Table of Contents

Page No.
Declaration
Certificate from the institute
Acknowledgement
Table of contents

Chapter 1
Introduction

1-13

Chapter 2
Profile of Company

14-26

Chapter 3
Financial Statement of Company

27-33

Chapter 4
Findings

34

Suggestion

35

Conclusion

36

Wibliography
1

CHAPTER 1
INTRODUCTION
MARGINAL COSTING
Marginal cost is the cost of the next unit or one additional unit of volume or output.
The marginal cost of a product is its variable cost. This is normally taken to be; direct
labour, direct material, direct expenses and the variable part of overheads.
Marginal costing is formally defined as: the accounting system in which variable costs
are charged to cost units and the fixed costs of the period are written-off in full against the
aggregate contribution. Its special value is in decision making. (Terminology)
The term contribution mentioned in the formal definition is the term given to the
difference between Sales and Marginal cost. Thus

MARGINAL
COST =

VARIABLE COST DIRECT

LABOUR
+
DIRECT MATERIAL
+
DIRECT EXPENSE
+
VARIABLE OVERHEADS

CONTRIBUTION SALES - MARGINAL COST

The term marginal cost sometimes refers to the marginal cost per unit and sometimes to the
total marginal costs of a department or batch or operation. The meaning is usually clear
from the context.
2

Theory of Marginal Costing

The theory of marginal costing as set out in A report on Marginal Costing published by
CIMA, London is as follows:
In relation to a given volume of output, additional output can normally be obtained at less
than proportionate cost because within limits, the aggregate of certain items of cost will
tend to remain fixed and only the aggregate of the remainder will tend to rise
proportionately with an increase in output. Conversely, a decrease in the volume of output
will normally be accompanied by less than proportionate fall in the aggregate cost.
The theory of marginal costing may, therefore, by understood in the following two steps:
1.

If the volume of output increases, the cost per unit in normal circumstances reduces.

Conversely, if an output reduces, the cost per unit increases. If a factory produces 1000
units at a total cost of $3,000 and if by increasing the output by one unit the cost goes up to
$3,002, the marginal cost of additional output will be $.2.
2.

If an increase in output is more than one, the total increase in cost divided by the total

increase in output will give the average marginal cost per unit. If, for example, the output is
increased to 1020 units from 1000 units and the total cost to produce these units is $1,045,
the average marginal cost per unit is $2.25. It can be described as follows:

Additional cost =
Additional units

$ 45 = $2.25
20

The ascertainment of marginal cost is based on the classification and segregation of cost
into fixed and variable cost. In order to understand the marginal costing technique, it is
essential to understand the meaning of marginal cost.
Marginal cost means the cost of the marginal or last unit produced. It is also defined as the
cost of one more or one less unit produced besides existing level of production. In this
3

connection, a unit may mean a single commodity, a dozen, a gross or any other measure of
goods.
For example, if a manufacturing firm produces X unit at a cost of $ 300 and X+1 units at a
cost of $ 320, the cost of an additional unit will be $ 20 which is marginal cost. Similarly if
the production of X-1 units comes down to $ 280, the cost of marginal unit will be $ 20
(300280).
The marginal cost varies directly with the volume of production and marginal cost per unit
remains the same. It consists of prime cost, i.e. cost of direct materials, direct labor and all
variable overheads. It does not contain any element of fixed cost which is kept separate
under marginal cost technique.
Marginal costing may be defined as the technique of presenting cost data wherein variable
costs and fixed costs are shown separately for managerial decision-making. It should be
clearly understood that marginal costing is not a method of costing like process costing or
job costing. Rather it is simply a method or technique of the analysis of cost information
for the guidance of management which tries to find out an effect on profit due to changes in
the volume of output.
There are different phrases being used for this technique of costing. In UK, marginal
costing is a popular phrase whereas in US, it is known as direct costing and is used in place
of marginal costing. Variable costing is another name of marginal costing.
Marginal costing technique has given birth to a very useful concept of contribution where
contribution is given by: Sales revenue less variable cost (marginal cost)
Contribution may be defined as the profit before the recovery of fixed costs. Thus,
contribution goes toward the recovery of fixed cost and profit, and is equal to fixed cost
plus profit (C = F + P).

In case a firm neither makes profit nor suffers loss, contribution will be just equal to fixed
cost (C = F). This is known as breakeven point.
The concept of contribution is very useful in marginal costing. It has a fixed relation with
sales. The proportion of contribution to sales is known as P/V ratio which remains the same
under given conditions of production and sales.
In economics and finance, marginal cost is the change in the total cost that arises when the
quantity produced has an increment by unit. That is, it is the cost of producing one more
unit of a good. In general terms, marginal cost at each level of production includes any
additional costs required to produce the next unit. For example, if producing additional
vehicles requires building a new factory, the marginal cost of the extra vehicles includes
the cost of the new factory. In practice, this analysis is segregated into short and long-run
cases, so that over the longest run, all costs become marginal. At each level of production
and time period being considered, marginal costs include all costs that vary with the level
of production, whereas other costs that do not vary with production are considered fixed.
If the good being produced is infinitely divisible, so the size of a marginal cost will change
with volume, as a non-linear and non-proportional cost function includes the following:

variable terms dependent to volume,

constant terms independent to volume and occurring with the respective lot size,

jump fix cost increase or decrease dependent to steps of volume increase.

