Process costing analysis at Starbucks Coffee Company

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.

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.

Job order costing allows managers and executives to determine how much profit is being made from each job, or in the case of Starbucks from each type of drink it delivers at a certain price (in this scenario, each "job" produces one unit of output, i.e. The drink) (Ingram, 2012). Starbucks is fond of releasing seasonal drinks; if it used a process costing method to determine whether or not this was profitable the company would end up with numbers that didn't actually reveal anything -- costs from the seasonal drink (and revenues from its sales) would be mixed in with all of the other drinks made and sold in the same period (Starbucks, 2012). A job-order costing method allows for greater effective control over price.

Process costing, on the other hand, allows the company to generate long-term statistics and see how costs are changing over time, which is going to be more of a factor in the continual process of coffee bean procurement (Ingram, 2012). Process costing also simplifies record keeping, making it much easier for the company to determine when changes need to be made and lowering the resources required to maintain careful control and transparency (Ingram, 2012). Thus its is recommended for Starbucks to continue using both costing methods.

Costing Flowcharts