The Coca Cola Company [Type the document subtitle] The Following involves the analysis of the costing techniques followed by the company along with its Budgeting system. It also involves the Investment appraisal analysis for the given data. [Type the author name] [Pick the date] ? TABLE OF CONTENTS: CONTENTS: 1)INTRODUCTION………………………………………………………………….
… 03 2)FOUNDATION AND HISTORY……………………………………………………
03 3)COSTING TECHNIQUES………………………………………………………….. 04 4)COCA COLA’S COSTING TECHNIQUE ………………………………………..
05 5)BUDGETING SYSTEMS……………………………………………………………. 6 6)BUDGETING SYSTEM OF COCA COLA……………………………………… 07 7)INVESTMENT APPRAISAL ANALYSIS………………………………………….. 10 8)CONCLUSION…………………………………………………………………………12 9)REFERENCES…………………………………………………………………………. 13 INTRODUCTION: “Share a COKE , Share the happiness”. The above statement is the slogan for the Coca-cola Company which has now become 125 years old. The slogan says Share the Happiness , it is a notable fact that the Costing technique and the budgeting system is one of the factors responsible for bringing out that happiness.
The following assignment involves the Analysis of the costing techniques and the costing technique followed by the company along with the Budgeting system of the company. The History of the Coca-cola Company can be briefly explained as follows : The Foundation and Progress : It was in the year 1886 when Dr. John Pemberton created a great-tasting beverage that was first served as a fountain dring at Jacob’s Pharmacy in Downtown , Atlanta ,Georgia. The business started small, with a modest nine drinks served a day.In the 1920s,Robert Woodruff, then President of the Coca Cola Company, envisioned global expansion and developed a separate organization within the Company specifically designed to market and sell coca cola outside the United States. By 1930, Coca-cola was bottled in 27 countries.
The subsequent years brought continued product expansion, particularly during the world war time period. Over the years, Coca-cola gained popularity worldwide and with it the consumer demand for new products and packaging emerged with the growth in the beverage portfolio.The current year 2011 marks the 125th anniversary of coca cola which has seen unbelievable growth and expansion reaching upto 200 countries in the world with over 500 brands and 3500 beverage products. (Reference: The story of Coca cola – Lonnie Bell , The annual report of Coca Cola 2010) COSTING TECHNIQUES : The most common costing techniques followed by major MNC (Multi National Companies) would include Absorption Costing Technique and Marginal Costing Technique. The new method introduced to the list is Activity Based Costing Technique, which is generally used as a internal decision-making tool.
The Efficiency of a company’s performance is based on the type of costing technique the company uses and the Budgeting system it follows. Focusing on the costing techniques, The Absorption costing technique is a costing technique where all normal costs whether it is variable or fixed costs are charged to cost units produced. Process costing is used by companies that produce many units of essentially the same product, like Coca-Cola Co. or Scott’s paper towels.
The costs incurred in producing such homogeneous products are pretty much the same for every unit produced.Basically the definition for Process costing is that it is an accounting system that gathers direct and indirect costs of manufacturing and then averages them out into a “cost per unit” for each product. Process costing is the opposite of Job costing, which determines the specific cost for each task in a procedure of creating a product. (References: Life cycle:Costing techniques,models and applications by B. S. Dhillon Accounting and Finance in Business by Mike Bendrey ,Roger Hussey,Colston West College accounting coach)COCA COLA’S COSTING TECHNIQUE: The Coca Cola Company operates in more than 200 countries and markets more than 500 brands and 3,500 beverage products. It is a essentiality that the company should follow a well organized costing technique to sustain the position the company holds in the world.
The costing technique followed by the Coca-cola Company is Process Costing which is one of the forms of Absorption Costing. The Coca-cola company is a homogeneous product manufacturer company. With 1. Billions units sold a day, the company is the largest soft drink manufacturer in the world and hence it becomes important to have a simple accounting system to determine how much these products should be sold at.
