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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 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 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.
Rs.crores
Sales
Rs.crores
Compensation
to employees
Rs.crores
Insurance
premium paid
Rs.crores
Rent &
lease rent
Rs.crore
total fixed
cost
Mar-89
Mar-90
Mar-91
Mar-92
Mar-93
208.01
256.5
312.2
397.88
490.16
10.07
10.72
12.62
14.6
16.19
0.47
0.6
0.87
0.93
1.32
0.97
1.12
1.41
2.29
4.79
11.51
12.44
14.9
17.82
22.3
Mar-94
Mar-95
Mar-96
Mar-97
Mar-98
Mar-99
Mar-00
Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
566.12
712.16
997.46
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
18.28
25.88
40
47.61
53.69
78.73
94.95
107.66
135.95
149.82
163.78
171.13
189.23
223.87
356.93
331.91
455.63
458.23
1.48
1.55
1.66
2.13
2.23
2.05
1.91
1.74
2.01
1.46
1.42
1.48
1.69
2.17
2.23
1.66
1.33
1.43
5.33
6.1
7.06
8.56
10.94
12.62
13.41
14.37
15.16
14.93
15.64
14.91
15.31
15.89
18.16
17.7
20.99
24.17
25.09
33.53
48.72
58.3
66.86
93.4
110.27
123.77
153.12
166.21
180.84
187.52
206.23
241.93
377.32
351.27
477.95
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.
Rs.crores
Advertising
expenses
Rs.crores
Power, fuel &
water charges
Rs.crores
Raw materials,
stores & spares
Rs.crores
Purchase of
finished goods
Rs.crores
total variable
cost
Mar-89
Mar-90
Mar-91
Mar-92
Mar-93
Mar-94
Mar-95
Mar-96
Mar-97
Mar-98
Mar-99
9.42
12.47
14.36
20.03
25.61
32.35
37.76
44.36
55.99
79.89
108.51
6.94
11.01
12.49
13.53
17.05
20.45
23.09
26.28
35.49
41.28
42.93
121.74
154.17
175.44
167.08
199.69
216.58
300.64
431.41
533.09
574.64
612.04
0.05
0.12
0.05
1.36
9.4
5.36
9.97
18.82
0.54
38.24
30.18
138.15
177.77
202.34
202
251.75
274.74
371.46
520.87
625.11
734.05
793.66
Mar-00
Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
113.09
128.46
155.41
150.74
136.12
121.26
135.94
149.09
172.21
194.36
267.51
302.62
42.44
58.85
64.14
68.39
76.69
85.07
103.91
115.56
123.94
159.76
158.87
219.2
524.33
560.1
575.12
600.97
710.63
819.49
889.67
1082.55
1450.39
1750.47
2036.2
2589.76
24.74
30.94
40.11
41.97
33.75
32.43
28.3
26.79
34.67
50.23
58.96
95.7
704.6
778.35
834.78
862.07
957.19
1058.25
1157.82
1373.99
1781.21
2154.82
2521.54
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 expenses and depreciation.
Rs.crores
Advertising
expenses
Rs.crores
Power, fuel &
water charges
Rs.crores
Raw materials,
stores & spares
Rs.crores
Purchase of
finished goods
Rs.crores
total variable
cost
Mar-89
Mar-90
Mar-91
Mar-92
Mar-93
Mar-94
Mar-95
Mar-96
Mar-97
Mar-98
Mar-99
Mar-00
Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
9.42
12.47
14.36
20.03
25.61
32.35
37.76
44.36
55.99
79.89
108.51
113.09
128.46
155.41
150.74
136.12
121.26
135.94
6.94
11.01
12.49
13.53
17.05
20.45
23.09
26.28
35.49
41.28
42.93
42.44
58.85
64.14
68.39
76.69
85.07
103.91
121.74
154.17
175.44
167.08
199.69
216.58
300.64
431.41
533.09
574.64
612.04
524.33
560.1
575.12
600.97
710.63
819.49
889.67
0.05
0.12
0.05
1.36
9.4
5.36
9.97
18.82
0.54
38.24
30.18
24.74
30.94
40.11
41.97
33.75
32.43
28.3
138.15
177.77
202.34
202
251.75
274.74
371.46
520.87
625.11
734.05
793.66
704.6
778.35
834.78
862.07
957.19
1058.25
1157.82
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
149.09
172.21
194.36
267.51
302.62
115.56
123.94
159.76
158.87
219.2
1082.55
1450.39
1750.47
2036.2
2589.76
26.79
34.67
50.23
58.96
95.7
1373.99
1781.21
2154.82
2521.54
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.
total cost
Mar-89
Mar-90
Mar-91
Mar-92
Mar-93
Mar-94
Mar-95
Mar-96
Mar-97
Mar-98
Mar-99
Mar-00
Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
11.51
12.44
14.9
17.82
22.3
25.09
33.53
48.72
58.3
66.86
93.4
110.27
123.77
153.12
166.21
180.84
187.52
206.23
241.93
377.32
351.27
477.95
483.83
138.15
177.77
202.34
202
251.75
274.74
371.46
520.87
625.11
734.05
793.66
704.6
778.35
834.78
862.07
957.19
1058.25
1157.82
1373.99
1781.21
2154.82
2521.54
3207.28
149.66
190.21
217.24
219.82
274.05
299.83
404.99
569.59
683.41
800.91
887.06
814.87
902.12
987.9
1028.28
1138.03
1245.77
1364.05
1615.92
2158.53
2506.09
2999.49
3691.11
Sales
208.01
256.5
312.2
397.88
490.16
566.12
712.16
997.46
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
7000
Total Fixed Cost
6000
5000
4000
3000
Total Cost
2000
2 per. Mov. Avg. (Total Fixed
Cost)
1000
0
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
Average Cost
70.00
60.00
50.00
40.00
30.00
2 per. Mov. Avg.
(Average Cost)
20.00
10.00
31/3/2010
31/3/2008
31/3/2006
31/3/2004
31/3/2002
31/3/2000
31/3/1998
31/3/1996
31/3/1994
31/3/1992
31/3/1990
year
0.00