Analysis Of Firms Implementation Experiences With Activity Based Costing

Analysis Of Firms Implementation Experiences With Activity Based Costing Acknowledgment

In the name of Allah, the Most Gracious and the Most merciful. All praises to Allah and His blessing for the completion of a thesis. I thank God for all the opportunities, trails and strength that have been showered on me to finish writing the thesis.

Analysis Of Firms Implementation Experiences With Activity Based Costing I experienced so much during this process, not only from the academic aspect but also from aspect of personality. My humblest gratitude to the holy prophet Muhammad (PBUH) whose  way of life has been a continuous guidance for me.

The success and final outcome of this assignment required a lot of guidance and assistance of many people and I extremely fortunate to have got this all along the completion of my assignment work. Whatever I have done is only due to such guidance and assistance and I would not forget to thank them.

Abstract

This report is all about to show a Marketing plan for Nike’s products; with reference to older offerings the report shows the plan that how can Nike offer new products in the market. With respect to this the report contains comprehensive marketing plan components including company analysis (Nike’s current and future status), situation or market analysis and competitors analysis; the report shows the Nike’s objectives and marketing strategies in terms of its 4ps that is it is shown that Nike can offer and increase its product range by offering other related products as aerobic products to its customers and set value-based pricing strategy accordingly, and for new offerings it can increase its other media other than commercials that is it can focus more on social media to promote its new products and it may expand its business in other countries as China, Middle-East etc. Beside this, the financial budget of this marketing plan has been discussed which is been forecasted by reviewing Nike’s previous years revenue and marketing expenses figures. Also execution plan as well as contingency plan has been shown which is thoroughly depends upon Nike’s senior management and team work which would make its objectives possible new offering.

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Introduction:

Topic:  How the deferential cost analysis is performed in the organization

Definition:

Differential  cost analysis:

Analysis Of Firms Implementation Experiences With Activity Based Costing Meaning of Differential Cost Analysis Differential costing is a technique where mainly differential costs are considered relevant. Differential cost is the difference in total costs between two acceptable alternative courses of action. The alternative actions may arise due to change in sales volume, price, product mix, or such actions as make or buy or continue or stop production, etc. The key emphasis in differential costing is on change in total costs associated with alternative decisions. When the change in costs occurs due to change in the activity from one level to another, it may result in incremental cost [i.e., increase in costs] or decremental cost [i.e., decrease in costs]. Differential costing is a broader term that includes both incremental costing and decremental costing. The differential cost analysis is a useful tool for the management to know the results of any proposed changes in the level or nature of activity. Under this method, the differential costs are ascertained for each proposal and compared with the expected changes in revenue associated with each proposal. When there is net excess revenue, the proposal will be accepted; otherwise it will be rejected. The determination of differential cost is simple. It represents the difference in the relevant costs for the alternative proposal under consideration

Differential cost  analysis involves analyzing the different costs and benefits that would arise from alternative solutions to a particular problem. Relevant revenues or costs in a given situation are future revenues or costs that differ depending on the alternative course of action selected. Differential revenue is the difference in revenues between two alternatives. Differential cost or expense is the difference between the amounts of relevant costs for two alternatives.

Future costs that do not differ between alternatives are irrelevant and may be ignored since they affect both alternatives similarly. Past costs, also known as sunk costs, are not relevant in decision making because they have already been incurred; therefore, these costs cannot be changed no matter which alternative is selected.

Analysis Of Firms Implementation Experiences With Activity Based Costing For certain decisions, revenues do not differ between alternatives. Under those circumstances, management should select the alternative with the least cost. In other situations, costs do not differ between alternatives. Accordingly, management should select the alternative that results in the largest revenue. Many times both future costs and revenues differ between alternatives. In these situations, the management should select the alternative that results in the greatest positive difference between future revenues and expenses (costs).

