Gulfstream G650 Program - Research Paper Example

? Research Paper of the Table of Contents Introduction 4 Principle goods and services 5 Market share 6 Geographic locations where it operates 7 Major competitors 7 Activity Based Costing 7 Factors for that leads to choosing activity based costing 7 Ramifications of implementing ABC in the international business environment 9 Structure of the distribution of costs using ABC 10 Standard Cost 11 Factors influencing the decision 11 Ramifications of costs, quantity, and variances 12 Ramifications of using standard costs in the international business environment 14 Benefit for the firm by analyzing future projects in terms of relevant costs 14 Expansion 14 Consolidation 15 Downsizing 16 Conclusion 17 References 18 Introduction The airline industry is growing rapidly in the globalised business environment. With advancement of technology, modes of transportation have improved significantly. In the global village, transportation and communications occupies a key position in the business front as well as in the personal lives of individuals. Hence, the private jet sector is expanding rapidly. A number of companies are competing steeply with one another in the international market. In this paper, the case of Gulfstream Aerospace Corporation has been presented with reference to the benefits accrued to the company by adopting activity based costing strategies. The research design provides an overview of the pattern of research made in this paper. Research design is the basic framework that is used to collect information and evidence for exploring the research question (Bryman & Bell, 2007). In this research, the deductive approach to research has been adopted, in which the researcher studies theories existing on the benefits of activity based costing and verifies them by testing them in the context of a selected airline company. Secondary data for the study has been collected from existing sources, such as newspapers, magazine articles and company annual reports published in the print media as well as on the internet. It has also been explored in this paper whether the company would benefit by using standard costs and its consequence in international business scenario. This paper also provides an over view on how decision making in the firm is affected by these approach to measure costs. The factors that encourage incorporation of standard cost in the company’s costing structure have been discussed. Implications of standard cost on price variance and quantity variance have been explored. Benefits of expansion, consolidation and downsizing for the firm have been explained in the paper. Finally, it has been discussed how the firm might benefit by implementing the relevant method of costing in its future projects. Company background Gulfstream Aerospace Corporation is one leading airlines service provider in the United States. It is a subsidiary firm of General Dynamics (Gulfstream, 2012). Gulfstream is one segment of the parent company; the four main segments of the company are aerospace, marine systems, combat systems and information systems and technology. Gulfstream designs, develops, manufactures and sells some of the most technologically-advanced jet aircrafts (Gulfstream, 2012). The aircrafts are designed for both commercial and also defense purposes. Besides innovating, designing and manufacturing their own vehicles, the company also has pre-owned aircrafts that it lets out to customers for contract ownership. The company has its headquarters in Virginia, but operates in several countries across the world. Some of the best skills and talents from different countries are possessed by Gulfstream. More than 11,500 people employees work with Gulfstream in 11 locations in different countries. The company is a market leader in all the segments in which it operates. Gulfstream has reached this position by following a disciplined approach towards growth. The company has developed its profile very carefully and selected its product and service portfolio in sync with its target markets. It targets the government and commercial customers of the US as well as governments and commercial customers of foreign countries. Each of these segments has several business units operating within them. Each unit has its own administrative department. This allows the units to operate independently without a central control. Principle goods and services The goods and services developed by Gulfstream are marketed aggressively by its marketing team. The organization develops its strategies and implements them through a balanced model of business framework. The company has developed a range of high end aircrafts over the period of last 50 years. The products and service offerings that bring revenue to the company can be divided into three parts; Aircraft manufacturing, fitting and completions, Aircraft services and Pre-owned aircrafts offerings. There is high level of operations flexibility within the company. It is highly innovative. In the last year, Gulfstream has introduced a new passenger aircraft that has higher range than the previous versions and has greater passenger capacity. The product line of Gulfstream includes a wide spectrum of aircrafts offered at varying prices and wide performance options. This wide range of speeds, cabin dimensions, passenger capacity and associated price range make the aircraft suited to the appropriate transportation need of the customer. Thus, the company’s products become attractive to the target customers. With the changing work atmosphere and diversity of the global customer, such a wide range of products make the company highly competitive in the international market. The company has manufacturing units in different countries for producing different models of cabins; however, all the models are outfitted within the facilities located in the US. This leads to uniformity of the products and the company can provide better quality assurance. Since the individual units within each segment