Evaluating the costing system in place at Apple

This study will turn to three issues of concern to Apple plc. First is the function and nature of direction accounting information in strategic and operational determination devising. Management needs to understand the type of determinations to be made at both strategic and operational degrees, the traditional techniques that supported such determinations and the restrictions of those techniques. Besides, which contemporary techniques replaced the traditional techniques and why? Understanding this function will heighten direction ‘s ability to do sound strategic determinations that will heighten the value of the company. The 2nd issue will affect looking at the bing system of the company. Is the bing costing system in usage appropriate or non? If it is appropriate, why? If non, why non? What will be the most appropriate costing technique and why is it appropriate compared to other techniques? Finally, an rating of the public presentation measuring system of the company and urge either a better system or beginning for alternate steps to slake the turning competition between divisional directors of the company. We will briefly stare with a profile overview of Apple Plc.

There is no individual, ideal direction accounting system that suits every organisation ( McWatters et Al, 2008 ) . A different organisational circumstance leads to a different direction accounting pattern.


Apple Plc is a confectionary maker. Figure one represents a dislocation of Apple ‘s divisions and the procedures they go through to recognize the concluding merchandise. The different colorss in each merchandise stand for the concluding end product for each division. Although the commixture is done together, the cookery and packaging differs. For the cookery, the merchandise type will find the temperature degree. While for the packaging, if the company is a monopoly, it would truly count. In a perfect market, client ‘s penchant is placed as top precedence. Does the client prefer to keep the confect saloon on a stick or experience it with his/her bare custodies?

Nature of Management Accounting

Before set uping a common land for the consideration of the nature of direction accounting, a definition of the term would be appropriate. Management accounting can be defined as a procedure of supplying appropriate information chiefly intended to help directors in doing better determinations ( Drury, 1998 ) .

In old old ages, direction accounting techniques like traditional budgeting, cost-volume-profit analysis, standard costing and discrepancy analysis, were adaptable to the concern environment when merchandise assortments were few, competition was low, overhead costs were comparatively low, machine-controlled procedures were minimum and houses ‘ were largely labour intensifier ( Sulaiman, Ahmad and Alwi, 2004 ) . An illustration was the traditional accounting system used by Hewlett-Packard ( Groot and Lukka, 2000 ) . This system gave Hewlett Packard information on departmental costs which made each director aware of his/her costs and item of the costs by type. However, many concerns and environments began to germinate as a consequence of technological alterations, globalisation and altering client mix. Writers identified insufficiencies in these techniques, when used as tools in planning and control determinations ( Kaplan, 1983 ; Bromwich and Bhimani, 1994 ; Lucas, 1997 ) . Awareness amongst companies on the demand to accomplish excellence in manufacturing/service bringing and usage such an accomplishment as a scheme to vie efficaciously grew ( Drury, 1998 ) . Companies started associating their schemes with decrease in production and stock list costs, quality betterment and invention, decrease in lead times and increased flexibleness in run intoing single client ‘s demands ( Lucas, 1997 ) . This paved the manner for the debut of modern-day accounting techniques like mark costing, entire quality direction, Just In Time ( JIT ) , Activity Based Costing ( ABC ) , Balance Scorecard and Process re-engineering, which support organisation in accomplishing their aims. An illustration is the instance of Hewlett Packard when they advised all their concern units to follow activity-based costing ( ABC ) systems. Their purpose was to supply information to assist gestate new merchandises ( aim bing ) , lower production costs and make up one’s mind about localisation of mills.

Restrictions of the traditional direction accounting techniques

In their article titled “ The rise and autumn of direction accounting [ 2 } ” , Johnson and Kaplan ( 1987 ) identified certain restrictions to the traditional direction accounting patterns.

-Management accounting studies are of small usage to operational directors trying to maximise productiveness and minimise cost. It takes clip to fix the study and even after readying, the information provided is excessively distorted for directors to understand. This distracts directors from placing the cardinal factors for procedure and production efficiencies.

-Management accounting patterns failed to supply relevant set of steps in which such organisations operates. These steps were meant to reflect the organisation ‘s competitory environment, its merchandises, procedures and engineering.

-Management accounting patterns overly focused on short term fiscal public presentation.

-Management accounting systems fail to supply accurate merchandise costs. The usage of simplistic and aggregative merchandise costing is utile for fiscal coverage. However, it does non stand for the demands by each merchandise on the houses ‘ resources. Rather, it is based on direct labor. This deformation could ensue in ill-conceived determinations on merchandise pricing, merchandise mix, merchandise sourcing and rival response.

The function of Management Accounting Information in Scheme

Scheme is the procedure of set uping a profitable or sustainable place against the forces that determine industry competition ( Porter, 1985 ) . The aim is to place the house so as to derive competitory advantage. This involves bring forthing long term programs while possible programs and actions of rivals. Tricker ( 1989 ) compared “ the relationship between scheme and direction accounting to the relationship between military scheme and military intelligence ” ( Hopper et Al, 2007 ) . For direction accounting to play a function in strategic direction, directors must supply both internal fiscal and non-financial information about the internal environment, and external fiscal and non-financial information, about the external environment in which the company operates.

