Introduction to Coca-Cola Company
Coca Cola Company has recognition as one of the leading multi-national marketers, producers and distributors of non-alcoholic beverages, refreshments, concentrates, and syrups in the United States. Coca Cola Company is recognized for its strong name and brand portfolio which has enabled the company to maintain its position in the listing of the top 100 brands since 2007. Currently, Coca Cola Company enjoys a massive growth rate, boosted by acquisitions and mergers with other firms in the beverage industry. The company has a strong linkage between its strategic goals and mission statement and vision, which has enabled the multinational company to acquire a competitive advantage over its competitor companies.
Budgeting system
The budgeting process is an important element in Coca Cola Company. As much as the process involves a complicated endeavor, Coca Cola uses the Zero-Base Budgeting technique, top down and bottom up methods for budgeting. According to the information obtained from an interview conducted with the budgetary committee, the budgetary committee prepares the company’s budget by collecting, identifying, communicating and summarizing nonfinancial and financial information collected from the divisions of the company. The company exercises central system of decision making and hence, all the information from the divisions and segments must be authorized by the budgetary committee as well as the senior directors in the headquarters.
According to Banerjee (2006), a company should only approve those expenses that contribute and support the objectives of the organization. In Coca Cola Company, before the expenses of the company and those of the divisions are approved, the budgetary committee assesses and analyzes the operations and approves those that contribute to the company’s corporate strategy. Activities approved by the budgetary committee are then passed to the managers for further evaluation. At this stage, the accountants usually estimate the effect of the proposed budget on the company’s value as well as the cash flow.
After evaluation and gathering, Coca Cola Company initiates the Zero based budgeting process which involves the preparation of budgets of each business division. This method assumes that the budget for the next period is zero and expenditure must be justified in order to be approved by the budgetary committee. The zero based budget is instrumental in analyzing the discretional costs and attempts to eliminate slacks and inefficiency in the current operations. The zero based budgeting is implemented in all the divisions of Coca Cola Company with an aim of increasing efficiency. In other instances, depending on the division’s policy, a top down or bottom approach is implemented. According to information gathered from the questionnaires and interviews with the budgetary committee in one of the segments in North America, bottom up budget approach is commonly used by the company.
The budgetary system in Coca Cola is useful for evaluation since it defines the objectives and goals of the organization. The budgetary system further helps disclose the extent by which actual results have fallen short or exceeded the budget. In addition, evaluation in Coca Cola Company ensures that the resources in the company are efficiently used as well as providing a basis for revising the current budget in case it does not provide the expected results. The managers are further concerned by the budgetary system since it provides information on how the segments are being coordinated without physically being there. All the divisions usually provide quarterly results and compare them with the budgetary figures then they send the results to the headquarters of the company.
According to information obtained from the interview with employees and annual report of Coca Cola Company, different divisions use different budgetary systems. For instance, the division in North America uses flexible budgetary system since the segments in North America were recently acquired. Banerjee (2006) argues that flexible budgetary system is instrumental in comparing monthly results and since the division is new, it is important to measure the monthly performance in order to evaluate whether the division is making a profit. Divisions in Africa use top down budgeting process where the determination of the operation to be included in the budget is determined by the senior management. In addition, the senior management approves the operations proposed, and the major responsibility of implementation falls on the budgetary committee of the divisions. This approach embraced by Coca Cola Company is very effective and ensures that the company achieves it objectives.
Management Accounting System
Coca Cola uses different types of management accounting systems. However, the most commonly used management accounting system is the balanced scorecard. Coca Cola’s balanced scorecard contains information from research and development. This information is collected in the field through the analysis of the industry as well as the practices of other firms in the same industry. Essentially, the whole concept of the balanced scorecard involves benchmarking. Benchmarking involves the analysis of the practices implemented by other firms and adapting the best. Therefore, according to information obtained from an interview, Coca Cola developed the drink Novida after analyzing the market and found out that their main competitor Pepsi had implemented a new technology that could have captured a wide coverage of the market.
