Samsung is the world’s largest smartphone maker; however, its profitability is under great threat. Recent reports suggest that even though Samsung produced ten times as many smartphones as Apple, the company only generated half as much revenue in the mobile division. The inevitable decline in profitability is attributed to rising manufacturing costs arising from increasing costs of components. At the same time, Samsung faces serious competition from Huawei, Lenovo, and ZTE Corp. The firm needs a renewed approach to its cost accounting methods to curb the rising costs of components to ensure sustainable profitability. Activity-based costing and standard costing would benefit Samsung while cost-plus concept would harm its profitability.
Samsung’s Principal Goods and Services
Mobile phones make up Samsung’s main product line. Samsung produces a wide range of products and services, including laptops, televisions, monitors, smartwatches, home theater and audio, mobile phones, home appliances, desktop computers, and security systems, among several others (Chang, 2011). However, mobile phones make up the biggest segment of the company’s products and services. According to Chang and Lee (2014), mobile phones account for 60 percent of Samsung's revenue, an observation that is confirmed by its financial statements. As such, the corporation’s profitability largely depends on the performance of the mobile phones division.
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Global Market Share
Samsung has held the record for leading the smartphone market in the last years. According to a report by Matyugina et al. (2020), as of 2018, Samsung had a 19 percent market share beating Apple and Huawei at 13.4 and 13 percent, respectively. The market share has grown to 20.3 percent as per the first quarter of 2021, with Xiaomi coming in second place. Samsung has undergone a tremendous growth rate in the smartphone sector, considering the brand was behind Nokia, Apple, and HTC in 2010 with a market share of only 7.6 percent (Matyugina et al., 2020). Samsung continues to influence the smartphone market worldwide.
Major Competitors
Samsung's main competitors, especially in the smartphone market, include Apple, Huawei, Lenovo, and Xiaomi. As demonstrated above, Samsung leads the smartphone market. However, it faces fierce competition from Apple, its long-term rival, and emerging brands such as Xiaomi, Huawei, and Lenovo. According to Dunn (2017), even though Samsung introduced ten times as many smartphones as Apple, it only generated half as much revenue as Apple. This means that Samsung lacks the operational efficiency that Apple has, and because of this, coupled with the rising costs of components, it could lose the market to Apple. At the same time, Xiaomi closes in on Samsung's market share, with other promising brands such as Oppo and Vivo proving to be a threat.
Activity-Based Costing
Activity-based costing (ABC) approaches costing differently from conventional cost accounting methods. As Jalalabadi et al. (2018) explain, an organization assigns costs to activities of all products and services according to their actual consumption in the ABC method. In other words, in this approach, activities are treated as cost centers instead of products or services. As Jalalabadi et al. (2018) further clarify, since the method provides a clearer depiction of overhead costs and their associated factors, it benefits sectors with high overhead costs, including transport, hotels, and the likes. Notably, Samsung does not fall in industries thought to benefit from the ABC method.
Production Cost of Smartphones
Nonetheless, according to its financial statements, the company incurs various costs in producing its smartphones. R&D, warranty, components, labor, and advertisement, among others, are examples of overhead generating activities associated with the manufacture of Samsung’s mobile phones. Generally, the costs of producing a smartphone are as follows: cost of components (battery, camera, screen, processor, memory, modem, sensor, holding material, assembly), R&D, labor, rent, utilities, repair and maintenance, and administrative costs. However, not all products undergo the same overhead generating activities since Samsung has a wide range of smartphone products for different market segments. Therefore, the above activities should be allocated on a reasonable basis.
Samsung's New Challenge: Cellphones Rising Component Costs
Samsung is experiencing a new challenge of rising costs of components contributing to even higher overhead costs. According to Jalalabadi et al.’s (2018) view of ABC and its application, Samsung can use the method to increase its profitability despite the rising cost of components. Since ABC assigns costs based on overhead activities, the company can streamline its production process and minimize its costs. This is made possible by saving business time, money, and resources. ABC is suitable for Samsung mostly because the brand produces customized products for different markets; as such, overhead costs are spread evenly across all products.