In practice the above definition of marginal cost as the change in total cost as a result of an
increase in output of one unit is inconsistent with the differential definition of marginal cost
for virtually all non-linear functions. This is as the definition finds the tangent to the total
cost curve at the point q which assumes that costs increase at the same rate as they were at
5

q. A new definition may be useful for marginal unit cost (MUC) using the current
definition of the change in total cost as a result of an increase of one unit of output defined
as: TC(q+1)-TC(q) and re-defining marginal cost to be the change in total as a result of an
infinitesimally small increase in q which is consistent with its use in economic literature
and can be calculated differentially.
If the cost function is differentiable joining, the marginal cost is the cost of the next unit
produced referring to the basic volume.

If the cost function is not differentiable, the marginal cost can be expressed as follows.

A number of other factors can affect marginal cost and its applicability to real world
problems.

Some

include information

of

these

may

asymmetries,

be

considered
the

market

presence

failures.
of

positive externalities, transaction costs, price discrimination and others.

Features of Marginal Costing

6

These

negative

may
or

The main features of marginal costing are as follows:

1.

Cost Classification

The marginal costing technique makes a sharp distinction between variable costs and fixed
costs. It is the variable cost on the basis of which production and sales policies are designed
by a firm following the marginal costing technique.
2.

Stock/Inventory Valuation

Under marginal costing, inventory/stock for profit measurement is valued at marginal cost.
It is in sharp contrast to the total unit cost under absorption costing method.
3.

Marginal Contribution

Marginal costing technique makes use of marginal contribution for marking various
decisions. Marginal contribution is the difference between sales and marginal cost. It forms
the basis for judging the profitability of different products or departments.

Advantages of Marginal Costing Techniques

1.

Marginal costing is simple to understand.

2.

By not charging fixed overhead to cost of production, the effect of varying charges per

unit is avoided.
3.

It prevents the illogical carry forward in stock valuation of some proportion of current

years fixed overhead.

4.

The effects of alternative sales or production policies can be more readily available

and assessed, and decisions taken would yield the maximum return to business.
5.

It eliminates large balances left in overhead control accounts which indicate the

difficulty of ascertaining an accurate overhead recovery rate.

6.

Practical cost control is greatly facilitated. By avoiding arbitrary allocation of fixed

overhead, efforts can be concentrated on maintaining a uniform and consistent marginal

cost. It is useful to various levels of management.
7.

It helps in short-term profit planning by breakeven and profitability analysis, both in

terms of quantity and graphs. Comparative profitability and performance between two or
more products and divisions can easily be assessed and brought to the notice of
management for decision making.

Disadvantages of Marginal Costing Techniques

1.

The separation of costs into fixed and variable is difficult and sometimes gives

misleading results.
2.

Normal costing systems also apply overhead under normal operating volume and this

shows that no advantage is gained by marginal costing.

3.

Under marginal costing, stocks and work in progress are understated. The exclusion of

fixed costs from inventories affect profit, and true and fair view of financial affairs of an
organization may not be clearly transparent.
4.

Volume variance in standard costing also discloses the effect of fluctuating output on

fixed overhead. Marginal cost data becomes unrealistic in case of highly fluctuating levels
of production, e.g., in case of seasonal factories.
5.

Application of fixed overhead depends on estimates and not on the actuals and as such

there may be under or over absorption of the same.

6.

Control affected by means of budgetary control is also accepted by many. In order to

know the net profit, we should not be satisfied with contribution and hence, fixed overhead

is also a valuable item. A system which ignores fixed costs is less effective since a major
portion of fixed cost is not taken care of under marginal costing.
7.

In practice, sales price, fixed cost and variable cost per unit may vary. Thus, the

assumptions underlying the theory of marginal costing sometimes becomes unrealistic. For
long term profit planning, absorption costing is the only answer.
Presentation of Cost Data under Marginal Costing and Absorption CostingMarginal costing
is not a method of costing but a technique of presentation of sales and cost data with a view
to guide management in decision-making.
The traditional technique popularly known as total cost or absorption costing technique
does not make any difference between variable and fixed cost in the calculation of profits.
But marginal cost statement very clearly indicates this difference in arriving at the net
operational results of a firm.

The principles of marginal costing

The principles of marginal costing are as follows:
a.

For any given period of time, fixed costs will be the same, for any volume of sales

and production (provided that the level of activity is within the relevant range). Therefore,
by selling an extra item of product or service the following will happen.

Revenue will increase by the sales value of the item sold.

Costs will increase by the variable cost per unit.

Profit will increase by the amount of contribution earned from the extra item.

b.

Similarly, if the volume of sales falls by one item, the profit will fall by the amount of

contribution earned from the item.

c.

Profit measurement should therefore be based on an analysis of total contribution.

Since fixed costs relate to a period of time, and do not change with increases or decreases
in sales volume, it is misleading to charge units of sale with a share of fixed costs.
d.

