Cost Management of Mr Print Legacy

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Introduction

Cost Management is a subject compulsory for accounting students to take. This subject provides knowledge about managing costs of producing products and services. As far as we concerned, minimizing the cost and maximizing the profit would be the main objective or goal of the firm itself. By acquiring this Cost Management knowledge, the students can know how an accountant allocates the costs by using the appropriate and suitable method to provide the best decision making for the company. Studying this subject is basic and important for a person who wants to become an accountant because this subject will enhance the decision for the company in term of internal.

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In the process of preparing the report, there are many information and knowledge we would like to share after interviewing Mr Print Legacy. This company founded recently in 2015. After a one-year struggle to sustain in the business, they managed to survive until now because of their dedication and determination. Their business is well-known at Gombak especially because the price is reasonable and become the top choice of people especially on family events, festivals and also university events.

We decided to interview the owner of the company. He shared important evidence and information pertaining to the cost management of Mr Print Legacy. His contribution really helps us to finish this report and assignment.

From the information that the owner gave us, we have gathered some information which is related the teachings of the cost management such as costing system, spoilage management, management of accounting for materials, accounting for labour, accounting for overhead and some of our evaluations and recommendation.

In the costing system, we would determine whether the company use job costing or process costing. For spoilage management, we found some details about their normal and abnormal spoilage. Next, for accounting for materials, we know about how they handle their direct and indirect materials and some information related to their material management. In accounting for labour, we studied about their direct and indirect labour cost management and what method they use to pay their labour. Not only that, but their allocation in overhead was also good information for us to share and to report because their costing system was too simple and perfect enough. Based on this information, we make our own analysis, evaluation and recommendation by using our knowledge and source that we have to suggest a better option to the company for managing their cost.

For further discussion about the cost management of this company is explained well in this report. The information is authentic because we had evidence interviewing the owner. Finally, it can be said deeply that this project helped us to understand how a manufacturing company manages its cost.

Background of the Company

Mr Print Legacy Enterprise was founded on 6 January 2015 by Aminrool Hafiz and Mohd Amir Zaid in Gombak, Selangor Darul Ehsan. This company started as a small shirt printing company but now they have been sustaining and growing slowly which is the reason they are well-known at Gombak, Selangor. In the beginning, this company was focusing on normal printing on the shirt and also designing the shirt.

Alhamdullilah, they managed to survive in this economy even they face many hardships in sustaining the business. They have registered their company at Security Commission Malaysia and then they build their networking by having a good relationship with competitors. Back then, only schools and universities only give opportunities to this company to do business. But now, most people go to them because of good customer service and a reasonable price.

However, it cannot be denied that they go through hardship in getting business, handling problematic customer and much more especially financially. Mr Print Legacy uses a sales credit system, so it can cause them some delay of payment which will lead to financial problem in future. Not only that, but creditor and worker who not get paid yet also will not satisfy with the company due to the sales credit system.

After, few months facing these types of problems, the managed to bounce back in the industry. In this company, they managed to grow and become one of the best choices for people out there due to the dedication and determination of the employees and the owners. Not only that, but the leadership of the owners is also one of the reasons why the company still sustaining until now. They reduced sales credit and they focus on giving discount and promotion price to the customers.

It is a good achievement for the company because they managed to open up a factory near to their main office. So, this company can produce more and accept more order from the people, especially in a special period of time. Next, Mr Print Legacy also focusing on opening new branches at every state which they already had started the process. This can be sure that the company would be recognized as the best printing and fabric firm to produce. The company always prioritize the customer needs and that's why they are on the page.

For future sustainability, Mr Print Legacy planning to open up a fashion type of business not only focusing on printing. They also planned to collaborate with a big company like Jakel and Ariani to expand their business. Diverse business is helpful for the company if they choose the right way and correct method.

Product Costing System

For the product costing system, Mr Print Legacy Sdn Bhd uses only one from cost accumulation methods, which is job costing method in order to trace their cost of production. This is because Mr Print Legacy sells many types of custom-made jersey with various designs from its own designers and designs from customers. The costs of the jersey are different and can be traced according to each quality, size, quantity and design. Apart from selling jersey, Mr Print Legacy also sells caps, corporate shirts and also T-shirts. The cost incurred to produce those selling items can be traced specifically to the orders. So, job costing method is appropriate to be used by Mr Print Legacy in order to trace their cost of producing the custom-made jersey as well as those additional items which are caps, corporate shirts and T-shirts.

