Intrinsic Value of Boeing Company - Research Paper Example

?Introduction Boeing is a considered the world’s biggest aerospace company and top manufacturer of commercial jetliners, defense, space and security systems (Boeing in Brief, 2011). The company has 63,000 employees around the world and worth $32 billion (Boeing Defense, Space, & Security, 2011). It is the chief leader in innovation and aerospace products and services. The demands of the customers made the company continue to expand its products and services such as development, design, support, sales and manufacture of commercial jetliners, satellites, military aircraft, missile defense, launch systems and services and human space flight (Intrinsic Value of Boeing Company, 2010). The company expanded to include in their services the creation of new and more proficient commercial airplanes. They included to integrate military platforms and defense systems and create advanced technology resolutions (Boeing in Brief, 2011). The company operates in Chicago with more than 165,000 employees across the United States and other countries (Boeing in Brief, 2011). Most of their employees are college degree holders, with those advanced degrees in technical and business fields thus making the company one of the most diverse in terms of talent and capabilities word wide. Boeing has been categorized into two business units namely, Boeing Commercial Airplanes and Boeing Defense, Space and Security (Boeing in Brief, 2011). Boeing Capital Corporation provides for the financial solutions of the two business units (Boeing in Brief, 2011). On the other hand, Boeing Engineering, Operations and Technology develops, acquires, applies and protects processes and innovation of technologies (Boeing in Brief, 2011). The Shared Services Group of the company provides for the broad range of services to the company (Boeing in Brief, 2011). One of the major competitors of Boeing is Airbus. According to the article in The Economist (2010), Boeing and Airbus have been rivals in the industry of commercial aviation. China and Russia at the same time will launch their single-aisle jets which are expected to operate in 2016. The Commercial Aircraft Corporation of China will be assembled locally and expected to be cheaper. Russia’s United Aircraft Corporation aims to compete with the two most powerful companies in aviation industry (New competition for Airbus and Boein, 2010). The direct competitors of Boeing are the following companies: European Aeronautic Defense and Space Company, Lockheed Martin Corporation and Northrop Grumman Corporation. Lockheed Martin Corporation or LMT has a market capital of 24.40B, while Northrop Grumman Corporation has 15.28B (Direct Competitor Comparison, n.d.). Boeing and ABC Activity-Based Costing or ABC is a “method of attributing costs to products based on first assigning costs of resources to activities and then costs of activities to products” (Activity-Based Costing and Quality Management, n.d., p. 453). This method is one of the foremost developments in product costing. As stated in Chapter 8 of Activity-Based Costing and Quality Management, this method is considered as more accurate but requires more time and expense. A research study was conducted to Boeing Commercial Airplane Group (BCAG) in Wichita Division in 1999 to 2000. Paduano, Harris, and Gershenfeld (2000) believed that the Activity-Based Costing method is worth the study due to its great interest on Boeing’s lean practices involving cost of production and services. With this study, the researchers wanted to find out the effects of using the ABC method and its benefit to the company bearing in mind that ABC management will lead to a more accurate allocation of company’s charges and improvement on costs. According to Paduano, Harris, and Gershenfeld (2000), motivation for the application of ABC rooted from the fact that the method recognizes the true costs which will help the leaders or managers in decision making such as in manufacturing. This method also helps the managers truly understand that in making their critical choices, they will affect the company thus ABC is said to have been designed to help companies prioritize overall manufacturing environment rather than individual products (Paduano, Harris, Gershenfeld, 2000). In the study conducted at BCAG in Wichita, the company set guidelines to ensure that the ABC management implemented accommodated each of the major business units such as engineering, fabrication, assembly, support and tooling (Paduano, Harris, Gershenfeld, 2000). There were three categories of costs designed in BCAG Wichita: primary, secondary, and tertiary costs. In Wichita, the application of the method started by analyzing and strengthening the process of the company’s accounting system and focusing on areas that needed improvement. According to Paduano, Harris and Gershenfeld (2000), Boeing Wichita group is hopeful that the implementation of the ABC method will enhance the company’s ability to compete and increase its ability to meet its future goals. The study was divided into two phases: Light Structures and Structural Bond. In the first phase, the analysis showed that rates used in calculating the costs for each work process were inaccurate and impractical and the company’s managers were using these rates in the decision-making. Thus ABC management implementation in Wichita showed the importance of using accurate ABC rates in enhancing the ability of the manager to decide based on true cost of work (Paduano, Harris, Gershenfeld, 2000). The second phase on the other hand revealed how ABC method was able to quantify the cost of the activity of doing a rework and identified the original problem in the company (Paduano, Harris, Gershenfeld, 2000). In the end, the study conducted by