Abstract
The current paper assesses different costing techniques and assesses how JetBlue can derive benefits from using such costing techniques.. The project aims to determine how the business will profit from integrating diverse costing approaches to give effect to better decision taking.. Costing methods facilitates the organization to utilize such financial resources more optimally. Costing techniques are necessarily not reflected in company annual reports or financial statements. These occur separately and are given as supplementary information for managers and stakeholders to assess the company’s organizational effectiveness.
Table of Contents
Introduction.
Firm Background
Activity-Based Costing
Standard Costing
Future Projects in terms of Relevant Costs
Conclusion
References
JetBlue Airline Costing Techniques
Introduction
The current paper is based upon analyzing the different costing techniques which an organization undertakes to acquire better financial efficiency. Accordingly, the present article incorporates the evaluation of activity-based, standard, and relevant costing techniques. The research includes analyzing such costing techniques by associating the same in the context of JetBlue. The different circumstances under which JetBlue might undertake such costing techniques and their long-run implications have been discussed. The paper begins with a brief analysis of JetBlue’s background, their span of operations, and their general strategies to succeed. The subsequent sections of the document include evaluating different costing processes and how JetBlue can incorporate the same to manage their financial resources better. The data for the current paper has primarily been collected from secondary sources such as web publications, journals, and books. The study essential follows a descriptive and interpretative approach. The research technique developed is primarily qualitative.
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Firm Background
JetBlue is a low-cost airline with its head office situated in Long Island City, the U.S. It is seen to operate in 12 countries, which include nations of Latin America, South America, and the Caribbean. The company serves 87 destinations spread across 24 states (JetBlue, 2014). JetBlue focuses crucially upon providing excellent and timely services that are priced economically. The flight services of JetBlue can be crucially be divided into two essential segments, virtually business class, and economy class. JetBlue tries to create differentiation in their service offerings by incorporating the aspect of quality, which most low-cost carriers are seen to emphasize less upon. Superior personal space and complimentary entertainment are considered as essential aspects by the firm. Innovation and sustainable operations are also a necessary part of the sustainable strategies of JetBlue. JetBlue, apart from its financial services, has incorporated Mint, a premium transcontinental service. These flights provide high comfort travel services, mainly to target high-end customers. JetBlue also has its internet services provided inside the flight (Gittell & O’Reilly, 2001).
JetBlue’s success in the markets of the U.S. can be attributed to its widespread and efficient network. The company tries to consistently expand their services by expanding into new territories and formulating new partnerships. Such commercial corporations facilitate JetBlue in their frequent flying program, logistics services, and code sharing. Executives at JetBlue believe that business partnerships are essential to share resources and attain competitive advantages. Leveraging secure networks have facilitated JetBlue to enhance their number of passengers and areas served. JetBlue’s market share, compared with those of Delta, U.S. Airways, United Airlines, and Southwest Airlines, is also seen to be quite ahead, who is also the company’s main competitors (Wynbrandt, 2010).
JetBlue’s services were crucially impacted after the 9/11 incident and the fluctuating behavior of consumers in respect of air travel. However, the company was able to revive itself adequately and has emerged onto becoming one of the fastest-growing airline networks. The main driver of JetBlue’s success in the markets of the Americas was their strategy relating to enhancing non-stop flights, while most airlines reduce their services relating to the same. Moreover, the high financial stability and the growing revenues facilitated the firm to continue innovating and expanding services. JetBlue’s popularity in the market also came from the substantial old fashioned service advantages. The company’s effective research strategies concerning analyzing consumer needs and delivering the same have played an essential role in their maintenance of market share (Wynbrandt, 2010).
The following sections of the paper evaluate how JetBlue can incorporate various costing techniques to achieve financial efficiency. The incremental profits gained through such methods may eventually be forwarded to the customers of the organizations.
Activity-Based Costing Technique
Activity-Based Costing or ABC is a system that establishes a relationship between a firm’s activities and costs incurred during production.
The policy stresses upon understanding that charges are incurred within an organization due to various events. It is considered to be an appropriate method for allocating indirect costs. Firms utilize the ABC costing technique to disintegrate incidental damages and identify the activities due to which such charges have arisen. Organizations primarily use such systems to decompose the overall indirect costs (Oregon State University, 2015).
JetBlue may benefit from including the ABC costing system in their financial management systems, in the international business environment, in the following ways:
Product associated costs can be accurately be identified under the ABC technique. The disintegration of values is more feasible under the ABC costing method. The ABC technique focuses on the cost and effect relationship in which organizational expenses and activities taking place are seen to share as production activities are carried out. The indirect costs which are associated with production can be better identified based on such a costing system. Hence by incorporating such a costing technique, JetBlue can quickly identify and analyze the indirect costs and related activates, which give rise to the same (Innes, Mitchell & Sinclair, 2000).
