Cost Analysis of Nestle

INTRODUCTION TO NESTLE
Nestl is a multinational packaged foods company founded and headquartered in Vevey,
Switzerland. It is the worlds foremost Nutrition, Health & Wellness Company, committed serving
consumers all over the world. Their focus on responsible nutrition and promoting health and
wellness is a core value, emphasizing responsibility and sustainability. Nestl products are sold in
almost every country in the world.
COST ANALYSIS
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.

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.

Nestle Pakistan limited is using STANDARD COSTING as a base for input measurement.
Standard costs are usually associated with a company's costs of direct material, direct labor, and
manufacturing overhead. Rather than assigning the actual costs of direct material, direct labor, and
manufacturing overhead to a product, nestle like many manufacturers assigns the expected or
standard cost. This means that its inventories and cost of goods sold will begin with amounts
reflecting the standard costs, not the actual costs, of a product. Nestle, of course, still has to pay the
actual costs. As a result there are almost always differences between the actual costs and the
standard costs, and those differences are known as variances.
REASON FOR USING STANDARD COSTING
Nestle is currently using Standard costing method because the related variances are valuable
management tool. If a variance arises, management becomes aware that manufacturing costs have
differed from the standard (planned, expected) costs.

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Cost Analysis of Nestle

If actual costs are greater than standard costs the variance is unfavorable. An unfavorable
variance tells nestle management that if everything else stays constant the company's actual
profit will be less than planned.
If actual costs are less than standard costs the variance is favorable. A favorable variance tells
management that if everything else stays constant the actual profit will likely exceed the
planned profit.
The 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 FOH OF NESTLE COMPANY:

Particulars Rs (in thousands) Rs (in thousands)

DIRECT COST

Direct Raw material:

760746
Opening stock
14391229
Add: purchase
(1240513) 13911462
Less: closing stock
Packaging material 2784775
consumed
2454121
DIRECT LABOR
15579565
FACTORY OVERHEAD
22721151
COST OF PRODUCTION

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Cost Analysis of Nestle

FIXED AND VARIABLE COST OF NESTLE COMPANY

Following table illustrate the cost of the NESTLE COMPANY

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 FIXED COSTS Rs.in corer

Depreciation on Building 727

Cost Analysis of Nestle
Depreciation Plant & Machinery 2118

Depreciation lease on land 109

Rates And Taxes 348

Depreciation Vehicle 196

Depreciation furniture & fixtures 170

Depreciation computer 275

R&D 368

Auditor's Remuneration 763

General Expenses 9201

Security 446

Insurance 286

Director's Fee 2192

Telephone and Fax 355

Legal and Professional 2159

Repair and Maintenance Building 281

Processing charges 2098

Other Repairs 678

Rent 2132

Advertisement 39019

Total Fixed costs 63921

VARIABLE COST

Repairs To Machinery 425

Raw Material 77335

Primary Packing Material 50071

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Power and Fuel 4 4239

Stores and Spares 1172

Excise Duty 3099

Cost Analysis of Nestle

All the expenses have been classified under two categories of cost:
Fixed cost
Variable cost

Fixed cost as a % of Total Cost 27.423

Variable cost as a % of Total Cost 72.575

Major part of the expense is variable cost accounting to 71.57% while only 28.423% is fixed
cost. That means if variable cost per unit is controlled to some extent then cost can be
controlled. Though fixed cost seems to be low when compared to variable cost it is also an
indication that company has invested well in fixed assets as 27.423% is a comparably high
value.
The NESTLE Pakistan limited has invested a considerable amount in advertisement and
publicity which accounts to around 63.13% of fixed cost
Expense on raw materials and primary packing material together constitutes 76.25% of
variable cost. This depends mainly on the market demands as well the capacity of
production.
DIRECT MATERIALS USAGE VARIANCE
Under a standard costing system, production and inventories are reported at the standard
costincluding the standard quantity of direct materials that should have been 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 NESTLE will have an unfavorable 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 favorable usage variance. The amount of a
favorable and unfavorable variance is recorded in a general ledger account Direct Materials Usage
Variance. (Alternative account titles include Direct Materials Quantity Variance or Direct Materials
Efficiency Variance.) Let's demonstrate this variance with the following information.
Direct Labor: Standard Cost, Rate Variance, Efficiency Variance
"Direct labor" refers to the work done by those employees who actually make the product on
the production line. Unlike direct materials (which are obtained prior to being used) direct labor is

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Cost Analysis of Nestle

obtained and used at the same time. This means that for any given good output NESTLE can
compute the direct labor rate variance, the direct labor efficiency variance, and the standard direct
labor cost at the same time.
Variable Overhead: Standard Cost, Spending Variance, Efficiency Variance
Manufacturing overhead costs" refer to any costs within a manufacturing facility other than direct
material and direct labor. Manufacturing overhead includes such things as indirect labor, indirect
materials (such as manufacturing supplies), utilities, quality control, material handling, and
depreciation on the manufacturing equipment and facilities of Nestle Company. "Variable"
manufacturing overhead costs will increase in total as output increases.
Fixed Overhead: Standard Cost, Budget Variance, Volume Variance
"Fixed" manufacturing overhead costs remain the same in total even though the volume of
production may increase by a modest amount.
RELATIONSHIP BETWEEN VARIANCES
If the direct labor is not efficient at producing the good output, there will be an unfavorable
labor efficiency variance. That inefficiency will likely cause additional variable manufacturing
overheadresulting in an unfavorable variable manufacturing overhead efficiency variance. If
these inefficiencies are significant, it is possible that NESTLE may not be able to produce enough
good output to absorb the planned fixed manufacturing overheadresulting in an unfavorable fixed
manufacturing overhead volume variance.
REFERENCES
Nestle pvt Limited(Mr.Muzamil, Mr. Naeem Butt)
WWW.google.com
WWW.wikipedia.com

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