THE IMPLEMENTATION OF ACTIVITY-BASED

COSTING AND ITS IMPACT ON DECISION-

MAKING IN PT. K

SKRIPSI

By

DEA HANDAYANI

008201400025

Presented to

The Faculty of Economics, President University

In partial fulfillment of the requirements

For

Bachelor Degree in Economics, Major in Accounting

PRESIDENT UNIVERSITY Cikarang Baru - Bekasi

Indonesia

2018

  i

THE IMPLEMENTATION OF ACTIVITY-BASED

COSTING AND ITS IMPACT ON DECISION-

MAKING IN PT. K

SKRIPSI

By

Dea Handayani

008201400025

Presented to

The Faculty of Economics, President University

In partial fulfillment of the requirements

For

Bachelor Degree in Economics, Major in Accounting

President University

Cikarang Baru - Bekasi Indonesia

2018

  ii

  iii

  iv

CONSENT FOR INTELLECTUAL PROPERTY RIGHT

Title of Skripsi: The Implementation of Activity-Based Costing and its

Impact on Decision-Making in PT. K

1. The Author hereby assigns to President University the copyright to the

Contribution named above whereby the university shall have the exclusive

right to publish the Contribution and translations of it wholly or in part

throughout the world during the full term of copyright including renewals and

extensions and all subsidiary rights. ���

2. The Author retains the right to re-publish the preprint version of the

Contribution without charge and subject only to notifying the university of

the intent to do so and to ensuring that the publication by the university is

properly credited and that the relevant copyright notice is repeated verbatim. ���

3. The Author retains moral and all proprietary rights other than copyright, such

as patent and trademark rights to any process or procedure described in the

Contribution. ���

4. The Author guarantees that the Contribution is original, has not been

published previously, is not under Consideration for publication elsewhere

and that any necessary permission to quote or reproduce illustrations from

another source has been obtained (a copy of any such permission should be

sent with this form). ���

5. The Author guarantees that the Contribution contains no violation of any

existing copyright or other third-party right or material of an obscene,

  v

  vi

PLAGIARISM CHECK

  vii

  viii

  ix

PERMISSION LETTER FROM THE COMPANY

  x

ABSTRACT PT. K is a small-medium company focusing in knitting industry. Currently,

the company is implementing Traditional Costing method. A new costing system, which is Activity-Based Costing method (ABC), is going to be implemented. The aim of this research is to find out a more accurate total cost of the products to obtain higher profit and to know which products are generating profit and which products are making a loss, through one of the types of short-term decision-making, which is keep or drop analysis. The result of this research indicates that by implementing ABC, 3 of the products, such as collar, cuff, and bottom are supposed to have higher total cost, but because of the implementation of current costing system, it is lower, which indicates undercosting. However, for rib and toy sweater, it is overcosted. Moreover, the result of using keep or drop analysis indicates that by using ABC method, one of the products, which is cuff, is unprofitable. A recommendation for the company is that it is suggested for the company to use ABC method as the costing system, since it is more accurate, more detail and helps the company to make better decision-making.

Keywords: Traditional Costing, Activity-Based Costing, Cost Driver, Decision-

Making

  xi

INTISARI PT. K adalah perusahaan kecil menengah yang bergerak di bidang rajut.

Saat ini, perusahaan tersebut menerapkan sistem penetapan biaya dengan metode Tradisional. Sistem biaya baru, yaitu Activity-Based Costing (ABC) akan diterapkan. Tujuan dari penelitian ini adalah untuk mencari tahu biaya produk yang lebih akurat untuk mendapatkan keuntungan yang lebih tinggi dan untuk mencari tahu produk apa yang menguntungkan dan merugikan, dengan menggunakan salah satu tipe pengambilan keputusan jangka pendek, yaitu keep or drop. Hasil dari penelitian ini menunjukan bahwa dengan menerapkan ABC, 3 produk yaitu collar, cuff, dan bottom seharusnya memiliki biaya produk yang lebih tinggi, tetapi karena penerapan sistem yang sekarang, biaya produk ketiga barang tersebut terlalu rendah. Sedangkan, rib dan toy sweater memiliki hasil yang berkebalikan. Selanjutnya, hasil dari penerapan analisa keep or drop menunjukan bahwa dengan menggunakan metode ABC, salah satu produk yaitu, cuff menghasilkan kerugian. Rekomendasi untuk PT. K adalah sebaiknya perusahaan tersebut mencoba untuk menerapkan metode ABC karena lebih akurat. Dari hasil yang didapat, menunjukan bahwa metode ABC lebih rinci dan dapat membantu perusahaan untuk melakukan pengambilan keputusan yang lebih baik.

Keywords: Traditional Costing, Activity-Based Costing, Cost Driver, Decision-

Making

  xii

ACKNOWLEDGEMENT

First of all, I would like to express my deepest gratitude to Allah SWT for

giving me the strength and guidance to complete my skripsi within the scheduled

time. A skripsi with a title “The Implementation of Activity-Based Costing and

its Impact on Decision-Making in PT. K.” was done as a part of fulfilling the

requirement for bachelor degree in Accounting major in President University. On

this occasion, I would like to deliver my gratitude to the parties who have helped

and supported me in making this skripsi, namely to:

1. My beloved family, Appa, Eomma, Karen and In Chel who always become

my biggest supporters in my life. Thank you for the love, prayer, and nonstop

support you have given to me until now. Thank you for being a light in my

life and giving me the opportunities in order to reach the utmost success.

2. My thesis advisor, Ma’am Monika Kussetya Ciptani. Thank you Ma’am for

your patience, guidance and full support in making this thesis. Without

Ma’am, this thesis cannot be completed on time.

3. The Dean of Faculty of Business, Head of Accounting Study Program,

Accounting Study program staffs and all Accounting lecturers. Thank you for

the opportunity of having an experience in making skripsi, for supporting the

study activities in this President University and for delivering the knowledge

to me since 2014 until now.

4. Muhammad Rasil Fashhan, who always become a loyal partner until now.

Thank you for staying with me for the past 2 years and support me in the

greatest of moments and the darkest of hours, especially during the making

process of this skripsi. Thank you for being my biggest supporter besides my

family.

5. Bersama Kita Bisa and Para Pencari squad, Daniel Robertho P., Frederica

Constantia, Ivana S., Maria Jesslyn S., Mulyani Fitri, M. Farhan, M. Rasil

Fashhan, Ramiz Fadhillah, Ranny Andriani C., Rizka Amalia, Widiasih

  xiii

Mumpuni, and Widya Yohana S. Thank you for always being my mood

booster in my university life. Thank you for being a passionate and endless

companion. I am incredibly fortunate to have someone like you in my life.

You guys are the best.

6. My personal doctor, Steffi Cong Andinata, who always become my buddy,

sister and teacher since 2008. Thank you for teaching me on how to be strong,

for being a good listener, life advisor and everything. Thank you for the

support you have given to me while making this skripsi. Thank you for being

there for me whenever I need it. Let’s stay together till the end.

7. My first buddy in President University, Dewi Salindri and Gabriella Ganis

Sekaringpuri. Thank you for the beautiful memories in B-4 dorm. Thank you

for all the help and encouragement since the first time we met until now.

Thank you for the laugh and jokes.

8. Tante Yani and Om Ato from PT. K. Thank you for helping me in supporting

my skripsi for the past 5 months and letting me uses the information from the

company to complete my research.

9. All Accounting President University students batch 2014. Thank you for your

support indirectly. Let’s end our university life beautifully together.

10. Other parties that cannot be mentioned one by one who always give support

and encouragement therefore I can finish my skripsi according to the time

given.

Finally, I hope Allah SWT is pleased to repay all the good of all those who

have helped me and hopefully this research is useful for readers in the future and

can satisfy the related party.

Bekasi, March 31st, 2018

Dea Handayani

  xiv

TABLE OF CONTENT  COVER PAGE ....................................................................................................... i

PANEL OF EXAMINER APPROVAL SHEET ................................................ ii

DECLARATION OF ORIGINALITY .............................................................. iii

CONSENT FOR INTELLECTUAL PROPERTY RIGHT ............................. iv

PLAGIARISM CHECK ...................................................................................... vi

PERMISSION LETTER FROM THE COMPANY ......................................... ix

ABSTRACT ........................................................................................................... x

INTISARI .............................................................................................................. xi

ACKNOWLEDGEMENT .................................................................................. xii

TABLE OF CONTENTS ................................................................................... xiv

LIST OF TABLES ............................................................................................ xvii

LIST OF FIGURES ........................................................................................... xix

CHAPTER I - INTRODUCTION ....................................................................... 1

1.1 Research Background .................................................................................. 1

1.2 Research Questions ..................................................................................... 5

1.3 Research Objectives .................................................................................... 6

1.4 Significance of the Research ....................................................................... 6

1.5 Thesis Organization .................................................................................... 7

CHAPTER II - LITERATURE REVIEW ........................................................ 10

2.1 Theoretical Review ................................................................................... 10

2.1.1 Cost of Product ............................................................................... 10

2.1.2 Traditional Costing System ............................................................ 12

2.1.2.1 Benefits of Traditional Costing System ........................... 14

2.1.2.2 Limitations of Traditional Costing System ...................... 14

2.1.3 Activity Based Costing (ABC) ....................................................... 15

2.1.3.1 Benefits of Activity Based Costing System ..................... 17

  xv

2.1.3.2 Limitations of Activity Based Costing System ................ 19

2.1.3.3 Reasons Most Companies did not adopt ABC ................. 20

2.1.3.4 Seven Ways to Implement ABC ...................................... 21

2.1.3.5 Cost Hierarchies in ABC .................................................. 22

2.1.4 Decision-Making ............................................................................ 22

2.1.4.1 Impact of Accuracy of Product Costing towards Decision-

Making ............................................................................. 23

2.2 Previous Researches and Limitations ....................................................... 25  

CHAPTER III - RESEARCH METHODOLOGY .......................................... 28

3.1 Research Design ....................................................................................... 28

3.2 Research Instrument ................................................................................. 28

3.2.1 Data Collection Method ................................................................ 28

3.2.2 Data Analysis Method ................................................................... 31

3.3 Types of Data ........................................................................................... 31

3.4 Company’s Background ........................................................................... 33

3.4.1 Brief Company Profile .................................................................. 33

3.4.2 History of Company ...................................................................... 33

3.4.3 Company’s Main Operations ........................................................ 34

3.4.4 Organizational Structure ............................................................... 35

3.4.5 Company’s Production Process ..................................................... 35

CHAPTER IV – RESULTS AND ANALYSIS ................................................. 39

4.1 Costs ......................................................................................................... 39

4.1.1 Cost Object Identification ............................................................. 40

4.1.2 Direct Material Cost ...................................................................... 40

4.1.3 Direct Labor Cost .......................................................................... 41

4.2 Traditional Costing Method ..................................................................... 43

4.3 Activity-Based Costing Method ............................................................... 44

4.3.1 Activities Identification and Cost Allocation ................................ 44

4.3.2 Determining Activity Cost Driver and Activity Consumption ..... 54

4.3.3 Overhead Cost of the Products ...................................................... 55

  xvi

4.3.4 Consumption of Total Cost using Traditional Costing and ABC . 56

4.4 Impact on Decision-Making ..................................................................... 59

4.4.1 Analysis on Keep or Drop Decision using Traditional Costing

System .......................................................................................... 59

4.4.2 Analysis on Keep or Drop Decision using Activity-Based Costing

System .......................................................................................... 61

CHAPTER V - CONCLUSION AND RECOMMENDATION ...................... 74

5.1 Conclusion ................................................................................................ 74

5.2 Limitations and Recommendation ........................................................... 75

5.3 Implications .............................................................................................. 79

REFERENCES .................................................................................................... 80

APPENDICES ..................................................................................................... 83

                                                   

  xvii

     

LIST OF TABLES Table 2.1. Previous Studies on Activity-Based Costing Implementation ............. 25

Table 4.1. Total Unit of Products Produced in 2016 ............................................. 40

Table 4.2. Direct Material Cost Allocations to Products ...................................... 41

Table 4.3. Direct Labor Cost in each Activity ...................................................... 41

Table 4.4. Direct Labor Cost Allocations to Products .......................................... 42

Table 4.5. Direct Labor Cost Rate ........................................................................ 43

Table 4.6. Direct Labor Hours of Each Product .................................................... 43

Table 4.7. Overhead Cost Rate ............................................................................. 44

Table 4.8. Indirect Labor Cost Allocations ........................................................... 45

Table 4.9. Needle Cost Allocations ....................................................................... 46

Table 4.10. Repair and Maintenance Cost Allocations ......................................... 47

Table 4.11. Depreciation Cost Allocations ........................................................... 47

Table 4.12. Electricity Cost Allocations ............................................................... 48

Table 4.13. Water Cost Allocations ...................................................................... 49

Table 4.14. Telecommunication Cost Allocations ................................................ 49

Table 4.15. Fuel Cost Allocations ......................................................................... 50

Table 4.16. Gas Cost Allocations .......................................................................... 50

Table 4.17. Packaging Cost Allocations ............................................................... 51

Table 4.18. Office Supplies Cost Allocations ....................................................... 51

Table 4.19. Transport Cost Allocations ................................................................ 51

Table 4.20. Tax Expense Allocations ................................................................... 52

Table 4.21. Overhead Cost Based on Each Activity ............................................. 53

  xviii

Table 4.22. Activity Cost Pools and Cost Drivers of PT. K ................................. 54

Table 4.23. Cost Drivers Consumption of Each Product ...................................... 55

Table 4.24. Overhead Rate of the Product/Unit .................................................... 56

Table 4.25. Total Cost of the products using Traditional Costing Method ........... 57

Table 4.26. Total Cost of the Products using Activity-Based Costing Method .... 57

Table 4.27. Comparison of Total Cost using Traditional and ABC Method ........ 58

Table 4.28. Cost Classification ............................................................................. 59

Table 4.29. Segmented Income Statement using Traditional Costing .................. 60

Table 4.30. Classifications of Activity Resources ................................................ 62

Table 4.31. Segmented Income Statement using ABC ......................................... 63

Table 4.32. Segmented Income Statements using ABC After Dropping Cuff .... 65

Table 4.33. Keep or Drop Analysis ...................................................................... 68

Table 4.34. Segmented Income Statements using ABC After Dropping Cuff and

Eliminate Resource Spending ............................................................ 70

Table 4.35. Three Alternatives of Keep or Drop .................................................. 73

Table 4.36. Electricity usage ................................................................................. 89

Table 4.37. Details of Direct Labor Hours ............................................................ 89

Table 4.38. Details of Cost Driver Consumption .................................................. 89

  xix

LIST OF FIGURES

Figure 2.1. Traditional Costing System Cost Allocation ...................................... 12

Figure 2.2. Activity-Based Costing System Cost Allocation ................................ 17

Figure 3.1. Knitted Fabrics Production Process .................................................... 35

Figure 3.2. Toy Sweater Production Process ........................................................ 35

 

  1

CHAPTER I

INTRODUCTION

1.1 Research Background

As years keep on growing, competition is also getting tighter due to the

presence of businesses in the market. In recent years, there has been an

increasing global competition both manufacturing and service company.

Gunasekaran et al. (1999) explained that the competition in manufacturing

companies keeps on increasing every year in offering goods and services in

best quality and competitive prices. Increasing productivity could be made to

reduce the product cost or another way is by reducing manufacturing cost.

Cost system is very useful for companies in order to manage their cost.