Coca Cola uses the internet, newspapers, journals, periodicals and exhibitions as means of collecting information required for planning. This information is later on stored as informative reports in the company’s archives. The use of the informative report is to ensure that the information is distinguished from the rest while enabling easy access. Coca Cola is known to have the best communication strategy with its divisions and segments and hence the informative reports are easily disbursed to these units at ease. The information is then prepared into a balanced scorecard which serves to provide the company with feedback around the external outcome and internal business processes. Through the information collected from the meetings of the company, the balanced scorecard has served to improve the strategic performance as well as transforming the strategic planning into practice.
Information in Coca Cola Company is usually disseminated throughout the organization by first sending the information to the heads of departments. The media used in such cases is the emails, minutes and informative reports stored in the company’s database. After the heads of the relevant department’s access the information passed to them, they then pass on the information to the subordinates through meetings, memos and emails. The importance of passing the information to the heads of departments as well as subordinates is to ensure that they stay focused on the corporate strategy of the company.
Costing process
Coca Cola Company uses batch costing, job-order costing and process costing. In practice, batch costing involves a method that is employed when the production consists of repetitive processes and the exact number of items to be produced in one batch. The production of soda and similar drinks simultaneously forces the company to employ this method of costing which is very effective on the side of the company. In batch costing, the total cost incurred in the production of sodas and energy drinks is distributed on the number of sodas or drinks manufactured when the batch is completed. Coca Cola Company uses job order costing when it feels that there is a need for tracking costs accruing to the company on individual product basis.
The process costing is usually applied when the operations of a company involve continuous production of homogenous units. Therefore, the output happens to be a sequence of operations. This costing system has been extensively used in Coca Cola Company since the production of drinks and sodas originate from the packaging of bottles and mixing of the components required. In this costing system, Coca Cola allows cost to be accumulated on the basis of process, while the cost per unit is obtained by dividing the sum of process costs by the number of bottles and any material added at each stage production. After determining the cost of each bottle and raw materials used in each production process, Coca Cola then uses the First-in, First out (FIFO) and Last in, First out (LIFO) methods in the process costing depending on the stock available for raw materials.
Capital decision making
According to the information obtained from the minutes of meetings held, interviews with the executive officers and questionnaires, it is evident that the capital decision making process lies in the hands of the senior executive officers. The idea of investing in a project or undertaking a certain investment originates from the research and development department. The department forwards the ideas to the board which holds a meeting to decide on whether or not to undertake the investments. If the investment ideas are good, the board then delegates the accounting department to evaluate the profitability of the projects.
Coca Cola uses a variety of methods of evaluating the profitability of projects and investments. When the board delegates the accounting department to evaluate the profitability of the projects, the various methods they employ are; Net Present Value (NPV) method, Internal Rate of Return (IRR) method, Modified Internal Rate of Return (MIRR), Payback method and Accounting Rate of Return (ARR). The net present value discounts the expected cash flows and compares the value with the initial capital outlay. The internal rate of return and modified internal rate of return calculates the rate of return expected from a project and compares with the cost of capital. The payback method simply measures the number of years required for a project to recoup its initial cash outlay.
Coca cola mostly uses the NPV, IRR and Payback methods when determining the projects to appraise. The company accepts projects that have NPV equal to zero or above while rejecting projects with negative present value. As for the IRR, the company accepts projects with IRR greater than the cost of capital and in case the projects are many and only one of the projects is to be implemented, projects with high IRR are accepted. Also, the company accepts projects that have lower paybacks since it implies that the project will take less time to recoup the initial investment. In addition, the company uses payback period method while measuring the performance of a project. A project with higher cash flows in the initial years indicates high profitability.
Capital acquisition and structure
According to the information acquired in the annual report, it is evident that Coca Cola Company acquires most of its funding from the retained earnings. From the minutes of the company, the company uses the pecking order theory which states that while sourcing out for funds, it is easier to start with the retained earnings which is the cheapest source of funding followed by debt financing and lastly the funding from equity. In addition, the company has high earning power hence most of the funding required is usually obtained from the retained earnings.
Coca Cola has a debt ratio of 30 percent, which implies that Coca Cola has a medium gearing ratio. This capital structure is optimal, and the company cannot fall into liquidation problems. The company uses debt financing when the tax advantage emanating from the borrowing is higher than the interest payment. The current capital structure of Coca Cola is optimal, and this shows that the company can undertake new projects without any difficulties.