In the 1970s, Bowman ‘s ( 1990 ) survey showed that houses had developed an economic orientation in which external histrions were considered as rivals that drive down net income degrees. However, Hopper et Al ( 2007 ) argued that benefits can besides come from partnering with rivals, clients and providers. The perceptual experience that rivals can be concerted every bit good as confrontational has broadened the construct of strategic direction accounting as a procedure of information sharing between rivals. Accounting information will be required at each stage of the strategic determination doing procedure.

Scheme Problem designation: This requires non-financial, qualitative information about issues of an internal and external nature. This will affect carry oning a PESTEL analysis and analysing Porter ‘s five forces industry construction.

Strategic options: To bring forth these options, direction requires both fiscal and non fiscal quantitative informations produced from internal and external issues.

Strategic actions: To choose appropriate actions, direction requires chiefly quantitative, fiscal, internal information about costs, benefits and chances of classs of action.

The necessity of fiscal and non fiscal information every bit good as quantitative and qualitative information is what makes the anterior direction accounting information insufficient.

Strategic Decisions utilizing direction accounting information

The cardinal intent of direction accounting is to help directors in accomplishing the organisation ‘s strategic aims. For this, directors have to see the strategic determinations involved. These include

-Make or Buy Decisions

Directors have to make up one’s mind whether to bring forth the goods and supply the same services within the organisation ( insourcing ) or outsource some of their activities to outside sellers. This determination is based on the house ‘s scheme to accomplish and keep a competitory advantage within the market. One of the ways to accomplish this advantage would be to cut down the cost of production activities by working within the value concatenation of the company.

This is either by maintaining cost depression or distinguishing the merchandise. One of the ways it can accomplish this is to use Porters ‘ generic schemes to specify the place it wants to take. Sometimes, companies prefer to do the merchandise in order to retain control of the merchandise, market and engineering. However, companies can besides make up one’s mind to outsource some of the company ‘s activities to cut down costs of production and enhance quality by outsourcing to specializers in that field.

Traditional technique

The traditional direction accounting technique antecedently adopted by companies was more of a ‘value added ‘ position which was mostly internal to the house ( Shank and Govindarajan, 1993 ) . This starts with payment to providers and ends with charges to clients with the purpose of maximising the difference. `For directors from a strategic point of position, this technique was deemed inadequate for three grounds

-It starts excessively late and ends excessively shortly: Opportunities to work linkages with the house ‘s providers is missed since the cost analysis will at the point of purchase. Besides, chances to work the house ‘s clients are missed since the cost analysis will stop at the point of sale.

-It randomly distinguishes between natural stuffs such as care and other purchased inputs.

-Competitive advantage can non be to the full explored without sing all purchased natural stuffs and cost elements involved.

Contemporary technique

These insufficiencies are made up for by value concatenation analysis which is a modern-day development tool. Unlike the value added position, this tool considers both the providers and the clients as linkages in the value concatenation. This provides the company with an chance to work any of the linkages that will add value to the house.

Product-Mix Decision

Directors must besides make up one’s mind which merchandise to do and in what measure ( Bhimani et al, 2008 ) . This involves direction placing the direct and indirect cost associated with bring forthing that merchandise. The most of import factor to see when doing a pick is to weigh the benefits of the merchandise with the cost of supplying the merchandise.

Traditional technique

The traditional direction accounting technique adopted is Cost Volume Net income Analysis. It helped directors understand the interrelatedness between measure sold, cost, selling monetary value, net income. Although this technique is simple to utilize, there are certain restrictions that make it unequal.

-Fixed and variable costs merely approximate costs in an intermediate scope of end product. If degrees of end product should change beyond this scope, a valid appraisal utilizing CVP analysis will non be possible.

-It assumes a changeless gross revenues monetary value which is unrealistic if one wishes to increase gross revenues.

-CVP analysis suggests that monetary value is maximized if an infinite figure of units are produced. This is unrealistic given capacity restraints and the demand to do monetary value grants to sell more units.

. Contemporary technique

The usage of Activity-Based Costing or throughput accounting will be utile in the long tally that considers the full life-cycle of a merchandise. This is unlike CVP that is merely appropriate for short tally fringy analysis.

Other determinations include pricing determinations, client profitableness determinations, and one-off particular order determinations.