of the organization operate independently, they are very much customer oriented. They can develop their products according to the transportation needs of the buyers belonging to the target customer base. The different products of Gulfstream are G150, G280, G450, G550 and G650. Market share Over the last 12 years, the market for jet airplanes has swelled considerably. The market leaders are Bombardier and Gulfstream with 36 percent and 32 percent market shares respectively (Yago and Trimbath, 2003). Other smaller competitors account for the remaining 32 percent of the market share. Geographic locations where it operates The company operates in North America as well as in other parts of the world. The country has a strong market outside the United States and almost 8 percent of the consolidated revenue earned by the company comes from the international businesses of Gulfstream. They are present in Canada, Mexico, Brazil, Australia, Germany, Switzerland, Spain, France, Italy and the United Kingdom. The base of the company is situated in North America at Virginia; however, the company has recently adopted expansion strategies to enter new markets, particularly the emerging markets of Asia. Customers of the international market represent a rapidly growing segment of the aircraft business of the company. Major competitors Gulfstream is one of the leading companies in the airlines industry. It also faces strong competition from other companies, such as Bombardier, Beechcraft, Inc. and Cessna Aircraft Company. The companies are the main competitors in private jet sector. Bombardier, accounting for 36 percent of the world market for private jet, is the biggest rival of Gulfstream. Activity Based Costing Factors for that leads to choosing activity based costing The firm Gulfstream uses the traditional method of Absorption costing for establishing the product cost both for profit measurement and stock valuation purpose. But this techniques suffers from some major drawbacks like encouragement for the production of finished goods, the stocks are mainly valued for the purposed of financial accounting, the overhead costs are mainly absorbed on the basis of direct labor, fixed costs are often charged to the products on the basis of production volume, which is not always correct and lastly absorption costing often fails to accommodate higher amount of fixed cost. On the other hand Activity Based Costing (ABC) is the method of costing in which the costs are traced to the activities first and then to the products. ABC is the system of costing in which the main focus is on the activities that are conducted in order to manufacture the products. Activities become the prime element for calculation of cost accumulation. ABC assumes that activities responsible for incurring the costs and products are liable for creating demand for the activities. The costs that are charged to the products are based on the use of each activity towards the manufacturing of the product. In traditional costing method, which is being presently followed by Gulfstream the cost are not first traced to the activities, rather they are traced to the certain organizational units, such as plants or departments and then to the products. Thus, one thing in traditional costing and Activity Based Costing remains same that in the second and the final stage, both the systems traces the cost to the products. ABC by emphasizing on the activities tries to ascertain the factors that cause the major activities, cost incurred in such activities and the relationship between the products produced and the activities caused (Lal & Srivastava, 2009). The relationship between the three is given below: Figure 1: Activity Based Costing Process Source: (Lal & Srivastava, 2009) Due to these drawbacks in traditional absorption costing, activity based costing should be used. Moreover, activity based costing offers several advantages to Gulfstream, which are as follows: It is regarded as a more equitable method of charging the cost to the products. The complexity in the production process is considered, while charging the cost. Complex and short run products might attract high level of unit cost as compared to the simple and long run products. Many costs that are considered to be fixed under marginal or absorption costing can be treated as variable under long term in case of activity based costing. This in turn led to discouragement of building up of finished stocks. ABC helps in achieving cost control. It focuses on what is happening in the production environment and identifies the elements that are subjected to managerial control (Bendrey, Hussey & West, 2003). Ramifications of implementing ABC in the international business environment Activity based costing offers several opportunities to the organization by adding value. The activity based costing provides better information to the management of the organization. ABC uses more data as compared to the conventional costing methods, which provides informed estimation regarding the product costs. This better product costs helps the manager in taking better pricing decision, which is very important in this competitive international business environment in which Gulfstream is operating (Sisaye, 2006). It also provides better information related to the cost of the processes and the activities. ABC helps the managers in realizing the activity that is incurring higher amount of cost and on the basis of which proper steps can be taken so that the cost can be reduced. Thus, ABC offers various strategic opportunities to the companies. More particularly in the cost arena, the company succeeds in developing the competitive advantage by becoming a lower cost producer. Overhead cost which is major concern for Gulfstream, will gain attention through activity based costing (Weil & Maher, 2005; Hansen, Mowen & Guan, 2009). Structure of the distribution of costs using ABC The Gulfstream distributes the costs like direct material, direct labor and overhead through batch costing. Batch