Cost Information Report: Analyzing Manufacturing And Operating Costs

Direct Costs

Coca Cola

An American based corporation and manufacturer, producer and marketer of aerated drinks, carbonated drinks and syrups. The company is known by its core product Coca- Cola which came into existence in 1886 by pharmacist John Stith Pemberton, Atlanta. Currently the revenue of the Coca cola Company is US$ 35.410 Billion with the operating income of US$ 7.501 billion. With the team of the 61800 employees the company is performing consistently (Coca Cola, 2017).

Direct costs are the costs are the costs which can be directly attributable to a specific centre or object such as the variety of processes or product. Direct costs are may be different as the rate of the output changes in case of the labour, material, fuel or power. These costs are generally managed and controlled by the department manager. The fundamental rule explains there are certain costs which are of fixed nature in the short term period and in the long term the costs are of the variable nature (Business Dictonary, 2017). The direct costs that are attributable to the Coca Cola Company are transportation costs such as cans, lids of the bottle, packaging material, chemicals.

Indirect costs fall under the category of those costs which are not directly attributable to the activity, cost object or the event. Such costs are generally accumulate in the overhead cost pool and allocated to the various activities through the use of different allocation methods that build a bridge between the activity and the indirect cost (Accounting tools, 2017). For example the maintenance of the equipment, depreciation, rent, quality assurance, purchasing wages and production management are some of the examples of the manufacturing indirect costs (Correia and Saldanha-da-Gama, 2014)..

A fixed cost is an expense or cost which does not fluctuate due to increase in the number of goods or services produced or sold. The fixed costs those costs which cannot be avoided irrespective of the production or sales. They are usually used in the breakeven analysis and also plays a vital role in deciding the profitability of the business. For the Coca Cola company marketing budget would form the major fixed cost. Another additional expense could be and equipment purchased or taken on lease for the production of the new product. The real estate taxes and the insurance premiums are also part of the fixed costs.

A variable cost is the corporate expense which changes as the volume of the company’s production changes. There is a direct relationship between the variable costa and the volume of the production. As the production raises the variable costs rises and it falls as the production goes below the break even. For example sweeteners and packaging are the variable costs to Coca Cola Company since basic line of the company is to deliver the syrup to the bottlers. Generally the variable costs are directly attributable to the contribution margin of the company.

Indirect Costs

A semi-variable cost, which is also known as semi fixed cost is a composition of both the fixed and the variable cost (Gu, Simunic and Stein, 2017). These costs remain fixed for a particular level and become variable once the level is exceeded. In case of the zero production, a fixed cost is still incurred. The variable costs incur only when the functions of activity volume are performed. The marketing expenditure is the best example of the mixed cost. The nature of the marketing costs are such that they are not directly proportional to the sales and there are other factors which influence the units sold henceforth, the marketing costs are not categorised as a variable cost.

The relationship can be define by the variables such as Y= a+bx

Y= Total Cost

A= Total Fixed Cost

B=Variable cost per unit of the activity

X= Number of units of the activity

A stepped cost or a step cost which does not change suddenly with respect to the changes in the activity volume. Step costs remain constant for a given level of the activity, yet it fluctuates as the basic threshold is crossed. If the total cost increases with a small acceleration in activity, it must be referred to as the step variable cost (Li, 2018). On the other hand if the total cost is changing because of the major change in the activity it is referred to as the step fixed cost. In case of the Coca cola company the cost of the new production facility on which depreciation is attributable and the supervisors getting the salary to operate the same.

The major product of the company is the Coca Cola, and the calculation of the cost per unit for the 100ml is done below. The selling price shall be set at Rs. 6 apparently.

Calculation of the cost per unit				in million
				Per Unit	Total
				20000
Sales				1.7705	35410
Cost of goods sold				0.6628	13256
Gross Margin					22154
Variable operating expenses			0.4216	8432
Margin
Fixed operating expense					4295
Earnings before interest and tax				9427
Interest expense					841
Other Income					-1844
Earnings before income tax				6742
Income tax Expense					5560
Net Income					1182
Production Capacity				150
Actual Output				120
Production Cost Components			per unit	total
Raw Materials				420	63000
Direct Labour				87	13000
Variable Costs				2	8432
Total Variable				509	84432
Fixed Costs				36	4295
Total Manufacturing Costs				88727
Total cost per unit				4.43635	20000

