GUSTILLO KARTONAN: COST SYSTEM EVALUATION

In Partial Fulfillment of the Requirements in Cost Accounting 2

Junela Mae Benares

Hannah Marie Danoy
Bianca Gargalicano
Rachel Ann Octavio

University of St. La Salle

Mrs. Leah Mae M. Santiago, CPA

Cost Accounting 2 Adviser
February 2016

CHAPTER 1
Introduction

The Industry as a Whole

Manufacturing industry refers to those industries which involve in the manufacturing and
processing of items and indulge in either creation of new commodities or in value addition. The
manufacturing industry accounts for a significant share of the industrial sector in developed
countries. The final products can either serve finished goods for sale to customers or as
intermediate goods used in the production process. Manufacturing industries are the chief wealth
producing sectors of an economy. These industries use various technologies and methods widely
known as manufacturing process management.
Chickens are among the most abused animals in our food industry. There are very few
laws in place that protect them. This industry is needing suppliers of equipment needed for them
to use and would serve as their protection. The equipment include those manufacturing boxes for
cocks, egg trays, knots, feeding equipment, and cages. Chickens are transported to different areas
within or outside of the country. While being transported, the chickens are not protected against
the heat or cold. Some of them die by either freezing to death in the winter or from suffocation in
the summer. In order for them to be protected, poultry shipping boxes are needed for delivery.
Poultry shipping boxes are essential to the business for this solves more than 40% of all poultry
rearing problems. Chickens must be shielded from hostile weather conditions such as cold, rain,
sun and wind while in delivery. Poultry shipping boxes will provide assurance that your birds
will be delivered safely with durable construction and design. This shipping boxes are designed

for quick and easy unfolding and for the insertion of separation dividers to provide bird
compartments that easily slide into place. Most of the business owners in rural areas order supply
from those manufacturers that offer cheapest costs.
Nowadays, the most common material used for chicken boxes is a cardboard.
Cardboard is a generic term for a heavy-duty paper of various strengths, ranging from a simple
arrangement of a single thick sheet of paper to complex configurations featuring multiple
corrugated and non-corrugated layers. The term cardboard may refer to a variety of heavy paperlike materials, including card stock, corrugated fiberboard, or paperboard. The meaning of the
term may depend on the locale, contents, construction, and personal choice.
In business and industry, material producers, container manufacturers, packaging
engineers, and standards organizations, try to use more specific terminology. There is still not
complete and uniform usage. Often the term cardboard is avoided because it does not define
any particular material.
The group decided to choose this business due to the increasing trend of cockfighting and
the quest for self-employment. This is common in the country because people are mostly turning
to poultry farming as business. Also, these businesses rarely have their own accounting system
and proper accounting procedures when it comes to costing. Rural markets in the Philippines
inherit problematic conditions such as transaction costs that are often too high. Input costs are
generally high. Transport, handling and communication costs are also high. The poor terms of
trade of farmers at times act as disincentive to increase production. In most cases the Philippine
commercial poultry sector was found to be high-cost producers and hence uncompetitive in a
more liberalized trade environment. This study aims for the efficiency of these systems to be
improved.

Background of the Owner

Edward B. Gustillo, Jr. started small businesses during his elementary years until he
graduated college in order to provide himself financial support. When he graduated, his business
was selling salted eggs and balot. However this has not been successful due to the shortage of
supply of eggs and therefore causing him to lose money than to gain. He decided to go abroad
for a better job. It lasted for 5 years and he went back to the country because he couldnt take the
pressure and the situation of the job itself.

History of the Business

When the owner in the name of Edward B. Gustillo, Jr. came back, he decided to put up a
bigger business knowing that it has been his expertise. He thought of a business that would
lessen his expense for the supply but will give him a greater gain. Influenced by his father and
brothers who participate in cockfighting, and his friends who are also suppliers of chicken boxes
and other cockfighting equipment, he came up with boxes for chickens. He had two options. First
is to use rejected boxes and second is to recycle boxes from different minimarts. When he tested
the first option, he discovered that his gain was minimal. So he went for the second option
instead. Using his skills in sewing, he made 10 boxes and sold it to people he knew. From there,
he saw that the business could be successful.
During the first operation of the business, the problem was with the quality of the boxes
since the owner used recycled materials. Because of this, he combined different kinds of boxes to
improve the quality of the product. The boxes also vary in sizes.

