Unilever Product Cost Processes
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Published: Thu, 10 Aug 2017
Unilever is proven to be one of the biggest consumer goods companies in the world. The new business in the family, as every other, must be inserted in the system smoothly, without interference in both company`s management. In order for this to be done, there are certain rules, approaches and ways which may help entering without troubles. Let`s start with the product cost processes.
The cost management systems are made to provide information which can be used for decision making. No matter if it’s about a product, or a service, cost systems accumulate and report their costs. The type of product determines the calculation processes and cost systems used to set its cost. The two most common costing systems are the job order cost system and the process cost system. The following section will discuss each of them.
The job-order costing systems are useful when costs are accumulated by individual units of a product, or batches of product. Or, with other words, it depends on the individual customer order, due to the uniqueness of the specifications required to the customer`s needs. Dudick (1985) stated that: “Although there is some advantage to making analytical studies through use of direct costing, companies making products that are unique to a customer should always give close attention to actual costs on a full costing basis”. Examples of products that are suited to job-order costing are office building, airplanes, or even the movies made by Walt Disney Productions. (Donovan, 2006, p.14)
The accounting system used for job-order costing are patterned after the physical flow of a product and after the production process. As pointed from Chadwick and Magin (1989, p.94), job costing tends to be carried out on a historic basis (after the event). However, they also stated that costing systems purpose is to provide quotations, which itself involves predetermination. Forcing a quote, which is unjustified, may become an issue or more specifically said, a competitive situation. (Wang, Shen, 2007,p.283).
In the product costing, obviously, the costs are accumulated by process. Products are standard and they are built to stock, rather than to individual customer order. This cost system is frequently used by chemical companies, oil companies, paint manufacturers and companies for food and beverages. The products in these companies are usually made in large quantities, and each unit is made similarly, so that the per unit product cost is determined by dividing the total product cost by the number of units of product made during a period of time. (Edmonds, Edmonds, Tray, 2000, p.486).
However some costs cannot be traced directly to a particular job. Elements such as indirect labor and materials, rent, depreciation etc. are not traceable and usually the costs of them are added together, and averaged between measures such as labor hours, in order to determine the total cost to individual units. In addition we can say that clearly more effort is needed for completing a job-order system by tracing the cost of a specific product, however both systems require some form of cost averaging. (Edmonds, Tray, 2000, p.487).
In our case, it is necessarily for Unilever, as a host for the new company, to calculate the costs of their new product or service. The reasons for that are plenty, but mainly this must be done in order to help the general decision making. Setting an appropriate cost system is of crucial importance for knowing the cost of goods sold, the cost of inventory, for determining the profit and loss on sales and for aiding planning and cost control. Since the products offered by Unilever are mostly by units, and by that I mean home care and personal care products, or even Ben & Jerry`s ice creams, for the new business probably will be used job-order costing system.
The approaches to budgeting are many and different, but when it comes to new business, only some of them can be used. One definition from Heitger (2010) for budgeting is: “A budget is a comprehensive, formal plan, expressed in quantitative terms, describing the expected operations of an organization over some future time period”. Creating a budget is the best way to keep your business and its finances on track. Conditions such as changing tax legislations, macroeconomic factors and so on are very important to be took into account, so as different internal factors.
It is hard even for a regular company to keep up with the details and not to get bogged down with the daily problems, what about major company like Unilever, that runs many smaller ones. It is easy to forget the bigger picture, however that can be managed. How? With budgeting, of course. Successful businesses invest time and money to prepare appropriate budgets, to create business plans and to monitor the performance of the finance. Decision making and the structured planning is what makes the growth of one business, and that means that profits are improving, the returns on investments (ROI) is increasing and costs are reducing.
Before planning the initial budget for the new business, Unilever should be aware of some details. The company should outline the changes that wants to make to the new business, for example changes in the market, within the customers and many more. Operational changes may came up also, so as any issues or problems. Unilever should gather information about the past financial performance of the new business and forecast the future investments that will be made. In the end, the company must set goals for the year. (Quebec, 2009 and Sun, Linch, 2008).
Nugus (2009, p.198) suggest a couple of approaches for budgeting. First one is called Traditional Budgeting. As a starting point for the new budget, last year`s budget is taken in account, so the expected increases are pre-programmed. This approach relies on the fact that the variables remain the same, in relation to one another, from the previous year to the next. It is easy to implement, minimum amount of maintenance is required, although it has serious limitations. One of them is assuming that the last year`s budget is already tested AND trusted, which may not be true. In Unilever as the new host of the company this approach may not be the best one, due to the change in the management as a whole. Fintrey (2012) calls this approach to budgeting Incremental Budgeting. Zero Based Budgeting or ZBB is a budget that starts with a zero in the beginning of the year. Basically, it shows only the projects that brings the highest benefits to the company, which means that it focuses all the resources to objectives that are successful. The disadvantage is that it focus on short-term thinking and money-drive decisions. The Base Budgeting (BB) is a budget that focuses on resources that are enough to run the organization, but who decide what is enough? Activity Based Budgeting (ABB) is an interesting approach that uses the activities as a driving force which generates costs into business. This means that costs can be assigned to an activity instead to the number of units of product. Last one, presented by Fintray, is the Kayzen Budgeting. It is about the increasing improvements within the costs. It emphasizing the analysis of continuous cost savings and improvements.
CIMA suggests one different approach to budgeting and it’s called participative budgeting. The official terminology is “A budgeting system in which all budget holders are given opportunity to participate in setting their own budgets”. (CIMA, 2010, p.218)
The last approach I want to present is the so called rolling budget, or continuous budget. It is best described from Bisschof and Mestry (2009, p.112). This type of budgeting emerged from the fact that every day management is a very short and unreliable amount of time for rightful decision making, so it operates in a system where a 12 month budget of units and resources is divided into quarterly periods. Shae, Shae and Siegel (2012, p.308) add that this approach keep the managers in the company focused on the costs for at least 1 year ahead and this helps them not to pay attention only to short-term results. So as the fixed budgets become more and more criticized in this changing world, because of their ineffectiveness, more companies started to abandon them. There are so many events that can`t be predicted, such as natural disasters, stock market crashes etc. Rolling budget, or forecasts, pays attention on the future and ensure that the planning process will be kept and ongoing. This exactly is the type of budget used from Unilever. In his article “Let It Roll or Why more companies are abandoning budgets in favor of rolling forecasts”, Russ Banham says that instead of the traditional budget that they use, now Unilever relies on an eight-quarter rolling forecast. As recorded revenues of $54 billion in 2010, thanks to the rolling budget they managed to forecast the demand for all of 2011 and 2012. Neal Vorchheimer, Director and Chief Executive Officer of Unilever quoted: “We`re using bottom-up forecasting to come up with the best view of the eight quarter on a rolling basisâ€¦each month we update that quarter`s forecast based on that events that have occurred, such as the recent uptick in oil and other commodity prices, and make changes accordingly”. In this way, Unilever can afford to pull money from an area that is “stuck in the mud” and give it to a more reliable unit for product development or advertising. (Banham R., 2011). The best approach could not be pointed firstly because each company should choose a budgeting system that fits needs and priorities.
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