The budgeted output has been calculated at the rate of 90% and at the rate of 110% to get a detailed analysis of the profit and the variances when the production decreases by 10% and when the production is at 110%.  The profits at the rate of 90% are reduced by 23% 

Output Increase/Decrease	100%		90%		110%
Sales Units	20000		18000		22000
Sales	35410		31869		38951
Variable Cost	13256		11930.4		14581.6
Contribution	22154		19938.6		24369.4
Fixed Cost	12727		12727		12727
Profit	9427		7211.6		11642.4

It is advised that the company shall sell at least 11489 units to maintain the breakeven point. If the company sold the bottles below this number than the company will suffer a loss. This is the minimum quantity the company is required to maintain (Nichols, Wahlen and Wieland, 2017).

Fixed Costs

The break even often abbreviated as in B/E in financial terms is a situation which is a no profits no loss solution. From the table below it can be described that the break even units of the company is 11489.57. This is the situation where the cost and revenue are treated equally. 

Breakeven Sales Unit
Contribution per unit	1.1077
Breakeven Sales units	Total fixed Cost
	Contribution per unit
	12727
	1.1077
Units	11489.57

Budgeted output is the output that is planned to be achieved during a particular point of time with the efficient utilisation of the production process (Accounting Coach, 2018).

Calculation of the Budgeted output
Contribution	132727
Fixed Cost	12727
Profit	120000
Desired Profit	132727
	1.1077
Sales	119822.154
Selling Price Per Unit	1.7705
Budgeted output	67677.01441

UNITS	REVENUE	FIXED	TOTAL		PROFIT
10000	17705	12727	6628	19355	-1650
15000	26557.5	12727	9942	22669	3888.5
20000	35410	12727	22154	34881	529
25000	44262.5	12727	16570	29297	14965.5
30000	53115	12727	0.6628	12727.66	40387.34

                                                                

The above graph explains that the number of the units sold by the company shall be more than 10000 otherwise the company will have to go below the breakeven point and the losses will be incurred immediately. The formula to calculate the budgeted output is to calculate the desired profit. After that the total sales are divided by the sales per unit. The profit starts after the units are more than 10000 (Shepherd, 2015). Margin of the safety on the other hand is a situation under under which there is a difference between the actual sales and the breakeven sales. In case of the Coca Cola company the Actual sales are 35147 (in million) and the breakeven sales are 11489 (in million), the difference being 23658.

Therefore it is advised to the company shall keep a margin of safety under a budget for the sustainable future period. It is a source of measure which will ultimately define the reduction in revenue to achieve the breakeven. Therefore the fixed costs shall be reduced in order to avoid the common cause of lower margin of safety.

References

Accounting Coach, (2018) What is the difference between a budget and a standard? [online] Available from https://www.accountingcoach.com/blog/budget-standard [Accessed 26th June 2018].

Accounting coach, (2016) What does stepped cost mean? [online] Available from https://www.accountingcoach.com/blog/what-does-stepped-cost-mean [Accessed 26th June 2018].

Accounting tools, (2017) Indirect costs [online] Available from https://www.accountingtools.com/articles/2017/5/10/indirect-costs [Accessed 26th June 2018].

Business Dictonary, (2014) Direct cost [online] Available from com/definition/direct-cost.html”>https://www.businessdictionary.com/definition/direct-cost.html [Accessed 26th June 2018].

Coca Cola, (2017) Annual Report 2017, [online] Available From https://www.coca-colacompany.com/company-reports [Accessed 27th June2018]

Correia, I. and Saldanha-da-Gama, F., (2014) The impact of fixed and variable costs in a multi-skill project scheduling problem: An empirical study. Computers & Industrial Engineering, 72, pp.230-238.

Gu, T., Simunic, D.A. and Stein, M.T., (2017) Fixed Costs, Audit Production, and Audit Markets: Theory and Evidence.

Li, W.S., (2018) Competitive Analysis: Game Theory. In Strategic Management Accounting (pp. 143-156). Singapore: Springer.

Nichols, D.C., Wahlen, J.M. and Wieland, M.M., (2017) Pricing and Mispricing of Accounting Fundamentals in the Time?Series and in the Cross Section. Contemporary Accounting Research, 34(3), pp.1378-1417.

Shepherd, R.W., (2015) Theory of cost and production functions.  United States: Princeton University Press.