Management Accounting

Integrated Case Study

TOP Co.

Parallel Class : Y

Sebastian Edward Goenadi ( 130416001 )

Paskalia Vica Putri Permata ( 130416015 )
Melia Suseno ( 130516003 )
Evelyne Brilliana Susanto ( 130516008 )

FACULTY OF BUSINESS AND ECONOMICS

UNIVERSITY OF SURABAYA
2018
 STATEMENT OF AUTHORSHIP

We the undersigned ( group 1 ) declare that the attached task is purely the result of our
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This report does not / has not been served / is used as the material for the duty on other
subjects unless we stated clearly that we use.
We understand that we collect this task may be reproduced or communicated for the
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If we are guilty of fraud then we are ready to accept the sanction did not pass and black list.

Sebastian Edward Goenadi Paskalia Vica Putri Permata

(130416001) (130416015)

Melia Suseno Evelyne Brilliana Susanto

(130516003) (130516008)
 CHAPTER I
TOP Co.

I. BACKGROUND PROFILE

TOP Co. is a business entity that focusing on producing furniture and selling the product
to the local and international market. The table shows us that the sales of furniture are going
stable eventhough during September, 2017 the company faced some losses. In order to
increasing their profit, the company doing evaluation in quality of product and price to gain
some profit.

Every company which is runs their business in manufacturing company needs raw
materials to produce a product. TOP co. also needs raw material to produce furniture. The
company has already classified their raw materials such as wood, mdf, veneer, plywood, and
various types of paint. TOP Co. also have overhead cost such as bolts, nuts, glue, sandpaper,
and handle. Along through the production process, TOP Co. engaged labour with varying
salaries.

In here, TOP Co. shows the flows of their production process:

Step 1 : the flow of operational process for TOP Co.

Receiving Preparing Raw Prepare Work In Process

Order Material In Process Production

Step 2 : stages of production process

Cutting Forming Finishing

In cutting process : the wood will be cut by ordered size

In forming process : the wood will be processed further
In finishing process : final process
Not only shows the flow during production process, TOP Co. also give information
related to the report of defects product, the information will be shown below:
Production Process Defects Causes
Cutting - improper measures of wood - ignorance by the production
- the wood is below standards staff
- leak in work in process - bad quality of wood
supplied

Forming - bended materials - machine performance was

under performed caused by
lacking of the maintenance
Finishing - improper colouring - ignorance by the production
- product drop from staff
conveyor - improper handling product
by the conveyor

In order to solve the defective products due to errors or omissions during production
process. TOP Co. categorized into scrap and rework. It will be defined as scrap when the issues
are appear caused by the loss of unavoidable waste of wood by volume purchased then it will
be compensated to the revenue from scrap sold. In different way, it will be defined as rework
when the defects are assume to absorb the cost of labour and overhead in full amount, but there
is no need to added some of materials.
 CHAPTER II
THEORETICAL FRAMEWORK

