Costs Associated with Google Company - Coursework Example

Google Company Name: Course: Tutor: Date: Table of Contents Table of Contents 2 1.0 Overview 3 2.0 Costs associated with Google Company 6 2.1 Direct materials costs 7 2.2 Period costs 8 2.3 Sunk costs 9 3.0 Contribution margin income statement 9 4.0 Break Even Point (BEP) 10 4.1 Google Company Margin Income Statement for 2010 11 4.2 Limitations of break even analysis 12 5.0 Recommendations on how to BEP in a competitive scenario 13 References: 14 Google Company 1.0 Overview Google Company is one of the leading multinational corporations that are highly reputed because of its reliable services in the market. It has invested in internet search, promoting, advertising, and cloud computing technologies (Goodman, 2008, p. 320). Two PhD students of Stanford University in 19th August, 2004 founded it. This was the time initial public offer was launched in the market. The two students, who founded it and privately incorporated on 4th September, 1998 were Sergey Brin and Larry Page. They are often dubbed as Google guys because they are the founders of software that is globally recognized (Girard, 2009, p. 125). The company has not only competent management team but, also qualified, committed, and determined. The two founders are the top managers and major decision makers and strategy formulators. Sergey Brin is the president while Larry Page is the Chief Executive Officer (CEO) of the technology (Drury, 2007, p. 633). Due to their management and leadership skills, the company has gain competitive advantage in the market. In addition, it has employed more than 20000 employees globally, who are experienced, qualified, dedicated, committed, and determined in achieving the set goals and objectives of the company (Dubrin, 2011, p. 472). They all discharge their duties professionally in order to meet the needs and expectations of the stakeholders or the users in the market. Furthermore, it has committed and dedicated board of directors, who work for the success of the company in the industry full of competitors (Goodman, 2008, p. 325). The mission statement of the company is its pillar that has made it achieve its goals and objectives. Its mission statement is to ensure there accurate world information that is reliable, accessible, useful, and universally acceptable globally. The main focus and goal of the founders of the company was to become a leading firm in the information technology industry globally. Without doubt and prejudice, it has proven its capability and potentiality in the market. According to the research conducted recently in United States of America, it is one of fastest, largest, and leading technologies company in the world. It has the largest market share and customer base in the industry because it the leading and dominating engine industry (Girard, 2009, p. 127). The company has gain success and growth because of its consistent and reliable advertising revenues or return. Research is core in the company on how to improve services and products in the market. In addition, it offers adverts that related to the content of the web page that is provided (Drury, 2007, p. 636). There are variety of free products and services offered by the Google Company ranging from myriad of free search services to Google Map to services available for use in mobile phones. These services have attracted millions of users of the Google websites materials daily. Advertising is one of the leading incomes because it provides consistent flow of revenue to the company. Many companies advertised their products and services through Google company’s websites and are charged (Girard, 2009, p. 129). Performance of the company is measured based on economic and financial growth. There has been significant economic of the company in the last five years because of the improved stock prices in the market. The prices has hit the $500 and has been rising rapidly; hence, attracting more shareholders. The Google stock market value has been high reaching the highest point ever of $504.77. This is based on the free cash flows that have led to slightly overvalued stocks by 0.4% in the stock market. The Google stock prices have been ranging between $32 and $100 per share depending on market demand and supply (Goodman, 2008, p. 332). To improve its performance and to maintain economic stability, the company has been able to acquire more than 20 firms since its inception. This is a strategic position the company is using to gain competitive advantage in the industry. In addition, it has acquired other firms in order to reduce competition in the market. In 2003, it acquired Applied Semantics Company, and in 2006 it acquired a web-based word processing company commonly known as Writely (Cafferky & Wentworth, 2010, p. 63). This was acquired in early 2006, but in late 2006, it acquired the YouTube, which was a real threat or competitor at a cost of $1.65 billion. In early 2007, it acquired DoubleClick that was the largest advertising and promotion competitor at the cost of $3.2 billion. In the same year, it acquired Tonic Systems Company that is used for adopting Power Point files into html and PDF documents (Girard, 2009, p. 130). The company is actively competing with other Microsoft office that is paired with web-based and spreadsheet software documents. In addition to the acquired companies, there are other services that the firm has acquired. It has acquired and develops video conferencing, graphics optimization, and security software. Technology advancement is propelling the company towards improving its service provision to its customers in the market (Goodman, 2008, p. 335). It has been expanding its operations making it a highly reputed company in the world. The systems and software of the company are reliable because they do not fail, but incase of a technical problem, the company engineers corrects the problem within the shortest time possible so as not inconvenience its customers. The advertisement and page design were text-based because it is faster; hence, has made the company sustain and maintain its competitiveness in the market (Girard, 2009, p. 132). 