The ABC theory of costing is based on accurate and fair procedures, making its reliability highly feasible. Since cost drivers are first identified, and accordingly, respective costs are allocated, this system of costing leads to correct results. Such effective costing techniques facilitate JetBlue to meet the information needs of stakeholders effectively and provide them with reliable information regarding organizational operations.
JetBlue production managers can better control organizational expenses by incorporating the ABC system of costing, necessary while operating at a full scale and spread across different nations. Although fixed expensed can be less regulated through ABC, the variable expenses can be suitably reduced by implementing the ABC system. Managers can look into the various activities which give rise to additional costs and try to monitor and control the same to attain higher revenue (Krishnan, 2007).
JetBlue executives can utilize the information procured from the ABC costing system to make decisions relating to the expenses associated with different product lines and develop strategies for enhancing profits of the same. Such policies can be taken by the experts of JetBlue by identifying the relationship existing between costs and activities (Anderson, Hesford & Young, 2002).
Financial managers are often required to report to the marketing and production managers, the areas of production which account for maximum expenses. Based on such information, marketing and production managers take steps towards reducing expensing so that production can be carried out in a more liable manner. However, while doing so, bins are required to identify and categorize the mandatory and avoidable cost driving activities.
The ABC technique of costing is seen to work effectively for service-oriented industries rather than the manufacturing industries. This is because the majority of expenses occurring in manufacturing industries are direct costs. The proportion of indirect damages is less. On the other hand, in service industries, direct payments are low, whereas incidental expenses form the majority of the costs. Hence JetBlue can sufficiently make use of the ABC system of costing for suitably allocating costs and resources (Homburg, 2001).
Once the activities which drive costs are identified, JetBlue can effectively determine the actions which utilize resources highly and can develop strategies towards controlling the same. The ABC costing technique can be a useful technique for allocating resources, managing costs associated with different activities, and retaining higher profits within the organization. The ABC technique facilitates regulating prices as the scale of operations advance (Sartorius, Eitzen & Kamala, 2007).
Accordingly, the consequences of implementing ABC can, therefore, be seen to be as follows:
1) Identification of various types of costs associated with production.
2) The pooling of primary and secondary cost drivers.
3) Cost objects or activities which give rise to various costs can be monitored.
4) Better implementation of the budgets and utilization of funds towards various expenses.
5) By identifying such costs, it becomes possible to formulate reports such as profit and loss accounts and other management reports. These can be used for effective decision making.
6) Through the ABC analysis reports, it becomes easy to take action upon reducing the various activities, which are the main cost drivers and thereby facilitate cutback of cost of operations (Cardinaels, Roodhooft & Warlop, 2004).
Based on the ABC analysis, JetBlue may consider structuring the distribution of costs using the following categories:
Direct damages- These expenses arise from those activities which are directly associated with production. They include charges such as direct labor and materials (Anderson & Young, 2001).
Indirect costs- These are the real overhead costs associated with production but are not easily identified. Few examples of such expenses are essentially purchasing order costs, set up costs of machines, packaging costs, testing and calibration costs, maintenance, and cleaning expenditures. Such losses can be easily linked with the activities at JetBlue. Mostly the indirect damages are associated with repair and maintenance of the airplanes and in-flight facilities. Marketing and sales-related expenses are also incorporated in these sections. ABC costing techniques is useful, mainly in allocating and identifying the costs occurring in these sections (Barrett, 2005).
As organizations are integrating themselves more with the global accounting standards, the implementation of ABC techniques is seen to become more widespread. Most organizations use the ABC technique so that indirect costs can be better broken down and evaluated. It also becomes possible for organizations to compare the profits procured under ABC and other accounting techniques. Additionally, the method is used for preventing cost distortion and better information providing to the organizational stakeholders. In the international business platform providing accurate and timely information in respect of financial activities is essential. Often mere analysis of the profit and loss account is not considered to be sufficient to analyze the different types of cost drivers. However, through the preparation of the ABC statements and thereby breaking down the structure of overhead expenses is considered to be useful. Since ABC costing technique is primarily used in the service industries, it is a suitable process for comparing the results of operations. JetBlue can effectively analyze the costs occurring under the ABC technique with other firms in the same industries and evaluate whether their internal services incur higher costs or are at par. This would facilitate the organization to determine whether their internal operations are being carried out efficiently or not (Cagwin & Bouwman, 2002).
Standard Costing Technique
Standard costing techniques facilitate firms to identify and analyze the difference between “actual costs and standard costs” (Bhimani, Datar & Foster, 2002).