costing are used in the situations, where the items that are manufactured are identical in nature and are produced in batches. The products retain their identity from the beginning till the end of the manufacturing process. Under this method of costing, batches are treated as cost units and the costs incurred, gets accumulated against each batch (Dutta, 2003). The two principle steps that have been discussed above are segregated into the following steps, while implementing ABC in Gulfstream. Identifying the main activities that take place in the organization. For instance, in case of Gulfstream, they should consider activities like material handling, assembly, matching, dispatch, purchase, receipt, etc. The factors that determine the cost of the activities should be identified. These are also referred as the cost drivers. In case of Gulfstream, the factors are the number of setups; number of orders delivered, number of purchase orders, etc. The cost towards each activity should be allocated. The overhead to the product should be charged on the basis of activity usage and expressed in terms of cost driver. In case of Gulfstream, suppose the total cost of purchase was $4,000 and the numbers of purchase orders placed are 40. Therefore, the batch that is generating the four purchase orders will be charged $100 x 4 = $400 for purchasing overheads. Standard Cost Factors influencing the decision Standard cost expresses the amount of cost that is attainable under good performance. For Gulfstream using standard cost will be highly beneficial, since it provide a more reliable and realistic predetermined cost on the basis of which actual cost can be compared. Standard cost involves more sophisticated evaluation, operation analysis and comprehensive reviews of the external and internal factors. It provides a reliable way of measuring product cost, pricing, planning, coordination and cost control. On the other hand estimated costs are less realistic, as they are determined by projections using the average of the past data. As it is not determined scientifically, so they are not helpful for the management (Gupta, Sharma & Ahuja, 2006). Therefore, these disadvantages of estimated cost make standard cost more appropriate to be applied for Gulfstream. Following are the primary factors that lead to usage of standard cost: Planning is process that is incorporated by every organization, such that the resources can be utilized by the business in such a manner that it leads to maximization of business profits. In case of Gulfstream standard cost will be more convenient method for preparing the budget as compared to actual cost. This is because standard costs for various product mixes and different production levels can be built up to generate the total cost. By using standard costs, Gulfstream will be able to implement better coordination among all the functions like accounting, research, engineering, marketing and manufacturing, so that they can aim towards the accomplishment of a common goal. Cost control is the most important aspect that every organization aims. The main objective of cost control is production of the required quality at lowest attainable cost under the prevalent condition. Gulfstream is not an exception in this case; they also aim to control their cost, in which standard cost can be of great help. By using standard cost Gulfstream will be able to reduce the clerical and labor expenses by avoiding the detailed record keeping method, which is otherwise required when actual costs are used. The production and pricing policies can be formulated using standard cost. When the standard unit cost is available to the company, using this information expected sales price and costs can be computed using that basis. Apart from these, standard cost also acts as incentives to the employees, if they are reasonable and attainable, which in turn improves the performance of the employees and retains the quality of the product. Ramifications of costs, quantity, and variances After determining the standard cost, the organization will be preparing the budget performance report, which will be summarizing the standard cost fixed by the company, the actual cost that the organization incurred and the differences between the two for the number of units manufactured by the company. The difference between the standard cost and the actual cost is referred to as cost variances. If the actual cost is less than the standard cost, then it is called as favorable cost variance. On the other hand, when the actual cost exceeds the standard cost, it is called as unfavorable cost variance. Therefore, based on these variances the management of an organization can take decision regarding how they will control the cost (Duchac, Warren & Reeve, 2011; Warren, 2013). Gulfstream is a manufacturing company that manufactures aircraft. The total manufacturing cost variance is the difference between the total actual cost and the standard cost for units that are manufactured by the organization (Kinney & Raiborn, 2012). The major variances that Gulfstream experiences is given below: Figure 1: Total Manufacturing Cost Variance Source: (Warren, Reeve & Duchac, 2010) Price variance and quantity variances are the two most important factors of which Gulfstream is concerned. The price variance indicates whether the management has paid more or less than the standard price, whereas the quantity variance measures the efficiency of the management in using the inputs. These two variances will be used by the management in deciding their efficiency and fixing the pricing strategy (Horngren, 2008). Price Variance = (Actual price – Standard price) x actual quantity used Quantity Variance = (Actual quantity used – Standard quantity allowed for the actual output) x standard price. Ramifications of using standard costs in the international business environment Gulfstream is operating in international business environment and standard cost is an efficient measure that helps in managing the business