Manufacturing Strategy Of The Coca-Cola Company - Research Paper Example

Manufacturing Strategy Of The Coca-Cola Company Introduction Through the years, accounting has evolved from a mere number-crunching exercise to an important aspect of business and decision-making. Companies, especially multi-nationals, have recognized that accounting and the accounting policies and procedures provide quantitative data that are necessary for management to make informed decisions and analyze the companies’ operations. This paper analyzes the accounting policies a big company, Coca-Cola Company, had adopted, how it applies these policies, how such policies (and their results) are reported in the annual report and how the application of these policies affect the strategic planning and decision-making of this company. Basic Accounting Policies In general, the accounting policies of Coca-Cola are “in accordance with accounting principles generally accepted in the United States” (2008 Annual Report or AR; page 77) or the US GAAP. The following paragraphs discuss the accounting policies adopted by Coca-Cola for its specific accounts. Cash equivalents are basically composed of “marketable securities that are highly liquid and have maturities of three months or less” (2008 AR; page 81) from date of acquisition. To control its exposure on its cash equivalents, the company transacts only “with financial institutions of investment grade or better” (2008 AR; page 81). Such exposure is monitored daily and any downgrade in the rating of these institutions is reviewed immediately. Bad debts are used by the company to adjust its receivables to their collectible value. Bad debts are reviewed annually and the review is based on the company’s past experiences in terms of receivables written off, level of uncollectible accounts, level of accounts that were already past due before these were collected and the current operations and financial position of the company’s customers and partners. On inventories, these are “valued at lower of cost or market” (2008 AR; page 81). Cost is determined using either the average cost or the first-in, first-out method. Property, plant and equipment are also accounted at cost. The company uses the straight-line method in calculating its depreciation expense. The useful lives of the company’s fixed assets vary. Its containers have a life of 10 years or even less while buildings and improvements are depreciated over 40 years or less. Leasehold improvements, on the other hand, are amortized over the shorter of the life of these improvements (as estimated by the company) or the applicable lease term. For its financing activities, the company uses a mix of debt and equity financing. The company’s strategy is to use debt financing to reduce its “overall cost of capital” which, in turn, increases its “return on shareholders’ equity” (2008 AR; page 64). The company’s short-term and long-term debts are mostly interest-bearing commercial papers and notes issued in the United States. The company monitors its interest rates through a mixture of short-term and long-term debt. To control its interest rate exposure on these debts, the company enters into derivative instruments such as interest rate swap agreements. These derivative instruments are designated as hedges of the applicable exposure and are reviewed on a quarterly basis as to their hedging effectiveness. Such instruments are accounted for using the fair value. Critical Accounting Policies In page 37 of the 2008 AR, the company outlined five accounting policies and estimates which are considered “most critical”. These are: (1) basis of presentation and consolidation; (2) estimating recoverability of noncurrent assets; (3) recognition of revenues; (4) accounting for income taxes and (5) accounting for contingencies. The following paragraphs briefly discuss each one of these areas and the accounting for them. The basis of presentation and consolidation is a critical accounting policy for the company since it has numerous subsidiaries (controlling interest) and associates (non-controlling interest) in various countries. Assessing whether these investments are subsidiaries or just associates is a critical judgment area for the company since the classification will determine if the investee-company will be consolidated or not. The company considers various factors such as “ownership interest, representation on the board of directors, participation in policy-making decisions and material intercompany transactions” (2008 AR; page 37). For subsidiaries, these are disclosed as such and the subsidiaries’ financial position and results of operations are consolidated with the company. For associates, these are accounted for using the equity method and disclosed as such accordingly. The company has been criticized by certain accounting experts on its nonconsolidation of several associates or investee-company. The company, however, has remained firm on its policies and has remained consistent on which entity to consolidate and which to account for using the equity method. Estimating recoverability of noncurrent assets is another critical accounting policy for