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Management and Cost Accounting for Pepsi Company
Management and Cost Accounting for Pepsi Company
Name
Institution
Management and Cost Accounting for Pepsi Company
Introduction
All the profit making organizations have a major objective of maximizing profits and this can only be achieved through efficient and effective management of both material and human resources. According to Weygand (2009), management accounting is a core part of management that is concerned with the identification, presentation, and interpretation of information useful in formulating strategies, decision making, optimizing resource use, controlling and planning activities, safeguarding assets, and disclosure to employees. These managerial functions can only be achieved by an important tool called standard costing. Standard cost accounting techniques, therefore, represent the central part of management accounting techniques, which also include responsibility accounting statement and budgetary system. This enables profit oriented organizations and manufacturing firms achieve their profit maximization objectives through effective and efficient use of material and human resources by proper use of management accounting techniques (Weygandt, 2009). This report seeks to identify and synthesize the effects of core formative influences on the systems of management accounting in the recent history of Pepsi Cola Company. It will also identify the important drivers for changes in the company and in the general business environment, and also evaluate their potential and actual effects on the concept of management accounting. The report will also seek to describe, discuss, and critically appraise balance scorecard as a best way of measuring the performance of business organizations.
Company Background
Pepsi is a leading global company dealing in beverages, snacks, and food. They use contract manufacturers or manufacture, market and sell a variety of convenient, salty, grain based snacks, carbonated beverages, and foods in over 200 countries (Weygandt, 2009). Its largest operations are in North America (Canada and United States), United Kingdom, and Mexico. The company has a commitment to a sustainable growth, which is basically referred to as a performance with purpose. It also has a commitment focused to generating a healthy financial return and at the same time give back to the society. This includes meeting the needs of its consumers by offering a spectrum of reliable and convenient beverages and foods and reducing the company’s impact on its environment through energy, water, and packaging initiatives. The company also seeks to support its employees through inclusive and diverse culture that strives to recruit and retain world class talent (Gill & Gill, 2009).
The company was started in 1898 by an industrialist and Pharmacist called Caleb Bradham. It came to be known as PepsiCo in 1965 after merging with Frito Lay. Until 1997, the company owned Pizza Hut, KFC, and Taco Bell, but these restaurants were later spun off into the Tricon Global Restaurants. In December 2005, the company surpassed Coca-Cola Company for the first time since the two companies began to compete (in terms of market value) (Weygandt, 2009). The company is organized into three basic business units: (1) PepsiCo Americas Foods, which include Quaker Foods North America, Frito-Lay North America, and Latin American snack and food business, (2) PepsiCo Americas Beverages, which include Latin America beverage Businesses and PepsiCo Beverage North America, (3) PepsiCo International, which includes all Pepsi businesses in Europe, United Kingdom, Middle East, Asia, and Africa. The company manufactures and sells its products through consolidated businesses and non controlled affiliates (Gill, & Gill, 2009). The leading sweet and salty snack brands of the company include Doritos, Lay’s, Cheetos, Ruffles, and Smith’s. The company also uses contract manufacturers to manufacture and a sell several Quaker brand snacks and cereals. It also manufactures and sells beverage concentrates, finished goods, and fountain syrups under other beverage brands including Marinda, 7 UP, Pepsi, and Mountain Dew. The brands are sold to independent distributors, authorized bottlers, and retailers. However, in some markets, the company operates its own distribution facilities and bottling plants. The company also uses the contract manufacturers to market and sell ready to drink tea products through international joint ventures (Gill, & Gill, 2009).
The company operates in a highly competitive market environment. It competes against regional, local, global, and private manufacturers on the basis of quality, product variety, price, and distribution. In the United States, the company’s chief beverage competitor, Coca-Cola Company, enjoys a large share of carbonated soft drink consumption, while it enjoys a large share of liquid beverage consumption (Weygandt, Kieso, & Kimmel, 2010). The Coca-Cola Company also enjoys a significant share of the carbonated soft drinks consumption in other markets outside the US. On the other hand, Pepsi’s snack brands enjoy significant leading worldwide positions in snack industry. Its snack brands are faced with regional, local, global, and national snack competitors. Success in such a competitive environment depends on the effective promotional strategies for the existing products and the new products to be introduced. The company believes that its brands’ strength, marketing and innovation, its products’ quality, and flexible distribution networks enables it to compete favorably.
