Airbus: Financial Benefits & Costs - Research Paper Example

? Airbus: Financial Benefits & Costs Table of Contents 3 of the firm 4 ABC benefits 7 Standard Costs 11 Relevant Costs 14 Conclusion and Recommendations 16 References……………………………………………………………………………………….17 Abstract Airbus is a leading manufacturing airline company in the world. Despite its largest share in the market, Airbus still faces some particular criticism due to its internal disagreements. This unraveled when the company lost almost $300 million on the contracts it had with the consortium, a member of Aerospace in Britain who called for the reorganization of the managerial and financial structure of Airbus. This was done in 1988 by sprucing the supervisory board of the company, the creation of the executive board, and the establishment of the chief executive position. Despite of all that, Airbus company still captured the a huge share in the aircraft commercial market which was steadily growing and even won several contracts with the Air Canada and the Canadian Airlines International in the late 1980. Up to now, Airbus still owns the largest market share in the industry. The company uses standard costing and ABC system of costing that has benefited it from the past. The relevance, application, advantages, disadvantages, and benefits of various costing systems such as Activity Based costing, standard costing, and relevant costs will be described in the sections below. The Airbus Company already applies ABC system and benefits from it. The company is also likely to benefit from the mentioned costing systems due to the various advantages mentioned in the relevant sections of the paper. Section I: Description of Firm Airbus is a leading manufacturer of aircrafts in the world and is headquartered in Toulouse, France. Its commercial know-how, customer support, efficiency in manufacturing, and technological leadership has impelled it to the front position of the industries of air transport and aviation. The mission of the Airbus firm is to provide the best suited aircraft to the needs of the market and to provide support for those aircraft with the highest service quality. The comprehensive and modern line of product of the Airbus firm entails great families of successful aircraft that ranges between 107 and 525 seats: the wide body long ranges A340/A330 and the following generation A350 XWB Family; the single aisle Family of A320; and the double deck Family of A380. Airbus captures almost half of all the agreements of airline orders consistently in the commercial market place. The firm’s customers all over the world have more than 11000 orders of Airbus jetliners, and the deliveries as at 12 December 2011 totaled up to 7000. The firm continually broadens its range of products and scope through applying its proficiency to the military market. The firm is also dedicated to assisting airlines in promoting their fleets’ profitability. It delivers various services in a wide range of support areas that are tailored to the requirements of the operators’ individual need all over the world (Congressional Research Service, 1992). Airbus strives as an industry leader to be a competent eco-efficient firm. The firm was actually the first company of aeronautics to earn the ISO 14001 environmental certification in the world for all its products and production sites for its whole cycle. The company is dedicated to see to it that the air transport remains the eco-efficient mode of delivering value and transport at very minimal impact on the environment. In its fly by wire product line of jetliners, the company’s approach make certain that its aircraft have the highest possible degree share of the commonality in handling characteristics, on board systems, and cockpits. The company also has a history of putting together from different countries the best of them around the world. This is underscored by the global network of the company’s suppliers drawn from over 30 different countries in order to deliver parts, components, hardware and systems at the highest levels of quality. Additionally, the company is determined to outsource the larger packages of work to the suitable partners in the long run and its trusted one tier suppliers. This in turn ensures an enhanced manufacturing and lean design for Airbus as well as with a maximum flexibility in the industry. The policy of Airbus is to include such long term suppliers and partners at the earliest stage of joint development in order to foster a mutual relationship (Thornton, 1995). Airbus was the very first company to create operation that is dedicated to working together with the lessors in 1995. These included its greatest customers, International Lease Finance Corporation and GE capital Aviation Services. It offered an option that was of low risks to the airlines which allowed them to operate efficiently without the need of providing flexibility or financing a fleet to remove or add the capacity as required. These lessors are the low risk Airbus customers. They are not highly susceptible to the recurring nature of the air transport because of their presence in the globe. Airbus is a global firm with over 55000 employees, together with subsidiaries owned in China, America, Japan, and Middle East. It also owns centers for spare parts in Frankfurt, Hamburg, Washington, Singapore, and Beijing. Its training centers are in Miami, Toulouse, Beijing, and Hamburg with over 150 service field offices all over the world. Today, Airbus captures almost a half of all the airliner commercial