When a unit of product is made, the extra costs incurred in its manufacture are the

variable production costs. Fixed costs are unaffected, and no extra fixed costs are incurred
when output is increased.

MARGINAL COSTING PRO-FORMA

Sales Revenue

xxxxx

Less Marginal Cost of Sales

Opening Stock (Valued @ marginal cost)

xxxx

Add Production Cost (Valued @ marginal

xxxx
cost)
Total Production Cost

xxxx

Less Closing Stock (Valued @ marginal

(xxx)
cost)
Marginal Cost of Production

xxxx

Add Selling, Admin & Distribution Cost

xxxx

Marginal Cost of Sales

(xxxx)

Contribution

xxxxx

Less Fixed Cost

(xxxx)

Marginal Costing Profit

xxxxx

10

Marginal Costing versus Absorption Costing

The net profits are not the same in both costing techniques because of the following
reasons:
1. Over and Under Absorbed Overheads
In absorption costing, fixed overheads can never be absorbed exactly because of difficulty
in forecasting costs and volume of output. If these balances of under or over
absorbed/recovery are not written off to costing profit and loss account, the actual amount
incurred is not shown in it. In marginal costing, however, the actual fixed overhead
incurred is wholly charged against contribution and hence, there will be some difference in
net profits.
2. Difference in Stock Valuation
In marginal costing, work in progress and finished stocks are valued at marginal cost, but in
absorption costing, they are valued at total production cost. Hence, profit will differ as
different amounts of fixed overheads are considered in two accounts.
The profit difference due to difference in stock valuation is summarized as follows:
a.
b.

When there is no opening and closing stocks, there will be no difference in profit.
When opening and closing stocks are same, there will be no difference in profit,

provided the fixed cost element in opening and closing stocks are of the same amount.
c.

When closing stock is more than opening stock, the profit under absorption costing

will be higher as comparatively a greater portion of fixed cost is included in closing stock
and carried over to next period.

11

d.

When closing stock is less than opening stock, the profit under absorption costing will

be less as comparatively a higher amount of fixed cost contained in opening stock is

debited during the current period.

The features which distinguish marginal costing from absorption costing are
as follows.
a.

In absorption costing, items of stock are costed to include a fair share of fixed

production overhead, whereas in marginal costing, stocks are valued at variable production
cost only. The value of closing stock will be higher in absorption costing than in marginal
costing.
b.

As a consequence of carrying forward an element of fixed production overheads in

closing stock values, the cost of sales used to determine profit in absorption costing will:

include some fixed production overhead costs incurred in a previous period but
carried forward into opening stock values of the current period;

exclude some fixed production overhead costs incurred in the current period by
including them in closing stock values.

In contrast marginal costing charges the actual fixed costs of a period in full into the profit
and loss account of the period. (Marginal costing is therefore sometimes known as period
costing.)
c.

In absorption costing, actual fully absorbed unit costs are reduced by producing in

greater quantities, whereas in marginal costing, unit variable costs are unaffected by the
volume of production (that is, provided that variable costs per unit remain unaltered at the
changed level of production activity). Profit per unit in any period can be affected by the
actual volume of production in absorption costing; this is not the case in marginal costing.

12

d.

In marginal costing, the identification of variable costs and of contribution enables

management to use cost information more easily for decision-making purposes (such as in
budget decision making). It is easy to decide by how much contribution (and therefore
profit) will be affected by changes in sales volume. (Profit would be unaffected by changes
in production volume).In absorption costing, however, the effect on profit in a period of
changes in both:

production volume; and

sales volume;

Is not easily seen, because behaviour is not analysed and incremental costs are not used in
the calculation of actual profit.

13

CHAPTER 2
PROFILE OF PEPSI
PepsiCo Inc.

Type

Public

Traded as

NYSE: PEPS&P 500 Component

Industry

Beverages

Founded

New Bern, North Carolina, U.S. (1919)

Founder(s)

Donald Kendall
Herman Lay

Headquarters Purchase, New York, U.S.

Key people

IndraNooyi(Chairperson and CEO)

Revenue

US$66.4 billion (2013)

Operating
income

US$9.705 billion (2013)

Net income

US$6.7 billion (2013)

Total assets

US$77.487 billion (2013)

Total equity

US$24.389 billion (2013)

Employees

278,000 (2012)
14

PepsiCo Inc. is an American multinational food and beverage corporation headquartered

in Purchase, New York, United States, with interests in the manufacturing, marketing and
distribution of grain-based snack foods, beverages, and other products. PepsiCo was
formed in 1965 with the merger of the Pepsi-Cola Company and Frito-Lay, Inc. PepsiCo
has since expanded from its namesake product Pepsi to a broader range of food and
beverage brands, the largest of which include an acquisition of Tropicana in 1998 and a
merger with Quaker Oats in 2001which added the Gatorade brand to its portfolio.
As of January 22, 2012 PepsiCo's product lines generated retail sales of more than
$1 billion each and the company's products were distributed across more than 200
countries, resulting in annual net revenues of $43.3 billion. Based on net revenue, PepsiCo
is the second largest food and beverage business in the world. Within North America,
PepsiCo is ranked (by net revenue) as the largest food and beverage business.
Indra Krishnamurthy Nooyi has been the chief executive of PepsiCo since 2006, and the
company employed approximately 278,000 people worldwide as of 2012. The company's
beverage distribution and bottling is conducted by PepsiCo as well as by licensed bottlers
in certain regions. PepsiCo is a SIC 2080 (beverage) company.

