Manufacturing Overhead Cost of Coca Cola - Example

Introduction

The paper is intended to evaluate and discuss the process of manufacturing products, mainly to understand the system of costing and budgeting and effective management. For this purpose, the paper is going to analyze the manufacturing process of Coca Cola. The paper will identify the manufacturing process and flow chart of production of Coca Cola, its product manufacturing cost, the problem the company needs to address and the new overhead and budget because of that problem.

Overview of Company and Product

Coca Cola is the multinational company of beverages. It is the leader in the worldwide network of manufacturers and retailers of non alcoholic beverages and syrups. The company was founded in 1886 with its first product Coca Cola (its flagship). Now the company operates in more than 100 of countries of the world with its franchises. The Coca Cola is the core product of the company that contributes the major part in the revenue of the company. It is the most popular product in the world. It is the major and foremost product of the coca cola Company (Coca Cola, 2015). The product can be seen in the picture below:

Flow Chart of the Manufacturing Process

The chart below shows the flow of manufacturing process of Coca Cola:

(Youtube: How the Coca Cola is made)

The flow process shows that the three different phases are covered during the manufacturing process of Coca Cola. The first phase is to produce the actual product i.e. fluid which is starting from the water treatment and move to syrup processing. In the mean while, the second phase is aimed to prepare the bottles and to wash them to facilitate them to fill the fluid. Along with these two phases, the third phase is to filled bottles with Co2. The three phases are dependent on each other as no single phase can be completed without the two other phases to provide the well produced finished product.

Manufacturing Overhead Cost of Coca Cola

As the process of manufacturing is based on various phases, different costs are obviously aligned with the manufacturing. However, these costs are not going to determine randomly, but the proper product cost model is going to apply. According to Weygandt, Kimmel & Kieso (2009), the product manufacturing cost is the cost for all activities and process involved in changing the available resources and raw material into the final product. These costs include raw material cost, direct labor cost and the manufacturing overhead. Before determining these three costs for Coca Cola, it is important to understand these three costs (Hiesinger, 2009).

Direct material is the raw material that the manufacturers purchase to convert them into finish product. All those materials, products or parts that are outsources to use in the manufacturing of the end product are considered as the direct material (Hiesinger, 2009). Actually, direct materials are those that are physically associated with the manufacturing of the product. Here, the raw material includes the following materials along with the percentages of total cost of raw material:

• Carbonated water = 3%
• Corn Syrup of high fructose = 10%
• Phosphoric Acid = 2%
• Caramel Color = 10%
• Natural flavors = 11%
• Caffeine = 1%
• Bottle = 45%
• Caps =20%

It is assumed that as the coke is the largest brand and produces the products in very high quantity, the purchasing cost of its raw material must be half or quarter of other companies because of the high volume it produces and its ability to manufacture.

Apart from direct material, another cost is associated with direct labor (Wiliams et al. 2005). The direct labors include all labors and workers working in the factory and directly associated with manufacturing of the product. The cost related to the direct labor includes working hours, pay etc. The manufacturing overhead is all those cost that are indirectly involved in the manufacturing of the product. All these costs cannot be classified and include in direct material and labor cost, thus all other costs, apart from direct labor and material are considered as manufacturing overhead (Weygandt, Kimmel & Kieso, 2009; Wiliams et al. 2005). Hence, the labor and their working consumed to complete the manufacturing flow is accounted as the direct labor cost of coca cola.

Predetermined rate

The predetermined rate of the coca cola is as follows:

It is assumed based on the figures identified by Weygandt, Kimmel & Kieso, (2009) that raw material is 54% of the total cost and direct labor is 13% of the total cost, therefore, subtracting raw material and direct labor from the total percentage of cost, the remaining percentage is considered as predetermined rate as shown in the table below:

In percentage

In millions

Cost of goods sold

100%

$ 17482.00

raw material

54%

$ 9,440.28

direct labor

13%

$ 2,272.66

predetermined rate

33%

As the predetermined rate is 33%. The manufacturing overhead will be calculated by applying the predetermined rate on the overall cost of the goods sold.

Apply manufacturing overhead to your product

It is not easy to calculate the manufacturing overhead determining the actual indirect cost. Therefore, the manufacturing overhead is going to determine based on the predetermined rate. As the predetermined rate is 33%, apply this percentage on the total cost of the product manufactured. The total cost is $ 17482.00 (Coca Cola, 2015); hence, the manufacturing overhead for the product manufactured is as follows:

Manufacturing overhead of coca cola = $5,769.06

Based on the predetermined rate of the product, the manufacturing overhead is identified.