2.0 Costs associated with Google Company There are many costs associated with the company. These costs include certification or education fees, cost of insurance, research and development costs, processing, renewal, installation, infrastructure maintenance cost, configuration costs, total up-front costs, server hardware costs, and Administration labor costs. These costs are commonly classified or categorized into two groups. These are variable and fixed costs. Fixed costs do not vary or change with sales or output. These costs may include salaries of managers, rates, and rent of business premises. Variable costs vary or change with the quantity sold or produced. Such costs include costs of raw materials, commissions, and other allowances. These are the most common costs in the company. Costs are part of business operations in the company (Goodman, 2008, p. 337). Business license cost will allow the business or give permission the business to operate. It makes the business to operate legally. For Google Company to operate, it must pay license fee. Licensing fee is classified as variable cost because it keeps on fluctuating. Google Company is operating because it has been licensed; hence, costs associated with getting business license (Girard, 2009, p. 133). Costs of insurance are necessary for the company because it will ensure the company continuous to operate incase of risks arising. Insurance costs are classified under variable costs because government regulations on insurance premiums. All companies pay premiums to insurance companies for the intended business for security purposes incase of risks arising. Research and development costs are essential in all technology and innovation companies such as Google Company. Research and development cost are variable because it will depend on the type of research being conducted. For example, Google Company may be conducting research on how to improve operability of YouTube, then; the cost will vary on research on how PowerPoint will operate. Server hardware costs are classified under variable costs because servers vary depending on size and its applicability (Girard, 2009, p. 134). 2.1 Direct materials costs The materials used in the Google Company to manufacture final product are known as raw materials. These include the soft wares, internet connection appliances, modems, and other appliances necessary in the company. Direct material costs are integral in the company’s products and services because this is the cost that cannot be avoided. In addition, this cost can be easily traced conveniently and physically. For example, it can be said that, 13% of the total sales revenue is termed as direct material costs (Goodman, 2008, p. 342). However, it is sometimes difficult to determine the worth of some materials because of their nature. If it cannot be traced easily, then it is known as indirect material. These include things such as glue, cello tape, screws, cleaning materials, lubricants, other insignificant materials that were used in connections. They are also known as indirect material cost. They are all put together and termed as overheads because they cannot be directly associated with products (Cafferky & Wentworth, 2010, p. 65). Furthermore, there are indirect labor costs that are indirectly associated with management department and operations of the company. These indirect labor costs include the payments made to repair and maintenance technicians, cleaners, sweepers, supervisors, and top management allowances (Jawahar, 2008, p. 93). The list of indirect costs can be long because there are many costs that can be included. In addition to the mentioned costs, there are other significant indirect costs that include depreciation of buildings, vehicles, machinery, and equipment. Insurance, council tax and rates, rent, telephone, electricity, and water bills are classified as indirect costs (Drury, 2007, p. 639). 2.2 Period costs Period costs vary in organizations and industries. Administration costs are associated with administrative aspects of the organization. Administrative cost can also be fixed or variable depending on the type of cost (Gitman & Carl, 2008, p. 400). The salaries, allowances, and other related costs are part of the administrative costs. The rent top the buildings used in conducting transactions falls under this category too. Selling, promotion, advertisement, and distribution costs can be part of the administration costs because they are accumulated together (Girard, 2009, p. 135). Other administrative costs include clerical, organizational, and executive costs that are associated with the management of the organization. Examples of these costs can include general accounting, executive compensation, public relations, secretarial, and other miscellaneous costs associated with the generation administration and management of the organization (Gitman & Carl, 2008, p. 423). They are also known as non-manufacturing costs in companies like Google, which do not manufacture products. Finance costs are the costs associated with providing short-term, long-term, and permanent finance. Other costs falling in this category are long term and short term interest on loans, and dividends (Goodman, 2008, p. 343). 2.3 Sunk costs A sunk cost is the costs that has already been incurred or spend. In addition, these costs cannot be changed by any decision made presently or even in future. The costs used to register the name of the company fall under this category (Lock, 2007, p. 402). No decision can guarantee the changes whatsoever because they are not differential costs; hence, should be ignored while making decisions. For example, if the Google Company bought a machine several years ago, it cannot be returned to the buyer because it has been used by the company (Goodman, 2008, p. 345). 