Origins
The recipe for Pepsi (the soft drink), was first developed in the 1880s by a pharmacist and
industrialist from New Bern, North Carolina, named Caleb Bradham who called it
"Pepsi-Cola" in 1898. As the cola developed in popularity, he created the Pepsi-Cola
Company in 1902 and registered a patent for his recipe in 1903. The Pepsi-Cola Company
was first incorporated in the state of Delaware in 1919. The company went bankrupt in
1931 and on June 8 of that year, the trademark and syrup recipe was bought by Charles
Guth who owned a syrup manufacturing business in Baltimore, Maryland. Guth was also
15

the president of Loft, Incorporated, a leading candy manufacturer, and he used the
company's labs and chemists to reformulate the syrup. He further contracted to stock the
soda in Loft's large chain of candy shops and restaurants, which were known for their soda
fountains, used Loft resources to promote Pepsi, and moved the soda company to a location
close by Loft's own facilities in New York City. In 1935, the shareholders of Loft sued
Guth for his 91% stake of Pepsi-Cola Company in the landmark Guth v. Loft Inc. Loft won
the suit and on May 29, 1941 formally absorbed Pepsi into Loft, which was then rebranded
as Pepsi-Cola Company that same year. (Loft restaurants and candy stores were spun off at
this time.) In the early 1960s, the company product line expanded with the creation of Diet
Pepsi and purchase of Mountain Dew.
In 1965, the Pepsi-Cola Company merged with Frito-Lay, Inc. to become PepsiCo, Inc., the
company it is known as at present. At the time of its foundation, PepsiCo was incorporated
in the state of Delaware and headquartered in Manhattan, New York. The company's
headquarters were relocated to its still-current location of Purchase, New York in 1970, and
in 1986 PepsiCo was reincorporated in the state of North Carolina.
PepsiCo was the first company to stamp expiration dates, starting in March 1994.
Acquisitions and divestments
Between the late-1970s and the mid-1990s, PepsiCo expanded via acquisition of businesses
outside of its core focus of packaged food and beverage brands; however it exited these
non-core business lines largely in 1997, selling some, and spinning off others into a new
company named Tricon Global Restaurants, which later became known as Yum! Brand,
Inc. PepsiCo also previously owned several other brands that it later sold so it could focus
on its primary snack food and beverage lines, according to investment analysts reporting on
the divestments in 1997.Brands formerly owned by PepsiCo include: Pizza Hut, Taco
16

Bell, Subway, KFC, Hot 'n Now, East Side Mario's, D'Angelo Sandwich Shops, Chevys
Fresh Mex, California Pizza Kitchen, Stolichnaya (via licensed agreement), Wilson
Sporting Goods and North American Van Lines.
The divestments concluding in 1997 were followed by multiple large-scale acquisitions, as
PepsiCo began to extend its operations beyond soft drinks and snack foods into other lines
of foods and beverages. PepsiCo purchased the orange juice company Tropicana
Products in 1998, and merged with Quaker Oats Company in 2001, adding with it
the Gatorade sports drink line and other Quaker Oats brands such as Chewy Granola
Bars and Aunt Jemima, among others.
In August 2009, PepsiCo made a $7 billion offer to acquire the two largest bottlers of its
products in North America: Pepsi Bottling Group and PepsiAmericas. In 2010 this
acquisition was completed, resulting in the formation of a new wholly owned subsidiary of
PepsiCo, Pepsi Beverages Company. In February 2011, the company made its largest
international acquisition by purchasing a two-thirds (majority) stake in Wimm-Bill-Dann
Foods, a Russian food company that produces milk, yogurt, fruit juices, and dairy
products. When it acquired the remaining 23% stake of Wimm-Bill-Dann Foods in October
2011, PepsiCo became the largest food and Beverage Company in Russia.

Restructuring
In February 2002 ahead, the CEO of PepsiCo Inc. plans to cut 8,700 jobs or about 3 percent
of PepsiCo's global workforce and boost marketing spending for its brand by as much as
$600 million. It may save about $1.5 billion by 2014.

17

Competition
The Coca-Cola Company has historically been considered PepsiCo's primary competitor in
the beverage market, and in December 2005, PepsiCo surpassed The Coca-Cola Company
in market value for the first time in 112 years since both companies began to compete. In
2009, The Coca-Cola Company held a higher market share in carbonated soft drink sales
within the U.S. In the same year, PepsiCo maintained a higher share of the U.S.
refreshment beverage market, however, reflecting the differences in product lines between
the two companies. As a result of mergers, acquisitions and partnerships pursued by
PepsiCo in the 1990s and 2000s, its business has shifted to include a broader product base,
including foods, snacks and beverages. The majority of PepsiCo's revenues no longer come
from the production and sale of carbonated soft drinks. Beverages accounted for less than
50 percent of its total revenue in 2009. In the same year, slightly more than 60 percent of
PepsiCo's

beverage

sales

came

from

its

primary

non-carbonated

brands,

namely Gatorade and Tropicana.