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To illustrate relevant, differential, and sunk costs, assume that Joanna Bennett invested $400 in a tiller so she could till gardens to earn $1,500 during the summer. Not long afterward, Bennett was offered a job at a horse stable feeding horses and cleaning stalls for $1,200 for the summer. The costs that she would incur in tilling are $100 for transportation and $150 for supplies. The costs she would incur at the horse stable are $100 for transportation and $50 for supplies. If Bennett works at the stable, she would still have the tiller, which she could loan to her parents and friends at no charge.

Choice	Demand
1	15,000 units at $6 per unit
2	12,000 units at $7 per unit
3	10,000 units at $8 per unit
4	7,000 units at $9 per unit

The company’s fixed costs of $20,000 per year are not affected by the different volume alternatives. Variable costs are $5 per unit. What price should be set for the product? Based on the calculations shown in the table below, the company should select a price of $8 per unit because choice (3) results in the greatest total contribution margin and net income. In the short run, maximizing total contribution margin maximizes profits.

Choice	Sales Price	– Var. Cost =	Contribution margin per unit x	Number of units    =	Total margin	Fixed costs	Net income (loss)
1	$6	$5	$1	15,000	$15,000	$20,000	$(5,000)
2	$7	$5	2	12,000	24,000	20,000	4,000
3	$8	$5	3	10,000	30,000	20,000	10,000
4	$9	$5	4	7,000	28,000	20,000	8,000

 Accept or Reject Special Orders

Analysis Of Firms Implementation Experiences With Activity Based Costing Sometimes management has an opportunity to sell its product in two or more markets at two or more different prices. Movie theaters, for example, sell tickets at discount prices to particular groups of people—children, students, and senior citizens. Differential analysis can determine whether companies should sell their products at prices below regular levels.

Good business management requires keeping the cost of idleness at a minimum. When operating at less than full capacity, management should seek additional business. Management may decide to accept such additional business at prices lower than average unit costs if the differential revenues from the additional business exceed the differential costs. By accepting special orders at a discount, businesses can keep people employed that they would otherwise lay off.

To illustrate, assume Rios Company produces and sells a single product with a variable cost of $8 per unit. Annual capacity is 10,000 units, and annual fixed costs total $48,000. The selling price is $20 per unit and production and sales are budgeted at 5,000 units. Thus, budgeted income before income taxes is $12,000, as shown below.

Rios company
Income statement
For the period ending May 31
Revenue (5,000 units at $20)			$100,000
Variable costs:
Direct materials cost ($4 per unit)	$20,000
Labor ($1 per unit)	5,000
Overhead ($2 per unit)	10,000
Marketing and administrative costs ($1 per unit)	5,000
Total variable costs ($8 per unit)		$40,000
Fixed costs:
Overhead	$28,000
Marketing and administrative costs	20,000
Total fixed costs		48,000
Total costs ($17.60 per unit)			88,000
Net income			$12,000

Assume the company receives an order from a foreign distributor for 3,000 units at $10 per unit. This $10 price is not only half of the regular selling price per unit, but also less than the $17.60 average cost per unit ($88,000/5,000 units). However, the $10 price offered exceeds the variable cost per unit by $2. If the company accepts the order, net income increases to $18,000.

Analysis Of Firms Implementation Experiences With Activity Based Costing Revenue would increase to $130,000 with the special order. Each of the variable costs increases in total by 60% because total volume increases by 60% (3,000 units in the special order/5,000 units regularly produced).  The revised income statement would appear as follows:

Rios company
Income statement (with Special Order)
For the period ending May 31
Revenue (5,000 units at $20 + 3,000 units at $10)			$130,000
Variable costs:
Direct materials cost ($4)	$32,000
Labor ($1)	8,000
Overhead ($2)	16,000
Marketing and administrative costs ($1)	8,000
Total variable costs ($8 per unit)		$64,000
Fixed costs:
Manufacturing overhead	$28,000
Marketing and administrative costs	20,000
Total fixed costs		48,000
Total costs ($14 per unit)			112,000
Net income			$18,000

Note that the fixed costs do not increase with the special order. Because the special order does not increase the fixed costs, the special order’s revenues need only cover its variable costs.

