Financial analysis and ABC costing critique of Apple Inc.
Introduction and the analysis of the history and development of Apple Inc
Apple Inc, formerly known as Apple computers was created on 1 st April 1976. The founders
were Steve Jobs and Steve Wozniak who incorporated the company on 3 rd January 1977 and
started its operations with the release of Apple 1 in Cupertino, California, USA. For more than
twenty years later, Apple computers concentrated on the production of personal computers which
included Apple II, Power Mac and Macintosh computer models. The computer market was
heavily dominated by Apples competitors and business was very low which led to the ouster of
its founder Steve jobs from the company in 1985. He later returned in 1996 with his new
company NeXT which was bought and incorporated into Apple computers the same year. He
later became the organizations CEO a year later. Starting with the unique and original model of
iMac, Jobs founded a new culture of corporate philosophy that identified products by their
simple design and branding them independently. These led to the discoveries of iPod in 2001,
iTunes music store in 2003 and later iPhone, iPod Touch, and currently the iPad. These products
catapulted Apple to be the largest publicly traded company not only in the USA but the entire
world by market capitalization whose estimated value is slightly over US$ 600 billion as by the
end of September the year 2012.
On 27 th January 2010, Apple announced a wide screen, which was made from a multi
tablet like media known as the iPad. The ipad operates on the same touch based operating
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1Drucker, Peter F. Management Challenges of the 21st Century. (New York: Harper Business,
1999.)
system. The ipad also operates the same touch based on the iPhone application. The ipad was
officially launched on 3 rd April 2010 and it sold more than $ 500000 by the end of the first week.
During the same yea, Apples market capitalization surpassed those of Microsoft for the first time
since the year 1989.
Apple released the fourth high level 4 th generation i-phone which introduced video calling and
multitasking.
Analyze and interpret financial statement from the perspective of different stakeholders.
Investors
Investors would be interested in information touching on the profitability of the company and the
financial ratios. Apple’s sales increased to 66% from 52% between the years 2010 and 2011. The
cost of goods sold also increased by 54% in the year 2010 which led to the decrease in gross
margin. The increase in the cost of goods sold was due to the expenses incurred in the cost
structure of iPad, a new product.
Earnings before interest, taxes and dividend increased by 83% between the years 2010
and 2011. Earnings before interest and taxes and the net profit before taxes were almost similar
due to the reason that Apple Inc did not incur any interest expenses. The net profit after taxes
increased to 85% between the year 2010 and 2011.
Apple Inc doesn’t have any short term or long term debts at the end of both financial
periods. Total liabilities increased by 73% and 45% and total equity by 51% and 60% between
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1Staubus, George J. Activity Costing and Input-Output Accounting (Richard D. Irwin, Inc., 1971)
the years 2010 and 2011 respectively. The increase in equity was due to the increase in retained
earnings which increase to 69% in 2011 compared to 58% in 2010. Retained earnings increased
to 82% in 2011 from 77% in 2010.
There was a growth in total assets by 55% during the period same (2010-2011). This was
influenced by the increase in investment and the total fixed assets. The current assets increased
by 8% between the years 2010 and 2011. There was however a drop in the stocks and debtors
during the last period which was attributed to the low level of stocks maintained by Apple Inc to
mitigate the total risks of obsolescence. There was also an increase in the net fixed assets by 63%
during the years under review i.e. 2010-2011. The investment in long term projects leaped to
119% between the years 2010 and 2011.
Shareholders.
The total sales in Asia and pacific tripled between the years 2009 and 2011. There was an overall
drop in sales in America as per the percentage but the actual sales went up significantly. The
American sales went up from $24 billion in 2010 to $38 billion in the year 2011. The iPhone
sales went up significantly due to the increase of resellers and the signing of contracts with
cellular network communication providers. The sales of iPad and computers also increased
moderately. 1(Drucker, Peter F., Management Challenges of the 21st Century)
Total investments contributed 61.6% of total assets in the year 2011 and 52.9% in 2010.
Short term investments have maturities of less than 3 months while long term investments have
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1Drucker, Peter F. Management Challenges of the 21st Century. (New York: Harper Business,
1999.)
maturities of more than one year to five years. There were net unrealized gains of $106m during
the year 2011 and no relative net realized gains or losses for 2010.
