Pepsi-Cola Manufacturing Company Accounting System - Case Study Example

Report On Pepsi/Cola Manufacturing Company Accounting System & Financial Part PepsiCo is the leading international snack, beverage and food company. The company produces or uses contract producers to sell and market various snacks, beverages and food in approximately 200 nations. It operates mostly in the United Kingdom, North America (USA and Canada), and Mexico. PepsiCo is committed to sustainable growth, which is described as Performance with Purpose; it is focused on producing healthy financial returns as well as giving back to the community the company serves. This entails meeting customer needs for a wide range of beverages and foods, and minimizing its effect on the environment packaging, water and energy initiatives. It also supports employees through an inclusive and diverse culture that retains and recruits world-class talent (Scribd.com, 2012). Operations of PepsiCo PepsiCo has three business divisions that include; PepsiCo International (PI) – this section includes the entire Latin American beverage Businesses and North America PepsiCo Beverages. PepsiCo American Foods (PAF) – it includes the whole of Latin American food and snack businesses (LAF), Frito-Lay North America (FLNA) and Quaker Foods North America (QFNA). PepsiCo Americas Beverages (PAB) – includes all the PepsiCo Businesses in Asia, Europe, United Kingdom, Middle East and Africa (Scribd.com, 2012). Manufacturing System and Methods of Costing Products PepsiAmericas is the second biggest Pepsi-Cola bottler in the universe. The company manufactures and distributes over 100 different brands and flavors in nine nations. Pepsi-Cola Jamaica uses Sage FAS 500 Fixed Assets to manage or control its entire life cycle of fixed assets (the life cycle also includes disposals, transfers and depreciation of assets). The assets entail plastic bottle equipment, closure line machines, filler line machines, computers, furniture, office equipment, delivery trucks, and bottling machinery. FAS Report Writer is an option that provides the user with batch, drilldown, and graphical reporting capabilities. It saves time on reporting and lets the user get information about things such as detailed asset analysis, acquisitions, accumulated decreases, and depreciation for any period of time. Assets in Pepsi-Cola Jamaica is recorded in Jamaican dollars and then converted into United States dollars when the data is moved to the headquarters (SAGE FAS, 2008). FAS Asset Inventory offers Pepsi-Cola Jamaica an automated fixed asset tracking system. The tracking system is composed with a state-of-the-art bar code technology. FAS Asset Accounting is integrated within the system, and it allows modified or new physical inventory data to be simply reconciled with the present asset data. FAS Asset Accounting is utilized at the main office in Pepsi-Cola Jamaica and in other seven distribution channels across the island (SAGE FAS, 2008). The methods of costing products in Pepsi-Cola are divided into two, and they include manufacturing costs and non-manufacturing costs. Manufacturing costs is defined as the expenditure sustained in carrying out the organization’s production processes. The manufacturing costs entail direct costs, for instance, expenses, materials, and labor, and indirect costs such as overheads and subcontracting. The method of costing products in Pepsi-Cola will be elaborated further by using Lay’s (Scribd.com, 2012). Lay’s is a brand name for potato chips marketed under the Frito-Lay division, which is owned by PepsiCo. In the production of Lay’s, the manufacturing costs include direct materials, direct labor, and manufacturing overheads. Direct materials used in the production of Lay’s include potato, oil, seasoning (flavor), film (packet), and carton. Direct labor is reserved for labor cost that can be traced back to the distinct units of products. In this scenario, direct labor is sometimes referred to as touch labor. This is because the direct labor workers simply touch the products as they are being made. Direct labor entails employees working in the input, peeling, washing, slicing, frying, seasoning, and packaging departments (Scribd.com, 2012). Manufacturing overhead is the last and third component of manufacturing cost in Pepsi-Cola. In this case, it entails the entire costs of manufacturing with the exception of direct labor and direct material. Adjustable manufacturing overheads include electricity, gas (gas generator), nitrogen (N2) flush, utility expenses, repairing costs, and maintenance costs. Fixed manufacturing overheads include the following transportation costs, depreciation, meals, rental costs (in case the generator is hired on rent), overtime, labor in quality department, and warehousing labor. Indirect materials entail food stickers (Scribd.com, 2012). Non-manufacturing costs are costs that are incurred in the manufacturing of the products. These costs include advertising expenses and salary of sales persons. The non-manufacturing costs are usually divided further into two categories; administrative costs, and marketing and selling costs. Marketing and selling costs entails all the costs needed to secure consumer orders and have the finished products into the hands of the consumers. These costs are usually referred to as order filling or order getting costs. These costs entail placement costs, commissions, and transportation costs (Scribd.com, 2012). Administrative costs entail all organizational, clerical and executive costs linked with the general management of a company rather than with selling, marketing or manufacturing. Executive compensation, public relations, general