2.1 Basic Managerial Accounting Concepts

2.1.1 Cost is the amount of cash or cash equivalent sacrificed for goods and or
services that are expected to bring a current or future benefit to the organization.
2.1.2 Expense is costs that have been consumed or expired.
2.1.3 Cost object is any item such as product, customer, department, project,
geographic, region, plant, and so on, for which costs are measured and assigned.
2.1.4 Assigning cost to the cost object. The ability to assign a cost to a cost object in
an economically feasible way means of a caused and effect relationship. In here,
there are 2 traceability cost:
i. Direct cost : are costs that can be easily and accurately to be traced to a
cost object.
ii. Indirect cost : are costs that cannot be easily and accurately traced to a
cost object.
2.1.5 Other categories of cost. It is an addition cost to being categorized as either
direct or indirect cost, cost are often analyzed with respect to their behavior
patterns, or the way in which is a cost changes when the level of the output
changes, such as:
i. Variable cost : is increase in total as output increases and decrease in
total as output decreases.
ii. Fixed cost : is a cost that does not increase in total as output increase and
does not decrease in total as output decrease.
iii. Opportunity cost : is the benefit given up or sacrificed when one
alternative is chosen over another.
2.1.6 Product cost are those cost, both direct and indirect, of producing a product in a
manufacturing firm or of acquiring a product in a merchandising firm and
preparing it for sale. In here, product cost are divided into 3, such as :
i. Direct materials : are those materials that are a part of the final product
and can be directly traced to the goods being produced.
ii. Direct labor : is the labor that can be directly traced to the goods being
produced.
 iii. Manufacturing overhead : is all product costs other than direct materials
and direct labor.
2.1.7 Period cost : are all costs that are not product costs.
2.1.8 Selling cost : those cost necessary to market, distribute, and service a product
or service
2.1.9 Administrative cost : all costs associated with research, development, and
general administration of organization that cannot reasonably be assigned to
either selling or production.
2.1.10 Prime cost : sum of direct material plus direct labor
2.1.11 Conversion cost : sum of prime cost plus manufacturing overhead.
2.1.12 Cost of goods manufactured : represents the total product cost of goods
completed during the current period and transferred to finished goods inventory.
2.1.13 Work in process : is the cost of the partially completed goods that are still on
the factory floor at the end of time period.
2.1.14 Cost of goods sold : the cost of goods that were sold during the period therefore
transferred from finished goods inventory on the balance sheet to cost of good
sold on the income statement.

2.2 Activity Based Costing and Management

Activity based management is focusing on how to managed their activities well. In other
words, activity based management is a wide and integrated system where management is
focusing on the activity to make a improvement in reaching customer value so that the
company will be gained more profit. In here, there are 2 broader activities, such as :
i. Value added activities : is all activities which is added value to products
Here the characteristic : - there is a changes in design
- there is a real new activities exists
- make the next activities really happened
ii. Non value added cost : is all activity which is not added value to the company.
Non value added costs are costs that are caused by :
- non value added activities
- inefficient value added activities
2.2.1 Cost reduction is activity management carries with it the objective of cost reduction.
Activity based management can reduce costs in 4 ways, such as :
i. Activity elimination : it is happened when activities that fail to add value are
identified, measures must be taken to rid the organization of these activities.
ii. Activity selection : involves choosing among different sets of activities that are
caused by competing strategies.
iii. Activity reduction : decreases the time and resources required by an activity.
iv. Activity sharing : increases the efficiency or necessary activities by using economies
of scale.

2.2.2 Activity based customer costing

Customers are cost objects of fundamental interest and it can help to produce
significant gains in profit. Customers can consume customer driven activities in
different proportions with the sources of order frequency, delivery frequency,
geographic distance, sales and promotional support, and engineering support
requirements. Customers can also help to setting the price, determining customers
mix, and improving profitability.

2.2.3 Activity based supplier costing

Activity Based Costing ( ABC ) can help managers to identify the real cost of a
firm’s suppliers. Assigning the cost of supplier related activities in suppliers follows
the same pattern as ABC product and customer costing. Supplier driven activities
includes of purchasing, receiving, inspection of incoming components, reworking
products, expediting products, warranty work, and so on.

2.3 Production Cost

Production cost refers to the cost incurred by a business when manufacturing a good or
providing a service. Production costs include a variety of expenses including, labor,
raw materials, consumable manufacturing supplies and general overhead.
2.3.1 Direct labor
Direct labor is production or services is assigned to a specific product, cost
center, or work order. When a business manufactures products, direct labor
is considered to be the labor of the production crew that produces goods,
such as machine operators, assembly line operators, painters, and so forth.
 The cost of direct labor is generally considered to be the cost of regular
hours, shift differentials, and overtime hours worked by employees, as well as the
related amounts of payroll taxes.
Direct labor is considered to be a direct cost, which means that it varies
directly with revenue or some other measure of activity. This is not necessarily the
case in a production environment, where the manufacturing area typically requires
a certain amount of staffing, irrespective of the number of units produced. The
direct cost concept is more applicable in a professional billings environment, where
the cost of direct labor usually varies with changes in revenue.

