United Parcel Service Accountings - Assignment Example

ASSIGNMENT United Parcel Service (UPS) is a US multinational company with a series of operations and branches world-wide. Chief amongits activities are the freight service, shipping, tracking, business solutions and so on. According to a press release from its headquarters in Atlanta dated May 8, 2008 the company is in the process of signing an agreement with DHL, USA to “provide transportation on its air network for all of DHL’s express, deferred and international package volume within the USA. UPS will, also, provide air lift for DHL packages between USA, Canada and Mexico. The agreement, when finalized would extend for 10 years and produce up to 1 billion dollars in revenue for UPS” (UPS website). This decision will, inevitably, entail relevant costs as well as non-relevant costs in the form of influencing operational parameters of the company. I have identified the following two costs as significant to this particular decision: Labor cost Material cost As for the non-relevant costs the following two are appropriate for my analysis: Structural alterations in existing managerial operations Alterations in existing time scales (a). Labor cost occupies a very important place in this decision of the UPS company. Assuming that one billion dollars in revenue as anticipated by the COO of UPS would entail a labor cost component of $200 million, a fair estimate, company will have to fork out one fifth of its revenue to pay additional salaries and wages to the new staff. Now let’s assume that UPS hires permanent labor much less and depends on a contracted labor force to carry out this new operation. It will reduce corresponding obligations that occur as a result of hiring unionized labor. (b). Let’s assume now that capital cost is equal to $ 450 million. Capital equipment is to be bought to carry out the extended operations with DHL such as additional aircraft and a fleet of vehicles. Together with labor cost, the total will be $ 650 million. Assignment Two Let’s assume that the operations of UPS are scaled down to a manageable proportion for us to understand how unallocated costs can be identified and accurately explained. Irrespective of the size of the business organization, unallocated costs which are indirectly incurred by a firm in the process of selling a product, are a cause for concern. The best examples of such costs include promotion costs and discounts made available to customers. In other words every business organization is supposed to identify cost centers so that cost incurred in the process of selling a product can be allocated. In the company account books, centers may not be available for all costs. In such a situation the accounting practice explains it as ‘an unallocated cost. (UPS Annual Report, 2007, p. 26) This table makes it easy to grasp the concept of cost of goods sold for a merchandising business. Beginning stock: $10000 Cost of goods purchased$4000 Goods Available for Sale = ($1000+$4000) $5000 Cost of Goods Sold $3000 Ending stock: $2000 One must be sure that the sum of beginning stock and cost of goods purchased is equal to goods available for sale, and so is the sum of cost of goods sold and ending stock. Cost of goods purchased is calculated as follows. Purchases minus purchases returns and allowances and minus purchases discounts gives us net purchases. Net purchases plus freight-in gives us cost of goods purchased. Here the discounts offered give us an idea of the unallocated costs. Cost of goods sold is calculated by subtracting ending stock from goods available for sale. The revenue from merchandise sold must be matched with the cost of goods sold. It is here that we apply the principle of unallocated costs. Cost of sales or cost of goods sold is an indication of the cost of those items sold during the most recent accounting period. It can be done by specific identification, taking stock, or different methods using estimates such as the retail method. Cost of goods sold is also the decisive factor in arriving at gross profit and in a manufacturing business or a service provider’s business such as UPS, it is determined under the periodic method as follows: Sales--------------------------------- $1,000,000 Cost of Goods Sold Stock 01/01/03-- $ 50,000 Purchases------------ 450,000 Direct Labor--------- 300,000 _______ 800,000 Less: stock 12/31/07----- 100,000 _______ Net Cost of Goods Sold---------------- 700,000 ______ Gross Profit on Sales------------------ $300,000 The activity used by me here is a simple calculation of how a fairly big merchandising business will experience unallocated costs. I took 30 minutes to analyze the problem of unallocated costs. My inputs are the substitution of a simple periodic method instead of a complex analytical process. Results: “There aren’t straightforward accounting practices to account for every cost incurred by a firm”. REFERENCES 1. United Parcel Service, (2007), P. 26. Retrieved: June 6, Annual Reports, 2008, from: http://www.ups.com 2. Kieso, D.E, Weygandt and Warfield, T.D (2006, 12th Ed.), Intermediate Accounting, New Jersey, John Wiley & Sons. 3. Activity Based Accounting (ABC) has become a fairly accepted alternative to conventional accounting. Conventionally the assumption has been that high volume customers are profitable customers. For example in the case of UPS there are a quite number of high volume corporate customers. Therefore this approach assumes that a happy customer will be followed by profits. ABC rejects this hypothesis. It is a costing model that identifies cost pools or activity centers in an organization and assigns costs to products and services (cost drivers), based on the number of transactions. I have chosen an example from the supply chain management of UPS. An ABC process for UPS’ Freight Forwarding Service (Ocean). Activity (as per cubic foot) Cost ($) Full container load (FCL) $ Less than container load (LCL) $ Logistics 10,000 1 2,500 3 7,500 Shipping 40,000 100 2,000 1900 38,000 Receiving 10,000 1 2,000 3 7,500 Preparing 10,000 1 2500 3 7,500 Handling 30,000 500 15,000 500 15,000 Total 24,500 75,500 Note: set up refers to process set up Product Cost Calculation: Overhead cost for FCL : $ 24,500 : 100 = $ 245 Overhead cost for LCL: $ 75,500 : 950 = $ 79.47 Product cost calculations under Traditional Cost Accounting (TCA) and Activity Based Cost Accounting: Cost for FCL : Overhead: TCA…… $ 50.00 ABC ………….$ 245.00 Direct cost: TCA…….$ 20.00 ABC…………..$ 20.00 Total: TCA…… $ 70.00 ABC………….$ 265.00 Cost for LCL: Overhead: TCA…….$ 100.00 ABC…………. $ 79.47 Direct cost: TCA…..$ 40 .00 ABC………… .$ 40.00 Total: TCA… $ 140.00 ABC………… $ 119.47 My conclusion: Given the above results TCA is a less practical method of cost accounting because it fails to take into consideration a number of factors in cost attribution process. ABC is the better alternative it enables the management to realistically assign costs to their centers so that planning process becomes more target oriented. I used hypothetical data to construct separate cost parameters for FCL and LCL of ups so that my conclusion is identical to what is presented in UPS accounts. But UPS accounts do not provide a better example. I spent little more than one hour on this construction. REFERENCES 1. Hansen, D.R, and Mowen, M.M, (2005, 2nd Ed.), Cost Management: Accounting & Control, Massachusetts, Southwestern College Publishers. 2. United Parcel Service, (2007), Annual Reports, p.30, Retrieved on June 6, 2008 From http://www.ups.com Read More