Cost Accounting SEC 10-K Project Requirements

Johnson & Johnson’s SEC-10K Report

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Cost Accounting

Johnson & Johnson brands include household names of medications and first aid supplies. Among its well-known consumer products, the Band-Aid Brand line of bandages, Tylenol medications, Johnson’s Baby products, Neutrogena skin and beauty products, Clean & Clear facial wash and Acuvue contact lenses is the largest nonalcoholic beverage company.

 201720182019
Cost of Goods Sold$25,439 M$27,091 M$27,556 M
Gross Profit$51,011 M$54,490 M$54,503 M
Operating Income$17,673 M$17,999 M$17,328 M
Percentage Growth
 2017 to 20182018 to 2019
Cost of Goods Sold6.50%1.72%
Gross Profit6.82%0.02%
Operating Income1.84%-3.73%

From 2017 to 2018 Johnson & Johnson’s cost of goods sold percentage growth was 6.50%. The cost of goods sold increased because Johnson & Johnson’s operating income increased. The cost of goods sold percentage slightly increased to 1.72% in 2018 to 2019.  Gross profit is the profit a company makes after deducting the costs associated with making and selling its products, or the costs associated with providing its services. The gross profit for Johnson & Johnson was 6.82% from 2017 to 2018 as the revenues and cost of goods sold increased. The revenue increased causing the cost of goods sold to increase. The gross profit increased slightly by 0.02% from 2018 to 2019.

Operating income is a measurement that shows how much of a company’s revenue will eventually become profits. Operating income is similar to a company’s earnings before interest and taxes. Johnson & Johnson’s operating income has a percentage increase of 1.84% from 2017 to 2018 however from 2018 to 2019 it decreased to -3.73%.

Johnson & Johnson  has three business segments: Consumer, Pharmaceutical and Medical devices that create products in the following continents/regions:

  • United States
  • Europe
  • Western Hemisphere/Excluding U.S
  • Asia Pacific
  • Africa

 Johnson & Johnson has an array of products other than their famous baby products. Johnson & Johnson’s primary focus is to create products related to human health and well-being. For example, Johnson & Johnson has a Medical Device segment that includes a range of products used in the orthopedic, surgery, cardiovascular, diabetes care and vision care fields. 

Inventory Disclosures:

Johnson & Johnson Net Inventory (Dollars in Millions)
 20192018
Raw Materials$1,117$1,114
Goods in Process$1,832$2,109
Finished Goods$6,071$5,376
Totals$9,020$8,599

Johnson & Johnson’s Sec 10K reports that the raw materials in 2018 was $1,114 and in 2019 it increased by $3 million. The raw materials essential to Johnson & Johnson are generally readily available from multiple sources. When there are exceptions, the temporary unavailability of those raw materials would not likely have a material adverse effect on the financial results of the Company. In 2018 the goods in process was $2,109 million but decreased to $1,832 in 2019. The finished goods increased to $6,071 dollars in 2019 from 2018 which reports $5,376. Johnson & Johnson uses the LIFO reserves of inventory expected to be sold, or consumed within one year or operating cycle, if longer to record their inventory. Johnson & Johnson’s inventories decreased from 2017 to 2018 but then increased from 2018 to 2019 exceeding 2017 level. 

Johnson & Johnson relies on global supply chains, and production and distribution processes, that are complex, are subject to increasing regulatory requirements, and may be faced with unexpected changes such as those resulting from Brexit, that may affect sourcing, supply and pricing of materials used in the Company’s products. These processes also are subject to complex and lengthy regulatory approvals. Johnson & Johnson does not specify the name of their raw materials but states that they would not use these ingredients in their products because of consumer importance • Triclosan • PFOA • Cocamide DEA • Toluene • Styrene • Nitromusks and polycyclic musks • Tagetes • Rose crystal • Diacetyl • Animal-derived fragrances.

Strengths:

  • Global Dominance- Leading healthcare company operating in over 60 countries
  • Highly influenecial
  • Highly Experienced – 130 years of experience
  • Robust supply chain- Extensive supply chain that ensures all raw materials are available, finished products are distributed efficiently

Weaknesses:

  • Lack of diversification- Johnson & Johnsons revenue comes from three segments pharmaceutical, medical, and consumer so they can incur a major loss
  • Overdependence on successful products-  Johnson & Johnson’s over-dependence on $3.5 billion yearly from Zytiga until 2018 when a court allowed sales of generic versions of the drug leading to a sharp decline in sales. 