2.3.2 Direct materials.

Consists of those materials consumed as part of the production process, including
the cost of normal scrap that occurs as part of the process. Scrap is the excess
unusable material remaining after a product has been manufactured. Direct
materials are those materials and supplies that are consumed during the
manufacture of a product, and which are directly identified with that product.

2.3.3 Factory overhead

Consists of those costs required to maintain the production function, but which are not
directly consumed on individual units.
Examples : utilities, insurance, materials management salaries, production salaries,
maintenance wages, and quality assurance wages.
The total product cost equals the sum of the direct material, direct labor and manufacturing
overhead :

Total product cost = Direct materials + Direct Labor + Manufacturing Overhead

The unit product cost equals total product cost divided by the number of units produced

Total Product Cost

Per-unit product cost = Number of Units Produced

2.4 Segmented Reporting and Performance Evaluation

Absorption costing and Variable Costing are two kinds of methods that can be used to
measure income. Income statement can be arrange with two method, variable costing and full
or absorption costing.
 2.4.1 Variable Costing
Variable costing is a methodology that only assigns variable costs to inventory.
This approach means that all overhead costs are charged to expense in the period
incurred, while direct materials and variable overhead costs are assigned to
inventory. There are no uses for variable costing in financial reporting, since the
accounting frameworks (such as GAAP and IFRS) require that overhead also be
allocated to inventory. Consequently, this methodology is only used for internal
reporting purposes.
Variable cost = Direct Material + Direct Labor + Variable Overhead Cost

2.4.2 Absorption costing

Absorption costing is defined as a method for accumulating the costs associated
with a production process and apportioning them to individual products. This
type of costing is required by the accounting standards to create an inventory
valuation that is stated in an organization's balance sheet. Absorption costing is
used as reporting standard appropriate with PSAK and for external reporting
purposes.
Absorption Costing = Direct Material + Direct Labor + Fixed Overhead Cost
There are some ground rules in absorption costing:
- If production > sales, absorption net income > variable net income
- If production < sales, absorption net income < variable net income
- If production = sales, absorption net income = variable net income

2.5 Tactical decision

Tactical decision is the short term decision within the small-scale actions and limited end
in view. In the other hand, the long term decision , which is known as strategic decision ,
use the relevant cost. In the short run decision making, there is an outline of one decision-
making model :
1. Recognize and define the problem
2. Identify alternatives as possible solutions to the problem. Eliminate alternatives that
clearly are not feasible
3. Identify the costs and benefits associated with each feasible alternative. Classify costs
and benefits as relevant or irrelevant, and eliminate irrelevant ones from consideration
 4. Estimate the relevant costs and benefits for each feasible alternative
5. Assess qualitative factors
6. Make the decision by selecting the alternative with the greatest overall net benefit

Relevant costing is of value in solving many different types of problems. Traditionally,

these applications include decisions :

1. Make or Buy
Make or Buy is the decision involve a choice between internal and external production,
about whether to make a particular product or to purchase it from an outside supplier.

2.6 Pricing Decision

Pricing is a crutial term since the manager should ensure that the revenue can cover all of
the remaining costs not included in the base cost. Determining a price that is large enough
to cover significant other costs requires considerable judgment and cost estimation. There
are two types of pricing :
1. Cost-Based Pricing
Cost based pricing is when the company have to determine the cost, the profit (markup)
and then the price. The mechanics of this approach are straightforward. The markup is
a percentage applied to the base cost. The challenges of cost-based pricing included
accurately estimating thee costs and selecting an appropriate markup percentage.

𝑃𝑟𝑖𝑐𝑒 𝑢𝑠𝑖𝑛𝑔 𝑚𝑎𝑟𝑘𝑢𝑝 = 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 + (𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 𝑥 𝑚𝑎𝑟𝑘𝑢𝑝 𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒)
 CHAPTER III
ANALYSIS