It is good for the company to have the right cost management system due to

the relevant and timely information obtained. The information will be used to

supports better management on the resources of the products that will results

in the improvement of cost, quality and profitability (Babad & Balachandran,

1993).

Cost system provides accurate information related with cost that can be

used by managers to make strategic decisions and improvements of the

operational activities. In addition, by having accurate information, it will

help companies to do better since they are on the right track. Once the

company relies on the wrong cost estimation, it will affect the whole

operation, which is misdirects decisions.

  2

Traditional costing method is one of the tools that can be used to

allocate indirect cost. It is the costing system that allocates factory overhead

by volume of production. The examples of allocation base on traditional

costing are labor hours and machine hours, which is rarely represents the

indirect cost of a product (Majid & Sulaiman, 2008).

A study done by Mishra and Vaysman in 2001 clarify that traditional

costing is known to be the costing system that is less expensive and simpler.

On the other hand, it could results in distortion of product costs due to the

cost allocation because it does not reflect the actual cost of the product. For

example, activities will be needed for some products that are more complex

than the other, which means it needs more cost allocation base to be more

precise. If manager uses distorted cost numbers in making decision, it might

lead to long-run losses. Therefore, companies around the world are

encouraged to use activity-based costing method to avoid that kind of

situation.

Activity-based costing method (ABC) is considered as a popular tool in

the 1980s among manufacturing companies around the world and due to the

accuracy of the system (Pierce & Brown, 2006). Nassar et al. (2015) states

that around 20% until 30% of companies around the world have use ABC.

Furthermore, ABC is used due to the limitations of traditional costing

because in ABC, costs are allocated based on the work activities of the

products, which means that there are multiple cost drivers.

  3

ABC is the system that provides accurate and good information about

the cost that will be very useful for managers in making appropriate product

mix, pricing, process improvement, and others (Ittner et al., 2002). By

implementing ABC, companies are able to know which products are more

profitable than the others because ABC re-allocates the indirect costs

accurately according to the activities.

Nowadays, lots of businesses exist in every part of the world either the

large one or the small one. Not only large industries, the existence of small

medium enterprises bring positive impact as well to the nation’s economy all

over the world due to the contribution of job opportunities and output, which

shows that SMEs play a big role as well in the market (Gunasekaran et al.,

1999). ABC is known for the accuracy of the system and has been popular

among large industries around the world. However, SMEs have not given

deeper attention on ABC, while actually it is very important for the company

to improve their performance and competitiveness (Gunasekaran & Singh,

1999).

A study done by Ahmad (2013) stated that there are more than 98%

companies in ASEAN are considered as SMEs. However, from those 98%,

the number of SMEs that use ABC as their costing system was very low.

Large enterprises make a greater use of ABC compared to SMEs. Moreover,

Ahmad et al. (2017) shows that there are only 17% of SMEs in Asia that

implement ABC. From that fact, the researcher is interested to use SMEs as

the sample of the research.

  4

Duh et al. (2009) stated that most of the previous studies were

conducted within companies located in Western countries and not many

studies are conducted in Asia. However, Asia’s companies also have a

significant impact on the world’s economy. Furthermore, previous research

has been focusing on applying ABC system on different industry. Also,

according to Majid and Sulaiman (2008), in developing countries, only 4%

until 28% companies adopt ABC. One of the developing countries is

Indonesia, which means that companies in Indonesia are rarely using ABC.

While a study on Asia’s developing companies and other industries will also

be beneficial both theoretically and practically. Therefore, a knitting company

that is located in Indonesia is selected for this study.

PT. K is a company involves in knitting industry. Based on the first

interview with the CEO and head of finance division on Saturday, September

16th, 2017, currently the company has been facing some problems related

with the profit. There is a decrease in the profit for several years. It was also

found by the head of finance division that the cost of making some products

are higher than the revenue the company generates, which indicates a loss.

Due to that situation, it shows that there is a problem regarding the decision

on determining the product cost, resulting in an error in determining the

selling price as well.

Recently, PT. K is using one of the costing systems, which is traditional

costing. It is suspected that the costing system used by the company is not

accurate enough, therefore ABC is implemented to know the total cost of the

  5

products using ABC and to know whether the total cost that is being used

now is higher or lower than the total cost using ABC. Then, decision-making

on whether to use the existing system or ABC system and whether to drop

some products will be discussed.

This study will discuss deeply about the implementation of ABC

system and its impact on decision-making in PT. K. By implementing ABC,

it is expected that the company is able to make an improvement. This study

examines how applying ABC costing will help knitting company to make

analysis on the cost of production, manage overhead cost and make

recommendations regarding the total cost or products that will lead to an

increase in profit.

1.2 Research Questions

Based on the research background explained above, here are the

questions of the study:

1. How is the calculation of total cost/unit of the products if overhead cost

is allocated using existing method (Traditional costing)?

2. How is the calculation of total cost/unit of the products if overhead cost

is allocated using ABC?

3. What is the best possible decision the company can do to maximize their

profit based on keep or drop decision analysis using traditional costing

and ABC?

4. What is the impact of implementing ABC on decision-making?

  6

1.3 Research Objectives

According to research questions stated above, there are 4 purposes of

this study, such as:

1. To find out the total cost/unit of the products if overhead cost is allocated

using traditional costing.

2. To find out the total cost/unit of the products if overhead cost is allocated

using ABC.

3. To find out the best decision the company can do to increase their profit.

4. To explore the impact of implementing ABC on decision-making.

1.4 Significance of the Study

According to the objectives mentioned above, the results of this study

are expected to be beneficial for several parties, such as:

a. Future Researchers

This study is expected to provide deeper knowledge in Accounting

field especially on ABC method. Moreover, it is also expected to be able

to give information to related parties regarding the implementation of

ABC in PT. K. Another benefit is to become a reference related to the

topic for the future.

b. The Company

Due to the problem faced by PT. K, this study will provide the

information and suggestion that is very useful for the success of the

company. They are going to have new experience of using new system

  7

and the manager is able to make better decision-making due to the

accuracy of information. Moreover, manager is able to know which

products are costly and withstand the company to gain more profit.

Therefore, the manager will decide which one is better for the company.

c. The Researcher

This study is expected to provide the researcher with new experience

in applying ABC method from the theory that has been taught inside the

class with the practical experience inside the company. The researcher

also will get benefit on how ABC is implemented in real life condition.

1.5 Thesis Organization

Chapter 1 – Introduction

This chapter includes the background of this research, research

questions, the objectives of the research and the significance of the study. It

described the specific problem. Moreover, there is a brief explanation on the

content of each chapter. PT. K is a company focusing on knitting industry.

Recently, the company is facing a problem in their profit. ABC system is

implemented to find out the new total cost and keep or drop product analysis

will be made. It is expected to help the company in finding solution to

increase their profit.

Chapter 2 – Literature Review

This chapter includes the background theory of this research and also

the relevant research about the problem. The theory includes the brief

  8

explanation and types of cost, traditional costing system, and ABC system. It

will also discuss about the impact of accurate product costing in making

decision. Furthermore, there are several previous researches that serve as the

guidelines of this research.

Chapter 3 – Research Methodology

This chapter includes the research design, research instrument, which

includes the method of data collection and also the data analysis method, the

types of data that will be used and also the company profile of the sample.

This research is a qualitative research of knitting industrial company (PT. K)

in determining product cost using ABC system. The data was collected

through documentation, interview and observation starting from October –

November 2017.

Chapter 4 – Data Analysis and Interpretation of Results

This chapter includes the description of the data obtained and the

analysis, which will answer the research questions that have been listed in

chapter 1. The result shows that there are 3 products that are undercosted and

2 products that are overcosted. From keep or drop analysis, there is 1 product

that has negative product margin. However, the analysis indicates that the

highest profit will be generated if the company decides not to drop any

product.

  9

Chapter 5 – Conclusions and Recommendations

This chapter includes the summary of research findings and also the

things that cannot be done by researcher / limitations followed by the

recommendations for the future research. The conclusion of this study is that

it is better for the company to implement ABC system. Furthermore, the

impact of implementing ABC in decision-making is that ABC provides better

and clearer information regarding the total cost of the product.

  10

CHAPTER II

LITERATURE REVIEW

2.1 Theoretical Review

2.1.1 Cost of Product

Cost is the amount of cash that is spent or paid for an asset (Horngren

et al., 2015, p. 51). It includes all of the cash spent to acquire the asset until

its ready to use. For instance the cost of an inventory will includes the

freight cost and the cost of building will includes all of the spending until

the building is ready to use. In companies, both service and manufacturing,

and in all kind of industries, cost is divided into several types, based on its

category. Here are the two examples of the categories based on Horngren et

al. (2015, p. 52-55):

a. Cost based on the behavior in accordance with the activity

1. Variable cost; is the cost that will be change as the total product

increase. It includes the direct materials, direct labor and sales

commissions. For example, a company would like to produce a desk.

Then, the variable cost will be the cost of the wood.

2. Fixed cost; is the cost that will never change no matter how big the

quantity of the products is. The example is the rental expense of a

building (Accountingverse, n.d.). The amount of rental expense will

never change even though the total products produced is higher or

lower.

  11

b. Cost based on the ease of traceability

1. Direct cost; is the cost that can be traced directly to the product. It

includes the material and the labor. According to Hansen et al.

(2009, p.28), direct cost is related directly to the production. From

the case in section a, the direct cost associated with the desk will be

the wages for the workers that make the desk and the materials to

make the desk itself.

2. Indirect cost; is the cost that is not directly related to the product and

it cannot be easily traced to the product. The example will be based

on the case before, if a company would like to produce a desk, the

wages of the workers and materials will be the direct cost. However,

the indirect cost will be the electricity expense and advertising

expense. It cannot be traced directly to the product but it is needed to

produce the desk. Indirect cost is needed to decide the total product

cost. However, indirect cost is not easy to be traced, therefore

costing system to determine the allocation of indirect resources to

the product can be traced correctly. The examples are traditional

costing system and ABC.

There are also the other terms called cost object, cost driver and cost

allocation. Cost object is usually anything; it can be product, consumers,

department, activities, etc., for which the cost can be measured. However,

cost driver is the variable that becomes the root cause of why a cost occurs.

  12

Lastly, cost allocation is the process to identify indirect cost of the products

to cost object.

2.1.2 Traditional Costing Method

Traditional costing is the costing system that allocates the

manufacturing overhead cost using volume-based measure. This method

will be very good for companies that have homogenous product, as they

consume the same amount of resources (Fennema et al., 2015). Traditional

costing is the method that uses one allocation base for the whole products,

for example direct labor hours. It was popular and developed decade years

ago. At that time, direct labor hours is the allocation base used because

labor was the major expense, which is around 80% of all cost, that is why it

became the base. However, now, direct labor expense only 8% - 12% of the

costs, which shows that it’s not suitable anymore to become the base

(Cabell & Stevenson, 2002).

Source: Cost Management Accounting & Control (p.86), by Hansen, Mowen & Guan, 2009

Figure 2.1. Traditional Costing System Cost Allocation

  13

Figure 2.1 shows how costs are allocated to the products. Direct costs,

such as material and labor costs are traced directly to the products because it

is related directly to the products. However, the overhead costs cannot be

traced directly because it is not the main costs for making the products, but

it is needed to produce the products. In figure 2.1, traditional costing use

direct labor hours as a base to determine the overhead costs as a whole.

Then, both direct and overhead costs will be added to generate the total

product costs.

According to Hansen et al. (2009) there are two ways to allocate

indirect cost in traditional costing, such as:

a. Plant-wide Rates

It is the method that allocates all of the indirect cost or

manufacturing overhead cost of the company to a single unit level

driver. It is usually using direct labor hours, machine hours and a

percentage of a product’s direct cost. A plant-wide rate is suitable for

company that has similar products because they will consider the

resources used by one product is the same with the other. However, it is

not appropriate for company that has heterogeneous products because

the resources used will also be different.

b. Departmental Rates

It is the method of allocating indirect cost based on each

department. This method usually used by company that has diverse

products with different production process. For example, a company

  14

has two departments. Both departments will have their own driver, the

first department use machine hours as their driver while the second use

direct labor hours. After allocating the cost, the allocation cost of each

department will be add together to form the total indirect cost of the

product.

2.1.2.1 Benefits of Traditional Costing Method

Based on Johnson (2011), the main benefit of traditional costing

is that it is in accordance with Generally Accepted Accounting

Principles (GAAP). Also, if the company only sell one kind of product,

it will be very good to apply traditional costing. Another one is it is

easy to implement traditional costing (Pondent, 2017). It is easy to

trace the direct labor and direct material costs to the product.

2.1.2.2 Limitations of Traditional Costing Method

The major disadvantage of using traditional costing as costing

system is that it could lead to distortion of product cost. The distortion

happens due to the application of allocation base. In case those

companies are producing diverse and complex product, it’s better not to

use traditional costing because the resources used for each products will

be different (Fennema et al, 2015). They need to add another base,

because the more complex the product, the more allocation base needed

to make it precise. It also can leads to distortion because it doesn’t

provide accurate information for the management. Thus, will results in

  15

poor decision made by management and bad thing will happen to the

company (Chea, 2011).

Managers also sell and make decision about product, price and

others based on inaccurate cost information. It is very harmful to make

decision based on inaccurate information because it will leads to the

decreasing of revenue and sometimes in the future can lead to

bankruptcy because they are not able to compete in the market

(Pondent, 2017). During allocating the overhead, traditional costing

only include the cost to the product, while non-manufacturing costs are

excluded and it becomes the period cost, for example advertisement

expense (Johnson, 2011).

Nowadays, everything in this world has been change, which

involves the changes of manufacturing companies. Today, everything is

becoming more advanced; it includes the advancement of cost

allocation method. The new cost allocation method exists to overcome

the limitations of traditional Costing, which is ABC (Cohen, 2004).

2.1.3 Activity Based Costing Method (ABC)

ABC method is the costing system that allocates the indirect cost

based on each activities of the cost object. According to the survey in

manufacturing industries in the USA, made by Raffish (1991) stated in Duh

et al (2009), around 45 to 55 percent of total product cost is the direct

material, while 30 to 50 percent is the manufacturing overhead. Therefore,

  16

because manufacturing overhead plays a big role in product cost, it is better

if companies could use the accurate costing system.

Cost system have a goal to allocate indirect cost to the product based

on their consumption and each type of products will be different depend on

the complexity. However, traditional costing often fail to achieve that goal,

therefore, some researchers argue that companies need to implement ABC

rather than traditional costing (Fennema et al., 2015). Furthermore, ABC

method is the solution for problems that cannot be solved using traditional

costing system. One of the limitations of traditional costing is the lack of

accuracy in determining the cost of products.

According to Haroun (2015), ABC is a good alternative of cost system

since it is more accurate. ABC has a goal to make a realistic cost allocation

to products. To achieve that goal, it can be done by paying attention to the

activity of the company itself. According to the research done by Majid &

Sulaiman (2008), most companies use ABC for making decisions regarding

the product, to reduce the costs of products, budgeting, and performance

measurement.

Sometimes, most companies facing problems regarding their profit

and loss. Those happen due to the mistakes in deciding the total cost. They

are selling their products for below the cost, which makes their company

facing a loss (Cohen, 2004). ABC also helps company to know exactly

which activities / products that are beneficial for the company and which

one is not (Chea, 2011).

  17

Today, most businesses are not only focusing on one product.

However, they are always inventing new products, which is more complex

than before. ABC is the cost system that recognizes this complexity because

they are using multiple cost drivers. Therefore, companies with lots of

products variance are encouraged to implement ABC.