After 3 months of weighing the advantages and disadvantages of the business, he risked
for it to continue.
The business is located in Puentebella Subd., Brgy. Taculing, Bacolod City, specifically
in the residence of the owner. He promoted the product to different customers by personally
talking to them especially the ones owning poultry farms and fighting cocks. The Gustillo
Kartonan began a year ago having more or less 50 customers within Brgy. Alijis and
Mansilingan, Bacolod City. Later on, a customer suggested that he should start selling outside
the city. He tried and succeed.
The manpower is composed of 2 persons including the owner. They are making at least
20 boxes a day targeting 100-400 products a week. Due to the higher demand that the business is
getting, the tools used for the products were being upgraded to improve the quality and to
increase productivity.
As of now, the business is selling within and outside Bacolod City. The products are
being sold by piece ranging from 19Php 20Php for customers within the city while 22Php
24Php for customers out of town.

CHAPTER 2
Marketing and Management Aspect
Product

The target market of the business are the wholesalers who order an estimated volume of about
100 to 500 pieces. The regular customers reside in areas such as Murcia, Concepcion, Silay,
Burgos and Tangub. The competitors of the business include poultry and cockfighting equipment
sellers but mostly, small entrepreneurs whom Mr. Gustillo also know. Their prices ranges from
20 25 Php, similar with Gustillo Kartonans pricing. The marketing strategy used by the
business is mostly in the means of sales talking. The business owner is doing door-to-door sales
in order to gain customers. The business focuses on lowering its price while maintaining the high
quality of the product that would be more suitable to the needs of the market in order to gain the
loyalty of the customers. To expand the business, the owner has decided to produce another
product which is the native bayong. However, the owner has not yet started producing the said
product.
The business is in the form of a sole proprietorship. It is being operated and managed by
the owner himself and with the help of one laborer. There is only one laborer since the owner

cannot find people who have the skills and can work effectively and efficiently to meet the
demand of the customers. Also, most of the workers he hire, do not stay longer in the business.
The business does not have an organizational chart since the owner himself is the one responsible
for the processes of the business such as getting the supplies, making the product, and delivering
it to the customers. The business does not have standard opening hours since the production is
dependent upon the availability and convenience of the laborer just as long as he complies with
the required volume of products demanded by the customers. The working hours also depend on
the ability of the laborer to finish the required production. However, the work usually is being
done throughout the night in order to maximize the time and complete the manufacturing
process. Overtime payment is not necessary in the business since there is no standard opening
and working hours. Moreover, there is no employee benefits given to the worker.
In a week, the owner is able to accommodate orders from a minimum of 4 customers.
Due to an increase in the demand and the corresponding difficulty to deliver the ordered volume
of products because of the insufficient manpower, the owner opted to ask an allowance of 3 to 4
days from the customers as a consideration to meet the deadline. Within these days, the owner
makes sure that he delivers at least 25 percent of the orders and the remaining is to be followed
in the succeeding days.
In this kind of business, the owner found a way to maximize the profit and lessen the
expenses and wastes by selling about 300 kilograms of scrap materials monthly. The income
from the sale of these scrap materials serves as payment for the electricity.

CHAPTER 3
Technical Aspect

Actual Flow of Manufacturing Process

The process starts with the buying of materials especially of boxes from marts by the
owner. Then these materials are being prepared. The next step is to cut and punch holes in the
cardboards from the used boxes. The third step is to pair small cardboards with large ones to
form a single box. Separately, the handles of the boxes are made using plastic strapping bands
and rivets. Then, the different parts of the product are assembled using the wire. Since there are
two kinds of finished products, the whole process ends with folding the assembled box or not
depending on the request of the customer.

The products are then delivered to the customers. Scrap materials are collected and sold
to scrap buyers such as junk shops. When the income is collected from the sale, the utilities
expense are being paid and it is also used to buy additional set of materials to make another
volume of chicken boxes.

Suppliers
(marts)

Input of
materials

Cutting and punching of holes on the

cardboards

Pairing of small cardboards with the large ones to form a

single box

Making the handle of the box with the use of plastic strapping
bands and rivet

Assembling the parts with the use of

wire

Folding the assembled parts using

magic tapes

Deliver the
products

Customers

Collect and sell the scrap

materials

Scrap buyers (Junk

shops)

Input of Materials

Cutting and Punching of holes

Pairing of small and large boxes

Making the handle of the box

Assembling

Finished Product

the parts

Costing
Direct Materials
The product has two kinds. One is the flat product which allows the customer to fold it
himself and the other one is already folded. Both are composed of direct materials such as wire,
rivet, plastic strapping handle, and cardboard from recycled boxes.
The wire is used to tie up a mixture of small and large card boards. 1 kilogram of wire costs
P85. The owner buys 30 kilos for P42 each kilogram saving P43. This is good for 70-100 boxes.
In an estimate, one finished product consumes P1 cost of wire.
Rivet is used to attach strapping handles into the card board. One box of rivet with 2000
pieces costs P280. 4 pieces of rivets are needed in one box costing an estimate of P1.
The owner buys 6 rolls of strapping handle costing P80 per roll. One finished product
consumes a P1 cost of strapping handle.
Magic tape is also used in assembling the parts of the product however the owner opt not to
include the cost in pricing since the cash outflow to provide the material comes from the sale of
scrap materials.