PepsiCo's Frito-Lay and Quaker Oats brands hold a significant share of the U.S. snack food
market, accounting for approximately 39 percent of U.S. snack food sales in 2009. One of
PepsiCo's primary competitors in the snack food market overall is Kraft Foods, which in
the same year held 11 percent of the U.S. snack market share. Other competitors for soda
are RC Cola, Cola Turka, Kola Real, Inca Kola, ZamZam Cola, Mecca-Cola, Virgin
Cola, Parsi Cola, Qibla Cola, Evoca Cola, Corsica Cola, Breizh Cola, Afri Cola.

Products and brands

PepsiCo's product mix as of 2012 (based on worldwide net revenue) consists of 63 percent
foods, and 37 percent beverages. On a worldwide basis, the company's current products

18

lines include several hundred brands that in 2009 were estimated to have generated
approximately $108 billion in cumulative annual retail sales.
The primary identifier of a food and beverage industry main brand is annual sales over $1
billion.

Areas of business
The structure of PepsiCo's global operations has shifted multiple times in its history as a
result of international expansion, and as of 2010 it is separated into four main
divisions: PepsiCo Americas Foods, PepsiCo Americas Beverages, PepsiCo Europe,
and PepsiCo Asia, Middle East and Africa. As of 2009, 71 percent of the company's net
revenues came from North and South America, 16 percent from Europe and 13 percent
from Asia, the Middle East and Africa.Approximately 285,000 people are employed by
PepsiCo worldwide as of 2010.

Corporate governance
Headquartered in Purchase, New York, with research and development headquarters
in Valhalla, New York, PepsiCo's Chairman and CEO is IndraNooyi. The board of
directors is composed of eleven outside directors as of 2010, including Ray Lee
Hunt, Shona Brown, Victor Dzau, Arthur C. Martinez, Sharon Percy Rockefeller, Daniel
Vasella, Dina Dublon, Ian M. Cook, Alberto Ibarguen,James J. Schiro and Lloyd G.
Trotter. Former top executives at PepsiCo include Steven Reinemund, Roger Enrico, D.
Wayne Calloway, John Sculley, Michael H. Jordan, Donald M. Kendall,Christopher A.
Sinclair and Alfred Steele.
On

October

1,

2006,

former

Chief

Financial

Officer

and

President IndraNooyi replaced Steve Reinemund as Chief Executive Officer. Nooyi

19

remained as the corporation's president, and becameChairman of the Board in May 2007,
later (in 2010) being named No.1 on Fortune's list of the "50 Most Powerful Women and
No.6 on Forbes' list of the "World's 100 Most Powerful Women". PepsiCo received a 100
percent rating on the Corporate Equality Index released by the LGBT-advocate
group Human Rights Campaign starting in 2004, the third year of the report.
Charitable activities
PepsiCo has maintained a philanthropic program since 1962 called the PepsiCo
Foundation, in which it primarily funds "nutrition and activity, safe water and water usage
efficiencies, and education," according to the foundation's website. In 2009, $27.9 million
was

contributed

through

this

foundation,

including

grants

to

the United

Way and YMCA, among others.

In 2009, PepsiCo launched an initiative they call the Pepsi Refresh Project, in which
individuals submit and vote on charitable and nonprofitcollaborations. The main recipients
of grants as part of the refresh project are community organizations with a local focus and
nonprofit organizations, such as a high school in Michigan thatas a result of being
selected in 2010received $250,000 towards construction of a fitness room. Following
the Gulf of Mexico oil spill in the spring of 2010, PepsiCo donated $1.3 million to grant
winners determined by popular vote. As of October 2010, the company had provided a
cumulative total of $11.7 million in funding, spread across 287 ideas of participant projects
from 203 cities in North America.In late 2010, the refresh project was reported to be
expanding to include countries outside of North America in 2011.
Environmental record and product nutrition
According to its 2009 annual report, PepsiCo states that it is "committed to delivering
sustainable growth by investing in a healthier future for people and our planet," which it
20

has defined in its mission statement since 2006 as "Performance with Purpose". According
to news and magazine coverage on the subject in 2010, the objective of this initiative is to
increase the number and variety of healthier food and beverage products made available to
its customers, employ a reduction in the company's environmental impact, and to
facilitate diversity and healthy lifestyles within its employee base. Its activities in regards
to the pursuit of its goals namely environmental impacts of production and the nutritional
composition of its products have been the subject of recognition from health and
environmental advocates and organizations, and at times have raised concerns among its
critics. As the result of a more recent focus on such efforts, "critics consider (PepsiCo) to
be perhaps the most proactive and progressive of the food companies", according to
former New York Times food industry writer Melanie Warner in 2010.
Environmental record
Genetically Modified Food Ingredients
PepsiCo has contributed $1,716,300 to oppose the passage of California Proposition 37,
which would mandate the disclosure of genetically modified crops used in the production
of California food products. PepsiCo believes "that genetically-modified products can play
a role in generating positive economic, social and environmental contributions to societies
around the world; particularly in times of food shortages."
Water usage (India, U.S., U.K.)
PepsiCo's usage of water was the subject of controversy in India in the early and mid-2000s
in part because of the company's alleged impact on water usage in a country
where shortages are a perennial issue. In this setting, PepsiCo was perceived by India-based
environmental organizations as a company that diverted water to manufacture a
discretionary product, making it a target for critics at the time.
21

