Process Costing at The Coca-Cola Company
The Coca-Cola Company is a multinational beverage corporation engaged in the manufacturing, retail, and marketing of bottled nonalcoholic drinks. Incorporated in 1892 and headquartered in Atlanta, the company is the largest beverage producer and distributor globally, with an expansive product portfolio offered in over 200 countries and territories worldwide. Over the years, the Coca-Cola company has continuously expanded its product range innovatively and dynamically to satisfy the ever-growing demand and market for carbonated soft drinks. In this regard, the firm has a robust brand establishment spread across various market segments, including dairy, coffee, tea, dairy, and plant-based juices, water, and other soft drinks. Its most popular beverages include Coke, Sprite, Minute Maid, Ades, Fanta, Schweppes, and Dasani. These products are highly standardized across all countries and regions where they are offered, implying that all consumers receive the same commodity. Although the company manufactures a wide range of products, the identical nature, volume, and consistency of the manufacturing operations make process costing the ideal cost distribution model.
The Nature of the Coca-Cola’s Work and the Range of Products its Manufactures
The Nature of the Company’s Work
The Coca-Cola Company is a beverage manufacturing company with an expansive product and brand portfolio. The multinational is the leading producer of nonalcoholic soft drinks with a product line spread across nutrition commodities, energy drinks, fruit juices, bottled water, caffeine-free drinks, and sugar and calorie-free refreshments (Mayureshnikam & Patil, 2018). These products are manufactured in large volumes and are standardized across over 200 countries and territories globally (Chua et al., 2020). In this regard, all Coca-Cola commodities are identical despite the geographical locality from which they are purchased. This implies that despite the diverse attributes of customers from different regions, they all end up buying similar products. For instance, a person who buys a bottle of Coke from an outlet in the United States ends up consuming the exact item as someone who procures it from a supermarket in Dubai. Among the prominent reasons for this occurrence is that Coca-Cola manufactures syrups, beverage bases, and concentrates for onward distribution. In this regard, one feature of Coca-Cola’s work is the production of identical and standardized commodities for its customers globally.
Additionally, the specific products manufactured by Coca-Cola are produced continuously for extended periods in all of their production facilities and bottling establishments across the world. Although each beverage has its unique processes and ingredients, the procedures and operational steps are repeated numerous times while utilizing the same personnel, materials, and equipment. This implies that Coca-Cola uses a continuous flow manufacturing model in which the finished products are manufactured in a perpetual cycle, generating extensive volumes of highly standardized commodities.
The nature of Coca-Cola’s work also entails a multistage production procedure where the manufacturing process occurs in three major phases. The initial stage involves the preparation of concentrates and syrups, where direct materials, including refined sugar, water, colorings, and other ingredients, are mixed to generate the base liquid for its beverages. This is followed by the filling of cleaned and sterilized bottles with the solution before capping them. In the last step, the filled bottles are inspected, labeled, and then packaged for warehousing and distribution. From this multi-phased production pattern, work-in-process commences at the initial manufacturing stage, where the mixing of the various ingredients occurs. The output of this phase serves as the raw materials or inputs of the subsequent stage of blending, with the process culminating in the third step of packaging, where inspection and labeling occur. Notably, this process is defined as producing large batches of homogenous products through a consistent and standardized process. The company utilizes several work-in-process inventory accounts to track product costs through each production department.
Range of Products Manufactured by Coca-Cola Company
The Coca-Cola Company ranks prominently among the globally reputable corporations with an extensive product portfolio. Although the firm is best known for the Coca-Cola drink, its flagship product, it has continually expanded its beverage offerings to reflect consumer dynamics, trends, and lifestyles. The major beverage categories include water and hydration, sparkling soft drinks, coffee and tea, dairy, and plant-based juices. Kanesam et al. (2018) contend that the continuous brand extension and the balancing and broadening of the product range are designed to provide consumers with a broader selection of refreshments. For instance, the company has over 30 water brands, including Dasani, AquaArius, Aha, and Ciel (The Coca-Cola Company, 2021). The sparkling beverages constitute the firm’s traditional range of products under which such prominent brands as Coca-Cola, Sprite, Diet Coke, and Fanta are offered. Such ready-to-drink teas and coffee beverages as Peach, Nestea, and Green Tea Strawberry and dairy and plant-based juice beverages, including Ades, Minute Maid, and Simply are popular refreshments (The Coca-Cola Company, 2021). Coca-Cola has also developed a range of energy and sports drinks to provide proper hydration and replenishment of minerals to help people in sports achieve better performance.
How Process Costing is Better than Job Order Costing for Coca-Cola Company
Process costing, also known as continuous or average costing, is a managerial accounting method of tracking and assigning the production expenses of homogenous products at various production stages or processes. According to Noreen et al. (2016), this costing model aggregates all the manufacturing expenditures by processes or departments, which are then apportioned to the total output of the period. This differs sharply from such other cost allocation systems as job order costing, where unique attributes and features define each production activity. Labro (2019) posits that process costing systems are characterized by such features as high levels of standardization, low product flexibility, and repetitive production cycles. Homogenous products and large production volumes are also prominent characteristics where such cost-tracking strategies are applied. In this regard, the suitability of the adopted cost allocation strategy is influenced by the nature of the products and the consistency of the production process.
