NATIONAL FOODS LIMITED

NATIONAL FOODS LIMITEDManagerial Accounting201204-Jul-12

By:Ahmed Riaz KianiAyaz TanveerBilal ImtiazMuhammad UzairSufiyan TariqueSultan Yousaf

Executive SummaryNational Foods limited is the pioneer in the spices business and has been able to be the market leader for more than 40 years. The secret behind its unparalleled success in the industry is to the companys values and ethics, which are to manufacture and sell only those products which are 100% safe and healthy for the use of their customers. The core benefit of their products is to provide hygienic food which requires less time to prepare. This report on the company shows that the company has been able to remain profitable in the industry for the last three years, despite the energy crisis and rising costs of raw materials. They have been able to achieve this profitability due to the managements extreme focus on achieving cost efficiencies in all operational departments of the company.Given the homogeneity of its products and the large volumes, the company applies process costing method. Through this method the costs of individual units is allocated by averaging the total cost of a batch. Applying the ABC costing method we observed that per unit overhead rate has fallen over the years and is a proof of that the management is persistently following its goal of reaching superior cost efficiencies. Break even analysis reveals that the company has quite a low number of sales units required to reach the breakeven. This low value is due to high profit margins per unit of sales, which the company is able to charge because of the company brand equity and the reputation of the products to be of premium quality.The budgeting by the management has always been on the lower end of the actual outcome every year. Same trend is seen by the variance analysis that in mid year 2010 the variance of budgeted from actual was much larger compared to other two years of analysis.

Table of ContentsExecutive Summary2Introduction4Vision and Mission Statement4Products5Benefits of Cost Accounting9Cost accumulation method used11Analysis of Income Statement12Analysis of Cost of Goods Sold13Application of Activity based Costing14Break even Analysis17Break even in Units17Break even in Sales18Budgeting19Sales Budget19Production Budget20Direct Material Budget20Direct Labor Budget21Manufacturing Overhead Budget22Selling and Administrative expense Budget22Computation for CGM and CGS23Master Budget24Budgeted Income Statement24Budgeted Balance sheet25Variance Analysis26Conclusion & Recommendation28References30Appendix31

IntroductionNational Foods began its journey in 1970 as a Spice company, with a revolutionary product that popularized the concept of having clean, healthy food. National foods initiatives were, to make food that is hygienic, reduce time spent in the kitchen by women, foster health and contribute towards personal attractiveness, so that people who use our products would be able to experience a more rewarding life-style.This was long before the phrase Corporate Mission had even been invented. However, thefounders philosophyremains unchanged over time. Even if their language and the notion of only women doing the housework have become outdated, in this age of rapidly changing lifestyles, fuelled by the rampant development of technology; consumers are compelled to alter their eating habits. National Foods responds to this challenge of developing innovative food products based on convenience and quick preparation in line with modern lifestyles and yet retains traditional values through its diverse collection of food products.In a history that now crosses three decades, National Foods success has been influenced by the major events of the day economic boom, depression, wars, changing consumer lifestyles and technological advancements. Even after three decades the companys focal point still remains on customers needs through product development in line with the changing market trends.Vision and Mission StatementTo be a Rs.50 billion food company by the year 2020 in the convenience food segment by launching products and services in the domestic and international markets that enhance lifestyle and create value for our customers through management excellence at all levels.Products

