Introduction . 3
Overview of Company. 5
Activity Based Costing 6
Standard Costing .. 9
Future Projects . 10
Summary and Conclusion 11
Reference .. 13
Introduction
It has always been the objective of the firm to encourage cost minimization as possible so as to enjoy the benefits of increased profitability which is the ultimate goal of many organizations. However, it is also prudent to note that these organizations would be required to make a choice of the most efficient costing methods to be adopted in the organizations business operations. Hence, the study shall undertake an in depth research so as to identify the various costing methods that would be adopted by an organization so as to enhance cost efficiency for the company (Berry, 2006). Consequently, the study has identified two major costing methods that could be adopted by an organization so as to enhance the effectiveness of costs. To begin with, the study shall take a keen scrutiny on activity based costing (ABC) so as to reveal the benefits that an organization would accrue from incorporating this costing method. Conversely, the study will also evaluate the factors that would be significant in influencing the company’s choice of activity based costing. It will also be the objective of the paper to find out the implications of implementing the activity based costing in the international business environment. The analysis of this costing method will not end without the study disclosing how the organization would configure the distribution of costs using the ABC method.
Secondly, the study will also perform an intense evaluation of standard costing and how it can be of benefit if adopted in the organization. Furthermore, the study will also be interested in finding out some of the determining factors in making a choice of adopting standard costing in an organization. Consequently, the study will also present the consequences of quantity, costs and variances while using the standard costing in an organization. This will provide a strong basis for managers to understand the outcomes that would prevail while implementing the standard costing in an organization. The study on standard costing will mark an end by outlining the implications of incorporating standard costing method in the global business environment. This will therefore, provide useful information on how standard costing can be utilized to sustain the process of globalization by creating efficiency in organizations (Lal, 2009). Lastly, the research will perform an informed analysis so as to determine what benefits organizations would accrue by evaluating their future projects based on the relevant costs involved. It has been common for a majority of companies to analyze future projects based on the cash flows and profitability. However, in this study we shall learn how the analysis of future projects would be done based on the significant costs as well as the benefits to be accrued by the company.
In order to be able to understand the issue of analyzing future projects using the vital costs, the study shall use a particular company to assess its anticipated projects. Accordingly, the study will determine how the company would apply the relevant projects costs in the decision making process of adopting future projects. The research design will take the form of a case study on a particular manufacturing company which would be used to develop the basis of the research. The company to be used in the case study will be Hewlett Packard (HP) which is a multinational firm that is involved in information technology and manufacture of computers. Hence, this will offer a good opportunity for the study to be performed in a giant manufacturing firm thereby assuring that the research would be offered with enough information so as to achieve its objectives. The study intends to acquire both primary data and secondary data so as to provide enough insights for the purpose of developing a comprehensive analysis of the company. Hence, the data collection method to be used will be the interview method as well as reading from secondary sources such as reports, books and journals (Creswell, 2003). The interview method will form the basis of collecting primary data which is very useful in the analysis of the company. The data collected by the research will be undertaken through a series of qualitative analysis so as to accrue the necessary inferences which would help to solve the research problem.
Overview of the Company
Hewlett Packard is a multinational manufacturing which has a diverse product portfolio which ranges from personal computing, printing and imaging as well as offering technology related solutions to its clients. The company has developed seven divisions to serve its expansive product portfolio, these divisions include; HP services, enterprise storage and servers, software, the imaging and printing group, the personal systems group, corporate investments and HP financial services. The technology solutions segment of the company provides software, storage, servers and IT services for organizations and medium market business clients to assist them in controlling the information technology situation. The company is a multinational company which conducts business in over 170 countries across the world. However, United States is the major geographical market for HP Company which accounts for a larger percentage of its total revenue. However, the company’s headquarter is located in Palo Alto, California. The company is the world’s leading manufacturer of personal computers and this could be attributed to the feature of its diverse product portfolio which ensures that it provides more products and services to the customers. The company receives its revenues from the seven divisions which are formulated in its organizational structure. Therefore, this means that the company receives huge amounts of revenue from several income streams.
In 2012, the company recorded the largest sales revenues attributed from unit sales of products all over the world. For this reason, the company leads the information technology industry in terms of market share. This is consequently attributed to its expansive product range which increases its sales revenues due to more products and services. The company attained its leading market position after displacing the former market leader, Dell in 2006 and it was able to sustain its market leadership henceforth. However, this leadership in the market share has also been facilitated by the various acquisitions and mergers that the company has been able to undertake. For instance, the company made an acquisition of Voodoo personal computers and also merged with the IT giant Compaq as a way of expanding its productivity and performance in the industry. The IT industry is a very competitive industry that is made up of active and innovative players who continue to offer extreme competition to the company with regards to quality, technology, price, brand, range of products, distribution and reputation. The company experiences stiff competition in all the seven divisions of its operation from other organizations in the sector. Some of the major competitors in the market includes; Dell, Apple, Toshiba Corporation, Acer and Lenovo Group.