As a result, in 2003 PepsiCo launched a country-wide program to achieve a "positive water

balance" in India by 2009. According to the company's 2009 corporate citizenship
report, as well as media reports at the time, the company (in 2009) replenished nearly six
billion liters of water within India, exceeding the aggregate water intake of approximately
five billion liters by PepsiCo's India manufacturing facilities.
Water usage concerns have arisen at times in other countries in which PepsiCo operates. As
a result of water reduction practices and efficiency improvements, PepsiCo in 2009 saved
more than 12 billion liters of water worldwide, compared to its 2006 water usage.
Environmental advocacy organizations

including the Natural

Resources

Defense

Council and individual critics such as Rocky Anderson (mayor of Salt Lake City, Utah)
voiced concerns in 2009, noting that the company could conserve additional water by
refraining from the production of discretionary products such as Aquafina. The company
maintained its positioning of bottled water as "healthy and convenient", while also
beginning to partially offset environmental impacts of such products through alternate
means, including packaging weight reduction.
Pesticide regulation (India)
PepsiCo's India operations were met with substantial resistance in 2003 and again in 2006,
when an environmental organization in New Delhi made the claim that, based on its
research, it believed that the levels of pesticides in PepsiCo (along with those from rival
The Coca-Cola Company), exceeded a set of proposed safety standards on soft drink
ingredients that had been developed by the Bureau of Indian Standards. In 2010, PepsiCo
was among the 12 multinational companies that displayed "the most impressive corporate
social responsibility credentials in emerging markets", as determined by the U.S.

22

Department of State. PepsiCo's India unit received recognition on the basis of its water
conservation and safety practices and corresponding results.
Packaging and recycling
Environmental advocates have raised concern over the environmental impacts surrounding
the disposal of PepsiCo's bottled beverage products in particular, as bottle recycling rates
for the company's products in 2009 averaged 34 percent within the U.S. The company has
employed efforts to minimize these environmental impacts via packaging developments
combined with recycling initiatives. In 2010, PepsiCo announced a goal to create
partnerships that prompt an increase in the beverage container recycling rate in the U.S. to
50 percent by 2018.
Energy usage and carbon footprint
PepsiCo, along with other manufacturers in its industry, has drawn criticism from
environmental advocacy groups for the production and distribution of plastic product
packaging, which consumed an additional 1.5 billion US gallons (5,700,000 m3)
of petrochemicals in 2008. These critics have also expressed apprehension over the
production volume of plastic packaging, which results in theemission of carbon
dioxide. Beginning largely in 2006, PepsiCo began development of more efficient means of
producing and distributing its products using less energy, while also placing a focus
on emissions reduction. In a comparison of 2009 energy usage with recorded usage in
2006, the company's per-unit use of energy was reduced by 16 percent in its beverage
plants and 7 percent in snack plants.
In 2009, Tropicana (owned by PepsiCo) was the first brand in the U.S. to determine the
carbon footprint of its orange juice product, as certified by the Carbon Trust, an outside
auditor of carbon emissions. Also in 2009, PepsiCo began the test deployment of so-called
23

"green vending machines", which reduce energy usage by 15 percent in comparison to

average models in use.

Product nutrition
Product diversity

From its founding in 1965 until the early 1990s, the majority of PepsiCo's product line
consisted of carbonated soft drinks and convenience snacks. PepsiCo broadened its product
line substantially throughout the 1990s and 2000s with the acquisition and development of
what its CEO deemed as "good-for-you" products, including Quaker Oats, Naked Juice and
Tropicana orange juice. Sales of such healthier-oriented PepsiCo brands totaled $10 billion
in 2009, representing 18 percent of the company's total revenue in that year. This
movement into a broader, healthier product range has been moderately well received by
nutrition advocates; though commentators in this field have also suggested that PepsiCo
market its healthier items as aggressively as less-healthy core products.
In response to shifting consumer preferences and in part due to increasing governmental
regulation, PepsiCo in 2010 indicated its intention to grow this segment of its business,
forecasting that sales of fruit, vegetable, whole grain and fiber-based products will amount
to $30 billion by 2020. To meet this intended target, the company has said that it plans to
acquire additional health-oriented brands while also making changes to the composition of
existing products that it sells.

Ingredient changes
Public health advocates have suggested that there may be a link between the ingredient
24

makeupof PepsiCo's core snack and carbonated soft drink products and rising rates of
health

conditions

such

as obesity and diabetes.

