Cost Analysis of Nestle
INTRODUCTION TO NESTLE Nestlé is a multinational packaged foods company founded and headquartered in Vevey, evey, Switzerland. It is the worlds foremost Nutrition, !ealth " #ellness $ompany, committed serving consumers all over the world. %heir focus on responsi&le nutrition and promoting health and wellness wellne ss is a core value, empha emphasizing sizing responsi&ility responsi&ility and sustain sustaina&ility a&ility.. Nestlé products are sold in almost every country in the world.
COST ANALYSIS $ost analysis is the analysis of cost of a company in a short run and also in long run. 'enerally the cost analysis is done for the short run as some factors of production are fi(ed and only few are varia&le while in the long run every factor of production is varia&le i.e. all fi(ed costs are turned into varia&le cost. )or N*S%+*, factors of production for the short run are divided into )i(ed cost and Varia&le cost. %he Fixed includes es insura insurance nce premiu premium m paid, paid, rent rent and lease rent rent and compensat compensation ion to Fixed cost includ employ employees. ees. %he %he Variable cost includes raw materials, stores and spares, power, fuel and water charg charges, es, adverti advertisin sing g e(pense e(penses, s, market marketing ing e(pense e(penses, s, distri distri&ut &ution ion e(pens e(penses, es, travel travel e(pens e(penses, es, communication e(penses and depreciation. Nestle akistan limited is using STANDARD &ase for for inpu inputt meas measure ureme ment nt.. STANDARD COSTING as a &ase Standard costs are usually associated with a company-s costs of direct material, direct la&or, and manufacturing overhead. ather than assigning the actual costs of direct material, direct la&or, and manufacturing overhead to a product, nestle like many manufacturers assigns the e(pected or standard cost. %his means that its inventories and cost of goods sold will &egin with amounts reflecting the standard costs, not the actual costs, of a product. Nestle, of course, still has to pay the actual costs. /s a result there are almost always differences &etween the actual costs and the standard costs, and those differences are known as variances variances.. REASON FOR USING STANDARD COSTING
Nestle is currently currentl y using Standard costing method &ecause the related variances are valua&le management management tool. If a variance variance arises, management management &ecomes aware that manufacturing manufacturing costs have differed from the standard 0planned, e(pected1 costs.
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Cost Analysis of Nestle •
If actual costs are greater than standard costs the variance is unfavora&le. /n unfavora&le variance tells nestle management that if everything else stays constant the company-s actual profit will &e less than planned.
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If actual costs are less than standard costs the variance is favora&le. / favora&le variance tells management that if everything else stays constant the actual profit will likely e(ceed the planned profit. %he sooner that the accounting system reports a variance, the sooner that Nestle
management can direct its attention to the difference from the planned amounts.
DM, DL AND FO OF NESTLE COM!ANY"
!artic#lars
s 0in thousands1
s 0in thousands1
DIRECT COST Direct Ra$ %aterial" *+*-+ O&e'i'( stoc) /-01/221 Add" &#rc.ase 3/2-4/05
/01//-+2
Less" closi'( stoc) !ac)a(i'( %aterial co's#%ed
2*6-**4 2-4-/2/
DIRECT LA7OR /44*14+4 FACTORY OVEREAD 22*2//4/ COST OF !RODUCTION
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Cost Analysis of Nestle
FI8ED AND VARIA7LE COST OF NESTLE COM!ANY
)ollowing ta&le illustrate the cost of the N*S%+* $23/N4
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)I5*6 $2S%S
s.in corer
6epreciation on 7uilding
898
Cost Analysis of Nestle
6epreciation lant " 3achinery
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ates /nd %a(es
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rocessing charges
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ower and )uel
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Stores and Spares
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Cost Analysis of Nestle /ll the e(penses have &een classified under two categories of costB • •
)i(ed cost Varia&le cost
Fixed cost as a 9 o: Total Cost
2*;-20
Variable cost as a 9 o: Total Cost
*2;4*4
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3aCor part of the e(pense is varia&le cost accounting to 8:.A8D while only 9;.?9>D is fi(ed cost. %hat means if varia&le cost per unit is controlled to some e(tent then cost can &e controlled. %hough fi(ed cost seems to &e low when compared to varia&le cost it is also an indication that company has invested well in fi(ed assets as 98.?9>D is a compara&ly high
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value. %he N*S%+* akistan limited has invested a considera&le amount in advertisement and
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pu&licity which accounts to around @>.:>D of fi(ed cost *(pense on raw materials and primary packing material together constitutes
[email protected] of varia&le cost. %his depends mainly on the market demands as well the capacity of production.
DIRECT MATERIALS USAGE VARIANCE Ender a standard costing system, production and inventories are reported at the standard costFincluding the standard quantity of direct materials that should have &een used to make the products. If the manufacturer actually uses more direct materials than the standard quantity of materials for the products actually manufactured, the N*S%+* will have an unfavora&le direct materials usage variance. If the quantity of direct materials actually used is less than the standard quantity for the products produced, the nestle will have a favora&le usage variance. %he amount of a favora&le and unfavora&le variance is recorded in a general ledger account 6irect 3aterials Esage Variance. 0/lternative account titles include 6irect 3aterials Guantity Variance or 6irect 3aterials *fficiency Variance.1 +et-s demonstrate this variance with the following information. Direct Labor" Sta'dard Cost, Rate Varia'ce, E::icie'c< Varia'ce
H6irect la&orH refers to the work done &y those employees who actually make the product on the production line. Enlike direct materials 0which are o&tained prior to &eing used1 direct la&or is Page 5
Cost Analysis of Nestle o&tained and used at the same time. %his means that for any given good output N*S%+* can compute the direct la&or rate variance, the direct la&or efficiency variance, and the standard direct la&or cost at the same time. Variable O=er.ead" Sta'dard Cost, S&e'di'( Varia'ce, E::icie'c< Varia'ce
3anufacturing overhead costsH refer to any costs within a manufacturing facility other than direct material and direct la&or. 3anufacturing overhead includes such things as indirect la&or, indirect materials 0such as manufacturing supplies1, utilities, quality control, material handling, and depreciation on the manufacturing equipment and facilities of Nestle $ompany. HVaria&leH manufacturing overhead costs will increase in total as output increases. •
Fixed O=er.ead" Sta'dard Cost, 7#d(et Varia'ce, Vol#%e Varia'ce
H)i(edH manufacturing overhead costs remain the same in total even though the volume of production may increase &y a modest amount. RELATIONSI! 7ET>EEN VARIANCES
If the direct la&or is not efficient at producing the good output, there will &e an unfavora&le la&or efficiency variance. %hat inefficiency will likely cause additional varia&le manufacturing overheadFresulting in an unfavora&le varia&le manufacturing overhead efficiency variance. If these inefficiencies are significant, it is possi&le that N*S%+* may not &e a&le to produce enough good output to a&sor& the planned fi(ed manufacturing overheadFresulting in an unfavora&le fi(ed manufacturing overhead volume variance.
REFERENCES •
Nestle pvt +imited03r.3uzamil, 3r. Naeem 7utt1
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###.google.com
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###.wikipedia.com
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