Figure 2.2 explained the cost allocation using ABC. Different from

figure 2.1, overhead costs in figure 2.2 are allocated with more than one

base. The green boxes are the activity cost driver while the purple boxes are

the bases from each activities that will be used to determine the overhead

costs. After the costs from each activity are found, it will be summed up and

added to the direct costs that will results in total product cost.

2.1.3.1 Benefits of Activity-Based Costing System

ABC is beneficial for companies due to several reasons. First, the

result from ABC is accurate because it is according to the actual

Source: Cost Management Accounting & Control (p.96), by Hansen, Mowen & Guan, 2009

Figure 2.2. Activity-Based Costing System Cost Allocation

  18

activities performed on specific jobs. As a result, better decision-making

will be made because of the accuracy (Nassar et al, 2009). Second,

through cost analysis and resource consumption patterns, management

can reengineer the manufacturing process in achieving a more quality

and efficient output pattern. Third, the accuracy will lead to more

accurate product profitability measurements and better strategic decisions

about selling pricing and product lines.

Overall, the benefit of implementing ABC is there is an

improvement regarding the internal of the company, which will results in

high profit. The accurate information from ABC will be used by

managers to implement improvement. For example by discontinuing

product that is a costly and stop serving unprofitable customer. As a

result from this improvement, the company’s performance also will be

improved.

By implementing ABC, it can help the management to know which

products or activities are value added to the company or which one is

non-value added to the company. Furthermore, the unprofitable products

can be eliminated, and the company is able to increase their profitability

without increasing the prices.

Another benefit is ABC pays attention to non-manufacturing costs

unlike traditional costing. Advertisement expense is one of the examples

of non-manufacturing cost. This kind of expense is not directly related to

the product, however it has a major contribution to the total cost. It can

  19

be effectively designated since utilizing activity based costing can

appropriately comprehend the connection amongst expenses and its

causes.

2.1.3.2 Limitations of Activity-Based Costing System

Besides the benefit, ABC has its own limitations. The significant

drawback of ABC is that in spite of the fact that ABC is a logical

approach, the implementation is difficult, time consuming and costly.

Different from traditional costing, ABC technique is not in accordance

with GAAP, therefore companies that use ABC need to make two cost

systems and accounting books, one will be for the internal management

while the other will be for external reports.

Based on Majid & Sulaiman’s (2008) research on Implementation

of ABC in Malaysia, the cost of implementing ABC is high. There will

be high set-up cost. Those things happen because of the time and effort

spent by the management in determining the cost driver. Compared to

traditional costing that only has a single cost driver, ABC requires

various measures of activity to be collected, examined, and included in

the system, perhaps less comparable to the level of accuracy gained that

ultimately leads to high costs. This means that ABC system is very

expensive to develop and implement.

Next, it is due to the lack of available skills. To implement ABC,

there should be an expert to train the employees on how to operate the

system. If unskilled employees are taking care of the new technique,

  20

there is a possibility that it will be messed up because they don’t really

understand, which will impact the company’s performance.

Lastly, by changing its costing system, it means companies are

changing their whole organization, which means it is time consuming

(Cabell & Stevenson, 2002). Like most innovation management, ABC

often takes more than a year to develop or implement to the stage of

success (Majid & Sulaiman, 2008). Moreover, it is quite hard to

determine the cost pools for each activity. ABC needs to decide the cost

of activity pools to measure the cost drivers for base allocation.

2.1.3.3 Reasons Most Companies did not Adopt ABC

Companies implement ABC in their company due to several

reasons. First, managers sometimes did not know that there are new

techniques that can be applied to their company. So they tend to continue

doing what they are doing right now. Second, lack of expertise.

Sometimes company lack of employees with good skills and knowledge,

which makes their company are left behind from the competitors. Lastly,

because of the lack of support from top management, sometimes the cost

to implement new technique is expensive, therefore managers tend to

find an easy way for them by using the traditional technique (Majid &

Sulaiman, 2008)

  21

2.1.3.4 Seven Ways to Implement ABC

Based on Horngren et al. (2015, p. 185-187) here are seven steps to

implement ABC system in a company, which includes:

a. Identify the cost object. Cost object is the product that is going to be

produced by the company.

b. Identify the direct costs of the products. To implement ABC system,

managers need to know first which one is the direct cost and which

one is the indirect cost, because ABC will only be implemented to

indirect costs.

c. Identify the activities and also the allocation base to allocate the

indirect cost. This can be done by seeing the cost hierarchies.

d. Identify the total indirect costs of each allocation base. It is usually

the budgeted indirect costs.

e. Then, compute the rate per unit of each allocation base. It can be

done by dividing the total indirect cost of each allocation base to the

budgeted quantity of allocation base.

𝐴𝑙𝑙𝑜𝑐𝑎𝑡𝑖𝑜𝑛  𝑅𝑎𝑡𝑒 =𝑇𝑜𝑡𝑎𝑙  𝐼𝑛𝑑𝑖𝑟𝑒𝑐𝑡  𝐶𝑜𝑠𝑡𝑠𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑  𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦

f. Compute the indirect cost of the product by multiplying the rate

from step 5 to the quantity of allocation base that will be used for the

product.

𝐼𝑛𝑑𝑖𝑟𝑒𝑐𝑡  𝐶𝑜𝑠𝑡 = 𝐴𝑙𝑙𝑜𝑐𝑎𝑡𝑖𝑜𝑛  𝑅𝑎𝑡𝑒  𝑋  𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦

g. Finally, compute the total cost by adding the direct labor, direct

material and indirect cost.

  22

2.1.3.5 Cost Hierarchies in ABC

Cost hierarchies are usually used to identify the cost driver to

become the based of the activity. ABC commonly use four levels, such as

output unit level cost, batch level cost, product sustaining cost and

facility-sustaining cost (Horngren et al, 2015, p. 183-184).

a. Unit level costs, are the cost based on the activities performed on

each item produced. It includes machine operation costs.

b. Batch level costs, are the cost based on the activities performed on a

group of units. It includes machine setup and inspection.

c. Product sustaining costs, are the cost to support each products or

services rather than unit. It includes the maintenance design,

development cost, etc.

d. Facility-sustaining costs, are the costs of activities to support the

organization as a whole rather than each products or services. This

cost should be deducted later on from the operating income and it is

not going to be allocated to the product. It includes building

depreciation, etc.

2.1.4 Decision-Making

Based on Oxford Advanced Learner’s Dictionary, decision-making is

the process of determining something important in an organization, group,

etc. decision-making usually used to achieve some goals. It helps the

  23

organization to grow. In achieving the goals, obstacles will always come

and managers will need to make decision-making to solve the problems.

There are five steps so that decision-making can be used properly.

First, managers need to know the problem that they face. Second, they need

to gather information and all data related to the problem. Third, once the

information has been obtained, managers will make some options to solve

the problem. Fourth, from those options, they will choose the best option

and make some planning. Fifth, managers could follow up the action.

In today’s economy condition, costing system is considered as one of

the most important tools in providing information to find out the profitable

and unprofitable activities and products. Those costing system will be used

by managers to make decisions and the cost information obtained will

become the base of their decision. One of the decision-making is deciding

whether to keep or drop a product.

2.1.4.1 Impact of Accuracy of Product Costing towards Decision-Making

Every manager for all companies will surely have goals regarding

the financial aspects, which includes profit and revenue. From those

goals, they will make their own decision based on the cost information.

Those cost information has its impact on the finance of the company. The

reliability and accuracy of the information need to be considered in order

to obtained the exact and accurate target in the future (Markgraf, 2012).

An article made by Kimball (2011), explained about the impact of

accuracy in decision-making. Kimball stated that accuracy is very crucial

  24

for companies. Inaccurate number / information can lead to problems

later in the future. From implementing ABC, the information obtained

will be used by the company for decision-making. Once the product cost

is not accurate, it will results in poor decision-making.

White (2011) explained that, “Product cost is a critical

manufacturing metric and it is a cost about which financial reporting

standards provide a great deal of guidance. To ensure that the

accountants have met reporting requirement and that the financial

statement was audited.” According to White (2011), product cost is the

most important and critical factor of decision-making or making planning

for future activities. Costing system will be needed to decide the exact

cost of the product. Those costing system provide a wide range of

information and the decision maker from the companies will make action

depend on the information obtained from the system.

Once, Brierley (2013) stated in his journal that the founder of

Carnegie Steel Company, Andrew Carnegie, stated that managers should

focus on the product cost because if they able to control the cost, later in

the future, profit will appear on their own. Cost is the base thing that

company needs to know. If manager wants to know their profit, they

need to know the cost of product first. When manager wants to decide

whether to make or buy product, they need to know the cost also. So,

basically cost is crucial to the whole thing (Brierley, 2013).

  25

Accuracy of product cost will also beneficial for the company in

determining the profit of the company. In keep or drop analysis, product

cost will plays a big role because it will determine the selling price and

sales revenue. Keep or drop analysis will finds out whether each product

generates profit or even a loss. From that information, it will determine

which products are going to be dropped. If the product cost is inaccurate

due to the allocation of overhead cost, the decision will also inaccurate

that will affect the profit later.

2.2 Previous Research and Limitations

Some previous studies were conducted regarding the research of ABC

system both in Indonesia and outside Indonesia. Here are the lists of previous

research that are related to this study.

Year Title of Article Author(s) Results of Studies Limitations of

Studies

2008 Implementation

of activity based

costing in

Malaysia: A

case study of

Jamaliah

Abdul

Majid &

Maliah

Sulaiman.

ABC is recognized as a

beneficial tool for

improving the performance

of these two companies.

The companies

used as the

respondent were

only big

companies.

Table 2.1. Previous Studies of Activity Based Costing Implementation

  26

two companies. These companies

experience some problems

when implementing ABC

and it’s related to the

managerial factors, which

are the top management

support and regarding the

employees understanding in

operating the system.

The data collected

was provided by

managers and

direct interview

with the workers

cannot be done,

therefore the

researcher cannot

do crosscheck to

validate the

information.

2011 Applying

Activity-Based

Costing

Approach for

Construction

Logistics Cost

Analysis.

Yuan

Fang S,

and

Thomas

Ng

ABC can help the company

to allocate the resources

used to the activity.

No experts related

to the field.

The implementation of

ABC gives the company a

logistics option, resulting in

low logistics cost.

The application of

ABC on the other

types of projects

or industries also

should be done to

support the theory

of ABC deeper.

2015 An Empirical

Study of

Activity-Based

Costing (ABC)

Systems Within

the Jordanian

Industrial Sector

Critical Factors

and Barriers to

ABC

Implementation.

Mahmoud

Nassar,

David

Morris,

Andrew

Thomas,

and Alan

Sangster

Around 55.7% of

companies are

implementing ABC.

Focusing only on

the companies

listed in Amman

Stock Exchange.

The factors that make

companies decided to

implement ABC is due to

the increasing in overhead

costs and product variants.

  27

From the table above, mostly the results show that implementing ABC

is beneficial for companies. Moreover, it can facilitate companies due to the

accuracy of the system. The previous studies listed above are conducted out

of Indonesia. However, the studies on ABC also have been conducted in

Indonesia by several researchers, but mostly it is the big companies that are

listed in Indonesia Stock Exchange. Most of the limitations are related to the

type of industries and size of businesses.

This research will cover the limitations faced by the previous

researches. ABC will be implemented in Indonesia’s company that is

considered as SMEs focusing on knitting industry that is not listed in

Indonesia’s Stock Exchange.

  28

CHAPTER III

RESEARCH METHODOLOGY

3.1 Research Design

This type of research is a qualitative study of knitting industrial

company in determining product cost using ABC system. This qualitative

study was conducted intensively, in which researcher participating in taking

note of what actually happened, and doing reflective analysis of various

documents found in the field. This study describes the process of educational

activity based on the condition happening in the field as a further study

material to explore a deeper knowledge on such specific topic. The data

obtained from the field will be analyzed to form a recommendation on how

the company can overcome the problems that they faced currently. The

design of this study is using last period data.

3.2 Research Instrument

3.2.1 Data Collection Method

a. Documentation

One of the data collection techniques in this study is using

documentation techniques. Documentation is a technique that is done

by collecting data through company documents that serve as the

evidences regarding the data related to the problem. The documents

include the financial report of the company and the detail report on cash

  29

inflow and cash outflow. Those documents were used in determining

the current product cost, revenue, and profit of the company. Moreover,

it was used as well to find out the cost drivers and total cost in

acquiring the raw materials to obtain the new product cost using ABC

system. Such documents were in physical or electronic forms.

b. Interview and discussions

Another technique was by doing an interview and some

discussions. Interview is one of the method that allow the researcher to

obtain information by making a question and answer session that can be

asked directly or through a media. The interview conducted was a face-

to-face interview and also an online interview. The researcher uses 2

types of interview due to the limited time that the interviewees have.

During working hours, it is quite hard to do the interview, so some of

the simple questions are being asked online interview. Furthermore, the

interview is considered as unstructured interview / informal interview.

The interview contain an open-ended questions related with the topic.

The transcript of the interview is provided on Appendices 1. The

interview and discussions was conducted on,

Date : Saturday, October 14th, 2017

Time : 15.30 – finish (After working hours)

Place : PT. K

Interviewees : Head of finance division, head of production

division, and the owner of the company .

  30

Topic : Company profile, total employees, working

hours, total salaries of each employee, product

produced, production process, detail information

about machine usage, current costing system, and

usage of some materials.

c. Observation

In this technique, the researcher was finding information by going

directly to the field. It was a participant observation and the type of

participation was complete observer. The researcher was observing the

production process of the company starting from receiving the purchase

order until producing finished goods. In addition, the thing observed

also includes the process of determining product cost by the owner and

also the finance division. It was an uncontrolled observational study

because the researcher was not interfering the real-life situation.

Moreover, it is a participation observation but it is part of passive

participation because the researcher was only pure observing the

production process without being part of the action. The observation

conducted also a structured and unconcealed observation. The

observation has been designed systematically, which includes, what is

being observed, when is the observation occur and where it is

happened. Further, unconcealed observation means that the production

division knows that the researcher is observing them. The observation

was conducted on,

  31

Date : Monday, October 23rd – Saturday, November

4th, 2017

Time : 07.30 – 16.30 (Working hours)

Place : PT. K

Things to observe : The production process of transforming raw

materials into finished goods, which are

knitted fabrics and toy sweater.

3.2.2 Data Analysis Method

The method of data analysis used in this research is descriptive

analysis method that is done by collecting data of cost that happened at

company, present it so that it gives description about actual situation of

company, whether company have grouped cost properly, calculate cost of

product correctly and set the selling price appropriately. At first, the

researcher implement ABC to determine the new total cost of products and

it is compared to the current total cost. Next, one of the types of short-term

decision-making, which is keep or drop analysis is applied using both

traditional and ABC method to know which products are unprofitable and

make an analysis whether to keep or drop the unprofitable products. Then,

from the results of the analysis, conclusions and suggestions are drawn.

3.3 Types of Data

Types of data used are quantitative and qualitative data. Qualitative data

is data in the form of letters, pictures, diagrams and so forth (not numbers)

  32

that describe something or words. In this case the required data is data about

the history of the establishment of PT. K, company location, organizational

structure, production process, and others. Quantitative data is data that

contains the numbers obtained from the company. Quantitative data needed in

this research is data about production cost in the form of raw material cost,

labor cost, and factory overhead cost.