Total liabilities were approximately 35% with no debts recorded in the financial books.
Total equity was roughly 65% in which retained earnings accounted for 49% of the total equity
in the year 2010 while increasing to 54% in the year 2011.
Apple Inc doesn’t have a lot of fixed because it’s a manufacturing concern and most of those
jobs are outsourced to a company named Foxcomm.
Creditors.
The creditors would be interested in the financial stability of the organization. The
working capital and the company’s liquidity ratios. The liquidity status of Apple Inc is one of the
best worldwide. The net cash after operations stood at $18.1 billion in the year 2010 and $35.6
billion in 2011. The current ratio was 2.74 and 2.01 times in the years 2011 and 2010
respectively. This was majorly contributed by cash and the short term investments. The current
and quick ratios did not differ much as the stock levels were low.
The concerned creditors would be interested in viewing the Profitability of Apple Inc.
Return on earnings improved to 29.3% and 33.8% in the years 2010 and 2011. This improvement
was due to the high operating efficiency and financial leverage. The return on assets was
enhanced in the same manner as the return on earnings.
Analyze and interpret the use of management accounting information in organizations.
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1Staubus, George J. Activity Costing and Input-Output Accounting (Richard D. Irwin, Inc., 1971)
Management accounting information is defined as the overall provision of information
needed by the management for the main purpose of formulation of policies and organizations
objectives, planning, controlling and directing the activities of the company ,for making
disclosures all stake holders including the company employees and safeguarding the assets of the
company
Managers. They use the management accounting information in making critical decisions and
use the estimates and analysis generated from these financial documents to budget and forecast
future growth, the expected profits and the expansion plans. (Kaplan, Robert S. and Bruns, W.,
Accounting and Management: A Field Study Perspective).
Shareholders and investors. They use the information to analyze the past and the potential
activities, the performance, the financial status and the estimated returns on the investments.
They use the information to calculate the profitability ratios, return on assets and the returns on
earnings.
Employees. The employees use the management information to assess the performance of the
company in terms of growth and remuneration improvement or losses and job cuts,
redundancies.
Creditors. They use the information to calculate the leverage and gearing ratios of the company.
They use the information to assess the credit worthiness of the organization and its abilities to
meet its financial obligations.
The government. The government uses accounting information to calculate and estimate the
provisional taxes expected from its citizens and the companies involved. It also uses the
information to formulate its national development and recurrent fiscal and monetary policies.
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1Drucker, Peter F. Management Challenges of the 21st Century. (New York: Harper Business,
1999.)
The Inland Revenue authority liaises with the government in assessment and collection of taxes.
The non- profit making organizations need the management accounting information to establish
and maintain its members subscriptions, donations and grants issued.
Critically analyze the role and function of financial information in the management business.
The role and function of financial information is to assist and facilitate the basic functions of an
organization. These are;
Planning .The major role and function of financial information is planning the operations of firm.
This entails the production of estimates, analysis and the budgetary processes. The reconciliation
of material variances and the establishment of costing systems. Planning also involves
coordination of the other departments towards the overall achievement of the company’s
objectives and goals.
Control. The production of accounts and the establishment of costing system lead to the control
department that deals in the analytical work of investigating abnormal variances and the
reconciliation of the budgetary processes and the actual expenditures incurred or the revenues
received. The control department relies heavily on the information provided to make critical
analysis and uses evaluation techniques to reach logical conclusions.
Organization. There is a direct correlation of the organizational structure and the financial
management accounting system. It’s hard to determine which has more weight than the other one
but it’s very useful that the management should generate the required information at the right
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1Staubus, George J. Activity Costing and Input-Output Accounting (Richard D. Irwin, Inc., 1971)
time. The organizational structure or system should be in a position to make immediate use of
the information gathered.
Communication. The existence of the budgetary and the financial management accounting
system is a vital process that has to be outlined and communicated effectively to the relevant
departments of the organization and also to the heads of sections. They should be aware of their
achievements and failures.
Detail the key components of the ABC costing approach.
