Introduction to Costs in Management Accounting for Coca Cola

This article provides an overview of costs in management accounting for Coca Cola, including direct costs, indirect costs, fixed costs, variable costs, semi-variable costs, and stepped costs. It also covers budgeted output, breakeven point, and margin of safety.

Management Accounting

MANAGEMENT ACCOUNTING 1
Table of Contents
Overview....................................................................................................................................2
Introduction of the Costs............................................................................................................2
Direct Costs............................................................................................................................2
Indirect costs...........................................................................................................................2
Fixed Costs.............................................................................................................................3
Variable costs.........................................................................................................................3
Semi Variable cost..................................................................................................................3
Stepped Cost...........................................................................................................................4
References..................................................................................................................................8

MANAGEMENT ACCOUNTING 2
Overview
Coca Cola
An American based corporation and manufacturer, producer and marketer of aerated drinks,
carbonated drinks and syrups. The company is known by its core product Coca- Cola which
came into existence in 1886 by pharmacist John Stith Pemberton, Atlanta. Currently the
revenue of the Coca cola Company is US$ 35.410 Billion with the operating income of US$
7.501 billion. With the team of the 61800 employees the company is performing consistently
(Coca Cola, 2017).
Introduction of the Costs
Direct Costs
Direct costs are the costs are the costs which can be directly attributable to a specific centre
or object such as the variety of processes or product. Direct costs are may be different as the
rate of the output changes in case of the labour, material, fuel or power. These costs are
generally managed and controlled by the department manager. The fundamental rule explains
there are certain costs which are of fixed nature in the short term period and in the long term
the costs are of the variable nature (Business Dictonary, 2017). The direct costs that are
attributable to the Coca Cola Company are transportation costs such as cans, lids of the
bottle, packaging material, chemicals.
Indirect costs
Indirect costs fall under the category of those costs which are not directly attributable to the
activity, cost object or the event. Such costs are generally accumulate in the overhead cost
pool and allocated to the various activities through the use of different allocation methods

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that build a bridge between the activity and the indirect cost (Accounting tools, 2017). For
example the maintenance of the equipment, depreciation, rent, quality assurance, purchasing
wages and production management are some of the examples of the manufacturing indirect
costs (Correia and Saldanha-da-Gama, 2014).
.
Fixed Costs
A fixed cost is an expense or cost which does not fluctuate due to increase in the number of
goods or services produced or sold. The fixed costs those costs which cannot be avoided
irrespective of the production or sales. They are usually used in the breakeven analysis and
also plays a vital role in deciding the profitability of the business. For the Coca Cola
company marketing budget would form the major fixed cost. Another additional expense
could be and equipment purchased or taken on lease for the production of the new product.
The real estate taxes and the insurance premiums are also part of the fixed costs.
Variable costs
A variable cost is the corporate expense which changes as the volume of the company’s
production changes. There is a direct relationship between the variable costa and the volume
of the production. As the production raises the variable costs rises and it falls as the
production goes below the break even. For example sweeteners and packaging are the
variable costs to Coca Cola Company since basic line of the company is to deliver the syrup
to the bottlers. Generally the variable costs are directly attributable to the contribution margin
of the company.
Semi Variable cost
A semi-variable cost, which is also known as semi fixed cost is a composition of both the
fixed and the variable cost (Gu, Simunic and Stein, 2017). These costs remain fixed for a

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particular level and become variable once the level is exceeded. In case of the zero
production, a fixed cost is still incurred. The variable costs incur only when the functions of
activity volume are performed. The marketing expenditure is the best example of the mixed
cost. The nature of the marketing costs are such that they are not directly proportional to the
sales and there are other factors which influence the units sold henceforth, the marketing
costs are not categorised as a variable cost.
The relationship can be define by the variables such as Y= a+bx
Y= Total Cost
A= Total Fixed Cost
B=Variable cost per unit of the activity
X= Number of units of the activity
Stepped Cost
A stepped cost or a step cost which does not change suddenly with respect to the changes in
the activity volume. Step costs remain constant for a given level of the activity, yet it
fluctuates as the basic threshold is crossed. If the total cost increases with a small acceleration
in activity, it must be referred to as the step variable cost (Li, 2018). On the other hand if the
total cost is changing because of the major change in the activity it is referred to as the step
fixed cost. In case of the Coca cola company the cost of the new production facility on which
depreciation is attributable and the supervisors getting the salary to operate the same.
Activity 1
The major product of the company is the Coca Cola, and the calculation of the cost per unit
for the 100ml is done below. The selling price shall be set at Rs. 6 apparently.

