Cost Analysis Cost can be defined as a sacrifice or foregoing which has already occurred or has potential to occur in future with an objective to achieve a specific purpose measured in monetary terms. Cost is determined by various factors and each of these has significant implications of cost decisions. An increase in any of these will affect cost pattern. The most significant determinant is price of factors of production, which are uncontrollable, as they are largely determined by the external environment of any business. Moreover the marginal efficiency and productivity of these factors is strongly related to their cost, higher the productivity or efficiency, lower will be the cost of production. Technology is the third important determinant and has the same relationship with cost as the efficiency of inputs. Other things being equal, better technology enhances productivity and reduces cost of production. Finally, level of output also affects cost, especially direct cost, which varies with level of output. Hence cost should be measured in context of its objective. Mathematically we can express the cost function as: C = f (Q, T, P) Where C = cost; Q = output; T = technology; P = price of inputs Cost analysis is the analysis of cost of a company compan y in a short run and also in long run. Generally the cost analysis is done for the short run as some factors of production are fixed and only few are variable while in the long run every factor of production is variable i.e. all fixed costs are turned into variable cost. Thus it would be difficult to do the cost analysis anal ysis of the company and also it would not be reliable. To see the analysis of the company in the long run we can divide the long run into number of short runs and thus we can visualize the result. For NESTLE, factors of production for the short run are divided into Fixed cost and Variable cost. The Fixed cost includes insurance premium paid, rent and lease rent and compensation to employees. The Variable cost includes raw materials, stores and spares, power, fuel and water charges, advertising expenses, marketing expenses, distribution expenses, travel expenses, communication expenses and depreciation.
TOTAL FIXED COST SHEET
Rs.crores Year
Sales
Rs.crores
Rs.crores
Rs.crores
Rs.crore
Compensation to employees
Insurance premium paid
Rent & lease rent
total fixed cost
Mar-89
208.01
10.07
0.47
0.97
11.51
Mar-90
256.5
10.72
0.6
1.12
12.44
Mar-91
312.2
12.62
0.87
1.41
14.9
Mar-92
397.88
14.6
0.93
2.29
17.82
Mar-93
490.16
16.19
1.32
4.79
22.3
Mar-94
566.12
18.28
1.48
5.33
25.09
Mar-95
712.16
25.88
1.55
6.1
33.53
Mar-96
997.46
40
1.66
7.06
48.72
Mar-97
1207.32
47.61
2.13
8.56
58.3
Mar-98
1429.34
53.69
2.23
10.94
66.86
Mar-99
1606.05
78.73
2.05
12.62
93.4
Mar-00
1546.43
94.95
1.91
13.41
110.27
Mar-01
1680.31
107.66
1.74
14.37
123.77
Mar-02
1927.28
135.95
2.01
15.16
153.12
Mar-03
2058.95
149.82
1.46
14.93
166.21
Mar-04
2285.52
163.78
1.42
15.64
180.84
Mar-05
2373.16
171.13
1.48
14.91
187.52
Mar-06
2643.96
189.23
1.69
15.31
206.23
Mar-07
2944.2
223.87
2.17
15.89
241.93
Mar-08
3647.49
356.93
2.23
18.16
377.32
Mar-09
4472.04
331.91
1.66
17.7
351.27
Mar-10
5232.59
455.63
1.33
20.99
477.95
Mar-11
6382.78
458.23
1.43
24.17
483.83
The above table 4.1 shows the total fixed cost incurred by the company since 1989 which comprises of insurance premium paid, rent and lease rent and compensation to employees.
