Analysis of Sony Regarding Management Accounting

Analysis of Sony Regarding Management Accounting

Introduction

The final project paper presents an analysis of Sony regarding management accounting. The company is selected for analysis and discussion due to its popularity and manufacture of various products, which can be considered under the managerial accounting framework, such as capital budgeting and costing approaches. The discussion aims to evaluate the company’s critical success factors, identification and discuss the company’s fixed and variable costs, and calculate the contribution margin income statement. The discussion will also determine and discuss the most effective costing method applicable to the company and evaluate the capital budget for the given project using the net present value (NPV) capital budgeting technique. The overall discussion of the project will be concluded by making recommendations for the company to consider regarding its management accounting practices.

Company Background

Sony Group Corporation, often abbreviated as SONY, is a Japanese multinational company that has its headquarters in Tokyo, Japan. According to Ahmad Aizam (2022), the company operates in the technology industry, producing numerous technological products such as entertainment equipment, kitchenware equipment, electronic products, and video games. The company is one of the world’s largest producers of these products. In terms of revenue, the company has the highest cash inflows in Japan, with its revenue in the 2021 financial year at $81.38 billion. SONY employs more than 109,700 employees and operates in all global markets. As of the year 2022, the company’s main products included cameras, computer hardware, consumer electronics, films, semiconductors, robots, music, TV shows, Telecommunication equipment, and video games. The company also generates revenue from providing various services to the public. Some services include network services, insurance, financial services, credit finance, banking, and advertising agency.

SONY’s Critical Success Factors

Critical success factors refer to various dimensions within a business that are crucial for achieving success. They are the major sources of an organization’s competitive advantage and require periodic evaluation for adjustments. In SONY’s case, various critical success factors push the company to maintain its position in the electronics market. The company’s success factors are product attributes, competitive capabilities, resources, market achievements, and competencies. Notably, these aspects drive the future of the company. SONY’s critical success factors are given below:

Diversification of product lines

The company has specialized in producing high-quality products within diversified product lines. The variety of products ensures that the company remains competitive and competent in the market at all times. As already identified in the company’s background, various products are produced, ranging from consumer items to financial services. In case one product underperforms in the market, another product will substitute through increased sales, maintaining the company’s revenues at the top at any given time. For instance, the company invented music-playing robots such as the humanoids QRIO and Rolly. Diversified product lines are critical success factors because they contribute to more revenue for the company. From now on, the company should ensure it maintains and increases its product lines to maintain competitiveness in the market.

Strategic Business Units

Strategic business units are important critical success factors for SONY. They include subsidiaries that produce various products, some unrelated to the company’s main products. The strategic business units ensure that the company is one of the complete entertainment firms globally. For instance, the company has strategic business units in consumer products and devices, music, pictures, Sony Ericsson, Financial services, Disc and B2B manufacturing, and networked products and services. Notably, these strategic business units enhance the company’s market position.

Global distribution and manufacturing network

SONY has a wide and strong distribution and manufacturing network that makes up the list of its success factors. The network is far-reaching, and most countries rely on the company for its products. Regarding manufacturing, the company has a network of production sites in Asia, Europe, and America from which it serves its market. Areas with no manufacturing centres have good distribution network coverage that ensures all markets are served to the maximum. Essentially, this is a critical success factor because it enhances the company’s dominance in the world market, ensuring competitors find difficult moments in attempting to replace it in any given market.

Technological and innovative activities

As a critical success factor, SONY has been identified for its capability to create in-house values for new recording and storage technologies as an alternative to adopting those of other typical manufacturers and standards. Over time, the company has produced unique products, such as compact discs and floppy disks, through innovative events. Although these products are no longer as important as they were, they sealed the company’s position as an innovative giant from which it has derived its success.

Extensive research and development

The last critical success factor of SONY is research and development, and the company has four research centres and three development groups. They include technology development centres aimed at developing business-based products and general component technologies, computer science laboratories aimed at forward-looking primary research, a display device group for developing next-generation display technologies, a cubed research centre for creating and development image dispensation technologies and material laboratories that concentrate on creating advanced materials used in their devices. All these centres form a basis for the company’s success in the global market over many years.

Fixed and Variable Costs

Fixed costs refer to expenses incurred by a business unit that remain unchanged regardless of the production output. On the other hand, variable costs refer to expenses incurred by a production unit, which vary depending on the amount of output produced. For SONY, fixed and variable costs can be identified. The two costs are determined from the company’s cost structure as reported in its income statement for the latest financial period that ended in 2021. From the statement, the company’s fixed and variable costs are as given below:

SONY Fixed costs

The company’s fixed costs are identified from the operating expenses reported in the income statement. They include loan payments, insurance, utility bills, lease costs, and rent expenses. Notably, these costs remain constant irrespective of the production output made by the company in any given production site. The company has many production sites across the world. The production units can, at times, have varying fixed costs. However, the identified fixed costs are universal for all of the company’s production units.