during the period of economic stability. At the same time during the economic volatility the management dedicates significant time in understanding the variance as compared to the standard cost that is largely driven by non-controllable macro-economic factors rather than any other value added or more useful activities for considering and addressing the effectiveness and efficiency of manufacturing. Using the information related to standard cost is more appropriate for supporting certain business decisions like using direct cost to support decisions related to marginal production. Thus, standard cost provides a useful measure taking important management decisions, which are very important in international business environment (KPMG LLP, 2010). Benefit for the firm by analyzing future projects in terms of relevant costs Expansion When the business is operating at the maximum sales or production capacity, but fails to cater the customer’s demand, which is continuously growing, in such a scenario expansion is the strategy that helps the organization to stay competitive in the market. With the expansion, the organization will have larger office, more employees, more location and additional production equipments. Gulfstream is a large company and due to the business expansion, the organization will enjoy economies of scale. Economies of scale signify that as the volume of the company’s production increases, the cost of manufacturing the product reaches the most efficient. This means that the business will be having much lower per unit cost because of its larger size. Therefore, the firm can buy raw material at a much cheaper rate, when buying in bulk and the high cost of the overhead and marketing campaign will be spread across the larger sales volume (BBC, 2013). Consolidation Consolidation involves initial acquisition of one or more platform companies and followed by purchase of add on acquisition. The owner of the platform company often considers this method as the process of recapitalization. Businesses like that of Gulfstream require diverse skill set, such as efficient operations management of the business, sufficient market knowledge and hard work. Business consolidation acts a most efficient way for increasing profits and sales of the business. This process will serve as the most effective way for reducing the production and the overhead cost, generate addition revenue, accomplish economies of scale and catch the attention of skilled managers by offering high compensation packages and other opportunities for Gulfstream. Moreover, it will also reduce some of the administrative functions, eliminate surplus staff and decrease the operational redundancies. This will lead to the decrease of the capital and operating costs, which in turn will develop the bottom line. Apart from cost cutting, it also offers other benefits for the management like the benefit of size. The business gains the ability to develop national accounts and attract the skilled employees. They also get the added benefits of (the) ability to create integrated system, establish brands and get attractive rebates from the vendors (Slee, 2011). Downsizing Downsizing is treated as a short-term management strategy. Downsizing is the process in which a large number of employees are dismissed in mass, which can impact on the competitive gains via cost advantage. In the world’s economic landscape downsizing has now acquired a very significant place in terms of dealing with international competition, re-engineering, trade agreement, economic deregulation and some forms of industrial restructuring due to new technologies. The three main drivers that can lead Gulfstream towards downsizing are pressures of global competition or new technology or increase in the customer demands including database-driven marketing and customer focus activities. However, the main reason for which Gulfstream should go for downsizing is to save money by reducing cost. Depending on the industry, the labor cost is seen to vary from 30 to 80 percent of the total business costs. By going for downsizing, Gulfstream can become fitter and leaner, decreases overhead cost, enhances shareholders value, increases productivity and facilitates swifter decision making. It also leads to improve customer service and quality and also makes the organization more flexible in taking risk. Apart from these benefits for the organization, it also offers benefits for the employees like enhancing the external focus and improves nature of team work. Thus, downsizing offers various positive aspects to the organization (Kakabadse, Ludlow & Vinnicombe, 2005; Cooper, Pandey & Quick, 2012). Conclusion Gulfstream Aerospace Corporation is one leading airlines service provider in the United States. Gulfstream designs, develops, manufactures and sells some of the most technologically-advanced jet aircrafts. Thus, manufacturing is the most important aspect of the organization and is the main source of revenue generation. This implies that material, labor and overhead costs are the main costs incurred by the organization. The firm was following absorption costing, but this report has suggested that Activity Based Costing (ABC) is more appropriate and beneficial. Furthermore, setting up the standard cost for finding the variance will be beneficial for taking significant managerial decision related to cost reduction. The report has also focused towards expansion, downsizing and consolidation, which will help the organization in taking management decisions. References BBC. (2013). Expanding a business. Retrieved from http://www.bbc.co.uk/schools/gcsebitesize/business/aims/sizeandorganisationrev1.shtml. Bendrey, M., Hussey, R. & West, C. (2003). Essentials of management accounting in business. Connecticut: Cengage Learning EMEA. Bryman, A. & Bell, E. (2007). Business research methods. Oxford: Oxford University Press. Cooper, C.L., Pandey, A. & Quick, J.C. (2012). Downsizing: Is less still more? 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