International markets have increasingly become hotspots for PepsiCo. These markets include Mexico, Eastern Europe, Saudi Arabia, China, and India. It has a 37% global share of the market operating in 190 nations. The company takes great care at every level of its operation to ensure that the highest level of standards is met. In their product marketing, advertising, and packaging, they strive to be excellent because they believe that their customers deserve to be served with better quality products and at the same time promise to work with an aim of improving all areas of their operations. In their bottling and manufacturing process, the company follows strict quality controls to ensure that its products meet the high quality standards expected from them by their customers. The company also follows strictly formulated quality procedures during package filling and manufacturing and each can and bottle passes through testing and inspection process (Weygandt, Kieso, & Kimmel, 2010). Containers are quickly rinsed and filled through high speed and a state of the art process, which ensures that no foreign material enters the products. The quality control measures ensure that the integrity of the products is maintained throughout the process of distribution from the warehouse to the stores shelf. PepsiCo local bottlers determine the products to pack and market in their territory of operation based on the demands of the local consumers and other market factors. It has a big market share to challenge its main competitor (Coca-Cola) and a balance of promotions to effectively communicate to its target customers.
The company’s operations outside the U.S., particularly Mexico, Canada, Russia, and the United Kingdom significantly contribute to its revenue and profitability and the growth of its businesses in the emerging markets such as china and India presents a very good opportunity for future expansion of the company (Weygandt, Kieso, & Kimmel, 2010). However, there is no assurance that the existing products or the newly manufactured products will be successful or accepted in the emerging markets due to local and global competition as well as differences in culture and product price. The financial performance of the company may be adversely affected if it is not able to expand its businesses in the emerging and developing markets or if it is not able to form strong strategic business alliances to survive in the competitive and ever changing political and economic environment. Civil unrest, market risks, and unstable political conditions could also have diverse effects on the financial performance of the company. To effectively compete, the company must develop a mutually beneficial relationship with its key customers, Wal-Mart, and other retailers. The loss of any of its customers including Wal-Mart could adversely affect its financial performance. The conduct of the company’s business activities, including distribution, production, advertising, sale, labeling, marketing, transportation, and so on, are subjected to various laws and regulations as administered by the government. The laws and regulations may change, at time, dramatically, due to economic, social, and political events. According to Weygandt, Kieso, & Kimmel, 2010), such changes may involve a change in food and drug laws, labeling, marketing and advertising practices, export of the company’s product, laws restricting on the kind of ingredients to be used, or high taxations. These may have serious implications in the operations of the company such as increasing the cost of production.
Critical Accounting Policies
The policies may obligate the management to make subjective and difficult judgments concerning uncertainties, which may thus have significant impact on the financial results of the company. Likelihood of future changes and precision of such estimates highly depend on a range of underlying variables and a number of possible outcomes. The company’s critical accounting policies operate in conjunction with revenue recognition, goodwill and brand valuations, and income tax expense.
Revenue Recognition
The company’s products are sold on credit terms or for cash. Credit terms are established according to the industry and local practices and it normally require payment to be made within a period of 30 to 90 days (Capparell, 2008). It may also guarantee discounts for the customers who make early payments. It recognizes revenue for delivery or shipment to its customers based on the written terms of sales. The company has a policy to replace out of date and damaged products from its store shelves and ware houses to ensure that the customers receive quality and fresh products that they expect.
Brand and Goodwill Valuations
The company sells its products under various brand names and the costs incurred in developing a brand must always be accounted for. In case the company makes some acquisitions, the buying price is allocated to the identifiable assets and liabilities, based on the estimated value (Capparell, 2008). Any remaining buying price is recorded as goodwill. Determining a fair value requires a significant assumption and estimate based on evaluation of several factors such as product life cycles, marketplace participants, market share, consumer awareness, brand history, amount of future cash flows, future expansion expectations, and discount rates. The company has a belief that a brand can have an indefinite existence if it has a record of strong cash flow and revenue performance (Weygandt, Kieso, & Kimmel, 2010). This has made it develop the ability and intent of supporting the brand at present and the foreseeable future. In the event that perpetual brand criteria are not timely met, the brands are then amortized over their expected future useful lives, ranging from five too forty years.