3.1 Basic Managerial Accounting Concepts

3.1.1 Cost object in TOP Co. is the furniture itself which was ordered by the
Customers
3.1.2 Direct cost in TOP Co. are production supervisor salary, price of raw materials,
production staff salary, factory security salary, maintenance staff salary.
3.1.3 Indirect cost in TOP Co. are quality control staff salary, grader staff salary,
purchasing staff salary, cost of building maintenance, cost of machinery
maintenance, cost of vehicle maintenance, insurance, water and electricity, rent
of special tools, depreciation of vehicles, depreciation of machinery,
depreciation of building, and fuel.
3.1.4 Direct materials in TOP Co. are Mahoni, rimba wood, sengon wood, mdf,
veener, plywood, and paint
3.1.5 Direct labor in TOP Co. are production staff salary, factory security salary,
maintenance staff salary, and supervisor salary.
3.1.6 Manufacturing overhead are glue, bolts and nuts, screw, nailm sandpaper,
handle, quality control staff salary, grader staff salary, purchasing staff salary,
cost of building maintenance, cost of machinery maintenance, cost of vehicle
maintenance, insurance, water and electricity, rent of special tools, depreciation
of vehicles, depreciation of machinery, depreciation of building, and fuel.
3.1.7 Prime cost : direct material + direct labor
3.1.8 Conversion cost : prime cost + manufacturing overhead

3.2 Activity Based Costing and Management

3.2.1 Value added in TOP Co. starts with receiving order from customer, then it
follows with preparing the raw materials needed for production, then the output
will become work in process, and the output will be placed as in process
production. The next stage of the production are including 3 important stages of
production process. In the first stage which is called cutting, the materials (
woods ) will be cut by the size ordered from customers. In this stage, the process
needs precision since the inaccuracy of 1 mm will be reprocessed from the
beginning. Eventhough it is a small error, it will give bad impact in following
 up process. So, it means that if the customers has already requested to be cut in
1 cm, the wood need to be cut accurately.
3.2.2 In the second stage which is called forming. In this stage there are 2 main
process such as wooding process and paneling process. In wooding process, the
wood which was already delivered from stage 1 will be sculpted according to
the order using spindle machinery. And it will be processed further until it has
already smooth. Then it will be delivered to paneling process to complete the
material needed such as mdf, veener, using hot press and hand banding
machines. After done in this stage, the wood will be delivered to sanding for
smoothing by using special tools which is called orbitel. Then go to the
assembling process to construct the part into furniture.
3.2.3 In the last stage which is called finishing. The process starts with final sanding,
after the product reached precious stage, then it will be delivered to quality
control of final sanding to get best result. After that, the product will be coloured
by order from customer. After all the steps were done, the quality control team
will be checked for the last time before it will be packed. After checking the
product, if there is no defects, then the product is ready to be packed.
3.2.4 Non value added in TOP Co. is doing inspection by quality control team to
ensure that the furniture is in a good condition to be delivered to the customer.
In TOP Co. case the non value added cost are come from inefficient value added
activities. So to minimized it, the company must do in a efficient way so that
the cost will be less.

3.3 Production Cost

3.3.1 Direct Labor

Table 3.3.1
Description of Direct Labor Cost for 2017
Total Direct Total Annual
Number of Wage Per Day +
Production Stage Labor Cost per Direct Labor
Direct Labor Meal Allowance
day Cost
Cutting (Stage 1) 6 person Rp. 39.294 Rp. 235.764 Rp. 80.159.760
Forming (Stage 2) 10 person Rp. 39.294 Rp. 392.940 Rp. 133.599.600
Finishing (Stage 3) 15 person Rp. 39.294 Rp. 589.410 Rp. 200.399.400
Lump sum wages in 120 person Rp. 34.000 Rp. 4.080.000 Rp.1.387.200.000
Stage 1
Lump sum wages in 160 person Rp. 34.000 Rp. 5.440.000 Rp.1.849.600.000
Stage 2
 Lump sum wages in 220 person Rp. 34.000 Rp. 7.480.000 Rp.2.543.200.000
Stage 3
TOTAL 531 person Rp. 18.218.114 Rp.6.194.158.760
Source: Internal data of “TOP” CO., adapted

3.3.2 Direct material

The raw materials of “TOP” CO. are some types of popular wood, mdf, veneer,
plywood, and some types of paint that are manufactured accordingly to the
customers’ order.
Table 3.3.2
The monthly average usage of Direct Materials
Year of 2017

