The current report aims to address the different issues related to product costing, corporate social responsibility and sustainability reporting in the context of an Australian entity. Therefore, Colgate and Palmolive Australia has been chosen as the organisation, which is a global firm involved in the production, distribution and provision of healthcare, household and personal care products. The first segment of the report would lay emphasis on providing a brief description of the organisation and its value chain analysis. The second portion of the paper would explain the design of an activity-based costing overhead system for the selected products of the organisation. Finally, the report would shed light on evaluating the corporate social responsibility and sustainability reporting in the context of Colgate and Palmolive Australia.
Colgate-Palmolive Pty Limited (Colgate-Palmolive) is regarded as one of the major Australian companies having business operation in the industry of consumer goods. The company was established in the year of 1806 and it is headquartered at 300 Park Avenue New York, NY, United States. It needs to be mentioned that the main business operations of Colgate-Palmolive can be found in manufacturing, marketing and distribution of personal care as well as household cleaning products. Colgate-Palmolive offers the customers of Australia with major oral care products including toothbrushes, toothpastes, mouthwashes, dental floss and different kid’s products. Apart from this, major involvement of the company can be observed in providing contract manufacturing services. Colgate-Palmolive is based in Sydney, Australia and it is a major subsidiary of Colgate-Palmolive Company (colgatepalmolive.com 2018).
It can be seen from the above that Colgate-Palmolive operates in the consumer goods industry of Australia and it is regarded as a major industry in Australia as it largely contributes towards the development of Australian economy. However, it needs to be mentioned that the Australian consumer goods industry has been struggling over the years due to weak economic growth and volatile customer sentiment. In the recent year, this industry has been able in generating $169 billion of revenue. From the period from 2013 to 2016, this industry has a growth rate of 0.7% that is very low. More than 75,500 businesses can be seen in this industry along with more than 705,302 of employees (Ibisworld.com.au 2018).
It needs to be mentioned that Colgate-Palmolive earns their revenues from the selling of two types of products; they are oral care products and home and fabric care products. The presence of four major segments or brands can be seen in the business operations of Colgate-Palmolive; they are Colgate, Palmolive Naturals, Hill’s and Ajax. These are the main streams of revenue for Colgate-Palmolive (Colgate.com.au 2018).
For this report, the oral care product category of Colgate-Palmolive is taken into consideration. The oral care products of Colgate-Palmolive are a specific type of consumer goods that take care of the oral problems of their customers. Colgate-Palmolive provides their customers with some specific types of products like toothpastes, toothbrushes, mouthwashes, kid’s products, specialty products and tooth powders. Among all these products, toothpastes and mouthwashes are taken into consideration for further evaluation. Some of the popular Colgate brands of Colgate-Palmolive are Colgate Strong Teeth, Colgate MaxFresh, Colgate Total, Colgate Visible White and others.
Figure 1: Value Chain of Toothpastes and Mouthwashes
(Source: Gereffi & Fernandez-Stark 2016)
Value Chain Analysis is considered as a major process of the business organisations for the identification of the primary as well as support activities that help in adding value to its final products; and then involves in the analysis of these activities for the reduction costs. There is not any exception of this fact in case of Colgate-Palmolive as the company involves all these processes for the creation of value by delivering the end products that are toothpastes and mouthwashes.
From the above figure, it can be observed that the value chain model of Colgate-Palmolive for the products like toothpastes and mouthwashes has five specific segments; they are inbound logistics, operations, outbound logistics, marketing and sales and services. All these segments can be divided into four different activities like Upstream activities, Operation Stage, Downstream activities and Administration activities. They are discussed below:
Upstream Activities: This is regarded as a major stage in Colgate-Palmolive for the production of toothpastes and mouthwashes. The major activities under this are research related to the development of the product, design development and the supply of required raw materials for the production of these two products. The major expenses under this activity are research and development costs, purchase of raw materials cost and transpiration cost of the raw materials to the main factory of Colgate-Palmolive in Australia (Mudambi & Puck 2016).
Operation Stage: In the value chain of Colgate-Palmolive, this stage is considered as another major stage as the process of product development takes place here. It needs to be mentioned that some of the major expenses under this stage are wages to the workers, electricity cost, fuel costs, maintenance cost for machinery and other costs. Colgate-Palmolive prices their products like toothpastes and mouthwashes by taking into consideration all of these direct as well as indirect costs (Gereffi & Fernandez-Stark 2016).
