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Evaluation of Procter & Gamble’s Strategy in Determining the Cost Structure of Their Business

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Tide, Old Spice, Crest, Ivory, Swiffer. The chances are that most consumers in the United States and the rest of the Western world have heard of these brands, and associate them with specific types of products. Procter & Gamble is one of the leading conglomerations in the world. With products ranging from baby shampoo to deodorant to cough drops, the consumer goods corporation holds brands that are marketed globally. This makes the corporation an interesting case study in the discussion of cost accounting, particularly in relationship to the global business environment. Because the corporation has operations, brands, and marketing campaigns the world over, it is crucial that the company assess the most efficient means of accounting costs across all of its operations in order to remain effective in the global business environment. The approach to cost accounting for Procter & Gamble is the main focus of this research paper. More specifically, the paper examines activity based costing and standard costing in reference to Procter & Gamble’s operations and assesses how the company could (or could not) benefit from each cost model. Overall, the paper argues that Procter & Gamble would benefit from utilizing the standard cost model in manufacturing and its day-to-day operations, due to the potential for vast differences in overhead across its various holdings, and benefit from activity based costing in its human services areas of operation, such as marketing and research and development, due to the variances in cost and productivity.

This is a qualitative research project, that bases its discussion of the costing models on existing academic research and primary research of the data and numbers relevant to Procter & Gamble. The research presented in this paper originates from a wide range of sources, ranging from the OECD to academic journals to Procter & Gamble itself. The combination of these sources makes for a holistic discussion of both how the various cost models work and how they related to the operations of Procter & Gamble. In other words, the available data regarding Procter & Gamble will be evaluated using the two costing models identified above. The paper combines academic sources on the costing models with primary numbers and data from Procter & Gamble to inform its discussion, ultimately forming an original synthesis of information for the discussion. As mentioned above, this is a qualitative approach, but also uses quantitative numbers in regards to the past and projected performance of this international consumer goods conglomeration.

In order to se the context of this discussion, the paper first turns to an overview of the corporation, including its principle goods and services, market share, geographic locations, and major competitors. These details will be referred back to throughout the discussion. Second, the paper turns to an overview of activity based costing and how Procter & Gamble could benefit from this model, including details on how costs could be restructured within the company using activity based costing. Third, the paper discusses standard costs and how they best apply to Procter & Gamble. As with the discussion of activity based costing, this section includes both the logic for utilizing standard costing and the ramifications of utilizing this model. Finally, the paper turns to the future of Procter & Gamble; more specifically, the paper examines how the company could benefit by analyzing future projects in terms of relevant costs. Future plans in this case include expansion into other geographic regions and consolidation of the company. All three of these main topics are discussed in relationship to the international business environment, since Procter & Gamble is an international firm and is directly impacted by changes in this environment. In other words, because Procter & Gamble is dependent on its international operations, it is crucial to consider how the two costing models work toward efficiency within this specific context. This is not meant to be an exhaustive account of the benefits and drawbacks of each cost accounting model; instead, it is simply an application of these models to the operations of Procter & Gamble. Overall, the research paper shows that Procter & Gamble can benefit by increasing efficiency and decreasing overhead in the international business environment by utilizing the standard costs model, primarily due to its static nature across geographic regions.

Procter & Gamble

As mentioned above, Procter & Gamble is one of the leading consumer goods conglomerates in the world. The company is nearly 180 years old as of this year. According to the President & CEO, “A company does not last for that long if its management is not willing to change anything and everything, except for its purpose and core values, to serve consumers and create value for shareowners” (P&G, 2015, 2). In other words, Procter & Gamble ostensibly finds its success and increased value in its willingness to adapt everything from research and development to pricing strategies in the face of a changing global business environment. The focus of this paper is on what these changes have looked like, and how the company can continue to change in the future. According to the company’s annual report, the upcoming years will see Procter & Gamble “putting the strategies and capabilities in place to transform Procter & Gamble into a faster-growing, more profitable and far simpler company” (P&G, 2015, 2). This is an important context to consider with a discussion of activity based costing, standard costs, and the future of Procter & Gamble in the face of the current global business environment. But what does Procter & Gamble look like now? To create context, this brief section assesses the company’s principle goods and services, market share, geographic locations of its operations, and its major competitors.

