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ARE 119 Final Project


Apple Inc. In Managerial Accounting Aspect
Qianheng Lao

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Abstract

The concepts found in managerial accounting are not only in the textbook, but also closely
related to the job and life of individual in the real world. By the concepts, managers use the
provisions of accounting information in order to better inform themselves before they decide
matters within their organization, which acids their management and performance of control
functions. By the opinions, the managerial accounting is about one company, for controlling and
planning, making decision, improvement, and performance, and is about the economics, for
supply and demand, price and quantity, and efficiency. Together, these suggest a company is
necessary to have a useful department of managerial accounting and manager in order to gain a
positive increasing margin, which building a health environment for a growing economics.
Therefore, both a growing economics and a profitable company require and depend on the
managerial accounting. In the meantime, these also prove that the study of the managerial
accounting are quiet useful and supporting each individual. In the real world, for a big wellknown company, like Apple Inc., the tools of managerial accounting are applied in order to
enhance its decision-making.
Keywords: managerial accounting, cost-volume-profit, master budget, flexible budgets
and variance analysis, absorption and variable costing, cost behavior, strategy and balanced
scorecard

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ARE 119 Final Project

Apple Inc. In Managerial Accounting Aspect


Apple is a well-know brand in the world and it gets a group of crazy fans all over the
place. Even though everyone knows Apple, there are few people get a deep knowledge of this
company in different aspects.
Apple Inc. actually is an American multinational technology company. It was founded by
Steve Jobs, Steve Wozniak, and Ronald Wayne in Cupertino, California. Over this several
decades, it designs, develops, and sells consumer electronics, computer software, and online
services. The hardware products are the iPhone (smartphone), iPad (tablet), Mac (personal
computer), iPod (MP3), and Apple Watch (smartwatch). It also develops its own software which
include the OS X operating system for the Mac, ISO operating system for the iPhone, iTunes for
media player, Safari for web browser, and etc... According to Forbes, Apple Inc. is the most
valuable company in the world with the largest market capture, and with the largest sales, profits,
and assets among the worlds biggest technology companies. It is the worlds most valuable
company with $740 billion in market cap, more than doubling that of Google, the worlds second
most valuable company.
For such a big computer, the managerial accounting must play an important role in its
field.
Discussion
Managerial Accounting and Manager. Managerial accounting is the process of
measuring, analyzing, and reporting financial and nonfinancial statement that help managers to
fulfill the goal of the company. In other word, it helps the manager of Apple to accomplish the

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goal, and manager uses it to develop strategies, coordinate production and marketing decision,
and evaluate Apple Inc.s performance. The various terms help managers to distinguish different
cost, which will impact each financial statements. A direct cost is any cost that is related to the
particular cost object and can be traced in an economically feasible way, like labor and material
cost. However, an indirect cost cannot be traced, like insurance and depreciation. A variable cost
is a cost that changes in total proportion to change in related level of total activity, like
packaging. However, a fixed cost remains unchanged for a given time period, like rent and loan
payment. Apples manager can assign different cost to the same cost object depending on the
purpose.
Cost-Volume-Profit. The CVP analysis assists managers in understanding the behavior
of total cost, total revenue, and operating income of an Apples products as changes occur in
output level, selling price, variable cost, or fixed cost. Managers use it to understand how profits
change in sale volumes, so they can target the sale level they need to achieve to meet their profit
plan. CPV helps manager make decision on pricing and compare risk of loss when revenues are
low and upside profit when revenues are high for different proportion of variable and fixed cost.
In other word, by using the cost-volume-profit, manager can be easier and more efficient to make
decision on the new model of iPhone and iPad each year in order to target the sale level and
achieve the greatest profit plan. The difference between total revenues and total variable costs is
called contribution margin, indicates why operating income changes as the number of units sold
changes. For example, Apples manager can look at income statement of first quarter of 2016
(shown as Appendix 1) to get total revenue and variable costs in order to calculate contribution
margin. Therefore, he/she will understand the relationship between operating income and the
number of units sold. On the other hand, while CPV is used, there are four assumption. The first

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one is changes in revenues and costs arise only because of changes in the number of product
units sold and the number of units sold is the only revenue driver and the only cost driver. The
second is total costs can be separated into two components: a fixed component that does not vary
with units sold and a variable component that changes based on units sold. The third is when
represented graphically, the behaviors of total revenues and total costs are linear in relation to
units sold within a relevant range. The last one is selling price, variable cost per unit, and total
fixed costs are known and constant. Income taxes can be incorporated into CVP analysis by
using the target net income to calculate the target operating income. The breakeven point is the
quantity of output sold at which total revenues equal total costs, that is where the operating
income is zero. It is unaffected by income taxes because no income taxes are paid when
operating income equals zero. Income taxes and breakeven point can be referred to the tools of
CPV in order to analysis the company.
Master Budget. It summarizes the financial projections of all Apple Inc.s budget. It
expresses managements operating and financial plan for a specified period including a set of
budgeted financial statement. Responsibility accounting helps measure master budget in specific
items. It is a system that measures plans, budgets, actions, and actual result of each responsibility
center. A responsibility center is a part of the company whose managers are accountable for
specified set of activities. Job-costing system and activity-based costing also should follow
master budget as a future plan or a goal to achieve. Job-costing is one of the two basic type of
costing system that assign cost to a product of Apple, in which a cost object is a unit of a distinct
product called a job. Refining a costing system help manager make better decision about how to
allocate resources and which product to produce. Activity-based cost is one of the best tool for
refining a costing system. It approaches to costing that focuses on individual activities as a