3.0 Contribution margin income statement This is an income statement where variable expenses are deducted to arrive at contribution margin from sales. To arrive at net profit or loss, fixed expenses are subtracted for the period. The contribution margin shows the amount that is available to yield a profit or a loss and to cover fixed costs (Cafferky & Wentworth, 2010, p. 67). Margin of safety (MOS) is what exceeds the actual sales or the budgeted over the breakeven point volume of sales. Margin of safety (MOS) is used to know the amount of sales before losses are experienced. The risk is lower when the margin of safety is higher and vice versa of not breaking even (Jawahar, 2008, p. 99). Margin of safety is used to determine the strength the business in the competitive environment. This will enable it to know what it has lost or gained within certain period. With this, it will be easy to determine whether it is below or above the break even point (Drury, 2007, p. 640). The formula for calculating margin of safety is: Margin of safety = total actual or budgeted sales – Break even sales (Dubrin, 2011, p. 477). Furthermore, margin of safety can be expressed as a percentage. This can be obtained by dividing margin of safety (MOS) by total sales in terms of dollar (Gitman & Carl, 2008, p. 432). Margin of safety = Margin of safety / total actual or budgeted sales. 4.0 Break Even Point (BEP) In business and economics especially in cost accounting, break even point (BEP) is a point where revenues and expenses are equal. There is no net gain or loss because it has broken even (Lock, 2007, p. 412). For example if Google Company receives income that is more than $ 1200000 per year, it will get a profit. However, if the profit is less than $ 1200000 per year, then that is a loss (Cafferky & Wentworth, 2010, p. 68). Though break even point is one of the simplest is one of the simplest tools in analytical tools and techniques in management, it the least used. This is important because it will provide a more dynamic and representative view of the existing relationship between profits, costs, and sales (Dubrin, 2011, p. 479). To understand the break even point well, it should be expressed in a percentage form. Furthermore, managers at the Google Company will have the opportunity to analyze where they expect the break even point so that they formulate strategies and make decisions on how to attain it. This is a very important aspect in financial analysis (Drury, 2007, p. 642). Google Company sells one unit at $ 60 and it produces 10000 units. The variable expenses are charged at $ 45 per unit. In addition, its fixed expenses are $ 120000 Sales of the Google Company for the year 2010 were $ 600000 Variable expenses were $ 450000 Fixed costs were $ 120000 4.1 Google Company Margin Income Statement for 2010 Description Total per unit % of sales Sales (10,000 units) $ 600000 $ 60 100% Less variable expenses $ 450000 $ 45 Contribution margin $ 150000 $ 15 Less fixed expenses $ 120000 Net operating income $ 30000 Solution to margin of safety (MOS) Margin of safety = Total sales – Break even sales or Margin of safety = current output - breakeven output (Cafferky & Wentworth, 2010, p. 69). = $ 600000 - $ 480000 = $ 120000 Where $ 600000 is the sales and $ 480000 = (600000 – 1200000 fixed expenses) Margin of safety percentage = (Margin of safety in dollars / Total sales) * 100% or margin of safety% = (current output - breakeven output)/breakeven output x 100 = ($ 120000/ $ 600000)/ 100% = 0.2 or 20%. The break even of sales Break Even Point (in sales) = Fixed Costs/ Cost per unit Sales = Fixed expenses + profit + Variable expenses $ 60Q = $ 45Q + $ 120000 + $ 0 $ 15Q = $ 120000 Q = $ 120000 / $ 15 PER UNIT Q = 8000 units Or At $ 60 per unit = $ 480000 Where, 60Q and 45Q are the costs per unit $ 120000 is the fixed expenses 4.2 Limitations of break even analysis It only focuses on costs only or supply side. It fails to explain what sales are actually supposed to be for the product at different prices. It presumes that fixed costs are constant (Drury, 2007, p. 643). This can be true in the short run but scale of production increase will cause the fixed costs to increase or rise (Gitman & Carl, 2008, p. 435). In addition, it assumes that variable costs are constant per unit of output in linearity, which may not be true always. Break even point is therefore important even though there are some shortcomings (Cafferky & Wentworth, 2010, p. 70). 5.0 Recommendations on how to BEP in a competitive scenario Breakeven point in a business is important because it will determine the success or failure of the business. To improve the breakeven point, the selling price should be kept constant. However, if the demand and supply change, the price should be adjusted accordingly. If it wants to maximize returns, then it should reduce the fixed costs by negotiation on reduction of rent, salaries, remunerations, and other fixed costs (Drury, 2007, p. 640). In addition, it should ensure telephone bills are kept in a better controlled way together with other costs. Variable costs should be reduced so that so that profits can be maximized and to avoid losses that may occur if the costs or expenses are higher than the revenue or income generated. This will ensure the break even point remain competitive. The costs should be adjusted depending on the market demand and supply. In addition, prices should be adjusted so that the target profits are not compromised and at the same time customers are retained (Cafferky & Wentworth, 2010, p. 66). References: Cafferky, M. & Wentworth, J. 2010. Break Even Analysis. New York: Business Expert Press. Pp. 63-70. Drury, C. 2007. Management and Cost Accounting. New York: Cengage Learning EMEA. Pp. 633-642. Dubrin, A. 2011. Essentials of Management. New York: Cengage Learning. Pp. 472-479. Girard, B. 2009. The Google Way: How One Company Is Revolutionizing Management as We Know It. Kansas: No Starch Press. Pp. 125-135. Gitman, L. & Carl, M. 2008. The Future of Business: The Essentials. New York: Cengage Learning. Pp. 400-435. Goodman, A. 2008. Winning results with Google AdWords. New York: McGraw Hill Professional. Pp. 320-345. Jawahar, L. 2008. Cost Accounting. New York: Tata McGraw-Hill Education. Pp. 93-99. Lock, D. 2007. Project management. New York: Gower Publishing, Ltd. Pp. 402-412. Read More