Cost assessment is crucial for a wide variety of purposes, as it helps to determine the profitability of products and create an optimal product mix. According to Savić et al. (2019), selecting the correct costing systems is crucial to estimate the profitability of a product correctly, as it may affect the accuracy of the conclusions. This paper focuses on the analysis of Nestle’s costing system based on the analysis of the company’s financial statement for FY2014. The purpose of the paper is to provide recommendations for Nestle to improve presentation of financial statements for other businesses or financial institution.
Analysis of Current Costing System
According to Fisher and Krumwiede (2015), there are three dimensions of the costing systems, including convenience, correctness, and costs of implementation. In other words, it should be convenient to get the required cost information for making a strategic decision (Fisher & Krumwiede, 2015). Additionally, the costs should be presented relatively accurate, which implies that if different mangers use different costing systems, the results of the assessment are likely to have problems with accuracy (Fisher & Krumwiede, 2015). Finally, the costing system should have an optimal cost of implementation and maintenance to ensure that it does not burden the company’s fixed costs (Fisher & Krumwiede, 2015).
The analysis of Nestle’s approach to product costing revealed that the company’s costing strategy was inconvenient. In particular, different managers used different costing systems, which is one of the red flags of an inconvenient costing systems (Fisher & Krumwiede, 2015). As a result, Nestle Business Excellence committee developed a strategy that focused on Simplifying, Standardising, and Sharing of the costing systems, which allowed the company to increase its profit margins (Nestle, 2015). Moreover, the company’s costing system provided inaccurate results, as many products were found to be non-profitable (Fisher & Krumwiede, 2015). Thus, the company’s costing system needed significant improvement in 2015.
Four Key Product Design Questions
There are four types of questions that should be answered when selecting a costing system. First, the managers need to know what costs should be included in the product cost assessment (Fisher & Krumwiede, 2015). Since Nestle operates in numerous countries and produces numerous products, thus it needs to collect all the possible information, as there may be an increased number of variables (Nestle, 2015). Second, managers need to known the level of detail required for costing assessment (Fisher & Krumwiede, 2015). Nestle needs increased number of details about the variables to process the information and make informed decisions (Nestle, 2015). Third, the managers need to understand what level of complexity is required for cost assessment (Fisher & Krumwiede, 2015). The company requires somewhat simple assessment methods to organize the indirect cost to minimize errors. Such organization is in accord with Nestle’s strive to simplify, standardize, and share the cost assessment practices (Nestle, 2015). Finally, the company needs to allocate costs somewhat simply to ensure standardization.
Recommendations for Improving Financial Statements
There are several suggestions that can be made based on the assessment provided in the previous section. First, the company should use life-cycle costing system in the financial statements, as they provide the largest number of items, including material, labor, variable and fixed factory overhead, non-factory costs, along with R&D, design, customer service, disposal (Fisher & Krumwiede, 2015). Second, Nestle should use resource consumption accounting, as this approach provides the greatest detail on the costs. Third, Nestle should use activity based costing, as it is a relatively simple method to account for indirect product cost that allows using cost drivers and activity cost rates to help manage business (Fisher & Krumwiede, 2015). Finally, Nestle is recommended to allocate indirect costs using transaction-based drivers, as it allows the needed level of simplification and standardization (Fisher & Krumwiede, 2015). The four modifications suggested above will improve the costing system of Nestle significantly.
References
Fisher, J. G., & Krumwiede, K. (2015). Product costing systems: Finding the right approach. Journal of Corporate Accounting & Finance, 26(4), 13–21. Web.
Nestle. (2015). Annual report 2014. Web.
Savić, B., Milojević, I., & Petrović, V. (2019). Cost optimization in agribusiness based on life cycle costing. Economics of agriculture, 66(3), 823-834.