Investment decisions and short term and long term financing


Company which been studied is carry out the industry of making furniture product which are wooden base since year 1990, located in Medium Industrial Zone, Batu Gajah Perak. The company name was known as RAMANIS FURNITURE. This Company has a factory, office space and exhibition space. product that has being made is internal furniture house such as cabinet, seat rest, bed, cot, dining set, components such as table leg, school chair and table. Major product that produced by company this is sofa set that mostly exported to all around in Malaysia. While seat and table product on the other hand, become second product largest that produced to meet local demand. Quantity of product issued based on to customer bookings, due to this, production rate is not an average expected. Case study for this assignment is only focusing to product of rear knee component seat.

2) Role of management accountants

Acquire and use Company fund and ensure that fund can maximize value and corporate profitability. Apart from that, company manager is responsible to make important decisions especially investment in company asset and how those assets get financing. In the meantime, he also needed to think of the best way to run company resources such as employee, machine, building and equipment.

Lady using a tablet
Lady using a tablet


Essay Writers

Lady Using Tablet

Get your grade
or your money back

using our Essay Writing Service!

Essay Writing Service

a) Make investment decisions and short-term and long-term financing

Rapid company development visible through increase of company sale dramatically. These sales increased need additional investment in inventory and fixed assets such as plant and equipment. Hence, financial manager should determine type and asset quantity which need bought in short period and long term. At the same time, he also need think of best way to finance that asset investment. For example, does the company have adequate financial resources to buy asset of necessity. Need company uses loan or equity to finance asset purchases. What short-term debt use implication or long-term?

b) Make finance planning and forecast

Financial Manager should make planning for company's future. As such, financial manager have to cooperate with managers from different departments in corporate so that feasible whole company strategic planning can be implemented. For example, financial manager make forecast of cash need in future. With the existence of efficient planning, financial manager can estimate company cash requirement in future.

c) Control and Coordination

Financial Manager should interact and collaborating with other managers to ensure company operate efficiently. Control and coordination that undertaken by financial manager is important, especially in large company which has many departments so that organizational goal can be achieved. For example, in new workers recruitment in company, financial manager would be liaising with manager in human resource division to choose candidates that qualifying to fill certain post that offered.

d) Deal in Stock Market

Financial manager also taking role in deal in money market and capital market. Money market is market which run short-term sales and securities purchase that have due time less than one year. Security in money market is consuming low default risk. While capital market is market which run long-term sales and securities purchase that have due time exceeding one year. This security having high risks because is long term. Due to this, financial manager should follow development of financial market to enable him to decide efficient and effective financing.

3) Various type of cost classification.

Concept of cost

Cost is source which need being sacrificed to obtained goods or service that will be used to generate profit. Figure 1.1 illustrate of cost classification.

Cost Classification

Financial Statement


Business function


Figure 1.1: Cost classification according to category

3.1 Cost classification according to Behaviour

It is the cost that is observed through its behaviour on production or units produced. This cost can consist of:

a) Fixed cost:

This cost involved regularly by organization without influenced by activity that carried out.

Example: Machine depreciation.

Figure 3.1.1: Relationship between fixed cost and activity

y = a

The linear function for the fixed cost is:

where, y = Total Cost, and a = Total Fixed cost

b) Variable cost:

- Having direct contact with production level. Example: Direct material.

Figure 3.1.2: Relationship between variable cost and activity

y = bx

Lady using a tablet
Lady using a tablet


Writing Services

Lady Using Tablet

Always on Time

Marked to Standard

Order Now

The linear function for variable cost is:


y = Total Cost;

b = Variable Cost per Unit; and

x = Level of Activity.

c) Mixed cost:

Has been cost that have fixed cost and variable cost element.

Mixture example of cost: telephone bill.

Figure 3.1.3: Relationship of mixed cost with activity

y = bx + a

The equation for mixed cost is:


y = Total Cost;

b = Variable Cost per Unit;

a = Fixed Cost; and

x = Total Activity or Units.

3.2 Cost classification according to Business function.

Cost classification according to business function is the cost that is classified according to the activity or operations that is carried out by a business. For the purpose of this assignment, we classify the cost according to two functional aspects:

manufacturing operation function; and

non-manufacturing operation function.

As we know, manufacturing operation is an operation that processes raw materials to finished goods. Whereas, non-manufacturing operation can be divided into two which are a commercial operation that carries out the activity of buying and selling finished goods and a service operation that provides a service to others. Figure 3.10 illustrated of cost classification according to business function.