Average Cost per

Raw Material Quantity Used Price
month
Mahoni/Mahagoni 971,38 Rp. 1.800.000/m3 Rp. 1.748.500.000
Rimba wood 786.82 Rp. 1.000.000/m3 Rp. 786.825.000
Sengon wood 327,84 Rp. 1.600.000/m3 Rp. 524.550.000
Mdf 4800 Rp. 55.000/sheet Rp. 262.275.000
Veener 15.611,57 Rp. 14.000/m2 Rp. 218.562.500
Plywood 2271 Rp. 77.000/sheet Rp. 174.850.000
Paint 12.490 Rp. 35.000/ kg Rp. 437.125.000
Scrap 500 Rp. 750/truck Rp. 375.000
Rp 4.153.062.500
TOTAL

Source: Internal data of “TOP” CO., adapted

3.3.3 Overhead Cost

The other production costs other than direct material and direct labor costs in the
company are classified as overhead cost. The overhead costs in “TOP” CO are
the costs of building maintenance, machinery maintenance, vehicle maintenance,
insurance, water & electricity, rent of special tools, depreciation of vehicles,
depreciation of machinery, depreciation of building, and fuel. Some descriptions
about the overhead costs for “TOP” CO. are as follows:

Tabel 3.3.3
Overhead Cost of “TOP” Co.
Year of 2017

Type of Cost/Expense Amount

 Depreciation on Vehicles Expense Rp. 107.625.000
 Depreciation on building Expense Rp. 336.000.000
 Depreciation on machinery & equipments Expense
 Maintenance of machinery & equipments Expense Rp. 1.104.000.000
 Maintenance of vehicles expense Rp. 480.000.000
 Maintenance of building expense
 Supplies of maintenance for machinery & equipments Rp. 128.400.000
expense Rp. 156.000.000
 Electricity expenses Rp. 1.154.494.000
 Fuel expenses
 Water expenses Rp. 3.360.000.000
 Rent of equipments expenses Rp. 132.000.000
 Insurance expenses Rp. 2.700.000
  Laboratory test expenses* Rp. 4.800.000
Rp. 123.600.000
Rp. 150.000.000
TOTAL Rp 7.239.619.000

Total Product Cost of “TOP” Co. (for one year)

Rp. 4.153.062.500 + Rp 6.194.158.760 + Rp 7.239.619.000 = Rp. 17.586.840.260

3.4 Segmented Reporting and Performance Evaluation

Absorption costing and Variable Costing are two kinds of methods that can be used to
measure income. Income statement can be arrange with two method, variable costing and
full or absorption costing.
3.4.1 Variable Costing
Variable costing, assigns only variable manufacturing costs to the products
VC = DM + DL + VOH
VC = Rp 4.327.537.500 + Rp 6.194.158.760 + Rp 4.803.994.000
VC = Rp 15.325.690.260

3.4.2 Absorption Costing

Absorption costing is defined as a method for accumulating the costs associated
with a production process and apportioning them to individual products. This type
of costing is required by the accounting standards to create an inventory valuation
that is stated in an organization's balance sheet. Absorption costing is used as
reporting standard appropriate with PSAK and for external reporting purposes.

Absorption costing, assigns all manufacturing costs to the product

AC = DM + DL + FOH
AC = Rp 4.327.537.500 + Rp 6.194.158.760 + Rp 2.435.625.000
AC = Rp 12.912.321.260

Absorption Costing Variable Costing

Sales 91.511.147.377 91.511.147.377
(COGS) 17.761.315.260 15.325.690.260
GROSS 73.749.832.117 76.185.457.117
PROFIT
(Operating 0 2.435.625.000
Expense)
OPERATING 73.749.832.117 73.749.832.117
INCOME

There are some ground rules in absorption costing:

- If production > sales, absorption net income > variable net income
- If production < sales, absorption net income < variable net income
- If production = sales, absorption net income = variable net income

