Analyzing Samsung's Cost Management: Accounting Strategies & Future

This report analyzes Samsung's cost management strategies in the face of rising component costs and intense competition in the smartphone market. It examines the company's global market share, major competitors, and geographic locations. The report explores the application of activity-based costing (ABC) and standard costing to improve cost allocation and control. It also discusses the limitations of cost-plus pricing and outlines Samsung's future plans for expansion and innovation. The analysis concludes that implementing effective cost management measures and strategic approaches is crucial for Samsung to maintain profitability and achieve its growth targets. Desklib provides access to similar solved assignments and resources for students.

MANAGEMENT
ACCOUNTING
ASSIGNMENT

1
By student name
Professor
University
Date: 25 April 2018.
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Contents
Introduction and Background......................................................................................................................3
Discussion and Analysis...............................................................................................................................3
Principle Goods and Services.......................................................................................................................3
Global Market Share....................................................................................................................................3
Geographic Locations..................................................................................................................................4
Major Competitors......................................................................................................................................4
Activity Based Costing (ABC)........................................................................................................................4
Production Costs of Cell phones..............................................................................................................5
Samsung's New Challenge: Cell phones Rising Component Costs...........................................................6
Standard Cost System..................................................................................................................................7
Cost-Plus Concepts......................................................................................................................................7
Samsung’s Future Plans...............................................................................................................................8
Conclusion...................................................................................................................................................8
References...................................................................................................................................................9
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Introduction and Background
A report has been prepared on company, Samsung, which is one of the leading giants in
the field of smartphone manufacturing. In 2017, the company’s worldwide market share was
21.6% with Apple being the only near competitor. Considering the leadership in the industry, the
company also tries to maintain the profitability in the smartphone business but the costs of the
quality components that go into the system proves to be a challenge. The main issue addressed in
the paper is how Samsung can beat its competitors amidst rising component costs and the same
has been analysed using different cost techniques. The methodology has been based on
secondary data and the annual report and website of the company (Goldmann, 2016).
Discussion and Analysis
Principle Goods and Services
The company majorly has 6 revenue streams namely CE, IM, Semiconductor, DP,
Harman and others. The company has a history of over 80 years and is a South Korean
multinational conglomerate and is involved in businesses of majorly manufacturing and selling
electronic products, semiconductors. It is also involved in chip making, ship building, Samsung
Life Insurance and operator of one of resorts in South Korea and also in advertising.
Global Market Share
The company currently possesses the market share of greater than 22%.
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Geographic Locations
The company has a worldwide presence in the form of a number of subsidiaries with the
headquarters being located at Seoul district in South Korea.
Major Competitors
Off late the company has received heavy competition from Apple and MI, which are one
of its major competitors. There are some other Chinese competitors as well. The main reason for
the competition has been the low cost whereas Samsung has been facing stiff competition in this
aspect.
Activity Based Costing (ABC)
The company has produced almost 10 times the new models as compared to Apple but
the profit from the same has been nearly half (Erik & Jan, 2017). Although, the company has
been selling almost equal the number of smartphones but Apple earns almost twice the profits
earned by Samsung. In the year 2016, Samsung introduced nearly 30 new models of
Smartphones whereas Apple produced only 3. In order to lower down this cost, the company can
make use of Activity based costing in its cost allocation techniques and this can help in making
the division profitable. It is a technique which identifies all the activities within the organization
and thereby allocates the cost of each of the activity to each of the products and services based
on the consumption of the resource (Alexander, 2016). The main benefit of this costing