orders in the world. The company relies on partnerships and cooperation with the major companies around the world, together with a network in 30 countries with 1500 suppliers. The Airbus operates as a manufacturer of the aircraft. It offers products of jetliner such as military transport aircraft, and civil airline aircraft. The company’s line of services include military airlifting, maritime patrol, search and rescue, surveillance operations, applications of medical evacuation, and enforcement of the economic exclusion zone. It also provides aerial tankers for transport missions and in-flight refueling; the company also has support services for its operators, services for cargo carrier, commercial flights of charter on demand, and airline and asset consultancy services. In the process of delivering its products and services, the company faces competition from its major competitors in the market. Some of its major competitors include Etihad Airways, EasyJet plc, Qatar Airways, JetBlue, IndiGo, Spirit Airlines, Republic Airways Holding, and the Boeing Company (Congressional Research Service, 1992). In the Oxford Economic Report, suggests that the future prosperity of the world may depend on the thriving and growing industry of aviation which in the current economic times supports 8 percent of the economy of the world. In relation to the market share performance, Airbus has continually made strong performance of sales in 2011. This has brought milestone commercially and the company has continually met the demand of the robust industry for the modern jetliners product line. Its annual business is paced with the major contracts that come from the leasing companies and airlines, and A320 neo variants. The company has the biggest market share in the aviation industry. Its new choices of engine such as the LEAP-X from the CFM International and the PW1100G Pure Power from Whitney and Pratt delivers a wide range of play load capabilities and saves fuel. This leads to an efficient line of product which gives it a competitive advantage over its competitors (McGuire, 1997). For example, in 2011, the total order bookings for the A320 Family was brought from 23 customers to 1256 and the gross sales of the aircraft in A320 Family stood at 8292 as at December. This depicted Airbus as the best seller in the industry. Airbus in the Global Market Forecast, predicts that the worldwide air traffic will more than double within the two coming decades. This prediction is greatly boosted by the great access to the flight services in the traditional and emerging markets. According to the market forecast, more than 26900 passenger jetliners will be required due to the ever increasing demand which represents $3.2 trillion market value. Some of the factors that drive this kind of high demand include higher degree of urbanization, emerging economies, increasing number of mega cities, and the growth of population with the increasing wealth. In addition, other forces include the need to replace with the new eco-efficient models the old crafts in the markets established, and the ongoing low cost carriers’ expansion (Thornton, 1995). Section II: ABC Benefits. This section highlights the benefits of Activity Based costing if employed by Airbus Company. The ramification of its implementation and the structure of the costs distribution for the firm using the costing system are also highlighted. In distributing the company costs, the company benefits from using the Activity Based costing. This is because ABC is a method of accounting which assigns costs to various activities in regards to their utilization of resources, and not services or products. This will enable the resources and the associated costs to remain more accurate when attributed to the services and products that they use in the company. This does not eliminate or change any cost, but offers detailed information on how the consumption of costs take place in the company. The Airbus Company distributes of costs for the firm using Activity Based costing through assigning the costs incurred to the activities engaged in. it is an extreme vital tool in the improvement process of the firm and the programs of reduction of costs incurred. The ramification of using Activity Based costing is that all particular activities forming the whole production process are accurately assigned costs. For instance, in the Airbus Company, it will be easy to determine accurately the cost of every activity that is involved in the manufacturing of the aircrafts from the acquisition of orders to the delivery of the completed aircraft. Through this process, it will not be difficult to identify the least and the most expensive part of the production process. The activity improvement process of the company therefore will focus on the parts considered expensive in the process. In the international business, Activity Based costing through assessing the costs of the services and the products can give an illustration of their costs and assist in the establishment of the individual service and product profitability. This is specifically vital in the international firms and modern businesses in which firms are making attempts to personalize and differentiate both the services and products and make them according to the requirements and needs of individuals (Lynn, 1997). Airbus derives various benefits when it applies Activity Based costing in its financial analysis. Some of the common benefits derived from the application of the costing system include: improvement of the profitability