Income Tax Expense
The company’s income, available tax planning opportunities, and statutory tax rates are determinants of the annual tax rate. Significant judgment is vital in the evaluation of tax position and determining the annual tax rate. Deferred tax liabilities normally represent the tax expenses recognized in the financial statements in which payments have been deferred. In 2008, annual tax rate for the company was 26% compared to 25% in 2007 (Capparell, 2008). The 1% increase in tax rate in 2008 is primarily attributed to the absence of tax benefits recognized in the previous years in relation to favorable resolution of foreign tax matters. The costs incurred by the company include the purchase of direct material, manufacturing overhead costs, and direct labor costs. The raw materials used in the company include oil, potatoes, and flavor. The direct labor comprises of three steps namely, raw material, processing, and packaging. Manufacturing overhead costs incurred by the company include the cost of electricity in the manufacturing process.
Internal Accounting Procedures
The company has the snacks department, which has several major divisions that accumulate costs. The divisions include: production, finance, R & D, Personnel, planning, and marketing. The department of marketing is composed of sales and distribution, advertising and marketing, and general and administration (Capparell, 2008). However, costing is majorly associated with the department of production. The company’s costing is classified into manufacturing costs and non-manufacturing costs. Manufacturing cost is composed of direct material, direct labor, and manufacturing overhead, which on the other hand is composed of variable manufacturing overhead and fixed manufacturing overhead. Non-manufacturing costs is composed of selling costs and administrative costs.
Manufacturing Costs
This is the expenditure incurred in the production process. The costs incurred by the company under this category include direct costs, which include the cost of raw materials such as oil, potatoes, seasoning (flavor), carton, and film (packet). The other cost is direct labor, which are basically labor costs and sometimes called the touch labor since the workers typically touch the products. According to Capparell, (2008), direct labor include workers working in peeling department, washing department, input department, frying department, slicing department, packaging department, and seasoning department. The other cost is the manufacturing overhead, which include all manufacturing costs except direct labor and direct material. Variable manufacturing overhead costs include gas, electricity, nitrogen (N2) flush, repairing costs, utility expenses, and maintenance costs, whereas fixed manufacturing overhead costs include rental costs, meals, transportation costs, and depreciation. It is also composed of indirect labor costs, which include security guards, labor used in the service department, labor in the engineering department, warehouse labor, overtime, and labor in the quality department.
Non-manufacturing Costs
These are the costs not incurred in the process of manufacturing a product. They include such costs as advertising expenses and salaries of salesmen. Non-manufacturing costs are again divided into two categories as selling and marketing costs and administrative costs. Marketing and selling costs are the sales required to secure the customer orders and ensure that the finished products safely reaches the hands of the customers (Gill, Mickey, & Gill, Cheryl, 2013). The costs are often referred to as order filling costs or order getting costs. They include placement costs, commissions, and transportation costs. The other category of non-manufacturing costs is the administrative costs, which include clerical, organizational, and executive costs associated with the general organizational management rather than with marketing, manufacturing, or selling. Administrative costs include general accounting, executive compensation, public relations, secretarial, and other such costs used in the overall administration of the company. In the Snacks department of Pepsi Company, the following costs are listed as administrative costs: salaries, depreciation costs, and office expenditure (furniture and stationery costs).
Cost Classification on Grounds of Cost Behavior
Costs can be classified based on their behavior other than being classified as manufacturing and non-manufacturing (Gill, Mickey, & Gill, Cheryl, (2013). These are variable costs and fixed costs. Variable costs are costs that vary in direct proportion to the changes in activity levels. In the case for PepsiCo, the variable costs incurred include electricity and gas. On the other hand, fixed costs are costs that remain constant regardless of the changes in activity levels. For PepsiCo, such costs include depreciation of fixed assets, transportation costs, cost of permanent staff, and rental costs. Other costs incurred by the company include extra benefits and fringe benefits given to employees. Fringe benefits are the perks given to workers to motivate them with an aim of retaining them. Fringe labor includes meals, overtime, and transportation. Extra benefits to executives also include provident fund, pay roll, free medical facility, fuel expense, transport expense, and cell phones.