The process costing determines the average cost for each unit so that it is easy to sell both a large amount of products or a small amount and understand how much profit is being made on the products. This type of accounting system would not be as effective if the company was creating many different items that had different costs of tasks throughout the process.With this costing technique , a Manager can easily determine if there is a weak link in production chain by keeping an eye on the cost per unit each day. Using the accounting programs involved in process costing, a manager can figure out where in the process the item’s per unit cost is going up.
This way a single manager or a team of managers can monitor millions of units being produced without needing to check on each department unless a problem comes up. By the same token, these numbers need to be watched diligently, as a change of even a fraction of a cent can cost thousands of dollars quite quickly.The Advantages that are equipped with the use of this costing technique in a company like Coca Cola can be stated as follows: •The company can determine the importance of fixed costs in production • Financial accounts prepared with less expenses •Shows less fluctuation in net profit when production remains constant and sales fluctuate.
The following table shows the company’s Financial highlights and performance which is based on the Process costing. Performance of the Process costing technique followed by Coca Cola Over theYears: Year Ended December 31,2010200920082007(in millions US$)SUMMARY OF OPERATIONSNet operating revenues 35119309903194428857Operating income 8449 8231 8446 7252Net income attributable to shareowners of the Coca-cola Company11809 6824 5807 5981BALANCE SHEET DATATotal Assets75921486714051943269Long term debt14041 5059 2781 3277BUDGETING SYSTEM: Specific plans for saving and spending income are made and carried out by organizations. These plans, or budgets, are essential for development, spending and saving priorities.Properly preparing a budget also serves as a reference to check how well money is being managed during a period by allowing managers to see actual revenues and expenses compared to budgeted revenues and expenses.
There are several steps that should be followed to successfully implement a budget. These include setting financial goals, planning budget categories, maintaining financial records, and balancing and adjusting the budget. Setting financial goals is the starting point in the budgeting process Coca-Cola’s Budgeting System: Coca Cola makes or licenses over 3,000 drinks in some 200 countries.It owns 32% of Mexico’s bottler Coca-Cola FEMSA and 23% of European bottler Coca-Cola Hellenic Bottling. In the fiscal year ending in December of 2009, the company reported sales of approximately 30. 99 billion dollars and 92,800 employees. The Coca-Cola system has become a global business that operates on a local scale in every community it does business. The Coca Cola Company follows the Envelope Budgeting system.
The envelope budgeting system is a process that works by assigning income to various virtual “Containers” called Envelopes. It’s Appeal is in it’s simplicity, even though there are a lot of tools out there to make it complicated.The envelopes would contain the amount of cash or a note listing the amount to be used particular sections. If an envelope is depleted, The funds must come from another envelope in the system. There are many Justified reasons for the Coca-cola company to follow this budgeting system.
They include the factor of simple to use and intuitive with the benefit that the expenditures are fixed at a certain amount . The envelopes are consistently non-zero and are also used to adjust the budget of the company. The system cannot handle large emergencies , provided that the company is not cash rich.Working with nearly 300 bottling partners , the Company has improved its budget reaches and added more than 1 billion incremental unit cases of volume to it’s business.
The Unit case volume grew by five percent and exceeded the long term growth target. In the year 2010 , the company generated $ 9. 5 Billion in cash from operations, upto 16 percent over 2009. The company has returned $7. 2 Billion to the Shareowners. Being immensely cash rich , the company has decided on the commitment to more than $25 Billion in new system investments over the next five years 2012-2017.
Also, The Coca cola system is observed to be following both accrual based appropriations and Obligation based appropriations. •The Obligation based appropriations give rights to make commitments and to make cash payments according to these commitments. Such appropriations have their own life cycle and are not limited to one year. •The Accrual based appropriations cover full costs , for the operations of a department and other increases in liabilities or decreases in assets. Full costs are the goods and services consumed over a period.The alternate budgeting systems available for the company are Tracking to the penny budgeting system and capital budgeting system. With tracking to the penny budgeting system , the company can track every single expenditure it makes by the end of the day. Such information plays a vital role in making future decisions about spending which can be made risk free and also it helps to identify Budget leaks, With the Capital Budgeting system, The company can look forward to further solidification of their grounds in foreign countries by planning long term investments and expenses with the system.