the company due to its substantial investments in fixed and other noncurrent assets. In making this estimation, the company performs impairment test in accordance with US GAAP. Some accounts are tested for impairment on an annual (or even more frequent) basis while others are just tested when “conditions exist that indicate the carrying value may not be recoverable” (2008 AR; page 38). As with any other company or business, one of the critical accounting areas is revenue recognition. The company recognizes revenues from its sales of its products when the title to the products passed on to the buyer or customer. The transfer of such title is in accordance with the sales contract or terms entered into between the customer and the company. In addition, the company provides incentives to its customers. The amounts of these incentives are disclosed by the company as deductions from its revenues. Accounting for income taxes, particularly deferred income taxes or liabilities, is another critical accounting area for the company. Its provision for income taxes is subjected to significant judgment. Deferred income tax assets and the related tax benefits are also reviewed by management to assess whether such should be recognized in the balance sheet or just disclosed. On the deferred tax liabilities, the concern here is mostly on the undistributed earnings of the company’s subsidiaries as the company did not recognize the deferred tax liability due to the indefinite nature of the investment (and subsequent reinvestment). Such reinvestment strategy is subjected to reassessment by the company and any changes in this strategy may result to a change in the deferred tax liability. The last critical area is the accounting for contingencies. The contingent matters mostly relate to legal cases and income or indirect taxes. Due to the uncertainty of these matters, the company assesses the probability of their occurrence, with such assessment affecting the recognition (or nonrecognition) of the contingent liability. The company disclosed material contingencies in the Note 13 of its financial statements. Cost Accounting One critical aspect of the company’s operations is its cost accounting. As stated in page 81 of its 2008 AR, its inventories are composed of raw materials and packaging and finished goods. These inventories are accounted for using the lower of cost (average cost or first-in, first-out methods) or market. Product costing and cost accounting are two critical areas in the operations of Coca-Cola. As stated in page 15 of the 2008 annual report, the company uses a variety of raw materials and packaging materials for its operations. Any increase or decrease in the cost of these materials, to the extent that such cannot be recovered through increase in selling prices, will affect the operations of Coca-Cola. Similarly, if the company fails to properly account for the costs of its products and packages, such may result to misstated cost, gross profit and over-all net income. Thus, it is very important that the company captures accurately all the costs related to manufacturing and packaging of its products. In controlling its costs and improving its cost performance, the company puts up various bottling plants around the world. These are viewed as “cost centers” (Miltenburg, 2005), however, they help reduce the cost of transporting the company’s products from one plant to its global customers. Monitoring the costs of these plants, however, is a challenge for the company. To this end, each bottling plant of the company has its own accounting group in-charge of recording the accounting transactions of the subsidiary. The accounting records are submitted to the head office through the company’s intranet where these are analyzed, recorded, consolidated and reported. The analysis of such costs entail comparing actual with forecast, reviewing the cost accounts and assessing the reason behind the differences. The need to adjust the forecast is also assessed based on actual data. Over-all, the company’s thrust have been to become cost-efficient without sacrificing the quality of its products. To this end, the company keeps a close relationship with its suppliers to ensure that the latter is in tune with the policies of the company. The company also has its “Supplier Guiding Principle” (found in http://www.thecoca-colacompany.com/citizenship/supplier_ guiding_principles.html) where the company communicates its expectations and its values to its suppliers. These principles are “are implemented through: a) open communications to all existing and potential suppliers of TCCC around the world; b) making them part of all agreements and purchase orders with every direct supplier to TCCC; and, c) assessing suppliers of packaging, ingredients and trademarked materials for compliance with the minimum requirements, with a focus on correction of shortfalls”. Division Presidents and the appropriate officers are the ones who monitor the compliance of these suppliers. Accounting and Coca-Cola’s Strategic Planning The company ensures that it captures and records all of its business transactions to enable management not only to