iPhone Compatibility With Apple Pencil Report (Assessment)

Introduction

This research work has chosen Apple as the company to advise which new product line to launch after assessing the product’s viability using available managerial accounting tools. It is dedicated to applying managerial accounting in determining the viability of the Apple Pencil compatibility with iPhone by performing a cost analysis of the new product (Weygandt, Kimmel, & Kieso, 2018). It will use appropriate frameworks to gather and present data for the company management decision making after a capital budgeting evaluation. Techniques such as Net Present Value (NPV), Internal Rate of Return (IRR), Payback Period, and Accounting Rate of Return (ARR) will aid in deciding whether or not this is a good opportunity to pursue.

Background Information

A typical 1^st generation iPhone Pencil for iPad connects to the iPad via Bluetooth technology and is charged via a lightning connector hidden under a magnetic cap. When fully charged, it can last up to 12 hours. The device’s interior parts have a sequence of sensors that detect how hard or soft the tip is pressed against the screen when in use. The Pencil comes with an extra tip and a lightning adapter for charging with an iPad or iPhone charger. The second (2^nd) generation was released in 2018 alongside the third and fourth-generation iPad Pro. It is flattened to prevent rolling off surfaces, has a non-detachable connector, and supports wireless charging. In any commercial organization, the primary motive of developing new technologies is to offer a product or service, which increases profits for the organization. That is the same with this project, and it will be in the best interest of Apple’s management to minimize costs as much as possible and increase the profit margins.

Problem Definition

Currently, the two versions of Apple Pencil, that is, the 1^st and 2^nd generation, are compatible only with iPod tablets. According to Apple, the 1^st generation Pencil works on almost all the iPod devices while the 2^nd generation one works only one of the latest iPod devices released in 2018. At the moment, not even a single version of the iPhone supports the Apple Pencil. From a technical perspective, iPhone and iPad touchscreens are not similar in structure. Since the stylus was explicitly made to operate on the iPod, it cannot work on iPhone devices. Initially, displays supporting stylus were not much standard, and therefore, there was no widespread use of these devices (styluses). However, with the arrival of smartphones and tablets with touch-sensitive screens, there has been an increased need for stylus-use in drawing (sketching) and note-taking through handwriting.

Stylus input for most smartphone devices has remained a thing yet to come thanks to inadequate technology and poor user experience. “In recent years, stylus input has become popular. In particular, they are not only used for navigation and minor input; they are becoming popular for content creation in the form of sketching and handwriting.” (Helps & Helps, 2016, p.19). iPhone versions with considerably large touchscreens (5 inches and above) could comfortably be used together with the Apple Pencil, and their users could be excited about this development. Ritchie (2017) says, “I’ve wanted Apple Pencil support on iPhone — specifically iPhones with larger than 5-inch displays — for a long time. My background is art and design, and the idea of having a tiny drawing pad delights me.” Having the ability to draw or sketch artworks, mark up documents, annotate photos and take down notes conveniently and with a lot of ease on the phone by using Apple Pencil on the iPhone is impressive. From these insights, it is about time that Apple designs iPhone smartphones, which support the feature.

Methodology

As mentioned earlier, the technology of designing iPhone touchscreens does not support the use of the stylus. For a successful implementation of the project, Apple should consider re-engineering the next generation of iPhone displays so that they (the screens) can be compatible with the stylus input as a mandatory accessory. While this will attract costs, it is conceivable that it is the most suitable way to go in so far as this project is concerned.

Cost Analysis

Cost accounting systems exist for measuring, recording, and reporting product costs, in this case, the iPhone’s expenses, which can support Apple Pencil. Several frameworks are used to accomplish these tasks, but they differ in the type of manufacturing cost (Weygandt et al., 2020). At the end of this, investment appraisal can be done after figuring out all the fundamental aspects of the project (Batra and Verma, 2017). This paper will focus on the job order cost system, which will complement the Activity-Based Costing later on.

Job Order System

In this system, the company assigns costs to each task or batch of manufactured goods. A single job could be manufacturing a complete iPhone gadget together with an iPhone Pencil and other accessories. As for batch, many, for example, 5000 complete iPhones with accessories, are manufactured. In both cases, the purpose can either be to increase stock or serving orders from customers. The main objective here is to calculate the cost of each job completed.

The flow of goods in a job order system mimics materials’ physical flow as they are transformed into finished products. Manufacturing costs are labeled as Work in Progress Inventory. The cost of a complete job goes to the Finished Goods Inventory. When the items are sold, their prices are transferred to the Cost of Goods Sold (Weygandt et al., 2020). From this point, the individual costs are accumulated, and their total value is established.