In term of the cost measurement method, Mr Print Legacy uses a normal costing system to measure the cost incurred by the company in producing their products. With this costing measurement, Mr Print Legacy use actual cost for their direct material and direct labour, while for their overhead, the budgeted cost is used other than the actual cost. The total estimated cost of overhead will be divided by the total estimated amount of each actual cost driver incur in the manufacturing process to derive the predetermined overhead rates (POHR). Next, to measure the overhead cost incurred, the POHR will be multiplied with the actual cost driver amount at the end of the period.

Other than that, just like other company, Mr Print Legacy also incurs spoilage in their production process. The spoilage can be divided into two which are normal and abnormal spoilage. So, Mr Print Legacy just use abnormal spoilage. For the abnormal spoilage, it usually has been expected by the company. For every stage of producing the product, Mr Print Legacy has budgeted 10% of spoilage for the whole stage of production. For example, while producing the product, the spoiled product will incur in 10% of spoilage cost. The cost of spoilage will be transferred to all production cost. So, the maximum spoilage is only 10%, so if it more than 10%, it will affect the amount of cost. Besides, Mr Print Legacy also does reworks which redo the spoilage product until it can be sold. Usually, Mr Print Legacy will do rework production in Ramadan. They will rework the product and then give free to the people as a promotion.

Accounting for Materials

Materials are used for making finish goods. The company must provide good quality material to create a good selling product. Besides, the company must manage the material in a good performance.

Mr Print Legacy provide customization printing, embroidery and heat press service. So the major direct material that has been used by Mr Print Legacy is ink. The ink is used for printing clothes. The more ink is used in a cloth, the more the cost it is. So the cost of clothes is depending on the design that the customer wants. Besides, Mr Print also uses other materials such as fabric, button, and threat. That is forgiving perfection to the clothes.

Mr Print Legacy gets fabric from other suppliers. The quantity of fabric will be ordered by manager depend on the demand of customers. When the customer agrees to order the clothes with a type of clothing, Mr Print will order to the customer. The customers will be disclosed the type of fabric before they buy it.

Most of the customers will buy a bulk of clothes as is give a cheaper price. From that, Mr Print Legacy practise bulk purchasing which the supplier. Because of that, he has regular suppliers and it easier to Mr Print Legacy to direct contact with them.

Accounting for LabourCurrently, in 2019, Mr Print Legacy has 10 employees including 5 general factory operators, 3 graphic designers, and 2 sales and administrative staffs. The general factory operators handle the company productions, graphic designers who have the graphic designing skill, use to make creative designs for their customers, and staffs from sales and administration use to oversee the sales processes for the company like marketing, qualifying and proposing customers, and delivering products.

There are three general remuneration methods for labour costing, which are time-based scheme, output-based scheme, and premium bonus scheme. Based on our interview, Mr Print Legacy uses the time-based scheme which is a common form of remuneration being used. Under the time-based scheme, employees are paid according to time worked which is based on basic rate per hour, day, week, or month.

Since all the employees are permanent labours, they have a basic salary from RM 1,200 to RM 1,500 for a month. Mr Print Legacy abides with the law that workers can work for 8 hours and any hours worked beyond this which is called overtime that Mr Print Legacy needs to pay at a certain overtime rate. Moreover, the company concerns with its employee which leads to payments of allowances for like food and beverage, transportation, and accommodation. From the interview, it is found that the time-based scheme is applied to graphic designers and factory operators.

However, for sales and administrative staffs, they have a privilege to get a premium bonus which means wages are based on the time-based scheme plus bonus. The employees can get a bonus by achieving the monthly target of sales which only sales and administrative staffs can have this privilege. For example, if the company targeted sales for this month is RM 50,000, the employees eligible for the premium bonus if they managed to get sales of RM 50,000 or more.

