Cost structure analysis

1. Analysis of Cost Structure of
Hindustan Unilever Limited
Presented by:
(Group 13)
Anjali Sinha
Abhinav Ashesh
Shivesh Satyam
Sunny Agarwal

2. Background of the Company
 Hindustan Unilever Limited (HUL) is the largest FMCG
company in India.
 It is owned by the British-Dutch company “Unilever”
and has about 67% majority stake in Hindustan
Unilever Limited .
 Its products include foods, beverages, cleaning agents
and personal care products.
 It is headquartered in Mumbai, Maharashtra, India.
 Hindustan Unilever Limited has over 35 brands
spanning 20 distinct categories.
 As per Nielsen market research data, two out of three
Indians use HUL products.

3. Cost Structure of HUL

4. Cost Structure of HUL
Royalties, technical know-how fees, etc 7,354.70 3%
Rent & lease rent 1,965.10 1%
Outsourced professional jobs 41.6 0.01%
Non-executive directors' fees 13.8 0.005%
Advertising expenses 38,749.40 14%
Insurance premium paid 51.8 0.02%
Depreciation 2,859.10 1%
R & D expenses (capital & current account) 321.4 0.12%
Total Fixed Costs 51,356.90 18%
Total Cost 2,78,159
Fixed cost as a % of Total Cost 18%
Variable cost as a % of Total Cost 82%

5. Cost Structure over 5 Years

6. Cost Structure over 5 Years
Fixed Costs
2009-10 2010-11 2011-12 2012-13 2013-14 2014-
15
R & D expenses -0.2 -11.5 62.3 -30.2 -19.1 -64.7
Royalties, technical
know-how fees, etc 70.4 9.1 28.2 39.7 40
Rent & lease rent 18.3 -1.5 -4.1 8.2 -4.7 6.8
Insurance premium
paid 9.2 8.4 20.9 16.2 -12.3 -9.6
Outsourced
professional jobs 23.1 0.2 2.8 1.4 -19.3 -13.7
Non-executive
directors' fees 139.6 8.7
Advertising expenses 40.3 15.6 -4.7 22.7 11.8 7.2
Depreciation 17.8 20 -1.2 7.8 10.3 10.2

7. Comparison with peers
Particulars HUL P&G
Raw materials, stores & spares 34% 30%
Purchase of finished goods 13% 18%
Packaging and packing expenses 9% 1%
Power, fuel & water charges 1.10% 1%
Compensation to employees 6% 7%
Indirect taxes 8% 1%
Repairs & maintenance 0% 1%
Outsourced manufacturing jobs 1% 4%
Distribution expenses 5% 9%
Travel expenses 1% 1%
Miscellaneous expenditure 3% 2%
Total Variable Cost 82% 80%

8. Particulars HUL P&G
Royalties, technical know-how fees, etc 14% 29%
Rent & lease rent 4% 1.57%
Outsourced professional jobs 0.1% 7.25%
Non-executive directors' fees 0.03% 0.10%
Advertising expenses 75% 49%
Insurance premium paid 0.1% 0.10%
Depreciation 6% 14%
R & D expenses (capital & current account) 1% 0.01%

9. ₹ 297,172.80
₹ 41,095.50
₹ 49,174.10
₹ 56,829.70
₹ 43,849.20
₹ 37,336.80
Total Expenses (in Mn.)
Hindustan Unilever Ltd.
Godrej Consumer Products Ltd.
Dabur India Ltd.
Procter & Gamble Home Products
Pvt. Ltd.
Marico Ltd.
Colgate-Palmolive (India) Ltd.

10. Managerial Accounting and Decisions
• A strong supply chain saving programme,
driven by various cross functional teams such
as R&D, Procurement, Manufacturing and
Logistics, has delivered significant savings
• Aquagel Chemicals Private Limited, was
amalgamated

11. Evaluation of Managerial
performance through EVA
• EVA = Net Operating Profit after Taxes (NOPAT)
- Cost of Capital Employed (COCE).
• EVA will increase if:
I. Operating profits can be made to grow
without employing more capital,
II. Additional capital’s invested in projects that
return more than the cost of obtaining new
capital, I.e. profitable growth.

12. Economic Value Added (EVA) Trend
0
500
1000
1500
2000
2500
3000
3500
4000
2005 2006 2007 2008-09 (15
months)
2009-10 2010-11 2011-12 2012-13 2013-14 2014-15
Series1

13. Control Practices
• Rural and Modern Trade channels continued
as a key focus area.
• Company has changed the servicing model
from a physical servicing model to an online
ordering and fulfilment model.
• Used almost 60,000 tonnes of renewable
biomass as fuel, saving corresponding amount
of fossil fuels.

14. Cont...
• ‘World Class Manufacturing’ that aims to
eliminate non-value added activities leading to
further improvement in efficiencies and cost.
• The ‘Procure to Pay’ project ensured sustained
world class levels of payment efficiency and
purchase order compliance.
• P2P is a technique of using projected
manufacturing production schedule to figure out
what supplies material is needed

15. • Rank among the Top 3 companies in
manufacturing sector for Best Presented
Accounts by the Institute of Chartered
Accountants of India, for the second
consecutive year.

16. CVP Analysis
Particulars Formula Calculation Result
Break Even Sales(in
Rs. Millions) Fixed cost/(P/V ratio) 51356.9/0.3064 Rs.167627
P/V ratio
(Contribution / Sales
)*100 100178.80/326980 0.3064
Margin of safety Actual Sales - BEP(Rs) 326980-167627 1,59,353
Margin of Safety Ratio
(Margin of Safety
/Actual Sales)*100
1,59,353/326980)*100
48.73
Sales 326980
Fixed Cost 51356.9
Variable Cost 226802.1
Contribution 100178
P/V Ratio 0.3064
Working Notes:

17. CVP Analysis

18. Analysis
• Margin of safety is an advantage to the company.
MOS is 48..73% which is high. This means that
the firm will earn profits even if there is a slight
fall in production or sales.
• BEP sales is Rs.167627 millions which is
extremely low in comparison to current sales (Rs.
326980 millions).
• BEP analysis will help the banker in appraisal of
actual/projected performance of the borrower. It
also acts a sensitivity analysis tool to judge the
projected performance.

19. Suppose the company expects a profit of 60000
millions for the next financial year
Desired Profit 60000
P/V Ratio 0.3064
Fixed Cost 51356
Desired sales 363468.9
For the company to reach a profit value of 60000 millions it has to impove its sales by
Rs. 36,488 millions.

20. Should HUL spend ₹12,000 Millions on digital
advertising to increase sales by 10 percent?
Sales 326980
359679
Less: Variable Cost 226802
249482.3
Contribution 100178.80 110196.7
Less: Fixed Costs 51356
63356.9
Profit 48,821.90 46,839.78
Profit is decreased even more
So Hindustan Unilever Limited should not have
to spend on digital advertising