Downstream Activities: Downstream activities in the value chain of Colgate-Palmolive include the outbound logistics and it is considered as the process to deliver the finished good to the end customers. The major expenses under this activity are transpiration cost for the products to deliver to the customers, expenses related to packaging and labelling and others.
Administration Activities: This activity is considered as the last activity in the value chain of Colgate-Palmolive as it includes the segments like marketing, sales and services. Some of the major expenses in this segment of Colgate-Palmolive’s value chain are fees of the management, fees of the employees, different types of costs related to the head office like electricity cost and many others. (Mudambi & Puck 2016).
It can be seen from the above discussion that all the four types of activities are major activities for the creation of value for the customers by delivering quality products and services These activities cover the activities starting from research and development, bringing the raw materials to delivery of the finished products to the end customers.
ABC costing is considered as a major management accounting tool that is used for tracing the overhead costs to activities so that they can be assigned to the cost objects. Specifically, ABC costing can be used as a tool for allocating the indirect as well as overhead costs to the products or departments that generate these in the production process. The main focus of ABC costing is on the identification of the activities that are uses for processing the jobs for the development of cost pool (Öker & Özyapici 2013).
Certain differences can be seen between ABC costing and traditional overhead costing system. ABC costing is considered as more accurate as it takes into account all the relevant factors for assessing the cost of products. For this reason, it takes time and is complicated. However, traditional overhead costing is an easier process than ABC costing for the determination of cost of production as it solely relies on the assessment of average overhead rates. For this reason, it fails to provide the accurate result.
Under ABC costing, the determination of the cost of production is done based on the feedback from the customers and the pocket range. However, under traditional overhead costing, the determination of the cost of production is done after the products have been produced. These are the major differences between ABC costing and traditional overhead costing (Dale & Plunkett 2017).
The advantages of ABC costing are shown below:
The major disadvantages of ABC costing are discussed below:
It has been evaluated that the focus of the organisation is on oral care products and the two particular products chosen include toothpaste and breathe refreshing gel. For designing the activity-based costing system of these products, the following steps are taken into consideration:
Identification of costly activities needed to finish products:
Activity is a procedure consuming overhead resources (Langfield-Smith et al. 2017). The aim is to gain an insight of the different activities needed to manufacture the products of the organisation. This step needs meetings with the various personnel involved in Colgate and Palmolive. For the organisation there might be numerous activities need to manufacture the two products; however, the challenging issue is to minimise the activities having greatest effect on overhead costs. For toothpaste and breathe refreshing gel, the activities having the largest effect on overhead costs include the following:
This step needs that the overhead costs related to each activity would be allocated to the activity, which implies the formation of cost pool for each activity (Cooper 2017). For Colgate and Palmolive Australia, the cost pool for the activity related to purchase of materials would include item costs like purchasing personnel salary, rent for office space of the purchasing department and depreciation pertaining to purchase of office equipment. After careful review of all overhead costs, the following allocations are made:
However, it is noteworthy to mention that it is not direct labour cost. This denotes the overhead costs related to the assembly of products like supplies and the factory area utilised for assembly. After this, the next step involves the base of allocation driving the cost of each activity.
A cost driver could be defined as the action driving the costs related to each activity (Eldenburg et al. 2016). This step involves collection of information by interviewing the key personnel in various departments of Colgate and Palmolive. These departments primarily include production, purchasing, accounting and quality control. After careful assessment of the processes needed for each activity, the following cost drivers are identified in the context of the organisation:
It is important to note that the above information takes into consideration a projection of the activity level for each cost drive, which is required for computing a predetermined rate for each activity in the following step.
This is conducted by dividing the projected overhead costs identified in the second step by the projected level of activity of cost driver identified in the third step. The following table would provide the computation of overhead rate based on the information provided in the above three steps.
The overhead costs are assigned to products by multiplying the cost driver activity that the products use with the pre-determined overhead rate for each activity. Applied overhead is often utilised for describing this process (Kotas 2014). It is assumed that the cost driver activity occurs at Colgate and Palmolive for toothpaste and breathes refreshing gel. It is noteworthy to mention that the overall activity levels presented here are identical to the projected activity levels in the previous step.
