Inventory and Nestle

About approach approach is a multinational packaged foods gild founded and headquartered in Vevey Switzerland. it is the worlds foremost Nutrition. Health & Wellness Company committed serving consumers exclusively over the world. Their focus on responsible nutrition and promoting heaLth and wellness is a core value, emphasizing responsibility and sustainability. Nestle products atomic number 18 sold in almost every country in the world. boot STATEMENT Nestle is dedicated to providing the best foods to people throughout their day. Throughout their lives, throughout the world.With our unique familiarity of anticipating consumers needs and creating solutions. Nestle contributes to your well- be and enhances your quality of life. COST ACCOUBTING INFORMATION SYSTEM OF NESTLE INPUT quantity BASIS STANDARD COSTING Nestle is utilise STANDARD COSTING as a swinish for in attribute measurement received be are usually associated with a partys bell of read sensible, call jade , and manufacturing overhead. Rather than appointment the actual cost of direct actual, 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 corrects sold provide began with amounts reflecting the standard cost, nor the actual costs, of a product Nestle, of course still has to pay the actual costs. As a result there almost always differences between the actual costs and the standard costs, and those differences are known as variabilitys, REASON FOR USING STANDARD COSTING Nestle is currently using Standard be method be catch the related variabilitys are valuable management tool. If a discrepancy arises, management becomes certain that manufacturing costs view differed from the standard (planned. xpected) costs. If actual costs are greater than standard costs the variance is unfavorable. An unfavorable variance tells nestle management that if everything else sta ys constant the federations actual get will be slight 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 believably exceed the planned profit. The so unmatchabler that the accounting system reports a variance, the sooner that Nestle management base direct its attention to the difference from the planned accounts.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 put ond to make the products. If the manufacturer actually uses more direct materials than the standard quantity of materials for the products actually manufactured, the familiarity will have an unfavorable direct materials usage variance, If the quantity of direct materials actually employ is less than the standard quantity for the produ cts produced, the company will have a favorable usage variance.The amount of a favorable and unfavorable variance is recorded in a General ledger account locate Materials Usage mutant. (Alternative account titles include Direct Materials Quantity Variance or Direct Materials Efficiency Variance. ) Lets give this variance with the following culture. Direct Labor Standard Cost. Rate Variance, Efficiency Variance Direct labor refers to the trifle done by those employees who aciually make the product on the production line. (Indirect labor is work done by employees who work in the production area. but do not work on the production line.Examples include employees who set up & maintain the equipment. ) Unlike direct materials (which are obtained prior o being used) direct Labor is obtained and used at the same time, This means that for any given good output, we chiffonier compute the direct labor rate variance. The direct labor efficiency variance, and the standard direct labor cost at the same time. Variable Mfg Overhead Standard Cost, Sp goal 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. Variable manufacturing overhead costs will amplify in total as output increases. Fixed Mfg 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 VARIANCESIf 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 manuf acturing overhead efficiency variance. If these inefficiencies are significant, it is accomplishable that the company may not be able to produce enough good output to put one over the planned fixed manufacturing overheadresulting in an unfavorable fixed manufacturing overhead volume variance. TREATMENT OF VARIANCESThe handling of variances follows these guidelines If the variance amount is very small (insignificant relative to the companys net Income), simply put the entire amount on the income statement. If the variance amount is unfavorable, increase the cost of goods soldthereby cut net income. If the variance amount is favorable, decrease the cost of goods soldthereby increase net income. If the variance is unfavorable, significant in amount, and results from mistakes or inefficiencies, the variance amount can never be added to any entry or asset account.These unfavorable variance amounts go directly to the income statement and reduce the companys net income. If the variance is unfavorable significant in amount and results from standard costs not being realistic, allocate the variance to the companys strain accounts and cost of goods sold. The allocation should follow the standard costs of the inputs from which the variances arose. If the variance amount is favorable and significant in amount, allocate the variance to the companys inventories and its cost of goods sold. INVENTORY VALUATION METHOD ACTIVITY BASED COSTINGActivity based costing (ABC) assigns manufacturing overhead costs to products in a more logical manner than the traditional approach of simply allocating costs on the fanny of machine hours. Activity based costing first of all assigns costs to the activities that are the real cause of the overhead. It accordingly assigns the cost of those activities only to the products that are actually demanding the activities. IMPLEMENTATION OF ABC IN NESTLE Nestle company is using activity based costing method for inventory valuation. Firstly they