Costing Techniques Benefits for JetBlue - Research Paper Example

Costing Techniques of the The current paper evaluates various costing techniques and evaluates how JetBlue can derive benefits from the use of such costing techniques. The project tries to identify how the company can benefit by incorporating diverse costing strategies to give effect to better decision making. Costing techniques facilitates the organization to utilize such financial resources more optimally. Costing techniques are essentially not reflected in a company annual reports or financial statements. These occur separately and are provided to mangers and stakeholders as additional information to judge the operational efficiency of the company. Table of Contents Abstract 2 Introduction 4 Firm Background 4 Activity Based Costing 5 Standard Costing 8 Future Projects in terms Relevant Costs 12 Conclusion 13 References 14 Introduction The current paper is based upon analyzing the different costing techniques which an organization undertakes in order to acquire better financial efficiency. Accordingly, the current paper incorporates evaluation of activity based, standard and relevant costing techniques. The research incorporates analyzing such costing techniques by associating the same in context of JetBlue. The different circumstances under which JetBlue might undertake such costing techniques and their long run implications have been discussed upon. The paper begins with a brief analysis of JetBlue’s background, their span of operations and their general strategies to success. The subsequent sections of the paper include evaluating different costing processes and the manner in which JetBlue can incorporate the same to better manage their financial resources. The data for the current paper has been largely been collected from secondary sources such as web publications, journals and books. The study essential follows a descriptive and an interpretative approach. The research technique followed is essentially qualitative. Firm Background JetBlue is a low cost airline with its head office situated in Long Island City, the U.S. It is seen to operate in 12 countries which include nations of Latin America, South America and the Caribbean. The company serves 87 destinations spread across 24 states (JetBlue, 2014). JetBlue focuses crucially upon providing excellent and timely services which are priced economically. The flight services of JetBlue can be crucially be divided into two important segments, essentially business class and economy class. JetBlue tries to create differentiation in their service offerings by incorporating the aspect of quality, which most low cost carriers are seen to emphasize less upon. Superior personal space and complimentary entertainment are considered as important aspects by the firm. Innovation and sustainable operations are also an important part of the sustainable strategies of JetBlue. JetBlue, apart from their economic services has incorporated Mint, a premium transcontinental service. These flights provide high comfort travel services essentially to target the high end customers. JetBlue also have their own internet services provided inside the flight (Gittell & OReilly, 2001). JetBlue’s success in the markets of the U.S can be attributed their wide spread and efficient network. The company tries to consistently expand their services by expanding into new territories and formulating new partnerships. Such commercial partnerships facilitate JetBlue in their frequent flying program, logistics services and code sharing. Executives at JetBlue believe that commercial partnerships are essential to share resources and attain competitive advantages. Leveraging strong networks have facilitated JetBlue to enhance their number of passengers and areas served. JetBlue’s market share in comparison with those of Delta, US Airways, United Airlines and Southwest Airlines is also seen to be quite ahead, who are also the company’s main competitors (Wynbrandt, 2010). JetBlue’s services was crucially impacted after the 9/11 incident and the fluctuating behavior of consumers in respect of air travel. However the company was able to revive itself adequately and has emerged onto becoming one of fastest growing airlines network. The main driver of JetBlue’s success in the markets of the Americas was their strategy relating to enhancing non-stop flights, while most airlines reduce their services relating to the same. Moreover the high financial stability and the growing revenues facilitated the firm to continue innovating and expanding services. JetBlue’s popularity in the market also came from the firms old fashioned service advantages. The company’s effective research strategies in respect of analyzing consumer needs and delivering the same has played an important role in their maintenance of market share (Wynbrandt, 2010). The following sections of the paper evaluate how JetBlue can incorporate various costing techniques to achieve financial efficiency. The incremental profits gained through such techniques may eventually be forwarded to the customers of the organizations. Activity Based Costing Activity Based Costing or ABC is a system which establishes a relationship between a firm’s activities and costs incurred during production. The system stresses upon understanding that costs are incurred within an organization due to various activities. It is considered to be an appropriate method for allocating indirect costs. Firms utilize the ABC costing technique to disintegrate indirect costs and identify the activities due to which such costs have arisen. Organizations largely use such systems to disintegrate the overall indirect costs (Oregon State University, 2015). JetBlue may benefit from including the ABC costing system in their financial management systems, in the international business environment, in the following ways: Product associated costs can be accurately be identified under the ABC technique. Disintegration of costs is more feasible under the ABC costing technique. The ABC technique focuses upon the cost and effect relationship which organizational expenses and activities taking place are seen to share as production activities are carried out. The indirect costs which are associated with production can be better