Process Costing
The company’s snacks department undertakes the system of process costing because of the production of identical product units on a continuous basis and for a long period, costs are accumulated by the departments, and units are computed by the departments (Gill, Mickey, & Gill, Cheryl, 2013). For PepsiCo, there are three major departments involved in the manufacture of potato chips: processing department, packaging department, and input department. Input department deals with processing of the raw materials. The company owns farms where grade A potatoes are taken from. The potatoes are first put into check for quality inspection before being put into the process. After approval, they are then put into further processing. The next department is the processing department, which is further sub divided into five sub departments; washing, slicing, peeling, frying, and seasoning. The last department in this aspect is the packaging department whereby the products are packaged and then a nitrogen flush is passed into the packets before sealing to ensure that the products have a lifespan of three to four months in the case for the processed potatoes. The packets are packed into cartons and then sealed after which they are sent to the purchase points or warehouses (Capparell, 2008).
Cost flow system
The direct labor, manufacturing overhead, and direct materials are transferred into the account of work in progress after which they are transferred to finished goods inventory.
The company has undertaken a number of assumptions in its daily operations which include:
Labor is a fixed cost.
Discretionary fixed costs include quality maintenance expenses, R & D expenses, and advertising expenses.
Committed fixed costs include labor costs and contractual costs.
Summary
New businesses and companies that are less established normally require a break even in order to succeed. However, PepsiCo is an established business and a strong brand that do not require a break even analysis in order to run. It instead needs the break even analysis to analyze its profit margins. According to Gill, Mickey, & Gill, Cheryl (2013), PepsiCo’s existence in the market is attributed to its profit maximization objective and target profiting. In cost accounting analysis, there is need to look into costing procedures. It normally involves the use of absorption and variable costing procedures. In the case for PepsiCo they majorly focus on the variable costing approach, mainly used for decision making while absorption costing approach is used in the analysis of financial figures. These cost analysis methods are very vital in determining the profitability of the company and whether the company is in a position to attain its set objectives.
References
Capparell, S. (2008). The real Pepsi challenge: How one pioneering company broke color barriers in 1940s American business. New York, NY [u.a.: Wall Street Journal Books.
Gill, M., & Gill, C. (2009). The ultimate coke or pepsi?: Amazingly awesome questions 2 ask your friends!. Longwood, Fla: Fine Print Pub.
Gill, Mickey, & Gill, Cheryl. (2013). Coke or Pepsi? Forever!: Amazingly Awesome Questions 2 Ask Your Friends!. Fine Print Pub Co.
Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2011). Financial accounting: Tools for business decision making. Hoboken, N.J: John Wiley.
Weygandt, J. J. (2009). Hospitality financial accounting. Hoboken, N.J: John Wiley & Sons.
Weygandt, J. J., Kieso, D. E., & Kimmel, P. D. (2010). Managerial accounting: Tools for business decision making. Hoboken, NJ: Wiley.
Micro-Practice Settings in the Community
Micro-Practice Settings in the Community
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Micro-Practice Settings in the Community
Macro, mezzo, and micro are the three levels that agencies employ to reach out to people in communities. The micro-practice level deals with individuals, families, and small groups (Mattocks, 2018). This level is often used to help individuals with basic issues directly. Some of these issues include helping one to find a home, taking care of foster children, and giving counseling. The main purpose of micro-practice in social work is to meet with individuals, families, and small groups to help them improve their quality of life. This is done by guiding these people in identifying and managing the challenges that bar them from having a happy and quality life. These challenges may be mental, physical, emotional, financial, or spiritual (Mattocks, 2018). The agencies help individuals in coping with life despite these challenges. The meetings set up often give people hope and strength to keep fighting and pushing for a better life. These talks help people who have mental issues or suffer from any other diseases that may be chronic; to understand their status and learn to live with it. Micro-practice agencies are important because they will help connect their clients to better resources, healthcare services, and temporary housing to ensure their lives get better (Mattocks, 2018). This paper will present research done on micro-practice settings in the community. It will include a faith-based, governmental, and private agency.
Faith-Based Agency
Faith-based organizations have a great value in society. The primary role of these organizations has always been providing basic needs such as food, clothing, and shelter to the needy (Freund, 2021). Through a collaborative effort, individuals donate what they have to these organizations so that it is given to the less fortunate. Currently, the roles of these organizations are expanding, and they are now involved in housing and community development (Freund, 2021). The advantage of faith-based organizations is that they are fully committed and very passionate about helping people in the community. This is because it promotes people’s quality of life and nourishes their spirits. These organizations aim to help people; they also want to pull people into their faith and belief. Several faith-based organizations have been created to help other people in my community. For instance, the Catholic Church in my community has an organization that runs these operations. They give food, clothing, and shelter to those in need. Most of these resources come from church members, well-wishers, and donations from politicians and even the government (Freund, 2021). The church visits orphanages and shelters to donate the resources they have acquired. The people who manage to come to church and need this help are warmly received, counseled, and given the appropriate help. The church has built shelters that help accommodate the homeless. The church has an organizing committee that helps manage and redistribute the resources.