of the firm via monitoring the performance and the life cycle of the cost; provision of the insight into the least visible and the fastest growing element of overhead cost; improvement of budgeting effectiveness through identification of the relationship of the cost performance at different levels of service; creating links of the operational decision making to the corporate strategy; encouragement of total quality control and continuous improvement because the control and planning are all directed to the level of the production process; improvement of the buy or make, pricing and estimating decisions based on the cost of the product that reflects the process of manufacturing; and facilitation of the elimination of wastes by offering the visibility of the activities that adds no value in the production process (Congressional Research Service, 1992). The application of the Activity Based costing to the Airbus Company results into some particular advantages that are associated with the costing system. This costing system is a very accurate system in the process of costing in relation to the line of products, the units of stock keeping that the management employs, the product end users, and the category and channel streamlining the product flow to the end user from the producer. The Activity Based costing helps in the mastery process of the overhead cost concept. This is effectively exhibited during the allocation of resources of the company as utilized by the product lines and their relationship with the cost driver. From various studies, it is evident that ABC system is accessible, easy to interpret and understand, useable and can be implemented practically across all the business norms. The costing system will also allow the Airbus Company to use its marginal costs or unitary costs as the foundation of the computation. This system of accounting also works very well with the programs of up gradation and quality improvement. Through this costing system, Airbus will be able to identify and ear mark the burden of the business such as those activities which consumes more than they produce. The system of performance management employed by most departments of human resources can also do well with ABC system. In the international business set up, ABC system allows firms to put into operation the strategies of costing across the diagonal business processes and supply chains. This is due to the mimicking of the specific processes of the business by the system as the appropriation of the common pool of resources taking place like the resources that the business commonly use. The ABC system can also help international businesses like the Airbus in the benchmarking process which is actually an integral part of quality control (Heppenheimer, 1995). The ABC system benefits Airbus Company due to its advantages that come with the efficiency it accords to the distribution of costs to the activities. These are the benefit factors that influence my decision to use the ABC system. The system of costing is more accurate when costing the channels of distribution, customers as well as the company services and products. Overhead costs are better understood and everyone can easily understand the system of application. Contrary to other costing methods that only utilize total cost, ABC system uses unit costs and makes those activities which add no value visible. It also supports the performance scorecards and management, facilitates benchmarking, assesses every activity in relation to the resources used, identifies where high and low costs are incurred, assists in product planning for the future production, and reflects how the activities unravel in the firm (Lynn, 1997). ABC system is also associated with ramifications and consequences which may not be favorable to the firm. Some of the negative ramifications involved include: time consuming data collection process involved; the capital expenditure on ABC system and its cost of running is a road block to various companies; the system in most cases is very transparent and in some situations, managers want to keep some details away from the owners of the firm; the implementation and maintenance cost of the ABC system is high; it is not easy to establish and set up especially where the firm is applying the traditional methods of accounting; costing all activities may be time consuming to managers and wasteful; and the ABC system may offer too much detail that obscure a big picture of the firm that should may be kept a secret. Nevertheless, ABC system has technical limitation especially in the application. It is very easy to test the system on paper, but its desired impacts in the real situation is not easy to gauge properly unless the system is implemented directly by the firms that operate and conduct the analysis in the mechanism of kinetic time. This can be a huge stumbling block for the majority of organizations who are still transfixed to the current mechanisms of accounting and are reluctant to change to the new system (McGuire, 1997). Section III: Standard Costs. The standard costs are budgeted amounts for each unit of the firm’s output. Therefore the standard cost of a single unit of output is the production cost that is budgeted for that particular unit. This type of costing will also be beneficial to Airbus Company as it gives the estimates of the production cost and draws a budget for the process of production. The standard costs are based on the ideal performance. They can also be determined by the attainable and efficient performance