identified on the basis of such a costing system. Hence by incorporating such a costing technique JetBlue can easily identify and analyze the indirect costs and related activates which give rise to the same (Innes, Mitchell & Sinclair, 2000). The ABC theory of costing is based on accurate and fair procedures, making its reliability highly feasible. Since cost drivers are first identified and accordingly respective costs are allocated, this system of costing leads to correct results. Such effective costing techniques facilitate JetBlue to meet the information needs of stakeholders effectively and provide them with reliable information regarding organizational operations. JetBlue production mangers can better control organizational expenses by incorporating the ABC system of costing, necessary while operating at a wide scale and spread across different nations. Although fixed expensed can be less regulated through ABC, the variable expenses can be suitably reduced by implementing the ABC system. Managers can look into the various activities which give rise to additional costs and try to monitor and control the same to attain higher revenue (Krishnan, 2007). JetBlue executives can utilize the information procured from the ABC costing system to take decisions relating to the expenses associated with different product lines and develop strategies for enhancing profits of the same. Such strategies can be taken by the experts of JetBlue by identifying the relationship existing between costs and activities (Anderson, Hesford & Young, 2002). Financial managers are often required to report to the marketing and production managers, the areas of production which account for maximum expenses. Based on such information marketing and production mangers take steps towards reducing expensing so that production can be carried out in a more liable manner. However while doing so mangers are required to identify and categorize the mandatory and the avoidable cost driving activities. The ABC technique of costing is seen to work effectively for service oriented industries rather than the manufacturing industries. This is due to the fact that majority expenses occurring in manufacturing industries are direct costs. The proportion of indirect expenses is less. On the other hand, in service industries direct expenses are low, where as indirect expenses form majority of the expenses. Hence JetBlue can sufficiently make use of the ABC system of costing for suitably allocating costs and resources (Homburg, 2001). Once the activities which drive costs are identified, JetBlue can effectively determine the activities which utilize resources highly and can develop strategies towards controlling the same. The ABC costing technique can therefore be a useful technique for allocating resources, controlling costs associated with different activities and retaining higher profits within the organization. The ABC technique facilitates regulating costs as the scale of operations advance (Sartorius, Eitzen & Kamala, 2007). Accordingly the consequences of implementing ABC can therefore be seen to be as follows: 1) Identification of various types of costs associated with production. 2) Pooling of primary and secondary cost drivers. 3) Cost objects or activities which give rise to various costs can be monitored. 4) Better implementation of the budgets and utilization of funds towards various expenses. 5) Through the identification of such costs, it becomes possible to formulate reports such as profit and loss account and other management reports. These can be used for effective decision making. 6) Through the ABC analysis reports, it becomes easy to take actions upon reducing the various activities which are the main cost drivers and thereby facilitate cutback of cost of operations (Cardinaels, Roodhooft & Warlop, 2004). On the basis of the ABC analysis, JetBlue may consider structuring the distribution of costs using the following categories: Direct costs- These expenses arise from those activities which are directly associated with production. They include costs such as direct labor and materials (Anderson & Young, 2001). Indirect costs- These are the real overhead costs associated with production but are not easily identified. Few examples of such expenses are essentially purchasing order costs, set up costs of machines, packaging costs, testing and calibration costs, maintenance and cleaning expenditures. Such expenses can be easily linked with the activities at JetBlue. Mostly the indirect costs are associated with repair and maintenance of the airplanes and in flight facilities. Marketing and sales related expenses are also incorporated in these sections. ABC costing techniques is largely useful in allocating and identifying the costs occurring in these sections (Barrett, 2005). As organizations are integrating themselves more with the global accounting standards, the implementation of ABC techniques are seen to become more widespread. Most organizations use the ABC technique, so that indirect costs can be better broken down and evaluated. It also becomes possible for organizations to compare the profits procured under ABC and other accounting techniques. Additionally, it the technique is used for preventing cost distortion and better information providing to the organizational stakeholders. In the international business platform providing accurate and timely information in respect of financial activities is essential. Often mere analysis of the profit and loss account is not considered to be sufficient to analyze the different types of cost drivers. However, through preparation of the ABC statements and thereby breaking down the structure of overhead expenses is considered to be useful. Since ABC costing technique is largely used in the service industries, it is a suitable process for comparing the results of operations. JetBlue can effectively compare the costs occurring under the ABC technique with other firms in the same industries and evaluate whether their internal operations incur greater costs or is at par. This would facilitate the organization to determine whether their internal operations are being carried out efficiently or not (Cagwin & Bouwman, 2002). Standard Costing Standard costing techniques facilitate firms to