According to the Procter & Gamble website, the company manufactures and distributes consumer goods products in what it calls its “ten core categories” – these include Baby Care, Feminine Care, Family Care, Grooming, Oral Care, Personal Health Care, Hair Care, Skin and Personal Care, Fabric Care and Home Care (Procter & Gamble, 2016, n.p.). One gets the point that the main focus of the company is on care products for the consumer. As mentioned above, Procter & Gamble brands include household names like Tide, Pampers, and Gillete. Their products also include new brands based on recent research and development, such as Unstoppable collection of scent and fragrance products (Procter & Gamble, 2015, 4). All in all, Procter & Gamble has over 300 brands (Warren, 2012, n.p.). Perhaps more importantly, the company also has a global reach with operations in 180 countries (Warren, 2012, n.p.). The selling and market operations of Procter & Gamble are split into six specific regions: Asia Pacific, Europe, Greater China, India, the Midde East and Africa, Latin America, and North America. With this, it is clear that Procter & Gamble is successful all over the world, and nearly every country.

The company’s market share varies depending on which subcategory of care its products fall in. However, according to one business report, Procter & Gamble’s average market share across all of its products is 30% of the consumer goods market (Reuters, 2016, n.p.). In this way, Procter & Gamble is the second must profitable consumer goods conglomerate in the world, only trumped by Nestle (Wheelen, Hunger, Hoffman & Bamford, 2015, p. 336). However, the company does have its share of competitors – it does not, after all, control the entire consumer goods market. The competitors vary depending on in which market segment Procter & Gamble is operating. Perhaps the company’s most direct competitors include Unilever and Johnson & Johnson, both of which operate in the majority of Procter & Gamble’s consumer goods segments, including fabric, baby, feminine, family, and home care (CSI, 2016, n.p.). Secondary competitors include Avon and Colgate-Palmolive in personal care and beauty. Nestle is not a direct competitor since it focuses on other segments of the market, such as food and drink products. Now that the paper has established Procter & Gamble’s principle goods, market share, geographic locations, operations, and major competitors, it can turn to a more detailed assessment and application of activity based costing and standard costs in the context of the global business environment.

Activity Based Costing

Activity based costing is an alternative strategy for accounting for costs in a company. Standard accounting, as discussed below, simply relates overhead to direct costs. In contrast, activity based costing “is a method of assigning costs to products or services based on the resources that they consume,” with the aim of changing the way in which “costs are counted” (Economist, 2009, n.p.). The result is a more complex, but ostensibly more accurate, accounting of costs. One example is a mass-produced industrial robot in contrast to a customized one. According to standard costing, the two different types have the same amount of direct costs, as it uses the same amount of materials and labor. However, a customized robot requires much more time from a company’s engineers, which is an overhead. Activity based costing accounts for this additional overhead. Activity based costing is not a new development, as it has been around for thirty years (Turney, 2015, 1). Now, activity based costing powers “performance measures for scorecards, providing rates for customer profitability analytics, helping devise human resource plans, modeling sustainability, and supporting budget development and planning” (Turney, 2015, 1). In other words, activity based costing can be very beneficial for larger companies with global operations.

While often difficult to implement, many companies did so as pilot programs during the 80s, 90s and early 2000s. Benefits include more accurate data, the inclusion of overhead costs, and relevancy to service organizations, for which traditional costing is irrelevant (Geri & Ronen, 2005, 135). Despite its benefits, some analysts have shown that activity based costing does not live up to all that it promised, stating that from a “global value creation perspective” the costing model failed since “not too many companies retain it beyond a short pilot period” (Geri & Ronen, 2005, 133). Some of the weaknesses of activity based costing include the fact that it is “based on subjective arbitrary cost allocations,” that it “ignores constraints and does not differentiate a bottleneck from resources with excess capacity,” and that it “regards the relation between activities and resource consumption as linear, absolute and certain” (Geri & Ronen, 2005, 135). In other words, while activity based costing may provide more accurate data, it is often not pragmatic to implement this new costing model. It is worthwhile to look at these problems in detail, as well as how they apply to Procter & Gamble and its global operations and accounting.

For one, it is difficult to develop uniform cost allocations across many different subdivisions and operations. Second, activity based costing does not does not account for various production constraints, nor how to deal with products with excess capacity, as noted above. Finally, it oversimplifies the relationship between activities and resources. For these reasons, this paper contends that Procter & Gamble would not benefit in the long run by using activity based costing. The use of this costing model would simultaneously oversimplify the relationship between the firm’s activities and its costs, while also complicating accounting in a company that already has many different forms of operation around the world.

More specifically, the ramifications of implementing activity based costing in the international business environment would be overcomplicated, and not necessarily worth the effort in the long run. In the 1990s, Procter & Gamble “made some significant alterations to its corporate strategy; it aimed to reduce its cost structure and develop its differentiated business-level strategy, in an attempt to increase revenues and profits” (Warren, 2012, n.p.). More specifically, the company “implemented a hybrid organizational structure that considered the geographical dispersion of multiple marketplaces, respective specialization for particular brands and specializations and economies of scale in particular value creating functions” (Warren, 2012, n.p.). In other words, Procter & Gamble adapted its operations to the global business environment without having to fundamentally change its cost accounting structure, which would be unnecessarily time consuming and costly. Procter & Gamble has been able to retain its share of nearly a third of the consumer goods market by standardizing accounting but adding flexibility to corporate structure.

In short, to implement activity based costing in the international business environment would overcomplicate Procter & Gamble’s operations, and possibly lead to inconsistencies in its reporting. As one source states, the use of activity based costing “is especially important to businesses that provide customized products or services” (Rojas, 2015, n.p.). Because Procter & Gamble does not provide such products or services, but instead has standardized manufacturing processes all over the world for its hundreds of individual products, attempting to implement activity based costing across all of its operations would essentially be a waste of time and expensive endeavor as the best case scenario. The worst-case scenario would be the misinterpretation of data and, as a result, inaccurate external reporting. Instead, Procter & Gamble should continue to focus on its efforts to create agility and profitability in its corporate structure and strategy, leaving cost accounting to the traditional methods. For instance, the Procter & Gamble 2015 Annual Report states that the company “cannot deliver consistent and reliable growth and value creation without continuous improvement in productivity,” and as a result the company is “focusing on fewer priorities and activities” which “is leading to lower costs in overhead, cost-of-goods-sold, marketing and trade spending” (P&G, 2015, 4). Therefore, the main reason that Procter & Gamble should not implement activity based costing is that it is not necessary in light of the firm’s other efforts. Instead, the alternative standard costing model is discussed below.

Standard Costs

In contrast to activity based costing as discussed above, the standard costing model aims at identifying underlying costs for the following year’s budget. More specifically, a standard cost is the “predetermined cost of manufacturing a single unit or a number of product units during a specific period in the immediate future” (McKay, 2015, n.p.). These ostensibly provide “a good measure against which to manage the business through the following financial year” (CIMA, 2010, 1). The direct benefit of stand costing is that it both satisfies regulatory requirements for external reporting and management and performance. As one report states, companies “use standard costs and variances to value inventory for statutory purposes, for management reporting purposes and for performance measurement and management” (CIMA, 2010, 1). In other words, the standard costing model satisfies both the regulatory and strategic requirements for a company. This is particularly important in the international business environment, since regulations and requirements vary by country and region. Whereas activity-based costing is only good for an internal strategic audit, standard costs are useful for simplified accounting and relevant external reporting. In this way, this current paper contends that Procter & Gamble could benefit – and has benefited – by using standard costs. But what are the ramifications for Procter & Gamble using this model in the international business environment? This specific question is discussed below.

There are several advantages to using the standard costing model. The main advantage of the standard costing model has already been identified above – namely, that it satisfies both internal and external strategic and regulatory requirements. However, the secondary benefit to standard costing (sometimes called traditional costing) is that it more accurately reflects costs, quantity, and variances. More specifically, standard costing “divides cost into variables and fixed categories” (Rasiah, 2011, 87). In order to be useful to a firm, costing systems “require a specific type of information such as direct labor hours and units produced” (Rasiah, 2011, 83). Standard costing provides the specific accounting of factors like labor hours and units produced, while activity based costing focuses on the specific activities enacted in the operations to achieve these factors. In doing so, activity based costing does not distinguish between variable costs and fixed costs. The model only relates costs as a whole to the activity that created these costs, and assesses productivity and strategy from this point of view. In contrast, the standard costing model not only reflects actual costs, but also assesses these costs in terms of the quantity of products (i.e. which man hours or industrial robots are most productive relative to their cost), and the variances in cost. Because Procter & Gamble’s operations are primarily manufacturing and the logistics of distribution, the standard costing approach makes the most sense, as the company’s operations can be automated and standardizes around the world. Therefore, this paper recommends standard costing across most of Procter & Gamble’s operations as a primary driver for decision making, particularly in manufacturing.

More specifically, many hold that “standard costing should be used as an indicator or measure for…inventory valuation, performance management, factory efficiency, product sourcing, one off contract pricing decisions and overall pricing decisions” (CIMA, 2010, 3). However, it is important to note that while “Standard costing remains an important part of any decision making toolkit,” it should be used as the “whole answer” (CIMA, 2010, 3). Activity based costing might make sense in some aspects of Procter & Gamble’s corporate structure. In the international business environment, it may make sense to implement activity based costing for marketing and research and development in the company. This is based on two primary factors: first, activity based costing is most beneficial for service industries and companies heavy in human capital, and second because activity based costing can be expensive to both initiate and maintain. While automation and production can remain the same around the world, the the state of the international business environment means that marketing, R&D, and even management will vary by region. Because of this, Procter & Gamble can consider using activity based costing on a limited basis, in those areas where it would be most beneficial (such as marketing and research and development), but maintain standard costing model in its day-to-day operations and manufacturing.

P&G and the Future

One final point to assess in this paper is how Procter & Gamble can benefit by analyzing future projects in terms of their relevant costs and in the context of the international business environment. In the case of Procter & Gamble, these future plans include both expansion of operations and products, as well as consolidation of corporate structure. In both cases, Procter & Gamble should benefit by primarily implementing standard costing, with the exception of the cases already discussed above. This is an important topic to discuss, as companies (like Procter & Gamble) that have a global focus in performance and production can struggle organizationally in the face of a shifting global business environment. As one report from McKinsey & Co states, “high-performing global companies consistently scored lower than more locally focused ones on several dimensions of organizational health” (Dewhurst, Harris & Heywood, 2012, n.p.). This they called the “globalization penalty” (Dewhurst, Harris & Heywood, 2012, n.p.). Even the 2015 Annual Report from Procter & Gamble recognized this detrimental impact: “Fiscal 2015 was a tough year due to weakening developing market economics and the unprecedented negative impact of foreign exchange”, with organic sales growing by only 1% that year. (P&G, 2015, 1). Given the relatively detrimental impact that the shifting international business environment has had on Procter & Gamble in recent years, how can it adapt its future plans in terms of relevant costs?

First and foremost, Procter & Gamble should consider their expansion efforts in terms of the standard costs that these efforts could incur. According to the same McKinsey & Co report cited above, the growth of global companies is directly related to a rise in complexity costs (Dewhurst, Harris & Heywood, 2012, n.p.). More specifically, “Emerging markets complicate matters, as operations located there sometimes chafe at the costs they must be as part of a group centered in the developed world: their share of the expanse of distant corporate and regional centers, the cost of complying with global standards and of coordinating managers across far-flung geographies, and the loss of market agility imposed by adhering to rigid global processes” (Dewhurst, Harris & Heywood, 2012, n.p.). In other words, Procter & Gamble can most efficiently assess the profitability of future expansion by examining the standard costs associated with this expansion, particularly into emerging markets.

In contrast, Procter & Gamble can also benefit from considering the activity based costs of consolidating its corporate structure. As the company’s 2015 Annual Report states, the company is “narrowing our focus to these ten categories” (as identified above) to become “the best-performing company in the consumer products industry” (P&G, 2015, n.p.). Part of that process is a restructuring of the corporate organization. In order to assess how to best restructure, Procter & Gamble would ostensibly benefit by utilizing activity based costing in this narrow, specific context. Because the restructuring primarily has to do with the human services side of the company, the activity based costing model will allow Procter & Gamble to assess which of its human capital is most productive and effective, and which areas can be downsized to create growth elsewhere.


This discussion paper has assessed Procter & Gamble in terms of both the various costing models available to a company of its size as well as the impact of the global business environment on its operations and cost accounting. While not exhaustive, the paper has shown that Procter & Gamble is most likely to benefit by utilizing standard costs across most of its operations, with the exception of human capital based functions like marketing and research and development. More specifically, the paper has argued that Procter & Gamble would benefit from utilizing the standard cost model in manufacturing and its day-to-day operations, due to the potential for vast differences in overhead across its various holdings, and benefit from activity based costing in its human services areas of operation, such as marketing and research and development, due to the variances in cost and productivity. Combining these two costing models on a day-to-day basis may not be pragmatic, but by separating the two types of operations will position Procter & Gamble to remain productive, nimble and open to growth in the near future.

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