Financial Analysis of Vodafone: Costing, Pricing Decisions, and Demand

This report provides a comprehensive financial analysis of Vodafone Group PLC, a multinational telecommunication service provider. It begins by outlining the costing methods employed by Vodafone, specifically highlighting the use of process costing. The report then delves into cost classification based on behavior, differentiating between fixed, variable, and semi-variable costs. Pricing decisions are examined, with a focus on the cost-oriented method used by Vodafone and the factors influencing price setting, such as customer demand and competitor pricing. The report also covers unit costing, explaining how Vodafone determines the cost per unit of its products and services. Break-even analysis is presented, illustrating the point at which total sales equal total costs. Finally, the report discusses the impact of changing product prices on demand, emphasizing the concept of elasticity and its implications for Vodafone's sales and profitability. The analysis is supported by references to relevant books and journals.

FINANCE

Table of Contents
Introduction................................................................................................................................1
TASK 4......................................................................................................................................1
Costing method used by Vodafone Group plc..................................................................1
Cost classification on the basis of cost behaviour............................................................1
Pricing decisions in Vodafone Group plc.........................................................................2
Unit costing.......................................................................................................................3
Break-even analysis..........................................................................................................3
Changing the product prices and its impact on demand...................................................4
REFERENCES...........................................................................................................................5