identify and analyze the difference between “actual costs and standard costs” (Bhimani, Datar & Foster, 2002). Most organizations have an expectation regarding the actual units of products they would sell or a standard price at which products would be sold. However in reality, the actual volume of sales and the price at which sales are carried out might differ. Through the standard costing technique it becomes possible to identify the cause of variance between actual costs and the preset standard costs such as change in material usage, variation in price and so on. The standard costing technique is largely used because determination or procuring information regarding exact costs many at times becomes difficult due to lack of time. As per the changes observed, the finance manager may set standard costs for the coming periods so that variances are lower (Bhimani, Datar & Foster, 2002). By incorporating the standard costing techniques, JetBlue may incur a number of benefits, discussed as follows. Budgeting processes are hugely benefitted through such standards costing techniques. Usually when budgets are prepared, it is difficult to identify the exact costs which are associated with different activities of production. Later on, when the actual production activities are carried out, variances between the actual and standard costs can be assessed and shown. Accordingly modifications are made in the budgets. These adjustments in the budgets and related financial statements are made on the basis of the standard costing technique and the variances calculated on its basis (Lucey, 2002). Another important reason due to which JetBlue may consider using the standard costing technique is to ascertain inventory costs. Inventory valuation which is done at the beginning of a period might radically vary from the valuation at the end of the period. At the beginning, inventory costs are ascertained by using the standard rates. However when the actual costs are procured at the end of the period, numerous deviations is seen. This might be due to periodical fluctuations in quantity and prices. Accordingly it becomes essential to frequently update standard costs so that they are close to the actual costs. The standard costs up gradation are basically carried on the basis of the standard costing techniques (Sulaiman, Nazli Nik Ahmad & Mohd Alwi, 2005). JetBlue may use such costing techniques for successful financial decision making. For instance, it may identify the costs which are subject to frequent alteration and those which do not alter quite rapidly. Accordingly financial managers can take decision in respect of the standards based on which budgets can be formulated. Many organizations also use the standard costing system to allocate costs to materials, labor and other overheads, when there is lack of time to incorporate detailed allocation of costs (Edwards, Boyns & Matthews, 2002). JetBlue may also consider using the standard costing technique to provide information to clients and business associates regarding the prices of different goods, resources and materials. While placing or receiving orders from clients, it becomes difficult for firms to exactly predict future prices and accordingly sent information. Hence under such circumstances, JetBlue may consider using the standard costing technique to provide valuable information to clients. The company uses the standard rates procured to evaluate the costs and set budgets and proposals to attract clients and customers (Garrison, Noreen & Brewer, 2003). Standard costing is also often viewed as a control mechanism. It becomes feasible to assess levels of difference between the actual costs and the standard prices. For instance, if the firm perceives that usage of materials has been far more that the actual budgeted levels, then the management can take the required steps towards reducing the same. Hover not only types of control can be exercised by the organization. For instance, it is not possible to exercise control if there are deviations in the price of materials which occur due to market forces. The firm may hypothetically set benchmarks for production and cost and accordingly measure the extent of deviation. JetBlue may also be able to develop responsibility centers that are crucially entrusted with the task of measuring deviation and their prevention in the forthcoming periods. However, for the successful implementation and use of the standard costing technique, it is essential that budgets set during the initial period is accurate and as per the required standards of the organization (Adler, Everett & Waldron, 2000). The commonly used standard costing measures are as follows: Material variance SQ= standard quantity SP= standard price AQ= actual quantity AP= actual price Material Cost Variance= (SQ x SP) – (AQ x AP) Material Price Variance= AQ x (SP – AP) Material Usage Variance= SP x (SQ – AQ) Materials variances may aid JetBlue to understand the actual costs and usage as compared with the standards in respect of the same. Materials are an important part of the direct expenses of an organization. In case of JetBlue the material expenses can be essentially fuel, goods used during the flight, machines used for maintenance of air craft carriers, staff related goods and machines. The company is firstly required to categorize the various materials that it uses in its production process. Accordingly standard prices are set. These standard rates are then used against the actual output for copulation of the variance. Labor variance SH= standard hours SR= standard rate AH= actual hours AR= actual rate Labor Cost Variance= (SH x SR) ­– (AH x AR) Labor Rate Variance= AH x (SR – AR) Labor efficiency variance= SR x (SH – AH) Labor is an essential resource and cost driving factor in organizations. Being in the service industry, labor related expenses are seen to vastly occur. Accordingly it becomes essential for JetBlue to establish strategies which lead to the control of various expenses related with labor. Both material and labor variances are seen to facilitate control of direct expenses. It can therefore be stated that standard costing is effective for controlling and evaluating direct production related expenses. However overhead variances can be used for evaluation of