TOTAL VARIABLE COST SHEET
Rs.crores
Rs.crores
Rs.crores
Rs.crores
Rs.crores
Year
Advertising expenses
Power, fuel & water charges
Raw materials, stores & spares
Purchase of finished goods
total variable cost
Mar-89
9.42
6.94
121.74
0.05
138.15
Mar-90
12.47
11.01
154.17
0.12
177.77
Mar-91
14.36
12.49
175.44
0.05
202.34
Mar-92
20.03
13.53
167.08
1.36
202
Mar-93
25.61
17.05
199.69
9.4
251.75
Mar-94
32.35
20.45
216.58
5.36
274.74
Mar-95
37.76
23.09
300.64
9.97
371.46
Mar-96
44.36
26.28
431.41
18.82
520.87
Mar-97
55.99
35.49
533.09
0.54
625.11
Mar-98
79.89
41.28
574.64
38.24
734.05
Mar-99
108.51
42.93
612.04
30.18
793.66
Mar-00
113.09
42.44
524.33
24.74
704.6
Mar-01
128.46
58.85
560.1
30.94
778.35
Mar-02
155.41
64.14
575.12
40.11
834.78
Mar-03
150.74
68.39
600.97
41.97
862.07
Mar-04
136.12
76.69
710.63
33.75
957.19
Mar-05
121.26
85.07
819.49
32.43
1058.25
Mar-06
135.94
103.91
889.67
28.3
1157.82
Mar-07
149.09
115.56
1082.55
26.79
1373.99
Mar-08
172.21
123.94
1450.39
34.67
1781.21
Mar-09
194.36
159.76
1750.47
50.23
2154.82
Mar-10
267.51
158.87
2036.2
58.96
2521.54
Mar-11
302.62
219.2
2589.76
95.7
3207.28
Table 4.2 shows the total variable cost incurred by the company since 1989 which comprises of raw materials, stores and spares, power, fuel and water charges, advertising expenses, marketing expenses, distribution expenses, travel expenses, communication ex penses and depreciation.
TOTAL VARIABLE COST SHEET
Rs.crores
Rs.crores
Rs.crores
Rs.crores
Rs.crores
Year
Advertising expenses
Power, fuel & water charges
Raw materials, stores & spares
Purchase of finished goods
total variable cost
Mar-89
9.42
6.94
121.74
0.05
138.15
Mar-90
12.47
11.01
154.17
0.12
177.77
Mar-91
14.36
12.49
175.44
0.05
202.34
Mar-92
20.03
13.53
167.08
1.36
202
Mar-93
25.61
17.05
199.69
9.4
251.75
Mar-94
32.35
20.45
216.58
5.36
274.74
Mar-95
37.76
23.09
300.64
9.97
371.46
Mar-96
44.36
26.28
431.41
18.82
520.87
Mar-97
55.99
35.49
533.09
0.54
625.11
Mar-98
79.89
41.28
574.64
38.24
734.05
Mar-99
108.51
42.93
612.04
30.18
793.66
Mar-00
113.09
42.44
524.33
24.74
704.6
Mar-01
128.46
58.85
560.1
30.94
778.35
Mar-02
155.41
64.14
575.12
40.11
834.78
Mar-03
150.74
68.39
600.97
41.97
862.07
Mar-04
136.12
76.69
710.63
33.75
957.19
Mar-05
121.26
85.07
819.49
32.43
1058.25
Mar-06
135.94
103.91
889.67
28.3
1157.82
Mar-07
149.09
115.56
1082.55
26.79
1373.99
Mar-08
172.21
123.94
1450.39
34.67
1781.21
Mar-09
194.36
159.76
1750.47
50.23
2154.82
Mar-10
267.51
158.87
2036.2
58.96
2521.54
Mar-11
302.62
219.2
2589.76
95.7
3207.28
Table 4.3 shows the short run total cost data of the company and the corresponding graph (figure 4.1) shows the short run total cost curve.
SHORT-RUN TOTAL COST DATA
Year
total fixed cost
total variable cost
total cost
Mar-89
11.51
138.15
149.66
208.01
Mar-90
12.44
177.77
190.21
256.5
Mar-91
14.9
202.34
217.24
312.2
Mar-92
17.82
202
219.82
397.88
Mar-93
22.3
251.75
274.05
490.16
Mar-94
25.09
274.74
299.83
566.12
Mar-95
33.53
371.46
404.99
712.16
Mar-96
48.72
520.87
569.59
997.46
Mar-97
58.3
625.11
683.41
1207.32
Mar-98
66.86
734.05
800.91
1429.34
Mar-99
93.4
793.66
887.06
1606.05
Mar-00
110.27
704.6
814.87
1546.43
Mar-01
123.77
778.35
902.12
1680.31
Mar-02
153.12
834.78
987.9
1927.28
Mar-03
166.21
862.07
1028.28
2058.95
Mar-04
180.84
957.19
1138.03
2285.52
Mar-05
187.52
1058.25
1245.77
2373.16
Mar-06
206.23
1157.82
1364.05
2643.96
Mar-07
241.93
1373.99
1615.92
2944.2
Mar-08
377.32
1781.21
2158.53
3647.49
Mar-09
351.27
2154.82
2506.09
4472.04
Mar-10
477.95
2521.54
2999.49
5232.59
Mar-11
483.83
3207.28
3691.11
6382.78
Sales
7000 Total Fixed Cost
6000 5000
Total Variable Cost
4000 3000
Total Cost
2000 2 per. Mov. Avg. (Total Fixed Cost)
1000 0
2 per. Mov. Avg. (Total Variable Cost)
Table 4.4 shows the data of average fixed cost, average variable cost and average cost of NESTLE from year 1989. It can be clearly seen that average fixed cost is increasing constantly at a fixed rate which means that there has been increase in the cost of living and living standard of the people, also due to inflation the total fixed cost of the company increases with the years. Growth in GDP is also one of the main reason for the increase in the fixed cost. The total variable cost of the company also showed an increase but after 2008 the total variable cost has shown an immense increase. This may be because the company is now producing more and this has a direct impact on the total cost of the company. The total cost of the company has also shown a steep rise. Total fixed cost has a very little impact on the total cost of the company as compared to total variable cost. But this should also be taken into consideration that the sales of the company has also risen w.r.t. the total cost. From 2008 the sales of the NESTLE has achieved great heights, but it is very difficult to say from this data which product has contributed how much to the total sales of the company.