Opportunities:

  • Expand through acquisition- Acquisitions like Tylenol from 2016-2020 caused an increase of revenue
  • Focusing on emerging markets- Johnson & Johnson can focus on pharmaceutical sales in Africa, Asia, and Latin America
  • Target the lower class- Offering discounts on drugs

Threats:

  • Stiff competition
  • Increase in generics
  • The fight against drug abuse
  • Lawsuits

On page 1 of the Sec 10k report for Jonson & Johnson in the Cautionary Note Regarding Forward-Looking Statements, Johnson & Johnson finds it difficult to predict the number of risk and uncertainties because it is out of their control. Therefore, they advices investors to be cautious and educated about potential risk and uncertainties that could arise, which could financially affect the company.

The cost accounting issues that may arise in these areas as I consider the chapters for this week are going to be to determine and separate the division into production department or services department. They will also need to determine the square footage for each department in order to determine the cost. However, as stated in the SEC 10K report, the company has each production department square footage divided into geographical area. Then, the problem of dividing the store, manufacturing, facilities, and warehouses. This can be difficult however Johnson & Johnson is good about resolving this issue and if they choose to expand then all they need to do is add the departments square feet to their record and if they choose to close any of their offices or stores they would do the same thing, subtract it from their record. In addition, in order to ensure that J&J is in accordance with the FDA laws, they are subject to a five-year audit period by a third party cGMP Expert.

Since FASB is constantly changing their accounting policies companies have to adopt new policies which can be a long and daunting process for management and their accounting department.

Comment on any specific cost accounting-related information in the MD&A report. For example, management often explains higher or lower than expected performance in this section of the filing. Does management discuss cost or cost fluctuations, profitability, pricing, emerging markets, competitive positioning in the global market or any other key factors and performance indicators in the 10-K filing?

Johnson & Johnson’s management uses estimates as it is stated on page 46 of their SEC 10K form: “The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the amounts reported. Estimates are used when accounting for sales discounts, rebates, allowances and incentives, product liabilities, income taxes, depreciation, amortization, employee benefits, contingencies and intangible asset and liability valuations. Actual results may or may not differ from those estimates. The Company follows the provisions of U.S. GAAP when recording litigation related contingencies. A liability is recorded when a loss is probable and can be reasonably estimated. The best estimate of a loss within a range is accrued; however, if no estimate in the range is better than any other, the minimum amount is accrued. “

Management constantly has to estimate and rectify their budgets according to prior reporting periods and also according to new policies when adopted. In order to ensure their effectiveness, Johnson & Johnson is being audited. Management is responsible for maintaining and establishing accurate budgeting reports. One of Management’s main concern is to remain competitive and in business worldwide. Some of their challenge is to remain profitable in countries such as Venezuela because it is one of the country’s that’s constantly is an inflation target. In addition, the company is always exposed to fluctuations in currency exchange rates.

Contingent liabilities are liabilities that may occur based on the outcome of future uncertainties; and they can be reasonably estimated if the contingency is likely to happen. The Company records accruals for various contingencies, including legal proceedings and product liability claims as these arise in the normal course of business. The accruals are based on management’s judgment as to the probability of losses and, where applicable, actuarially determined estimates. In addition to accruals in the self-insurance program, claims that exceed the insurance coverage are accrued when losses are probable and amounts can be reasonably estimated. The Company follows the provisions of U.S. GAAP when recording litigation related contingencies. A liability is recorded when a loss is probable and can be reasonably estimated. The best estimate of a loss within a range is accrued; however, if no estimate in the range is better than any other, the minimum amount is accrued. The Company records accruals for loss contingencies associated with these legal matters when it is probable that a liability will be incurred and the amount of the loss can be reasonably estimated. Amounts accrued for legal contingencies often result from a complex series of judgments about future events and uncertainties that rely heavily on estimates and assumptions including timing of related payments.

Unfortunately, Johnson & Johnson does not address CSR however they do discuss the sustainability approach on their website. Since Johnson & Johnson is one of the world’s largest healthcare company, they have a unique ability to apply its expertise and partnering power to solve some of the most difficult global health challenges. They focus our sustainability efforts where Johnson & Johnson can achieve the greatest impact and their Health for Humanity 2020 Goals are aligned with the Company’s purpose. $11.4 billion was invested in research and development. 105,000 patients provided access to HIV treatment. 106,000 patients provided access to MDR-TB treatment. $37 million donated for disaster relief to support our communities. 75,000 health workers educated in 54 countries. The Sustainable Development Goals (SDGs) are a global framework for progress toward a more sustainable future. Engaging Stakeholders In 2019, conducted latest Priority Topics Assessment (PTA) to understand the views of the key stakeholder groups on environmental, social and governance (ESG) topics that they believe are priority for Johnson & Johnson.

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