Analysis Of Firms Implementation Experiences With Activity Based Costing If Rios Company continues to operate at 50% capacity (producing 5,000 units without the special order) it would generate income of only $12,000. By accepting the special order, net income increases by $6,000 ($18,000 net income with a special order – $12,000 net income without special order).

The differential analysis would provide the following calculations:

	Accept Order	Reject order	Differential
Revenues	$130,000	$100,000	$30,000
Costs	112,000	88,000	24,000
Net benefit of accepting order			$6,000

Variable costs set a floor for the selling price in special-order situations. Even if the price exceeds variable costs only slightly, the additional business increases net income, assuming fixed costs do not change. However, pricing just above variable costs of special-order business often brings only short-term increases in net income. In the long run, companies must cover all of their costs, not just the variable costs.

Adding or Eliminating

Periodically, management has to decide whether to add or eliminate certain products, segments, or customers. If you have watched a store or a plant open or close in your area, you have seen the results of these decisions. Differential analysis is useful in this decision making because a company’s income statement does not automatically associate costs with certain products, segments, or customers. Thus, companies must reclassify costs as those that the action would change and those that it would not change.

Sell or Process Further

Sometimes two or more products result from a common raw material or production process; these products are called joint products. Companies can process these products further or sell them in their current condition. For instance, when Chevron refines crude oil, it produces a wide variety of fuels, solvents, lubricants, and residual petrochemicals.

Management can use differential analysis to decide whether to process a joint product further or to sell it in its present condition. Joint costs are those costs incurred up to the point where the joint products split off from each other. These costs are sunk costs and are not considered when deciding whether to process a joint product further before selling it or to sell it in its condition at the split-off point.

The following example illustrates the issue of whether to process or sell joint products. Assume that Pacific Paper, Inc., produces two paper products, A and B, from a common manufacturing process. Each of the products could either be sold in its present form or processed further and sold at a higher price. Data for both products follow:

Product	Selling price per unit at split-off point	Cost per unit of further processing	Selling price per unit after further processing
A	$10	$6	$21
B	12	7	18

The differential revenues and costs of further processing of the two products are as follows:

Product

Different revenue of further processing

Differential cost of further processing

Net advantage (disadvantage) of further processing

Companies use this same form of differential analysis to decide whether they should discard their by-products or process them further. By-products are additional products resulting from the production of a main product and generally have a small market value compared to the main product. Sometimes companies consider by-products to be waste materials. For example, the bark from trees cut into lumber is a by-product of lumber production. Although a by-product, companies convert this bark into fuel or landscaping material. When the differential revenue of further processing exceeds the differential cost, firms should do further processing. As concerns increase about the effects of waste on the environment, companies find more and more waste materials that can be converted into by-products.

Make or Buy

Managers also apply differential analysis to make-or-buy decisions. A make-or-buy decision occurs when management must decide whether to make or purchase a part or material used in manufacturing another product. Management must compare the price paid for a part with the additional costs incurred to manufacture the part. When most of the manufacturing costs are fixed and would exist in any case, it is likely to be more economical to make the part rather than buy it.

By-products Additional products resulting from the production of a main product. By-products generally have a small market value compared to the main product.

Committed fixed costs Costs relating to the basic facilities and organizational structure that a company must have to continue operations.

Differential analysis An analysis of the different costs and benefits that would arise from alternative solutions to a particular problem.

Differential cost or expense The difference between the amounts of relevant costs for two alternatives.

Differential revenue The difference between the amounts of relevant revenues for two alternatives.

Discretionary fixed costs Fixed costs subject to management control from year to year; an example is advertising expense.

Joint costs Those production costs incurred up to the point where the joint products split off from each other.

Joint products Two or more products resulting from a common raw material or production process.

Make-or-buy decision A decision concerning whether to manufacture or purchase a part or material used in manufacturing another product.

Opportunity cost The potential benefit that is forgone from not following the next best alternative course of action.

Relevant revenues or costs Revenues or costs that will differ in the future depending on which alternative course of action is selected.

Sunk costs Past costs that are not relevant in decision making because they have already been incurred.

