Group Project: Costing systems adopted by an organisation
Costing system of any firm creates a great impact on the firm’s operating system and based on that it reflects their market performance. It is a framework which is used to estimate the cost of the products of the firm, inventory valuation and through the cost control, it estimates the profitability of a product. Accurate cost helps the firm to generate a profitable operation system. An efficient costing system determines the estimate of the work-in-progress, closing value of materials, and inventory of finished goods for preparation of financial statement. In this context, this article is going to discuss about Carrefour, UAE, and highlight the adopted costing system of the same. Further, this article will elaborate on the accounting software used by the Carrefour and how this system helps in the processing of data for the same.
Carrefour is a business unit. Carrefour first started its operations on 1 January 1958 in France as a retail store. Carrefour, UAE is one of the largest business units of hypermarket and supermarket chains in the world. It has started its operations in 1995 in UAE. Majid Al Futtaim holds the exclusive rights of Carrefour and under Majid Al Futtaim has already expanded the brand Carrefour in 38 countries all over the world. Carrefour concentrates on the development for each of its business units and builds strategies according to the needs of the industries which set a benchmark against its peers (Foster, 2014). Carrefour, UAE has expanded its business in five different sectors - hypermarkets (accounts to 51% of total sales), supermarkets (25% of total sales), convenience (10% of total sales), cash and carry (13% of total sales) and e-commerce (1% of total sales).
Carrefour considers the following strategies which have helped it to achieve excellence against its peers’-
Carrefour offers a wide range of services and products through its online and offline stores which focus on the same strategy of offering high-quality products at prices (Mouritsen, 2016). Carrefour offers its customers a wide range of food and non-food products. It also offers a wide range of convenience services like package pick up points, vehicle hire, pharmacies and health and beauty products, fuel oil delivery and many more, to its customers. Throughout the world, Carrefour offers financial and insurance services, leisure services like travel agencies, tickets for shows, with the help of its large and vast chain of stores and shopping centers. Carrefour also concentrates to lower the energy bill for its customers through a concrete but simple initiatives like it offer the lowest petrol prices at many service stations which it has integrated into its hypermarkets and supermarkets.
Carrefour primarily operates in the retail sector which is one of the largest in the world. It offers various ranges of products in its huge chain of hypermarkets, supermarkets, convenience stores, cash and carries stores and e-commerce sector. Along with the retail sector it has spread its wings in financial service sectors and also provides leisure services.
Carrefour’s 2014 performance showed a growth momentum which is achieved through a faster organic sales growth and an increase in earnings at constant exchange rates. Sales were up by 2.9%. Recurring operating income was up by 10.6% at constant exchange rates. Finance costs and the net cost of debt were lower than that of 2013. The net income from continuing operations increased to 1,182 million Euros compared with 949 million Euros in 2013. It continued its story of expansion by acquisitions of various brands in Italy and France which added value to the company.
In 2015 Carrefour’s net sales grew by 3.0% which results in an amount of 76,945 million Euros. Though the net sales came down to 1123 million Euros compared to 1367 million Euros in 2014. This fall in net income was due to the higher cost of sales and higher non-recurring income and expenses. Though in 2015 the net cash flows from operations increased to 2818 million Euros in 2015 compared to 2609 million Euros in 2014. Carrefour also obtained a new 2500 million Euros five-year bank facility. This operation contributed to the ongoing strategy to secure the firm’s long term financing sources.
Carrefour witnessed another year of growth in 2016 as the sales were up 2.7% due to the solid performance from the food business. Recurring operating income fell by 3.2 %. Finance costs and other financial income and expenses became stable compared to 2015.
2017 Carrefour witnessed a rise in sales by 2.6% though it witnessed a loss of 531 million Euros. Whereas the recurring income was down by 14.7%, the non-recurring expenses also increased.
Carrefour also witnessed a net loss of 344 million Euros in 2018. Though it was healthier compared to the result of 2017 where the loss was 531 million Euros.