Therefore, to ensure the profitable benefit of the accounting method, Samsung’s management will need dedication from all members. Jalalabadi et al. (2018) advise that the implementation of ABC requires two steps. First, the company will need to identify the products for which costs are allocated from an ABC point of view. Second, identify all direct and indirect costs and activities associated with each activity in producing the smartphones. Doing so ensures overhead costs and costs drivers are identified and streamlined. The Company will then get the idea of efficient and inefficient products, thereby eliminating products and practices deemed costly and wasteful. In conclusion, ABC will benefit Samsung by increasing its profits by cutting costs despite the increasing prices of components.
Standard Costing
Standard costing is used to estimate the expenses of a production process. According to Farkas et al. (2016), manufacturers utilize standard costing methods to forecast and plan their costs over a predetermined period. The advantage of the method is that it helps companies budget for the forthcoming financial year in terms of costs and compare actual and planned costs. That being the case, whether standard costing would benefit Samsung remains debatable, especially with the rising costs of components. Farkas et al. (2016) suggest that management is forced to respond to maintain profitability when actual costs exceed the planned costs. As such, when the cost of components increases, Samsung's management will be a force to adjust its products based on key components, thereby maintaining its profitability.
Cost-Plus Concept
The cost-plus concept involves selling price is determined by adjusting products' unit costs to reflect specific fixed markup. Guerreiro et al. (2012) assert that the cost-plus concept is the simplest method firms can use to determine prices as it embodies the fundamental idea of doing business. When critical costs increase, the price of a commodity will also increase with equal measure as far as the method is concerned. For Samsung, an increase in mobile phone components means a significant increase in the price of smartphones. This isn't good for the company in two ways. First, an increase in the price of smartphones will minimize sales and thus hurt profitability. Second, price-sensitive customers will opt for alternative products meaning Samsung will lose customers to its competitors.
While ABC and standard costing will benefit Samsung, cost-plus pricing will seriously hurt its revenue and profitability. The goal of any business is to optimize profitability and capture as much market as possible. Although Samsung has enjoyed a significant level of market share in the past years, its position in the market is under threat, especially because of the rising costs of components and intensifying competition. The company is forced to react to maintain its profitability and long-term brand reputation. As the discussion demonstrates, the ABC and standard costing methods are ideal solutions to solidifying Samsung’s future in the smartphone industry.
References
Chang, J., & Lee, M. (2014). Samsung's New Challenge: Rising Component Costs . WSJ. Retrieved 17 July 2021, from https://www.wsj.com/articles/SB10001424052702304163604579531020479990260.
Chang, S. J. (2011). Sony vs. Samsung: The Inside Story of the Electronics Giants' Battle For Global Supremacy . John Wiley & Sons.
Dunn, J. (2017). Samsung introduced 10 times as many phones as Apple last year, but its mobile division made half as much revenue . Business Insider Australia. Retrieved 17 July 2021, from https://www.businessinsider.com.au/samsung-vs-apple-galaxy-iphone-smartphone-revenue-chart-2017-2.
Farkas, M., Kersting, L., & Stephens, W. (2016). Modern Watch Company: An instructional resource for presenting and learning actual, normal, and standard costing systems and variable and fixed overhead variance analysis. Journal of accounting education , 35 , 56-68.
Guerreiro, R., Cornachione Jr, E. B., & Kassai, C. R. (2012). Determining The'Plus' In Cost-Plus Pricing: A Time-Based Management Approach. Journal of Applied Management Accounting Research , 10 (1).
Jalalabadi, F., Milewicz, A. L., Shah, S. R., Hollier Jr, L. H., & Reece, E. M. (2018). Activity-Based Costing. In Seminars in plastic surgery (Vol. 32, No. 04, pp. 182-186). Thieme Medical Publishers.
Matyugina, E. G., Broslavskiy, P. V., & Bulygina, M. V. (2020). Transformation of the World Market for Smartphones in the Context of Implementation Attacking Strategies by Chinese Companies. In International Scientific Conference" Far East Con"(ISCFEC 2020) (pp. 1997-2002). Atlantis Press.