Practical Applications of Differential Cost Analysis:

 Some of the decision-problems where it may be applied are as follows:

(a) Determination of the most profitable levels of production and price

(b) Acceptance of special orders – offer at a lower price or offering a quotation at lower selling price in order to increase the capacity.

(c) Sell a product as it is or after further processing

 (d) Determination of right price at which materials may be purchased

 (e) Decisions regarding alternative capital investment and plant replacement

Practical study of nike

Cost Analysis Cost Analysis Miss Moe Pwint Lwin Faculty: Mr. Amit Sharma ECONOMICS ECO 301 Assignment 3 COST ANALYSIS OF NIKE People produce and sell goods for the profit they are getting out of the production. Business is only profitable when it covers the expenses of production and provides the increase in wealth of an investor(s) making the investments. Production is the output of business. Productivity takes this output, and measures it against the inputs used to create it. These inputs are the four factors of production-land, labor, capital and enterprise Depending on the product they are selling, entrepreneurs need to choose the most efficient way to make their products. Their choice is influenced by the type of product they are making, and the output they require. Job Production occurs where a single product is made to customer requirements. This kind of production is best suited for making cars or airplanes. Batch production involves making similar items in set numbers such as fashion clothing. Mass production creates large numbers of identical, standardized products. This production method is suitable for business which produces daily consumable products. Just in time production reduces the costs of stockholding, by any delivery problem can halt all production

SWOT Analysis of Nike

Strengths

• The biggest strength of Nike is that it is an extremely competitive organization with its approach of “Just Do It” slogan for its brand epitomizing its attitude towards business. The company was founded on the principle that it would make shoes for anyone who could walk or run and this has been the guiding philosophy behind Nike. Coupled with its iconic “Swoosh” logo and its equally catchy tagline, Nike’s strength is that it has emerged as a “Can Do” company.
• Strength of the company is that it has outsourced all aspects of its production to overseas facilities and thereby, does not have any manufacturing outlet of its own. This has helped the company focus on higher value adding activities like design and research and development and at the same time, it has saved the high labor costs that are part of the traditional manufacturing sector.
• Apart from this, the other big strength of Nike is that it is a globally recognized brand that has top of the mind recall among consumers and the youth in particular. Further, the Nike brand is synonymous with quality and resilience as well as endurance and fitness, which makes it the brand of choice for athletes and anyone who wishes to run.
• Finally, Nike stands to benefit from the current disarray among its competitors because of the fragmentation of the market wherein Nike with its USP or Unique Selling Proposition can standalone among them.

Weaknesses

• Nike is almost exclusively driven by its footwear business and therefore, the footwear market contributes to a lion’s share of its revenues making it dependent on this segment for its survival. In these recessionary times, it is not a good business practice to be overly dependent on one segment and hence, Nike ought to diversify horizontally as well as vertically and include apparel and other accessories.
• Though we have mentioned the fact that it has outsourced its manufacturing aspects completely as strength, the negative publicity that Nike got because of labor unfriendly conditions in its overseas outlets has badly dented its brand image. Indeed, the name “Sweatshops” is used to mockingly describe the abhorrent conditions in its overseas manufacturing facilities.
• The company does its business through retailers who stock other brands as well. This means that the assiduously cultivated exclusivity is sometimes sacrificed because it has not yet spread its wings to include exclusive retailer outlets as part of its business strategy.
• Nike is perceived by some consumers as being too premium and a luxury brand. While this is necessarily not a bad thing, the current market scenario is such that consumers are migrating to the middle tier of the luxury scale as they are becoming price conscious and quality focused.

Opportunities

• The biggest opportunity for Nike is from the emerging markets of China and India where the Billion Plus new consumers are now aspiring to western lifestyles which means that they would be more receptive to brands like Nike. As the company is associated with premium branding and segmentation, it can be said that capturing the “emerging market newly affluent consumers’ prize” could well be a game changer for the company.
• In recent years, Nike has begun to diversify into accessories and other premium products apart its signature footwear segment. This is a step in the right direction and something, which would stand the company in good stead as it attempts to look for revenues beyond its traditional offerings.
• The emphasis on design of higher end footwear seems to be paying off for Nike that is increasingly being seen as a must have product for anyone who walks or runs and as the company was founded on the principle that it would serve anyone with legs, this strategy seems to have hit the right notes.
• Nike has the unique advantage of offering value for money and this can be leveraged to the hilt as the company begins to make inroads into the newer consumer segments, which want quality at an affordable price.

