Cost Accounting and Management Decisions of Apple Inc Essay:
Apple Inc is a US manufacturing high tech company founded by Steve Jobs and Steve Wozniak in the year 1976. Apple Inc is regarded as one of the most valuable companies in the world. Apple’s cutting edge products have had a major impact on the lives of people globally by providing highly technological and modern products that have made the modern lifestyle classy and enjoyable. The company’s products are consumed globally and are the market leader in quality. Although the company targets the middle and upper class market segment with its products, it has increasingly registered impressive profitability every years and with each introduction of new products; particularly the iPhone. The company is located in California, and was started in a garage by the two guys who dropped out of college. The company was incorporated in the year 1977 and was named Apple computer Inc which later changed to Apple Inc (Linzmayer, 2004).
Apple manufactures designs, and markets high tech computers, portable digital music players, software, mobile phones, laptops computers, servers, and ipads. Apple Inc has particularly become successful through products such as iPhones, iPad tablets, Mactosh computers, and portable iPod media players. Products produced by Apple are sold worldwide through the internet, retail stores, and direct sales. Additionally, Apple Inc sells its products via wholesales, cellular network carriers; value added sales and retailers in most countries. Innovation, creativity and design are the main reasons that have driven the company to the current level of prosperity.
In 1976 apple launched apple I personal computer, which was followed closely by Apple II which was very successful. Mactosh was introduced in style in the year 1984. Mactosh was a high quality product and it became an instant hit in the market. The Mactosh computer had a nice graphical user interface with a mouse. The graphical user interface set the standard for other PC makers. Subsequently, iMac computer was introduced in 1998 after the company had been restructured to focus on innovation the previous year. Apple Inc was undergoing a moment of high level innovation. Soon, the iPod was introduced in the 2001 which was followed by an online music store. Apple also introduced a smart phone – the iPhone in 2007 which was later followed by the iPad in 2010. The company has continued to thrive and excel through the high quality products it sells and particularly the iPhones and iPads which have totally revolutionized the world of technology through Smartphone and portable computers.
Many decisions about a firm’s products are highly influenced by Cost-Volume-Profit (CVP) analysis. Apple Inc is not an exception in this regard. Most of the costs Apple Inc needs to generate revenues are not reduced rapidly when the sales of their products declines. A fixed cost structure apple Inc uses normally generate high profits when their products are being bought in many number more during the holiday shopping season. But during normal period the company can suffer the operating losses. This is very normal.
Apple Inc makes some assumptions based in the cost volume profit analysis (CVP). These assumptions include: their sales mix is constant since they have many products, once one product goes down it can be supplemented by the other. Also their product cost is linear and they divide them to fix and variable costs. Their variable elements are constant per each unit, while the fixed elements are constant totally in a range which is relevant (Drury, 2006).
Another assumption apple Inc makes is that the selling price of their products will remain constant. This is because the price of that product will not change when the volume changes. They also don’t change their inventories. They continue producing the same number of units which equals the number of units they sale. The company does not increase the number of sales more than the company has never experienced. When the company wants to increase revenue it adjusts the model of their products, this will lead to increase in the selling price of the product, sales mix, and the fixed costs. Although, this has a disadvantages as the cost volume and profit assumptions will be violated.
In order for Apple company to determine the manufacturing cost of their products, they use a current cost system known as Activity-Based Costing system(ABC) .For instance when Apple make an iPhone they get about $645 in revenues. The gross margin of this product can be determined by using deduction from the overall margins. In order to build the iPhone, Apple has a cost structure to follow. An iPhone has about four categories of cost. These categories include: the cost used for the components that make the device also known as Bill of material (BOM).These money is usually paid to the suppliers who bring the components.
` Secondly, Apple incurs costs for warehousing and also transportation. In order for them to come up with the product they have to pay some money to the companies that are shipping the company and also for warehousing. They have to look for big warehouses to store the components, the warehouses are payed for. The companies also incur the production costs which include labor. Contractors are the one who are payed this cost for production.
Once the product ( iPhone) for this instance has reached the customers, the company still will incur the warranty expenses. This are the costs which are payed back to customers once they return void product within the given warranty period. The product BOM is estimated using a teardown analysis; this helps the company to determine insight which is competitive into the coast structure and gross margin since they will be able to predict their products which will not vary a lot between their products.
To build an iPhone the company takes about 24 hours. The software is installed and tested with other components within 6 to 8 hours. the workers in the company are payed about $1.78 per hour, if they spend 17 hours working then they will be payed about $30 .this is the cost for labor of one iPhones. But it’s hard to determine the cost of single phone.