INTRODUCTION
Vodafone is the multinational telecommunication service provider company whose
headquarter is in London, UK. It is the second largest mobile company that was established
in the year 1991. Vodafone Group is a public limited company which operates in
telecommunication industry. Company provides wide range of branded products and services
to meet the users’ communication requirements. The products include Vodafone handsets,
smartphones, headsets, internet and chargers (Kumar, 2012). However, its service comprise
of voice and messaging, broadband internet, repairing and other internet services.
TASK 4
Costing method used by Vodafone Group plc
Vodafone Group is using process costing method in the organization to find out the
product and service costs. It is a method of allocating all the business cost towards the
products produced by Vodafone. The method says that in case when there is number of
processes consist to produce business products than cost can be determined through using this
costing method. This costing method is used for determine the process cost of Vodafone
products (Jorgensen, Patrick and Soderstrom, 2012). It is mainly used in the organization that
produces mass production of identical products. It accumulates all the direct as well as
indirect product cost of the production process. Under this method, Vodafone determines
total process cost and also determines per unit cost for each process. Thereafter, each process
cost is charged to the manufactured products in order to decide the selling prices (Steven,
2014). Thus, it is clear that this method helps Vodafone in identifying the real cost of the
product through combining all the direct as well as indirect expenses.
Cost classification on the basis of cost behaviour
Cost includes all the expenses that Vodafone Group is incurring in their business.
Cost behaviour determines that how the expenses will be change according to the production
changes in Vodafone business (Bhimani and et. al., 2013). On the basis of behaviour, it can
be classified into fixed, variable and semi variable costs.
Fixed cost The expenditures that remain constant and
unrelated to changing the business production
will be termed as fixed cost (Costing
Accounting: Basic cost behaviour, 2014). It
includes depreciation expenditure, rent, rates
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and machinery insurance.
Variable cost Variable cost includes the expenses that
directly related to the Vodafone production.
In case of increasing the company's
production, expenditure also tends to increase
and vice versa (Drury, 2013). For instance,
material, labour expenditure and direct and
variable overheads.
Semi-variable cost It is the combination of both fixed and
variable cost of the business. The expenditure
that remains unchanged up to a specified
production limits, and after that point, it gets
changed according to the production changes
(Cost Behaviour, n.d.). For instance,
electricity bill will be the semi variable cost
for Vodafone Group.
Pricing decisions in Vodafone Group plc
Vodafone Group PLC is setting the prices of headset using cost oriented method.
Under this method, Vodafone determines the headset cost initially and after that, it added an
appropriate mark up percentage to the cost to decide the selling prices (Vollmers and et. al.,
2015). Adding an appropriate profit percentage helps to get desired business profit to the
Vodafone Group PLC. This method helps to ensure profit availability for the Vodafone
Group. Along with the cost and profit percentage, customer demand, competitors’ prices and
the users buying behaviour are also analysed for deciding the headset prices. For instance, if
the cost of the headset is 2500 and Vodafone desires to get appropriate profit percentage up to
40%. Then, the prices can be decided as under:
Product price = product cost + appropriate mark up percentage
= 2500£ + 40% of 2500£
= 2500£ + 1000£
= 3500£
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Unit costing
Cost per unit is known as unit cost. Vodafone produces number of services in their
business. Therefore, Vodafone Group needs to determine cost of per unit for deciding the
selling prices. It can be identified through dividing the total product cost to the number of
units produced (Datar and et. al., 2013). Further, total cost can be determined through adding
fixed cost and variable cost. For instance, Vodafone produces 30000 handsets at a variable
cost of 1250 each unit than unit cost can be determined as follows:
Number of units Fixed cost Variable cost Total cost Cost per unit
30000 22500000 37500000 60000000 2000
Cost per unit = Total product cost/ number of units produced
= £60,000,000/30000 handsets
= £2000
Break-even analysis
Marginal costing method helps to determine the break-even point for the company. It is the
point at which the difference between total sales and cost is zero. In another words, total
Vodafone sales and cost will be equal at this point (Sen, Roy and Sengupta, 2012). For
example, if the fixed cost for the Vodafone business is 294000£ and selling price and variable
cost per unit is 10£ and 7£ respectively. Then, BEP will be as follows:
BEP (In units) = Fixed cost/Selling price-variable cost or Fixed cost/Contribution
= 294000£/ (10£ - 7£)
= 294000£/3£
= 98000
BEP (In sales) = BEP (in units) * selling prices
= 98000 * 10£ = 980000£
The method can also be used in pricing decisions (DRURY, 2013). For instance, if
Vodafone Group needs to earn a desired profit of 3000000£ at selling 1100000 units than the
charged prices will be:
= (3000000£ + 294000£)/(x-7£) = 110000 units
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= (3294000£)/ (110000x – 770000£)
= (3294000£ + 770000£)/110000 = x
= 4064000£/110000 = 36.945£
Through setting prices to 36.945£, Vodafone business will be able to generate profit
of 3000000£ after selling 110000 units.
Changing the product prices and its impact on demand
Elasticity of demand identifies the changes in demand due to changing the product
and service prices offered by the company. For instance, if Vodafone rise their product prices
than the demand will get reduce. The reason behind that is that the users need to pay higher
charges to the company. For example, increase in the prices, customers will tend to use other
company's services which are available at lower the rates. However, if Vodafone decreases
their product or service prices, than it will help to attract higher number of customers due to
increase in demand. This in turn, helps to increase Vodafone sales and profit as well.
Thus, it can be concluded that both the management accounting and cost accounting
helps Vodafone Group PLC to ascertain product cost and decide selling prices effectively.
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REFERENCES
Books and Journals
Bhimani, A. and et. al., 2013. Management and Cost Accounting: UEL. Pearson UK.
Datar, S.M. and et. al., 2013. Cost accounting: a managerial emphasis. Pearson Higher
Education AU.
Drury, C., 2013. Costing: an introduction. Springer.
Drury, C.M., 2013. Management and cost accounting. Springer.
Jorgensen, B., Patrick, P.H. and Soderstrom, N.S., 2012. Overhead Cost Measurement:
Evidence from Danish Firms’ Switch from Variable to Absorption Costing. AAA.
Kumar, N.N., 2012. Vodafone marketing communications. Emerald Emerging Markets Case
Studies. 2(8).pp.1-8.
Sen, S., Roy, P. and Sengupta, S., 2012. Regular paper AI based Break-even Spot Pricing and
Optimal Participation of Generators in Deregulated Power Market. J. Electrical
Systems. 8(2). pp.226-235.
Steven, G., 2014. Absorption Costing. Financial Management.
Vollmers, G. and et. al., 2015. Cost Accounting for War: Contracting Procedures and Cost-
plus Pricing in WWI Industrial Mobilization in Italy. European Accounting Review.
pp.1-35.
Online
Cost Behaviour, n.d. [Pdf]. Available through:
<http://web.csulb.edu/~mconstas/acct310/notes/n02.pdf.>. [Accessed on 22nd January,
2016].
Costing Accounting: Basic cost behaviour, 2014. [Pdf]. Available through:
<https://accountingprofessor.files.wordpress.com/2012/09/s-cost-2014-spring-notes-
basic_cost_behavior1.pdf>. [Accessed on 22nd January, 2016].
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