The main material of the product which is the card board, comes from recycled boxes bought
by the owner for P2 for small boxes and P6 for the large boxes from stores and marts. One small
box can provide for one chicken box while one large box can provide for 2 chicken boxes.
Therefore, each finished product will cost P5 worth of cardboards.
For the direct labor, the owner pays his laborer P6 for every folded box he can complete and
P5 for the flat product.
The components of the price of the product follows.

Direct Materials
Cardboard

Standing Box

Flattened Box
P 5.00

P 5.00

Wire

1.00

1.00

Rivet

1.00

1.00

Strapping handle

1.00

1.00

P 6.00
P14.00
P20.00

P 5.00
P13.00
P19.00

Direct Labor
Total Production Cost
Selling Price

CHAPTER 4
Evaluations and Recommendations
Strengths-Weaknesses-Opportunities-Threats (SWOT) Analysis
Boxed chicken coops are used to transport roosters to avoid unwarranted cock fights and
for ease and cleanliness of transport. With these considerations, we can say that Mr. Gustillos
product has a high market share especially when it comes to the cockfighting business. However,
despite the high market share, the business still has a lot of competitors. The higher the number
of competitors, the lesser the number of probable customers the business gets unless it stands
out.
One of the strengths of the business is the quality of its products. Since the business
owner makes sure that the quality of the materials is high, the products made from it are also
durable and worth the cost. This is one of the advantages of the business against competitors.
Another strength is the lesser expenses because the materials are made of scrap materials from
boxes. Next, the owner has his own delivery car that makes it more convenient to deliver the
products to the customers and thus, causes him to save from paying another person or rent a car
to deliver the boxes.
In terms of the weaknesses, the owner neglects to add the utilities expenses in his costing
which is a very important rule in manufacturing processes. Due to this, the price of his product is
not efficient enough to cover the said expense and his income is somehow affected. Also, the
business needs more workers in order to be more productive since the owner only has one
laborer whom cannot finish all the orders at the specified date of delivery causing the owner to
ask for extensions. The areas covered by the business in which the owner delivers his product is

somehow limited depending on the work of the laborer causing to decline orders from distant
customers with lesser order. So the need of more workers is important to cope up with the orders
and cater more customers.
Due to the fact that his business location is within Bacolod and the business offers
delivery of products to other cities, we can say that the product is well marketed and covers a
larger scope than the others. All it needs is a little more advertising to probable customers.
Furthermore, loyalty of his customers created through the quality of his products and efficiency
of his service, can be of great help in giving him a name in this business.

Recommendations
The marketing strategy of this business is through sales talking, which in our own
opinion, is not a very strong game plan. Sales talking only comes when you personally engage
with a customer. Seeing as his target market is the wholesalers who purchase 100 to 500 pieces
per transaction, who are mostly older businessmen, and the media is by no means a great way to
market his products, then we highly recommend that the owner label his products with his
business name and contact number. This is another strategy of advertising which may very much
suit his business and attract the attention of potential customers. For cost purposes, he may
purchase an affordable blue ink or paint and have a huge wooden stamp with the business name
and contact number etched. Stamps like these can be made to order along the downtown areas.
Also, his door to door marketing may be effective but it cant quite grasp the attention of
a wider scope of potential customers. And so, we have come to advise that not only does he put a

stamp on his products but as well as handout flyers to his buyers and paper posters to stick to
cock pits and places where there are probable customers.
Mr. Gustillo could also create a partnership with some of his loyal customers who sell
cockfighting roosters. That for every sale of a cock, comes along his box stamped with his
business name and contact number. Not only does this advertise his product but it also covers a
wider scope of purchasers. Moreover, this strategy also creates a bond with the owner and his
loyal customers.
In Chapter 2, it was stated how his labor hours were done to the owners convenience just
as long as he complies with the quality, quantity, and the date demanded by the customers. With
this, we highly recommend he include his hours in the cost of his products and not only his
laborers. This is a business and he needs to get paid for the efforts he places in each product he
makes. He manages and manufactures his business and it is just right to receive some
compensation for his managing and manufacturing.
Also, the income from scrap materials used as payment for the electricity doesnt disclose
if the said income is used to pay for the bill incurred in the business alone or if it includes that of
the house as well.
The cost of the magic tape should also be part of the cost of the product. The income for
scrap materials should be reported as part of Other Income which means that the manufacturing
costs should not be offset from the other income.