year
sales
total fixed cost
total variabl e cost
total cost
ratio of fc and tc
ratio of vc and tc
average cost=(tc/s ales)*100
Average Fixed Cost = (tfc/sales)*100
71.95
Average Variable Cost = (tvc/sales) *100 66.42
31/3/ 1989 31/3/ 1990 31/3/ 1991 31/3/ 1992
208.0 1 256.5
11.51
138.15
149.66
7.69
92.31
12.44
177.77
190.21
6.54
93.46
74.16
69.31
4.85
312.2
14.9
202.34
217.24
6.86
93.14
69.58
64.81
4.77
397.8 8
17.82
202
219.82
8.11
91.89
55.25
50.77
4.48
5.53
31/3/ 1993 31/3/ 1994 31/3/ 1995 31/3/ 1996 31/3/ 1997 31/3/ 1998 31/3/ 1999 31/3/ 2000 31/3/ 2001 31/3/ 2002 31/3/ 2003 31/3/ 2004 31/3/ 2005 31/3/ 2006 31/3/ 2007 31/3/ 2008 31/3/ 2009 31/3/ 2010 31/3/ 2011
490.1 6 566.1 2 712.1 6 997.4 6 1207. 32 1429. 34 1606. 05 1546. 43 1680. 31 1927. 28 2058. 95 2285. 52 2373. 16 2643. 96 2944. 2 3647. 49 4472. 04 5232. 59 6382. 78
22.3
251.75
274.05
8.14
91.86
55.91
51.36
4.55
25.09
274.74
299.83
8.37
91.63
52.96
48.53
4.43
33.53
371.46
404.99
8.28
91.72
56.87
52.16
4.71
48.72
520.87
569.59
8.55
91.45
57.10
52.22
4.88
58.3
625.11
683.41
8.53
91.47
56.61
51.78
4.83
66.86
734.05
800.91
8.35
91.65
56.03
51.36
4.68
93.4
793.66
887.06
10.53
89.47
55.23
49.42
5.82
110.27
704.6
814.87
13.53
86.47
52.69
45.56
7.13
123.77
778.35
902.12
13.72
86.28
53.69
46.32
7.37
153.12
834.78
987.9
15.50
84.50
51.26
43.31
7.94
166.21
862.07
16.16
83.84
49.94
41.87
8.07
180.84
957.19
15.89
84.11
49.79
41.88
7.91
187.52
1058.2 5 1157.8 2 1373.9 9 1781.2 1 2154.8 2 2521.5 4 3207.2 8
1028.2 8 1138.0 3 1245.7 7 1364.0 5 1615.9 2 2158.5 3 2506.0 9 2999.4 9 3691.1 1
15.05
84.95
52.49
44.59
7.90
15.12
84.88
51.59
43.79
7.80
14.97
85.03
54.88
46.67
8.22
17.48
82.52
59.18
48.83
10.34
14.02
85.98
56.04
48.18
7.85
15.93
84.07
57.32
48.19
9.13
13.11
86.89
57.83
50.25
7.58
206.23 241.93 377.32 351.27 477.95 483.83
80.00 70.00 60.00 50.00 40.00 30.00 20.00 10.00 0.00 r a e y
0 2 9 9 9 9 1 1 / / 3 3 / / 1 1 3 3
4 6 9 9 9 9 1 1 / / 3 3 / / 1 1 3 3
8 0 9 0 9 0 1 2 / / 3 3 / / 1 1 3 3
2 4 0 0 0 0 2 2 / / 3 3 / / 1 1 3 3
6 0 0 2 / 3 / 1 3