Sources of data used in this study are internal data sources that are data

obtained from within the company consisting of primary data and secondary

data.

a. Primary data

This data is obtained from direct interviews with the parties

concerned in the company, such as business owners, head of production

division, and head of finance division, so that can be obtained

information needed in connection with the problem under study. Another

primary data is several documents, such as invoices, monthly cash

outflow and inflow.

b. Secondary data

This data is obtained from the existing data in the company, which

is financial statement that can assist in the formation of product

manufacturing costs. For instance, raw material cost report, labor cost,

and factory overhead.

  33

3.4 Company’s Background

3.4.1 Brief Company Profile

Name : K

Address : Jl. Raya Rawakalong no. 6A, Tambun, East Bekasi,

West Java, Indonesia.

Year Established : 1997

Business Type : Manufacturing company

Industry : Knitting

Company Structure : Limited liability company (PT)

Total Employees : 45

NPWP : 21.024.378.8-435.000

3.4.2 History of Company

The company was established on 1997. It is owned by a Korean

entrepreneur and considered as a family business, which involves the role of

his wife as the director. The company is a manufacturing company because

the products are made from transforming raw materials to finished goods

and it is also considered as a SME. At first, the owner has change the name

of the company for several times due to personal reasons. The company

starts its operation in Rawalumbu with only less than 20 employees and

located in a small house. Ten years later, they are able to acquire houses in

Tambun, East Bekasi.

During its first and second year of existence in the market, the

company was not a knitting company, while it is a clothing company. It

  34

produces a kind of human sweater and did export to Korea and other

countries. However, the business was not running well and they are facing a

loss. Finally, after further discussions with his wife, they decide to change

the company into knitting company and it runs until now.

3.4.3 Company’s Main Operations

PT. K have two kinds of products, such as:

a. Knitted fabrics

Knitted fabrics are textiles that made of knitting. It is usually

serves as the direct material for making jackets, trousers, shirts, skirts,

and others. PT. K is a company that produces the knitted fabrics that

will be used for their buyers in making clothes wear. Usually, there

are 4 types of knitted fabrics usage and it is different from the size of

the fabrics provided. It includes rib, collar, cuff, and bottom. Knitted

fabrics also have differences in the types of yarns and also needle.

There are several types of yarns used, such as, nylon, polyester,

cotton, etc. Those yarns are different based on the texture. The

differences in the needle will affect the level of elasticity.

b. Toy sweater

Sweater is knitted garment used for upper body. PT. K makes

sweater for toy, which is for doll. It also has different design based on

the demand from the buyer. For this kind of product, the yarn used is

wool.

  35

3.4.4 Organizational Structure

The organizational structure will be presented in Appendices 2.

3.4.5 Company’s Production Process

Figure 3.1. Knitted Fabrics Production Process  

Figure 3.2. Toy Sweater Production Process  

  36

Here are the steps of transforming the raw materials into finished goods.

a. Receives an order

PT. K receives a purchase order from buyer through email or

phone call. The person that receives the order will inform the order to

the director and the head of production division.

b. Designing pattern

This step only applies for Toy sweater only. It is designing the

body and arms patterns according to the real size requested by the

buyer. The person in charge will make 3 kinds of pattern, which are

pattern for knitting, linking and ironing.

c. Rolling up the yarns

After purchasing the yarns, warehouse division will receive the

yarns and help production division to count the yarns needed and

send the yarns to knitting department. Next, the production started by

dividing the yarns into several small cones by rolling up section, to

make it easier when it is putted in the machine.

d. Set up the machines

The machine needs to be set according to the needle size that is

being used. It also needs to be set according to the size of the

products.

e. Knitting

There are two kinds of way in making the products, such as

manually and automatically. For manual, the employees are

  37

responsible in making the product by their hand and for automatic

will be done by machines and the employees only need to monitor the

machine. In making knitted fabric, it can be done by both of them

while for toy sweater; it can only be done manually. For knitted

fabric, it will be send directly to product checking department.

However, toy sweater will be send to linking department first to

connect the fabric.

f. Product checking

After the products are done, it will be send to product checking

department. In this department, the employees will check the

products and make sure that the products are match with the order

made by buyers.

g. Quality checking

Next, it will be send to quality checking department. In this

department, the products will be checked, which one is considered as

decent product and which one is the spoilage product. The decent one

will be ironed while the spoilage one will be sent back to knit

department for doing a rework. In this department, the fabric with

nylon or polyester yarns are going to be washed first to remove the

oil from the yarns and to avoid any oil spotting when sewn by the

buyer.

  38

h. Washing and drying

After being checked, the products are going to be washed and

dried. However, it only applies for knitted fabrics. Usually, washing

is done to remove the oil in the yarns and to make the fabric

smoother.

i. Iron the fabrics

If all products are match with the order made by buyers and no

reject products, it will be ironed so that the fabrics are not crumpled.

j. Finalizing and packing

After all products are finished according to the order, it will be

send back to product checking department. They will count the

amount of the products and make a tag containing the size of the

fabric. They also will make the delivery order.

k. Deliver the products to buyers

Lastly, the products are shipped to the buyers. It can be through

the company’s own driver or using online transportation.

  39

CHAPTER IV

RESULTS & ANALYSIS

4.1 Costs

There are two types of costs, which are direct costs and indirect costs.

For the direct costs, it consists of direct material costs and direct labor costs.

Here are the lists of the costs related to the production of the company.

Direct Material Cost: Yarns PT. Surya Barutama 294,842,224

PT. Permata Era Duasatu 1,436,112,773

Total Direct Material Cost 1,730,954,997

Direct Labor Costs: Salaries 1,183,715,789 Extra payment , bonus 102,000,000 Total Direct Labor Cost 1,285,715,789 Overhead Costs: Indirect labor  343,884,210  Needle 148,850,000 Repair and maintenance 59,500,000 Depreciation 44,090,363 Electricity 57,072,841 Water 35,294,815 Telecommunication 18,392,863 Fuel 2,055,500 Gas 75,776,000 Packaging (plastic) 3,020,000 Quality control 35,500,000 Transport 125,307,000 Taxes 710,720 Total Overhead Cost 949,454,312     Source:  Internal  Document  from  Finance  Department  

  40

4.1.1 Cost object identification

Based on the stages that has been explained before in literature review

chapter, the first stage of implementing ABC System is by identifying the

cost objects, which are the products that the total cost are going to be

calculated in this research. The cost objects are knitted fabrics and sweater.

Knitted fabrics have four types and sweater is only one, which is toy

sweater. This research will be focusing on the five cost objects stated

before.

4.1.2 Direct material costs

The direct material used to produce knitted fabrics and sweater is

yarn. The total direct material cost is Rp. 1,730,954,997.

Month Products

Total Collar Cuff Bottom Rib Sweater

1 7,602 11,202 3,225 50 5,213 27,292

2 9,213 10,410 27,470 - - 47,093

3 11,640 19,752 18,414 - - 49,806

4 10,000 15,180 9,465 - 2,980 37,625

5 15,100 23,000 16,933 5,094 4,082 64,209

6 9,600 12,265 9,660 5,913 6,560 43,998

7 - 4,300 2,150 2,017 3,420 11,887

8 15,233 12,252 8,101 37,199 - 72,785

9 6,923 6,923 1,760 12,799 3,120 31,525

10 6,057 14,334 14,870 102 - 35,363

11 11,587 4,918 7,637 6,417 - 30,559

12 937 14,600 25,521 937 - 41,995

Total 103,892 149,136 145,206 70,528 25,375 494,137

Table 4.1. Total Unit of Products Produced in 2016

  41

Products Total Direct

Material Cost Collar Cuff Bottom Rib Sweater

363,932,222 522,421,322 508,654,586 247,058,597 88,888,270 1,730,954,997

Table 4.2 shows the amount of direct material cost consumed by each

types of product. It varies and bigger if the quantities of the products are

higher. The number of unit produced can be seen from table 4.1.

Furthermore, the direct material cost per unit is Rp. 3,503.

4.1.3 Direct labor costs

The total of working hours of the employees per day is 8 hours,

starting from 7.30 until 15.30. The employees are working 6 days in a week.

In 2016, there are 16 days of national holidays, 52 days of Sunday, and 12

days of leave. It means in 2016, the employees are working 285 days or

theoretically 2,280 hours of activity capacity. However, theoretical capacity

is not realistic, since problems might be happening. Therefore, the full

capacity of working hours is estimated to be 90% of the theoretical capacity,

which is 2,052 hours. The allocation of direct labor hours will be presented

in appendices 3.

Activities Salary /month Total salary/month Total salary

Designing (1 person)

Rolling up (3 person)

Automatic (8 person)

-

3,150,000

3,150,000

-

9,450,000

25,200,000

515,789

113,400,000

302,400,000

Table 4.2. Direct Material Cost Allocations to Products (In Rupiah)

Table 4.3. Direct Labor Cost in each Activity (In Rupiah)

  42

Activities Salary /month Total salary/month Total salary

Designing (1 person)

Rolling up (3 person)

Automatic (8 person)

Manual (8 person)

Linking (2 person)

Washing (1 person)

Drying (2 person)

Ironing (2 person)

Inspection (4 person)

Packing (2 person)

Delivery (2 person)

-

3,150,000

3,150,000

3,150,000

3,150,000

3,150,000

3,150,000

3,150,000

3,150,000

3,150,000

3,150,000

-

9,450,000

25,200,000

25,200,000

6,300,000

3,150,000

6,300,000

6,300,000

12,600,000

6,300,000

6,300,000

515,789

113,400,000

302,400,000

302,400,000

75,600,000

37,800,000

75,600,000

75,600,000

151,200,000

75,600,000

75,600,000

Total (35 person) 1,285,715,789

Activities Products

Total Collar Cuff Bottom Rib Sweater

Designing - - - - 515,789 515,789

Rolling up 23,842,280 34,225,372 33,323,472 16,185,542 5,823,334 113,400,000

Automatic 67,021,091 96,208,153 93,672,897 45,497,859 - 302,400,000

Manual 112,846,991 161,990,806 - - 27,562,203 302,400,000

Linking - - - - 75,600,000 75,600,000

Washing 8,377,636 12,026,019 11,709,112 5,687,233 - 37,800,000

Drying 16,755,273 24,052,038 23,418,224 11,374,465 - 75,600,000

Ironing 15,894,853 22,816,914 22,215,648 10,790,362 3,882,223 75,600,000

Inspection 31,789,707 45,633,829 44,431,296 21,580,722 7,764,446 151,200,000

Packing 17,388,000 31,752,000 14,112,000 9,324,000 3,024,000 75,600,000

Delivery 17,388,000 31,752,000 14,112,000 9,324,000 3,024,000 75,600,000

Total 311,303,831 460,457,131 256,994,649 129,764,183 127,195,995 1,285,715,789

Table 4.3 shows the total direct labor per activities with the number of

salaries they received each month and also in a year. However, table 4.4

shows the amount of direct labor cost allocated to each type of products.

Table 4.4. Direct Labor Cost Allocations to Products (In Rupiah)

Table 4.3. Direct Labor Cost in each Activity (Continuation) (In Rupiah)

  43

The number also varies according to the number of employees in each

activity and also in each product’s types. The number of unit produced can

be seen from table 4.1. Table below shows the amount of direct labor cost

consumed by each unit of the products.

Products Collar Cuff Bottom Rib Sweater

Direct Labor Cost/unit

2,996 3,087 1,770 1,840 5,013

4.2 Traditional Costing Method

Currently, the company implemented simple costing method, which

uses one allocation base. The company use direct manufacturing labor hours

as the cost allocation base. The total direct manufacturing labor hours are

68,946 hours in 2016. While the total overhead cost in 2016 is Rp.

949,454,312.

Products Total

hours Collar Cuff Bottom Rib Sweater Direct manufacturing labor hours

14,998 20,009 12,477 8,253 12,126 68,133

𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑  𝑅𝑎𝑡𝑒 =𝑇𝑜𝑡𝑎𝑙  𝑀𝑎𝑛𝑢𝑓𝑎𝑐𝑡𝑢𝑟𝑖𝑛𝑔  𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑  𝐶𝑜𝑠𝑡

𝑇𝑜𝑡𝑎𝑙  𝐷𝑖𝑟𝑒𝑐𝑡  𝑀𝑎𝑛𝑢𝑓𝑎𝑐𝑡𝑢𝑟𝑖𝑛𝑔  𝐿𝑎𝑏𝑜𝑟  𝐻𝑜𝑢𝑟𝑠

𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑  𝑅𝑎𝑡𝑒 =949,454,31268,133

𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑  𝑅𝑎𝑡𝑒 = 𝑅𝑝. 13,935  

Table 4.6. Direct Labor Hours of Each Product

Table 4.5. Direct Labor Cost Rates (In Rupiah)

  44

From the calculation above, it means that every direct manufacturing

labor hour, the overhead cost is Rp. 13,935. It will later be multiplied by the

number of hours for each product and divided by the total unit of the

products. The formula is stated below.

𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑  𝑅𝑎𝑡𝑒 = 13,935  𝑥𝑇𝑜𝑡𝑎𝑙  𝐻𝑜𝑢𝑟𝑠  𝑜𝑓  𝑡ℎ𝑒  𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑠𝑇𝑜𝑡𝑎𝑙  𝑈𝑛𝑖𝑡  𝑜𝑓  𝑡ℎ𝑒  𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑠

Products

Collar Cuff Bottom Rib Sweater

Overhead Rate/unit 2,012 1,870 1,197 1,684 6,659

4.3 Activity-Based Costing 4.3.1 Activities Identification and Cost Allocation

The first step is identifying activity cost pool. Here are the activities

happened during the production process on PT. K, such as:

1. Receiving

2. Designing

3. Sorting

4. Rolling up

5. Set up machines

6. Automatic machine operation

7. Manual machine operation

8. Linking

9. Washing

10. Drying

11. Ironing

12. Inspection

Table 4.7. Overhead Cost Rates (In Rupiah)

  45

13. Packing

14. Delivery

After all activities are listed, the next step is allocating all of the

overhead costs to the activities, to know the overhead cost for each activity.

a. Indirect Labor Cost

The indirect labor cost includes the salaries and wages, extra

work and bonus that are received by the employees outside the

production process.

Activities Indirect Labor Cost Receiving (2 person) 4,104 hours of receiving Sorting (1 person) 1,300 hours for sorting Rolling up 205 hours for supervising Set up machines (5 person) 4,428 hours for set up machines 228 hours for supervising Automatic machine 205 hours for supervising Manual machine 205 hours for supervising Linking 205 hours for supervising Washing 205 hours for supervising Drying 205 hours for supervising

75,600,000

37,800,000

4,148,421

189,000,000 4,148,421

4,148,421

4,148,421

4,148,421

4,148,421

4,148,421

Table 4.8. Indirect Labor Cost Allocations (In Rupiah)

  46

Activities Indirect Labor Cost Ironing 205 hours for supervising Inspection 205 hours for supervising Packing 205 hours for supervising

4,148,421

4,148,421

4,148,421

Total 343,884,210

b. Needle

Needle is the material that has a big role in the production

process. It is used to make the knitted fabrics and also sweaters. The

total cost of the needle is Rp. 148,850,000 for the whole production in

the year 2016. The cost will be allocated to each product directly.

Products

Collar Cuff Bottom Rib Sweater

Total cost 42,136,000 58,166,000 31,144,000 14,198,000 3,206,000

Total cost / unit

406 390 214 201 126

c. Repair and Maintenance

Repair and maintenance cost is the cost of fixing and

maintaining the machines and other equipment. This cost also include

the cost of hiring an expert for several days to fix some machines. The

costs are expected to be able to increase productivity and increasing

the useful life of the equipment.

