Introduction
By utilizing different costing methods, a company can boost its revenue by optimizing production costs versus functions and the value of its services or goods. PepsiCo, Inc. is a global manufacturer of beverages and snacks, although its primary expenses consist of storage, transportation, and advertising of its products (Trefis Team & Great Speculations, 2021). Being an international organization, this firm has to adapt to different circumstances, and pricing ranges to remain competitive in all markets it enters. This essay will analyze job order and process costing methods, PepsiCo, Inc. expenditures, and its factory overhead and provide recommendations regarding possible changes in its accounting approaches. This business has to adapt via a flexible approach to managing its expenses to increase its revenue.
Costing Methods
To understand how firms determine prices, it is vital to compare ways of allocating resources. A job order costing method applies to companies with a low volume of products that are difficult to create, such as films or cars (Weygandt et al., 2018). Each unit’s final value is assigned individually due to the unique features it may include. PepsiCo cannot benefit from this approach, as it does not create unique items per task. In turn, a process costing technique is more suitable for firms that manufacture a large volume of similar goods (Weygandt et al., 2018). Mass production businesses, including PepsiCo, rely on this type of cost allocation. A job costing method leads to higher prices, while process costing lowers them.
Factory Overhead
PepsiCo utilizes a process analysis approach for its manufacturing expenses. The primary value drivers for PepsiCo lie in indirect and overhead costs (Trefis Team & Great Speculations, 2021). The firm needs to constantly evaluate its payments of rents of facilities, equipment, logistics agreements, warehouses, and taxes to remain competitive with other local beverage manufacturers. Raw materials and direct labor affect Pepsi’s products on a lesser scale. If the company switches to the activity-based costing (ABC) method, it can allocate overheads for each activity associated with its goods, such as syrup conservation, and contracts with bottling providers.
Recommendation
Unlike traditional strategies, ABC is more complex and requires an in-depth analysis of business activities regularly. Traditional accounting approaches are inefficient in organizations where manufacturing overhead and other indirect expenditures are difficult to cover (Weygandt et al., 2018). Therefore, it is recommended that PepsiCo consider ABC as a primary way of determining the value of its beverages and food. I think that this method will work better due to its detailed exploration of sources that affect costs. This strategy can complement the process analysis with additional categories that highlight crucial components of PepsiCo’s supply chain.
Conclusion
In conclusion, PepsiCo relies on the evaluation of its processes to ensure that its products remain within an acceptable price range. Expenditures on logistics, taxation, and other factors depend on the region where the organization sells its beverages. Improper assessments of costs lead to a significant loss in firms’ revenue. Customers would refuse to purchase an overpriced item, or a business would not achieve its expected return on investments. Accounting plays a critical part in ensuring that markets remain fair and competition among companies is based on the real-life values of their services or goods. While the process costing is efficient for PepsiCo, this organization can switch to ABC to gain better control over its financial allocations by assessing factors per each activity involved in manufacturing.
References
Trefis Team, & Great Speculations. (2021). How much does PepsiCo spend on cost of sales and SG&A? Forbes.
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2018). Financial & managerial accounting (3rd ed.). John Wiley & Sons.