Pepsi Managerial Accounting report
Transcript of Pepsi Managerial Accounting report
Introduction to the company
PepsiCo is a leading global beverage, snack and Food Company. They manufacture or
use contract manufacturers, market and sell a variety of salty, convenient, sweet and
grain-based snacks, carbonated and non-carbonated beverages and foods in
approximately 200 countries, with its largest operations in North America (United States
and Canada), Mexico and the United Kingdom. PepsiCo’s commitment to sustainable
growth, defined as Performance with Purpose, is focused on generating healthy financial
returns while giving back to the communities it serves. This includes meeting consumer
needs for a spectrum of convenient foods and beverages, reducing its impact on the
environment through water, energy and packaging initiatives, and supporting its
employees through a diverse and inclusive culture that recruits and retains world-class
talent.
The Pepsi Cola Company began in 1898 by a Pharmacist and Industrialist Caleb
Bradham, but it only became known as PepsiCo when it merged with Frito Lay in 1965.
Until 1997, it also owned KFC, Pizza Hut, and Taco Bell, but these fast-food restaurants
were spun off into Tricon Global Restaurants. In December 2005, PepsiCo surpassed
Coca-Cola Company in market value for the first time in 112 years since both companies
began to compete.
PepsiCo’s Operations
PepsiCo is organized into three business units, as follows:
(1) PepsiCo Americas Foods (PAF), which includes Frito-Lay North America (FLNA),
Quaker Foods North America (QFNA) and all of Latin American food and snack
businesses (LAF)
(2) PepsiCo Americas Beverages (PAB), which includes PepsiCo Beverages North
America and the entire Latin American beverage Businesses; and
(3) PepsiCo International (PI), which includes all PepsiCo businesses in the United
Kingdom, Europe, Asia, Middle East and Africa
These three business units are comprised of six reportable segments (referred to as
divisions), as follows:
- Frito-Lay North America (FLNA)
- Quaker Foods North America (QFNA)
- Latin America Foods (LAF)
- PepsiCo America Beverages (PAB)
- United Kingdom & Europe (UKEU), and
- Middle East, Africa & Asia (MEAA).
The part of our concern in this report will be the Middle East, Africa and Asia (MEAA)
division as our research and collected data is confined to this region.
Middle East, Africa & Asia
MEAA manufactures, markets and sells through consolidated businesses as well as
through non controlled affiliates, a number of leading salty and sweet snack brands
including Lay’s, Doritos, Cheetos, Smith’s and Ruffles. Further, MEAA manufactures or
Uses contract manufacturers, markets and sells many Quaker brand cereals and snacks.
MEAA also manufactures markets and sells beverage concentrates, fountain syrups and
finished goods, under various beverage brands including Pepsi, Marinda, 7UP and
Mountain Dew. These brands are sold to authorized bottlers, independent distributors and
retailers. However, in certain markets, MEAA operates its own bottling plants and
distribution facilities. In addition, MEAA licenses the Aquafina water brand to certain of
It’s authorized bottlers. MEAA also manufactures or uses contract manufacturers,
markets and sells ready-to-drink tea products through an international joint venture with
Unilever.
Com petition
PepsiCo operates in highly competitive markets. It competes against global, regional,
local and private label manufacturers on the basis of price, quality, product variety and
distribution. In U.S. measured channels, its chief beverage competitor, The
Coca-Cola Company, has a larger share of carbonated soft drinks (CSD) consumption,
while PepsiCo has a larger share of liquid refreshment beverages consumption. In
addition, The Coca-Cola Company has a significant CSD share advantage in many
markets outside the United States. Further, PepsiCo’s snack brands hold significant
leadership positions in the snack industry worldwide. Its snack brands face local and
regional competitors, as well as national and global snack competitors, and compete on
the basis of price, quality, product variety and distribution. Success in this competitive
environment is dependent on effective promotion of existing products and the
introduction of new products. PepsiCo believes that the strength of its brands, innovation
and marketing, coupled with the quality of its products and flexibility of its distribution
network, allow it to compete effectively.
Critical Accounting Policies
These policies may require management to make difficult and subjective judgments
regarding uncertainties, and as a result, such estimates may significantly impact
Company’s financial results. The precision of these estimates and the likelihood of future
changes depend on a number of underlying variables and a range of possible outcomes.