Paduano, Harris and Gershenfeld (2000) proved that the implementation of the Activity-Based Costing was beneficial to Boeing Commercial Airplane Group in Wichita. The effects include a standard metric developed to determine if there is a need for rework, metric developed that helped share important information in critical parts of organization, created costs savings, development of training module and reduction of overtime hours (Paduano, Harris, Gershenfeld, 2000). According to Paduano, Harris, Gershenfeld (2000), the implementation of Activity-Based Costing in the interational business environment has been very popular among the companies in the commercial sector. Majority of the companies adopted this method to ensure they can compete to the business. However, implementation of this method in aerospace has been slower than other industries due to the structure of current product acquisition which is affected much by the need to interact with government agencies (Paduano, Harris, Gershenfeld, 2000). In addition, I would suggest using the same structuring or categorizing of costs by Boeing Wichita. As categorized by Paduano, Harris and Gershenfeld (2000), the three structures of costs as described as follows: • Primary costs – the activity’s cost can be assigned directly to the cost object. • Secondary costs – the activity has a cause and effect relationship to the cost object, even though there might be no direct relationship. These secondary activities are first driven to the primary activity center through location drivers, and subsequently to the cost object through activity drivers. • Tertiary costs – the activities have little or no cause and effect relationship to the cost object and costs are driven to the cost object using volume drivers such as labor hours or labor dollars. (p.6) Boeing and Standard Cost As defined by SCM Network in their International Standard Cost Manual, the Standard Cost Model (SCM) is “a method for determining the administrative burdens for businesses imposed by regulation. It is a quantitative methodology that can be applied in all countries and at different levels “(International Standard Cost Model Manual, n.d.). This method is known to be the most commonly applied to measure administrative costs. It is an “activity-based measurement of the businesses’ administrative burdens making it possible to follow the development of administrative burdens” (International Standard Cost Model Manual, n.d.). Standard Cost can be beneficial to the firm. Standard costing is considered a valuable management tool (Introduction to Standard Costing, n.d.). Instead of assigning actual costs such as in materials and manufacturing, this method allows the company to assign expected or standard costs which will create variances. Because of the variances, the firm will be able to know where the problem is and what to do. The sooner the variance is reported, the sooner the company can take action on this. If the variance is unfavorable, company’s actual profit will be lesser; on the other hand, if the variance is favourable, which means that the actual cost is less than the standard, the company will exceed the expected profit. Assigning standard cost is advantageous to save time and effort by just looking the the variance. Example of applying or assigning standard costs: Cost of building license: $500 thousand Cost of building construction: $5 million Actual cost of building license: $350 T Actual cost of building construction: $6.5 M The cost of building license has a positive variance of $150 thousand, thus increasing the possible profit. On the other hand, the actual cost of building construction has a negative variance of $1.5 million making a loss of $1.5 million in the targeted profit. In the scenario, the company can therefore identify which of the departments handling each responsibility committed an error in computation of budget. It can be said that the department handling the building construction had miscalculated the costs making the company suffer a loss of $1.5 M. The simplicity of assigning standard costs can help each company save time and effort without much putting more time in calculating the specific numbers. Thus, one of the major advantages of Standard Costing is simplification. In analysing and accounting big firms like Boeing, it will really require extensive effort and time to have an accurate computation of profits and costing. What is advantageous in using this method is that it is action-orientated and less burdensome. Using standard cost helps point out the specific part of onerous legislation that needs to be resolved. It also assists in determining which particular department is responsible for the problems and the total cost f these problems”(International Standard Cost Manual, n.d., p.48). Boeing and Relevant Costs In every decision making, it is almost always a difficult task to choose what decision to make given a numerous list of alternatives. However, amongst these alternatives and data, there are only few considered to be relevant. Managers constantly choose from at least two alternatives which have a list of costs and benefits to weigh. Thus upon the process of comparing costs and benefits of two alternatives comes the existence of relevant costs. Therefore, in making the decision between the alternatives, distinguishing which is relevant and not is very critical for reasons that: 1) helps managers save time and effort and 2) help avoid making erroneous decisions based on irrelevant alternatives (Relevant Costs for Decision Making, n.d.) As defined by Caplan (n.d.), relevant costs are “costs that are relevant with respect to a particular decision. A relevant cost for a particular decision is one that changes if an alternative course of action is taken. Relevant costs are also called differential