Analyzing Nestle SA’s current system would require a look into the three dimensions of convenience, correctness, and cost implementation. For instance, convenience is a measure of the amount of pain a user has to go through before obtaining their objectives. Nestle SA’s current costing system is well designed with a database that automatically calculates the ROI and cost implementation from up to date raw data. Therefore, to make business decisions, managers experience virtually no plain as the information is readily available. On the other hand, the correctness of the costing system deals with its accuracy. In 2015, Nestle SA produced 130,000 variations of its brands, of which 30% were not profitable (Fisher & Krumweide, 2015). Brand correctness was then achieved by cutting down the variants that were dropping productivity and enhancing focus on the profitable ones. Finally, the cost of implementation entails the one-time setup cost and long-term maintenance and upgrade cost. The paper by Fisher & Krumweide (2015) shows no indication of the warning signs, implying that the cost of implementation is acceptable. Additionally, the current system closely monitors all associated costs, tracks profitability reports to maintain efficiency, as demonstrated by the company’s balance sheets.
However, should Nestle SA want to change its current system or customize it further for a new product, its managers will have to ask four essential product design cost questions. First, Nestle SA should ask which costs should be included in the product costs (Fisher & Krumweide, 2015). Certain costs, like labor, material, and sufficient variable and fixed overhead, should always be included. On the other hand, not all costs are included, assuming they are known at the time. Secondly, the desired level of detail to track direct product costs should be determined. On the one hand, there is job costing and on the other is resource consumption accounting (Fisher & Krumweide, 2015). The company can choose to operate within that spectrum
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The third question Nestle SA should ask is how to organize its indirect production costs. As a multinational company, indirect costs are bound to be significant and affect performance if not monitored. Different strategies, like departmental cost pools, have been applied over the years. However, Chouhan et al. (2017) recommend activity-based costing over departmental cost pools for accuracy because they do no result in distorted product costs. The final question that needs to be considered, according to Fisher and Krumweide (2015), is how the indirect costs should be allocated to products. There are different options, but the recommended one for Nestle SA is transaction-based cost drivers because it maps the time to produce a product or a sachet to the associated cost. This information is essential, for instance, when calculating the ROI and the time resolution is enough for other purposes.
Therefore, to effectively present financial statements for other businesses and financial institutions, internal and external audits should be done. Nestle SA, for instance, should compile its financial statements in a database that can be shared with other businesses and financial institutions. The database should include financial records for every country they are operating in and summarizing it all in a single balance sheet.
Such a balance sheet, like the one presented for Nestle SA, helps to make the conclusion that Nestle SA’s financial position improved from 2013 to 2014 because there was an increase in the operating profit as a percentage of the sales increased, the financial debt to equity ratio dropped, and the earnings per share increased. However, sales also decreased between 2013-2014 while net profit increased because there might have been a drop in expenses, such as administrative and selling, or other income streams increased.
References
Chouhan, V., Soral, G., & Chandra, B. (2017). Activity-based costing model for inventory valuation. Management Science Letters , 7 (3), 135-144.
Fisher, J. G., & Krumwiede, K. (2015). Product costing systems: finding the right approach. Journal of Corporate Accounting & Finance , 26 (4), 13-21.
