Essay Sample on Managerial Accounting for Apple Inc. Activity-Based Costing

Established in 1976, Apple produces millions of cellphones annually and has taken over a third of the US cell market. Over the decades, the company’s product range grew to include other electronic devices, such as headphones, tablets, TV sets, and more. Apple is also reportedly developing an electric vehicle to rival Tesla’s success. Throughout the years, only one thing remained the same: the premiere price tag associated with Apple products that led to the company’s ever-growing profit. With such an obvious success case on display, business owners are wondering, does Apple use process costing or absorption costing methods to price the products just right? The secret behind Apple costing method is their activity-based approach that has been around since the 1980s but hasn’t been widely adopted until recently.

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What Is Activity-Based Costing and How Does It Work?

Activity-based costing (ABC) is a tried-and-true approach of making product price estimates more precise through assigning actual costs to every activity and resource that goes into the manufacturing of the final product. Unlike conventional accounting methods, this approach assigns direct costs to indirect expenses (overheads), resulting in accurate calculations and better operational and strategic decision-making.

ABC is used for customer pricing and profitability assessment. Through this approach, businesses like Apple can eliminate unprofitable products from their lineups and lower the rates of overpriced offers to boost demand.

Traditional Approach to Costing

Conventional absorption costing methods include job order and process cost systems and are used to estimate the product price and the value of the production facility inventory. These approaches rely on the product cost “absorbing” all the manufacturing expenses regardless of their nature. As a result, the product prices can be unreasonably inflated, and the facilities are incentivized to overproduce to affect the product cost.

These techniques have been in use for decades and produced satisfactory results. Managerial staff relied on these methods due to their simplicity and acceptable margin of error that was usable in a sluggish economy. However, new products, services, manufacturing processes, and value offers, along with increasing competition in the tech and IT industries, drove the adoption of a more accurate costing approach.

Solving Apple’s Costing Problems Through ABC

Absorption costing works for many retail and manufacturing businesses due to its straightforward and reliable nature. However, the common approach may be problematic for electronics giants that produce a broad lineup of products for various applications and markets.

So does Apple use job costing or process costing? The answer is neither, as Apple relies on ABC to estimate the overhead for various products accurately without inflating the rates further or losing profit on incorrectly-priced products. With ABC, Apple considers overheads as extra variables that affect the final price. These variables, ignored by the absorption approach, include R&D activities, marketing expenses, and distribution costs.

Moreover, ABC leads to the activity-based management (ABM) establishment. The precise calculations of ABC’s extra variables enable Apple managers to make better decisions, including the reduced use of resources and the increased manufacturing efficiency to boost the company’s profit margin.

The Benefits of the Activity-based Costing System for Apple

The general increase in efficiency and profit derived from Apple activity based costing approach is better illustrated through individual benefits derived throughout the manufacturing and sales processes.

• ABC accounts for a variety of operational factors outside the conventional production volume metrics.

• ABC showcases the relationships between the process performances and the costs that affect the product price.

• ABC enables the accurate analysis of production overheads through clear and logical calculations, not arbitrary numbers.

• ABC produces quantitative financial and non-financial metrics of the company’s performance.

• ABC can be used to generate insights into the relationship between the prices and the products, market segments, customers, and internal corporate processes.

• ABC highlights the changes in the product price over time and emphasizes the factors affecting the cost fluctuations.

• ABC focuses on the product’s cost changes and helps determine the processes that do not add value and can therefore be eliminated to save resources.

The full extent of ABC benefits depends on the particulars of the business model and market niche. Still, the ultimate result of introducing the technique combines the decrease in expenses and the increase in profits.

Implementing the ABC Technique

The increasing adoption of ABC techniques is hindered by the complexity of the introduction and initial ABC system setup that requires extensive investment. In general, the process can be divided into four stages that can be repeated in an iterative cycle until the desired results are achieved:

1. System design and construction. The system can be considered as a means to highlight the costs (resources, activities, cost objects) or a means to focus on processes (operational activities). At the onset, the company management should decide whether to prioritize operational or strategic management through ABC, as well as select the ABC attributes and decide on reporting basics.

2. Project planning and management. Considering the massive scale of the ABC system introduction, it should be spearheaded by a specialized team with a project manager at the helm. Communication between all departments taking part in the system introduction is critical, along with training and educating core personnel in the effective use of the system and its value for the company.

3. Conceptual and transactional data collection. At this stage, the team responsible for the ABC system introduction collects data on the activities performed by the equipment and employees, identifies the performance metrics and cost elements, determines the correlation between the activities and cost elements, and singles out the activity drivers.

4. ABC system introduction and ongoing maintenance for long-term sustainability. Once every aspect of the system is set in place, it can be put into active use, though most businesses go through several iterations until they land on the final version of the system. The relevant data must be updated regularly (monthly or quarterly) to ensure the ABC system produces accurate and actionable results.

The Limitations of the ABC Costing Method

Despite its numerous benefits, ABC is not a panacea, nor is it universally applicable for every business regardless of the industry and niche. The level of accuracy ABC provides requires vast amounts of data to be collected and analyzed, which translates into additional costs throughout the ABC system setup and its ongoing maintenance. Without properly sourced manufacturing and operational data, the complex calculations become obsolete. Therefore, businesses should consider the shift from absorption to activity-based costing a long-term investment in increased productivity.

Considering the complexity of the ABC calculations, software systems are best-suited to the task. And while tech giants like Apple can afford to invest in custom solutions, most small to medium-sized businesses do not possess the budget necessary for custom software development to seamlessly integrate the new system into the existing IT ecosystem. So instead, businesses settle for ready-made solutions that often come with integration and synchronization issues and do not account for the specifics of a particular market or business model.

Finally, the investment into an ABC system may be obsolete for businesses that specialize in a single type of product. In this case, the processes, resources, and activities would be similar enough to make the ABC approach excessive and wasteful. Conventional absorption costing would be better suited for companies relying on such a business model.

Summary

Activity-based costing was developed to solve the businesses’ growing dissatisfaction with the existing absorption costing models. As the business outputs become ever diverse, managers have to adopt new ways to account for extra variables that affect the product cost in unpredictable ways. And while incorporating the ABC approach is not an easy or a fast task, businesses can gain a variety of benefits, from eliminating products and processes that do not produce value to making better strategic decisions to reduce expenses and increase profits.

Like all other costing models, ABC has its share of limitations and drawbacks, including the substantial initial investment and steep learning curve. However, this costing approach is becoming prevalent among tech giants like Apple, which benefit from accurate estimates and valuable decision-making data.

Reference

Jameson, J. (2000). U.S. Patent No. 6,032,123. Washington, DC: U.S. Patent and Trademark Office.