TABLE OF CONTENTS

1. Introduction................................................................................................................................

2. Data Collection...........................................................................................................................

3. Analysis......................................................................................................................................

4. Conclusion ................................................................................................................................

1. Introduction
In today’s dynamic business environment, effective cost and management accounting practices

are essential for driving financial sustainability and strategic decision-making. This project aims

to analyze the cost and management accounting practices employed by Nestlé, a global leader in

the food and beverage industry, by studying its 2023 financial report. Through this analysis, we

seek to understand how Nestlé manages its costs, evaluates its financial performance, and

ensures optimal resource allocation to maintain its competitive edge.

The financial data from Nestlé's 2023 report will serve as the foundation for identifying key cost

elements, such as production and non-production costs, and exploring how these align with the

company's overall management accounting strategies. Additionally, we will delve into specific

accounting techniques, such as cost allocation, inventory valuation, and variance analysis, to

comprehend their application in Nestlé's business operations. By analyzing Nestlé’s financial

data and accounting practices, this project will provide a comprehensive understanding of how a

global corporation leverages its accounting systems to maintain profitability and achieve

operational excellence.

2. Data Collection

To thoroughly analyze Nestlé's cost and management accounting practices, we will extract and

evaluate key financial data from its 2023 financial report. The selected data points are essential

for understanding the company’s financial performance and cost management strategies. Below

is an outline of the data we will focus on:

● Cost of Goods Sold (COGS): 50 328 Million CHF

materials, labor, and manufacturing overhead. It highlights the company’s cost efficiency and its

impact on gross profit margins relative to revenue.

● Gross Profit 229 Million CHF

The 229 million CHF Gross Profit shows the earnings Nestlé retained after subtracting

production costs (COGS) from revenue. It reflects the company's core profitability and efficiency

in managing production expenses.

● Operating Expenses 26069 Million CHF

The 26,069 million CHF Operating Expenses represent Nestlé's costs for non-production

activities such as administration, marketing, and distribution. It highlights the resources spent on

running the business beyond production operations.

● Inventory Levels 1765 Million CHF

The 1,765 million CHF Inventory Levels represent the value of Nestlé's raw materials,

work-in-progress, and finished goods. It reflects the company's inventory management efficiency

and its ability to meet production and sales demands.

● Revenue Trends 353 Million CHF

The 353 million CHF Revenue Trend reflects the change in Nestlé's sales over a specific

period. It indicates growth patterns, market performance, or seasonal variations impacting the

company's revenue generation.

3. Analysis and Application

● Production Costs:

Production costs include direct materials, direct labor, and allocated overhead costs directly

associated with manufacturing.

Classification:

Cost of Goods Sold: 50,328 Million CHF

Reason: Cost of goods sold is determined on the basis of the cost of purchase or of production

adjusted for the variation of inventories.

● Non-Production Costs:

Non-production costs include marketing, distribution, and administrative expenses.

Classification:

Distribution Expense: 7765 Million CHF

Administrative Expense: 17549 Million CHF

Other Operating Expense: 755 Million CHF

Reason:The expenses reflect costs for logistics,marketing, and non-recurring items like

restructuring or legal fees, impacting overall profitability.

● Fixed Costs:

Fixed costs do not change with the level of production or sales activity within a certain range.
Classification:

Depreciation: 9543 CHF

Rent: 1880 CHF

Reason: Depreciation (9,543 CHF) is a fixed cost as it allocates the cost of assets over time,

unaffected by production levels. Rent (1,880 CHF) is a fixed cost because it represents consistent

payments for leased space, regardless of the company's activity.

● Variable Cost

Variable costs are expenses that change directly with the level of production or sales, such as raw

materials, direct labor, and utilities.

Classification:

Raw Materials: 3527 Million CHF

Reason: The 3527 Million CHF for Raw Materials reflects the cost of materials used in the

production of Nestlé’s goods, which can fluctuate based on production volume, raw material

prices, and supply chain factors.

● Graphical Representation:
 3.2 Inventory Costs Estimation Methods:

● FIFO: The annual report 2023 specifies that raw materials are valued using the FIFO

method, ensuring the cost is calculated based on the earliest stock purchased.

● Weighted Average Cost: Finished goods and work-in-progress inventory are valued using

the weighted average cost method. Both include overhead and depreciation allocations​.

