The Use of Activity-Based Costing (ABC) and its Impact

The Use of Activity-Based Costing (ABC) and its Impact

Background on Coca-Cola and How it Utilizes the ABC Method

One of the most well-known global beverage firms and brands is Coca-Cola. Since its founding in 1886, the company has risen to the top of the world soft drink market. The business manufactures and distributes a variety of non-alcoholic beverages, such as juices, carbonated drinks, sports drinks, and bottled water. Coca-Cola uses a variety of cost accounting approaches, including activity-based costing (ABC), to efficiently manage its operations and maximize its profitability (Bekimbetova et al., 2021). The ABC approach is used to assign costs to specific activities and then, based on how those activities are consumed, to goods or services. It aids in determining the actual costs related to each good or service and gives a more accurate and thorough understanding of the cost drivers.

Moreover, Coca-Cola’s implementation of ABC enables the business to acquire detailed insights into the cost structure of its operations. The business may allocate costs more precisely and make educated decisions about pricing, product mix, and resource allocation by identifying and examining the many activities involved in its production and distribution operations (Bekimbetova et al., 2021). Coca-Cola may identify crucial cost drivers like procuring raw materials, bottling, packaging, shipping, and marketing. The corporation may calculate the actual expenses related to each product line or brand by allocating costs to these activities depending on how many of those activities are consumed by various items.

Alternatives to the ABC Costing Method

Coca-Cola may choose from a number of alternatives to activity-based costing (ABC) for its cost accounting requirements. For instance, standard costing is a commonly used technique that allocates predefined costs to goods or services based on standard or budgeted expenses for overhead, materials, and labor. For each activity or cost element, it creates established cost criteria and then measures actual costs against these standards. It is generally easy to adopt standard costing, which may serve as a foundation for performance evaluation, variance analysis, and cost control. In addition, another alternative would be direct costing (Kimmel et al., 2020). Direct costing aims to identify and allocate only the direct variable costs to goods or services. Fixed costs are not allocated to specific items; they are viewed as period expenses and overhead and administrative costs. Understanding a product’s contribution margin and determining short-term profitability are two uses for this strategy (Quesado & Silva, 2021). However, it could not give a complete picture of all expenses incurred by the company, including long-term fixed expenditures.

Types of Resources Needed to Use ABC Method

The ABC method focuses on the activities that generate such costs and allocates them to goods or services based on their consumption of those activities, making it a more precise and realistic way for Coca-Cola to value indirect costs. Therefore, ABC mandates the execution of time studies to calculate the time spent on various tasks inside Coca-Cola’s operations. Time studies entail watching and tracking how long workers take to complete particular jobs or activities. Accurately estimating the resources used by each activity is made possible by this data (Kimmel et al., 2020). ABC also identifies activity drivers that contribute to or impact a specific activity’s resource consumption. The number of setups, client orders handled, or machine setups are examples of non-volume-based activity drivers. Volume-based activity drivers include units produced or hours spent (Kimmel et al., 2020). ABC establishes a more precise and direct connection between resource usage and activity cost by connecting the activity drivers to the activities.

Moreover, ABC implementation frequently necessitates cross-functional cooperation, whether it is with the technical team or marketing. The engineering team could be asked to contribute by offering perceptions into the technical facets of operations, resource use, and cost factors. They can aid in defining and identifying activities and making time and resource utilization projections. On the other hand, the marketing staff may offer insightful feedback on client needs and preferences, which can affect the motivation behind activities and the distribution of expenditures (Quesado & Silva, 2021). Cooperation across various services is essential to ensure the accuracy and relevance of the cost allocation process. Coca-Cola can obtain the numerous viewpoints, information, and skills required for a thorough application of the ABC technique by incorporating a number of teams and stakeholders.

Consideration of Outsourcing Products Instead of Manufacturing

If I were the owner of Coca-Cola and wanted to outsource rather than manufacture the product’s components, several financial considerations would need to be made. The price difference between manufacturing the component components internally and outsourcing them is one of the critical aspects to compare. Labor, raw materials, facilities, equipment, and overhead costs are included. Outsourcing may be profitable if it enables cost reductions via economies of scale or access to less expensive supplies. Evaluating potential outsourcing partners’ quality assurance procedures and standards is critical. Maintaining consistent product quality is essential for Coca-Cola’s brand reputation and consumer pleasure. Cost savings may be countered if outsourcing compromises quality control or necessitates extensive supervision.

Assumptions

Currently, Coca-Cola spends $10 million annually on producing components internally. According to an outsourcing proposal, reliable vendors can deliver the same component components for $7 million a year, including shipping and logistics costs. Other elements, such as supplier connections and quality control, are seen favorably. In this case, shifting the component components outside the company might save $3 million annually ($10 million – $7 million). The benefits of concentrating internal resources on critical skills and this possible cost reduction may allow Coca-Cola to generate a profit. Therefore, to guarantee that outsourcing is in line with strategic goals and is sustainable over the long term, it is crucial to undertake a thorough study that considers all important cost aspects.