The above figure mainly helps in depicting the overhead allocation through the cost driver activity presented and the overhead rates computed in the above table. The total assigned overhead costs amount to $8,000,000. This is the identical cost figure utilised for department and plant wide methods of allocation. With the help of activity-based costing, a refined method of assigning identical overhead costs to products could be provided (Lavia López & Hiebl 2014). Based on the above discussion, the overhead costs are assigned to the two chosen products of the organisation, which are illustrated as follows:
As discussed earlier, in order to compute product cost, three different components are needed that include direct materials, direct labour and manufacturing overhead. It is assumed that direct materials cost $1,000 for toothpaste and $1,300 for breathe refreshing gel. On the other hand, direct labour cost $600 and $750 for toothpaste and breathe refreshing gel respectively. Such information along with the overhead cost per unit would be computed to arrive at the total product cost per unit.
According to the previous allocation bases, the total overheads for toothpaste and breathe refreshing gel were $1,280 and $1,600 based on direct labour hours, while the selling prices are assumed as $3,200 and $4,500 respectively. Therefore, profit based on plant wide costing and ABC costing is presented as follows:
It is assumed that 80% of direct labour hours are allocated to toothpaste and 20% to breathe refreshing gel. The following table would reveal the detailed analysis of overhead allocation for the two products of Colgate and Palmolive:
While operating in the Australian market, it is needed for the management of Colgate-Palmolive to take into consideration the major social as well as environmental issues; and the company has mentioned about all of their initiatives towards these issues in their 2017 Sustainability Report. As per the report, the major social and environmental issues that Colgate-Palmolive has taken into consideration are oral health of the Australians, issue related to responsible sourcing and human rights, product stewardship, suitable packaging, issue of climate change, deforestation issue and water steward ship (Colgatepalmolive.com 2018).
In this context, the contents of Deloitte’s one article named “Sustainability for Consumer Business Companies: A Story of Growth” can be presented. This article states that the consumer goods companies have firmly adopted the agenda for the recognition of different sustainability related issues of their business. Through this article, Deloitte has mentioned the fact that the companies can find their products less relevant to the customer sentiment as well as less affordable in case they neglect their business issue related to social and environmental issues. For this reason, all the consumer goods companies must respond to all the environmental, social and sustainability issues related to their business (Deloitte.com 2018).
The three social and three environmental indicators of Colgate and Palmolive for the past four years are listed as follows in the form of a table and a figure:
As observed from the first chart, Colgate and Palmolive has been encouraging all its staffs to participate in heath and well being programs for educating their staffs on nutrition, weight loss topics along with keeping healthy body and mind. Moreover, it has increased its percentage of new products while updating the existing ones for the welfare of its customers (Schneider 2015). Finally, it has made significant charitable contributions over the years in both cash and in-kind for the poor and economically backward classes in different nations and the amount is seen to increase every year. Therefore, it has performed adequately in its social responsibility aspects. Hence, it is recommended to maintain these achievements in the future years as well.
In terms of greenhouse gas emissions, Colgate and Palmolive has performed adequately well, since it has managed to minimise its greenhouse gas emissions over the years in order to cut down the adverse effects on the environment. In order to deal with this issue, it has increased its usage of recycled content over the years for maintain environmental sustainability (Crutzen et al. 2017). However, water usage intensity has increased slightly in 2017, which needs to be minimised for preserving this crucial resource.
It is clearly evident from the above discussion that Colgate and Palmolive Australia has made significant contributions for ensuring the welfare of the society by providing education to employees on various topics while making significant improvements in its products. Moreover, the rising amount of charitable contributions is clearly evidence of the fact that the organisation is supporting the global economy, especially, the economically backward classes, for assisting them to make progress in their lives. However, in terms of environmental sustainability, water conservation should be provided importance for maintaining effective allocation of resources.
The oral care products that the industry manufactures often consist of a variety of chemicals, which should be reviewed from time to time. The governments might come up with new quality standards and if any chemical is deemed to be harmful to the people, it might lead to social issues. Moreover, the governments are coming up with stricter policies regarding the disclosures of greenhouse gas emissions and conservation of water, which might pose a severe environmental threat to the industry.
Conclusion:
From the above discussion, it is inherent that Colgate-Palmolive operates in the consumer goods industry of Australia and it is regarded as a major industry in Australia as it largely contributes towards the development of Australian economy. The value chain activities of Colgate and Palmolive cover the activities starting from research and development, bringing the raw materials to delivery of the finished products to the end customers. Moreover, it has been evaluated that the organisation would be highly beneficial, if it decides to adopt activity-based costing for allocating overhead costs to products. Finally, it has been found out that the organisation is performing well in terms of social disclosures; however, conservation of water is the only environmental issue that it has encountered in the recent years.
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