Governmental Agency
The government plays a valuable role in ensuring the lives of its people are good and of quality. It, therefore, offers social services to members of the community to achieve their goals. The government’s social services include free or affordable education, healthcare services, affordable housing, job training, adoption, and community development and management (Forenza & Eckert, 2018). The government employs social workers to give these services to people. The government has created agencies that help reach out to people in areas where some of these services are not accessible. For instance, an area can lack a mental health facility, and the government can play a role in dispatching social workers to these areas. They can do a door-to-door or set up a place to meet a small group of people at a time. Governmental agencies usually provide services at a subsidized cost (Forenza & Eckert, 2018). If it is education, the government can help pay a part of an individual’s tuition fee as they cater for the rest. The governmental agencies also provide minimum income support to individuals and households living in poverty (Forenza & Eckert, 2018). This way, the government helps improve the quality of life of people within its jurisdiction. Training jobs and engaging the youth in social work is another role that governmental agencies play. They engage the youth in activities that help in community development. This is a win-win situation since the youth will get paid for their services, and the community will benefit from these programs. Therefore, governmental agencies help develop individuals and the community through their programs.
Private Agency
Few private agencies deal with social work programs in my community. The few available agencies are sponsored by rich individuals and rely on donations from well-wishers. Despite wanting to help people in the community, the private agency faces challenges in reaching its goals. Paying their employers and getting resources to redistribute to society is challenging. However, most private agencies offer services like counseling that are affordable and easy to maintain (Jacob et al., 2020). Some volunteers work with private agencies without expecting pay. These individuals have a passion for guiding and counseling other people. They also want to see others happy through their talks and interaction. The private agency deals with individuals, families, and small groups. The major service provided is guidance and counseling. The people who seek help from these private agencies are often engaged in co-curricular activities and get enrolled in social clubs. This interaction with others through social activity helps the different individuals to build their self-esteem and confidence (Jacob et al., 2020). These actions, in turn, give these people a drive to work on the negativity in their lives and lead quality lives.
Hypothetical Client
The faith-based organizations, which are mainly churches in the community, receive many people every day. It could be adults, children, the old most of whom are homeless and lack basic needs. Therefore, faith-based agencies work around the clock to ensure they help as many people as possible (Mattocks 2018). The church could receive an orphaned child who is homeless. The church will take up the responsibility of taking care of the child. The child’s information will be investigated to ensure it checks out before the church takes him in as their responsibility. The concerned organization will report to the authorities to make them aware that the child is now under their care so that they get a go-ahead. Reporting to authorities will help prevent any future problems and need legal advice (Mattocks 2018). The client will be given food and shelter and also sponsor his studies. All the resources wired towards catering for this child come from the faith-based organization’s donations from the church, offerings, and donations from sponsors and well-wishers. At some point, the agency will connect the child to get a foster home so that they grow within the structure of a family. Alternatively, the child could be enrolled in an orphanage whereby the organization will send some of its members to visit him from time to time. As the church members visit the child they put in the home care, they also get the chance to visit the other children to give them food and clothing.
As a social worker, I have acquired skills to deal with different clients. Children have always been my soft spot because they are sweet and innocent. Approaching a child can be challenging, especially if they have undergone traumatic experiences. It, therefore, requires one to approach them with caution, or else they will shut off and not give you any relevant information. I would offer the child a snack, offer to play with them, or make a good and relevant joke to them. This will lighten up their mood and open a way for a good conversation. I would use indirect questions to get relevant and helpful information. For instance, they would tell you how they used to get late to school; you could ask them why and this will make them explain to you about their family life. The child could offer more information about their family or a hint to the kind of life. This will help me understand the child’s current situation and how I will be required to handle them. The person-in-environment theory will help me understand the child’s background and how they have been raised. This theory will help me get the information I will use to handle the child. I will know what to say and what to avoid ensuring that my client is comfortable throughout our interaction.
