Starbucks Coffee Company process costing analysis

Starbucks Costing

Process Costing at Starbucks

Process Costing

Process costing is a method of determining the cost to a company for each unit of output they produce within a certain timeframe, and determining how much cost is in each timeframe and how many units each timeframe produces (Hortens, n.d.). This makes sense for organizations that produce on a continual and constant basis where costs could be measured over time, rather than those that make customized or specialized products, or who produce a single unchanging product in specific batches as per consumer demand -- in other words, any organization or task where job order costing would be more effective (Hortens, n.d.). A standard manufacturing company would benefit from the use of process costing, for example, because the costs for each month of manufacturing will remain largely consistent, and trying to determine costs based on specific batches rather than simply by time would lead to over-complications and less meaningful information -- if the same number of materials are used and the same number of units are produced each time period, then there is no need to track individual batch costs and in fact tracking costs over time makes statistical information and projections much more easily accomplished (Hortens, n.d.)

Process costing takes all of the costs of operation, from the fixed costs of overhead to the variables costs of materials, labor, etc., and determines how much operations over each specific time period will cost -- in the case of the manufacturing firm, how much the costs are for each month (Hortens, n.d.). From there, with the average number of units produced each month known, it can be determined how much each individual unit of output -- each unite produced -- costs the company (Hortens, n.d.). Then, a determination of the appropriate pricing for each unit (a price that allows the company to make a profit) can be determined, and costs can be known and more easily projected for the future, as well.

Costing at Starbucks

A company the size of Starbucks, with operations taking place on such a broad scale, can make use of both job order costing and process costing at various points of its operations and value chain. As the world's largest specialty coffee and tea beverage retailer, Starbucks' operational needs run from the purchasing, shipping, and processing of coffee beans form around the globe to retail outlets with an even more diverse and far reaching spread, to the actual provision of beverages to consumers in relatively small retail locations (Starbucks, 2012). The scale and structure of these operations and the costs they incur for the company are quite different, and thus it makes sense of Starbucks to use both of the costing processes, one each for these two areas of operation.

Though of course there are fluctuations in the number of coffee beans shipped from point a (which could be any number of countries from which Starbucks procures it coffee beans) to point B (an even large number of distribution centers and then retail locations), over the long-term the process of coffee bean procurement can be seen as essentially constant and continual (Starbucks, 2012). For this reason, it would make sense to use the process costing method, with costs for this part of operations determined on a time scale rather than on a per-shipment basis. This will help Starbucks regulate its cost of procurement and make accurate long-term projections.

Making beverages for consumers also takes place on a continual basis, but the process or job changes considerably from beverage to beverage. The work and materials required to make and serve regular coffee is considerably different than the work involved in making and serving a venti half-caf mocha-vanilla soy frappucino, for instance, and though some long-term regularity would be expected in the number of each drain that is ordered estimating costs based on a time scale for this area of operations would be cumbersome and inaccurate. Using the job order costing method and determining how much the materials and labor cost for each type of drink (or, in the case of coffee, the cost for making a single batch of the drink), and thus more accurate prices can be set that reflect the company's costs and allow it to continue making a profit (and frappucinos). By utilizing both costing methods as appropriate, then, Starbucks can place itself in a more advantageous position regarding cash flow in and out of the business.

Benefits of Both Systems

There are definitely some complicating factors when it comes to using both costing systems, as ultimately all of the operations within a company interact. The coffee beans that are procured and that (if they use the above recommendations) Starbucks tracks with a process costing method are ultimately used to make the beverages in retail stores that the company (again, if following the advice here) tracks using a job order costing method, and thus there will be a need for some mechanism of converting the appropriate portion of costs when necessary. Even with this complication, however, the advantages of using both costing methods for different areas of operation makes this strategy well-warranted and very effective for the company.