Activity based accounting is a process that involves the application of costs to the actual
activities that cause them. The components are;
Identification of the actual activities that cause the overhead costs to be incurred. These involves
the use of the concept of cost drivers which are defined as the activities which cause the costs
instead of the costs themselves. A distinction can be made among the processes that add value
and those that do not add value, the ones that do not should be removed and awarded to the
valuable sections. 1(Staubus, George J. Activity Costing and Input-Output Accounting )
ABC helps to distinguish and separates the fixed cost, variable cost and the overhead.
These split and separation of cost assists in identification of the cost drivers. Direct labor and the
relevant materials are mostly easy to identify and trace directly to the products. Where the
products use common or similar resources differently, then weighing may be necessary.
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1Drucker, Peter F. Management Challenges of the 21st Century. (New York: Harper Business,
1999.)
The cost driver is the main factor that establishes or drives the cost of each activity that has been
identified. For instance, the activity cost of bank tellers can be related and associated with each
product by taking the measurements of how long each transaction of particular products take
(cost driver) at the counter. For the activity of operating machinery, the driver will be machine
operating hours. That’s the machine operating hours will also drive labor, maintenance and the
overall power cost during the machine’s operations and running activity.
Adjustment of the accounting system so as to allow costs to be collected by each activity
instead of the cost system and identification of the factors that cause each and every activity’s
cost to change. The allocation of short term variable cost using the volume associated cost
drivers like the direct labor hours, total machine hours, or direct material cost. Items like
electricity would be allocated and driven by machine hours and later apportioned in accordance
to the variability of the drivers. In the same way some items may differ with the value of the
materials used or with direct labor hours.
In terms of the additional support functions, it’s the nature of the transactions taken by
the support section which are related to the relevant cost drivers. For instance, the number of
purchase orders drives the purchases department. Similarly, the number of the total production
runs undertaken in a particular department drives several other costs such as inspection or the
production costs scheduled.
Immediately the cost drivers and the related costs have been identified, each one is
identified as a cost center to which all related costs are apportioned. In the example of purchases
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1Staubus, George J. Activity Costing and Input-Output Accounting (Richard D. Irwin, Inc., 1971)
above, the identified costs which are related to the cost center are divided and allocated by the
number of goods sold to determine the rate of charging out. For example if the cost were
identified as $10000 and 1000 items were immediately dispatched, then the charge out rate
would be $10 per item.
Critically debate the rise and impact of ABC approach
ABC came into being as a result of the need to feel in the gaps caused by the
inadequacies of the costing systems. The traditional absorption methods and the marginal costing
systems have technical fundamental weaknesses and can therefore be unreliable and inaccurate
as a costing technique. The main problem of marginal costing is that overheads are completely
overlooked and ignored. The main reason being that overheads are sunk cost and must be
compensated regardless of the level of activity. Ignoring the overhead costs inflates the net
profit. The profit in this case is in effect, the contribution. The main problem in this instance is
that all the overheads are not allocated to individual products and may not be regained when
setting the items selling price. These may create an avenue of losses that may lead to the closure
of business.
Absorption costing apportions all the overheads to the individual products. In order to
achieve this, the companies must directly apportion and allocate each service overhead to the
major production department. All the direct labor/machine hourly rates are then calculated. All
the costs are allocated to various individual departments and it’s assumed that the overhead costs
relate directly and precisely to the level of production. The major problem with this concept is
that the allocation or the apportionment of the costs is done arbitrary and may not give an
accurate view of the activities which are responsible for the costs. A certain product or an
Financial analysis and ABC costing critique of Apple inc.
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1Drucker, Peter F. Management Challenges of the 21st Century. (New York: Harper Business,
1999.)
activity may show a big loss just because the method used to allocate the costs have changed.
Absorption costing is time consuming and requires a lot of concentration and energy to
determine and implement an accurate basis of overall overhead allocation and eventual
apportionment. However, this process of allocation may interfere with the major causes for all of
these costs. Traditional costing concepts separate and split costs between fixed and variable. The
time scales that are relevant and applicable to most major projects make this method of costing
unsuitable and redundant. Costs should be classified in terms of short or long run since most
strategic decisions are meant to cover between three to five years during which period some
costs turn and become variable.
