Managerial and Financial Accounting
Managerial accounting at The Walt Disney Company assists internal decision-makers by providing detailed information on operational costs and performance metrics. It focuses on the data required to manage the business effectively, such as production costs at theme parks and resorts; however, financial accounting concentrates on providing financial information to external stakeholders. It includes detailed reports on overall revenues, such as the 20% increase in service revenues to $74.2 billion in fiscal 2022 (The Walt Disney Company, 2022).
The use of managerial accounting at Disney helps in planning for different business segments, including Direct-to-Consumer services, where an understanding of subscriber growth and rates is essential. Financial accounting requires compliance with generally accepted accounting principles (GAAP) and gives an overarching view of financial performance. It helps Disney’s shareholders and other interested parties understand the overall financial state of the company.
Variable and Fixed Costs
The Walt Disney Company’s variable costs fluctuate with changes in production or service levels. These include costs related to beverage, food, and merchandise sales at theme parks and resorts; for instance, the 36% increase to $5.4 billion in fiscal 2022 (The Walt Disney Company, 2022). Fixed costs remain constant regardless of production levels. Examples in Disney’s context are infrastructure costs: depreciation, maintenance, repairs, and technology support. In total, variable costs at Disney increase with higher sales. There was a 51% increase in product revenues due to higher sales at theme parks, which means higher variable costs as well.
Fixed costs do not change with the level of production since they become less significant per unit as production increases. In Disney’s case, it is a large company that has already achieved economies of scale. For example, one Disney Plus 1-month subscription brings $8 in revenue but costs $2 to support and serve; thus, two subscriptions would double variable costs to $4 without affecting any fixed ones.
Cost-Volume-Profit (CVP)
Cost-Volume-Profit (CVP) analysis assists The Walt Disney Company in understanding the relationship between profitability, sales volume, and costs. The analysis helps in determining the break-even point – the level at which total revenues equal total costs. It is needed for strategic planning in different business segments, such as theme parks and Direct-to-Consumer services (The Walt Disney Company, 2022).
CVP analysis can be applied to Disney’s theme parks, where an understanding of operating labor, infrastructure costs, and other operating expenses helps in pricing and operational strategies. In the Direct-to-Consumer business, CVP analysis assists in understanding how pay-per-view, advertising sales, and subscription fees revenues relate to distribution, production, and programming costs. Disney can also use CVP to evaluate decisions related to licensing of content or theatrical distribution, where changing volumes can significantly impact costs and revenues.
Costing Method
Process costing could be applicable to Disney’s segments where identical products are produced. The streaming service is a good example where each subscription can be viewed as an identical product. However, job costing is more suitable for Disney’s content production, such as episodic television content or film creation, since each project has distinct requirements and costs.
Activity-Based Costing (ABC) is a method that allocates overhead costs based on the activities that drive them; thus, Disney can use this in complex operations: theme parks since multiple activities contribute to overhead (Tran & Tran, 2022). In the Direct-to-Consumer business, ABC can help in accurately allocating technology distribution costs, operating labor, and support costs to different services and products. There are Studios General Entertainment, Sports, and international content creation groups, and they, too, can utilize a combination of job costing and ABC to accurately assign costs to projects.
Break-Even and Target Profit
The Walt Disney Company employs break-even analysis to determine the point at which total revenues equal total costs; therefore, it assists in understanding the level of sales necessary to cover all expenses. In fiscal 2022, the increase in revenues from services and products by 20% and 51%, respectively, and these numbers indicate that the company has surpassed the break-even point and entered a profitable stage (The Walt Disney Company, 2022).
Target profit analysis aids Disney in establishing sales targets to achieve desired profit levels; however, the method is also key in strategizing marketing and pricing. For the latter, Disney can formulate strategies to sustain growth in net income, which saw an increase of 40% in 2022 (The Walt Disney Company, 2022). Both break-even and target profit analyses play important roles in decision-making and managing the balance between costs and revenues.
For example, a break-even quantity for a Disney Plus (film) project would be 1 666 666 666,7 1-month subscriptions.