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Calculation of the cost per
unit in million

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Per Unit Total
20000
Sales 1.7705 35410
Cost of goods sold 0.6628 13256
Gross Margin 22154
Variable operating expenses 0.4216 8432
Margin
Fixed operating expense 4295
Earnings before interest and tax 9427
Interest expense 841
Other Income -1844
Earnings before income tax 6742
Income tax Expense 5560
Net Income 1182
Production Capacity 150
Actual Output 120
Production Cost Components per unit total
Raw Materials 420 63000
Direct Labour 87 13000
Variable Costs 2 8432
Total Variable 509 84432
Fixed Costs 36 4295
Total Manufacturing Costs 88727
Total cost per unit 4.43635 20000

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The budgeted output has been calculated at the rate of 90% and at the rate of 110% to get a
detailed analysis of the profit and the variances when the production decreases by 10% and
when the production is at 110%. The profits at the rate of 90% are reduced by 23%
Output
Increase/Decrease 100% 90% 110%
Sales Units 20000 18000 22000
Sales 35410 31869 38951
Variable Cost 13256
11930.
4
14581.
6
Contribution 22154
19938.
6
24369.
4
Fixed Cost 12727 12727 12727
Profit 9427 7211.6
11642.
4

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Activity 2
It is advised that the company shall sell at least 11489 units to maintain the breakeven point.
If the company sold the bottles below this number than the company will suffer a loss. This is
the minimum quantity the company is required to maintain (Nichols, Wahlen and Wieland,
2017)..
Breakeven
The break even often abbreviated as in B/E in financial terms is a situation which is a no
profits no loss solution. From the table below it can be described that the break even units of
the company is 11489.57. This is the situation where the cost and revenue are treated equally.
Breakeven Sales
Unit
Contribution per
unit 1.1077
Breakeven Sales
units Total fixed Cost
Contribution per unit
12727
1.1077
Units
11489.5
7

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Budgeted Output
Budgeted output is the output that is planned to be achieved during a particular point of time
with the efficient utilisation of the production process (Accounting Coach, 2018).
Calculation of the Budgeted
output
Contribution 132727
Fixed Cost 12727
Profit 120000
Desired Profit 132727
1.1077
Sales 119822.154
Selling Price Per
Unit 1.7705
Budgeted output
67677.0144
1

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Activity 3
UNIT
S
REVEN
UE
FIXE
D
TOTA
L
PROFI
T
10000 17705 12727 6628 19355 -1650
15000 26557.5 12727 9942 22669 3888.5
20000 35410 12727 22154 34881 529
25000 44262.5 12727 16570 29297
14965.
5
30000 53115 12727 0.6628
12727.
66
40387.
34
10000 15000 20000 25000 30000
-10000
0
10000
20000
30000
40000
50000
60000
UNITS
REVENUE
FIXED
PROFIT
The above graph explains that the number of the units sold by the company shall be more
than 10000 otherwise the company will have to go below the breakeven point and the losses
will be incurred immediately. The formula to calculate the budgeted output is to calculate the
desired profit. After that the total sales are divided by the sales per unit. The profit starts after
the units are more than 10000 (Shepherd, 2015). Margin of the safety on the other hand is a

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situation under under which there is a difference between the actual sales and the breakeven
sales. In case of the Coca Cola company the Actual sales are 35147 (in million) and the
breakeven sales are 11489 (in million), the difference being 23658.
Therefore it is advised to the company shall keep a margin of safety under a budget for the
sustainable future period. It is a source of measure which will ultimately define the reduction
in revenue to achieve the breakeven. Therefore the fixed costs shall be reduced in order to
avoid the common cause of lower margin of safety.

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References
Accounting Coach, (2018) What is the difference between a budget and a standard? [online]
Available from https://www.accountingcoach.com/blog/budget-standard [Accessed 26th June
2018].
Accounting coach, (2016) What does stepped cost mean? [online] Available from
https://www.accountingcoach.com/blog/what-does-stepped-cost-mean [Accessed 26th June
2018].
Accounting tools, (2017) Indirect costs [online] Available from
https://www.accountingtools.com/articles/2017/5/10/indirect-costs [Accessed 26th June
2018].
Business Dictonary, (2014) Direct cost [online] Available from
http://www.businessdictionary.com/definition/direct-cost.html [Accessed 26th June 2018].
Coca Cola, (2017) Annual Report 2017, [online] Available From https://www.coca-
colacompany.com/company-reports [Accessed 27th June2018]
Correia, I. and Saldanha-da-Gama, F., (2014) The impact of fixed and variable costs in a
multi-skill project scheduling problem: An empirical study. Computers & Industrial
Engineering, 72, pp.230-238.
Gu, T., Simunic, D.A. and Stein, M.T., (2017) Fixed Costs, Audit Production, and Audit
Markets: Theory and Evidence.
Li, W.S., (2018) Competitive Analysis: Game Theory. In Strategic Management
Accounting (pp. 143-156). Singapore: Springer.

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Nichols, D.C., Wahlen, J.M. and Wieland, M.M., (2017) Pricing and Mispricing of
Accounting Fundamentals in the Time‐Series and in the Cross Section. Contemporary
Accounting Research, 34(3), pp.1378-1417.
Shepherd, R.W., (2015) Theory of cost and production functions. United States: Princeton
University Press.