Costing Recommendation
Suggested computation of costs and prices are as follows. (For customers within the city)
Direct Materials
Cardboard
Wire
Rivet
Strapping handle
Magic Tape
Total Materials Cost

Standing Box
P 5.00
1.00
1.00
.50
.50
P 8.00

Direct Labor
Factory Overhead
Indirect Labor (P256 divided by average of 200 units checked and

Flattened Box
P 5.00
1.00
1.00
.50
.50
P 8.00

P 6.00

P 5.00

P1.28

P1.28

delivered per day)

Electricity
(2 florescent light of 18 watts/1000
x 6 hrs a day
x CENECO residential ave.rate of P9.98
x 30 days a month
divided by average production of 800 units )
Total Conversion Cost

0.04

0.04

P 7.32

P 6.32

Gasoline (P800 a week divided by average of 200 units per week)

Maintenance & Repairs (P1500 per month divided by 800 units)

P 4.00
1.88

P 4.00
P1.88

1.30

1.30

.75

.75

Total Production Cost

P 23.25

P 22.25

Selling Price

P 25.00

P 24.00

Depreciation Expense of car ((((130,000-30000(salvage value))/8(useful

life in years))/12months)/800 units)
Advertising Expense (flyer)

Direct Materials
Cardboard
Wire
Rivet
Strapping handle
Magic Tape
Total Materials Cost
For customers outside the City

Standing Box
P 5.00
1.00
1.00
.50
.50
P8.00

Flattened Box
P 5.00
1.00
1.00
.50
.50
P8.00

Direct Labor

P 6.00

P 5.00

Factory Overhead
Indirect Labor (P256 divided by average of 200 units checked and delivered

P1.28

P1.28

P 0.04

P 0.04

P7.32

P7.32

P 6.00

P 6.00

Maintenance & Repairs (P1500 per month divided by 800 units)

1.88

P1.88

Depreciation Expense of car ((((130,000-30000(salvage value))/8(useful life in

years))/12months)/800 units)
Advertising Expense (flyer)

1.30

1.30

.75

.75

Total Production Cost

P 25.25

P 24.25

Selling Price

P 26.00

P 25.00

per day )
Electricity
(2 florescent light of 32 watts/1000
x 6 hours a day
x CENECO residential average rate of P9.98
x 30 days a month
divided by average monthly production of 800 units )
Total Conversion Cost
Gasoline (P1200 a week divided by average of 200 units per week)

Discussion of Costing Recommendation

In the recommended costing, the group included the cost of magic tape in the materials
since it is directly involved in the finished product.
In the factory overhead computation, weve added the cost of indirect labor since the
owner himself does the inspection and the delivery of the product and it is just fair to give him
compensation and to include the amount of minimum wage divided by his hours of labor in the
cost of the product.
As stated in the recommendations, the cost of utilities must be reflected in the
computation of the cost of the product. The group reflected the amount of electricity and gasoline
expenses both for products being sold within and outside the city.
Lastly, the group added the cost of advertising which involves printing of flyers. This
promotional idea has been recommended to be used by the owner.
Since the owner has his own car and this is being used to get supplies from the suppliers
and deliver products to the customers, the depreciation and the expenses for maintenance and
repairs have been included in the recommended cost.
All of the above mentioned costs were the same for the products sold within and outside
the city except for the cost of gasoline. This is because the distance traveled increases as the
destination of the delivery gets further. Therefore, expenses spent for gasoline varies.

Conclusions

Coming up with the suggested costing, the business owner will earn a greater income.
Since the products are of good quality, customers will still choose to buy especially those who
have been loyal buyers of the products. Also, if the income continues, the group suggests that the
owner will hire additional workers in order to comply with the orders of the customers.
The study shows that the business can improve and earn a greater income by including all
costs involved in the production and increasing the prices from 19-20 Php to 24-25 Php within
the city and 25-26 Php outside the city without having to compromise the quality of the materials
used.
The group aims for the recommendations to be followed and to help the business of Mr.
Edward Gustillo, Jr. be more productive to the business itself and the customers it serves.

References
http://www.economywatch.com
https://en.wikipedia.org
http://www.peta.org