COST ACCOUNTING AND MANAGEMENT DECISIONS 6
CostAccounting and Management Decisions
CocaCola Company is the world’s leader in non alcoholic beverageproduction. Its products are found in over 200 countries. Studiesconfirm that Coca Cola products accounts for 3.1% of all types ofbeverages consumed daily, including water. The company produces morethan 500 beverage brands including sparkling beverages such as Coca-Cola, Fanta, Sprite, and Diet Coke among others. It also manufacturesand sells still beverages such as waters, juices, energy and sportdrinks, and ready to drink coffees and teas. Even though all thesebrands boost the profile of the company, there are 4 most importantproduct segments. The first most important brand is the Coca-Cola,the flagship of the company, which is globally recognized. Itrepresents 26 percent of Coca Cola Company’s stock value. Diet cokeis the second most important brand that represents 17 percent of thecompany’s stock value. It is a popular sugar free classic drink.Representing 14 percent of the company’s stocks are the coke zero,sprite zero, Barqs, and the likes. Powerade and similar brands have ashare of 14 percent. This division includes non carbonated drinkssuch as sports drinks and juices. Throughout its journey to success,Coca Cola has acquired several beverage companies thus, its greatdominance in beverages. The distribution of the Coca Cola productaccounts for 43% in the United States, 37% in Japan, Mexico, Brazil,china, and India, and the remaining 20% to the rest of the world(Lopez, 2012).
Changesin variable costs of the Coca Cola Company have a great effect oncost volume profit analysis (CPV). CPV estimates how costs, price,and sales volume affect the profitability of a company. It is one ofthe most essential tools used by decision makers to plan for thefuture of a company. Coca Cola Company can use CPV to plan for thefuture. To perform this, several assumptions must be made. The salesper unit is constant, total fixed costs are constant, costs are onlyaffected by activity changes, everything produced is sold, and totalvariable costs per unit are constant, are some of the assumptionsmade when performing CPV. Thus, changes in variable and fixed costsaffect the accuracy of CPV. Some of the Coca Cola’s variable costsinclude sweeteners and packaging. The changes in variable costs suchas sweeteners and packaging have a great impact on cost profitanalysis of the Coca Cola’s Company. These costs are directlyrelated to profit margins. This is because the higher the variablecost, the lower it contributes to the margin, if sales remainconstant. Thus, this will have a great impact in the cost profitanalysis. Other variable costs such as the costs of advertisementsmay have a profound effect on the CPV. In other cases, the costs ofadvertisements, which affect the cost profit analysis, are consideredfixed because a change in advertisement spending is not directlyproportional to sales. All in all, if the changes in either fixed orvariable costs occur, they affect the effectiveness of CPV. Theassumption that these costs are fixed may lead to improper futurepredictions and thus, fail in meeting the company’s objectives. Therefore, managers need to understand that changes in variable andfixed costs affect the accuracy of cost profit analysis (Weygandt, Kieso & Kimmel, 2010).
Costaccounting system is a framework that businesses use to estimate thecosts of products for cost control, inventory valuation, andprofitability analysis. The cost accounting systems in Coca ColaCompany focus on the process of mass production of goods. Themanufacturing process of this company begins with the mixing ofingredients to produce quality products. Next, the automated puts thebottles in positions and fills them up. The bottles are then capped,packaged, and moved to the warehouses of finished goods. Once theproduction in the company begins, it goes on until finished productemerges. Each unit of finished product is similar to any other(Weygandt, Kieso & Kimmel, 2010).
Thereare two types of costing, namely activity based costing andtraditional costing. In traditional costing, companies assignmanufacturing ahead of units produced. On the other hand, activitybased costing uses a more accurate view of product cost. Manycompanies use this as a supplemental costing system. Activity basedcosting account is preferred over beneficial costing account becauseof its greater accuracy. Companies allocate cost to activities thatrequire production hence, it eliminates assigning irrelevant coststo products. Further, activity based costing provides an easy avenuefor interpretation of cost for management. This helps the managers tounderstand the overhead costs. However, it is notable that activitybased costing is costly because of its complexity. This limits somecompanies that have inadequate finances. Worse still, some users ofactivity based system may easily misinterpret it. Therefore,companies that use activity based costing should employ experts inthis field to make use of the resources effectively. All in all, if acompany is financially stable like the Coca Cola, activity basedcosting is the most effective method of system costing.
Thecompany’s cost of sales forecasts did not meet the expectations asseen in the current financial statements. The forecasted cost ofsales was much less than the actual sales in the financial statement.Therefore, the forecasted profit was much less than the actualprofit. This is because the increases in the cost of sales have anegative impact in actual profits. The costs of sales increasedgreatly because of mild recession. This led to an increase in thecost of advertisements, which was much more than expected. Further,the cost of transporting finished products to the warehouses alsoincreased greatly.
Whileforecasting, the management should take into account some mildeconomic recession. Increases in the costs of sales affect the budgetgreatly when the world experience economic recessions (Havaldar,2010). Many companies tend to overestimate their budgets because theyfail to take into account that the cost of sales may increase thanexpected. However, in case the cost of sales increases than expected,the management should consider increasing the prices of the productsto meet the objectives of a company. The increases in prices shouldbe able to replace the amount spent in increases in the cost ofsales. A such, the management should respond immediately in case thecosts of sales increases as this may have a negative effect on thecompany’s profits. Coca Cola is a well established brand thatproduces large quantities if products hence, a small increase in theprices may not have a great impact in volume of sales.
Havaldar,K. K. (2010). Businessmarketing: Text and cases.New Delhi: Tata McGraw Hill Education Private Ltd.
Lopez,D. (2012). BrandDevelopment of Coca-Cola Company (UK): Exploring new brandingopportunities for Coca-Cola Company (UK).München: GRIN Verlag GmbH.
Weygandt,J. J., Kieso, D. E., & Kimmel, P. D. (2010). Managerialaccounting: Tools for business decision making.Hoboken, NJ: Wiley.