Toothpaste and Colgate- Palmolive
1. 0 Introduction Colgate- Palmolive is one of the leading consumer product organizations that have been dealing its products in worldwide. Colgate- Palmolive is an America based company and has many branches all over the world. One of the branches is located in Malaysia. Colgate- Palmolive (M) Sdn Bhd focusing their product segment on toothpaste and toothbrush. Both products are very competitive presently in Malaysia market. At the present, Colgate is implementing Activity-Based Costing (ABC) method.
ABC is a system had been practices in many organizations for being a tool to measures the cost and performance of the activities and the cost objects. Hence, the management should look into ABC system which uses to provide more accurate information for decision making in determining costs by cost object such as product, customer, and location and the cost pool of the company. 2. 0 Keys Areas for Improvement According to Reuben Mark (2003), Colgate Palmolive has highlighted its strategy of developing and launching innovative new products globally continues to strengthen the company’s market leadership positions around the world.
Hence, it does apply to Colgate Palmolive Malaysia. Indeed the implementation of activity based costing by Colgate Palmolive (M) provide information for achieving its plans since the ABC is costing technology that traces cost to products according to activities perform on them. Accurate cost information is produced as to such purposes; focusing company strategy, designing products to increase customer value, and continuously improving activities on the operation throughout the company (Peter, 1989).
In general, the ABC system cover such following area of activities including product design and processes, storage of raw materials, set up of machinery to ensure a smooth flow in the production line, machine operating time as well as cleaning of machine after each production. Product design is crucially for Colgate Palmolive (M) to survive in the market and leading the position. Innovation allows the company to continue doing business and thus create the competitive advantage as to product differentiation. The research and development indeed plays role for this rocess such example where Colgate Palmolive worked on improving soap packaging through quality engineering (Boehmer, 2008). Meanwhile, storage of raw materials ensures the effectiveness of the company on handling its inventory. Chilshom (2000) stated that the potential areas for optimization in production is through shortening of product lead times in which leads the Colgate Palmolive (M) to an increase in machine capacity, a reduction of inventories, shorter, and a higher customer satisfaction thus also leads to increased revenues in a demand driven-market.
Besides, by improving unit costs where a reduction of the units costs can be achieved by a high degree of machine capacity utilization. Having accurate cost data will allow Colgate Palmolive to identify activities which are not efficient and important, eliminate waste and reduce costs while improving the quality of the products. 3. 0 Steps for Each Activity There are arguments stated that traditional costing (TC) method can misrepresent a cost of the product where it might have deceive the management doing the resolution relating products (Briers, M. , Luckett, P. and Chee, C. 1997). According to Mansur, N. N. , Tayles, M. and Pike, R. (2012), the TC method apportion the indirect costs based on a single element when the deciding a product cost. The element such as number of direct labour hour or number of machine hour was used to apportion the indirect costs. This has created unfairness in costs apportionment into product as different activity provides different incurrence of cost. Furthermore, different product consumed different level of costs in different activities. Therefore, ABC method is formed to solve the traditional costing flaw.
ABC method emphasizes on each of the activity consumption that needed for producing a product. For the overhead costs to be incurred into the products, the resources, activities, costs and quantities are to be identified (Mansur, N. N. , Tayles, M. and Pike, R. , 2012). The allocations vary to products consumption in different activities. Therefore, management can makes decisions accurately. 3. 1 Cost Object Cost object can be customer, product, service or any other work unit for which a separate cost measurement is desired. The ideal cost object is “products” which are individual items that are sold to customers.
Linking the cost of activities directly to the products that consume the activities is the basis for product costing using the ABC system. To operate effectively, cost drivers should be selected with specific product. Besides that, the customer costing which is the calculation of the total of the total cost of serving a customer makes it possible to assess the profitability of possible either individual or group of customers. Hence, the cost object is different for different companies but there are similarity cost object within the industry which is products and customers. (Gunasekaran, A. , 1999) 3. 2 Cost Driver
Before a cost driver is selected, the management needs to gather up the activities in the manufacturing process which then needs to report the cost of each activity and later choose the suitable driver for the activity (No, J. J. and Kleiner, B. H. , 1997). *A cost driver is a factor that has direct influence on the cost and performance of the activities. The cost drivers provide the best explanation of why the costs in an activity cost pool change over time. The activity cost pool is the total cost associated with an activity. Cost driver is a variable used as denominator in the rates used to apply activity costs to product or cost objects.