The Existing Costing System Dilemma


Apple PLC is presently apportioning common costs to merchandises utilizing soaking up bing system. This is a procedure of apportioning fixed and variable operating expense costs to merchandises. This system has become a job because of the incentive compensation strategy in topographic point. Every division is soon evaluated based on their ability to run into the minimal net income border of 25 % , which will gain the trough a level fillip of ?100,000 if achieved. Besides, every 1 % surplus of the 25 % the directors makes, he/she earns ?2,500 excess. This has resulted in a turning competition between directors

Restrictions and effects of Absorption bing system acceptance in Apple PLC

-Divisional directors can non separate between their fixed costs and variable costs. This poses a job because equal information for doing relevant determinations can non be obtained. Therefore, merchandise costs are distorted.

-The bing cost system distorts net income appraisal due to Apple ‘s exposure to stock fluctuations as a consequence of its costing net income being a map of both gross revenues and production.

-Apple ‘s divisional directors have to cover with fixed operating expenses being capitalized in unsalable stock. Assuming there is a lessening in gross revenues demand, Apple will be left with excess stock. If such excess is non disposed of, the net income computation for the current period will be deceptive.

The effects of these restrictions are that costs are below the belt divided amongst the directors despite the fact that non all of them are involved in all the procedures. This will ensue in the deformation of net income borders achieved by directors.

The net income borders are extremely inaccurate because the costs have been every bit disconnected amongst the divisions. This in bend, faults the assessment system which is dependent on the net income border to measure public presentation of directors.

F ( x ) = Y, where Ten represents the net income border and why is the public presentation

Adoption of Activity-Based Costing System at Apple Plc

Activity-Based Costing is a system that calculates the costs of single activities and assigns costs to be objects on the footing of the activities undertaken to bring forth each merchandise or service. It is claimed that ABC is peculiarly utile in companies when:

-Varying demands on resources.

-Volume does non drive costs ;

-Overheads are a big per centum of entire cost ;

-Diverse merchandise scope ;

Execution of ABC at Apple plc will affect certain phases:

-Identifying the major activities that take topographic point in an organization- For Apple Plc, packaging is the lone activity that involves the three divisions

-Assigning costs to be pools/cost Centres for each activity- For Apple plc, each activity is assigned cost Centres

-Determining the cost driver for each major activity-

-Assigning the cost of activities to merchandises harmonizing to each merchandise ‘s demand for activities.

These factors will use to Apple Plc. A broad assortment of merchandises are produced with extremely automated procedures. The merchandises are likely to consume/cause different costs in their industry and it extremely improbable that volume thrusts many of the costs. From figure 1, non all the merchandises pass through the three procedures. For illustration, the inquiry states that the merchandises pass through a combination of common procedures: one such procedure could be cooking. The mill pot used can be used every bit long as the current spirit that is being cooked is needed but when a new spirit is needed the pot has to be cleaned out. This causes costs. Therefore, it can be seen that the driver of this cost is “ flavour alteration ” , non volume. Apple plc presently allocates most of its costs based on volume, the merchandises that have really few spirits will be bearing excessively much cost.

Table 3: Conjectural computation ( presuming ABC )

Restrictions of ABC

Apple plc will necessitate to believe really carefully about the nature of the costs. The scenario says that “ some but non all the procedures are common ” . How can these be costed? Although ABC will assist with the activities that surround the procedures for illustration set-ups, sluicing and so on instead than the procedure itself, it is really dubious that ABC can offer much aid here. Other restrictions to ABC include

-It is based on historical analysis and therefore go nullified when there is a alteration in the method or system of making concern.

-It is non a regular coverage modus operandi

-It does non place the true cost of a merchandise or service.

Performance Measurement

Benefits of utilizing net income border to mensurate managerial public presentation include-

-Managers can measure whether the net income being generated screens the capital invested in the unit.

-Management usage it to advance subject in the organisation ‘s capital budgeting procedure.

However the usage of Return On Investment by Apple Plc was based on a defective net income border that did non take into history the accurate costs incurred by each division. With the debut of ABC, the truth of the net income border for each division will be higher.

Table 4: A Conjectural use of the ROI

The tabular array may show a clear addition in ROI. However, decomposition will demo how a trough might try to pull strings his public presentation rating by giving an semblance of a nice addition in profitableness when really directors increased their Return on invested capital but decreased the long tally value of each division. These and other restrictions have led to the debut of the balance scorecard. For Apple a suited balance scorecard will dwell of a linked series of aims and steps that are both consistent and reciprocally reenforcing.


The debut of ABC could take to greater consciousness of some drivers of costs and hence this will take to a robust and defensible base for those costs. This will, in bend, make the directors responsible for their actions and turn their focal point towards efficiency. However, it will non work out the issues discussed. There is perchance a mark of weak direction here. ABC will enable a better position of cost drivers to be formed and should hence take to better activity direction but it will non bring around the jobs of an inappropriate public presentation assessment system. Thus the debut of the balanced scorecard will help direction in alining the public presentation of directors with the vision of Apple Plc. The balanced scorecard might non be sufficient and should be considered as a templet for mensurating public presentation. Economic Value added or Process re-engineering could be used to complement the balanced scorecard.

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