PepsiCo’s critical accounting policies arise in conjunction with the Following:
• Revenue recognition,
• Brand and goodwill valuations,
• Income tax expense and accruals
Revenue Recognition
PepsiCo’s products are sold for cash or on credit terms. The credit terms, which are
established in accordance with local and industry practices, typically require payment
within 30 to 90 days internationally, and may allow discounts for early payment. It
recognizes revenue upon shipment or delivery to its customers based on written sales
terms that do not allow for a right of return. However, its policy for DSD and chilled
products is to remove and replace damaged and out-of-date products from store shelves
to ensure that consumers receive the product quality and freshness they expect. Similarly,
its policy for certain warehouse-distributed products is to replace damaged and out-of-
date products. Based on the company’s experience with this practice, it has reserved for
anticipated damaged and out-of-date products.
Brand and Goodwill Valuations
PepsiCo sells products under a number of brand names, many of which were developed
by PepsiCo. The brand development costs are expensed as incurred. There are other
brands that PepsiCo has acquired. Upon acquisition, the purchase price is first allocated
to identifiable assets and liabilities, including brands, based on estimated fair value, with
any remaining purchase price recorded as goodwill. Determining fair value requires
significant estimates and assumptions based on an evaluation of a number of factors, such
as
marketplace participants
product life cycles
market share
consumer awareness
brand history and future expansion expectations
amount and timing of future cash flows
the discount rate applied to the cash flows.
The company believes that a brand has an indefinite life if it has a history of strong
revenue and cash flow performance, and we have the intent and ability to support the
brand with marketplace spending for the foreseeable future. If these perpetual brand
criteria are not met, brands are amortized over their expected useful lives, Which
generally range from five to 40 years.
Income Tax Expense and Accruals
The annual tax rate is based on company’s income, statutory tax rates and tax planning
opportunities available in the various jurisdictions in which the company operates.
Significant judgment is required in determining annual tax rate and in evaluating tax
position. Deferred tax liabilities generally represent tax expense recognized in financial
statements for which payment has been deferred, or expense for which the company
has already taken a deduction in tax return but have not yet recognized as expense in the
financial statements. In 2008, the annual tax rate was 26.8% compared to 25.9% in
2007.The tax rate in 2008 increased 0.9 percentage points primarily due to the absence of
the tax benefits recognized in the prior year related to the favorable resolution of certain
foreign tax matters, partially offset by lower taxes on foreign results in the current year.
In 2009, annual tax rate is expected to be approximately the same as 2008.
Financial performance
Snacks volume grew 10%, reflecting broad-based increases. Beverage volume grew 11%,
Acquisitions had a nominal impact on beverage volume growth. CSDs grew at a high-
single-digit rate and noncarbonated beverages grew at a double-digit rate. Net revenue
grew 22%, reflecting volume growth and favorable effective net pricing. Operating profit
grew 25%, driven by the net revenue growth, partially offset by increased commodity
costs.
Hierarchal structure of the company
Following are the board of directors of PepsiCo International
Victor J. Dzau,
Arthur C. Martinez,
Sharon Percy Rockefeller,
Daniel Vasella,
Alberto Ibargüen,
Lloyd G. Trotter,
Dina Dublon,
Michael D. White,
Ray L. Hunt,
Indra K. Nooyi,
Ian M. Cook,
James J. Schiro
Further; following is the hierarchal structure that PepsiCo. International operates in
Lays- Potato Chips
Lay's is the brand name for a number of potato chip (a.k.a
crisps) varieties as well as the name of the company that founded
the chip brand in 1938. Lay's chips are marketed as a division of
Frito-Lay, a company owned by PepsiCo Inc. since 1965
For the internal accounting analysis purposes we have selected the snacks department of
PepsiCo. In this department we further narrow it down to “Lays”
In Pakistan, Lays is available in mainly 5 flavors and is now the most popular snack
amongst youngsters of the country.
French Cheese
Salted
Masala
Tango
Bar B.Q
Factory Tour:
Our group paid a visit to the office of PepsiCo located in Gulberg, Lahore. We needed to
have a one-on-one conversation with the staff to get an idea of how PepsiCo handles its
internal finances. Since this kind of information was not available officially, we decided
to get it first hand.
Since we had set a meeting beforehand, we did not face any difficulty in getting in. The
staff, on a general level, was very friendly and helpful. Although, they did make us wait
for about half an hour before beginning the interview.
We were escorted to a room upstairs which was finely decorated, just like the entrance
lounge. The Factory Finance Manager from the snacks department introduced himself
and the question answer session begun.