identify all activities that use resources.Cost pools are set up for each of the activities identified. They assign overhead costs to the cost pools based on a cost driver. Cost pools are used to assign costs. Costs are designate to its, batches, or products. REASON FOR USING ACTIVITY BASED COSTING Nestle is currently using ABC techniques because it helps it in determining accurate product cost. Complex companies Like Nestle may see the most take in from this type of costing because it is most helpful when the costing information is difficult to understand or evaluate.ABC provides information to Nestle regarding processes that should be improved and the products or services that are contributing the most to companys profitability, ABC system also helps Nestle in knowing what are the factors that contribute most to cost, which in turn assists management in choosing best alternative in reducing overall costs incurred by the Nestle Company. ABC system can be the best tool to be util ized in implementing environmental accounting at the firm level. COST ACCUMULATION METHODNestle is using process costing method. It is a costing system in which the cost of a product or service is obtained by assigning costs to masses of lake or similar units and then computing unit costs on an bonny basis. Process costing averages the costs over all units to come to the per unit cost. In Nestle. Direct material and direct labor costs are tracked by department, and are assigned evenly to the products that black market through each department. Overhead costs are applied to each department and are assigned evenly to each product.Multiple WIP accounts are used one for every process. As products are moved from one process to another, the costs of the previous process are transferred to the next process. Five steps are manifold in Nestles process costing method firstly it summarizes the flow of physical units of output. Secondly, computes output in price of equivalent units, Thirdly, computes equivalent unit costs. Fourthly, summarizes total costs to account for. And at the closing, they assign total costs to units completed and to units in ending work in process inventory.REASON FOR USING PROCESS COSTING Process-costing used in Nestle because it broadens the economics of quality by classifying cost of non-conformance and cost of conformance i. e. costs incurred when a process is running without failure. It also allows Nestle tracking and reduction of costs normally associated with efficiency in addition to effectiveness (quality). COST FLOW ASSUMPTION first in first out In Cost flows assumption. Nestle is using first in first out method. FWO is an acronym for First In, First Out.A method of valuating the cost of goods sold that uses the cost of the oldest items in inventory first What comes in first is handled first what comes in next waits until the first is finished. Etc. REASON FOR USING first in first out Nestle is using FIFO as cost flow assumption for i ts products. Because most of its products are putrescible and they have short expiry date. Nestle also believe in tax minimization. For taxation purposes, FIFO assumes that the assets that ate renaming in inventory are matched to the assets that are most recently purchased or produced.Because of this assumption, there are number of tax minimization strategies associated with using the FIfo asset-management and valuation method. Due to this reason, Nestle is using FIFO method as a cost flow. FWO gives Nestle a better indication of the value of ending the inventory on the balance canvas tent. One of the reasons for using FIFO method by Nestle is the increasing rate of inflation. Because of this, Nestle uses FIFO inventory accounting in order to make their balance sheet look better. RECORDING INTERVAL CAPABILITY register records can be maintained on a eternal or a episodic basis In the past manufacturers tended to keep perpetual inventories, while retailers used the periodic method . However, today a variety of point of sale devices and dedicated microcomputer software are right away available to provide any company with perpetual inventory capability. NESTLES METHOD Nestle is Currently using perpetual method for maintaining the inventory records because this method provides the company with real time and line up inventory information.To record purchases, the periodic system debits the Purchases account while the perpetual system debits the product Inventory account. To record sales, the perpetual system requires an extra entry to debit the Cost of goods sold and credit Merchandise Inventory. By recording the cost of goods sold (or each sale, the perpetual inventory system lessens the need for adjusting entries and numeration of the goods sold at the end of a financial period, both of which the periodic inventory system requires.The reasons for which Nestle is using perpetual method rather than periodic inventory method is that By using perpetual method Nestle can determine their COGS and profit or loss after every sale unlike periodic, in which you get profit or loss at the end of the period. Nestle has prefer perpetual system because it is a realistic double entry system while periodic is arbitrary. The company can watch the inventory more closely using this method because whenever there is an increment and lessening inventory, some other account like profit loss must be debited or credited. And in the perpetual system stock loss gain is immediately noticed and not at the end of year when the physical count of the inventory is taken The advantages that Nestle has got due to the use of the perpetual inventory system, is a high degree of control, it aids in the management of proper inventory levels, and physical inventories can be easily compared. Whenever a shortage (Le. a missing or stolen good) is discovered, the Inventory Shortages account should be debited.