SONY variable costs

From the company’s income statements, variable costs are informed by the company’s cost of goods sold, which comprises credit card fees, packaging supplies, delivery costs, commission, production supplies, and material costs. Notably, these costs change with a change in the level of the production output made in the company for any given production site. The company has many production sites across the world. The production units can, at times, have varying variable costs. However, the identified fixed costs are universal for the company’s production units.

Contribution margin income statement

The contribution margin statement shows the influence of fixed and variable costs on the company’s income. The statement takes a different format from the traditional income statement format that does not classify costs into their fixed and variable constituents. Essentially, the statement arrives at its figure for the income by deducting variable expenses from the company’s sales revenue. The result from this subtraction provides the company’s contribution margin. According to Hansen et al. (2021), contribution margin refers to the difference between the selling price of a unit and the variable costs, which managerial accountants use in making various important cost decisions. For instance, contribution margin can be used to assess whether a product line should be discarded or added. Thus, it is used for end or continue decisions for a company.

For the case of SONY, the contribution margin statement for the financial month of September 2022 is given as follows:

	Amount in dollars
Sales Revenue	2,751,879
Less: Variable expenses	1,934,494
Contribution margin	817,385
Less: Fixed costs	479,273
Net Income	338,112

Costing methods

Many costing methods can be considered for organizations that undertake production processes, such as SONY. Since the company produces various products, several costing methods will be applicable for its different products. By definition, a costing method refers to monitoring all costs that are absorbed by a product before it is completed and ready for sale. The following methods are effective for SONY;

Process Costing

Process costing is a method that takes into account all costs incurred in producing massive products. Notably, this approach is suitable for SONY because it fits into the production of many similar products. Thus, the method fits the output of the company’s electronic devices, music, video games, and consumer electronics, which are produced in huge numbers. The process costing method will be used in the company’s cost by adding all direct expenses incurred at a given stage in production. Such direct costs include wages of machine operators and raw materials for production. The costing method fits well into SONY’s production processes because most of its products go through different steps before becoming fully completed products. Costs for the products are accumulated at every stage of production. The advantage of this production method to SONY entails saving time for the company as compared to other costing approaches that can be considered, such as job costing. Products are considered as a group and not taken into account individually. However, the costing method can be affected by inaccuracies by ignoring indirect costs.

Activity-Based Costing

The Activity-Based Costing (ABC) method refers to a production method that takes into account the cost of each unit from mass production by basing allocation on the activities involved. The method allocates overhead costs to products by considering the activities undertaken in producing the method (Quesado & Silva, 2021). ABC method is effective for use for specific products made by SONY. An example of productions made by the company for consideration under this method entails contracts to produce a single electronic tailored for a single customer. Another reason why SONY should consider this costing method for some of its production processes is because of the accuracy achieved for certain manufacturing activities. Essentially, this is so because the method offers an accurate picture of unit costs. However, implementing and maintaining this costing approach is expensive because there will be a need to identify all activities involved in producing a product. Since SONY has a substantial financial base, it has no problem considering this costing method for some of its operations.

Service costing

The service costing method is considered for SONY because, from the background of the study, some of the company’s revenues are raised from offering services to customers. Some of the services offered by the company include credit services, insurance, and financial services. The company needs a costing system for these services. Therefore, the service costing method is effective for the company. Essentially, the service costing method entails accounting for all operational costs incurred in offering intangible products. SONY must ascertain its service costs because they contribute to the company’s overheads. The method comprises intangible products, cost data collection, less working capital, cost classification by behaviour, internal and external services, cost per unit, and order-wise calculation. In determining the cost unit under service costing, SONY can consider all costs incurred in providing services for a given period and divide it by the total number of service units for the period. Notably, this will ensure service costs are monitored to enhance the company’s efficiency.

Use of Present Net Value (NPV)

The net present value (NPV) is a capital budgeting technique used to evaluate the viability of products for investment. According to Siziba & Hall (2021), the net present value reflects the difference between the future cash inflows and total cash outflows anticipated from a given project. The method is highly recommended for use due to its various advantages in evaluating various projects. One such advantage is the consideration of the time value of money. Second, the method is suitable for use when different projects which are mutually exclusive are subject to analysis. For effective capital budgeting, the method requires a hurdle rate, considering the cost of capital. Determining the hurdle rate is one of the most challenging aspects of the use of the method for capital budgeting. Once a firm has an effective discount rate, various projects can be evaluated. The method’s decision criteria entail accepting projects with positive net present values and rejecting those with negative present values. When multiple projects are considered, the project with the highest net present value should be accepted.

Case study NPV calculation

The case given in the question presents a project with a project cost of $2 million. The project life is expected to be ten years, and the cost of capital is expected to be 15%. Assuming SONY Incorporated expects to save $450,000 per year for the next ten years by purchasing the item, the project’s net present value will be given as follows.