Figure 3.1: Cost classification according to business function.

a) Manufacturing cost

Manufacturing cost is the same as production cost, that is, the cost involved in making a product or finished goods. Manufacturing cost comprises of the costs of direct materials, direct labour and factory overhead. Here are the brief explanations in fugure 3.2:

Main raw material that could be identified at products.

example: wood to be making furniture

Those who directly involved replace raw material to finished goods.

example: carpenter.

All manufacturing cost other than direct material cost and direct labour cost.Overhead cost known as indirect manufacturing cost

example, indirect raw material, electricity and telephone bill..

Figure 3.2: Type of manufacturing cost

Usually, the three manufacturing costs above has been produces by used of two elements which are Prime Cost and Conversion Cost. These element can be simplified as:

Prime Cost = Direct Material Cost + Direct Labour Cost

Conversion Cost = Direct Labour Cost + Overhead Cost

Production Cost = Primary Cost + Overhead Cost

b) Non-manufacturing Cost

Non-manufacturing cost is like the cost of traded goods for a commercial firm, marketing cost and administrative cost. The cost of traded goods is the cost of obtaining the goods for resale. Marketing cost is divided into sales and administrative costs. Administrative cost is the cost of running the operations of an organisation.

3.3 Cost Classification According to Period.

The costs already discussed can also be considered from the aspect of the time involved. There are two types of cost in this classification. They are:

Product cost: Cost which involved with completed materials production namely material, labour & factory overhead.

Period cost: Cost that uninvolved with production for example administration and sales expenses and administrative staff salary.

4. Product costing methods used in the RAMANIS FURNITURE organisation.


In product costing accounting system, there are two groups cost that taken into consideration, namely direct cost and overhead cost. Traditional costing method and ABC costing use the same approach in direct calculation of cost. Clear distinction between them is in overhead cost calculation and overhead cost distribution.

4.1 Traditional Costing Method (Maginal and Absorbtion costing)

In traditional costing method, costing model that built are predicated two groups cost, namely direct cost (that consist of direct material cost, labour cost and direct expenditure cost) and overhead cost (overhead cost). To get the total cost product per unit that produced, all the cost be totalled. Model of Traditional product costing explicable more at below:

Direct Material Cost.

Direct Material cost is biggest direct cost category in manufacturing overall cost product. There are several other element which influenced high or low of direct material cost. element that can influence cost of direct material such as price, quantity, quality, source, time and place. All six factors is interplay between one another. One of the useful techniques in industry engineering to reduce

Lady using a tablet
Lady using a tablet

This Essay is

a Student's Work

Lady Using Tablet

This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.

Examples of our work

direct material cost is through Value Analysis technique. Value Analysis technique aim to investigate and analyse every material or component that used from the cost angle so that the result may be combined for cost reduction planning purposes.

Labour Cost.

To many industry, usual labour cost are smaller compared to material cost. After all, are more disposed for increase profit by using labour force effectively compared to reduce material cost. On the other hand, are more disposed to identify material waste from labour force wastage. Labour costing can be made with consider two factors, namely time and money. Efficient use of the equipment and work study is necessary to reduce time for activities in a job.

Overhead Cost.

All indirect expenses that used in production such as rent, insurance, electricity supply payment, water, telephone, payments to outside contractor, cost for planning activities, tabulation, purchase, material handling, and cost of equipment that considered does not get communed continue to production a product garner as overhead cost. Overhead cost imposed to product per unit are grounded in labour hour or machine hour or both that are being used by a product. Overhead cost ' distribution usually made by estimate with overhead cost ' presumption directly proportional with labour total hours or machine total hours or both. If overhead total cost small compared to material cost and labour cost, traditional costing can count product cost with almost exact. After all, as situation that occur in current industry with overhead cost is fairly large cost, method use overhead cost based on labour hour or machine hour will cause less precise product calculation of cost. This is because does not necessarily product that discharges at high quantity and use labour hour or large machine hour use resources and large overhead cost. Instead low product output quantity, but use complex process, need support cost or overhead that large (for example set up cost, examination cost, planning and operating cost are high). Due to this, traditional cost accounting method, although can collect and report overall direct cost in detail, failed provide overhead cost ' distribution product accurately.

4.2 Costing Method of Activity-Base Costing (ABC)

ABC method begin to spread in manufacturing field and business especially in costing field product. Direct calculation of cost such as material cost, direct labour and expenditure cost still in used that practiced in traditional costing. ABC main concept is from introduction aspect to overhead cost concept that change compared to with traditional costing which regards all overhead cost is still and need to be distributed to products based on quantity. ABC costing method do separating of main cost which encompasses overhead cost to individual activity cost which is known as Cost Pool. Further cost every activity imposed to every product based on benefit received by every product through Cost Driver. Figure 4.2.1 show implementation model ABC costing.