Manufacturing Costs

Manufacturing costs comprise raw materials costs, factory labor costs, and manufacturing overhead costs.

Raw Materials Costs

Upon receiving raw materials, Apple debits its cost in the Raw Materials Inventory. It is not useful to declare values with specific jobs or customer orders. This inventory will be assigned to Work in Process and Manufacturing Overhead later on.

A rough estimation of the cost of manufacturing one iPhone device together with an Apple Pencil and other accessories, according to Brown (2020), is about $950.

Assuming on Nov. 15, Apple receives 5000 units of iPhone modules at $950 (Stock No. X5001), the total cost would be $4,750,000 ($950 x 5000). This information is recorded in table 1 as follows:

Table 1: Sample raw materials costs for Apple

Factory Labor Costs

Factory labor consists of three costs: the gross salary of factory workers, employer payroll taxes on employee taxes, and benefits such as pensions, sick, and vacation pay (Weygandt et al., 2020). Labor costs are debited to the Factory Labor Inventory. Assuming that an employee at Apple earns $300 per month as wages. If there are 200,000 employees in this line that would be $60,000,000 ($300 x 200,000) as labor costs. Out of this, $2,550,000 represents wages payable, while $450,000 represents payroll taxes for November as shown in table 2 below.

Table 2: Sample Factory Labor for Apple

Apple will then assign factory labor to work in process and manufacturing overhead inventories.

Manufacturing overhead costs

A company can realize overhead costs at any time; it could be daily or summarized periodically (Weygandt et al., 2020). Apple could incur overhead costs such as machinery maintenance or repairs, depreciation on company equipment, and property taxes, among other expenses that may come up. Manufacturing overhead can then be recorded in Work in Process as shown in table 3 below.

Table 3:Sample Overhead Costs for Apple

Activity-Based Costing

This research will apply the Activity-Based Costing (ABC) framework to perform a cost analysis of the project in question. ABC distributes overhead costs to various activity cost pools and then allocates the cost pools to products with cost drivers’ aid. A cost driver is an activity or transaction which directly affects resources used. The research by Weygandt et al. (2020, p. 153) explains that ABC allocates overhead in two distinct stages. It begins by assigning overhead costs to activity cost pools. Secondly, it uses the cost drivers to associate the overhead assigned to the activity cost pools to products. It is important to note that ABC does not replace other costing systems; for example, job order and process costing complement them.

Overhead Costs Analysis for This Project

In a practical situation, there could be hundreds of overhead costs at each stage of iPhone development. Barboza (2016) reports that there are about 400 steps at the assembling stage. This and other situations could attract overhead costs, which are worth considering. This research work looks at a few of the possible overhead costs. The identified activity cost pools are matched with corresponding cost drivers in table 4 below.

Table 4: ABC system for Apple

Capital Budgeting

For effective capital budgeting decisions, companies employ cash flows (cash inflows and outflows) instead of accrual accounting numbers, including expenses and revenues. Cash flows are used because the value of financial investments is a function of the total amount of cash inflows and outflows (Weygandt et al., 2020). In this research, we assume plausible cash flows, and therefore, there is no need to manipulate accrual accounting values to approximate cash inflows and outflows. Hypothetical values have been used in this section to help explain ideas.

Capital budgeting on the project in question generally depends on the following factors:

1. It depends on the risk appetite is associated with the new product line. The certainty of the returns from this project will either motivate or discourage the company from accepting a proposal; therefore, a lot of reflection should be done on market trends to avoid future disappointments.
2. It also depends on availability of funds in the company. Before arriving at a decision, the company has to be financially sound to avoid getting into unnecessary financial obligations as a requirement to actualize this product line.
3. The association with other projects also affects capital budgeting. If other proposed projects are independent of the one in question, a project may be treated differently than when the projects are similar. When they are related, rejecting one proposal may force the company to consider other available submissions.
4. The company’s decision making technique. The company may choose to look at the projects in terms of how suitable they are or accept or reject proposed projects.

Calculating Cash Flows for Apple

Assuming that this paper’s project will cost $1 billion and the annual cash inflows are $900 million, cash outflows are $400 million. To get net cash flows, proceed as follows:

• Initial investment = $1,000,000,000
• Cash inflows = $900,000,000
• Cash outflows = $500,000,000

Therefore, net cash flows is computed as ($900,000,000- $500,000,000) which gives $400,000,000.