of the firm. The costing system facilitates managerial controls through cost controls and operations of the firm. It increases the performance efficiency and eliminates wastes through formulating cost plans and setting up standards. In the international business, standard costs are calculated using the management standards of the relevant and necessary expenses, and the efficient operations. They are the costs of material, labor and overhead that are predetermined through a prescribed set of conditions of work (McIntyre, 1982). The Airbus Company is benefiting from this costing system due to its significance in the formulation of policy and planning of production process. It will also ensure that the cost of operations will be estimated and all activities directed towards those costs (Thornton, 1995). Due to this, some of the factors that influenced my decision to implement this type of costing include its benefits to the firm which include: the measurement of efficiency, where the management does so via comparing the standard costs with the actual costs incurred to evaluate the performance of the firm; determination of variance, the variances resulting from performance can also be determined through comparing costs. This will enable the management to locate areas of inefficiencies to adjust; enhances management by exception, where the targets of various individuals are particularly fixe if their performance is in line with the standards that are predetermined. Everyone is assigned a target to accomplish with the fixed standards; controlling costs incurred, this is the aim of any costing system. The standard costing system controls costs by setting the limits and analyzing variances; promotes the ability to make the right decisions, standard costing offers vital information to the management that assist them in making significant decisions on the production costs; and finally the elimination of the efficiencies, setting standards for various costs such as administrative, manufacturing, and selling expenses allows management to realize where the efficiencies are coming from in the whole production process (Banks, 1987). The standard costing system is however associated with particular ramifications in view of the expectations of the firm. Some of these limitations of the standard costing include: the costing system cannot be applied in the firms that produce non standard products, each job will invite different expenses if production has to be done according to the specifications set by the customer; the process involved in setting standards is not easy and requires distinct technical skills, hence consumes money and time; there are no existence of inset situations that are considered in fixing the standards and therefore the conditions for which the standards are made does not remain static; and that fixing responsibilities is not very easy this is because it is only the controllable variances that the standard costs can be applied to (Bond, 1991). The Airbus Company can therefore set its standards by determining its cost centers. The company can identify its current standards for the short term operations and link it to the ideal standards which are of a very high efficiency level. The basic standards to be achieved in the future indefinite time is also set as well as the normal standards. Generally, standard costing is a control management tool. The standards are taken as the parameters of performance measurement. It is evident from various studies that cost control and cost analysis are very essential for any activity. Hence the company needs to sometimes revise its costs to standardize due to unexpected changes in use of technology, raw material, and method of production among other activities that consume costs (Lorrell, 1980). The standard costing leads to the variance analysis. The production costs are usually affected by the internal factors in which management possesses a great degree of control. The variances of the standard costs inform the management on production effectiveness and the effort of the supervisory personnel. The availability of variances is not an end, but a board for more investigation, analysis, and action. They help the supervisory personnel in defending their employees concerning the failures that arose out of their reach. Variances also offer yardsticks that measure the fairness of standards and enable the management to put its effort and make necessary adjustments. It is in the field of management that the elimination of the causative factors of undesirable variances lies. The management also rewards the performance that is achieved as desired. However, the operating and supervisory personnel rely on the information system of accounting for the information that enhances intelligent actions towards the cost controls. Variances hence promote efficiency orientation, cost consciousness, culture of the thrift, and cost controls in the firm. Measures of latest developments in prices are also derived from variances and standard costs (McKenna, 1992). Airbus Company uses the standard costing system, it is deriving advantages such as: the provision for performance yardstick; minimization of wastages through detecting variances; assigning responsibility to various departments for costs incurred; creating cost effective attitude; encouragement of the reappraisals of materials, methods and techniques that minimize unfavorable variances; drawing the attention of management to the items that proceed as planned; making the entire organization