Activity Based Costing (ABC)
Activity based costing method involves monitoring and costing of business activities that entails their consumption of resources and costing of the ultimate outputs. The funds are allocated to activities whereas the activities are assigned to cost items with regards to the consumption projections. The development of this costing method was meant to serve the manufacturing sector where development in technology and improvement in productivity had decreased the fraction of material costs and direct labor. However, this resulted to an increase in the fraction of overhead or indirect costs (Anderson & Young, 2001). This situation of increased overhead costs rendered the traditional costing method inaccurate due to its attribute of assigning costs with regards to a particular volume measure. Hence, the use of the traditional costing method in such a condition of distorted costs would also lead to improper decision making by an organization. Hence, this method can be adopted by Hewlett Packard due to the fact that it is a manufacturing company as well as a service provider. The company would therefore accrue some benefits following the use of the ABC method of costing in its business operations. To begin with, the company would enjoy the benefit of enhanced accuracy due to the fact that the ABC method assigns the overhead costs hence making it certain that the cost estimates are correct.
Secondly, HP would be able to acquire an improved and more inclusive comprehension of overheads as well as the causes that results to their occurrence. It is believed that the traditional costing method could not be able to allocate overheads in the organizational activities; however, the ABC method is efficient in identifying these overheads and their resulting costs. Thirdly, the company would also benefit from the ABC method by being able to identify costly activities or those activities that do not add value to the outputs. This would therefore, be significant in ensuring that the company adopts cost efficiency in all its projects and future prospects which would consequently accrue more profitability to this multinational. Hence, the managers would have an informed judgment of making the choice of eliminating or reducing those activities. Lastly, HP would also benefit from using the ABC method due to the fact that this method also sustains other management policies which are present in the company. Some of these management practices which would be supported by ABC include; performance management, continuous improvements and scorecards (Plowman, 2001). Another important factor that influenced the choice of this method of costing is due to the fact that it reduces product costs distortions which might arise after the assignment of indirect costs. The implementation of the ABC method in the international business environment would present various ramifications to business. To begin with, the implementation of this costing method would require the participation of managers from the non accounting departments such as marketing and production. This is due to the fact that this method of costing traces the activities carried out and then assigns some costs to these activities and hence this would need close cooperation between managers from several departments in a company.
Therefore, in the global business platform, the ABC method would be effective in enhancing coordination and communication amongst the various departments thus promoting teamwork which would consequently result to improved organizational performance. The improved cooperation and coordination in the company would also enhance good relations amongst the management of the company with the employees, thereby facilitating improved job satisfaction amongst employees which would consequently accrue more performance for the company. It is also believed that the implementation of ABC in the global business environment would encourage management practices that are more process oriented as compared to those that are function oriented. In the global business arena this would be characterized by organizations taking up horizontal management style as compared to the common vertical management design. The structure of the distribution of costs for HP when using the ABC method would be a cost hierarchy which is quite common in manufacturing companies. Foremost, the cost structure would contain unit level costs which represent those costs that change with the number of units produced. The cost structure for the company would also include batch level costs which are costs that change with the number of batches being run (Grieco & Pilachowski, 1995). Consequently, product level costs would represent the direct or fixed cost of a product. Lastly, the structure of cost distribution would also be made up of facility level costs which are usually fixed and direct costs of the premises of business. This recommended structure would be efficient in tracing and allocating all costs accrued in the company’s operations hence ensuring that the company achieves the desired cost efficiency.
Standard Costs
The standard costs method involves the process of estimating cost targets which is then followed by the process of evaluating the performance. In case of an arising difference in the target costs and the actual costs, then an investigation is carried out so as to ascertain the cause of the discrepancy (Oliver & Amacom, 2000). As a result the use of Standard costs in HP would be beneficial through a number of ways that are facilitated by this costing method. To begin with, the company would accrue the benefit of improved and efficient decision making skills to the managers. For instance, standard costs give an elaborate way of how to produce the company’s products as well as how to price the product in the market. Thus, this costing method would equip the company managers with the capability of formulating informed decisions following the evaluation of cost targets and performance. Secondly, the company would also earn the benefit of monitoring manufacturing which would be supported by standard costs. For instance, the presence of a large variance in the standard costs would be a possible sign that there would be something wrong in the process. Therefore, standard costs would assist the management of Hewlett Packard in monitoring the manufacturing processes. Lastly, standard costs would benefit the information technology company by offering an opportunity for performance measurement. The performance of managers and employees would be effectively determined by looking at the deviations that prevail between the actual costs and the standard costs. Performance measurement is believed to be a vital component of the company’s human resource management since the company aims at maintaining a high quality and competent workforce who would facilitate the achievement of the organizational goals.