Recipe MasalaNational Recipes provide an authentic Pakistani food experience, be it Lahori Fish or Peshawari Chapli Kebab, each recipe has been specially designed to make the preparation of Pakistani cuisine as simple as possible. National Recipes are available in a variety of varieties to match the needs and taste buds of the end consumer.KetchupMade from the finest tomatoes, National Ketchups and sauces cater to every taste. From the hot and tangy to the sweet, National Foods offers ketchup for every dish and occasion. Use them as dips for your munchies, dressing for your salads, accompaniments for the main course or even as marinades for your recipes. National Foods sauces can do it all.JamsMade from real fruit pulp and juice, National Jams and Jellies offer you a taste of some of Pakistans most popular fruits. With a wide range of flavors, National Foods brings you the varied tastes of a range of tropical fruits, including Mango, Pineapple and even Kino, a variety of orange only found in the subcontinent. RicePakistans Basmati Rice is well known round the Globe for its Long Grain, appetizing flavor and musky Aroma. The finest quality of Rice gives the Perfect Taste and look to your meals. National Rice is at current available in two basic blends: National finest Super Kernel Basmati Rice & National Long Grain Basmati Rice.DessertsAll sweet things are irresistible and so are National Foods Desserts. For some, Pakistani desserts are a must after every meal, for others any time is dessert time. Some do it for the aftertaste, others have regular dessert cravings. But almost always, it gets you into the best of moods. In Pakistan, it is synonymous with good news and happiness. Three products in the range make National Foods Desserts three times as sweet.PicklesPakistani food without pickles is like a portrait without color. A mix of mustard oil, mixed spices, salt, citric acid and various vegetables and fruits, Pickles are used as a side relish, taste enhancer and even as a good source of digestion. Known for their uniquely sharp and tangy flavor, our pickles add that special something to food, making all the difference.Plain spicesPure Spices make every meal a magical experience. Hygienically packed and specially selected for the discerning consumer. The pure spices are available in 50g, 100g, 200g, 400g, 1,000g as well as bulk packing of 25 kgs to meet the specific consumer requirementsSaltNFL was the first company to manufacture iodized salt in Pakistan, and we are now brand leaders in the class. National Salt is a brilliant white, hygienic, 99.1% pure, free flowing refined product that adds taste and serves the human bodys requirement for iodine.ChineseNational Foods Chinese recipes make authentic, homemade Chinese a breeze to cook. A dash of our sauces range and vinegar livens up any soup or Chinese dish with savory and develops a flavor that keeps food lovers coming back for more.SnacksThe snacks range takes us from the strictly lunch-and-dinner crowd to any-time, any-place versatility. National Snacks add that extra zest of life to everything on the table, no matter if it is homemade or store-bought.Ready to eatNational ready-to-eat meals have come as a helping hand to homemakers. These are complete, pre-cooked meals packaged to retain absolute freshness, and require only heating before eating. Perfect for working women with limited time on their hands, unexpected guests, picnics, traveling, and even office lunches.Powdered DrinksNational Foods Fruitily instant drink mix is so much more than a refreshing beverage. Each serving of Fruitily is chock-a-block with essential nutrients that provide the energy that your body and mind need to replenish every day.

Benefits of Cost AccountingImportant advantages of a Cost Accounting System may be listed as below:1. A good Cost Accounting System helps in identifying unprofitable activities, losses or inefficiencies in any form.2. The application of cost reduction techniques, operations research techniques and value analysis technique helps in achieving the objective of economy in concern's operations. Continuous efforts are being made by the business organization for finding new and improved methods for reducing costs.3. Cost Accounting is useful for identifying the exact causes for decrease or increase in the, profit/loss of the business. It also helps in identifying unprofitable products or product lines so that these may be eliminated or alternative measures may be taken.4. It provides information and data to the management to serve as guides in making decisions involving financial considerations. Guidance may also be given by the Cost Accountant on a host of problems such as, whether to purchase or manufacture a given component, whether to accept orders below cost, which machine to purchase when a number of choices are available.5. Cost Accounting is quite useful for price fixation. It serves as a guide to test the adequacy of selling prices. The price determined may be useful for preparing estimates or filling tenders.6. The use of cost accounting technique viz., variance analysis, points out the deviations from the pre-determined level and thus demands suitable action to eliminate such deviations in future.7. Cost comparison helps in cost control. Such a comparison may be made from period to period by using the figures in respect of the same unit of firms or of several units in an industry by employing uniform costing and inter-firm comparison methods. Comparison may be made in respect of costs of jobs, processes or cost centers.8. A system of costing provides figures for the use of Government and other bodies for dealing with a variety of problems. Some such problems include price fixation, price control, tariff protection, wage level fixation, etc.9. The cost of idle capacity can be easily worked out, when a concern is not working to full capacity.10. The use of Marginal Costing technique may help the executives in taking short term decisions. This technique of costing is highly useful during the period of trade depression, as the orders may have to be accepted during this period at a price less than the total cost.11. The marginal cost has linear relationship with production volume and hence in formulating and solving "Linear Programming Problems", marginal cost is useful.