Table 4.8. Indirect Labor Cost Allocations (Continuation) (In Rupiah)

Table 4.9. Needle Cost Allocations (In Rupiah)

  47

Activities Repair and Maintenance Costs

Rolling Up Roll up machines: 3 units Automatic machine operation Automatic machines: 8 units Manual machine operation Manual machines: 8 units Linking Linking machine: 1 unit Washing Washing machine: 1 unit Drying Oven: 1 unit Ironing Iron: 2 units

11,305,000

22,610,000

14,875,000

4,760,000

1,785,000

1,785,000

2,380,000

Total 59,500,000

d. Depreciation

It is the cost of allocating the asset to its useful life. The

company use straight-line method with different useful life. For

washing machine and oven are 4 years while for irons and machines

are 8 years.

Machines type Activities Depreciation Cost

Automatic machines

Manual machines

Irons

Knitting

Knitting

Ironing

37,907,343

5,512,187

670,833

Total 44,090,363

Table 4.10. Repair and Maintenance Cost Allocations (In Rupiah)

Table 4.11. Depreciation Cost Allocations (In Rupiah)

  48

e. Electricity

Production division basically consumes most of the electricity

cost, which is for the machines. The amounts of kWh used by the

machines are obtained from the information written on the machines.

For determining the electricity rate per kWh, the first thing that need

to do is find out the category of the company, because according to

“Peraturan Menteri Energi dan Sumber Daya Mineral Republik

Indonesia No. 28 Tahun 2016”, the rate will be different within the

category. The company is in B2 category, which is Rp. 1,352/kWh.

Activities Electricity Costs

Rolling up Roll up machines: 3 units Use of electricity: 1,846.8 kWh Automatic machine operation Automatic machines: 8 units Use of electricity: 36,558 kWh Linking Linking machine: 1 unit Use of electricity: 1,408 kWh Washing Washing machine: 1 unit Use of electricity: 697.68 kWh Drying

Oven: 1 unit Use of electricity: 471.96 kWh Receiving Computer: 2 units Use of electricity: 1,231.2 kWh

2,496,874

49,426,416

1,903,616

943,263

638,090

1,664,582

Total 57,072,841

Table 4.12. Electricity Cost Allocations (In Rupiah)

  49

f. Water

Production division uses the total cost of this overhead cost,

which is in washing and ironing activities. In ironing, the water is

used to form the steam that is used for ironing. Water plays a major

role in these 2 activities because without water, it cannot run.

Activities Water Cost

Washing

Ironing

24,913,244

10,381,571

Total 35,294,815

g. Telecommunication

Telecommunication cost includes telephone cost and Internet

cost. This cost is basically the cost of communicating with buyers and

suppliers, through telephone and email. Therefore, this cost can be

directly allocated to the product. The total cost is Rp. 18,392,863.

Products

Collar Cuff Bottom Rib Sweater

Total Cost 5,206,595 7,187,365 3,848,353 1,754,396 396,154

Total Cost / Unit

50 48 27 25 16

h. Fuel

The company uses fuel to help the production process. It is used

to make the machine become smoother and lighter.

Table 4.13. Water Cost Allocations (In Rupiah)

Table 4.14. Telecommunication Cost Allocations (In Rupiah)

  50

Activities Fuel Costs

Automatic machine operation

Manual machine operation

1,027,750

1,027,750

Total 2,055,500

i. Gas

The gas is used only for ironing activities. The iron is not

electricity iron, however it is an iron used specifically for garment

industry, which is steam iron by using gas. The gas will be used for

boiling the water and the steam will be used for ironing. Therefore,

gas plays a big role in this activity.

Activities Gas Costs

Ironing 75,776,000

Total 75,776,000

j. Packaging

After the products are finished, it will be packed in a poly bag.

Furthermore, the size of the poly bag is 60 x 100 cm. The total cost of

acquiring the poly bag in 2016 is Rp. 3,020,000 and it can be traced

directly to the product per 200 pieces, which means that 1 poly bag

can be used for 200 pieces of products. So, the packing cost is Rp.

1,222 per 200 pieces.

Table 4.15. Fuel Cost Allocations (In Rupiah)

Table 4.16. Gas Cost Allocations (In Rupiah)

  51

Products

Collar Cuff Bottom Rib Sweater

Total Packaging 519 746 726 353 127

Total Cost / Unit 6 6 6 6 6

k. Quality control

Quality control is the cost of checking quality of the knitted

fabrics. Each buyers will have different demand for the quality,

therefore, the quality of knitted fabrics need to be checked first,

whether it is the same like what the buyers want or not.

Activities Office Supplies Costs

Inspection 35,500,000

Total 35,500,000

l. Transport

Transportation cost in this case includes the cost of buying car

fuel, toll expenses, the cost of currier and other cost related to the

activity in delivering the products to the buyer.

Activities Transport Costs

Delivery 125,307,000

Total 125,307,000

Table 4.17. Packaging Cost Allocations (In Rupiah)

Table 4.18. Office Supplies Cost Allocations (In Rupiah)

Table 4.19. Transport Cost Allocations (In Rupiah)

  52

m. Tax

The tax expense is only the property tax of the company. This

expense is related to the production activity because the property is

the place of the business and where the machine and other assets are

placed. The size of the land is 505m2 and the size of the building is

397m2. It is divided for several activities.

Activities Taxes Costs

Designing Wide use of factory space: 15.88m2 Sorting Wide use of factory space: 15.88m2 Rolling up Wide use of factory space: 7.94m2 Automatic machine operation Wide use of factory space: 75.43m2 Manual machine operation Wide use of factory space: 63.52m2 Linking Wide use of factory space: 47.64m2 Washing Wide use of factory space: 7.94m2 Drying Wide use of factory space: 7.94m2 Ironing Wide use of factory space: 15.88m2 Inspection Wide use of factory space: 43.67m2

28,429

28,429

14,214

135,037

113,715

85,287

14,214

14,214

28,429

78,179

Table 4.20. Tax Expense Allocations (In Rupiah)

  53

Activities Taxes Costs

Packing Wide use of factory space: 43.67m2 Receiving Wide use of factory space: 51.61m2

78,179

92,394

Total 710,720

After the overhead costs are allocated to each activity, from 14

company activities, all the main activities of the company can be directly

charged to the product. Meanwhile, there are some costs that are not

included in the activity, but can be charged directly when calculating the

cost of production materials. Table 4.21 shows the total overhead cost

consumed by each activity for all products.

Activities Overhead Cost

Receiving 77,356,976

Designing 28,429

Sorting 37,828,429

Rolling up 17,964,509

Set up machines 193,148,421

Automatic machine operation 115,254,967

Manual machine operation 25,677,073

Linking 10,897,324

Washing 31,804,142

Drying 6,585,725

Ironing 93,385,254

Inspection 39,726,600

Packing 4,226,600

Delivery 125,307,000

Total 779,191,449

Table 4.21. Overhead Costs Based on Each Activity (In Rupiah)

Table 4.20. Tax Expense Allocations (Continuation) (In Rupiah)

  54

4.3.2 Determining Activity Cost Driver and Activity Consumption

Each activity has their own activity cost driver as the base for

allocating the overhead cost to each products. The driver varies and some

activity used the same driver as the allocation base. Activity cost driver are

the basis to charge overhead cost to the products. In other words, activity

cost driver is used to track activity cost to cost object. The tracking is done

by calculating the consumption level from the activity cost driver of each

product. Here are the table that summarizes the cost driver and cost pool of

each activity.

Activities Activity Cost Driver Cost Hierarchy

Receiving Receiving hours Product sustaining

Designing Design hours Product sustaining

Sorting Number of PO Batch

Rolling up Machine hours Batch

Set up machines Setup hours Batch

Automatic knitting Automatic machine hours Output unit

Manual knitting Manual machine hours Output unit

Linking Linking machine hours Output unit

Washing Washing machine hours Output unit

Drying Drying machine hours Output unit

Ironing Direct labor hours Output unit

Inspection Direct labor hours Batch

Packing Delivery number Output unit

Delivery Delivery number Batch

The next stage of ABC system implementation is to identify the

activity cost driver for each activity and then charge the cost of each activity

into each product produced by PT. K, according to the portion of the cost

Table 4.22. Activity Cost Pools and Cost Drivers of PT. K

  55

drivers consumed by each product. Table 4.23 shows the complete

consumption of each product based on the activity driver stated in table

4.22.

Cost Driver Products

Total Collar Cuff Bottom Rib Sweater

Receiving hours 1,162 1,604 859 391 88 4,104

Design hours - - - - 21 21

Number of PO 92 127 68 31 7 325

Rolling up machine hours

1,743 2,406 1,288 587 132 6,156

Setup hours 1,564 2,540 952 434 126 5,616

Automatic machine hours

9,234 9,234 9,234 9,234 - 36,936

Manual machine hours 4,104 4,104 - - 7,344 15,552

Linking machine hours - - - - 1,656 1,656

Washing machine hours

455 653 636 308 - 2,052

Drying machine hours 455 653 636 308 - 2,052

DLH ironing 863 1,239 1,206 586 210 4,104

DLH inspection 1,726 2,477 2,412 1,171 422 8,208

Units produced 103,892 149,136 145,206 70,528 25,375 494,137

Delivery number 40 136 57 42 25 300

4.3.3 Overhead Cost of the Products

To charge the factory overhead cost of each activity on each product,

it must determine the overhead rate for each activity. The overhead rate is

obtained from the following formula.

𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑  𝑅𝑎𝑡𝑒 =  𝑇𝑜𝑡𝑎𝑙  𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑  𝐶𝑜𝑠𝑡  𝐸𝑎𝑐ℎ  𝐴𝑐𝑡𝑖𝑣𝑖𝑡𝑦

𝐴𝑐𝑡𝑖𝑣𝑖𝑡𝑦  𝐶𝑜𝑠𝑡  𝐷𝑟𝑖𝑣𝑒𝑟

To determine the overhead cost of each product, the result of overhead

rate will be multiplied by the consumption of the cost drivers listed in the

Table 4.23. Cost Drivers Consumption of Each Product

  56

table 4.23. To obtain the overhead rate per unit of each product, the

overhead rate already obtained can be divided by the number of units

produced by the company in that year. Table 4.23 shows the overhead rate

per unit of each activity and product therefore it form total overhead cost

per unit.

Activities Products

Collar Cuff Bottom Rib Sweater 103,892 149,136 145,206 70,528 25,375

Receiving 210.78 202.69 111.47 104.62 65.37

Design - - - - 1.12

Sorting 103.07 99.12 54.51 51.16 32.11

Rolling up 48.95 47.08 25.89 24.30 15.18

Set up machines 517.75 585.75 225.48 211.64 170.78

Automatic machine operation 277.34 193.20 198.43 408.54 -

Manual machine operation 65.22 45.43 - - 477.84

Linking - - - - 429.45

Washing 67.88 67.86 67.89 67.69 -

Drying 14.06 14.05 14.06 14.02 -

Ironing 188.99 188.99 188.99 188.99 188.31

Inspection 80.40 80.40 80.40 80.40 80.49

Packing 5.42 12.85 5.53 8.39 13.88

Delivery 160.82 380.90 163.96 248.74 411.52

Total 1,741 1,918 1,137 1,408 1,887

4.3.4 Comparison of Total Cost using Traditional Costing Method and ABC

Method

Next is comparing the total cost per unit obtained by using traditional

and ABC methods. To get the total cost per unit, add direct material cost,

direct labor cost, and overhead cost. Table 4.25 shows the result.

Table 4.24. Overhead Rate of the Product/Unit (In Rupiah)

  57

Products

Collar Cuff Bottom Rib Sweater 103,892 149,136 145,206 70,528 25,375

Direct Material Cost

3,503 3,503 3,503 3,503 3,503

Direct Labor Cost 2,996 3,087 1,770 1,840 5,013

Overhead Cost 2,012 1,870 1,197 1,684 6,659

Total Cost / Unit 8,511 8,460 6,470 7,027 15,175

In contrast to the traditional method of summing up the three types of

costs, in ABC, there are other costs that must be charged directly. Table

4.25. shows the calculation of total cost per unit using ABC method which

contains direct material cost, direct labor cost, overhead cost, needle cost,

telecommunication cost and packaging cost.

Products

Collar Cuff Bottom Rib Sweater 103,892 149,136 145,206 70,528 25,375

Direct Material Cost 3,503 3,503 3,503 3,503 3,503

Direct Labor Cost 2,996 3,087 1,770 1,840 5,013

Overhead Cost 1,741 1,918 1,137 1,408 1,887

Needle Cost 406 390 214 201 126

Telecommunication Cost 50 48 27 25 16

Packaging Cost 6 6 6 6 6

Total Cost / Unit 8,702 8,953 6,656 6,983 10,551

The following table summarizes the total cost of each product using

traditional and ABC methods. There are some products that have a low total

cost when allocated by traditional methods and there are also some products

that have a lower total cost when using the ABC method.

Table 4.26. Total Cost of the Products Using Activity Based Costing Method (In Rupiah)

Table 4.25. Total Cost of the Products Using Traditional Costing Method (In Rupiah)

  58

Products Traditional ABC Differences Unit Distorted Amount

Description

Collar 8,511 8,702 (191) 103,892 (19,843,372) Undercosted

Cuff 8,460 8,953 (493) 149,136 (73,524,048) Undercosted

Bottom 6,470 6,656 (186) 145,206 (27,008,316) Undercosted

Rib 7,027 6,983 44 70,528 3,103,232 Overcosted

Sweater 15,175 10,551 4,624 25,375 117,334,000 Overcosted

From the results above, it shows that there are some products that are

allocated higher by using traditional method or higher by using ABC

method. ABC helps companies to determine product cost based on activity,

which gives accurate results because it is realistic and more specific than

traditional costing.

The result shows that by using existing costing system, the company

set several total cost too high. By using ABC method, rib and sweater

products will have lower product cost. By having a lower product cost,

especially sweater, because sweater product has a quite big difference, the

company can compete in the market at a quite low price that allows the

company to attract more customers because the price is relatively cheaper

than the other company.

However, for collar, cuff, and bottom products, the product cost is

lower when using the existing costing system. By using ABC method, those

three products will have higher product cost. Collar, cuff, and bottom are

the products with the highest amount of unit produced, resulting in higher

total of spending. If it has higher product cost, it will has higher selling price

Table 4.27. Comparison of Total Cost using Traditional and ABC Method (In Rupiah)

  59

and revenue as well, which means the product margin will also higher. It

happens because the money the company receives is proportional with the

money the company spends.

4.4 Impact on Decision-Making

This section discuss more about the short-term decision-making that

can be made by the company in order to increase profit. One type of decision-

making is applied, which is keep or drop product line analysis. The total cost

of product from section 4.1 is used as the information to decide whether such

product line should be kept or drop. To support the keep or drop decision,

researcher used the two costing system, which are traditional costing system

and ABC system.

4.4.1 Analysis on Keep or Drop Decision using Traditional Costing System

In this method, the costs, both direct and indirect are classified first

into fixed and variable cost. Variable costs are the cost that will be changing

as the number of production is changing. While fixed costs are the opposite.

The classification of fixed and variable costs are summarized in table 4.28.

