Cost analysis of Nestle

Nestlé is a multinational packaged foods company founded and headquartered in Vevey,

Switzerland. It is the world’s 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. Nestlé products are sold in
almost every country in the world.
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. Page 1 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.
 DATA ANALYSIS AND INTERPRETATION

Contribution Contribution is the difference between sales and variable cost or marginal cost of
sales. It may also be defined as the excess of selling price over variable cost per unit.

Contribution = Sales - Variable cost

TABLE 1 HERE

The above table depicted that the contribution is highest (41409.00 Rs. in crores) in the year 2014 ,
and it is lowest (30377.61 Rs. in crores) in the year 2016. Sales has to be improved so as to increase
the contribution. Profit Volume Ratio Profit volume ratio, also called 'contribution ratio' or 'marginal
ratio' reveals the rate of contribution per product as a percentage of turnover. It indicates the
relationship of contribution to turnover. P/V ratio = Contribution *100 Sales

TABLE 2 HERE

It is noted from the table no.2, during the study period profit volume ratio is higher (46.78%) in the
year 2015 and it is lower( 40.55% )in the year 2016. P/V ratio has to be increased for the betterment
of the firm. Break-Even point (in rupees) Break-even analysis is a method of studying the relationship
among sales revenue, variable cost and fixed cost to determine the level of operation Manag. Adm.
Sci. Rev. e-ISSN: 2308-1368, p-ISSN: 2310-872X Volume: 6, Issue: 2, Pages: 99-103 101 at which all
the costs are equal to its sales revenue and this point is known as No Profit No Loss point. Break-
Even point = Fixed cost * Sales Contribution

TABLE 3 HERE

It is clear from the table no 3, breakeven point is higher in the year 2016 and it is lower in the year
2015. Increase in sales and contribution is essential for the stability of break-even point. Break-Even
Ratio Break-Even Ratio is the relationship between break-even sales and actual sales of a business
concern . Break-even ratio is ascertained by the following formula: Break-Even ratio = Break even
sales * 100 Actual sales

TABLE 4 HERE

It is inferred from the table no.4, Break-even Ratio is higher (14.37%) in the year 2016 and lower
(10.54%) in the year 2014. Break-even point only determines the break even ratio, it is crucial to
improve break-even point to enhance the break even ratio in the business is inevitable.
 CONCLUSION

This study aims at cost volume profit analysis in Nestlé (Ltd) for the period of 2012-2016. From the
above finding it has been concluded that the overall cost volume profit of Nestle Ltd is highly
performed. Overall sale of the Nestle is performing well and they should maintain. Cost volume
profit analysis examines the behaviour of changes in the output level, selling price, variable cost per
unit and fixed cost of a product or service.

During the study period (2012-2016) sales of the company was fluctuated. Hence, sales has to
improve to increase the contribution. P/V ratio is high (46.78%) in the year 2015 and low (40.55%) in
the year 2016. Both the key factor used in p/v ratio i.e., contribution and sales shows a fluctuating
trend which is the reason for the instability in p/v ratio. Steps must be taken to improve sales for the
stability of p/v ratio. Break-even point in rupees is higher in the year 2016 and lower in the year
2015. Increase in sales and contribution is essential for the stability of break-even point. Break-even
ratio is high in the year 2016 with a percent of 14.37 and low in the year 2014 with a percent of
10.54. Break-even point only determines the break even ratio, it is crucial to improve break-even
point to enhance the break even ratio in the business is inevitable.

REFERENCES
 Nestle pvt Limited(Mr.Muzamil, Mr. Naeem Butt)

R.K Sharma and Shashi.K.Gupta, "Management accounting " 2nd Edition, Kalyani Publisher 2004.

DALCI, İlhan. "Activity based Cost volume profit Analysis: Another Approach To Break even Analysis."
Çukurova Üniversitesi Sosyal Bilimler Enstitüsü Dergisi 14.2 (2005).

Edna Gunderson (2009) "Cost Volume Profit Analysis", International Journal of Accounting, 57-90

www.nationaljournal.com/
 Introduction

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

A cost benefit analysis is done to determine how well, or how poorly, a planned action will turn
out. The analysis relies on the addition of positive factors and the subtraction of negative ones to
determine a net result.

 CBA has been established primarily as a tool for use by governments in making their social and
economic decisions.

 CBA measures costs and benefits to the community of adopting a particular course of action e.g.
Constructing a dam, by-pass etc.

 When investment made commensurates with the benefit derived, it can be said that operation is
positive and viable; but when benefits derived do not compensate financial investments made, it can
be said that it is financially nonviable and negative.

What are the costs?

The next steps is to brainstorm all the costs associated with the problem and make a list of
these. For example, for the costs associated with hiring a new team member, you might write:

 Annual salary $40,000.

 Cost of benefits package $2,000.
  Recruiting costs $4,500.
 Training costs $1,500.
 Value of HR manager's time in hiring $3,000.

And so on. Costs include the direct cost of the resources - raw materials - needed and indirect
costs – overhead, administration – as well as the value of the human effort involved in the
implementation of the project. Think laterally and include all the possible expenses that may be
incurred both during the project and after it is finished. Will you need to train staff? Will there be a
decrease in output while the team gets used to the new system?

What are the benefits?

This step is the trickiest because it is very difficult to predict future revenues accurately,
especially if you've never undertaken a project like this one before. Also, there may be intangible
benefits that are tough to allocate a dollar value to. Things like employee satisfaction or the
impact of your action on the environment fall into this category.

In this step, you've got to come up with a numerical value for all the possible benefits associated
with your action. It's important to consult with stakeholders so you can properly evaluate the
benefits that may arise over the long term.