- Fixed Costs (FC): $10 billion (development, licensing, maintenance)
- Variable Costs per Subscriber (VC): $2/month (content delivery, customer support)
- Subscription Price per Month (SP): $8/month
- Break-Even Quantity (Q) = FC / (SP – VC) = $10,000,000,000 / ($8 – $2) = 1 666 666 666,7.
Short-Term Decisions
The Walt Disney Company faces short-term decisions related to pricing strategies because of the alteration of ticket revenues in their theme resorts and parks. Special order decisions can be considered by Disney, and it can be done by creating content offerings in their Direct-to-Consumer (DTC) services, which means flexible distribution. In the area of outsourcing, Disney needs to decide on two aspects: technology support and distribution costs.
These two aspects influence both their Direct-to-Consumer businesses and Linear Networks. These decisions contribute to the management of expenses and costs; for example, a 21% increase in administrative, general, and selling costs and a 19% increase in service costs (The Walt Disney Company, 2022). Decisions on selling or processing further can be evident in Disney’s content creation and licensing strategies since they affect distribution platforms: Studios, General Entertainment, Sports, and International.
Service Departments
Service departments within The Walt Disney Company can include marketing, distribution, operating labor, and technology support – these are core operations. Technology support costs are showcased in both Linear Networks and Direct-to-Consumer segments; however, the allocation of costs among service departments can also follow a systematic approach. The latter is based on the initial exploitation of marketing campaigns and the relative value of distribution windows (The Walt Disney Company, 2022).
Disney’s intentional flexibility in distribution can influence the timing and allocation of marketing, production, and programming costs among service departments. Effective cost allocation makes sure that the different service departments within the company function cohesively. In Disney’s context, the service departments support revenue generation: theme parks, DTC subscriptions, and theatrical distributions.
Budgets
The Walt Disney Company likely maintains operating budgets. They include sales budgets that match the 23% increase in total revenues observed in 2022 (The Walt Disney Company, 2022). Production budgets within the company can be critical in managing the costs of services and products, and it is showcased by the changes in costs of 19% and 36%, respectively (The Walt Disney Company, 2022). Marketing budgets are enabled to support growth in different sectors; for example, there was a 20% increase in service revenues by optimizing advertising and promotional expenditures (The Walt Disney Company, 2022).
On the financial budget side, a cash budget is necessary to manage liquidity since there are substantial income and expenditures recorded. A budget for interest expenses would assist in managing financial obligations and it is seen from the 1% change in interest expenses (The Walt Disney Company, 2022). Capital expenditure budgets can also guide Disney in its strategic investments in equipment, plant, property, and supporting infrastructure growth.
Variances
Disney can compute price variances to analyze deviations between actual and standard costs; for instance, there are differences in the cost of services and products. Volume variances can be key as well in evaluating the changes in the number of services and products since they can relate to the 20% and 51% increases in respective revenues (The Walt Disney Company, 2022).
Efficiency variances enable the company to assess how well resources are utilized. It is true, especially considering the fluctuations in administrative, general, and selling costs. The company employs a VAR model to estimate the potential one-day loss in the fair value of market-sensitive equity financial instruments, commodities, foreign exchange, and interest rates; therefore, these reflect financial risk management.
Financial and Non-Financial Performance Measures
Disney likely computes earnings per share (EPS) as a financial performance measure. For example, there are diluted and basic EPS, and they show 58% and 57% increases, respectively (The Walt Disney Company, 2022). Return on investment (ROI) can be another key financial measure for the company since it assesses the efficiency of different investments, such as the 7% increase in equity in the income of investees (Lanen et al., 2023).
On the non-financial side, customer satisfaction scores can be assessed within its theme parks and entertainment services; however, its purpose is to understand the success of customer engagement strategies. Employee retention and satisfaction rates can serve as non-financial performance measures; therefore, these showcase the company’s commitment to a healthy organizational culture and staff development.
References
Lanen, W., Anderson, S., & Maher, M. (2023). Fundamentals of cost accounting (7th ed.). McGraw-Hill.
The Walt Disney Company. (2022). Fiscal year 2022 annual financial report [PDF document]. Web.
Tran, U. T., & Tran, H. T. (2022). Factors of application of activity-based costing method: Evidence from a transitional country. Asia Pacific Management Review, 27(4), 303-311. Web.
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