indirect expenses associated with production (Schaltegger, Bennett & Burritt, 2006). Large companies such as JetBlue must not however over rely on standard costing alone as a tool for decision making. The standard costs and the actual costs and variances between the two are seen to commonly occur within an organization as a result of changing organizational environment. It might not be therefore always be possible to set standards in respect of costs accurately, even if the process of standard costing is carried out effectively. The occurrence of variances is quire natural in the business process. However, standard costing techniques are useful for enhancing the level of control over inventory and human resource. Most firms are seen to set industry standards on the basis of the industry general conditions. In most international organizations standard costing is therefore used as a supporting tool to maintain control over inventory. However it requires to be stated in this context, that standard costing techniques are more suitable in terms of internal control. It has less applicability in the international costs front for comparability. This is mainly due to the factor that different firms use differential items under the standard costs front. JetBlue may however utilize the standard costing process for analyzing the level of variance existing in their production process as compared with others in the same industry. If the degree of variation is high, it is possible to deduce that the internal control systems are low. The information is respect of standard costs can be provided to stakeholder to inform them regarding the operational stability existing within the organization. However the most important role played by standard costing in the international business front is to standardize the activity related expenses. In general it is observed that standard costing is perceived as a suitable technique for enhancing business intelligence. It induces relevance, consistency and timeliness into business activities. It is often used in the international business context for determination of profitability. JetBlue can therefore use the standard costing technique to enhance productivity and competitiveness (Garrison, et al., 2010). Future Projects in terms Relevant Costs Relevant costs are essentially those types of costs which lead to differential decision making and outcomes. Also such costs must lead to diverse decision making. JetBlue can take huge advantages of such relevant costs to take decisions. The relevancy of such costs is seen to vary according to the situation under which the costs are taken into concern. Relevant costs are generally differential, incremental and opportunity. Differential costs arise when a firm plans to change current strategies or is required to decide upon new strategies. For instance a differential cost circumstance may arise when JetBlue is required to determine between appointing a sales person and appointing a distributor. Under such a situation the company is required to assess the cost advantages procured under each of the options. Apart from cost advantages, the company also requires to assess risks. Such differential costs are required to be compared against differential revenues. As per the differential cost technique the same cost may seem to be effective or non effective under differential strategies. If the company wishes to sell their services within a small locality, hiring a sales person would be beneficial. On the other hand if the areas in which the services are required to be sold are widespread, it might be more beneficial if a distributor is appointed instead of sales persons (Garrison, et al., 2010). Another important relevant costs considered by accountants are marginal or incremental costs. In case of differential costs two completely different products or service is evaluated and chosen. However under the marginal costing technique, the company is required to assess the implications of procuring or producing the same product of services in an increased or lower volume. For instance the marginal costing technique can be used by JetBlue to assess the implications of procuring one extra unit of labor in their overall labor cost structure. Opportunity costs are mainly associated with the costs associated with foregoing an option so that another alternative can be selected. For instance if JetBlue is required to chose between two projects each varying in terms of costs and revenue, then the opportunity cost would be the cost which the company has foregone or has not chosen (Schaltegger, Bennett & Burritt, 2006). From the discussions carried out is it is clear that JetBlue may consider using such costs to evaluate the differences existing between different strategies and chose the option which is most feasible in terms of revenue maximization. Not all types of costs may seem to be relevant while taking decisions. For instance in an expansion project, JetBlue may consider to undertake evaluation of costs relating to labor, infrastructure and materials. Only those costs which directly impact enhancing the projects overall cost would be incorported. JetBlue in the recent times is considering expanding their overall activities by incorporating greater number of flights, enhanced services, adding seats to their current flights and revising their flight fares. While taking such decisions the company may consider incorporating decisions which are directly related with such expansion plans. JetBlue being one of the most famous organizations and successful brands in the airline industry is required to incorporate the aspect of quality while undertaking diverse strategies (Schaltegger, Bennett & Burritt, 2006). Conclusion From the analysis carried out it can be seen that JetBlue can effectively enhance their financial performance by undertaking different costing techniques. Costing techniques are essentially used for providing information to the management in respect of various costs so that effective decision making is possible. 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Wynbrandt, J. (2010). Flying High: How JetBlue Founder and CEO David Neeleman Beats the Competition... Even in the Worlds Most Turbulent Industry. New Jersey: John Wiley & Sons. Read More