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fundamental cost objects and uses the cost of these activities as the basis to assign cost to other
cost objects. By determining the master budget of each year, using responsibility accounting for
each item, and getting costing system and activity-based cost follow the master budget, Apples
managerial accounting assists manager in controlling the actual budget and maximizing the profit
of the year. As a result, the company could be more and more efficient.
Flexible Budgets and Variance Analysis. A flexible budget calculates budgeted
revenues and budgeted costs based on the actual output of Apple Inc. in the budgeted period. It
helps managers gain more insight into the cause of variance. Variance is the difference between
actual result and expected performance. It brings together the planning and control functions of
management, and is also used for evaluating performance and to motivate managers. The
flexible-budget variance is a good measure of sale price and cost performance because it
compares actual revenues to budgeted revenues and actual cost to budgeted cost. For example,
the manager uses the statement of operation of the last quarter to compare its revenue and
expense to the budgeted revenue and expense, which can be defined as flexible-budget variance.
It can be subdivided for its direct cost into price variance and efficiency variance. Price variance
is the difference between actual price and budgeted price multiplied by actual quantity of input,
while efficiency variance is the difference between actual input quantity used and budgeted input
quantity allowed for actual output multiplied by budgeted price. For instance, price variance
iPhone 6s is the difference between its actual price, which is $699 and its budgeted price, which
is determined by Apple, and then multiplied by actual quantity of input, which included direct
material. Managers have more control of efficiency variance because the quantity of inputs
primarily affect factors inside the company. By using the variance analysis, Apples managers
can control the budget, make decision, evaluate performance, and make continuous

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improvement. Flexible budgets in activity-base cost system give insight into why actual activity
cost differ from budget activity cost.
Absorption and Variable Costing. Absorption costing is a method of inventory costing
in which all variable manufacturing cost and all fixed manufacturing cost are including in
inventoriable cost. The inventoriable costs are all costs of a product of Apple that are considered
as assets in the balance sheet when they are incurred and that become cost of goods sold only
when the product is sold. For example, the inventoriable costs of the iPhone 6s, which include
material cost or labor cost, are considered as assets like inventories or cash in the balance sheet
(shown as Appendix B). After that iPhone 6s is sold, that assets would become cost of goods sold
in the income statement. When absorption costing is used, managers can increase current
operating income by producing more units for inventory, which directly affects income
statement. Producing for inventory absorbs more fixed manufacturing cost into inventory and
reduces cost expensed in the period. By using absorption costing, Apple and its managers would
be benefit. Absorption costing is cost-effective and less confusing for managers to use common
method of inventory costing for both external and internal reporting and performance evaluation.
It can help prevent managers from taking actions that make their performance measure look good
but that hurt the income they report to shareholders. It measures the cost of all manufacturing
resources, whether variable or fixed, necessary to produce inventory. An important attribute of
absorption is that it enables a manager to increase margins and operating income by producing
more ending inventory. Ending inventory is the book value of inventory at the end of a financial
or accounting reporting period, equals the beginning inventory balance plus the cost of any
inventory purchases minus the cost of any inventory sold and shrinkage. A manager need to
increase margins in order to produce more ending inventory. Therefore, he/she needs to either

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increase the cost of inventory purchases or decrease the cost of inventory sold. For intense, by
using absorption costing, a manager needs to increase operating income of Apple in order to
increase its cost of inventory purchases or decrease its direct cost. In other words, absorption
costing discourages the inventive incentive, but it can also lower the cost. Even though
absorption costing has a bad side for Apple, it actually benefit the company as a whole.
Cost Behavior. It is the most important to determining which products should be part of
their product mix. Managers are able to understand cost behavior through cost functions, which
are the basic building blocks for estimating costs. A cost function is a mathematical description
of how a cost changes with changes in the level of an activity relating to that cost. Cost functions
can be plotted on a graph by measuring the level of an activity, such as number of batches
produced or number of machine-hours used, on the x-axis. The amount of total costs
corresponding to or dependent on the levels of that activity are measured on the y-axis. There are
two assumptions that managers based on to estimate cost functions. One is variations in the level
of a single activity (the cost driver) explain the variations in the related total costs, and other one
is cost behavior is approximated by a linear cost function within the relevant range. Variable and
fixed cost-behavior patterns are valid for linear cost functions only within a given relevant range.
Outside the relevant range, variable and fixed cost-behavior patterns change, causing costs to
become nonlinear. The most important issue in estimating a cost function is determining whether
a cause-and-effect relationship exists between the level of an activity and the costs related to it.
Without a cause-and-effect relationship, managers will be less confident about their ability to
estimate or predict costs. Understanding the drivers of costs is critical for managing costs. There
are three way to cause cause-and-effect relationship. One is a physical relationship between the
level of activity and the costs, the second one is a contractual arrangement, and the last one is