Capital Budgeting Process

Determining a Discount Rate

When making capital budgeting decisions, a discount rate, also known as the required rate of return, is equivalent to the project’s capital cost. It is used to calculate future cash flows (Jiambalvo, 2019). Usually, a discount rate depends on the project’s riskiness compared to the existing product line and the cost of capital. For a project that seems riskier than the present company’s business line, the management can opt to increase the discount to promote sales (Weygandt et al., 2020). Choosing an inappropriate discount rate will most certainly lead to poor capital budgeting decisions. In most cases, companies overlook the riskiness of the product. As for the project proposal to Apple, a 15 per cent discount rate is appropriate since this is a new implementation.

Economic resources, such as funds in an organization, are limited. Simultaneously, the investment opportunities are numerous, which forces managers to ensure that they invest few resources of the organization in optimum proportions (Balafas, Florackis, & Kostakis, 2018). For this reason, several techniques have been identified by researchers to aid in the decision-making process (Jasuta, 2016). They include but are not limited to Net Present Value (NPV), Internal Rate of Return (IRR), Payback Period, and Accounting Rate of Return (ARR). For this particular investment, there will be no salvage value.

Payback Period

Payback Period (PBP) identifies the time period calculated as the number of years it takes to recover the initial investment amount from the net annual cash flows (Graham and Sathye, 2020). A project that returns the initial amount of capital investment in the shortest possible time is considered the best option

• Payback Period = Capital Investment ÷ Net Annual Cash Flow

For the project under discussion, the Payback Period is five years, which is calculated as follows:

• Payback Period = $1,000,000,000÷ $400,000,000 = 2.5 years

Depending on a company policy for accepting viable projects, they may accept if it suits them. For example, Apple may accept projects with a PBP of not more than five years. In this case, the project can be carried because its PBP is not exceeding five years. If cash flow is the same every year, then the PBP of a project becomes the ratio of capital investment to annual cash flow (Arnold, 2018). An assumption made in this approach is that yearly cash flows are even. According to Weygandt et al. (2020, p. 547), if annual cash flows are uneven, PBP is calculated when the cumulative cash flows are equivalent to capital investment.

As an illustration, consider the following table 6 shows cumulative cash flows from the Apple Pencil project:

Table 6: Calculation of PBP with Uneven Cash Flows

PBP = 4.5 years

Net Present Value

This method is one of the most essential discounted cash flow techniques in capital budgeting decisions. Discounted cash flow techniques consider both the time value of money and the estimated net cash flow from an investment (Weygandt et al., 2020). There is one candidate rule to follow when using this technique: A project is viable only if the NPV is zero or positive. The greater the positive NPV, the more feasible a project. It also involves discounting net cash flows back to their current values then comparing that value with the capital value of the investment. The difference between these two values is referred to as the Net Present Value. Based on the NPV of projects, a company’s capital budgeting decision is to select the portfolio of projects that do not exceed a specific budget and creates maximum value (Fernandez and Campo, 2019).

Internal Rate of Return

This technique involves evaluating proposed projects according to their promised rates of return (discount rate) and then applying a specific company expenditure policy to split them into viable and non-viable projects (Cole and Snider, 2019). Fernandez and Campo (2019) assert that in determining the rate of return, cash inflows are more effective compared to net income. While Net Present Value uses external discount rates, the Internal Rate of Return (IRR) seeks to find an internally related rate related to the proposed project (Khamees, Al-Fayoumi, & Al-Thuneibat, 2020). If there are three other individuals submitting proposals with 5, 10 and 15 percent discount rates at the time of proposing this project, the company has a decision to make. They will rank the tasks according to their rates and then decide on the most suitable one.

Accounting Rate of Return

According to Buckle and Thompson (2020), the rate of return on the capital investment is defined as the average accounting net income from the asset divided by the total cost of the investment. The average cost of investment is calculated by halving the initial investment and the salvage value. This technique considers the payback period and gives a possibility of ranking projects based on their rates of return. However, it negates the time value of money and any opportunity of investing back the money.

Conclusion

This paper proposed that Apple Company consider designing an iPhone smartphone that supports and uses an Apple stylus as input. It suggested that the Apple Pencil be sold together with the phone as a mandatory accessory to boost sales. Specific managerial accounting tools that could be applied here were also explored at length. The Activity-Based Costing approach was also discussed in light with overhead costs. Finally, the research discussed some capital budgeting techniques which are used in management decision making.

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