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Accounting

Costco Part 4

Costco is one of the largest chain of warehouse operating stores. Even though they are group along with other wholesale warehouse stores, Costco’s operating strategy is what sets them apart. They are able to generate a high sales volume and have rapid inventory turnovers that are unlike their competitors such as Sam’s Clubs, Walmart, or other wholesale stores. The main components of Costco’s operations are that it serves a warehouse members only club format that offers a select amount of quality products compared to major stores such as Walmart, or its main competitor Sam’s Club.  It operates to provide members including small business owners with low prices on bulk merchandise that allow for higher profit margins that are reflected in their operating costs savings, such as inventory and warehouse construction. Their operation is efficient and effective on achieved by the volume of their purchases, a reduction in their handling of merchandise, self-service facilities, and catering to the wants of their customers. Costco operates as a wholesaler retailer that provides customers with quality products at a quality service.

The way that Costco was formed has transformed in to the unique format that allows for entry into multiple industries including merchandising, manufacturing, and services. In merchandising Costco operates as a wholesaler by selling other company’s products and goods. They have become the leader in buying on a privately selective brands that customers will buy more without offering at a higher price. Costco also acts as a manufacturing company that makes and sells their own brand called Kirkland Signature Label. Kirkland Signature Label, which is designed to be of equal or better quality than national brands. (Costco, 2012) It accounts for a third of their sales and is offered at a lower price than the goods of other manufacturers. As Costco has succeeded and grew it has added other manufacturing services such as, special food packaging, optical laboratories, meat processing, and jewelry distribution. (Costco, 2010) Now Costco can also be classified as a service company as they provide services to their members in travel with Costco Travel, and provides financial services by acting as an investment broker offering members home and auto insurance with an agreement with Amerprise Insurance.

Costco uses suppliers and other entities that have a program in place in order to approve or monitor all the raw materials for food, packaging, and processing. Costco’s Kirkland Signature Label also monitors growers and suppliers that handle the raw material for food, wine, and other products. (Costco Produce Food Safety, 2012)

Standard costing is the practice of substituting an expected cost for an actual cost in the accounting records, and then periodically recording variances that are the difference between the expected and actual costs. (Accounting Tools, n.d) Costco is a good candidate for standard cost since they offer a low pricing on merchandise that saves on operating and overhead costs.

The benefits of standard costs for Costco are seen through the advantages of pricing their merchandise. Costco is selective of which brands to stock. If they cost the consumer more they will not sell it at their stores. Keeping the prices low help drive profits on sales. Standard costs help with price fixing by allowing for product elasticity and controlling their selling price. Costco’s performance evaluation is essential to their company’s success, standard costs help to eliminate variations in profit that might be due to the changes in stock holdings.

These performance evaluations helps to show the true measurement of profits.  As far as accounting measures for Costco, budgeting actual costs is never easy using standard cost in order to calculate overhead costs, variable, and semi-variable costs. Since Costco saves money and strives to reduce cost by eliminating extra packaging, using energy efficient methods, and other measures, standard costs can be used towards budgeting and planning. Standard costs will be useful for Costco in standardization of operations, processes, products, and the reduction of costs.

 

References

“Company Profile” (2012). Costco. http://phx.corporate-ir.net/phoenix.zhtml?c=83830&p=irol-homeprofile Web. 18 February 2013.

“Standard Costs.” (n.d). AccountingTools. http://www.accountingtools.com/standard-costing Web. 18 February 2013.

“Produce Food Safety and Expectations.” (2012). Costco. http://www.primuslabs.com/docs/Costco_Produce_Food_Safety_Audit_Expectations_FINAL_Revised_02_01_12.pdf. Web. 18 February 2013.