Generally, every company follows a proper costing system to ensure proper movement of their stocks and on time movement. There are few costing systems adopted by companies like FIFO, LIFO, Simple average method, and weighted average method. FIFO method includes the assumption of cost flow that always the first goods purchased are the first goods sold. This method includes selling of the first goods purchased or manufactured (Zimmerman, 2016). This method is generally used for perishable goods. The LIFO method is used for products which are not much perishable in nature. This method is followed so that the customers always get fresh products and product quality is maintained. This method is followed by the companies to maintain the inventory cost at a minimum. The simple average method is followed with the combination of FIFO and LIFO along with calculating the average inventory to be sold. The weighted average method is also followed by companies where the cost of goods sold is the sum of the beginning and closing inventory (Swenson, 2016).
Big retail giants like Carrefour uses technology along with advanced costing systems. To manage large quantities of stock of different nature, a systematically operated costing system is used by Carrefour. Carrefour uses the simple average costing method. The simple average method is one of the most popular methods followed by retail companies. To address the effect of fluctuation of prices of products, Carrefour uses the average method as it is very simple to calculate. The issue prices are affected by the price fluctuations of purchases. Product identification becomes a complex process for Carrefour to either follow a FIFO or LIFO as there are large varieties of products traded by Carrefour. Thus the average method is best cost management method adopted by Carrefour as only one inventory layer is involved.
For managing the indirect costs and overheads of the company, the process of standard costing used to improve overall cost efficiency. At first the budgeting of all cost takes place and then it is compared with the actual costs incurred. While the business process becomes complex, it becomes difficult to calculate the actual costs. The costs should be assumed in this process. This process may be adapted to forecast the profit or loss as it is compared to the actual cost incurred. Based on this comparison between actual and standard costs, a variance is calculated which leads to effective decision making by the management.
Carrefour uses the technological systems from Oracle and IBM for all its store operations while the expansion of regional business is planned. Enterprise Resource Planning (ERP) software coded by Oracle is being used by the company for running of its stores across the world. People Soft ERP software is used in all its systems where Carrefour being the global user of the software. Carrefour maintains cost efficiency in its products where customers also get cost benefits due to the use of ERP software. ERP software helps Carrefour’s cost management team uses ERP to improve procurement efficiency by forecasting the quantity needed for future use so that not much investment is blocked in a particular non-moving item while eliminating the repetitive processes. Implementation of ERP software also facilitates the collaboration of various departments across the company as all the data entered into the ERP system is centralized and as a result, everyone may use it when necessary. Since this system is highly adaptable in nature, scalability of the business processes may be achieved. If data was scattered in different software, then it is very difficult for the management to make of that data on time. Using of ERP eliminates this situation for Carrefour. Streamlining of various processes and cost-saving policy is implemented very easily while ensuring mobility and reporting. While data hacking is an issue with many retail firms, using highly advanced ERP software by Carrefour secures important and confidential data. Customer service is marked at a high rate because of this software usage.
The ERP software may be implemented by the following steps:
For management of the suppliers, Carrefour uses Electronic Data Interchange (EDI) platform developed by Infinite IT Solutions. By the implementation of the EDI system throughout the company successfully, sending of important documents and files to the suppliers may be electronically received and sent while emails, telephone, and fax systems are replaced. With vast integration options, EDI technology was necessary for Carrefour to use. The EDI system is operated through the internet while it is powered by a validation mechanism facilitating daily transactions with a large number of suppliers across the world. It reduces the delay of verification processes of confidential documents which may be automatically verified when uploaded. While the elimination of fax and email, the manual verification process is also eliminated. With the increasingly dynamic and competitive business environment, efficient business tie-ups with large supplier network is an absolute necessity. The usage of latest EDI technology has fastened the process of transactions such as sales invoices, ASN, and purchase invoices where information is shared instantly to respond effectively in every situation.
Carrefour started its business as a retail unit, whereas now it has transformed itself in a retail sector giant which is operating in 38 countries. It is expanding its wings in various other sectors as well. Carrefour in UAE is a great success stories which is providing high quality products and services at a very low price compared to its peers. Carrefour always tries to be upgraded in every aspect in its operating system, which is also followed in its costing system. While an ERP and EDI system is implemented, the staffs are needed to be trained properly so that they may be system friendly while checking the overall infrastructure of the company. As the ERP software is research-based software, it highly customizable as per the business needs of Carrefour. While Carrefour is successfully operating in the online and offline mode with a lot of product variety, effective implementation of modern cost management systems was necessary for the company to grow at such a high rate.