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knowledge of operations. By analyzing the cost behavior, managers will be easier and more
efficient to determine which products should be part of their product mix. The product-mix
decisions is about which products to sell and in what quantities. According to
Smallbusiness.chron, product mix refers to the total number of product lines that a company
offers to its customers. In Apple Inc., managers with cost behavior could determine the sale level
of the iPads, iPhones, MacBooks, and Apple Watch to achieve the profit plan. As a result, the
cost behavior of different products is quiet a powerful tool for the managerial manager to help
Apple earn a high profit.
Strategy and Balanced Scorecard. The strategy specifies how Apple Inc. matches its
own capabilities with the opportunities in the marketplace to accomplish its objectives. In other
words, strategy describes how Apple can create value for its customers while differentiating itself
from its competitors. In formulating its strategy, Apple must first thoroughly understand its
industry. Industry analysis focuses on five forces: competitors, potential entrants into the market,
equivalent products, bargaining power of customers, and bargaining power of input suppliers.
For the competitors of Apple, there are Microsoft, which primarily competes with personal
computer and its operating system, and also Samsung, which primarily competes with smart
phone and its operating system. For the potential entrants into the market, the small profit
margins and high capital cost discourage new entrants. For the equivalent products, Apple can
reduce production cost and create more new unique games and application that are only for
Apples products. For the bargaining power of customers, Apple can keep prices down and
support for the companies that need to buy large quantities of product. For the bargaining power
of input suppliers, Apples products require high-quality materials and skilled engineers and
technicians that demand higher prices and wage. The collective effect of these forces shapes

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Apples profit potential. In general, profit potential decreases with greater competition, stronger
potential entrants, products that are similar, and more demanding customers and suppliers. The
two generic strategies are product differentiation and cost leadership. Product differentiation is
offering Apples products and services that customers perceive as superior and unique. Cost
leadership is achieving low costs relative to competitors. Apple chooses its strategy based on an
understanding of customer preferences and its own internal capabilities, while differentiating
itself from its competitors. The balanced scorecard translates Apples mission and strategy into a
set of performance measures that provides the framework for implementing its strategy. Not only
does the balanced scorecard focus on achieving financial objectives, it also highlights the
nonfinancial objectives that an organization must achieve to meet and sustain its financial
objectives. The scorecard measures an organizations performance from four perspectives:
financial, customer, internal business processes, and learning and growth. Financial is the profits
and value created for shareholders, customer is the success of Apple in its target market, internal
business processes is the internal operation that create value for customers, and learning and
growth is the people and system capabilities that support operations. The measures that Apple
uses to track performance depend on its strategy. It balances the use of financial and nonfinancial
performance measures to evaluate short-run and long-run performance in a single report. The
balanced scorecard reduces managers emphasis on short-run financial performance because the
key strategic nonfinancial and operational indicators measure changes that a company is making
for the long run. Managers different decision makings will get the organization different
strategies and balanced scorecard. For the strategic analysis of operating income, the prices of
inputs decreased and the entire market expanded could lead to the increase of operating income.
To evaluate the success of a strategy, managers and management accountants of Apple need to

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link strategy to the sources of operating-income increases. Managers who have mastered the
strategic analysis of operating incomes changes gain an understanding of the levers of strategy
and strategy and strategy implementation that help them deliver sustained operating
performance. These actions are reflected in the income statement in each period.
Conclusion
The success of Apple Inc. today is not only because of its technology and products, but
also because of its managerial accounting department. The tools of managerial accounting
actually enhance the decision making of the company. Apple Inc. with Cost-Volume-Profit can
target the sale level they need to achieve to meet their profit plan, with master budget can have a
better managements operating and financial plan for each period, with flexible budget and
variance analysis can get a better budget plan and also evaluate its performance, with absorption
costing can reduce cost, with cost behavior can determine the product mix, with strategy and
balanced scorecard can gain an efficient performance. As a result, Apple Inc. have been doing a
great job in managerial accounting for its development, improvement, controlling, planning, and
performance. The case of Apple Inc. that widely using managerial accounting proves that each
field of managerial accounting is closely related to one company and is quiet important to assist
its way to success.

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Reference

Horngren, Charles T., Srikant M. Datar, and Madhav V. Rajan. A Managerial Emphasis. 15th ed.
Pearson, n.d. Print.
Chen, Liyan. "The World's Largest Tech Companies: Apple Beats Samsung, Microsoft, Google."
Forbes. Forbes Magazine, 11 May 2015. Web. 06 Mar. 2016.
Suttle, Rick. "What Is a Product Mix?" What Is a Product Mix? N.p., n.d. Web. 06 Mar. 2016.
http://smallbusiness.chron.com/product-mix-639.html

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Appendix A

https://www.apple.com/pr/library/2016/01/26Apple-Reports-Record-First-Quarter-Results.html

Appendix B

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https://www.apple.com/pr/library/2016/01/26Apple-Reports-Record-First-Quarter-Results.html