(References: Public Budgeting Systems –Robert D.Lee and Ronald Wayne , Coca Cola Annual Reports and Sustainability reports , Budgeting systems –A handbook for distributors by Theodore Cohn and Roy A. Lindberg. ) INVESTMENT APPRAISAL ANALYSIS ON THE GIVEN DATA: It is given that you are working for JD Printing Ltd. , as a Finance Assistant and your manager asked you to perform an investment appraisal analysis on a new capital investment. The company is considering renewing one of their printing machines and they have found three possible options.
You are required to evaluate these different options in your report and recommend one of them for purchasing.The company’s cost of capital is 15% and the company usually accepts projects with payback period shorter than 5 years period. Table 1: The projections with regards to the printing equipments Machine AMachine BMachine CPrice (? )1,000,000550,000400,000Expected economic life 6 Years6 Years6 YearsYear 1 revenue (? )150,00085,00070,000Year 2 revenue (? )230,000120,000125,000Year 3 revenue (? )400,000190,000150,000Year 4 revenue (? )300,000195,000165,000Year 5 revenue (? )250,000200,000120,000Year 6 revenue (? )140,000180,00080,000Scrap value (? )150,00040,000Nil Table 2: Present Value Factors Year/Rate14%15%16%17%18%19%10. 87720. 6960. 86210. 85470. 84750.
840320. 76950. 75610. 74320. 73050. 71820.
706230. 6750. 65750. 64070. 62440. 60860. 593440. 59210.
57180. 55230. 53370. 51580. 498750. 51940. 49720.
47610. 45610. 43710. 41960. 45560. 43230. 41040. 38980.
37040. 352170. 39960. 37590. 35380. 33320. 31390. 295980.
35060. 32690. 3050.
28480. 2660. 248790. 30750.
28430. 2630. 24340.
22550. 209100. 26970. 24720. 22670. 2080. 19110. 1756 The company’s cost of capital is 15% Therefore Total outlay = 15% of the Capital.
It is projected that the returns extend over 5 years. Calculation for the payback period: For Machine A – The price is 1,000,000 EurosTotal Returns is given by 150,000+230,000+400,000+300,000+250,000+140,000=1,470,000 Euros Average rate of returns (Internal Rate of return)=245,000 Euros/Year. Net return= 470,000 Euros %Net Return=47% The payback period was calculated to be more than 3.
5 years and to be exact , the total investment is covered in the fourth year. For Machine B- The price is 550,000. Total Returns =85,000+120,000+190,000+195,000+200,000+180,000=970,000 Euros Average rate of return( Internal Rate of return)=161,666. 66/Year. Payback period was calculated to be the same as the previous machine.
Net Return=420,000 Euros Net Return=76% For Machine C- The price is 400,000 Euros. Total Returns =70,000+125,000+150,000+165,000+120,000+80,000=710,000 Euros Average Rate of Return=118,333. 33/Year.
Payback period was also calculated to be the same. Net Return=310,000Euros %Net Return=77% NET PRESENT VALUE METHOD: YEARCASHFLOWDISCOUNT @ 15 %PRESENT VALUEMACHINE1231,2&312301,000,000550,000400,0001. 0001,000,000550,000400,0001150,00085,00070,0000. 869613044073916608722230,000120,000125,0000. 75611739039073294512. 53400,000190,000150,0000.
6575263000124925986254300,000195,000165,0000. 5718171540111501943475250,000200,000120,0000. 97212430099440596646140,000180,00080,0000. 4323605527781434584NPR -762652838242604 The Machine C is preferable due to the following reasons: •Low payback period •High Net Present Value CONCLUSION: The future is not simply a reflection of what has happened in the past but there are always changes either in the economic condition, competitive condition or even the customer needs and desires. Process costing suits the requirements of most managers in satisfying customers’ needs and at the same time gain profit for their organizations as it focuses less on cost and considers customers’ wants and requests to be the primary cost driver.
Nowadays, supply chain partners are selected before the product development, regardless whether process costing is being used or not. But choosing the right supply chain partner can affect in whether the process cost is reached or not. By implementing process costing within the supply chain, they can select the most appropriate product development and process technologies, eliminate cost overruns, limit the design problems and deliver the lowest