costs.” Determining Relevant Cost For example, the company is torn between two possible locations for expansion of office of the Boeing Engineering. The two locations are Texas and California. Data of expansion are the following: Texas Office: California Office: Building cost: $5 million Building cost: $5 million Building license cost: $100 thousand Building license cost: $80 thousand Maintenance and repair costs: $50 thousand Maintenance & repair costs: $50 thousand Annual cost of insurance: $1 million Annual cost of insurance: $1 million Cost of gasoline from Head office Cost of gasoline from Head office in Chicago: $1.6/ 32 miles in Chicago: $1.4/ 32miles We should take note that only those costs that differ in our given choices are relevant. In the data above, building cost is considered irrelevant. Whether you choose California or Texas, Boeing’s cost for building still remains the same. Building license cost is considered a relevant cost because it differs in our choices. If we take California office over Texas, the company can save $20 thousand. Maintenance repair cost is also considered irrelevant because the company already has decided the budget cost for its maintenance whether the office will be located in any of the choices. Annual insurance is also an irrelevant cost because it is already fixed. Lastly, the cost of the gasoline is relevant because if the company chooses to open California office, it is in fact farther from the head office in Chicago than in Texas. The company therefore can save in gasoline cost if they decided to open in Texas. Thus given the importance of relevant costs, Boeing can now eliminate unnecessary costs in making their decision. The company can save time and effort in making the decision when it comes to expansion and other future plans. Summary, Conclusion and Recommendations Boeing as one of the biggest company in the industry of aerospace and commercial jetliners and services must be able to update and compete in the market and its latest methods in analyzing the numbers. This is very important not only because it is ideal, but because technology and methods are very dynamic nowadays. The company must ensure that they are “in” in the market and they can maintain being one of the top companies around the world. Learning and applying methods in analyzing numbers, sales, data and performance of the company is very critical. Decision making of the officers or managers is a very vital process that the company cannot afford to just let it go without exerting time and effort and costs to be able to choose the best among the choices. ABC costing is a method that is considered as more accurate than other existing method in product costing. However, this method of attributing first the costs to resources rather than products requires more time and expense. The company has to pay the price of getting the more accurate method and result. Standard costing on the other hand, offers a simple computation and distinction of administrative burdens by assigning standard costs. Instead of putting much effort and time in computing the exact numbers or costs, standard costing offers the advantage of simplification by looking at the variance of standard costs to actual costs. This method is applied mostly in administrative costing. Relevant costing is a method of looking at the costs and benefits of the given choices. These costs and benefits are being compared in terms of its effect to a particular decision. These costs are those that differ in the given alternatives or choices which can affect a particular decision. It is therefore recommended that the company must see through different methods to ensure that the company managers or officers had chosen the decision that is the most beneficial to the company. This is not only to ensure that the company is doing its best, but to make sure that it is competitive and ready for any critical decision making in the near future. The competition in the industry is very high. The company cannot just relax if it is on top, instead, they have to make sure that they have taken into account everything that can affect the company whether this is in the terms of technology or the methods applied in product and administrative costing. References: Activity-Based Costing and Quality Management, (n.d.). Retrieved 14 November 2011 from http://marriottschool.net/emp/MRS/Files/ABC/ABC%20Chapter.pdf Boeing Defense, Space, and Security. (2011). Retrieved 14 November 2011 from http://www.boeing.com/bds/overview.html Boeing in Brief. About Us. (2011). Retrieved 15 November 2011 from http://www.boeing.com/companyoffices/aboutus/brief.html Caplan, D. (n.d.), Management Accounting: Concepts and Techniques. Retrieved 15 November 2011 from http://classes.bus.oregonstate.edu/spring-07/ba422/Management%20Accounting%20Chapter%203.htm. Direct Competitor Comparison, Competitors. (n.d.). Retrieved 14 November 2011 from http://finance.yahoo.com/q/co?s=BA+Competitors International Standard Cost Model Manual, (n.d.). Retrieved 13 November 2011 from www.oecd.org/dataoecd/32/54/34227698.pdf Intrinsic Value of Boeing Company (Ticker Symbol: BA), (2010). Retrieved 14 November 2011 from http://dowjonesstockinvesting.com/?p=141 Mike O. Relevant Costs for Decision Making [Internet]. Version 3. Knol. 2009 Jun 17. Retrieved 14 November 2011 from: http://knol.google.com/k/mike-o/relevant-costs-for-decision-making/2ipx0i8et13mu/6. New competition for Airbus and Boeing, (2010). Retrieved 14 November 2011 from http://www.economist.com/node/15719170 Paduano, R., Harris, W., Gershenfeld, J. (2000). Employing Activity Based Costing and Management Practices Within the Aerospace Industry: Sustaining the Drive for Lean. Retrieved 15 November 2011 from http://web.mit.edu/ctpid/lara/pdfs/abccasestudy.pdf Read More