Inventory breakdown for 2023:

● Raw Materials: CHF 5,725 million

● Finished Goods: CHF 6,509 million

● Allowance for write-downs: CHF 338 million

Total Inventories: CHF 11,896 million​.

Impacts of Inventory Management

Inventory management affects financial performance in these ways:

● Cost of Goods Sold (COGS): Improved inventory management helps in reducing waste

and stock spoilage which gives rise to decrease on Cost of Goods. With the help of

Annual report, it can clearly be seen that the COGS in 2022 was 51,745 Million CHF

which was then reduced to 50,328 Million CHF in 2023. A decrease of CHF 1,417

million in COGS cause a positive impact and improved gross profit.

● Gross Profit Margin:

❖ Gross Profit = Sales - COGS.

❖ 2023 Gross Profit: 92,998 − 50,328 = 42,670 million.

● Liquidity Improvement: Efficient inventory turnover means a company sells and

replenishes its stock quickly, which ensures that funds are not tied up in unsold goods.

The money can be used for other purposes, like paying off liabilities or investing in

growth. This directly contributes to liquidity improvement because it ensures that cash is

more readily available for immediate needs or opportunities.

● Risk Mitigation & Revenue Generation: FIFO protects the company in inflation times by

selling the cheaper and older inventory on new costs. This new cost is a source of profit

and play an important role in increasing company’s financial wealth and revenue.

Labor Cost Analysis

● Labor Cost: Distribution, marketing, and manufacturing embed labor costs:

❖ Distribution Expenses: CHF 7,765 million.

❖ Marketing and Administration Expenses: CHF 17,549 million.

● Total Expenses: CHF 7,765 + CHF 17,549 = 25,314 million CHF

Assume that the Labor Cost is 50% of the total expense, mentioned above, then:

Labor Cost Estimate: 0.5 × (7,765 + 17,549) = 12,657 Million CHF

● Labor Efficiency Ratio: The financial statements do not include data for Standard Hours

Allowed for Production or Actual Hours Worked, which are essential to calculate the

Labor Efficiency Ratio (LER). Hence, by using a reasonable assumption, we will

calculate the Labor Ratio.

Working has exceed the standard limit and reached 625,000 hours. So,

Labour Efficiency Ratio = Standard Hours for Production/ Actual Working Hours

= 600,000/625,000

=0.96 or 96%

Now this means that the workforce has achieved 96% of expected efficiency. Rest 4% indicated

inefficiency/excess time by the labor.

Allocation of Indirect Costs:

● Indirect Costs: Interest Expense on Defined Benefit Plans: These costs are mentioned in

the Net financial income/(expense) section and are related to employee retirement

benefits. So, the amount is 143 Million CHF for 2023 and 125 Million CHF for 2022.

● Depreciation: These costs are mentioned in the cash flow statement under Operating

Activities. So, the amounts are 3,458 Million CHF for 2023 and 3,541 Million CHF for

2022.

● Impairment: These costs are mentioned in the cash flow statement under Operating

Activities. Impairment represents the reduction in the recoverable value of assets. So, the

amounts are 647 Million CHF for 2023 and 276 Million CHF for 2022.

● Other Non-Cash Items of Income and Expense: These costs are mentioned in the cash

flow statement under Operating Activities. These typically include various adjustments

for non-operating or indirect costs. So, the amounts are 682 Million CHF for 2023 and

100 Million CHF for 2022.

Financing Activities. Currency revaluations reflect exchange rate changes and are

indirect costs. The amount is 682 Million CHF for 2023.

These indirect costs are scattered across different sections, and while not directly tied to

production, they impact overall financial performance.

Allocation:

Overheads (indirect costs) can be divided and assigned to specific cost centres/departments based

on the activities that drive those costs. For example, 3,458 million CHF of depreciation is

allocated across three cost pools (manufacturing, administration, distribution):

Manufacturing Overhead: 60% 0.6 × 3,458 = 2,075 million CHF

Administrative Overhead: 25% 0.25 × 3,458 = 865 million CHF

Distribution Overhead: 15% 0.15 × 3,458 = 518 million CHF

Production Overhead Absorption Rate

Formula: Overhead Absorption Rate = Total Overheads/ Machine Hours

From the depreciation allocation:

Total Overheads for Manufacturing: 2,075 million CHF

As total machine hours are not specified in the annual report, so by reasonable assumption, we

assume that Total machine hours: 5,000 hours.

= 415 Million CHF

This means 415 Million CHF of overhead costs is absorbed per machine hour.