He briefed us about the cost of goods sold which included direct material, direct labor
and manufacturing overhead costs. He then elaborated each category with the specific
example of potato chips. The raw material includes potatoes, oil and flavor. The direct
labor comprised of three steps
1. Raw Material
2. Processing
3. Packaging
Lastly, he explained the manufacturing overhead with the example of electricity. Other
than this, he told us about the marketing costs that were incurred by the company. Its
record is kept separately.
In the beginning, they were quite reluctant about giving out the information. However,
they cooperated with us on the maximum level which they thought was appropriate.
Internal Accounting Procedures
The snacks department of Pepsi Co. has the following major divisions where costs are
accumulated.
Production
Finance
R&D
Planning
Personnel
Marketing
SAD(sales and distribution)
ANM (advertising and marketing)
GNA (General and administrative)
The costing is mainly associated to the production department. The rest of this report
includes a detailed analysis of the costing procedures carried out in PepsiCo’s snack’s
production department.
Costs Classification:
Manufacturing Costs:
Cost Classification
Manufacturing Costs Non- Manufacturing Costs
Direct Labor
Manufacturing Overhead
Selling Costs
Administrative Costs
FixedManufacturing
Overhead
Variable Manufacturing
Overhead
Direct Material
Manufacturing cost is the expenditure incurred in carrying out the production processes
of an organization. The manufacturing cost includes direct costs, for example, labor,
materials, and expenses, and indirect costs, for example, subcontracting and overheads.
The costs identified as manufacturing costs in the production of Lays are as follows
1. Direct Materials
The materials that go into final product are called raw materials
Potato
Oil
Seasoning(flavour)
Film (packet)
Carton
2. Direct Labour
The term direct labor is reserved for those labor costs that can be essentially traced to
individual units of products. Direct labor is sometime called touch labor, since direct
labor workers typically touch the product while it is being made. Direct labour includes
worker working in
Input Department
Peeling department
Washing department
Slicing department
Frying department
Seasoning department
Packaging Department
3. Manufacturing Overheads
Manufacturing overhead, the third element of manufacturing cost, includes all costs of
manufacturing except direct material and direct labor.
Variable manufacturing overheads includes
Electricity
Gas (gas generator)
Nitrogen (N2) flush
Utility expenses
Repairing costs
Maintenance costs
Fixed manufacturing overheads includes
Rental costs (if gas generator is hired on rent)
Transportation costs
Meals
Depreciation
Indirect labour includes
Labour used in service department
Security guards
Labour in engineering department
Warehousing labour
Labour in quality department
Overtime
Indirect material includes
Food stickers
Non-Manufacturing costs
Non manufacturing costs are those costs that are not incurred to manufacture a product.
Examples of such costs are salary of sales person and advertising expenses. Generally
non manufacturing costs are further classified into two categories.
1. Marketing and Selling Costs
2. Administrative Costs
1. Marketing & Selling Costs :
Marketing or selling costs include all costs necessary to secure customer orders and get
the finished product into the hands of the customers. These costs are often called order
getting or order filling costs. These costs include;
Commissions
Placement costs
Transportation costs (per unit of product is charged)
2. Administrative costs
Administrative costs include all executive, organizational, and clerical costs associated
with general management of an organization rather than with manufacturing, marketing,
or selling. Examples of administrative costs include executive compensation, general
accounting, secretarial, public relations, and similar costs involved in the overall, general
administration of the organization as a whole. For PepsiCo, Snacks department following
costs are identified as its administrative costs;
Salaries
Office expenditure including furniture and stationery costs
Depreciation costs (offices)
Cost classification on the basis of cost behaviour
Apart from classifying costs as manufacturing and non-manufacturing costs, costs are
also classified on the basis of their behaviour. These are the
Variable costs
Fixed costs
1. Variable Costs
Variable cost is a cost that varies, in total, in direct proportion to changes in the level of
activity. In case of the manufacturing of Lays a number of variable costs are incurred.
The first is electricity cost. The electricity is generated from gas generators so the gas will
also be considered as a variable cost.
2. Fixed costs
Fixed Cost is a cost that remains constant, in total, regardless of changes in the level of
activity within the relevant range. In case of the manufacturing of Lays the fixed costs
incurred are firstly the depreciation of the fixed assets being used. Second is the cost of
the permanent staff. The transportation cost i.e. cost of transporting potatoes from the
farm to plant and then from the plant to warehouse is also considered as a fixed cost. The
rental cost e.g. of the generators that are used to generate electricity is also fixed cost.
Other Costs:
Other costs include the fringe benefits and the extra benefits given to the employees.