If the company wants to make a costing, it would be better if the company uses
absorption costing because not only they have the data of variable cost, but also a
fixed costs is included. So the costs is more revealing about the actual costs for
making an item. But if the company wants to have a decision making, it would be
better if they use variable costing, because they did not reveal the fixed cost.
3.5 Tactical Decision
In this case, the segment is based on one of the direct materials, which is the rimba wood.
Assume that the cost to produce the rimba wood itself is Rp 1.150.000 . TOP Co. needs
direct material Rp 875.000 and direct labor Rp 275.000 . Tactical decision making is used
by the TOP Co. to determine the problem in obtaining the wood as the direct material of
furniture.
Step 1 : Problem : Maximizing profit
Step 2 : Alternative : Make or Buy
Step 3 : Cost : DM, DL, purchase price, depre. Expense
Benefit : Furniture sales
Step 4 : Cost : DM, DL, purchase price
Benefit :-
Make Buy
DM Rp 875.000 -
DL Rp 275.000 -
Purchase Rp 1.000.000
price
Total Cost Rp 1.150.000 Rp 1.000.000
Step 5 : Qualitative aspect
- The quality from the supplier
- Employee lay off
- Build cooperation
Step 6 : Tactical Decision Making
It is better for TOP Co. to buy the rimba woods from the supplier because it
cost less than produce it self.

3.6 Pricing Decision

One of the more difficult decisions faced by a Top Co is pricing because they have to decide
at which price they want to sell their product to the market .
Direct Materials Rp 4.327.537.500
Direct Labor Rp 6.194.158.760
Overhead Cost Rp 7.239.619.000
Net Sales – Jan Rp 6.595.204.524
Net Sales – Feb Rp 7.924.632.813

3.6.1 Cost-Based Pricing

In this case, it should be considered based on the sales , not from the price because of the
information in the case but it still in the same formula and concept. Assume that TOP Co
used cost based pricing in determining the price.
DM a month Rp 4.327.537.500
6.194.158.760
DL a month = Rp 516.179.896,7
12
7.239.619.000
OH a month = Rp 603.301.583,3
12

From this calculation, it can be concluded that TOP Co. take around 21,08% profit from
the the cost.
Total Cost Rp 5.447.018.980 (100%) 𝑇ℎ𝑒 𝑀𝑎𝑟𝑘𝑢𝑝 𝑝𝑟𝑖𝑐𝑒
Gross Profit Rp 1.148.185.544 (21,08%) 1.148.185.544
Net Sales – January Rp 6.595.204.524 (121,08%) =
5.447.018.980
= 21,08 %
 CHAPTER IV
CONCLUSION

Top Co as the furniture company which sold the product either in local or international
market faced a downturn . The management of TOP Co is really seeking the best solution to
become cost leading company without sacrificing the standard quality for more customers in
the future. In the production term, there are the failure cost that should be reduced by TOP Co
since a lot of returned furniture were asked by the customer. These reworks and warranty claims
might be mitigated through the better performance and number of product testing. The
improvement on maintenance of machinery needs quite amount of extra cost eventhough this
big increase is worth of lowering rework and claim. Not only that, but a better policy for
selecting supplier will also lower the rework.
The other way to help the manager TOP Co is by using the Target-Cost Pricing to
determine the price of a product sine the customer have been become more sensitive to the
market. Making a unique design will be highly appreciated in the customer , however not with
the high price. In order to fulfill the demand, the manager should consider the price of the
market first and then downforward to the cost . Considering the market price first can be much
more helpful for TOP Co to compete within the competition pressure. After seeking by the
local market, then can be more expaned to the international market where the price will be
much different compared with the local price.
Selecting the labor can also be the other alternatives to the TOP Co. In fact , the scrap
and reworks are also done by the staff where the company charged the cost of scrap to the staff.
Meanwhile , TOP Co has the quality control staff and grader staff (checking the quality of
woods). In these case, it would be better if TOP Co combined both of them due to the similar
responsibility to check the quality of the wood. There are a lot of number of labors do the
similar things , that can waste of duty. By combining the labor, TOP Co can reduce the Direct
Labor cost to that the product cost can be reduced.
MIND MAP