The Coca-Cola Company uses process costing to effectively track the expenditures incurred in the production of its beverages. Noreen et al. (2016) note that process costing is mainly used by organizations that produce voluminous batches of homogenous products through a consistent process. As previously mentioned, direct materials are only introduced in the production operation in the first department. Consequently, the output of each manufacturing phase functions as the input of the subsequent manufacturing phase, with the last department producing the finished products. This implies that it is significantly challenging to track and aggregate the specific costs incurred after the initial production process. As a result, the production departments, representing the various manufacturing stages, monitor the flow of their expenditures by processes instead of a specific focus on a given job. Therefore, since the products are homogenous and each department has a work-in-process inventory account, the process costing model of cost tracking is the ideal strategy for ascertaining and accumulating expenditures in Coca-Cola Company.
Additionally, process costing is better than job costing at Coca-Cola company due to the repetitive nature of production. According to Noreen et al. (2016), the essence of this methodology is to accumulate all the related costs for the cumulative output volume and then distribute them proportionally over the entire batch. Notably, this is the most reasonable cost apportionment procedure due to the production of large volumes of homogeneous products, and the expenditures incurred for each unit of output cannot be differentiated. As a result, the company assigns costs to the processes or production departments and apportions them to the total output of a manufacturing cycle. Therefore, considering the homogenous nature of Coca-Cola products, process costing is the most optimal cost allocation model.
Further, Coca-Cola Company operates mass-manufacturing factories where large volumes of beverages are produced at every production cycle. Since all similar products pass through the same production process, it would be illogical and impossible to individually track all the costs associated with each unit throughout the entire production process. In this regard, the company determines the costs per item by monitoring the expenditures incurred at each stage of the production process. Additionally, since all the commodities are standardized and identical, it would be irrational to compute the cost of a single unit in a given batch. From this perspective, it is prudent for Coca-Cola Company to use process costing in accumulating and apportioning its costs to the final products.
Due to the staged and continuous nature of Coca-Cola’s manufacturing, process costing is the optimal expenditure allocation system compared to job order costing. This production model integrates a series of unit operations to ensure that raw materials are perpetually injected into the processing pipeline without interruption (Domokos et al., 2021). Under this method, the company can effectively and accurately monitor the costs associated with the direct materials, labor, and manufacturing overheads used at each stage of production. Since direct materials are only introduced at the initial manufacturing phase, the other departments keep track of the incurred overheads when processing the products. This implies that it is prudent for the organization to assign costs departmentally or process-wise instead of jobs due to the volumes of production. In such a production environment, it would be difficult and economically unfeasible to trace the cost components of direct materials and labor to each unit of beverage produced. In this regard, process costing is the most suitable approach to aggregating and apportioning costs to the final products.
A job order costing system is applied in the cost determination of custom products with unique features. As a result, this managerial accounting approach is only applicable where costs and manufacturing specifications are not identical for all customers or products. However, in Coca-Cola Company, no products are customized for a specific customer base, implying that it would be unnecessary to track the cost details of each product. This means that all products are priced uniformly since no particular product has unique cost components. Therefore, job order costing would not be an appropriate cost accumulation and allocation methodology for Coca-Cola.
Analysis of how Coca-Cola Company is Implementing Process Costing
The Coca-Cola Company implements the process costing model by tracking the costs of direct materials, labor, and manufacturing overhead expenditures in three primary processes. These include the processing phases of concentrate and syrup formulation, blending, and packaging. This implies that Coca-Cola monitors and aggregates the production costs departmentally or process-wise to reflect the multistage nature of its manufacturing operation. Notably, the production flow involves passing the various components from one manufacturing stage to the next in a regular flow. In this regard, each step or processing phase contributes to the development of the final products and computes the costs incurred in its operation.
In the initial phase of formulating the syrup and concentrates, such direct materials as water, sugar, colorings, sweeteners, and other ingredients are mixed to generate the base solution for various beverages. Notably, this is the only production phase where direct materials are introduced into the manufacturing process. The output of this stage functions as the inputs of the subsequent production phase of blending. In this regard, accountants of the initial production phase compute production expenditure by combining the costs of direct materials, labor, and factory overheads.
The second manufacturing stage entails the transfer of the concentrates and syrups to the blending phase, where such components as carbon dioxide are added to the beverages before bottling into cleaned and sterilized containers. Consequently, this processing phase incurs such costs as sterilization and bottling, which are department-specific. In the third step, the bottles filled with beverages are inspected for conformity to company standards, labeled, and packaged for warehousing and onward distribution. The specific expenditures incidental to this stage include the packaging costs, labeling, and inspection. Ultimately, all the cost components incurred across the entire production process are aggregated and proportionally distributed over the output volume of a manufacturing cycle. Therefore, Coca-Cola Company is implementing the process costing system to track the expenditures incurred by each production department or operational stage throughout the manufacturing cycle.
References
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