conscious of the costs; provision of incentive scheme basis to supervisors and workers and simplifies the procedures of cost controls; and a tool for effective budgeting, valuation of inventory, marginal costing, and business planning. On the other hand, standard costing are associated with some ramifications and problems to the international businesses. Such as: presenting the information on reports after a long period of time may render that information useless or stale; if variances are used as club by the insensitive managers, then it may lead to the suffering of morale; direct labor may be fixed essentially but standard costing assumes it is a variable cost and hence builds excess pressure on work in progress and inventories of finished goods; meeting the set standards may overrun other vital objectives of the firm for improving and maintaining quality and customer satisfaction; and that there is need for continual improvement and just meeting the standards may not be adequate enough for the firm (Newhouse, 1982). Section IV: Relevant Costs Analysis of future projects of the firm in relation to the relevant cost is beneficial to the firm especially where the firm intends to expand and/ or consolidate in the future. This is aided by relevant costs which supports decision making process in the firm. The decision made by firm regarding the future projects and plans such as downsizing, expanding and consolidation depends on the relevant costs associated with those decisions. The Airbus Company would hence benefit from analysis of its relevant costs in making future decisions and plans for its project. The firm will therefore follow a designed process that is applied when making decisions (Westlake, 1990). For instance, when a firm is in dilemma of production and/ or project to perform, the following decision criterion may be used to reach a valid decision depending on the relevant costs involved; clarification of the decision problem, specifying the criteria such as the objective, identification of the alternative projects together with their pros and cons, developing decision model where only factors that are relevant to the problem are mentioned, data collection where relevant data is collected in order to incorporate in the process of objectivity for accuracy, and finally selection of the best alternative from the listed alternatives after all considerations are made (Hilton, 2008). The main objective of appraising relevant costs is to determine the money value from a wide economic perspective. In order for costs to be rated as relevant, they must be able to affect the future performance and also differ within the available alternatives. Some of the relevant costs that are usually considered by firms making future plans for projects or expansion missions include: differential costs, the difference in items of cost in two or more alternatives of decision making; marginal or incremental costs, the cost that rises due to an additional unit; and opportunity cost, which is the cost of a forgone opportunity. These costs are beneficial and of great significance in that they help firms in making critical decisions such as accept or reject decisions, outsource a service or product decisions, sell or process further decisions, add or drop a service or product decision, and optimize or work under constraint of resources decisions. The Airbus Company will therefore benefit from using relevant costs in determining the future of its projects, productions, and expansion intentions among other future decisions to be made regarding the firm. It is therefore necessary to involve relevant costs in decision making as they depict which decision will be profitable to the firm (Campbell, 2003). Section V: Summary, conclusions, and recommendations In summary, the above sections have described the Airbus Company in relations to its product line and services. The overview of the firm’s market share and sales has also been depicted in the description section. The overall background of the firm and the competitors has also been shown in the same section. The relevance, application, advantages, disadvantages, and benefits of various costing systems such as Activity Based costing, standard costing, and relevant costs have been described in the sections respectively. The Airbus Company already benefits from ABC system and standard costs and is likely to have more benefits from the other mentioned costing systems due to the various advantages mentioned in the relevant sections of the paper. Hence I would recommend that the Airbus Company employs and/ or put more emphasis on the mentioned costing systems. In fact the firm should put more emphasis on the Activity Based costing and standard costing to allow it improve its efficiency and effectiveness in the manufacturing of the aircrafts. It can therefore be deduced that the Airbus Company is a leading aircraft manufacturing firm in the world and would do extremely better if the above recommendations are implemented effectively. References Banks, H. (1987). "Airbus Comes of Age," Forbes, February 23, Bond, F. (1991). "Airbus Subsidy Dispute Highlights Clash of U.S.-EC Industrial Cultures," Aviation Week & Space Technology, June 17, Campbell, H. (2003) Benefit-Cost Analysis: Financial and Economic Appraisal Using Spreadsheets. Cambridge: Cambridge University Press Congressional Research Service. (1992). Airbus Industries: An Economic and Trade Perspective. U.S. Library of Congress  Drucker P. (1999). 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