N.B., 2019. DIRECTIONS FOR DEVELOPMENT AND IMPROVEMENT OF A MANAGEMENT ACCOUNTING SYSTEM.  Economics and Innovative Technologies ,  2019 (3), p.6.

Annual Report  2020, Riotinto.com, viewed 13 May 2021, <https://www.riotinto.com/invest/reports/annual-report>.

Drury, C., 2018.  Cost and management accounting . Cengage Learning.

Fullerton, R.R., Kennedy, F.A. and Widener, S.K., 2014. Lean manufacturing and firm performance: The incremental contribution of lean management accounting practices.  Journal of Operations Management ,  32 (7-8), pp.414-428.

Ismail, K., Isa, C.R. and Mia, L., 2018. Evidence on the usefulness of management accounting systems in integrated manufacturing environment.  Pacific Accounting Review .

Kastberg, G. and Siverbo, S., 2016. The role of management accounting and control in making professional organizations horizontal.  Accounting, Auditing & Accountability Journal .

Oboh, C.S. and Ajibolade, S.O., 2017. Strategic management accounting and decision making: A survey of the Nigerian Banks.  Future Business Journal ,  3 (2), pp.119-137.

Tappura, S., Sievänen, M., Heikkilä, J., Jussila, A. and Nenonen, N., 2015. A management accounting perspective on safety.  Safety science ,  71 , pp.151-159.

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In The (Red)

The Business Bankruptcy Blog

Assignments For The Benefit Of Creditors: Simple As ABC?

Companies in financial trouble are often forced to liquidate their assets to pay creditors. While a Chapter 11 bankruptcy sometimes makes the most sense, other times a Chapter 7 bankruptcy is required, and in still other situations a corporate dissolution may be best. This post examines another of the options, the assignment for the benefit of creditors, commonly known as an "ABC."

A Few Caveats . It’s important to remember that determining which path an insolvent company should take depends on the specific facts and circumstances involved. As in many areas of the law, one size most definitely does not fit all for financially troubled companies. With those caveats in mind, let’s consider one scenario sometimes seen when a venture-backed or other investor-funded company runs out of money.

One Scenario . After a number of rounds of investment, the investors of a privately held corporation have decided not to put in more money to fund the company’s operations. The company will be out of cash within a few months and borrowing from the company’s lender is no longer an option. The accounts payable list is growing (and aging) and some creditors have started to demand payment. A sale of the business may be possible, however, and a term sheet from a potential buyer is anticipated soon. The company’s real property lease will expire in nine months, but it’s possible that a buyer might want to take over the lease.

• A Chapter 11 bankruptcy filing is problematic because there is insufficient cash to fund operations going forward, no significant revenues are being generated, and debtor in possession financing seems highly unlikely unless the buyer itself would make a loan. 
• The board prefers to avoid a Chapter 7 bankruptcy because it’s concerned that a bankruptcy trustee, unfamiliar with the company’s technology, would not be able to generate the best recovery for creditors.

The ABC Option . In many states, another option that may be available to companies in financial trouble is an assignment for the benefit of creditors (or "general assignment for the benefit of creditors" as it is sometimes called). The ABC is an insolvency proceeding governed by state law rather than federal bankruptcy law.

California ABCs . In California, where ABCs have been done for years, the primary governing law is found in California Code of Civil Procedure sections 493.010 to 493.060 and sections 1800 to 1802 , among other provisions of California law. California Code of Civil Procedure section 1802 sets forth, in remarkably brief terms, the main procedural requirements for a company (or individual) making, and an assignee accepting, a general assignment for the benefit of creditors:

1802.  (a) In any general assignment for the benefit of creditors, as defined in Section 493.010, the assignee shall, within 30 days after the assignment has been accepted in writing, give written notice of the assignment to the assignor’s creditors, equityholders, and other parties in interest as set forth on the list provided by the assignor pursuant to subdivision (c).    (b) In the notice given pursuant to subdivision (a), the assignee shall establish a date by which creditors must file their claims to be able to share in the distribution of proceeds of the liquidation of the assignor’s assets.  That date shall be not less than 150 days and not greater than 180 days after the date of the first giving of the written notice to creditors and parties in interest.    (c) The assignor shall provide to the assignee at the time of the making of the assignment a list of creditors, equityholders, and other parties in interest, signed under penalty of  perjury, which shall include the names, addresses, cities, states, and ZIP Codes for each person together with the amount of that person’s anticipated claim in the assignment proceedings.

In California, the company and the assignee enter into a formal "Assignment Agreement." The company must also provide the assignee with a list of creditors, equityholders, and other interested parties (names, addresses, and claim amounts). The assignee is required to give notice to creditors of the assignment, setting a bar date for filing claims with the assignee that is between five to six months later.

ABCs In Other States . Many other states have ABC statutes although in practice they have been used to varying degrees. For example, ABCs have been more common in California than in states on the East Coast, but important exceptions exist. Delaware corporations can generally avail themselves of Delaware’s voluntary assignment statutes , and its procedures have both similarities and important differences from the approach taken in California. Scott Riddle of the Georgia Bankruptcy Law Blog has an interesting post discussing ABC’s under Georgia law . Florida is another state in which ABCs are done under specific statutory procedures . For an excellent book that has information on how ABCs are conducted in various states, see Geoffrey Berman’s General Assignments for the Benefit of Creditors: The ABCs of ABCs , published by the American Bankruptcy Institute .