Costs Types of Costs

Direct material Variable

Direct labor Variable

Indirect labor Variable

Needle Variable

Repair and maintenance Variable & Common fix

Table 4.28. Costs Classification

  60

Costs Types of Costs

Direct material Variable

Direct labor Variable

Indirect labor Variable

Needle Variable

Repair and maintenance Variable & Common fix

Depreciation Common fix

Electricity Variable

Water Variable

Telecommunication Variable

Fuel Variable

Gas Variable

Packaging Variable

Quality control Variable

Transport Variable

Taxes Common fix

Collar Cuff Bottom Rib Sweater Total

Sales 928,453,905 1,324,799,396 986,495,228 520,375,079 404,315,005 4,164,438,613

Less variable cost:

Direct material 363,932,222 522,421,321 508,654,586 247,058,597 88,888,270 1,730,954,996

Direct labor 311,303,832 460,457,132 256,994,648 129,764,182 127,195,995 1,285,715,789

Needle 42,136,000 58,166,000 31,144,000 14,198,000 3,206,000 148,850,000

Repair & maintenance

4,582,131 6,577,606 6,404,274 3,110,620 1,119,158 21,793,789

Electricity 11,999,530 17,225,213 16,771,298 8,145,986 2,930,813 57,072,841

Water 7,704,256 11,059,388 10,767,953 5,230,102 533,116 35,294,815

Telecomm. 5,206,595 7,187,365 1,754,396 3,848,353 396,154 18,392,863

Fuel 432,168 620,373 604,025 293,381 105,554 2,055,500

Gas 15,931,857 22,870,033 22,267,367 10,815,482 3,891,261 75,776,000

Quality control 7,463,853 10,714,292 10,431,951 5,066,902 1,823,002 35,500,000

Packaging 634,953 911,469 887,450 431,044 155,084 3,020,000

Transport 28,578,789 51,002,147 24,182,053 16,267,926 5,276,084 125,307,000

Contribution margin

128,402,927 155,379,210 95,428,856 76,046,210 168,759,149 624,016,353

Table 4.29. Segmented Income Statement using Traditional Costing (In Rupiah)

Table 4.28. Costs Classification (Continuation)

  61

Collar Cuff Bottom Rib Sweater Total

Less common fixed expenses:

Repair & maintenance

37,706,211

Depreciation

44,090,363

Taxes

710,720

General admin

111,254,250

Operating income 87,059,265

Table 4.29 shows the segmented income statement of PT. K using

traditional costing method. From the table, it shows the operating income of

the company if they use traditional costing method is Rp. 87,059,265. The

result shows that all product line have positive product margin, which

means the company is not facing a loss at all and the company did very well

in terms of financial. From the table, it can be determined that if the

company use traditional costing method, it is better to not drop any product

line, since every products are profitable.

On the other hand, the segmented income statement using traditional

method is sometimes not accurate, because the costs are only classified as

variable and fixed cost. Therefore, the next section will be discussing about

the segmented income statement using activity based Costing method,

which is more detail in tracing costs to each product.

4.4.2 Analysis on Keep or Drop Decision using Activity-Based Costing

System

Different from traditional costing method, in this method, the cost is

not classified as fixed or variable cost. Instead of the cost, this method

Table 4.29. Segmented Income Statement using Traditional Costing (Continuation) (In Rupiah)

  62

classify its activities into 2 kinds of resources, which are flexible and

committed resources. A flexible resource is the resources that are going to

be changing if the unit product produced is changing as well. It means the

supply provided by the company is the same with the demand. So the

resource is used as needed.

However, committed resource is the opposite. It is the resource that

acquired by the company through explicit and implicit contract. This kind of

resource is not based on the needs of the production. However, it has its

own capacity. There is a possibility that the company is not using its

maximum capacity due to some reasons. If those things happen, there is an

unused capacity.

From the classification of the resources, it is classified again into

relevant and irrelevant cost. Relevant cost will be used for decision-making,

while irrelevant cost is ignored. The classifications of activity resources are

summarized in table 4.30.

Activities Activity Cost Driver

Receiving Direct labor hours Committed Irrelevant

Designing Design hours Flexible Relevant

Sorting Number of PO Flexible Relevant

Rolling up Machine hours Committed Relevant

Set up machines Setup hours Flexible Relevant

Automatic knitting Automatic machine hours Committed Relevant

Manual knitting Manual machine hours Committed Relevant

Linking Linking machine hours Committed Relevant

Washing Washing machine hours Committed Relevant

Table 4.30. Classifications of Activity Resources

  63

Activities Activity Cost Driver

Drying Drying machine hours Committed Relevant

Ironing Direct labor hours Committed Relevant

Inspection Direct labor hours Committed Relevant

Packing Delivery number Flexible Relevant

Delivery Delivery number Flexible Relevant

Collar Cuff Bottom Rib Sweater Total

Sales 928,453,905 1,324,799,396 986,495,228 520,375,079 404,315,005 4,164,438,613

Less unit-level

variable expenses:

Direct material 363,932,222 522,421,321 508,654,586 247,058,597 88,888,270 1,730,954,996

Direct labor 311,303,832 460,457,132 256,994,648 129,764,182 127,195,995 1,285,715,789

Needle 42,136,000 58,166,000 31,144,000 14,198,000 3,206,000 148,850,000

Packaging 634,953 911,469 887,450 431,044 155,084 3,020,000

Telecomm. 5,206,595 7,187,365 1,754,396 3,848,353 396,154 18,392,863

Contribution margin 205,240,303 275,656,109 187,060,148 125,074,903 184,473,502 977,504,965

Less traceable

expenses:

Receiving, Non-unit variable 471,307 650,582 348,410 158,590 35,693 1,664,582

Receiving, Traceable expense 21,431,423 29,583,480 15,843,023 7,211,434 1,623,034 75,692,394

Designing, Non-unit variable - - - - 28,429 28,429

Sorting, Non-unit variable 10,708,355 14,782,186 7,914,871 3,608,250 814,766 37,828,428

Rolling up, Non-unit variable 916,766 1,265,485 677,450 308,745 69,428 3,237,874

Rolling up, Traceable expense 4,169,676 5,755,732 3,081,206 1,404,245 315,776 14,726,635

Set up machines, Non-unit variable 53,789,909 87,357,014 32,741,684 14,926,356 4,333,458 193,148,421

Automatic knitting, Non-unit variable 15,174,905 15,174,905 15,174,905 15,174,905 - 60,699,621

Automatic knitting, Traceable expense 13,638,837 13,638,837 13,638,837 13,638,837 - 54,555,346

Table 4.31. Segmented Income Statement using ABC (In Rupiah)

Table 4.30. Classifications of Activity Resources (Continuation)

  64

Collar Cuff Bottom Rib Sweater Total

Manual knitting, Non-unit variable 2,053,781 2,053,781 - - 3,675,188 7,782,750

Manual knitting, Traceable expense 4,722,113 4,722,113 - - 8,450,097 17,894,323

Linking, Non-unit variable - - - - 3,074,616 3,074,616

Linking, Traceable expense - - - - 7,822,708 7,822,708

Washing, Non-unit variable 5,733,290 8,228,216 8,014,005 3,880,996 - 25,856,507

Washing, Traceable expense 1,318,798 1,892,693 1,843,419 892,725 - 5,947,635

Drying, Non-unit variable 141,487 203,057 197,771 95,776 - 638,090

Drying, Traceable expense 1,318,798 1,892,693 1,843,419 892,725 - 5,947,635

Ironing, Non-unit variable 18,117,442 26,011,021 25,318,234 12,302,226 4,408,648 86,157,571

Ironing, Traceable expense 1,519,856 2,182,042 2,123,924 1,032,023 369,838 7,227,683

Inspecting, Non-unit variable 7,465,034 10,713,146 10,432,018 5,064,632 1,825,171 35,500,000

Inspection, Traceable expense 888,781 1,275,498 1,242,027 602,991 217,303 4,226,600

Packing, Non-unit variable 563,547 1,916,059 803,054 591,724 352,217 4,226,601

Delivery, Non-unit variable 16,707,600 56,805,840 23,808,330 17,542,980 10,442,250 125,307,000

Product margin 24,388,596 -10,448,269 22,013,561 25,744,744 136,614,884 198,313,516

Less common

expenses: Unused capacity

Manual knitting 994,129

Linking 1,870,648

Facility-level

General admin 111,254,250

Operating income 84,194,489

Table 4.31. Segmented Income Statement using ABC (Continuation) (In Rupiah)

  65

Table 4.31 shows the segmented income statement of PT. K using

activity based costing method. From the table, it shows the operating

income of the company is Rp. 84,194,489, which means it is lower than

using traditional method. The segmented income statement is different from

traditional method because in ABC, it includes the amount of unused

capacity. It means that the company is paying for the capacity that is not

being used by the company for Rp. 2,684,777.

However, there is one product that has negative product margin,

which is cuff product. By having negative product margin, it shows that the

cost consumed by cuff product is not proportional to the profit received by

the company; therefore the company suffered losses in this product.

Although the company has quite high operating income, but it would be

nice if the company can increase its profit again, so that profit can be used

to make future growth.

From that condition, ABC has three possible ways to increase the

income, which are dropping the unprofitable product, reducing resource

spending by eliminating current unused activity capacities, and the

combination of both.

a. Dropping Cuff Product

Collar Bottom Rib Sweater Total

Sales 928,453,905 986,495,228 520,375,079 404,315,005 2,839,639,217

Less unit-level variable expenses:

Direct material 363,932,222 508,654,586 247,058,597 88,888,270 1,208,533,675

Table 4.32. Segmented Income Statements using ABC After Dropping Cuff (In Rupiah)

  66

Collar Bottom Rib Sweater Total

Direct labor 311,303,832 256,994,648 129,764,182 127,195,995 825,258,657

Needle 42,136,000 31,144,000 14,198,000 3,206,000 90,684,000

Packaging 634,953 887,450 431,044 155,084 2,108,531

Telecommunication 5,206,595 1,754,396 3,848,353 396,154 11,205,498

Contribution margin 205,240,303 187,060,148 125,074,903 184,473,502 701,848,856

Less traceable expenses:

Receiving, Non-unit variable 471,307 348,410 158,590 35,693 1,014,000

Receiving, Traceable expense 35,181,825 26,007,907 11,838,290 2,664,372 75,692,394

Designing, Non-unit variable - - - 28,429 28,429

Sorting, Non-unit variable 10,708,355 7,914,871 3,608,250 814,766 23,046,242

Rolling up, Non-unit variable 916,766 677,450 308,745 69,428 1,972,389

Rolling up, Traceable expense 6,844,940 5,058,108 2,305,209 518,378 14,726,635

Set up machines, Non-unit variable 53,789,909 32,741,684 14,926,356 4,333,458 105,791,407

Automatic knitting, Non-unit variable 15,174,905 15,174,905 15,174,905 - 45,524,715

Automatic knitting, Traceable expense 18,185,115 18,185,115 18,185,115 - 54,555,345

Manual knitting, Non-unit variable 2,053,781 - - 3,675,188 5,728,969

Manual knitting, Traceable expense 6,414,946 - - 11,479,377 17,894,323

Linking, Non-unit variable - - - 3,074,616 3,074,616

Linking, Traceable expense - - - 7,822,708 7,822,708

Washing, Non-unit variable 5,733,290 8,014,005 3,880,996 - 17,628,291

Washing, Traceable expense 1,934,363 2,703,857 1,309,415 - 5,947,635

Drying, Non-unit variable

141,487 197,771 95,776 - 435,034

Drying, Traceable expense

1,934,363 2,703,857 1,309,415 - 5,947,635

Ironing, Non-unit variable

18,117,442 25,318,234 12,302,226 4,408,648 60,146,550

Ironing, Traceable expense

2,177,135 3,042,438 1,478,332 529,778 7,227,683

Table 4.32. Segmented Income Statements using ABC After Dropping Cuff (Continuation) (In Rupiah)

  67

Collar Bottom Rib Sweater Total

Inspecting, Non-unit variable

7,465,034 10,432,018 5,064,632 1,825,171 24,786,855

Inspection, Traceable expense

1,272,921 1,778,845 863,610 311,224 4,226,600

Packing, Non-unit variable 563,547 803,054 591,724 352,217 2,310,542

Delivery, Non-unit variable 16,707,600 23,808,330 17,542,980 10,442,250 68,501,160

Product margin -548,728 2,149,289 14,130,337 132,087,801 147,818,699

Less common

expenses:

Unused capacity

Rolling up 5,755,732

Automatic knitting 13,638,837

Manual knitting 5,716,242

Linking 1,870,648

Washing 1,892,693

Drying 1,892,693

Ironing 2,182,042

Inspection 1,275,498

Facility-level

General administration 111,254,250

Operating income 2,340,064

Segmented income statement in table 4.32 shows what will

happen if the company drops the cuff product line. The table shows the

decreasing of operating income if the company decided to drop the cuff

product. The result shows that by dropping the cuff product, it will

make the company has lower profit, which is Rp. 2,340,064.

By dropping cuff product, it means that the unit level variable

expenses and also traceable expenses will disappear. Meanwhile, the

common expenses are increasing. In this case, the common expenses

Table 4.32. Segmented Income Statements using ABC After Dropping Cuff (Continuation) (In Rupiah)

  68

are the expenses of unused capacity from committed resources. This

occurs because of the elimination of cuff product, then the capacity that

should be used by the product becomes unused, and therefore, the

amount of unused capacity increases.

Keep Alternative Drop Alternative

Contribution margin 275,656,109 -

Less:

Sorting, non-unit variable 14,782,186 -

Rolling up, non-unit variable 1,265,485 -

Rolling up, traceable expense 5,755,732 -

Rolling up, unused capacity - 5,755,532

Set up machines, non-unit variable 87,357,014 -

Automatic knitting, non-unit variable 15,174,905 -

Automatic knitting, traceable expense 13,638,837 -

Automatic knitting, unused capacity - 13,638,837

Manual knitting, non-unit variable 2,053,781 -

Manual knitting, traceable expense 4,722,113 -

Manual knitting, unused capacity 994,129 5,716,242

Washing, non-unit variable 8,228,216 -

Washing, traceable expense 1,892,693 -

Washing, unused capacity - 1,892,693

Drying, non-unit variable 203,057 -

Drying, traceable expense 1,892,693 -

Drying, unused capacity - 1,892,693

Ironing, non-unit variable 26,011,021 -

Ironing, traceable expense 2,182,042 -

Ironing, unused capacity - 2,182,942

Inspecting, non-unit variable 10,713,146 -

Inspection, traceable expense 1,275,498 -

Inspection, unused capacity - 1,275,498

Packing, non-unit variable 1,916,059 -

Delivery, non-unit variable 56,805,840 -

Total 18,791,662 (32,354,437)

Table 4.33. Keep or Drop Analysis (In Rupiah)

  69

Table 4.33 also shows the keep or drop alternative analysis on

cuff product. Receiving activities is not included in the table because it

is irrelevant to the decision-making, because whether there is a

decreasing in demand, the activity capacity will not reduced. The table

shows that by keeping cuff product, the company will have positive

product margin, since there is revenue. However, if the company drops

the cuff product, the traceable expenses will be moved to unused

capacity, because the capacity used by cuff product is no longer being

used. The result will be negative, because the company is not

generating revenue, which means the unused capacity will be covered

by other products’ revenue.

