Question

• Estimate the product costs is for Fitbit.In 2018, we focused on providing more choice and accessibility to consumers in wearables to drive acquisition of users. We introduced Fitbit Versa, our first mass appeal smartwatch in the second quarter, resulting in increased smartwatch revenue over the course of 2018. Smartwatch revenue increased to 44% of revenue in 2018, from 8% in 2017. We also launched Fitbit Charge 3, which innovates on our Charge family of trackers, and which has sold more than 38 million devices. It gives people health and fitness features in a slim, premium tracker design, with smart functionality, and long battery life at an affordable price. The introduction of Fitbit Ace, a tracker designed for kids ages 8 and up and Fitbit family accounts, also expanded our addressable market.

FITBIT Financial statement	2018	2017
(in thousands, except per share data)
Consolidated Statements of Operations Data :
Revenue	$ 1,511,983.00	$        1,615,519
Cost of revenue (2)	$      908,404.00	$            924,618
Gross profit	$      603,579.00	$            690,901
Operating expenses:
Research and development (2)	$ 3,332,169.00	$            343,012
Sales and marketing (2)	$      344,091.00	$            415,042
General and administrative (2)	$      116,627.00	$            133,934
Change in contingent consideration
Total operating expenses	$      792,887.00	$            891,988
Operating income (loss)	$      189,308.00	$         (201,087)
Interest income (expense), net	$          7,808.00	$                3,647
Other income (expense), net	$        (2,642.00)	$                2,796
Income (loss) before income taxes	$   (184,142.00)	$         (194,644)
Income tax expense (benefit) (3)	$          1,687.00	$              82,548
Net income (loss)	$   (185,829.00)	$         (277,192)
Net income (loss) per share attributable to common stockholders (4) :
Basic	$                (0.76)	$                (1.19)
Diluted	$                (0.76)	$                (1.19)
Other Data :
Devices sold (5)	$        13,939.00	$              15,343
Active users (6)	$        27,627.00	$              25,367
Adjusted EBITDA (7)	$      (31,361.00)	$            (52,158)
Free cash flow (8)	60,327	-24,919

• Do the costs described include direct materials, direct labor, and manufacturing overhead?
• Are any product costs missing from these analyses?
• Discuss how you would try to determine direct materials, direct labor, overhead costs.
• Are there other costs that are not considered?
• Which product costing method do you think is appropriate for the product you chose and why?
• Are you outraged by the product mark-up?

Answer 1

(1): Yes, the costs described and provided in the income statement do include direct materials, direct labor and manufacturing overhead. Direct materials, direct labor and manufacturing overhead costs are included in the cost of revenue (also known as cost of goods sold).

(2): Product costs = total direct labor + total direct materials + consumable supplies + total allocated overhead.

So the product cost that is probably missing from the analysis is consumable production supplies.

(3): To determine direct materials, direct labor and overhead costs I will start with the direct materials cost. This can be determined by adding the total cost of materials purchased to the cost of beginning inventory and deduct the cost of ending inventory.

For determining direct labor cost I will compile the cost of all direct manufacturing labor that has been incurred during the period. For determining overheads I will aggregate the cost of all factory overhead that has been incurred during the period.

(4): No, all relevant costs have been considered.

(5): The product costing method that is appropriate in this case is “process costing”. This is because large quantities of the similar product are manufactured in long production runs in this case.

(6): Mark up = Selling price – cost

	2018	2017
Revenue	1,511,983	1,615,519
Cost of revenue	908,404	924,618
Mark up (gross)	603,579	690,901
Mark up % (gross)	39.92%	42.77%

I am certainly outraged by the product mark-up as the company has a margin of around 40%. This makes the consumers and buyers pay a large premium for this product which could otherwise could have been made more reasonably available to them.