Most organizations expect the actual units of products they would sell or a standard price at which products would be sold. However, in reality, the actual volume of sales and the rate at which transactions are carried out might differ. Through the standard costing technique, it becomes possible to identify the cause of variance between actual costs and the preset standard costs. These include a change in material usage, variation in price, and so on. The standard costing technique is used mainly because determination or procuring information regarding exact costs many at times becomes difficult due to lack of time. As per the changes observed, the finance manager may set standard prices for the coming periods so that variances are lower (Bhimani, Datar & Foster, 2002). By incorporating the conventional costing techniques, JetBlue may incur several benefits, discussed as follows.
Budgeting processes are hugely benefited through such standards costing techniques. Usually, when budgets are prepared, it is difficult to identify the exact costs which are associated with different activities of production. Later on, when the actual production activities are carried out, varying real and standard values can be assessed and shown. Accordingly, modifications are made in the budgets. These adjustments in the budgets and related financial statements are made based on the standard costing technique and the variances calculated on its basis (Lucey, 2002).
Another essential reason due to which JetBlue may consider using the standard costing technique is to ascertain inventory costs. Inventory valuation, which is done at the beginning of a period, might radically vary from the assessment at the end of the period. In the beginning, inventory costs are ascertained by using the standard rates. However, when the actual damages are procured at the end of the period, numerous deviations are seen. This might be due to periodical fluctuations in quantity and prices. Accordingly, it becomes essential to frequently update standard costs so that they are close to the actual damages. The usual charges up-gradation are carried based on the conventional costing techniques (Sulaiman, Nazli Nik Ahmad & Mohd Alwi, 2005).
JetBlue may use such costing techniques for successful financial decision making. For instance, it may identify the costs which are subject to frequent alteration and those which do not alter quite rapidly. Accordingly, business managers can decide in respect of the standards based on which budgets can be formulated. Many organizations also use the standard costing system to allocate costs to materials, labor, and other overheads when there is a lack of time to incorporate detailed allocation of costs (Edwards, Boyns & Matthews, 2002).
JetBlue may also consider using the standard costing technique to provide information to clients and business associates regarding the prices of different goods, resources, and materials. While placing or receiving orders from clients, it becomes difficult for firms to predict future costs accurately and accordingly sent information. Hence under such circumstances, JetBlue may consider using the standard costing technique to provide valuable information to clients. The company uses the standard rates procured to evaluate the costs and set budgets and proposals to attract clients and customers (Garrison, Noreen & Brewer, 2003).
Standard costing is also often viewed as a control mechanism. It becomes feasible to assess levels of difference between the actual costs and the usual prices. For instance, if the firm perceives that usage of materials has been far more than the actual budgeted levels, the management can take the required steps towards reducing the same. Hover not only types of control can be exercised by the organization. For instance, it is impossible to use control if there are deviations in the price of materials that occur due to market forces.
The firm may hypothetically set benchmarks for production and cost and accordingly measure the extent of the deviation. JetBlue may also be able to develop responsibility centers that are crucially entrusted with the task of measuring deviation and their prevention in the future periods. However, for the successful implementation and use of the standard costing technique, it is essential that budgets set during the initial period are accurate and as per the required standards of the organization (Adler, Everett & Waldron, 2000). The commonly used standard costing measures are as follows:
Material variance
SQ= standard quantity
SP= standard price
AQ= actual quantity
AP= actual price
Material Cost Variance= (SQ x SP) – (AQ x AP)
Material Price Variance= A.Q. x (S.P. – A.P.)
Material Usage Variance= SP x (SQ – AQ)
Materials variances may aid JetBlue to understand the actual costs and usage as compared with the standards in respect of the same.
Materials are an important part of the direct expenses of an organization. In the case of JetBlue, the material expenses can be essentially fuel, goods used during the flight, machines used for maintenance of aircraft carriers, staff-related goods, and machines. The company is firstly required to categorize the various materials that it uses in its production process. Accordingly, standard prices are set. These standard rates are then used against the actual output for the copulation of the variance.
Labor variance
SH= standard hours
SR= standard rate
AH= actual hours
AR= actual rate
Labor Cost Variance= (SH x SR) – (AH x AR)
Labor Rate Variance= A.H. x (S.R. – A.R.)
Labor efficiency variance= SR x (SH – AH)
Labor is an essential resource and cost-driving factor in organizations.
Being in the service industry, labor-related expenses are seen to occur vastly. Accordingly, it becomes essential for JetBlue to establish strategies that lead to the control of various expenses related to labor. Both material and labor variances are seen to facilitate control of direct expenses. It can, therefore, be stated that standard costing is effective for controlling and evaluating direct production-related expenses. However, overhead variances can be used to evaluate indirect expenses associated with production (Schaltegger, Bennett & Burritt, 2006).
