management accounting information systems in Coca-Cola

Author: Iloka Benneth Chiemelie

Published: 4th of October 2014

Background of Coca-Cola

In the two of the decades past, Coca-Cola has enjoyed tremendous success as one of the world’s most successful household brand. It is the largest soft drink producer and the main factor for the company’s tremendous success is its innovative approach to business. Coca-Cola has over 3,500 brands all over the world, and these brands are designed to serve individual market needs of different markets across the world. The company has remained successful in business for 127 years, thus providing it with advanced management expertise and experience that the company can use in bolstering its successful across the global market. In summary, Coca-Cola operates business in over 200 countries, and this vast market does provide the company with necessary backing to booster higher profitability. Its numerous brand names and global presence also provides the company with the opportunity of leveraging losses in some market to ensure overall sustainability.

Coca-Cola’s capital business process

Numerous studies have presented discussions on budgeting process of firms, and Hansen (1987)  is one of those researchers who made known that financial decisions in firms does involve understanding how the optimal capital of firms are structured in terms of weighted debts and equity. In terms of dividends, it does involve the approach of passing on funds generated by the company to equity-holders (Harford, 1999, 2005).  On that note, overall budgeting decision process in companies revolve around how much should be invested, what asset it should be invested in, and the level of expected outcome from such investments.

In terms of assets, they can either be long-term or short-term assets. Thus, capital budgeting focuses on the sizeable investment that must be made on long-term assets. These assets can either be tangible or intangible. Notwithstanding the tangibility of the assets, capital decision process can easily be distinguished on the connotation that such investments are large and they are done on the long-term.

Coca-Cola adopts capital budgeting decision process. This budgeting revolve around all activities that reflects the company’s past, concerns its present, and forecasts its future. The company begins by in research (intangible assets) in order to gain an understanding of what the market needs, then product development (tangible asset) in order to provide the market with products that meet their needs and generate sales for the company in the process. Although majority of its products are globally accepted, there is the need to note that the company offer 3,500 products in just over 200 markets, and this clearly demonstrates the company’s commitment towards customizing their products. Thus, it is obvious that the company adopts capital budgeting throughout its business ranks in order to determine what should be done, to whom it should be done for, and why it should be done – as well as how it should be done.

Coca-Cola’s management accounting information systems

In accordance with Wiley (n.d), Coca-Cola’s management accounting information system is controlled by its accounting managers. Management accounting is related to accounting information adopted by companies for internal decisions made on how the business should be operated in terms of expenses incurred and sales generated from such expenses. Wiley (n.d) presented some evidence to who how Coca-Cola makes use of cash book ledger for its management accounting information, and the company’s cash book ledger is divided into two sections. One section is used for cash disbursement journal record of all the payments made (such as accounts payable and operation expenditures). The second section contains the cash journal, which houses all cash record and receipts (such as cash sales and accounts receivable). Additionally, the company keeps record of all these journal on daily bases with respect to any given transaction performed and the company’s management accounting information system is illustrated in below appendix.

Coca-Cola’s cost accounting approach - ABC

The definition of process accounting is presented by McGraw-Hill (2008) as the costing system of products in which cost are accumulated on the bases of processes or departments, and these accumulated costs are assigned to products which have similar or identical processes. McGraw-Hill (2008) also made known that this process is what governs Coca-Cola’s daily business process as the company determines the cost of each products based on the activities involved in the production process. The company’s production process features three major activities as concentrate and syrup manufacturing, blending, and packaging.

From the above discussion, it is clear that the company makes use of activity based costing. This is because it does determine the price of its products based on the number of activities undertaken in the process of manufacturing such products. Thus, company also budgets its costs (operation expenses) based on the number of activities involved. This simply imply that the higher the activities involved in production, the higher Coca-Cola will budget for such production and vice versa.

Coca-Cola capital decision making process

In line with the company’s budgeting and costing methods discussed above, Coca-Cola adopts weighted average cost of capital (WACC) for its capital decision process. In this kind of capital decisions, the capital intended for investment is determined by calculating the cost of capital at which each of the activities involved and associated capitals are proportionally weighted (Investopedia, 2013). In this decision process, the company considers all sources of capital and the outcome is that it will increase its capital investments if the beta and rate of return measured for equity is found to increase.

Coca-Cola’s capital acquisition and structure

Eckbo (2009) described Coca-Cola’s capital acquisition and structure as equity based capital. This form of capital as Eckbo (2009) noted is acquired by making the company’s assets available in the market for investors and then paying these investors accrued investments interests in the form of dividends. This is basically a shareholder-bases structure in which the highest shareholder (whether it is a company or an individual) automatically becomes the chairman of the board.

Conclusion

Management accounting is a necessity in any given company for a number of reasons but the major reason is that it helps the company in forecasting and measuring expected outcome from its business processes. Thus, it is not surprising to notice that management accounting is an integral aspect of Coca-Cola’s accounting systems and overall management process.

The most significant discovery is that the company’ adopts ABC accounting measure as against the traditional cost approaches. The reason is because it maintains operation across the world and offers 3,500 products to the global market. Thus, it is necessary that it spends as it operates, instead of the combined budgeting approach that forces the company to spend even while it is not operating. By so doing, Coca-Cola is able to reduce overall costs while benefiting from increased economies of large scale production and increasing its profitability in the process.

In conclusion, management accounting is very important for companies as it does assist in the whole management process. However, the best costing measure is ABC because it allows companies to only spend when they operate – thus reduce their overall costs and take advantage of economies of large scale production to increase revenue.

References

Eckbo, B. E., 2009, “Bidding Strategies and Takeover Premiums: A Review,” Journal of Corporate Finance 15, 149-1781.

Hansen, R. G., 1987, “A Theory for the Choice of Exchange Medium in Mergers and Acquisitions,” Journal of Business 60, 75-95.

Harford, J., 1999, “Corporate Cash Reserves and Acquisitions,” Journal of Finance 54, 1969-1997.

Harford, J., 2005, “What Drives Merger Waves?” Journal of Financial Economics 77, 529-560.

The McGraw-Hill (2008), “Process costing.” Available at: http://novellaqalive2.mhhe.com/sites/dl/free/007000000x/216180/chap11.pdf.

Wiley (n.d.), “Financial Review Incorporating Management’s Discussion and Analysis: The Coca-Cola Company and Subsidiaries.” Available at: http://www.wiley.com/college/kieso/cokefinancial/cokeannual.pdf

Investopedia (2013), “Cost of Capital-Weighted Average Cost of Capital (WACC).” Available at: http://www.investopedia.com/walkthrough/corporate-finance/5/cost-capital/wacc.aspx