The quantity and quality of services offered by these faith-based organizations are good. However, these organizations should avoid pegging their services to their specific faith. When they offer help to people in the community, they should understand that not everyone will want to be a part of their faith. Some people do not believe in any religious aspects, but they will need help. So it does not mean that, as you offer them your help, they owe you their faith. Most people suffering out there are drunkards, drug addicts, and people who have engaged in criminal activities. These people know little to nothing about faith and churches, but faith-based organizations are obligated to help them. The organization will offer help, give them food and clothing, and counsel them. After this, an individual will decide to give their lives to the church and do as per the faith of the organization. If they accept to join the church, then the better for the organization, but if not, at least they did their part in helping the individual.
References
Forenza, B., & Eckert, C. (2018). Social worker identity: A profession in context. Social work, 63(1), 17-26. https://doi.org/10.1093/sw/swx052
Freund, A. (2021). Culturally-based socialization to social work: comparison of faith-based and secular students. Social work education, 40(2), 190-205. https://doi.org/10.1080/02615479.2019.1664453
Jacob, A., Tauati, A., & Brown, A. (2020). Applied response to homelessness: Model for service learning across the micro-macro social work practice continuum. Journal of Social Work Education, 56(sup1), S131-S141. https://doi.org/10.1080/10437797.2020.1723758
Mattocks, N. O. (2018). Social action among social work practitioners: Examining the micro-macro divide. Social Work, 63(1), 7-16. https://doi.org/10.1093/sw/swx057
MICROECONOMICS OF WHEAT PRODUCTION
MICROECONOMICS OF WHEAT PRODUCTION
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Pork Production
Commodity Description
Pork is one of the most preferred meat in the UK due to its white meat characteristics and the value it has to the body (Keeton and Dikeman, 2017). It is the meat of a domestic pig and is favored compared to the red meat. Denmark is the largest supplier of pork meat in the UK, having many individual farmers in the area. The gestation period of a pig depends on the breed kept. In the UK, the wild boar is the most common one, with a gestation period of 115 days, which is shorter compared to the Javan Warty Pig. The feed given to the pigs determines the time at which the pig will gain weight to reach the market requirement. A pig is slaughtered for pork when it gets to 60kgs. This weight is the most recommended; however, it may be a little bit less considering the market. Pork is traded in the London stock exchange.
Pork can be sold as raw meat or may be processed to make other products such as pork sausages, luncheon meat, and hot dogs (Iske, Morris and Kappen, 2016). It may be eaten unprocessed but cured in products such as smoked pork, ham, and bacon. It has a high protein content and fat hence help in the growth and development of consumers. It is also high in minerals and vitamins such as thiamine, zinc to aid in brain and immune system. Vitamin B12 and B6 help in blood and red blood cell formation and also improve brain function. Besides, it contains phosphorus and iron that is essential in body growth and maintenance.
Commodity Prices
According to the agriculture and horticulture delivery board, pig prices have been in the increase, especially between mid-2019 and February 2020. In April 2019, pig prices were at 139 sterling pounds, and by December 2019, the prices had risen to 162 sterling pounds (Pork.ahdb.org.uk, 2020). Currently, the price is at 162.82 pounds per kilogram. The drastic change within one year is extreme, with a difference of 23 pounds. The change in the price was because of the African Swine Fever, a severe viral disease that affected the farmers and killed most of the pigs being reared, mainly in Denmark (Taylor et al., 2020). The individuals who practice swine farming had to shift to other animal farming; hence the supply of pork meat went low. Also, the animals became resistant to the drugs that were used to prevent and cure this disease; thus, most of them succumbed to death. Due to low production that consequently caused less supply, pork prices rose from March, and until now, it has still maintained at 162, which is high compared to early 2019.
Low production with high demand in the market consequently impacts the prices, which leads to competition for the available product. Challenging weather conditions also affected the production of pork in the UK. High temperatures slow growth of pigs hence changing supply and lowers the quantity of the product in the market. High temperatures also reduce pig’s fertility; therefore, less production of pork that affect market supply (Loeb, 2019). Low or high outputs affect prices of pork in the market. The production level is influenced by many factors that affect prices profusely.
