Cadbury Schweppes Company’s Cost Evaluation

Introduction

This is a management essay based on Cadbury Schweppes where we shall evaluate operational cost control, product costing, pricing policy, planning, and decision making, monitoring business performance, building and maintaining competitive advantage, and capital budgeting decisions.

Cadbury Schweppes was incorporated in 1969 and is listed in London and New York stock exchange with 36,460 employees worldwide and with big sales of over eight billion. They are involved in the manufacture of chocolate and confectionery products, soft drinks and they engage in the business of confectionery wholesale in various parts of the world. They have a head office in London although the initial owners originated from Sweden and moved to London where they started operating business. It’s one of the oldest companies and largest family-run businesses in the world today.

They are competitors of Coca-Cola since 1969 when it was incorporated and merged with the carbonated drinks company. The company’s top management is still under the Cadbury family and it has been in the management of that family in the last two centuries. The company initially started operating as a grocery shop in Birmingham with the sale of popular drinks like Cocoa and chocolate coming in a few years later.

Product Pricing and Costing

When setting the prices for the products to be sold, the unit per cost is considered. Depending on the market the unit selling price will be set above the unit cost. However, if faced with stiff competition, the unit price can be set at the break-even point or slightly higher than the break-even point. At that production, the company will not be making any profit or losses.

Maintaining Day-to-Day Operational Control

To avoid wastages and losses, there is a need for the company to have operational control. That wastage that cannot be attributed to any unit of production should be amalgamated and be re-calculated for the value of one unit.

Planning and Decision-Making

The company has had good planning and decision-making process. They have budgets which are annual plans. They have capital investment plans and other strategic plans. Before taking any decision, the company takes into account budget plans or five-year plans. The budget for the company involves the day-to-day operations of the company in terms of finances and forecasts. The budget is short-term but will have long-term effects on the long-term sustainability of the company.

Monitoring Performance

For any company to succeed in production especially a company faced with competition from giants like Coca-Cola will need to strategically control and monitor the performance of each unit or cost center. This company monitors its operations through the use of cost centers which they maintain. They have monitored cost elements such as direct materials, variable overheads, fixed overheads, direct wages, and other costs. In accumulating form for a particular period which is normally per day, and by the end of the day the management accountant produces reports showing the cost incurred in production and how much is attributable to each unit.

Building and Maintaining a Competitive Advantage

Faced with the problem of competition from companies like coca-cola, the company has adopted generic strategies and uses five forces in positioning itself strategically in the market. This is entering agreements with suppliers to supply them with raw materials; They provide refrigerators and distribution vanes to distributors thus giving the buyer a flesh product like many competitors in the industry. They have also controlled the entry of new competitors through strategic alliances, acquisitions, mergers, and takeovers. Again, most of their products do not have substitutes except beverages which have substitutes like tea, coffee. This gives them an advantage over others.

Application of Costing Techniques (Methods) in Cadbury Schweppes

Marginal costing assumes that there is an excess of selling price over variable cost which will meet the fixed cost of ay organization. In the world of marginal costing, there is the contribution of each unit which is defined as the difference in sales value and the marginal cost of sales and the contribution must be equal to fixed cost at break even point. The applies marginal costing in the production of soft drinks. Each bottling plant is taken as a cost center and where there is the transfer of materials to a bottling it is charged at end of the day there is allocation of costs and the cost per unit is determined. This is used in determining the price of the drink.

ABC costing

This is an activity-based costing where activities are taken as cost centers. Each activity is allocated overheads as though they are cost centers. In this case, activity-based costing is applied in the production of soft drinks where each activity is allocated some costs. They use activities like maintenances of machinery and plants and are allocated costs from rent and rates, employees’ benefits, and many other costs. This is allocated using a specified method. For example, the allocation of employees’ benefits will be done using the number of employees performing the activity in the company.

Standard costing

Standards costing involve preparing budgets with the measure set out. The standard is set out of what is required from each production or the usage of each unit of material. The standards are always available if they have to make meaning. The standards are set under the following:

1. Realistic – they should be realistic and attainable under the existing conditions or if efficiency is followed.
2. Under conditions that are achievable by any reasonable man with existing resources.

Standard costing is applied by the company when producing chocolate since the production is known and the efficiencies of production have been measured over time.

Zero-based budgeting

For new activity, a product whose costs are not yet established will be produced based on the zero-based budget. This is important to the company as the new product can be produced and tested in the market. it is used by the company under study, during inflationary tendencies which are beyond control and when introducing new products in the market.

Benefits of costing techniques

Marginal costing – there are many benefits associated with this company method. This include:

• One can know the cost of each production factor and unit cost for each product.
• The company can know the units to be produced to reach break-even.
• The costs for each product produced will guide the price-setting where that if the production is below break-even, the company will use the information provided by this strategy to get out of this market.
• The company can compare the costs of products from different cost centers.
• It assists in determining the absorption rate for the overheads to different cost centers.
• It is easier to identify unprofitable products.

ABC costing

• There is the identification of costs associated with each activity.
• Each activity can control its costs.
• While allocating resources, each activity is recognized.
• There is motivation among employees as they would bed measured. based on the activities they perform.

Standard costing

• Actual costs comparing with the standards set.
• Cost deviations are measured and assessed which will assist in controlling the business of the company.
• It encourages investigation in the methods used in production which may lead to greater improvements in the production cost.

Limitation of the techniques

Marginal costing – there are many limitations associated with this company method. They are:

• Identification of the costs associated with particular productions becomes very difficult thus it is assumed that the use is uniform. This will affect the effectiveness as it is difficult to ascertain.
• The company break-even units are determined based on the costs which do not involve cash such as depreciation.
• The relationship becomes true for only a particular product or mix. The change in the mix will change the results.
• Selling prices are not constant thus the application of selling price is subjective. Also, sales may be made in large quantities calling for changes that are the issue of discounts.
• Variable costs vary from time to time.

Standard costing

• The standards set may unattainable.
• Conditions fluctuate from time to time thus the assumption of existing conditions will affect its effectiveness.
• Resource are limited changes in resources will affect the effectiveness of the method in use.
• Cost deviations are measured and assessed which may be unrealistic in cases where.

ABC costing

• There is the identification of costs associated with each activity becomes a difficulty.
• The allocation is done on the basis that is predetermined which is not true.
• Some activities may shortly run thus it is used as a cost center may be costly in the long run.

Conclusion

A company like Cadbury Schweppes with operations worldwide has a strong management accounting department that maintains the cost of the company. The department is involved in coming up with transfer costs for products between countries and production centers and these costs are shared out in the consolidated financial statements of the company. It’s no surprise apart from Coca-Cola, Cadbury Schweppes is the second company with the best transfer prices on earth.

The company has adopted standard variance costing, marginal costing, and ABC costing. They only referred to zero-based costing when they are starting a new product for product differentiation or cost leadership. To succeed in such a turbulent environment, costing and cost management are essential and Cadbury Schweppes has adopted it. This is why they are succeeding where others have not succeeded.