Threats

• The fact that the company has a global supply chain means that it is subject to the vicissitudes of international trade practices including labor strikes in its overseas locations, currency fluctuations that decrease its margins, as well as lack of control over the geopolitical events happening around the world which have the potential to disrupt its global supply chain.
• Nike must improve on its image wherein it is being seen as resorting to exploitative business practices in its overseas outlets. Already, it had to pay a heavy price (monetarily as well as metaphorically) because the emerging generation of consumers are socially and environmentally conscious which means that they would not like to buy a product that is the result of dubious business practices.
• The ongoing recession has taken a heavy toll on Nike with consumers becoming more price conscious and retailers demanding higher margins. The combination of retailing in third party outlets and competing brands cutting prices has made the going tough for Nike.
• Finally, Nike has to ensure that it does not dilute its focus like some of its competitors who are now in the doldrums. For instance, Reebok that promised a lot and was intensely competitive with Nike has seen its fortunes sag and hence, Nike must not go Reebok’s way and instead, must define its core competence and implement its strategies accordingly.

Data collection method:

Nike’s Mission Statement

According to Nikebiz.com, Nike’s mission statement is, “Through the adoption of business practices Nike is committed to securing intergenerational quality of life, restoring the environment, and increasing value for our customers, shareholders, and business partners.”(1) However, according to Acaria.com, it is, “To maximize profits to shareholders through products and services that enrich people’s lives. (2)

Current Company:

Nike, Inc.’s principal business activity is “the design, development and worldwide marketing of high quality footwear, apparel, equipment and accessory products”(3). Nike sells its products to about 20,000 retail accounts in the US and in approximately 110 countries around the world. Independent contractors manufacture almost all of Nike’s products. Most footwear products are produced outside the United States, while apparel products are produced both in the United States and abroad. Revenues for the fiscal year ending May 31, 1999 were $8.8 billion, compared with $9.6 billion in the previous fiscal year

METHODOLOGY:

The information and secondary data of Nike and Adidas were collected from published books, case studies, annual reports and academic journals. Further, this exploratory study is based on case studies of Nike Inc. and Adidas Group. Archival data from company annual reports was also researched to gather information of the companies.

 BACKGROUND OF NIKE & ADIDAS Nike, Inc

Is an American multinational corporation that is engaged in the design, development, manufacturing and worldwide marketing and selling of footwear, apparel, equipment, accessories and services. The company is headquartered near Beaverton, Oregon, in the Portland metropolitan area (USA). It is one of the world’s largest suppliers of athletic shoes and apparel and a major manufacturer of sports equipment, with revenue in excess of US$24.1 billion in its fiscal year 2012 (ending May 31, 2012). As of 2012, it employed more than 44,000 people worldwide. In 2014 the brand alone was valued at $19 billion, making it the most valuable brand among sports businesses..

Conclusion

Nike reported net revenues of $15.0 billion, a 9 percent increase from FY05.It grew by 7% from 2006 at the fiscal 07. The variances in cost to be concerned are variable costs such as labor costs and material costs in the long run. The prices of sneakers are going up prices compare to what it used to cost back in 30 years. Within 10years from now on, the price for the same pair of sneakers could go up twice. The decision to produce a product is mainly concerned with the indirect costs to the production. With the amount of profits percentage they are receiving, in the case of Nike, elasticity in cost is not very likely to face loss. It could affect the percentage of profit due to costs in production. Therefore as a financial forecast, there maybe a time for Nike to find alternative sources or increase investment to earn a higher returns. Their goal is to reach 21billion by the fiscal year end of 2011. To reach 21billion, their income must increase up to 16%. By the end of 2007, the Sale of Nike has increase in the past 6 years of an average of 11.46% growth showing a growth in revenue of company’s success.