Decision on Whether to Buy a New Replacement Piece of Machinery or Have the Current Machine Reworked

The decision to work on or repair the old equipment versus purchasing a new replacement piece of machinery would be based on a number of variables. First, it is essential to determine how much it will cost to fix and overhaul the old equipment. This covers any associated downtime during the repair procedure and the cost of labor and parts. A review of the anticipated increase in production effectiveness and the repair’s lifetime extension would also be considered. Second, comparing the price of getting a new replacement computer is crucial. This covers the machine’s purchase price, installation fees, training costs, and any other fees that could be incurred to integrate the new unit into the current production line. Third, it is crucial to evaluate the effect of the existing machine’s performance on production capacity and efficiency. Estimating the possible benefits of repair or replacement will be easier if you know how much slower the old system is and how much longer it takes to complete tasks. The decision-making process would consider the increase in manufacturing output, cycle times, and general efficiency.

Assumptions

The old machine’s useful life would be increased by three years at an estimated cost of $200,000 in repairs and overhaul. A new gadget will set you back $500,000; its projected life expectancy is ten years. The production efficiency is predicted to rise by 20% following the repair but by 30% following the installation of a new machine. A million dollars are produced annually by the existing machine.

Incremental Analysis

The additional cost of the repair is $200,000, and the additional gain is the 20% increase in output value over three years, or $200,000 each year. The profit would be $200,000 less $200,000, which equals $0. The incremental advantage of investing in a new machine outweighs the added cost by $300,000 per year for ten years, or 30%, of the enhanced output value. $300,000 minus $500,000 equals a net profit of $-200,000. The incremental analysis shows that the repair option has a net benefit of $0 and a net cost of $200,000 for the replacement option. In this fictitious case, the repair option would be chosen since it offers a cost-effective solution with no additional net cost and boosts production efficiency.

Major Strengths of the ABC Method

ABC offers a more precise and practical method of tying indirect costs to particular goods or services. ABC offers a more exact distribution of costs based on the actual use of resources by detecting and assessing activities and their cost drivers. Additionally, ABC enables businesses like Coca-Cola to concentrate on resource-intensive tasks that must be optimized. Management may decide on process changes, cost-cutting tactics, and resource allocation by knowing the cost implications of particular operations.

Weaknesses of the ABC Method

Firstly, ABC implementation can be a difficult and time-consuming procedure. It necessitates thorough analysis, data gathering, and the identification of activities and the factors that influence their costs. Also, ABC frequently makes subjective judgments and guesses when calculating activity costs and choosing cost drivers. As a result, some subjectivity and possibly bias are introduced into the allocation process.

Are the Benefits Worth the Costs?

If Coca-Cola’s operations occur in a complex and varied environment with wide fluctuations in activities and resource consumption, ABC could give a more precise cost allocation and promote efficiency gains. However, the expenses of implementing ABC may exceed the advantages for smaller or less complicated firms with generally homogenous operations.

References

Bekimbetova, G. M., Erkinov, S. B., & Rakhimov, U. F. (2021). Culture and its influence on consumer behavior in marketing (in the “Coca-Cola” company). Deutsche Internationale Zeitschrift für zeitgenössische Wissenschaft, (7-2), 4-6.

Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2020). Financial accounting: tools for business decision-making. John Wiley & Sons.

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.

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The purpose of this journal is to evaluate the use of activity-based costing (ABC) and its impact.

Using your favorite search engine, choose a company which uses the ABC method for costing inventory. For instance, Toyota and Coca-Cola.

Assume you are the owner of the company that produces the product. You have been offered the option to outsource the product’s component parts instead of making them. What cost factors would need to be considered? Does it make more financial sense to outsource these parts? Explain with examples/assumptions.
Assume the product was being made on an old piece of machinery that is slowing down production and causing delayed completion times. You have been given the option to either buy a new replacement piece of machinery or have this current machine reworked/repaired. Which option would you choose? What factors would be considered? State all assumptions and be sure to describe how incremental analysis would be used to make this decision.
Provide background on the firm and how it utilizes the ABC method within its operations.
What are possible alternatives to this costing method? Provide 2–3 examples.
How does the ABC method provide a more accurate and realistic way of valuing indirect costs? What types of resources are needed to use this method? Hint: Think about time studies, activity drivers, activity pools, and activity bases. Does the engineering team or marketing need to be involved? Explain.
Finally, explain the major strengths and weaknesses of the ABC method. Are the benefits worth the costs? Explain.
Your response should be at least 2 pages in length. Adhere to APA Style when creating citations and references for this assignment. Include at least two sources.