Reasons for and effects of price changes
In March 2019, the prices of pork went high from 138 to 162 sterling pounds due to the outbreak of African swine disease. Because the infected animals were not safe for consumption, the supply of pork reduced in the market (Hopkins and Terazano, 2020). This effect means a shift of supply shifted to the left, decreasing the quantity and increasing the price.
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5238757620000904875800100009525080010000952501381125003000375138112500234315080010000
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A shift in the supply may either increase or decrease or decrease the prices. As seen from the diagram, the original price in the market is P1, with a quantity of Q1, which is formed with the demand D1 and supply S1. As supply shifts to the left to S2, it decreases the amount of pork to Q2 and also increases the price to P2. The African Swine disease causes the change in supply to the left, hence reducing the quantity and increasing cost (Bowman et al., 2013). This impact occurs with the constant demand for the same product.
Shifts in demand either increases or decreases the price of products in the market. A right shift in demand increases both the quantity of the product and price in the market. This is because when there is high market demand, production increases; hence the market reacts by increasing the price. This is because people are willing to purchase more of the product. A leftward shift means a decrease in demand for pork. It causes the quantity to decrease, and the price also drops.
Changes in the price of pork are caused by production changes, government regulations, and economic factors (Stępień and Polcyn, 2016). Pork production is affected by the quality of feed they eat as this determines the weight they will gain hence the time they will get to the market. Government regulations, such as having price controls, also determine the prices of the product. The controls ensure that the prices are not too high for the consumers nor too low for the producers. High temperatures also affect production hence reducing the supply of the product in the market. The cost of production also determines the prices set. High costs increase the price.
Government interventions
Production of pork or pig farming continued even after the outbreak of the disease due to the government putting regulations on smallholder farmers to register their animals and have laws on feeding the pigs (Wasley, Heal and Smaith, 2018). The rules were a way to ensure that the disease does not spread to other areas of the UK. The disease profoundly affected areas of China; hence there was the prevention of export products from outside the country to prevent bringing in the disease. Also, for farmers who undertake extensive farming, the government provides subsidies to the farmers, to support the large-scale farmers and increase production. Such subsidies and support affect the quantity and prices of the product.
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According to the above diagram, an increase in subsidy has the effect of increasing the quantity of the product in the market and decreasing the prices. The pork farmers receive price P2 while the rest is covered by the government. The subsidy provided by the government is shown by P2, P1 Q1D, Q1S.
During the disease period, such government subsidy is beneficial to farmers as they use it in their production. This may be through providing safe feed free from the disease to the pigs by each farmer (Jurado et al., 2018). The disease is spread through contact by an infected animal or through the consumption of meat with infection; therefore, preventing these ways of spread ensures the animals are safe.
However, the success of this subsidy was also a challenge as people evaded from the purchase of pork for fear of consuming contaminated meat. Farmers, too, were worried about losses that may occur due to the disease hence had shifted to other forms of farming. The disease has a high rate of mortality, which may make farmers lose a lot.
Evaluation
China is the highest consumer of pork in the world, and the UK is one of the leading exporters of pork to China. Therefore, pork farming has a high demand across the globe; hence is sustainable. Animal products are profoundly affected by diseases but having disease control steps may ensure that the product production and supply is maintained throughout the years (Bornett, Guy, and Cain, 2003). Consumption of processed and smoked sausages is also high, especially for breakfast. This is evidence that there is a high demand for the product.
However, some religious communities do not consume pig products. This is a challenge to its long-run success in situations where the population grows. Also, production areas will be restricted to areas that the Muslims do not inhabit. The areas may be conducive for pork production, but since the community’s religion prohibit its consumption, they may not allow the farming to occur in their area (Fuseini et al., 2017). Nevertheless, the current high demand eventually requires high supply; hence production must increase.
Government OF UK, has regulations on pig production, how to handle and transport them. These regulations ensure that the product that gets to the market is safe for consumption. Subsidies have ensured that the prices are not too high for consumers. However, the effect of the disease was huge and still reflects current prices; the government is trying to support farmers, to increase production hence get a reduction in the rates.
Changes in the supply of wheat affect the prices, which may make consumers opt for other sources of animal protein such as beef. There are beef sausages, and people may decide to consume them for breakfast rather than the pork. To avoid this, the government needs to support pigs’ farmers by providing disease prevention methods, subsidies, and lands to practice farming. The support will encourage more farmers to practice pork farming hence increase production, which increases supply in the market, leading to decreased prices.
References
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