The problem to the company

Coco Cola being a largest company can reduce the cost of the manufacturing to increase the profitability of the company. In the annual report of the company, it is mentioned that the high cost each raw material can impact on the overall cost of the product that will directly impact on the profitability of the company. The cost of raw material takes the major part of the overall cost of manufacturing, hence, the increase in the cost of raw material could impact on the overall sale and profitability of the company as when the cost will increase, the company will increase the prices that can impact on the overall demand of the product (Coca Cola, 2015). The cost is the major challenge and problem for the company which is directly associated with the profitability, sales and demand of the product.

Therefore, the company is looking for the opportunity to reduce the cost of raw material. For this purpose, the company will use the sustainability approach. Here the sustainability means to use the waste material and reduce the waste in the manufacturing. The sustainability is the best solution to control the cost of the production and to increase the profitability of the company. The sustainability will not only help to control the direct material cost but also the direct labor cost.

Sales budget

Based on the assumed solution and approach for the cost issues of the company, it is expected that the sales of the company will increase by 2% by each quarter of the years. The sales budget is designed based on quarter sales of the year as shown in the table below:

Sales budget

Quarter 1

Quarter 2

Quarter 3

Quarter 4

$45,179.88

$46,083.48

$47,005.15

$47,945.25

Production budget

The production budget is designed based on the forecasted (assumption based) units of coca cola to be sold by each quarter of the year and inventory of units required for each quarter. It is developed based on the assumed sales and assumed beginning inventory. The products assumed based on the assumption of how much products can be sold in the forecasted sales in the sales budget.

Production budget

Quarter 1

Quarter 2

Quarter 3

Quarter 4

forecasted units to be sold

29999

31498.95

33073.8975

34727.59238

planned inventory units

8000

8000

8000

8000

total units required

37999

39498.95

41073.8975

42727.59238

beginning inventory

16000

8000

8000

8000

units required to manufacture

21999

31498.95

33073.8975

34727.59238

Direct materials

The same products will be used for the manufacturing of the product; however, the total cost of the raw material will be decreased.

• Carbonated water
• Corn Syrup of high fructose
• Phosphoric Acid
• Caramel Color
• Natural flavors
• Caffeine
• Bottle
• Caps

The total cost of raw material will be reduced by 5% by each quarter as follows:

Quarter 1

Quarter 2

Quarter 3

Quarter 4

 direct material cost

$ 8,968.27

$ 8,519.85

$ 8,093.86

$ 7,689.17

It can be seen in the table that how the total cost of raw material will be decreased with the application of sustainability approach.

Direct Labor

The direct labor cost is not an issue for the company, however, with the sustainability approach; the company is also expecting the decline in the direct labor cost by 2% as follows:

direct labor cost

Quarter 1

Quarter 2

Quarter 3

Quarter 4

direct labor

$ 2,227.21

$ 2,182.66

$ 2,139.01

$ 2,096.23

Manufacturing Overhead (include Predetermined O/H Rate)

The manufacturing overhead and predetermined rate are assumed to remain as same as found in the above process. The predetermined rate will be 33% and he manufacturing overhead will be $5,769.06.

Selling, General and Administrative budget

The selling, general and administrative budget will remain same as the reduced expenses of selling, general and administrative budget will be utilized for the marketing expenses and thus, here, the same selling budget is going to use i.e. $ 16,427 (Coca Cola, 2015).

Cash Budget

The cash budget is designed based on the expected income generated after sustainability approach, assumed investments and purchases as follows:

cash flows

net income

$ 100,898.26

depreciation

$ 1,970.00

net cash provided

$ 102,868.26

cash outflows

purchases

$ (15,831.00)

plant property equipment

$ (2,553.00)

net cash

$ (18,384.00)

balance at the end

$ 84,484.26

Income Statement

Based on the assumed and forecasted sales, cost and profit, the income statement is as follows:

Income statement

Yearly

revenue

$ 186,213.75

cost of goods sold

$ 64,992.49

gross profit

$ 121,221.26

gross profit margin

$ 0.35

operating charges

$ 1,657.00

Selling budget

$ 16,427.00

operating income

$ 103,137.26

tax

$ 2,239.00

net income

$ 100,898.26

Balance Sheet

Balance sheet is designed based on the actual assets and liabilities found in the annual report (Coca Cola, 2015) as follows:

balance sheet

total assets

$ 90,093.00

long term debt

$ 28,407.00

total current liabilities

$ 26,930.00

total equity

$ 25,764.00

total equity and liabilities

$ 81,101.00