Large companies such as JetBlue must not, however, over-rely on standard costing alone as a tool for decision making. The standard costs and the actual costs and variances between the two are seen to commonly occur within an organization as a result of changing the organizational environment. It might not, therefore, always be possible to set standards in respect of costs accurately, even if the process of standard costing is carried out effectively. The occurrence of variances is quire natural in the business process. However, conventional costing techniques are useful for enhancing the level of control over inventory and human resources. Most firms are seen to set industry standards based on general industry conditions. In most international organizations, standard costing is therefore used as a supporting tool to maintain control over inventory. However, it requires to be stated in this context that conventional costing techniques are more suitable in terms of internal control. It has less applicability in the international costs in front of comparability. This is mainly due to the factor that different firms use differential items under the standard costs front. JetBlue may, however, utilize the standard costing process for analyzing the level of variance existing in their production process as compared with others in the same industry. If the degree of variation is high, it is possible to deduce that the internal control systems are low. The information in respect of standard costs can be provided to stakeholders to inform them regarding the operational stability existing within the organization. However, the most crucial role of standard costing in the international business front is to standardize the activity-related expenses. In general, it is observed that standard costing is perceived as a suitable technique for enhancing business intelligence. It induces relevance, consistency, and timeliness into business activities. It is often used in the international business context for the determination of profitability. JetBlue can, therefore, use the standard costing technique to enhance productivity and competitiveness (Garrison et al., 2010).
Future Projects in terms of Relevant Costs
Relevant costs are necessarily those types of expenses that lead to differential decision making and outcomes. Also, such costs must lead to diverse decision making. JetBlue can take huge advantages of such relevant costs to make decisions. The relevancy of such expenses is seen to vary according to the situation under which the costs are taken into concern. Material costs are generally differential, incremental, and opportunity. Differential costs arise when a firm plans to change current strategies or are required to decide upon new strategies. For instance, a differential cost circumstance may occur when JetBlue is needed to determine between appointing a salesperson and appointing a distributor. Under such a situation, the company is required to assess the cost advantages procured under each of the options. Apart from cost advantages, the company also needs to evaluate risks. Such differential costs are required to be compared against differential revenues. As per the differential cost technique, the same price may seem to be useful or nonpractical under differential strategies. If the company wishes to sell its services within a small locality, hiring a salesperson would be beneficial. On the other hand, if the areas in which the services are required to be sold are widespread, it might be more useful if a distributor is appointed instead of a salesperson (Garrison et al., 2010).
Other significant relevant costs considered by accountants are marginal or incremental costs. In the case of differential costs, two completely different products or service is evaluated and chosen. However, under the minimal costing technique, the company is required to assess the implications of procuring or producing the same product of services in an increased or lower volume. For instance, the marginal costing technique can be used by JetBlue to assess the implications of procuring one extra unit of labor in their overall labor cost structure. Opportunity costs are mainly associated with the costs associated with preceding an option so that another alternative can be selected. For instance, if JetBlue is required to choose between two projects, each varying in terms of costs and revenue, the opportunity cost would be the cost which the company has foregone or has not chosen (Schaltegger, Bennett & Burritt, 2006).
From the discussions carried out is JetBlue may consider using such costs to evaluate the differences existing between different strategies and chose the option which is most feasible in terms of revenue maximization. Not all types of expenses may seem to be relevant while making decisions. For instance, in an expansion project, JetBlue may consider undertaking an evaluation of costs relating to labor, infrastructure, and materials. Only those costs which directly impact enhancing the project’s overall cost would be incorporated. JetBlue, in recent times, is considering expanding its global activities by incorporating a more significant number of flights, enhanced services, adding seats to their current flights, and revising their flight fares. While making such decisions, the company may consider incorporating choices directly related to such expansion plans. JetBlue is one of the most influential organizations, and successful brands in the airline industry are required to include the aspect of quality while undertaking diverse strategies (Schaltegger, Bennett & Burritt, 2006).
Conclusion
From the analysis carried out, it can be seen that JetBlue can effectively enhance their financial performance by undertaking different costing techniques. Costing techniques are mainly used for providing information to the management in respect of various costs so that effective decision making is possible. By only looking into the financial statements, managers might not be able to identify cost drivers and the level of increment of costs from the pre-established budgets and so on. Through such information, JetBlue managers can try to reduce the cost of operations and increase efficiency. Being a premier organization of the airline industry, the company has extensive spread operations and is seen to incur huge losses. Using such costing techniques, the company would be able to utilize its financial resources in a more optimized manner. The benefits acquired through optimal utilization of finance can be ultimately transferred to the consumers, thereby contributing towards their long term success strategies.
References
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