Present value= P*[(1-(1+r) ^-n)/r]

Where PV= present value of earnings

P= Value of each saving to be made

r= Expected cost of capital

n= number of years

Present Value= 450,000*[1-(1+0.15)^-10)/0.15)

= $2,258,445.882

Since the project cost will be $2 million, the difference between the project cost and the present value calculated above gives the net present value.

It will be given by ($2,258,445.882- $2,000,000) = $258,445.882

From the calculation above, the present value of the project is $258,445.882. Notably, this indicates profit obtained from the project and proves it is worth investing in it. Considering the decision criteria for acceptance or rejection described above, it is recommended that the company proceed and purchase the item.

Advantages and disadvantages of NPV

As already identified above, one of the benefits of using the above capital budgeting technique of net present value is the consideration of the time value of money. Under this aspect, the money at hand today is worth more than the same amount of money tomorrow. Therefore, by taking this aspect into account in calculations, more realistic results are obtained for project evaluation. Another advantage of the method relates to decision-making. The method makes it easier for an organization to determine whether a project will result in a loss or profit apart from comparing different projects (Lu & Yin, 2021). On the contrary, the method has its own weaknesses that one should consider before deciding to use it. First, the discount rate calculation is not based on set guidelines, not ignoring the identified challenge of calculating it as already discussed. Therefore, organizations that fail to calculate the company effectively may make inefficient evaluations. Additionally, the net present value method is not suitable for comparing projects of different sizes. Finally, the method may fail to account for any hidden costs that are not provided for in the evaluation.

Recommendations for SONY

The discussions throughout this paper using SONY as the company of analysis prompt various recommendations for the company to consider. The recommendations are as given below:

1. SONY should increase its critical success factors. Five critical success factors are identified for the company. However, the modern electronic products industry has seen an increase in innovative competitors such as Samsung and Apple. Therefore, the company needs to enhance its critical success factors.
2. SONY should make their fixed and variable costs clear for costing purposes. From the analysis conducted above, it is evident that the company’s fixed and variable costs are not clearly given out. Notably, this is so because the company uses the traditional format of presenting income statements. It is recommended that the company use all available formats to make it easier to calculate the contribution margin.
3. SONY incorporation should use three costing methods for effectiveness. Notably, this is so because the company produces a variety of products that cannot fit into a single costing method. As a result, the recommended costing methods are process costing, ABC costing, and service costing.
4. SONY should use NPV value to evaluate investment projects for its capital budgeting. The suggestion is based on the case scenario calculated and the discussion of the advantages and disadvantages of the method.

Conclusion

The discussion above relates to various management account concepts analyzed in the context of SONY. SONY is a Japanese multinational company that manufactures and sells consumer electronics and other products. The report identifies various critical success factors of the company, including diversified product lines, strategic business units, global distribution and manufacturing network, technological and innovative activities, and research and development. The paper also considers the company’s fixed and variable costs to create a contribution margin statement. Further, three costing methods suitable for the company are given. They include service, process, and ABC costing. Additionally, the paper selects the NPV capital budgeting method to evaluate the given scenario. Using the method, the project is established to have a positive net present value and is worth pursuing. Finally, the report makes recommendations for SONY to consider, including enhancing its critical success factors, considering multiple presentations of the income statement for costing purposes, using multiple costing methods for various products and services, and finally, using the net present value capital budgeting approach to evaluate investment projects.

References

Ahmad Aizam, A. H. (2022). Technology Entrepreneurship Project (ENT 600): Sony Group Corporation. https://ir.uitm.edu.my/id/eprint/55235/

Hansen, D. R., Mowen, M. M., & Heitger, D. L. (2021). Cost management. Cengage Learning.

Lu, J., & Yin, S. (2021, April). Application of net present value method and internal rate of return method in an investment decision. In Proceedings of the 4th International Conference on Global Economy, Finance and Humanities Research, Chongqing, China (pp. 10-11).

Quesado, P., & Silva, R. (2021). Activity-based costing (ABC) and its implication for open innovation. Journal of Open Innovation: Technology, Market, and Complexity, 7(1), 41.

Siziba, S., & Hall, J. H. (2021). The evolution of the application of capital budgeting techniques in enterprises. Global Finance Journal, 47, 100504.

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Each student should choose an organization with which she/he is familiar, such as the place of employment, business patronized, or other situation and describe how that organization either does or does not apply the course concepts on a day-to-day basis. The following course concepts should be discussed:

Critical success factors.

Identify and discuss the fixed and variable costs. Calculate the Contribution Margin Income Statement

Determine and discuss the most effective costing method for your organization.

Using the IRR or NPV method, calculate and determine if the following capital budget project is viable: project cost of $2 million, project life of 10 years, and cost of capital of 15%.

Provide a recommendation for the organization.

Information needed to complete the capital budgeting portion of the final project:

Your company expects to save $450,000 per year for the next 10 years by purchasing the item. The cost of capital is 15%.

The company believes its initial investment will be $2 million.