properly report its financials to its stakeholders but also to have proper basis for assessing the company’s performance and for its strategic planning. To this end, the company obtained an integrated system (the SAP Enterprise Management and mySAP Business Intelligence). This system processes accounting information, at the same time, it generates financial reports needed for planning the company’s operations. Financial information generated by each subsidiary and the head office are integrated through this system (the hub, of which, is located in the head office in Delaware) via the company’s intranet. The information is then processed by the system. For external purposes, the system consolidates the financial information and generates the necessary financial reports. The system is also very much in use for internal reporting purposes. Actual financial data are processed and extracted on a daily basis for distribution to the concerned managers. These data are used to analyze the operations of the company and to update the monthly consolidated forecasts of the company. Monthly forecasts cover not only the projected consolidated sales of the company and its subsidiaries but also its projected cost of sales, operating expenses and profitability. Other than the monthly forecasts, the company also uses its actual financial data “to perform business planning at the strategic and operational level around all financial issues, like sales, price, cost, headcount, profitability and financial statements (SAP; 2001). Actual financial data are analyzed, particularly the sales trend for the past few months or so. This can be done not only on the consolidated sales of the company but also on the brand level. The data are then used to project the sales level during the next few months. Trends such as these are also assessed and differences between the financial forecasts and the actual trends are reviewed for possible explanations on the fluctuations. The actual financial data of the company is also used for cash planning and forecasting. In page 60 of the 2008 AR, the company stated that it usually funds significant expenditures such as capital expenditures through internally-generated funds. If these funds fell short of the amount of expenditures, the company will resort to borrowing from its lender-banks. Thus, it is very important that the company will be able to project properly its expenditures every year. To do this, the company and its subsidiaries project major expenditures and cash disbursements the following month or year and assess if the projected operations will generate enough funds to cover such expenditures. If there is a need to do so, the company avails of external funding to finance such expenditures. The budgets and forecasts prepared by the management are reviewed by the Finance Committee of the company. According to Coca-Cola’s website devoted to governance, the Finance Committee is tasked to prepare, for the approval of the Board of Directors, “annual budgets and such financial estimates as it deems proper”. It “shall have oversight of the budget and of all the financial operations of the Company, shall recommend dividend policy to the Board of Directors and from time to time shall report to the Board of Directors on the financial condition of the Company”. Conclusion This paper analyzes the accounting policies a big company, Coca-Cola Company, had adopted, how it applies these policies, how such policies (and their results) are reported in the annual report and how the application of these policies affect the strategic planning and decision-making of this company. In summary, Coca-Cola adopted accounting policies that are in accordance with the prevailing accounting policies in the United States. It ensures that it discloses the impact of critical accounting policies such as consolidation, revenue recognition, income taxes, recovery of costs of noncurrent assets and accounting for contingencies. The company uses actual financial data not only for external reporting purposes but also to come up with strategic plans that will drive the company’s operations in the future. Such plans use a variety of actual financial reports and are reviewed by the Finance Committee. References 2008 Annual Report. The Coca-Cola Company. Retrieved on April 10, 2009 from http://www.thecoca-colacompany.com/investors/form_10K_2008.html. Coca-Cola Goes Live with Global Consolidation, Planning, Reporting and Decision Making Using mySAP.com. 2001. SAP. Retrieved on April 10, 2009 from http://www.sap.com/ mexico/solutions/netweaver/businessintelligence/pdf/CS_Coca_Cola.pdf. Finance Committee Charter. The Coca-Cola Company. Retrieved on April 10, 2009 from http://www.thecoca-colacompany.com/investors/governance/finance.html. Supplier Guiding Principle. The Coca-Cola Company. Retrieved on April 12, 2009 from http://www.thecoca-colacompany.com/citizenship/supplier_guiding_principles.html. Miltenburg, John (2005). Manufacturing Strategy. New York: Productivity Press. Retrieved on April 9, 2009 from http://books.google.com.ph/books?id=k6f5tti-_cIC&printsec= copyright&dq=coca-cola+cost+accounting&hl=en#PPR4,M1. Read More