The

company

aligns

with

personal responsibility advocates, who assert that food and beverages with higher
proportions of sugar or salt content are fit for consumption in moderation by individuals
who also exercise on a regular basis.
Changes to the composition of its products with nutrition in mind have involved reducing
fat

content,

moving

away from trans-fats,

and

producing

products

in calorie-

specific serving sizes to discourage overconsumption, among other changes. One of the
earlier ingredient changes involved sugar and caloric reduction, with the introduction
of Diet Pepsi in 1964 and Pepsi Max in 1993 both of which are variants of their fullcalorie counterpart, Pepsi. More recent changes have consisted of saturated fat reduction,
which Frito-Lay reduced by 50% in Lay's and Ruffles potato chips in the U.S. between
2006 and 2009. Also in 2009, PepsiCo's Tropicana brand introduced a new variation of
orange juice (Trop50) sweetened in part by the plant Stevia, which reduced calories by
half. Since 2007, the company also made available lower-calorie variants of Gatorade,
which it calls "G2".
Distribution to children
As public perception placed additional scrutiny on the marketing and distribution of
carbonated soft drinks to children, PepsiCo announced in 2010 that by 2012, it will remove
beverages with higher sugar content from primary and secondary schools worldwide. It
also, under voluntary guidelines adopted in 2006, replaced "full-calorie" beverages in U.S.
schools with "lower-calorie" alternatives, leading to a 95 percent reduction in the 2009
sales of full-calorie variants in these schools in comparison to the sales recorded in 2004. In
2008, in accordance with guidelines adopted by the International Council of Beverages
25

Associations, PepsiCo eliminated the advertising and marketing of products that do not
meet its nutrition standards, to children under the age of 12.
In 2010, First Lady Michelle Obama initiated a campaign to end childhood obesity in
which she sought to encourage healthier food options in public schools, improved food
nutrition labeling and increased physical activity for children. In response to this initiative,
PepsiCo, along with food manufacturers Campbell Soup, Coca-Cola, General Mills and
others in an alliance referred to as the "Healthy Weight Commitment Foundation",
announced in 2010 that the companies will collectively cut one trillion calories from their
products sold by the end of 2012 and 1.5 trillion calories by the end of 2015.

26

Chapter 3
Financial statements of PepsiCo

Balance Sheet
All numbers in thousands

Period Ending

28-Dec-2013

29-Dec-2012 31-Dec-2011

Assets
Current Assets
Cash And Cash Equivalents

9,375,000

6,297,000

4,067,000

303,000

322,000

358,000

Net Receivables

6,954,000

7,041,000

6,912,000

Inventory

3,409,000

3,581,000

3,827,000

Other Current Assets

2,162,000

1,479,000

2,277,000

22,203,000

18,720,000

17,441,000

1,841,000

1,633,000

1,477,000

Property Plant and Equipment

18,575,000

19,136,000

19,698,000

Goodwill

16,613,000

16,971,000

16,800,000

Intangible Assets

16,039,000

16,525,000

16,445,000

2,207,000

1,653,000

1,021,000

77,478,000

74,638,000

72,882,000

12,533,000

12,274,000

11,949,000

5,306,000

4,815,000

6,205,000

Short Term Investments

Total Current Assets

Long Term Investments

Accumulated Amortization
Other Assets
Deferred Long Term Asset Charges
Total Assets
Liabilities
Current Liabilities
Accounts Payable
Short/Current Long Term Debt
27

Other Current Liabilities

Total Current Liabilities

17,839,000

17,089,000

18,154,000

Long Term Debt

24,333,000

23,544,000

20,568,000

Other Liabilities

4,931,000

6,543,000

8,266,000

Deferred Long Term Liability Charges

5,986,000

5,063,000

4,995,000

110,000

105,000

311,000

53,199,000

52,344,000

52,294,000

Minority Interest
Negative Goodwill
Total Liabilities
Stockholders' Equity
Misc Stocks Options Warrants

(130,000)

(123,000)

(116,000)

Redeemable Preferred Stock

Preferred Stock

Common Stock

25,000

26,000

26,000

Retained Earnings

46,420,000

43,158,000

40,316,000

Treasury Stock

(21,004,000)

(19,458,000)

Capital Surplus

4,095,000

4,178,000

4,461,000

Other Stockholder Equity

(5,127,000)

(5,487,000)

(24,099,000)

Total Stockholder Equity

24,409,000

Net Tangible Assets

(8,243,000)

28

22,417,000

20,704,000

(11,079,000)

(12,541,000)

Income Statement
Period Ending

28-Dec-2013 29-Dec-2012 31-Dec-2011

Total Revenue

66,415,000

65,492,000

66,504,000

Cost of Revenue

31,243,000

31,291,000

31,593,000

Gross Profit

35,172,000

34,201,000

34,911,000

25,357,000

24,970,000

25,145,000

110,000

119,000

133,000

9,705,000

9,112,000

9,633,000

97,000

91,000

57,000

9,802,000

9,203,000

9,690,000

911,000

899,000

856,000

Income Before Tax

8,891,000

8,304,000

8,834,000

Income Tax Expense

2,104,000

2,090,000

2,372,000

Operating Expenses
Research Development
Selling General and Administrative
Non Recurring
Others
Total Operating Expenses
Operating Income or Loss
Income from Continuing Operations
Total Other Income/Expenses Net
Earnings Before Interest And Taxes
Interest Expense