Accounting for Overhead

In business, overhead cost refers to the of indirect material, indirect labour and other operating costs which are associated with the typical daily running of the business yet cannot be conveniently charged directly to particular business activity, product, or service. In addition, this overhead cost in a manufacturing firm has been called as factory overhead. The factory overhead is the costs incurred during the manufacturing process, excluding the costs of direct labour and direct materials. Examples of manufacturing overhead are factory insurance, utilities, factory supervisors' salaries, and machine maintenance.

There are three general approaches to allocating overhead cost, which are a volume-based approach, departmental approach, and an activity-based approach. Since each approach has its own pros and cons, so a company needs to adopt any of those approaches, that fits with the nature of the company. Therefore, choosing the right approach is crucial in order to determine the exact product cost.

From the interview that we conducted, it is found that Mr Print Legacy uses the volume-based approach to allocate its overhead costs into its products. This is because Mr Print Legacy only has a single cost driver which is direct labour hour. However, it does not mean that the company has chosen the right overhead allocation approach because most companies which use this kind of approach, involve mass production like canned foods, mineral water bottles, and plastic production.

Since the company does not have a proper cost management system, it tends to allocate all its overhead costs from a single cost pool. In order to be more accurate in allocating overhead, the company should adopt the activity-based approach because they have various cost drivers like a number of machine hour used, direct labour hour worked, and a number of product returns from customers.

Evaluation and Recommendation

For a growing company such as Mr Printing Legacy, there were many important problem and solution need to be taken care as soon as possible in order for the company to achieve success in the future consistently.

The first problem is the company does not have an accountant. An accountant plays an important role in the company to inspect every financial data of the company made or received. Every successful company have an accountant to take care of the company financial information. For Mr Printing Legacy, the one who responsible in financial record is the manager itself as he learns to use the accounting software from the internet. To solve this issue, the company should hire an accountant in order for the company to have a clear record on the financial data of the company such as costing, employee salary and profit for the year.

Next problem is related to the first problem. The company does not have the rate of allocation on normal spoilage. Normal spoilage occurs under normal condition or an expected loss arises under efficient operating conditions (i.e. unavoidable or uncontrollable). For example, if the company ink printer is evaporating, the company will incur it as normal spoilage. Mr Print Legacy only allocate the rate for abnormal spoilage for its production which is 10 per cent and if it exceeds the rate, the salaries from the employee which is responsible for that spoilage will be deducted. Having the allocation on normal spoilage is important for the company to reduce expenses although the probability is low. Hence, the company should allocate for normal spoilage to happen in production.

Lastly, the company facing the customer dilemma where the customer wants the order to be completed sooner. This problem arises frequently as when the customers make an order, they will push the company to produce it as soon as possible as if they want it to be completed tomorrow. If this problem continues, the employee in the company will be stressed and it will reduce the efficiency and quality of the production. The company should explain the company policy in customer dealings to the customer such as the duration of the order to completed. Also, the company can solve this issue by hiring more employee in the production department.

Conclusion

To conclude, we can say that Mr Print Legacy had managed their cost of production in an effective and efficient way. By referring their way of handling the cost related to materials, labour and overhead, the company is actually doing well. Even though they do not have an accountant, they will adapt and appropriate management method for handling their cost. It is very crucial for a company to use proper cost management and allocate the cost correctly in order to accurately find out the profitability. Alongside, appropriate cost management system helps the company in decision making regarding their usage of source and also their marketing strategies. It can be seen clearly that even without an accountant, this company success enough because they use the correct cost management.

Overall, there is a reason why it is compulsory for accounting students to conduct this project. It helps and provides a clear understanding of cost management for the students when they found out and learn practically from outside. Studying in the class only does not sure that the students can be good at management accounting but when they managed to apply outside the classroom only can help them to clearly understand it. Apart from that, we were also advised by one of the owners of Mr Print Legacy pertaining to open up a business. He gave us some input and knowledge in handling people and business.

Not only that, by interviewing this company, but our confidence level has also been increased and our soft skills have improved. Cost management is not about preparing and allocating the cost, it is about how we communicate, how good we are in decision making and time management. Thus, it can clearly be shown that this project gave us a lot of benefit to the student.