technique over the traditional or conventional costing is that it allocates and assigns all the
indirect costs into the direct costs in the most logical manner such that none of the product is
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under-priced or over-priced. Samsung has been using this for a while and it has benefitted them
as now the correct cost allocation is being done and thereby appropriate product pricing is being
done. The main factors which would have influenced this decision would have been proper cost
allocation, correct pricing of different products, appropriateness of profit margin product wise,
etc.
Production Costs of Cell phones
The major costs which are involved in the manufacturing of the smart phone includes the
chip, the processor cost, the display cost, flash and DRAM costs, camera costs, wireless section
costs and user interface and sensors costs (Linden & Freeman, 2017). These are the major costs
involved in the manufacturing of the smartphones whereas there are some allied additional costs
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as well like those of wireless connectivity, battery, power management, box contents,
manufacturing labour costs, factory costs and finally the overheads costs.
Samsung's New Challenge: Cell phones Rising Component Costs
In terms of the amount, the overall costs range from 30% to 50% in the smart phone
manufacturing and rest is margin, but amidst the rising cost of the electrical components, the cell
phone manufacturers are finding it difficult to maintain the level of profitability that was possible
few years ago (Choy, 2018). The only way to increase and regularise the same is to use in-house
manufacturing or other efficient cost allocation and measuring techniques like those of activity
based costing as discussed above, standard costing, just in time approach, etc.
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Standard Cost System
The company can also make use of the standard costing technique whereby actual costs
of manufacturing are compared with the forecasted or estimated costs that should have been
incurred and the variances are computed to identify and analyse the areas where the cost control
can be done in terms of the material costs, labour costs or the overhead costs, etc. It also helps in
identifying the actual reasons of the variance, which can be in the form of price rise of the
material or the excess quantity of materials being used. It can also be in the form of labour or
overheads variances as well (Arnott, Lizama, & Song, 2017). The factors which would have
influenced undertaking this technique includes helping the company in identifying the reasons
for the variances and thereby implementing the cost control measures in order to lower down the
costs and increase the profitability.
Cost-Plus Concepts
The cost plus concept is basically related to the pricing of the product whereby the
product is being priced based on the costing of the product and the required margin percentage or
share is being added to arrive at the selling price (Bromwich & Scapens, 2016). The main
advantage of this technique is that all the products are priced in a manner such that all of them is
profitable but it fails to consider the market conditions like demand and supply. Further it is rigid
in approach and uses accounting data rather than the actual costing data and therefore is
ineffective during competition as the product cost overruns at times.
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Samsung’s Future Plans
As per the future plans of Samsung, the company is looking for expansion and
consolidation plans in terms of investment in 3 major areas namely new technology, creative
solutions and producing innovative products (Heminway, 2017). The company plans to achieve
the annual revenue of USD 400 billion and thereby becoming one of the top 5 brands in the
world. The strategic approach which will help in achieving the above targets are creativity, talent
and partnership which is being immensely focused by the company.
Conclusion
From the above discussion and analysis, it is quite clear that Samsung holds one of the
major share in smartphone market and is on path to become one of the top most brands in the
world but one of the pain areas in the form of lower profitability can be corrected and improved
by implementation of various cost collection measures as has been discussed. Furthermore,
different strategic approach must also be followed to achieve the future goals.
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References
Alexander, F. (2016). The Changing Face of Accountability. The Journal of Higher Education, 71(4), 411-
431.
Arnott, D., Lizama, F., & Song, Y. (2017). Patterns of business intelligence systems use in organizations.
Decision Support Systems, 97, 58-68.
Bromwich, M., & Scapens, R. (2016). Management Accounting Research: 25 years on. Management
Accounting Research, 31, 1-9.
Choy, Y. K. (2018). Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous Worldview
Analysis. Ecological Economics, 3(1), 145. Retrieved from
https://doi.org/10.1016/j.ecolecon.2017.08.005
Erik, H., & Jan, B. (2017). Supply chain management and activity-based costing: Current status and
directions for the future. International Journal of Physical Distribution & Logistics Management,
47(8), 712-735.
Goldmann, K. (2016). Financial Liquidity and Profitability Management in Practice of Polish Business.
Financial Environment and Business Development, 4(3), 103-112.
Heminway, J. (2017). Shareholder Wealth Maximization as a Function of Statutes, Decisional Law, and
Organic Documents. SSRN, 1-35.
Linden, B., & Freeman, R. (2017). Profit and Other Values: Thick Evaluation in Decision Making. Business
Ethics Quarterly, 27(3), 353-379. Retrieved from https://doi.org/10.1017/beq.2017.1
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