Activity-based costing: Starbucks Company's case - Essay Example

Download file to see previous pages This study looks into Starbucks Company buys and roasts the high-quality whole bean coffees and together with other products such as tea beverages, handcrafted coffee, and a number of fresh foods, they are sold by the company via the retail sores operated by Starbucks. The company also produces and sells a variety of beverages that are ready-to-drink. The channels that are outside of the company-operated retail stores are all known as specialty operations collectively. The company generates its revenue via the company-operated retail outlets or stores and the specialty operations. The specialty operations comprise of the retail stores that are licensed by the local business partners, tea and packaged coffee through licenses in warehouse club stores, grocery, arranged licenses with the business partners and arrangements with the foodservice companies. The revenue that is obtained from the company-operated retail outlets accounts for the largest revenue contribution as opposed to the specialty operations. As at October 3rd the year 2010, the number of Starbucks employees were approximately 137,000 worldwide with the employees in US being about 107,000 people, and 101,000 employees in the company-operated retail outlets and the remaining spread in the regional offices, store development, and roasting, administrative, and warehouse operations. The revenue of Starbucks Company has been on the rise year after year. The most impressive values were the growth in the last year’s annual report indicating an increase in revenue from $10.7billion to 11.7billion. The Starbucks Company has also been able to reduce the sales percentage that is devoted to general, administrative costs, and selling from 38.26% to 36.71 percent. The gross profit for Starbucks Company as at the October 2/ 2011 was 6,751.1 US dollars and their net income averaged at 1,245.7 US dollars (Starbucks, 2012). Activity-Based Costing Activity based costing abbreviated, as ABC is a concept where the producers or manufactures assign the manufacturing costs to their products in a manner that is logical. Drury (year:pp 223) a proposes that there are three cost systems that define which type of costs are assigned to the cost objects. These include the direct costing system, which involve only the assigning of the direct costs to the cost product. Indirect costs are not assigned to the product hence, reported as contributions to the indirect cost. The direct cost is only recommended where the indirect costs form a low proportion of the company’s total costs. ABC assigns the indirect costs to the product cost. The ABC system first assigns the costs to the activities that form the real overhead causes, and then assigns the costs of the overhead activities to only products that actually require the activities (Accounting Coach, 2012). Application to the company The Starbucks Company buys and roasts coffee the high quality whole been coffee and then sells it together with the other products that are earlier outlined. The high-quality whole been coffee requires certain activities such as roasting, packaging, and testing and several machine set ups since the coffee is sold in small quantities through the company-operated outlets or stores. The system of activity costing will help the company by first recognizing that the roasting, packaging, and testing and the machine setups are activities that the company incurs certain costs and hence the company consumes its major resources via these activities. The Starbucks Company, therefore, will calculate the cost of these resources that are used in each of the outlined activities. This forms the first level of application of the ABC system in the assigning of costs to the prod ...Download file to see next pagesRead More