Colgate- Palmolive is one of the leading consumer product organizations that have been dealing with its products 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 the Malaysian market. At present, Colgate is implementing the Activity-Based Costing (ABC) method.ABC is a system that had been practicing 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 the ABC system which uses to provide more accurate information for decision making in determining costs by cost objects such as product, customer, and location and the cost pool of the company.
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) provides information for achieving its plans since the ABC is costing technology that traces cost to products according to activities performed on them. Accurate cost information is produced for 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 the 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 a competitive advantage as to product differentiation. The research and development indeed play a role in this process such example where Colgate Palmolive worked on improving soap packaging through quality engineering (Boehmer, 2008). Meanwhile, the storage of raw materials ensures the effectiveness of the company in 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 higher customer satisfaction thus also leads to increased revenues in a demand-driven market.
Besides, by improving unit costs where a reduction of the unit costs can be achieved by a high degree of machine capacity utilization. Having accurate cost data will allow Colgate Palmolive to identify activities that are not efficient and important, eliminate waste, and reduce costs while improving the quality of the products.
Steps for Each Activity
There are arguments stated that the traditional costing (TC) method can misrepresent the cost of the product where it might have to 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 deciding a product cost. The element such as a number of direct labor hours or a number of machine-hours was used to apportion the indirect costs. This has created unfairness in costs apportionment into the product as a different activity provides different incurrence of cost. Furthermore, different products consumed different levels of costs in different activities. Therefore, the ABC method is formed to solve the traditional costing flaw.
ABC method emphasizes 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 product consumption in different activities. Therefore, management can make decisions accurately.
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 products. Besides that, customer costing which is the calculation 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 is a similarity cost object within the industry which is products and customers. (Gunasekaran, A., 1999)
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 a 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. A cost driver is a variable used as the 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 number of orders, number of suppliers, and number of parts ordered. (Gunasekaran, A., 1999)
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. Even though the price between both products is not much indifference but it can be claimed that the ABC system more accurate measurements the resources consumed for both products.
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 business offer the average product at lower costs for a broadest possible market. Product differentiation is the strategy to focus offers unique products by creating new products (innovation). Therefore, Colgate Palmolive is considering and focusing on these challenges through two basic strategies: differentiating its product and achieving the cost leadership. It can see that Malaysia had chosen by Colgate Palmolive because has a higher market share of toothbrush and toothpaste. In fact, Colgate was selling more than 30 kinds of different products of toothpaste 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 toothbrush should be innovative, colorful and unique then make the customer interested and touched to those products. The cost of toothbrush and toothpaste 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 products and technologies. Obviously, Malaysia has successful cost leadership that could generally increase Colgate Palmolive Sdn Bhd’s market share and makes this company grow up.
Advantages of ABC System
One of the advantages of ABC is that this system gives more accurate costing. ABC system is the method that is useful for all types of business (Hansen, D. R., and Mowen, M. M, 2007). For instance, Colgate Palmolive uses ABC software that can evaluate the cost of its activity and cost object. The reason for 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 customer’s 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 behavior 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 the ABC system assists management in making decisions about product profitability. This is because ABC using unit cost rather than the total cost of making decisions. 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 an investigation based on the current production costs to do adjustment on the new products that going to be launch.
The activity-based costing is one of the tools of strategic management accounting which allows 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 objects. The implementation of the 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 industries in Malaysia. Innovation in its products and having a lower cost in the market with good quality always get into the attention of the company as this product differentiation and cost leadership are the key to the competitive advantage.
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