Compare the costs and benefits and make an informed decision.

The final step is to compare the total costs against the total benefits and make your decision. Do
the benefits outweigh the costs? Do they do so significantly? If so, you should green light the
project.

At this stage, most businesses will consider the payback period. This represents just how long it
will take for the business to reach the break even point, which is the point at which the benefits
have repaid the costs. The shorter the payback period, the less time you'll have to wait before
your project starts making money.

For simple analyses, the following calculation will give you a rough idea of your payback period:

Total cost / total revenue = length of payback period.

Why Cost Benefit Analysis.???

C ost Benefit Analysis is used to determine: w hether a solution/project is economically feasible 
 w hich of two or more projects provides the best return on investment

The Role of Assumptions in Cost-Benefit Analysis

Unless you are extremely lucky, you are never going to get all the information you need to
complete a cost-benefit analysis. There will always be gaps in the information that you have to fill
one way or another. One way of doing this is through assumptions, or your best guess at the
information that is missing.

For the inexperienced project manager, creating your assumptions is one of the scariest aspects
of cost-benefit analysis. The fear decreases once you understand that assumptions are
supported by evidence, and are not just wild guesses. Basically, you're going to go where the
evidence leads you.

Here's an example. Suppose you're running a cost-benefit analysis on a real estate investment
project. You may not know what the maintenance expenses will be going forward. What you do
know, however, are the types of maintenance charges you paid out for similar properties in the
past. You can use some of those numbers to make a solid assumption for incorporation into your
analysis. Industry benchmarks, average cost and average rates of return are all useful proxies
when the project-specific data is missing.

Take care when using assumptions. Things don't always follow trends and even the smallest
change in your assumption can produce dramatically different results. There's a way of covering
off on that, and it's called "sensitivity analysis."

Importance
Whenever you need to make a business decision, invariably you have to weigh one choice
against another. Sometimes, the choice is between Project A and Project B, and sometimes the
choice is between Project A and doing nothing at all. A cost-benefit analysis is the simplest way
of comparing your options to determine whether to go ahead with a project. The idea is to weigh
up project costs against benefits, and identify the action that will give you the most bang for your
buck.

Cost-benefit analysis (CBA) is an attempt to estimate a monetary value for environmental or public
health degradation. In a regulatory context, it should be seen as a complementary tool to risk
assessment for the purposes of public decision-making. CBA should, therefore, be particularly
relevant in the governance of modern biotechnology. GMOs, however, provide a ‘textbook case’ of the
complexity which results from any attempt to conduct CBA in relation to innovation, this being a
function of their novelty, the ethical concerns which they raise, their economic importance, the danger
 of potentially irreversible effects on biodiversity, the absence of scientific unanimity in risk
assessment, and consumer fear. This chapter underlines the importance of CBA in the regulation of
GMOs and highlights the specific difficulties with which such analysis is confronted. It argues that
these difficulties should not be considered as a reason to dispense with economic evaluation.

Use of cost-benefit analysis

Cost-benefit analysis is a prescriptive technique. It has an explicit normative basis and is
performed for the purpose of informing policy makers about what they ought to do. It is based on
welfare economics and requires all policy impacts to be stated in monetary terms.

Some people find the very idea of assigning a monetary value to lifesaving or to quality of life,
which is an essential element of cost-benefit analysis, meaningless and ethically wrong. Human
life, it is argued, is not a commodity that can be traded against other goods. It should therefore
not carry a price tag. However, the purpose of assigning a monetary value to human life is not to
engage in trading in the usual sense of that term. It is simply to provide a guideline with respect
to the amount of resources we would like to spend on the prevention of accidents or injuries, given
the fact that not all of our resources can be spent for this purpose. Some form of economic
reasoning - that is some form of thinking that recognises the fact that resources are limited and
can be put to very many alternative uses - is simply inevitable, given the following basic facts:

If these basic observations are accepted as a fair description of the choices we are facing, then
some kind of cost-benefit reasoning, although not necessarily formalised, is simply inevitable: We
engage in this sort of thinking whether we are conscious of it our not.

The main reason for doing cost-benefit analyses of road safety measures is to help develop policies
that make the most efficient use of resources, i.e. that produce the largest possible benefits for a
given cost. Cost-benefit analysis seeks to identify the cheapest way of improving road safety.
While one can think of arguments for choosing expensive solutions, one should never forget the
fact that once resources have been committed to an expensive solution to a problem, they are no
longer available for alternative, and possibly more beneficial, uses.

What Is the Relevance of Cost-Benefit Analysis for Business?

When you're in love with an idea, it's easy to let your imagination run away with you. Many
businesses have suffered badly because they invested in a project that sounded good in the
boardroom, but ultimately didn't generate any returns. A cost-benefit analysis can bring your
ideas into the real world, effectively asking the question "Is it worth it?"

In terms of business decision-making, you can use the methodology to analyze a wide variety of
situations:

 To evaluate whether a capital investment is worth it.

 To decide whether to hire new employees.
 To determine whether a project or operating change is feasible.
 To develop a benchmark for comparing projects.
 To weigh up one marketing initiative against another.
 To appraise the desirability of a proposed policy.
 To prioritize investments, so you're focusing on the actions that return the most value first.
 To quantify the effects that a change initiative would have on stakeholders.
 To establish goals for the project itself, for example, to set time, productivity or cost restraints on
a project you've analyzed and approved.

In many ways, the cost-benefit equation is what business is all about. Spending money (costs) to
creating value (benefits) is what businesses do, so customers will buy from you and you can turn
a profit. Introducing a formal process for assessing the cost and benefit of making the proposed
changes simply adds rigor to something your business is already doing each day.