Moreover, cuff has the highest total unit, which means that the

activity capacity is high. Due to the elimination, the capacity is moved

to unused capacity, which makes lower profit because of the high

amount of unused capacity. Furthermore, one of the reasons why the

profit is lower is because the company still pays the same amount of

common fixed cost, even though the unit produced is decreasing.

b. Dropping Cuff Product and Eliminate Activity Resource

This section discusses about the possibility of reducing resource

spending of current unused capacity. The company can also try to

reduce resource capacity, which is by eliminating several machines and

laying off several employees. The practical working hours of each

  70

employee is 2,052 hours annually. From the consumption of capacity

stated in table 4.23, the resource capacity that can be eliminated based

on employees’ working hours are rolling up, set up machines, manual

machine operations, and inspection, each of the activity can eliminate 1

employee. While automatic machine operations can eliminate 2

employees. However, if based on machine hours, rolling up, automatic

machine operations, and manual machine operations can eliminate 1

machine each.

Collar Bottom Rib Sweater Total

Sales 928,453,905 986,495,228 520,375,079 404,315,005 2,839,639,217

Less unit-level variable expenses:

Direct material 363,932,222 508,654,586 247,058,597 88,888,270 1,208,533,675

Direct labor 311,303,832 256,994,648 129,764,182 127,195,995 825,258,657

Needle 42,136,000 31,144,000 14,198,000 3,206,000 90,684,000

Packaging 634,953 887,450 431,044 155,084 2,108,531

Telecommunication 5,206,595 1,754,396 3,848,353 396,154 11,205,498

Contribution margin 205,240,303 187,060,148 125,074,903 184,473,502 701,848,856

Less traceable

expenses:

Receiving, Non-unit variable 471,307 348,410 158,590 35,693 1,014,000

Receiving, Traceable expense 35,181,825 26,007,907 11,838,290 2,664,372 75,692,394

Designing, Non-unit variable - - - 28,429 28,429

Sorting, Non-unit variable 10,708,355 7,914,871 3,608,250 814,766 23,046,242

Rolling up, Non-unit variable 916,766 677,450 308,745 69,428 1,972,389

Rolling up, Traceable expense 4,563,293 3,372,072 1,536,806 345,585 9,817,757

Table 4.34. Segmented Income Statements using ABC After Dropping Cuff and Eliminate Resource Spending (In Rupiah)

  71

Collar Bottom Rib Sweater Total

Set up machines, Non-unit variable 53,789,909 32,741,684 14,926,356 4,333,458 105,791,407

Automatic knitting, Non-unit variable 15,174,905 15,174,905 15,174,905 - 45,524,715

Automatic knitting, Traceable expense 13,638,836 13,638,836 13,638,836 - 40,916,508

Manual knitting, Non-unit variable 2,053,781 - - 3,675,188 5,728,969

Manual knitting, Traceable expense 4,722,113 - - 8,450,097 13,172,210

Linking, Non-unit variable - - - 3,074,616 3,074,616

Linking, Traceable expense - - - 7,822,708 7,822,708

Washing, Non-unit variable 5,733,290 8,014,005 3,880,996 - 17,628,291

Washing, Traceable expense 1,934,363 2,703,857 1,309,415 - 5,947,635

Drying, Non-unit variable 141,487 197,771 95,776 - 435,034

Drying, Traceable expense 1,934,363 2,703,857 1,309,415 - 5,947,635

Ironing, Non-unit variable 18,117,442 25,318,234 12,302,226 4,408,648 60,146,550

Ironing, Traceable expense 2,177,135 3,042,438 1,478,332 529,778 7,227,683

Inspecting, Non-unit variable 7,465,034 10,432,018 5,064,632 1,825,171 24,786,855

Inspection, Traceable expense 954,691 1,334,134 647,707 233,418 3,169,950

Packing, Non-unit variable 563,547 803,054 591,724 352,217 2,310,542

Delivery, Non-unit variable 16,707,600 23,808,330 17,542,980 10,442,250 68,501,160

Product margin 8,290,261 8,826,315 19,660,922 135,367,680 172,145,177

Table 4.34. Segmented Income Statements using ABC After Dropping Cuff and Eliminate Resource Spending (Continuation) (In Rupiah)

  72

Collar Bottom Rib Sweater Total

Less common expenses:

Unused capacity

Rolling up 846,853

Manual knitting 994,129

Linking 1,870,648

Washing 1,892,693

Drying 1,892,693

Ironing 2,182,042

Inspection 218,848

Facility-level

General administration

111,254,250

Operating income 50,993,021

From the segmented income statement in table 4.34, it shows that

the number of operating income is increasing rather than only dropping

the cuff product. There is an increase of Rp. 48,652,957. It happens

because the company is reducing it’s spending, which makes the

amount that the company paid is lower. However, the company still

cannot earn higher operating income rather than keeping the cuff

product is due to the amount of unused capacity. In order to earn higher

operating income, the company needs to allocate its unused capacity to

another product. Not only earning higher revenue, the company can

also earn higher operating income.

Table 4.34. Segmented Income Statements using ABC After Dropping Cuff and Eliminate Resource Spending (Continuation) (In Rupiah)

  73

Keep Alternatives

Drop Alternatives

Drop & Eliminate Resources

Contribution margin 977,504,965 701,848,856 701,848,856 Less traceable expenses 779,191,449 551,030,157 529,703,679 Product margin 198,313,516 150,818,699 172,145,177

Less common fixed expenses Unused Capacity: 2,864,777 34,224,385 9,897,906 Facility level: 111,254,250 111,254,250 111,254,250

Operating income 84,194,489 5,340,064 50,993,021

Table 4.35 summarizes the three alternatives that the company can do.

First is keeping the unprofitable product, second is dropping the product and

the last one is dropping the product and eliminating several activity

resources. It shows that if the company drop the cuff product and eliminate

several activity resources, they can get higher profit rather than only

dropping the product. It happens because the amount of fixed cost is

decreasing because of eliminating machines and laying off some employees,

resulting in lower amount of unused capacity. However, it is still lower than

keeping the product. It determined that if the company use activity based

costing method, it is better to keep the cuff product. Even though it is

unprofitable, but it helps the company to generate more revenue that helps

to cover the fixed costs and also reducing the unused capacity.

Table 4.35. Three Alternatives of Keep or Drop (In Rupiah)

  74

CHAPTER V

RECOMMENDATION & CONCLUSION

5.1 Conclusion

Based on the results and analysis from the previous chapters on the

implementation of ABC method in PT. K and its impact on decision-making,

the author conclude that:

1. The total cost of the products if the company implements traditional

costing method is

a. Collar : Rp. 8,511

b. Cuff : Rp. 8,460

c. Bottom: Rp. 6,470

d. Rib : Rp. 7,027

e. Sweater: Rp. 15,175

2. The total cost of the products if the company implements activity based

costing method is

a. Collar : Rp. 8,702

b. Cuff : Rp. 8,953

c. Bottom: Rp. 6,656

d. Rib : Rp. 6,983

e. Sweater: Rp. 10,551

The result shows that the total cost of the products if the company

used ABC is mostly higher rather than traditional costing method.

  75

However, two of the products, which are rib and toy sweater, have lower

total cost compared to the traditional method.

3. The best possible decision that the company can do to maximize its profit

is by keeping the cuff product and allocates the unused capacity left,

which are manual knitting and linking. Moreover, the company also can

try to implement ABC in determining the overhead cost of the products,

since ABC provides more detail information and it is based on the

activity used by the products.

4. The impact of implementing ABC in decision-making is that ABC

provides better and clearer information regarding the total cost of the

product. The keep or drop analysis is made to test the impact of ABC and

the result shows that ABC provides the information that traditional

method do not provide, which is the unused capacity. If traditional

method shows that all products are profitable, ABC does not say so. One

of the products, which is cuff, is unprofitable because it has negative

product margin. After being tested whether by dropping cuff will make

higher profit or not, the result shows that it makes the profit lower.

5.2 Limitation & Recommendation

Although this research has achieved its objectives described in chapter

1, there are some limitations that hamper the smoothness of this research

process, including:

1. Hard to find the right timing for doing direct interview with the head of

production and finance division due to the limited time the researcher has

  76

because of the schedule that the researcher has collide with schedule of

the head of production and finance division.

2. Observation time also last quite long for some product, which is toy

sweater because there is no purchase order at that time. It means that the

researcher needs to wait until the company receives an order and doing

the observation regarding the production process and activities. Those

situations hamper the research process, which takes too much time for

the researcher to obtain the data.

3. This research is limited to the implementation of ABC in manufacturing

company focusing on knitting industry.

4. Due to the limited time of the research period, the researcher can only do

the research for 1 year only, which is 2016. If the research period is

longer, the researcher is able to make comparison with the previous

years, which is in 2014 and 2015 and see which methods are suitable and

beneficial for the company.

The existence of limitations in this research provides opportunities for

future research. Based on the conclusion and limitation stated above, there are

some recommendations that can be used for several parties, such as:

a. Future Research

1. Focus on small-medium companies in different sector, for example

service industry in order to deepen the theory related with the topic,

which is Activity-Based Costing.

  77

2. Extent the period of the research, which is 3 years in a row and sees

which method is better for the company.

b. The Company

1. The company should immediately rectify the product cost calculation

method that has been done. Although the method of Activity Based

Costing is more time consuming and its implementation is more

difficult, especially considering that PT is a small company, but if the

company continues to use simple method in its cost calculation, it will

cause distortion of product cost which can ultimately bring adverse

impact to the company.

2. From keep or drop analysis section, if the company decides to drop

the cuff product, it is better for them to reduce its resource spending,

therefore the amount of unused capacity will also reduced. Moreover,

the company can also try to allocate its unused capacity (if they don’t

want to reduce its resource spending) to the other product, resulting in

shorter working days annually.

3. Another recommendation will be accepting special order offered to

the company. By accepting special order, the company will be able to

allocate its unused capacity to the other products, resulting in lower

unused capacity. Moreover, the company also can generate revenue

from the special order. When accepting special order, the company is

able to gain profit from the order because when making the product,

they don’t need to pay for the fixed cost again. The fixed cost will not

  78

be changing unless the job is exceeding the capacity. It has been

covered by the earlier production. So the company only needs to pay

for the variable costs. This also applies if the company decides to

make new product. The product that can be made is socks, saiba,

yoke, etc.

4. The company can try to increase its target profit, resulting in higher

selling price and higher revenue.

5. In order to maximize profit, it is recommended for the company to

implement Activity Based Costing method as the method for

determining overhead cost of the products. The benefits can be shown

in results and analysis section that the overhead cost of some products

using Activity Based Costing method is higher than traditional

method. Moreover ABC method provides a better and detail

information regarding the consumption of resources based on each

activity, which means it is based on the actual condition of the

company. However, since PT. K it still considered as a small-medium

enterprise, which may not be too ready in terms of time, effort, etc. in

implementing ABC, the company can still apply traditional costing

method with several improvements. For example by categorizing

several overhead costs like telecommunication, needle, and packaging

cost to direct cost, resulting in less significant overhead cost. If the

overhead cost is less significant, the use of different methods in the

cost calculation will not make a big difference.

  79

5.3 Implications

Based on the results obtained from this research, the research has

implications to some parties, which includes:

1. For the company, the results of the research are expected to give

contribution and becoming the base for making improvements and solve

the current problem dealing with corporate profits. Based on the

conclusions, by using activity based costing method, the company will

get a positive impact in the preparation of the cost of production, namely

in the cost of factory overhead costs on each product. From the

calculations that have been done also can be seen that activity-based

costing is a good alternative for companies in order to maximize profits

by using the method of cost of production is appropriate in the loading of

factory overhead costs.

2. For the academician, the results are expected to give contribution for

future research. It is expected that the research can be used as the

previous research and as the reference for future research related to the

topic, which is Activity-Based Costing method implementations.

Moreover, it is also expected to provide benefits in the development of

management accounting science, especially in the discussion of the

method of activity based costing, in maximizing profit, and charging cost

drivers in the preparation of cost of production.

  80

REFERENCES

Accountingverse. (n.d.). Types of Costs (Cost Classifications). Retrieved October 18, 2017, from http://www.accountingverse.com/managerial-accounting/cost-concepts/types-of-costs.html

Ahmad, K. (2017). The Implementation of Management Accounting Practices and Its Relationship with Performance in Small and Medium Enterprises. International Review of Management and Marketing, 7(1), 342-353.

Ahmad, K., Teng, N. W., & Zabri, S. M. (2017). The Implementation of Activity-Based Costing in Malaysian Small and Medium-Sized Enterprises. Advanced Science Letters, 23(4), 3170-3173. doi:10.1166/asl.2017.7692

Babad, Y. M., & Balachandran, B. V. (1993). Cost Driver Optimization in Activity-Based Costing. The Accounting Review, 68(3), 563-575.

Brierley, J. A. (2013). The Uses of Product Costs in Decision-Making. International Journal of Managerial and Financial Accounting, 5(3), 294-309. doi:10.1504/ijmfa.2013.058551

Chea, A. (2011). Activity-Based Costing System in the Service Sector: A Strategic Approach for Enhancing Managerial Decision Making and Competitiveness. International Journal of Business and Management, 6(11), 3-10. doi:10.5539/ijbm.v6n11p3

Cohen, H. (2004). Implementing an Activity-Based Costing Model (Master's thesis, Nelson Mandela Metropolitan University, Port Elizabeth, South Africa).

Duh, R., Lin, T. W., Wang, W., & Huang, C. (2009). The Design and Implementation of Activity‐Based Costing. International Journal of Accounting & Information Management, 17(1), 27-52. doi:10.1108/18347640910967726

Fennema, M., Rich, J. S., & Krumwiede, K. (n.d.). Asymmetric Effects of Activity-Based Costing System Cost Reallocation. Advances in Accounting Behavioral Research, 8 (4), 167-187. doi:10.1016/s1475-1488(04)08007-x

Gunasekaran, A., & Singh, D. (1999). Design of Activity-Based Costing in a Small Company: A Case Study. Computers & Industrial Engineering, 37(1-2), 413-416. doi:10.1016/s0360-8352(99)00106-0

Gunasekaran, A., Marri, H., & Grieve, R. (1999). Justification and Implementation of Activity Based Costing in Small and Medium‐Sized Enterprises. Logistics Information Management, 12(5), 386-394.

  81

doi:10.1108/09576059910295869

Gunasekaran, A., Marri, H., & Yusuf, Y. (1999). Application of Activity‐Based Costing: Some Case Experiences. Managerial Auditing Journal, 14(6), 286-293. doi:10.1108/02686909910280217

Hansen, D. R., Mowen, M. M., & Guan, L. (2009). Cost Management: Accounting & Control (6th ed.). Mason, OH: South-Western Cengage Learning.

Haroun, A. E. (2015). Maintenance Cost Estimation: Application of Activity-Based Costing as a Fair Estimate Method. Journal of Quality in Maintenance Engineering, 21(3), 258-270. doi:10.1108/jqme-04-2015-0015

Horngren, C. T., Datar, S. M., & Rajan, M. V. (2016). Cost Accounting: A Managerial Emphasis (15th ed.). Harlow, England: Pearson.