When businesses and companies expand and grow over a certain period of time, the
nature of their transactions progressively become more complex. The costs incurred due to the
complexity of businesses vary no necessarily because of the volume. A business that produces
for instance a hundred complex and sophisticated items will need advanced support functions
than a business that produces one or two simple items. When costs are apportioned and allocated
on the basis of their volume, then the products whose outputs are the highest receive the most or
the highest level of apportioned costs. Items whose volumes are smaller take a disproportionate
length of time and material to produce but will only be apportioned and allocated a minor
proportion of the support cost.
Most costing methods are based and rely on financial costing systems and are therefore
unsuitable for critical decision making purposes. Only the production overhead costs can be
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1Staubus, George J. Activity Costing and Input-Output Accounting (Richard D. Irwin, Inc., 1971)
absorbed into the cost of the product for reasons of inventory valuation, while ignoring the
administrative expenses.1. (Staubus, George J., Activity Costing and Input-Output Accounting)
Labor hours are used as the major basis for absorption even though they form a relatively
small proportion of the total cost.
The impact of Activity based accounting has been felt mostly in management accounting. The
identification and allocation of costs with the activities that cause them is clear and the cause and
effect contributes to the management control.
The identified cost drivers can be used as a cost measure and also as a performance
measure. The identification and determination of costs from cost drivers is of great assistance to
budgeting within each support department.
The existence of cost driver rates can be used and implemented as an input into the
design of all the new products and eventually modification of existing ones
While overcoming some of the historical problems related with cost allocation, the
availability of costing information is viewed positively and with confidence with relevant line
managers.
In comparison with the traditional concepts, costs are allocated and apportioned in
different proportions while pointing out the products that should be removed or improved.
Reasoned argument whether ABC should be used by Apple Inc.
Activity based costing should not be used by Apple Inc because of the following reasons.
Although activity based costing is a relatively accurate method of allocating costs, its main
Financial analysis and ABC costing critique of Apple inc.
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1Drucker, Peter F. Management Challenges of the 21st Century. (New York: Harper Business,
1999.)
weakness lies in its complex nature. ABC requires a lot of information before it can apply. For
instance, the number of orders and units available, the total components produced and inspected.
Some of this information may be unavailable or difficult to obtain and may also be inaccurate.
This may result in costs being allocated on an incorrect basis. Whereas ABC may be best suited
for large companies and organizations, its major weakness lies in identification and
determination of cost drivers is a tough decision to undertake. These may lead to incorrect basis
for apportionment purposes which may prove disastrous to Apple Inc.
Reference.
Drucker, Peter F. Management Challenges of the 21st Century. (New York: Harper Business,
1999.)
Ehrhardt, M., Brigham, E. Corporate Finance: A Focused Approach (3rd ed.). p. 131, 2008).
Garrison, Ray H; Eric W. Noreen, Peter C. Brewer. Managerial Accounting . (McGraw-Hill
Irwin. 2009)
Kieso, D. E., Weygandt, J. J., & Warfield, T. D. Intermediate Accounting (12th ed.).( Hoboken,
NJ: John Wiley & Sons, p. 1320, 2007).
Khan, M. Theory & Problems in Financial Management. (Boston: McGraw Hill
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1Staubus, George J. Activity Costing and Input-Output Accounting (Richard D. Irwin, Inc., 1971)
Higher Education. 1993).
Kaplan, Robert S. and Bruns, W. Accounting and Management: A Field Study Perspective
(Harvard
Mocciaro Li Destri A., Picone P. M. & Minà. A Bringing Strategy Back into Financial Systems of
Performance Measurement: Integrating EVA and PBC, (Business System Review, Vol 1, Issue
- pp.85-. 2012),
Elmurugan, Manivannan Senthil. The Success and Failure of Activity-Based Costing Systems.
(Journal of Performance Management 23.2 (2010): 3-33. Business Source Complete. Web. 15
Mar.)
Staubus, George J. Activity Costing and Input-Output Accounting (Richard D. Irwin, Inc., 1971)
Vance, D. Financial analysis and decision making: tools and techniques to solve
financial problems and make effective business decisions.( New York: McGraw-Hill.
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