accounting, and secretarial costs are all examples of administrative costs. Other costs involved in the general and overall administration of the company are also considered as administrative costs. For PepsiCo Snacks department, the following costs are recognized as administrative costs; office expenditure (stationary and furniture costs included), salaries, and depreciation costs (such as offices) (Scribd.com, 2012). The Role of the Managerial Accounting System in Controlling PepsiCo Operations The following is an overview of the non-manufacturing costs at PepsiCo. PepsiCo, Inc. manufactures more than 500 products under various brand names such as Pepsi-Cola, Tropicana, Quaker, Gatorade, and Frito-Lay. In the year 2006, the net sales for the company totaled $35.1 billion, leading to operating profits worth $6.4 billion. The highest cost on the income statement was $15.8 billion, and this was represented by the cost of sales. General, selling, and administrative costs were the second highest cost on the income statement, and it totaled to $12.8 billion. These costs are referred to as period costs, indicating that they must be disbursed during the period in which they were incurred (Heisinger, 2009). The selling costs for PepsiCo include promotional coupons, television advertising (it is most likely the largest piece of the general, selling, and administrative costs), salaries of advertising and marketing personnel, and costs of shipping products to the consumers. The administrative and general costs include bonuses and salaries of top executives, and administrative departments’ costs, including accounting, information technology, legal, and personnel (Heisinger, 2009). It is worth to note that Pepsi-Cola puts considerable importance to the non-financial measures when evaluating the success of the company. This can be supported by the fact that the bonuses given to the managers are associated to meet the targets. It is based on the non-financial measures and conventional financial measures. The non-financial measures include employee motivation, which is based on regular surveys, and market-oriented measures, which are based on customer attitudes, market share (recognized as marketplace profit and loss account), and quality (Duke, 2012). The management at PepsiCo, Inc. is responsible for consolidation of the financial statements, maintenance of effective control over the financial reports, and evaluation of the effectiveness on internal control over the financial reporting. In other words, the management is responsible for the establishment and maintenance of adequate internal control over the financial reports (Delta Publishing Company, 2008). PepsiCo’s 2008 Annual Report offers a total of 14 notes to elaborate the accounting methods, estimates, and principles used for the preparation of the financial statements. The report offers a total of 24 pages of Management Discussion and Analysis (MD&A) (Baginski et al., 2011). In the MD&A section of the 2008 Annual Report, PepsiCo defines the business as a whole, and it also describes the business operations in each of the company’s six divisions. Apart from the qualitative descriptions, the section also offers valuable details about each division’s financial performance. There is a managerial analysis which compares the results of the fiscal years 2008 to 2007, and fiscal years 2007 to 2006. Furthermore, the MD&A section of PepsiCo offers important insights into the company’s business risks, and the manner in which PepsiCo manages them, crucial accounting policies applied by PepsiCo and the PepsiCo’s capital and liquidity resource situation. The section also offers a glimpse of PepsiCo’s prospects in the future, for instance, its intention in the year 2009, to repurchase common shares worth $2.5 billion (Baginski et al., 2011). A look at the PepsiCo’s 2004 to 2008 balance sheets shows stable changes in the common-size percentages during that period. For instance, PepsiCo witnessed a significant increase on the number of assets involving cash, and a sharp decline in short-term investments in the year 2008. The decline in short-term investments can be explained by the considerable amounts of short-term investments sold or matured. In the cash flow statement, operations were more than enough to finance equipment, plant, and property expenditures. Furthermore, PepsiCo was able to raise more cash by issuing a considerable amount of long-term debt. A huge amount of cash was used to repurchase shares its own stocks, and pay dividends. The remaining cash equivalents and cash in cash were invested by PepsiCo, thus, resulting in the increased common-size percentage (Baginski et al., 2011). In other words, the MD&A section of PepsiCo offers a wide glimpse of how the company manages its finances. References Bagniski, S. P., Bradshaw, M., Stickney, C. P., & Wahlen, J. M. (2011). Financial reporting, financial statement analysis, and valuation: A strategic perspective. Mason, OH: Cengage Learning. Delta Publishing Company. (2008). Accountant’s guide to financial management. Los Alamitos, CA: Delta Publishing Company. Duke, O. (2012). Non-financial measures of performance. Retrieved from http://www.reedlearning.co.uk/learn-about/1/ll-non-financial-measures-of-performance Heisinger, K. (2009). Essentials of managerial accounting. Mason, OH: Cengage Learning. SAGE FAS. (2008). Pepsi-Cola Jamaica: More fun in the Sun with Sage FAS. Retrieved from http://www.blytheco.com/attachments/products_and_services/FAS/case_studies/FAS_Pepsi_Jamaica.pdf Scribd.com. (2012). PepsiCo managerial accounting report. Retrieved from http://www.scribd.com/doc/38593673/Pepsi-Managerial-Accounting-report Read More