Ittner, C. D., Lanen, W. N., & Larcker, D. F. (2002). The Association Between Activity-Based Costing and Manufacturing Performance. Journal of Accounting Research, 40(3), 711-726. doi:10.1111/1475-679x.00068

Johnson, R. (2011, November 13). Traditional Costing vs. Activity-Based Costing. Retrieved from http://smallbusiness.chron.com/traditional-costing-vs-activitybased-costing-33724.html

Kimball, T. (2011, December 19). Importance of Accurate Calculating in Product Cost. Retrieved from http://smallbusiness.chron.com/importance-accurate-calculating-product-cost-36698.html

Majid, J. A., & Sulaiman, M. (2008). Implementation of Activity Based Costing in Malaysia. Asian Review of Accounting, 16(1), 39-55. doi:10.1108/13217340810872463

Markgraf, B. (2012, July 23). Importance of Costing in Managerial Decision Making. Retrieved from http://smallbusiness.chron.com/importance-costing-managerial-decision-making-51739.html

Mishra, B., & Vaysman, I. (2001). Cost-System Choice and Incentives-Traditional vs. Activity-Based Costing. Journal of Accounting Research, 39(3), 619-641. doi:10.1111/1475-679x.00031

Nassar, M., Morris, D., Thomas, A., & Sangster, A. (2009). An Empirical Study of Activity-Based Costing (ABC) Systems Within the Jordanian Industrial Sector: Critical Success Factors and Barriers to ABC Implementation. Research in Accounting in Emerging Economies, 9(3), 229-263. doi:10.1108/s1479-3563(2009)0000009011

Pierce, B., & Brown, R. (2006). Perceived Success of Costing Systems: Activity‐

  82

Based and Traditional Systems Compared. Journal of Applied Accounting Research, 8(1), 108-161. doi:10.1108/96754260680001046

Pondent, C. S. (2017, September 26). Advantages & Disadvantages of Traditional Costing. Retrieved from https://bizfluent.com/info-8645304-advantages-disadvantages-traditional-costing.html

Stevenson, T. H., & Cabell, D. W. (2002). Integrating Transfer Pricing Policy and Activity-Based Costing. Journal of International Marketing, 10(4), 77-88. doi:10.1509/jimk.10.4.77.19552

White, L. (2011, April 1). Product Cost: Making It Decision Oriented. Retrieved from https://www.automationworld.com/article/product-cost-making-it-decision-oriented

  83

APPENDICES Appendices 1 – Interview Transcript

a. Face-to-face Interview 1) Director

• Bagaimana sejarah terbentuknya PT. K? Jawab: Terbentuknya itu tahun 1997. Waktu awal terbentuk,

lokasinya di Rawalumbu. Karyawannya juga masih kurang dari 20. Dulu kita bukan produksi kain rajut sama sweater boneka, tapi produksi sweater untuk orang atau pakaian yang terbuat dari rajutan terus di ekspor ke luar negeri, contohnya Korea. Tapi setelah beberapa tahun, agak sulit juga karena suka ade kendala pas mau ekspor. Jadi kita pindah haluan aja ke kain rajut untuk aksesoris baju dan jaket sama produksi sweater boneka. Sekitar 5 tahun setelahnya, kita pindah ke daerah Bekasi Timur tapi bukan gedung sendiri, masih ngontrak. 5 tahun berikutnya baru kita beli rumah di daerah Tambun. Produksi berjalan sampai sekarang di rumah itu. Waktu awal-awal sempat juga ganti nama beberapa kali karena personal reason.

• Total karyawan ada berapa?

Jawab: 45 orang

• Jam masuk dan pulang karyawan jam berapa? Jawab: Normalnya masuk jam 07.30 sampai 16.30. Jadi 1 hari kerja

8 jam plus 1 jam istirahat. Khusus untuk bagian otomatis dibagi 2 shifts. Shift pertama dari jam 07.30 sampai 16.30 yang terdiri dari 4 karyawan dan shift kedua dari jam 16.30 sampai 01.30 yang terdiri dari 4 karyawan juga.

• Gaji per bulan berapa? Setiap orang beda atau sama?

Jawab: Gaji per bulan Rp. 3,150,000 sudah termasuk uang makan. Setiap orang gajinya sama dan setiap bulan sama.

2) Head of Production • Barang apa saja yang diproduksi?

Jawab: Ada 2 tipe barang yang di produksi, yaitu kain rajut dan sweater boneka. Untuk kain rajut, terbagi menjadi 4 macam yang terdiri dari collar, cuff, rib, dan bottom.

• Bagaimana proses produksi kain rajut?

Jawab: Kain rajut ada 4 macam dan proses produksinya sama. Sebelum produksi, kita terima PO dulu dari buyer, nanti ada

  84

penjelasannya mereka butuh berapa pieces, tipenya apa aja dan ukurannya. Kalau udah terima order, nanti kita sortir dulu kebutuhan benangnya berapa terus dikirim ke bagian gulung. Waktu terima benang kan bentuknya besar, nah dibagian gulung bakal dipindahin ke cone yang lebih kecil biar muat ditaruh di mesin. Kalau udah dipisahin ke cone kecil, langsung dikirim aja ke bagian rajut, dibagi 2 buat ke otomatis sama manual. Nah sebelum mulai aktivitas ngerajutnya, mesinnya diatur dulu sesuai sama permintaan dari buyer. Yang diatur itu tipe jarumnya sama tingkat elastisitasnya. Kalau semua semua udah beres, tinggal taruh benang terus dimulai prosesnya. Kalau sudah jadi, nanti barangnya bakal dikirim ke bagian inspeksi. Dibagian ini, kebagi lagi jadi 2, pertama inspeksi produk dulu baru kalau udah selesai inspeksi quality. Bedanya 2 bagian itu, kalau yang produk itu diliat sesuai sama permintaan engga, kalau bagian quality itu dicek ulang ada yang reject atau engga. Udah selesai dicek, dikirim ke bagian washing trus kalau udah dicuci dikeringkan, lalu dikirim ke bagian iron. Iron disini fungsinya buat ngelurusin kainnya. Kalau habis dicuci kan kainnya suka keriting, nah di iron ini digosok biar rapih lagi, kayak baju aja gitu hehe. Kalau udah digosok, dibalikin ke bagian packing buat dibungkus. Dibagian ini, biasanya nanti bakal ada kertas gitu, nah karyawannya nanti bakal bikin kayak semacam ticket gitu di setiap piece, yang isinya itu warna, tipe, pokoknya spesifikasi produknya deh. Kita itu ngebungkusnya pake polybag gitu dan biasanya 1 polybag bisa masukin 200 pieces kain rajut atau sweater boneka. Kalau udah dimasukin dan udah beres, kepala produksi bakal bikin surat jalan terus dikirim ke buyer. Nah dikirimnya itu bisa pake supir kita sendiri atau kalau lagi dikejar waktu banget, suka dibagi dua, beberapa pake supir beberapa pake kurir. Itu aja kadang bisa hampir seharian supirnya anter barang. Kalau kurir kadang juga dipake buat kirim ke luar negeri. Proses produksi selesai kalau udah dikirim.

• Bagaimana proses produksi sweater boneka?

Jawab: Proses tadi kan buat kain rajut ya, kalau sweater boneka sebenernya sama aja sih gak beda banget. Cuma kalau sweater boneka ada beberapa tambahan. Kalau untuk sortir benang dan gulung sama aja. Cuma bedanya kalau sweater boneka harus bikin pola dulu. Polanya ada 3. Pola untuk bikin kain rajutnya, pola buat bagian linking sama bagian gosok. Kalau pola udah jadi, proses produksi kain rajutnya dimulai terus masuk ke bagian inspection, nah kalo sweater

  85

boneka ini gak dicuci ya, jadi langsung digosok aja. Setelah digosok, baru dikirim ke bagian linking. Linking itu proses buat nyambungin bagian badan sama lengannya. Nanti kalau udah selesai, baru di cek lagi sekalian di packing. Terus dikirim deh ke buyer.

• Mesin-mesin yang ada biasanya hidup berapa jam 1 hari?

Jawab: Mesin di pabrik ada beberapa. Kalau mesin otomatis ada 8, semuanya hidup 18 jam per hari. Ada juga mesin gulung, itu total ada 3, hidupnya 8 jam per hari. Mesin cuci sama mesin pengering juga sama 8 jam, jumlahnya masing-masing 1 mesin. Kalau mesin linking itu hidupnya 1 hari 8 jam. Tapi mesinnya hidup gak setiap hari, jadi tergantung berapa banyak PO. Nah kalau tahun lalu itu PO sweater boneka ada 7, 1 PO itu butuh waktu kurang lebih 33 hari buat ngelinking, jadi total 230an hari. Mesin linking kita cuma punya 1, tapi di 1 mesin itu ada 3 alat jahit. Kalau mesin manual, 8 jam sehari. Tapi itu gak pakai listrik, jadi dia cuma digerakin pake tangan aja.

3) Head of Finance • Metode biaya apa yang diterapkan oleh perusahaan untuk

menentukan harga jual? Jawab: Kalau untuk tentuin total biaya per produk sih pake metode

tradisional ya. Kalau untuk biaya benang sama karyawan biasanya sesuai pemakaian sih, biasanya pake patokan yang tahun lalu. Nanti paling dinaikin sedikit karena kan harga benang juga naik tiap tahunnya.

• Kalau pakai metode Tradisional, allocation basenya apa?

Jawab: Jam kerja langsung. • Untuk nentuin harga jualnya gimana?

Jawab: Hasil yang dari metode Tradisional itu biasanya kita tambahin sama profit yang kita mau. Biasanya sih 5%. Jadi ditambahin 5% nya dari total biaya masing-masing produk aja.

• Sempat survey dulu gak sebelum nentuin harganya? Kan biasanya

buat bisa bersaing harus tahu juga harga di perusahaan lain berapa. Jawab: Survey iya. Kan suka ada kondisi kita gak bisa nerima

pesanan dari buyer, jadi suka dilempar ke perusahaan rajut juga yang emang kenal dan suka kerja bareng kita. Jadi kita pasti tahu harga yang mereka kasih berapa. Terus itu juga

  86

jadi patokan kita buat nentuin harga, ya biar ga jauh-jauh banget dari harga competitor gitu.

b. Online Interview

1) Head of Production • Bedanya mesin otomatis sama manual apa?

Jawab: Sebenernya bedanya cuma dioperatornya aja. Kalau otomatis berarti mesinnya yang kerja, karyawannya cuma mantau dan tugasnya itu taruh benang di mesin, kalau ada benang putus disambungin lagi, kalau tiba-tiba mesin berhenti sendiri mereka yang hidupin. Sedangkan yang manual itu berarti yang buat produknya orang. Jadi karyawan yang ngerjain.

• Kalau produk udah selesai, dibungkus pake apa? Berapa banyak?

Jawab: Dibungkus pake polybag. Banyaknya tergantung quantity yang diproduksi. Biasanya 1 polybag bisa muat 200 pieces.

• Air digunain untuk apa?

Jawab: Kalau air dipakainya buat nyuci kan ya udah pasti sama buat gosok. Kan gosoknya bukan pakai gosokan yang buat baju biasa yang pake listrik. Gosoknya pake uap, jadi airnya dipakai buat ngehasilin uap.

• Minyak untuk apa?

Jawab: Minyak itu buat ngelancarin mesin aja sih sebenernya. Kadang kan mesin suka berat terus agak macet2 gitu, jadi ya kita pakein minyak. Buat itu aja sih, gak ada buat yang lain.

• Gas untuk apa?

Jawab: Kalau gas buat ngegosok juga. Kan airnya harus direbus dulu biar ngehasilin uap.

• Peralatan kantor tiap divisi punya atau gimana?

Jawab: Peralatan kantor kayak pulpen, pensil dsb pasti punya sih setiap divisi. Kayak kalau untuk bagian rajut kan mereka nanti bakal bikin kayak ticket sendiri gitu isinya tipe, warna sama nama mereka. Gunanya kalau nanti barang itu reject, bakal dikembaliin ke orang yang buat, nah mereka yang bikin ulang. Sama sih semuanya begitu, buat bikin catatan, jadi pasti punya. Makanya kalau beli peralatan kantor, pasti dibagi rata ke semuanya. Banyaknya tergantung banyak anggota per divisi juga.

  87

Appendices 2 – Organizational Structure

  88

  89

Appendices 3 – Detail of Activities

Watt Working Hour(s)

annually Total (kWh)

Automatic Machines (8 machines) 1000 36,558 36,558 Linking Machine (1 machine) 800 1,760 1,408 Washing Machine (1 machine) 340 2,052 697.68 Drying Machine (1 machine) 230 2,052 471.96 Rolling Up Machines (3 machines) 300 6,156 1,846.8 Computers (2 computers) 300 4.104 1.231.2

Number of Employees Activities

Collar Cuff Bottom Rib Sweater Total Hours 103,892 149,136 145,206 70,528 25,375

1 Designing - - - - 21 21

8 Automatic 4,104 4,104 4,104 4,104 - 16,416

8 Manual 4,104 4,104 - - 7,344 15,552

2 Linking - - - - 3,312 3,312

3 Rolling 1,743 2,406 1,288 587 133 6,156

1 Washing 455 653 636 308 - 2,052

2 Drying 910 1,306 1,271 617 - 4,104

4 Inspecting 1,726 2,477 2,412 1,172 421 8,208

2 Packing 547 1,860 780 575 342 4,104

2 Delivering 547 1,860 780 575 342 4,104

2 Ironing 863 1,239 1,206 586 211 4,104

35 14,998 20,009 12,477 8,523 12,126 68,133

Cost Driver Products Collar Cuff Bottom Rib Sweater

Receiving hours

2 employees

92 PO

1,162

127 PO

1,604

68 PO

859

31 PO

391

7 PO

88

Design hours

1 employee

- - - - 7 PO

4 hours/PO

28

Table 4.36. Electricity Usage (In Rupiah)

Table 4.37. Details of Direct Labor Hours (In Rupiah)

Table 4.38. Details of Cost Driver Consumption (In Rupiah)

  90

Cost Driver Products Collar Cuff Bottom Rib Sweater

Roll up machine

hours

3 machines

92PO

1,743

127PO

2,406

68PO

1,288

31PO

587

7PO

133

Setup hours

5 employees

1 person

92 PO

14 hours

(2 auto)

4 hours

(1 manual)

1,564

1 person

127 PO

14 hours

(2 auto)

8 hours

(2 manual)

2,540

1 person

68 PO

14 hours

(2 auto)

952

1 person

31 PO

14 hours

(2 auto)

434

1 person

7 PO

3 hours

(1 linking)

20 hours

(5 manual)

126

Automatic

machine hours

8 machines

After setup, repair & maintenance

2 machines

18 hours

285 days

9,234

2 machines

18 hours

285 days

9,234

2 machines

18 hours

285 days

9,234

2 machines

18 hours

285 days

9,234

-

Manual machine

hours

8 machines

After setup, repair & maintenance

1 machine

8 hours

285 days

4,104

2 machines

8 hours

285 days

4,104

- - 5 machines

8 hours

255 days

7,344

Linking

machine hours

1 machine

After setup, repair & maintenance

- - - - 8 hours

230 days

1,656

Washing

machine hours

1 machine

103,892 unit

455

149,136 unit

653

145,206 unit

636

70,528 unit

308

-

Table 4.38. Details of Cost Driver Consumption (Continuation) (In Rupiah)

  91

Cost Driver Products Collar Cuff Bottom Rib Sweater

Drying machine

hours

1 machine

103,892 unit

455

149,136 unit

653

145,206 unit

636

70,528 unit

308

-

Direct labor

hours ironing

2 employees

103,892 unit

863

149,136 unit

1,239

145,206 unit

1,206

70,528 unit

586

25,375 unit

210

Direct labor

hours inspection

4 employees

103,892 unit

1,726

149,136

unit

2,477

145,206

unit

2,412

70,528

unit

1,171

25,375 unit

421

Table 4.38. Details of Cost Driver Consumption (Continuation) (In Rupiah)