Important Features Of ABCs . A full analysis of how ABCs function in a particular state and how one might affect a specific company requires legal advice from insolvency counsel. The following highlights some (but by no means all) of the key features of ABCs:

• Court Filing Issue . In California, making an ABC does not require a public court filing. Some other states, however, do require a court filing to initiate or complete an ABC.
• Select The Assignee . Unlike a Chapter 7 bankruptcy trustee, who is randomly appointed from those on an approved panel, a corporation making an assignment is generally able to choose the assignee.
• Shareholder Approval . Most corporations require both board and shareholder approval for an ABC because it involves the transfer to the assignee of substantially all of the corporation’s assets. This makes ABCs impractical for most publicly held corporations.
• Liquidator As Fiduciary . The assignee is a fiduciary to the creditors and is typically a professional liquidator.
• Assignee Fees . The fees charged by assignees often involve an upfront payment and a percentage based on the assets liquidated.
• No Automatic Stay . In many states, including California, an ABC does not give rise to an automatic stay  like bankruptcy, although an assignee can often block judgment creditors from attaching assets.
• Event Of Default . The making of a general assignment for the benefit of creditors is typically a default under most contracts. As a result, contracts may be terminated upon the assignment under an ipso facto clause .
• Proof Of Claim . For creditors, an ABC process generally involves the submission to the assignee of a proof of claim by a stated deadline or bar date, similar to bankruptcy. (Click on the link for an example of an ABC proof of claim form .)
• Employee Priority . Employee and other claim priorities are governed by state law and may involve different amounts than apply under the Bankruptcy Code. In California, for example, the employee wage and salary priority is $4,300, not the $10,950 amount currently in force under the Bankruptcy Code.
• 20 Day Goods . Generally, ABC statutes do not have a provision similar to that under Bankruptcy Code Section 503(b)(9) , which gives an administrative claim priority to vendors who sold goods in the ordinary course of business to a debtor during the 20 days before a bankruptcy filing . As a result, these vendors may recover less in an ABC than in a bankruptcy case, subject to assertion of their reclamation rights .
• Landlord Claim . Unlike bankruptcy, there generally is no cap imposed on a landlord’s claim for breach of a real property lease in an ABC.
• Sale Of Assets . In many states, including California, sales by the assignee of the company’s assets are completed as a private transaction without approval of a court. However, unlike a bankruptcy Section 363 sale , there is usually no ability to sell assets "free and clear" of liens and security interests without the consent or full payoff of lienholders. Likewise, leases or executory contracts cannot be assigned without required consents from the other contracting party.
• Avoidance Actions . Most states allow assignees to pursue preferences and fraudulent transfers. However, the U.S. Court of Appeals for the Ninth Circuit has held that the Bankruptcy Code pre-empts California’s preference statute , California Code of Civil Procedure section 1800. Nevertheless, to date the California state courts have refused to follow the Ninth Circuit’s decision and still permit assignees to sue for preferences in California state court . In February 2008, a Delaware state court followed the California state court decisions , refusing either to follow the Ninth Circuit position or to hold that the California preference statute was pre-empted by the Bankruptcy Code. The Delaware court was required to apply California’s ABC preference statute because the avoidance action arose out of an earlier California ABC.

The Scenario Revisited. With this overview in mind, let’s return to our company in distress.

• The prospect of a term sheet from a potential buyer may influence whether our hypothetical company should choose an ABC or another approach. Some buyers will refuse to purchase assets outside of a Chapter 11 bankruptcy or a Chapter 7 case. Others are comfortable with the ABC process and believe it provides an added level of protection from fraudulent transfer claims  compared to purchasing the assets directly from the insolvent company. Depending on the value to be generated by a sale, these considerations may lead the company to select one approach over the other available options.
• In states like California where no court approval is required for a sale, the ABC can also mean a much faster closing — often within a day or two of the ABC itself provided that the assignee has had time to perform due diligence on the sale and any alternatives — instead of the more typical 30-60 days required for bankruptcy court approval of a Section 363 sale. Given the speed at which they can be done, in the right situation an ABC can permit a "going concern" sale to be achieved.
• Secured creditors with liens against the assets to be sold will either need to be paid off through the sale or will have to consent to release their liens; forced "free and clear" sales generally are not possible in an ABC.
• If the buyer decides to take the real property lease, the landlord will need to consent to the lease assignment. Unlike bankruptcy, the ABC process generally cannot force a landlord or other third party to accept assignment of a lease or executory contract.
• If the buyer decides not to take the lease, or no sale occurs, the fact that only nine months remains on the lease means that this company would not benefit from bankruptcy’s cap on landlord claims. If the company’s lease had years remaining, and if the landlord were unwilling to agree to a lease termination approximating the result under bankruptcy’s landlord claim cap, the company would need to consider whether a bankruptcy filing was necessary to avoid substantial dilution to other unsecured creditor claims that a large, uncapped landlord claim would produce in an ABC.
• If the potential buyer walks away, the assignee would be responsible for determining whether a sale of all or a part of the assets was still possible. In any event, assets would be liquidated by the assignee to the extent feasible and any proceeds would be distributed to creditors in order of their priority through the ABC’s claims process.
• While other options are available and should be explored, an ABC may make sense for this company depending upon the buyer’s views, the value to creditors and other constituencies that a sale would produce, and a clear-eyed assessment of alternative insolvency methods. 

Conclusion . When weighing all of the relevant issues, an insolvent company’s management and board would be well-served to seek the advice of counsel and other insolvency professionals as early as possible in the process. The old song may say that ABC is as "easy as 1-2-3," but assessing whether an assignment for the benefit of creditors is best for an insolvent company involves the analysis of a myriad of complex factors.