Cost accumulation method usedGenerally two cost methods are used; one is the job costing which involves the costing based on heterogeneous products or different product under one shed. While National Foods uses the process costing as it is engaged in producing homogenous product with the large volume. Process costing at NFL requires pre planned demand estimation and costing for the production. This helps in effective resource management, cost efficiency and timely operations of the company and thus this ultimately reflected in the financials like ROA. Moreover company operation department uses normal and actual overhead cost allocation for proper forecasting for successive years based on differential of both.Normal Costing is based on the forecasting of the estimated number of units to be sold while the overhead is allocated based on the movement and level of economic condition and company cost controlling procedure. Once this normal costing is done the budgets are formed and after the period it is matched with the actual cost incurred and the difference is kept to minimize the forecasting error in the next period. Proper journal entries are made with respect to the cost journal for cost tracking during the production and helpful in final audit for the costing department. This is how NFL is using the cost accumulation technique for correct forecasting and planning for production efficiency thus getting a title of cost leadership.

Analysis of Income Statement The analysis is done for the period of three years from 2009-2011. NFL has worked on reducing cost either it is cost of production or general administrative cost associated with operations. As economic condition are highly tensed like inflation and power shortage but company is able to maintain its production cost as the percentage of sales at almost the same level over the years.The distribution cost is reduced compared to previous years because of reduction in total number of distributors just to reduce cost and giving more business to already existing distributors thus beneficial for both the company and the associated business partners. Administrative expenses is also decreased slightly because of increases in sales and keeping the sales force at the same level thus distributing additional sales over the same workforce. Remaining all the other heads remains at the same contribution level and providing a cushion for the company to earn higher profit.Moreover income statement analysis reveals that company has maintained its cost structure even in the economic pressure and depicted a bullish financial performance in terms of profitability and maintaining the same financing structure by utilizing strong internal cash generation. The analysis reveals the company has beaten the declining market trends over the years due to the global financial recession, profitability rose up to the highest level in all years representing an annual growth rate of approximately 30%. The major part is contributed by the local operation while export operations also grew over the years. The combined effect of the improved financial condition is reflected through the rise in share price from 45Rs/share to almost 200Rs/share as of the current period, so a good financial representation in such a period.

Analysis of Cost of Goods Sold The cost of goods sold is the major cost incurred by every company which generates the revenue for it also. The CGS as the percentage of the sales remains almost at the same level during this economic inflationary pressure, which reflects the cost efficiency measures taken by the company. The material cost increases as proportionate to the additional units of sales. While due to repositioning of the product leads to a significant increase in the packaging material. While salaries as respect to output remains at an adequate level while the Islamic financing markup payment has increased compared to previous years. Fuel and power cost has increased over the years due to the rising trend of oil prices prevailing in the market and the extension of the distribution setup to the other countries. NFL has reduced it expenditure and spending on R&D which is an alarming situation bemuses herbal products require an intense research element but a major drawback has been seen under this particular head. The extension of operation leads NFL to invest in fixed assets but contrary company opted for the rental building which resulted in a double amount of rental expenses as compared to the previous years. Same situation with the travelling cost a bullish graph due to rising oil and fuel prices and lastly company has reduced its expenditure on repairs and maintenance.Finally this year the beginning work in process is in higher amount so as the finished goods which show the stack of inventory by the company by a higher amount as compared to the previous years. But on the cost side company has still managed to be as cost efficient as possible and maintained cost in such economic pressure.

Application of Activity based CostingActivity based costing help distributing indirect cost on the basis of different cost object and further different cost pools. For National foods the total manufacturing overhead is distributed based upon the number of 6 cost objects or the production process which constitute the total overhead the phases are: Cleaning phase Crushing phase Boiling phase Mixing phase Testing phase Packaging phaseThe cost is distributed based upon these phases on the measure of number of machine hours the process used, labor hours, number of products, setup hours and quantity passed through a particular path. The respective cost allocation base are the divide with the cost drivers leading to get a unified cost object rate further the total respective allocation is divided to the number of units sold during the respective year to get a overhead cost rate of a single unit. The overhead cost has a rising trend over the years, also the setup hours has increased means a more idle work while contrary the machine hours and labor hours has increased meaning more productivity and output in terms of number of units produced and processed during a year. The Overhead rate on the basis of ABC is:

Break even AnalysisBreak even analysis refers to the estimation that when cost will be equal to the revenues generated and the situation of no profit and loss. In case of NFL the break even is calculated for both in terms of units and sales volume.Break even in Units

The breakeven in unit says that the demanded unit to sale is on the increasing trend as the units needs to sell 83,123,000 units in last year but it actually sold double number of units. The breakeven units are calculated for the estimation of target that sales force needs to achieve at the minimum level.

Break even in SalesNow for break even in sales are given as:

The break even in sales volume also shows a same trend of rising one. The main reason is due to the combined effect of the rise in per unit selling price and the rise in fixed cost which result in the higher break even of sales. One thing need to be crucially looked by the company that contribution margin needs to be controlled as it is on declining trend and thats why a large base of number of units and sales volume.

Budgeting Budgeting refers to the forecasting of the sales and units that Company needs to sell for earning desired profits and estimating the material require for the production. Three budgets are prepared for the future three years 2013, 2014, 2015 which includes Sales, production, material, labor, overhead, selling & admin expenses and Master budget including Budgeted Income statement and Balance sheet.Sales Budget

In sales budget the budgeted sales units are estimated based upon GOLY growth over last year and potential of product it can get more market share. Moreover selling price is estimated based on the past trend and inflation in the economy.

Production Budget

NFL has recently changed its inventory policy that it stock 20% of the budgeted units while previously it hold 10% of the budgeted units. Same case with the beginning inventory, in current period it hold 12.5% of inventory previously it was 7.5%. And that resulted in greater number of units to be produced that actually budgeted to sell. Direct Material Budget

The Direct material budget shows the forecasted inventory in value terms it needs to hold in the beginning and ending which is same as previously. The required material increases with the time due to increase in production volume.Direct Labor BudgetFor estimating the direct labor cost the labor hours are estimated based on the production requirement and per unit labor time. Based on this the labor wage rate is multiplied to get the estimated labor cost. The labor cost shows a drastic movement of upward slope due to inflation level and per hour increasing labor wage rate.

Manufacturing Overhead Budget

Selling and Administrative expense Budget

Computation for CGM and CGS

Master BudgetBudgeted Income Statement

The data from all the previous budgets are combined to form the profit and loss statement. Next year profit will fall as compared to this year due to low budgeted number of units but in remaining years it increases at far greater rate. Master budget comprises of both Income and balance sheet which are given and reflects company will grow by a good amount in the next upcoming years both in profitability and asset base.

Budgeted Balance sheet

Variance AnalysisVariance represents the deviation from the actual sales and cost structure to the budgeted one. The variance includes the static variance, flexible budget variance and sales volume variance, based on actual cost and budgeted cost to check either its favorable or not. U represents the unfavorable and F represents the favorable.

Conclusion & RecommendationThe analysis of National Foods Limited in this report is showing that the company has remained profitable in the past years, improved its cost efficiencies, has a low unit volume requirement for break even, and budgeted data is underestimated from the actual performance recorded in the current year. There is room for improvement in certain areas of the company which can reduce its costs further, without any major financial contribution required instead small changes in some operational areas will help improve efficiencies.At the production level the setup time is the major source of delays which cause increase in costs. A reduction in setup time will result in higher percentage of utilization of the machinery and equipment.Currently NFL has duplication of resources in their distribution and management teams so it needs to reevaluate the procedures and be more cost efficient. Labor contracts should be evaluated in order to stop union influence on demand of more wage rate and ultimately increase in manufacturing cost.Investment must be done in the fixed machinery to utilize raw material up to the extent so as to produce more output with comparatively smaller input base.

References www.nfoods.com National Foods Annual Report 2009National Foods Annual Report 2010National Foods Annual Report 2011http://www.preservearticles.com/201103234647/11-advantages-of-a-good-cost-accounting-system.htmlhttp://www.hamariweb.com/articles/article.aspx?id=2133http://classof1.com/homework_answers/cost_accounting/advantages_of_cost_accounting/

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