In practice, it is possible that the number of cost drivers exists for the same cost pool. For example, purchasing activity’s cost pool has different cost drivers such as the numbers of orders, number of suppliers and number of parts ordered. (Gunasekaran, A. , 1999) 3. 3 Calculation of Total Cost and Cost Drivers Colgate-Palmolive has numerous products with numerous activities and different cost drivers and taken toothpaste and toothbrush as an example for ABC calculation. Assume the following was the information of toothpaste and toothbrush production. | |Toothpaste |Toothbrush | | |Number of units produced |30000 |20000 | | |Direct Materials |450000 |350000 | | |Direct Labours |350000 |50000 | | |Activity |Cost Driver |Cost Driver Volume |Total | |Setup |Number of setups |150 |50 |200 | |Making |Machine Hours |3000 |2000 |5000 | |Inspection |Number of inspection |100 |100 |200 | Table 3. 1 Information of relating toothpaste and toothbrush Activity |Overhead Costs | |Setup |150000 | |Making |750000 | |inspection |100000 | |Total Overhead Costs |1000000 | Table 3. 2 Overhead costs for toothpaste and toothbrush If calculate the unit cost by assuming using machine hours as the element. |overhead costs/ machine hour |= |1000000 | | | |5000 | | |= |200 / machine hour | |Toothpaste |Toothbrush | |Direct Materials |450000 |350000 | |Direct Labours |350000 |50000 | |Overhead costs |600000 |400000 | |Total Costs |1400000 |800000 | |Number of units produced |300000 |200000 | |Unit Cost |4. 67 |4 | Table 3. Statement showing calculation of unit cost using traditional method Below show the calculation of unit cost using ABC method. |Activity |Cost per driver | |Setup |750 per setup (150000/200 setups) | |Making |150 per machine hour (750000/5000 machine hours) | |Inspection |500 per inspection (100000/200 inspections) | Table 3. 3 Calculation of driver for each activity. |Toothpaste |Toothbrush | |Direct Materials | |450000 | |350000 | |Direct Labours | |350000 | |50000 | |Overhead Costs | | | | | |Setup (750 per setup) |112500 | |37500 | | |Making (150 per machine hour) |450000 | |300000 | | |Inspection (500 per inspection) |50000 | |50000 | | |Total Overhead Costs | |612500 | |387500 | |Total Costs | |1412500 | |787500 | |Number of units produced | |300000 | |200000 | |Unit cost | |4. 7083 | |3. 9375 | Table 3. Statement showing calculation of unit cost of toothpaste and toothbrush using ABC method. |Particular |Toothpaste |Toothbrush | |Traditional Method |4. 67 |4 | |ABC Methods |4. 7083 |3. 9375 | Based on the calculation shown in the table above, product toothbrush price is under traditional method and the product of toothpaste is underpriced in using the traditional method.
Even though, the price between both products are not much in difference but it can be claimed that ABC system more accurately measurements the resources consumed for both products. 4. 0 Increased on National Market Share in Context of Cost Leadership and Product Differentiation Bhimana, A. , Horngren, C. T. , Datar, S. M. , Forster, G (2008) state that the cost leadership is one of strategy in a business offer the average product at lower costs for a broadest possible market. Product differentiation is the strategy to focus offers the unique product by creating new products (innovation). Therefore, Colgate Palmolive is considering and focusing to these challenges through two basic of strategies: differentiating its product and achieving the cost leadership.
It can see that Malaysia had chosen by Colgate Palmolive because has higher market share of tooth brush and tooth paste. In fact, Colgate was selling more than 30 kinds different products of tooth paste and it’s most popular brands’ name in Oral care. By differentiating the products, this company creates the different new product form the other competitors such as focusing on the design and packaging of the tooth brush should be innovative, colourful and unique then make customer interested and touched to those products. The cost of tooth brush and tooth paste usually based on the quality of products, and it may allow Colgate to charge a higher price.
Here, the solution is to reduce the costs and designing the new brand of product and technologies. Obviously, Malaysia has successful cost leadership could generally increase Colgate Palmolive Sdn Bhd’s market share and make this company to grow up. 5. 0 Advantages of ABC System One of the advantages of ABC is that this system gives more accurate costing. ABC system is the method which is useful for all types of business (Hansen, D. R. and Mowen, M. M, 2007). For instance, Colgate Palmolive uses the ABC software that can evaluate the cost of its activity and cost object. The reason of Colgate Palmolive adopted the ABC system is to provide the more accurate revelation of the cost of program and services.
Moreover, Colgate Palmolive implemented the ABC system which helps the manager easily understand the impact of products and customers variety on profit margin. After that, this ABC system took the difference in how this company entered orders from its customers, how the packaged orders, how delivered orders, and spent time to deliver it to each customers location. This ABC system has helped Colgate Palmolive acquire the large national customer because it has identified ‘the specific manufacturing, distribution, and handling costs related with serving this customer”. Furthermore, ABC provide support on performance measurement whereby the information provided on cost drivers and cost driver rates shows great influential power on staff behaviour and used as performance measurement.
Cost drivers provide volume measures on different aspects of operational performance which reflect the effectiveness of the activity concerned. When linked to costs, the cost drivers can help in assessing the efficiency with which activities are carried out. Colgate- Palmolive can In addition, the detailed information by ABC system assists management in making decisions about product profitability. This is because ABC using unit cost rather than the total cost on making decision. Management can evaluate how the current product and process designs affect activities and costs as a way of identifying new designs to reduce costs. Colgate can do investigation based on the current product costs to do adjustment on the new products that going to be launch. 6. 0 Conclusion
The activity based costing is one of the tools of strategic management accounting which allow the Colgate Palmolive (M) to measure the cost and performance of the activities and the cost objects. It does provide more accurate information for decision making in determining costs by various cost object. The implementation of ABC system by Colgate Palmolive (M) is closely in line with the objective of the company to leads in the market of oral, health and care industry in Malaysia. Innovation in its products and having a lower cost in the market with a good quality always get into the attention of the company as these product differentiation and cost leadership are the key for the competitive advantage.