Fringe benefits are perks offered to employees in order to keep them motivated and for
the purpose of retaining them.
Fringe benefits given to labor include
Meal
Transportation
Overtime
Extra benefits to higher executives includes (varies with status)
Pay roll
Provident fund
Medical free facility
Transport
Fuel expense
Cell phones (monthly bill of cell paid)
Lays and Process Costing:
The snacks department of PepsiCo undertakes the process costing system because;
Identical units of products are being produced for a longer period of time on
continuous basis
Costs are accumulated by departments
Unit costs are computed by departments
Lays- Departments:
Production department three main departments that are involved in the manufacturing of
lays potato chips. These include
Input department
Processing department
Packaging department (taping department)
Input Department:
Grade A Potatoes are brought from farms owned by PepsiCo. Before putting them into
process they are first checked for quality inspection. And once approved they are put for
further processing.
Processing department:
This department is further subdivided into 5 sub-departments;
Washing
Peeling
Slicing
Frying
Seasoning
First the potatoes are thoroughly washed in water. Next the skin is gently peeled off so
that the flavor remains. After which potatoes are thinly sliced and rinsed again to remove
any excess starch. Then the slices are cooked to a crispy crunch in all natural-oil. Lays
Classic Potato chips were cooked in hydrogenated oil until 2007. Currently, the chips are
made with 100% pure sunflower oil which is lower in saturated oil. Finally the chips are
topped with a sprinkle of salt or other seasonings.
Packaging:
The processed potatoes are packed into their respective packets. And before sealing the
packets Nitrogen flush is passed through the packets in order to maintain the life span of
the product to three to four months. Then these packets are sealed and packed into the
cartons. And finally these finished product inventory is sent to ware houses or purchase
points.
The Cost Flow System
The Direct materials, direct labor and manufacturing over head costs are transferred to
work in process account and from their it is then transferred to the finished goods
inventory.
The cost flow is further illustrated by the following sequence of diagrams.
1. to record the use of direct material
2. To record the direct labor costs
3. To apply manufacturing overhead to departments
General assumptions undertaken by the company
Labor is the fixed cost
Discretionary fixed costs include
- R&D expenses
- Quality maintenance expenses
- Advertising expenses
Committed fixed costs include
- Labor
- Contractual costs incurred as a result of contracts between distributors
Break Even
The planning manager of PepsiCo’s snacks department claims that break even is a
requirement for companies that are not properly established and for new businesses. As
PepsiCo is a strong brand and an established business, it does not require breakeven
analysis to run their business instead they use break even analysis at lower level to
analyze the profit margins. He claims that their existence in the market is as the result of
PepsiCo’s objective of profit maximization and target profiting and not just meeting the
expenses
Appendix A is the Cost of Goods sold and contribution margin statement which could be
used for break even analysis.
Break even can be calculated using the formula
Break even in rupees = Fixed expenses
CM Ratio
Dollar sales to attain Target profit = Fixed expense + Target profit
CM Ratio
Costing Procedures
Both variable and absorption costing procedures are used. In PepsiCo they mainly focus
on variable costing approach which they use for decision making while the absorption
costing is used for analyzing the financial figures.
This again brings us to Appendix A
Budgets
Introduction
A budget is a plan expressed in dollar amounts that acts as a road map to carry out an
organization’s objectives, strategies and assumptions.
A company might have a master budget or profit plan for the upcoming year. The master
budget will include a projected income statement and balance sheet. Within the master
budget will be operating budgets such as a sales budget, production budget, marketing
budget, administrative budget, and budgets for departments. In addition there will be a
cash budget and a capital expenditures budget.
It is a common practice that the budgets prepared for the next accounting year will be
detailed by quarter or by month. It is also typical that the annual budget will not be
changed once the actual year begins. For managers, a budget is a guide that it not so rigid
that it prevents timely action when needed. In rare circumstances the annual budget might
be revised, but only when the business environment has radically changed.
Operating budget approach
The company uses the operating budget approach in which the budget is made for the
whole year i.e. 12 months from January to December which is reviewed almost every
month but it is not the rolling one to check if there are some variances there are
afterwards corrected according to the current situation.
Participative budgeting approach
The company also uses self imposed budgeting or participative budgeting approach in
which they ask all the managers from different departments to give their requirements
and allocate costs to their requirements then these requirements are overviewed by
administration for budgeting.
For instance, plant manager are consulted for all the overheads because later it becomes
very difficult to knock down the whole process.
Budgeting committee
Budgeting committee is divided into
Control committee
Planning committee