Methodology
This project used the inductive approach while obtaining data needed. The research strategies used in this project involved a combination of both secondary and primary data. The primary research entailed interviews and questionnaires given to the employees of Coca Cola Company using the survey method. Secondary data for Coca Cola Company were available, and in this project, the data was retrieved from Coca Cola’s notes, reports, minutes from meetings and emails. In addition, organizational structure theory, benchmarking technique, costing methods and capital structure theories were used to evaluate the managerial performance of Coca Cola Company.
Data Collection
Interview with the budgetary committee and personnel was carried out in order to determine whether how non financial and financial information regarding the company’s operations is carried out. The zero based budgeting system, top down, and bottom down techniques were also evaluated in order to analyze the effectiveness of the budgeting system in the company. Questionnaires were also distributed in the budgeting department so as to provide the information required regarding the techniques used. Budgetary estimates and the actual budget figures were obtained from the annual report and the quarterly reports produced by the company.
Structured questionnaires were distributed to the employees in the production department in order to get first hand information on how costing is conducted. The information regarding costing methods such as process and batch costing were obtained from the company’s departmental reports and executive reports. The costing techniques were analyzed in order to evaluate the effectiveness.
Interviews with the senior executive officers were conducted with regard to capital decisions and capital acquisitions. The theories used by the company such as pecking order were analyzed in order to evaluate their effectiveness. Executive reports, emails and minutes from meetings were used to analyze the process of decision making process in Coca Cola Company. Benchmarking technique was used to evaluate the effectiveness of all the systems in the company.
Sample Size
The population that was used in the project consisted of the managers and employees of Coca Cola Company, and the sample included a group of employees still working in one of the segments in North America.
Conclusion
This project has endeavored to analyze the various systems used in Coca Cola Company. It is evident that the company uses prudent management and financial strategies in order to gain competitive advantage over its competitors. Through the information obtained from the use of benchmarking technique, costing methods, capital structure theories and organizational structure theories, it is clear that Coca Cola systems are effective, and they do not have any slacks or inefficiencies. In addition, the company budgeting systems in the divisions has been instrumental since it has lead to the increase in the ability of management and disbursement of funding required for operations. The management accounting system has enabled the company to develop new products as well as staying focused on the goal of the company. The capital decision and capital structure of the company are well developed, and the company enjoys easy management through the application of these methods. Over the years, the Coca Cola Company has used the analyzed techniques. Interestingly, these techniques and strategies have turned out to be a success. Therefore, it is important that companies use effective systems.
References
Banerjee, B. (2006). Cost Accounting Theory And Practice 12Th Ed. New Delhi: PHI Learning Pvt. Ltd.
Coca Cola Company. (2011). UNITED STATES SECURITIES AND EXCHANGE COMMISSION- FORM 10-K. Coca Cola Company Annual Report, 1-166.
Debarshi, B. ( 2011). Management Accounting. Delhi: Pearson Education India.
Drury, C. ( 2007). Management and Cost Accounting (7, illustrated ed.). London: Cengage Learning EMEA.
Ehrhardt, M. C., & Brigham, E. F. (2010). Financial Management Theory and Practice (13 ed.). London: Cengage Learning.
Houston, J. F., & Brigham, E. F. (2009). Fundamentals of Financial Management (12 ed.). London: Cengage Learning.
Mode of Obtaining Information
All the managers feel that the zero based budgeting system is effective.
Employees feel that the bottom up budgeting system is effective since it seeks their opinion.
Managers and employees in the division located in North America feel that top down and bottom up approach is effective.
Questionnaires
Budgeting and production departments
50 percent of the employees agree that the budgeting system and the costing methods implemented by Coca Cola Company are effective.
Interview
Senior directors
The directors felt that the capital decision criteria and capital acquisition methods implemented are effective though some felt that the company should embrace other methods such as ARR while determining projects to appraise.
Annual report
Accounting
The information showed that the company does not use much of debt financing and instead it uses more its retained earnings. The debt ratio for the company was observed to be 30 percent.
Emails, notes and minutes from meetings held.
Organization as a whole
80 percent of the employees and managers were contented with the systems implemented by the company. 10 percent were indifferent between choosing deciding whether the systems were effective. The rest felt that the company can do better to increase its performance.