Hence, standard costing would play a significant role in enhancing the process of performance management which is the responsibility of the company managers. One of the influencing factors that led to the adoption of the standard costs method is the fact that senior managers would use these standards in performance management, decision making and pricing functions. Another influencing factor is the fact that the standard costs represent the opportunity cost of production hence it offers the company with a better way of determining the opportunity cost. The ramification of costs in the standard costs method is the fact that target costing is the main idea behind standard costs. The target cost is determined by the prevailing market conditions which set the selling price of products as well as the organization which has the responsibility of estimating the profit margin. The overhead variances that would occur in the company are caused by the fact that the activity base estimate differs from the actual activity base (Lightner, 1970). It is also prudent to note that the amount spend on fixed indirect cost is different from the standard s. The use of standard costing in the international business environment is thought to have various implications on business operations. Foremost, standard costing would help to enhance cost control angst international firms. The standard costing usually tracks stock using budgeted amounts and hence the difference between the actual amount and the budgeted amount offers some insights about cost control. It is also important to note that standard costing in the global business would result in a reduced short term fluctuation of direct costs.
Future Projects
If the company would analyze its future projects in terms of costs rather than the incomes, then the company would accrue some given benefits. The analysis of future projects based on the costs would include the use of cost benefit analysis (CBA) which is a method that looks at the benefits and costs for effective analysis of projects. To begin with, the company acquires the benefit of making a choice of the most profitable project depending on the level of the costs involved for the given project (Sanwal, 2007). Analysis based on costs is also important to the company since it provides the managers with the opportunity costs of foregoing given projects thus providing a framework for the expected revenues from such projects. It is also beneficial that an analysis made for future products on the basis of the costs since prices are subject to fluctuations and hence analysis based on revenue flows would not be efficient enough in selecting the best project. One of the future plans of the company is to make some expansion so as to improve its productivity as well as performance. However, in the expansion plan the company would apply the element of cost by undertaking an expansion process that is cost responsive to ensure that such plans would succeed as planned by the business. The expansion process for the company would entail an acquisition or merger of the company with a potential company that would be effective in improving the company’s operations as well as the market share so as to ensure an increased performance. However, the company has also performed some downsizing so as to improve profitability and also reduce the costs of doing business. Downsizing is guided by the fact that the firm seeks to cut on costs by reducing the size of the management.
Summary and Conclusions
The study was interested in finding out the various costing methods adopted by organizations in their business operations. However, the study identified two costing methods which would be undertaken through a rigorous research process so as to find out the benefits of these costing methods to companies as well as the factors which influence the choice of that particular costing method. Hence, in this study we look at the activity based costing method and the standard costs method. The research utilizes a case study methodology by using Hewlett Packard as the company to be studied on the costing methods. HP is a multinational company that operates in the information technology sector and the company is the leading manufacturer of PC and other IT products. The company has over 170 subsidiaries all over the world and it also faces extreme competition from rivals such as; Dell, Apple and Lenovo. Data for the study was collected through interview and reading from secondary sources. The ABC method is based on the fact that costs should be allocated to all the activities of the business.
This method of costing is regarded as a proper method since its costs are based on the activities performed in the organization. This method also identifies the overhead costs involved in a company thus ensuring that costs for the company are of the highest accuracy. This costing would offer various ramifications if used in the international business environment. These would include; an increased cooperation and communication amongst managers in the company so as to identify the various activities that would be classified as overheads. The second method that was studied is the standard costs method which works on the basis of targets and measurements of these targets. Standard costing has been found to be accruing various benefits to the company such as promoting decision making as well as being a measure of the opportunity to assists the management in projects selection. Furthermore, standard costing is also associated with the benefit of enhancing employee performance management in the company. However, the study also went further so as to find out the implications of using every costing method in the global business environment. As a result, the study reveals some of these implications which are attributed to these costing methods. Finally, the study has also revealed that a company would benefit from analyzing future projects with regards to the costs other than the common revenue used. The company has various future projects which it intends to analyze using costs associated so as to enjoy the benefits of costing.
References
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