If you compare the manufacturing cost of an iPhone to other devices which look alike, it is higher than the devices. This cost normally range from $12.5 to $30 for every phone. The costs used for labor represent a small value of the overall cost structure which is about 2% to 5% of the sales price. Sanity check is done for the costs allocated for warranty expenses, transportation and manufacturing cost.
The cost structure of the Apple Company does not include the Engineering and development (R&D), and administrative costs. This are termed as fixed costs hence not allocated for production of the product. The company has a “clock cycle” which times every worker, these ensure each and every worker spends same time in their work place (Drury, 2006 ) .
Benefits of using activity –based costing system
These methods of activity- based costing system is used by the company in assigning costs to the cost objects and also calculate individual activities cost, on the way activities are undertaken in the production of each product and service. The company uses the Activity-Based Costing system to vary demands put on the resources, used when the volume doesn’t drive the costs, when the big percentage of total coast is due to overheads.
Apple Inc. uses ABC to diversify their product ranges. Although Apple is using the ABC method in their coasting system they underwent various stages to implement the method fully. These stages include: they identified the major activities that are undertaken in the company (packaging involves three divisions in Apple Inc), they assigned costs to cost centers in each activity, for each major they determined the cost driver, and they assigned products the cost of activities following each products demand.
Apple Inc applies the above factors in the running of their organization. They produce many products through process which are automated, these products cost differently during their manufacturing this are the volumes which drive many costs. Those products which have got more specifications and complications require much more production cost.
Traditional system for management system
In order for an organization to maximize productivity and minimize costs, the traditional management system will not be of great help for mangers. This is because a lot of time is taken to prepare the report and the information provided is hard for managers to understand since it’s distorted. This gives managers hard time to identify important factors for production and process efficiencies.
The traditional system focused on short term performance on the finances. Also it does not give set of measurements which are relevant to the operation of the company. Traditional management system cannot provide costs of the products and it does not represent each product’s demands on the resources of the organization. Pricing of the products, product mix, and sourcing of the product cannot be determined appropriately.
The forecast gross margin of Apple Inc incurred greater costs in introducing new iPads and iPhones. This is because people need to buy the iPhones and iPads shopping during the holiday. The analysts predicted the forecast gross margins of the company to be 38% but it was not to their expectations since it will be 36.5 % to 37.5 % .the current period revenue will be $55 billion to $ 58 billion.
The earnings of Apple’s Inc increased by 61% in its previous year which ended September 2012 but fell in this year for the first time in 10 years. The percentage of sales increased led to increase of the cost of goods that were sold from 56.13 percent to 62.38 percentages this led to revenue decrease. For instance cost of goods by September 2012 was $87,846 while by September 2013 had increased to $106,606.the trend has increased for the past five years.
Strategy of internationalization depends on the company’s characteristic following the country’s size, origin and its age. Every organization has a mode of entry which is different and best for them big challenge is when a country’s population is less and yet the company is competing with other multinational companies.
Another strategy is use Oracle. After entering the forecast and fiscal budgets into Oracle during preparations of exhibits for the financial review, specific reports should run to verify the assumptions made on the budget, expense and revenue categories, change in net assets, funding allocation ado do reviews to the yearly trends for forecasts and actual. Allocation revenues should be marched every fiscal year so as to base revenue allocation amounts (Grady, 2006).
The company can should do base allocation adjustment, this will help to record changes in base revenue allocation after completing the budget. These allocated adjustments should be posted by the budget office through the journal entry. The company should also post one time allocation monthly so that they can show the revenues that are allocated to every department in the organization from the general company sources which are approved yearly.
Apple. (n.d.). Apple. Retrieved November 21, 2013, from http://www.apple.com/
Drury, C. (2008). Management and cost accounting (7th ed.). London: South-Western.
Grady, J. D. (2009). Apple Inc. Westport, Conn.: Greenwood Press.
Join Academia.edu & Share your research with the world. (n.d.). The Analysis of Apple Inc. Marketing Mix.. Retrieved November 23, 2013, from http://www.academia.edu/2647488/The_Analysis_of_Apple_Inc._Marketing_Mix
Linzmayer, O. W. (2004). Apple confidential 2.0: the definitive history of the world’s most colorful company ([Rev. 2nd ed.). San Francisco, Calif.: No Starch Press.
Cost Accounting and Management Decisions of Apple Inc Essay: