Starbucks Corporations Cost Allocation Problem

Table of Contents

Introduction
Activity and time period used for the study
The inputs used for the study
Results
Implications from the results
Conclusion
References

Introduction

Starbucks is the worlds largest coffee shop retail chain operator. It faces keen competition from Mc Donalds Corporation and Dunkin Donuts Inc. in the coffee market of United States. Luxury end products are supplied by them. The spending habit among the target customer group towards loyal products provides competitive advantage to Starbucks. Price discounting policy is not adopted by them in the concept that customers are ready to pay premium prices for its high -end brand. Their core products are bean coffee and for this high quality coffee whole beans are procured which they sell with different varieties of tastes and qualities. (Starbucks corporation-SBUX, 2009).

Recast financial statements can be defined as Financial statements of the business that are adjusted to reflect the actual financial benefits of business ownership. (Recast financial statements, 2009). Recasting of financial statements is required in order to present the adjusted position of the financial statements. In order to present the actual cash flow available to the owner, adjustments are required in the reported financial statement data.

Activity and time period used for the study

For the identification of allocation of common costs, the financial statements of the company for the period 1^st April 2000 to 31^st March 2001 are considered.

The inputs used for the study

For the common cost allocation of the Starbucks Company, the previous financial report of the company is used. The common cost elements on the total cost are considered for this cost allocation purpose.

Results

The following Table presents the common cost allocation of the company for the period 1.4.2000 to 31.3.2001

Particulars	Percentage on total cost	Amount in $
Wages and salaries	45%	69750
Electricity	25%	38750
Telephone	15%	23250
Maintenance and repair	10%	15500
Others	5%	7750
Total Common costs for the period		155000

Implications from the results

Common Cost allocation is used for the determination of the cost of products and services that has to be incurred by a company. It excludes the price of the service and only service costs incurred are considered. For the cost allocation purpose, the common cost incurred on different departments is divided according to certain percentage.

The recasting of common cost allocation of the Starbucks Company reveals that a major portion of the common cost of the company is on account of wages and salaries of employees. It accounts for about 45 % of the total common cost incurred for the operations. Electricity is another major cost that increases the operating costs of the organization. The common cost allocation should help the company to measure the percentage of different cost elements on the total common cost of the operations.

Conclusion

In the manufacturing and marketing industry a major percentage of the total cost of operation for a particular period is of common cost in nature. In such companies cost allocation is an adoptable method for finding out the actual cost of products and services incurred by the company. As a company in the manufacturing and marketing industry, cost allocation is helpful for Starbucks to find out the actual cost incurred by the company for the different sections in the organization towards provision of products and services. The common cost allocation of the company reveals that wages and salaries are a major percentage of the total common cost. In order to reduce the operating cost, the company has to concentrate on reducing the labor cost.