The Procter & Gamble Company Cost Accounting

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work in process decreased $134, finished goods saw decrease of $821.

The overall decrease in the inventory account was $1,305. Lower inventory generated $313 million of cash mainly due to lower commodity costs and supply chain optimizations. Inventory days on hand decreased 7 days due to foreign exchange impacts, supply chain optimizations and lower commodity costs.

Financial Ratios

Liquidity Ratio

Liquidity ratios are the ratios that measure the ability of a company to meet its short term debt obligations. These ratios measure the ability of a company to pay off its short-term liabilities when they fall due. The quick ratio is a measure of a company’s ability to meet its short-term obligations using its most liquid assets (near cash or quick assets). Procter and Gamble quick ratio of 0.55 for 2015 compared to its competitor Colgate-Palmolive quick ratio of 0.67 (CSIMarket Company, 2015) A quick ratio of 0.5 would suggest that both companies are able to settle more than half of its current liabilities.

Current ratio is balance-sheet financial performance measure of company liquidity. Current ratio indicates a company’s ability to meet short-term debt obligations. The current ratio measures whether or not a firm has enough resources to pay its debts over the next 12 months. The current ratio of 1.00 shows that Procter & Gamble is meeting is current obligations paying off some of their liabilities can help raise the ratio. Its competitor Colgate-Palmolive current ratio of 1.23 (CSIMarket Company, 2015) can meet financial obligations effectively when they fall due.

Profitability Ratio

Profitability ratios measure a company’s ability to generate earnings relative to sales, assets and equity. These ratios assess the ability of a company to generate earnings, profits and cash flows relative to relative to some metric, often the amount of money invested. They highlight how effectively the profitability of a company is being managed. Return on assets (ROA) is a financial ratio that shows the percentage of profit that a company earns in relation to its overall resources (total assets). Procter & Gamble Return on assets or ROA was 5.22% in 2015, but compared to its competitor Colgate-Palmolive their ROA for their year-end December 2014 was 16.20%. This shows that the competitor Colgate-Palmolive efficiently manages its company’s assets to generate profit better that Procter & Gamble.

Return on equity (ROE) is the amount of net income returned as a percentage of shareholders equity. It reveals how much profit a company earned in comparison to the total amount of shareholder equity found on the balance sheet. Procter & Gamble ROE for 2015 is 11.33% the industry average is 23.93% (CSIMarket Company, 2015) so Procter & Gamble ratio is underperforming for its shareholders. The higher the ROE, the better. But a higher ROE does not necessarily mean better financial performance of the company. Procter & Gamble’s competitor Colgate-Palmolive has a ROE of 190.39% at year-end 2014.

Gross profit margin (gross margin) is the ratio of gross profit (gross sales less cost of sales) to sales revenue. It is the percentage by which gross profits exceed production costs. Gross margins reveal how much a company earns taking into consideration the costs that it incurs for producing its products or services. Procter & Gamble has a gross profit margin of 49.03% for 2015 compared with its competitor Colgate-Palmolive gross profit margin ratio of 58.51% in 2014 (CSIMarket Company, 2015).

Net profit margin is a ratio of profitability calculated as after-tax net income (net profits) divided by sales (revenue). Net profit margin is displayed as a percentage. It shows the amount of each sales dollar left over after all expenses have been paid. Procter & Gamble net profit margin for 2015 was 9.37% and Colgate-Palmolive net profit margin ratio is 12.62% P&G could manage converting sales into profits better.

Activity Ratio

Activity ratios measure company sales per another asset account activity ratios measure the efficiency of the company in using its resources. Asset turnover ratio for 2015 was 0.56 compared to industry average of 0.73 Procter & Gamble is performing below average when using its assets to generate revenue.

Accounts receivable turnover is the number of times per year that a business collects its average accounts receivable. The ratio is intended to evaluate the ability of a company to efficiently issue credit to its customers and collect funds from them in a timely manner. Procter &Gamble Accounts receivable turnover is 13.56 which means that the company’s accounts receivable turned 13 times during the year and the average accounts receivable was collected 26.9 days. Its competitor Colgate-Palmolive accounts receivable was collected 34.2 days.

Inventory turnover is a measure of the number of times inventory is sold or used in a time period such as a year. Procter & Gamble inventory turnover is 6.37 for 2015 which turned about 6.4 times and sells its inventory in 57 days. Colgate-Palmolive inventory turnover is 5.11 or in 71 days it sells its inventory.

This ratios can be used to help measure the effectiveness over cost control. Operating costs can be monitored with the use of direct and indirect operating ratios. The direct material operating ratio for Procter & Gamble was 0.2 or direct material is 20% of net sales. No mention of Fixed overhead in consolidated financial statements.

Opportunities for Cost Control & Improved Profits

The Procter & Gamble Company (PG), is the largest household and personal products company in the world. This is a highly competitive sector Procter & Gamble faces local as well global competition from various players worldwide. Procter & Gamble operates through five segments:

Fabric Care and Home Care – includes brands such as Ariel, Tide, and Downy

Baby, Feminine and Family Care – includes brands such as Pampers and Always

Beauty – includes brands such as Olay, Pantene, and Head & Shoulders

Grooming – includes brands such as Gillette

Health Care – includes brands such as Oral-B

Procter &