Minority Interest

(47,000)

Net Income From Continuing Ops

(36,000)

(19,000)

6,740,000

6,178,000

6,443,000

Discontinued Operations

Extraordinary Items

Effect Of Accounting Changes

Other Items

6,740,000

6,178,000

6,443,000

Non-recurring Events

Net Income
Preferred Stock And Other Adjustments
29

Net Income Applicable To Common Shares

6,740,000

6,178,000

6,443,000

Cash Flow
All numbers in thousands

28-Dec-2013 29-Dec-2012 31-Dec-2011

Period Ending

Net Income

6,740,000

6,178,000

6,443,000

2,689,000

2,737,000

Operating Activities, Cash Flows Provided By or Used In

Depreciation

2,663,000

Adjustments To Net Income

Changes In Accounts Receivables
Changes In Liabilities

(371,000)

(658,000)

(88,000)

(250,000)

(666,000)

1,093,000

451,000

180,000

4,000

144,000

(331,000)

(111,000)

(715,000)

Changes In Inventories
Changes In Other Operating Activities

(400,000)

Total Cash Flow From Operating Activities

9,688,000

1,277,000

8,479,000

8,944,000

(2,795,000)

(2,714,000)

(3,339,000)

(48,000)

(60,000)

(699,000)

(231,000)

(1,580,000)

(3,005,000)

(5,618,000)

Investing Activities, Cash Flows Provided By or Used In

Capital Expenditures
Investments
Other Cash flows from Investing Activities

218,000

Total Cash Flows From Investing Activities

(2,625,000)

Financing Activities, Cash Flows Provided By or Used In

Dividends Paid

(3,434,000)

(3,305,000)

(3,157,000)

Sale Purchase of Stock

(1,905,000)

(2,172,000)

(2,957,000)

Net Borrowings

1,466,000

2,089,000

936,000

Other Cash Flows from Financing Activities

(33,000)
30

(42,000)

(27,000)

Total Cash Flows From Financing Activities

(3,789,000)

Effect Of Exchange Rate Changes

(3,306,000)

(196,000)

Change In Cash and Cash Equivalents

3,078,000

(5,135,000)

62,000

(67,000)

2,230,000

(1,876,000)

Ratio data TTM as of 12/28/2013

Return on Assets

Return on Equity

Industry Comparison

Industry Comparison
29.01%

8.12%
Return on Capital
Industry Comparison
11.78%

Margin Analysis - PepsicoInc (PEP)

Gross Margin

Levered Free Cash Flow Margin

Industry Comparison

Industry Comparison
52.96%

8.45%

EBITDA Margin

SG&A Margin

Industry Comparison

Industry Comparison
18.59%

37.92%

Asset Turnover - PepsicoInc (PEP)

Total Assets Turnover

Accounts Receivables Turnover

Industry Comparison

Industry Comparison
0.9x

Fixed Assets Turnover

11.0x
Inventory Turnover

31

Industry Comparison

Industry Comparison
3.5x

8.9x

Credit Ratios - PepsicoInc (PEP)

Current Ratio

Quick Ratio

Industry Comparison

Industry Comparison
1.2x

0.9x

Long-Term Solvency - PepsicoInc (PEP)

Total Debt/Equity

Total Liabilities/Total Assets

Industry Comparison

Industry Comparison
121.5x

68.5x

Growth Over Prior Year - PepsicoInc (PEP)

Total Revenue

Tangible Book Value

Industry Comparison

Industry Comparison
1.41%

-25.60%

EBITDA

Gross Profit

Industry Comparison

Industry Comparison
3.77%

2.84%

Receivables

Inventory

Industry Comparison

Industry Comparison
-0.41%

-4.80%

Diluted EPS Before Extra

Capital Expenditures

Industry Comparison

Industry Comparison
10.15%

Cash From Ops.

2.98%
Levered Free Cash Flow

32

Industry Comparison

Industry Comparison
14.26%

-17.52%

Marginal cost sheet of Pepsi

Sales Revenue

60,547,000

Less Marginal Cost of Sales

25,357,000

Contribution

35,172,000

Less Fixed Cost

28,432,000

Marginal Costing Profit

6,740,000

33

Chapter 4
Findings, Suggestion and Conclusion
Findings

Marginal cost is the cost of the next unit or one additional unit of volume or output.

The marginal cost varies directly with the volume of production and marginal cost
per unit remains the same. It consists of prime cost, i.e. cost of direct materials,
direct labor and all variable overheads.

The concept of contribution is very useful in marginal costing. It has a fixed relation
with sales.

PepsiCo was formed in 1965 with the merger of the Pepsi-Cola Company and FritoLay, Inc. PepsiCo has since expanded from its namesake product Pepsi to a broader
range of food and beverage brands, the largest of which include an acquisition
of Tropicana in 1998 and a merger with Quaker Oats in 2001which added
the Gatorade brand to its portfolio.

Net Income of Pepsi for 2012-13 was 67,40,000 which was higher as compare to
the year 2011-12.

The net profit ratio was 1.41% and Gross Profit Ratio was 2.84 for the year 20122013.

34

Suggestions

35