Figure 4.2.1: Activity-Base Costing method

Although calculation ABC method more complex and require a longer time, with information technology development, static model and dynamic model (simulation model) ABC can be implemented in time and with reasonable cost. Consideration between the provision accuracy and cost should give attention so that benefit from method this exceeding from cost that issued. ABC method accuracy depends on selection activity factors, cost pool and cost driver. Figure 4.2.2 Can clarify (ABC) model that can be used. At the same time, it can determine accurate cost to products or services that supplied, ABC method also can determine costs against every corporate client and also every goods distribution channel that practised by company.

Overhead cost



Product manufacturing

Labour hour

Quantity product

Raw material

Labour hour

Receipt issue

Provision set up

Labour hour

Quantity needed

Figure 4.2.2: Determining factor comparison cost for traditional costing method with ABC method.

4.3 Direct Calculation of Cost Example

Traditional costing method and ABC costing use same approach in direct calculation of cost. Direct cost which involved in seat rear knee component production include direct cost such as material cost, labour cost, finishing cost and cost support materials that bought directly from distributor like screws, dowel and other.

Direct Material cost:

Material cost = 0.001 tone/component X RM900.00/tone = RM0.90/component.

Labour Cost:

Labour calculation of cost calculated by multiplying labour wage rate (RM4.00 an hour or RM0.067 a minute) with standard time (achieved time from studies on operation machines that used to finish up that component).

Total time = 214 second = 3.57 minutes Ã- 1.3 (no productivity %)

= 4.641 minute/component

Total labour cost = RM0.067/minutes Ã- 4.641 minutes/component = RM0.31/component.

Direct Expenditure Cost (cost support materials):

Material cost for finishing calculated based on chemical usage number on component surface during finishing process and chemical material cost that. With = chemical substance transfer efficiency 40%, and finishing surface width which need is 0.58 sq ft, so wide that need to be considered

is actually 1.45 sq ft.

Per litre = chemical usage 66 sq ft

Per chemical material cost = litre RM5.40

Chemical material cost for finishing = 1.45 X RM 5.40 / 66 = RM 0.12 x 2

= RM 0.24 / component

Metal tool for per unit installation rear knee component of necessity is 3 unit dowel pin D11 x 35 that priced RM0.10 per unit. As such hardware cost per unit metal rear knee component is RM0.30. Total direct cost which involved for rear knee per unit is RM2.52.For overall cost for rear knee component by using traditional costing method, factory estimate that overhead cost is 20% from product direct cost that studied namely RM0.35/component (20% from RM1.75). Total direct cost that studied is RM1.75 (RM0.90 + RM0.31+ RM0.24 + RM0.30 = RM1.75).

As such, overall cost in rear knee production for product per unit by using traditional costing method is RM2.10 (RM2.10 = RM1.75 + RM0.35). Distribution as much as 20% from total direct cost to overhead cost frequent questioned and ABC costing method have been able to handle this problem.

To do calculation of overhead cost based on ABC costing method, generally several measures need to be followed and accommodated with real manufacturing condition based on type of production in organisational that studied.

(i) Process definition: Identify entry and product for each level of process. Perusal are made at manufacturing process flow chart component that studied.

(ii) Identify activities: To identify entire activity that have sub function, refering to company organization chart and stages in manufacturing process flow chart according to hierarchy function.

(iii) Updates Ledger structure: Combined related accounts.

(iv) Identify cost driver: Cost driver is all activity which caused cost in activity. Among major cost driver and evaluated based on the rate. Schedule 2 showing example cost impeller that commonly used.

(v) Identify the cost and structure cluster: Identify cost cluster and adapt by all activity which involved.

With follow construction procedure ABC model such as that was listed above, model application ABC cost can used to calculate overhead cost to component that studied.

Schedule 2 is overhead cost model ABC based on process that undertaken in seat rear knee component manufacturing. Detail for this cost model involved association between process, cost activity and cost driver based on model and process flow in this back knee component manufacturing. Determination of cost driver is base on minute unit.

Labour costs are segregated to every production activity that is on every machine which represents every process according to production process flow component. As such labour cost divided into 12 manufacturing process and labour calculation of cost this based on Cycle Time and Inter Arrival Time of raw material. Calculation that made refer to production entire time that is for 8 hours or 480 minutes. Result for ABC costing method illustrated in Figure 4.

Schedule 2 : Activity for ABC model to rear knee seat component



1 . (Rough sawing)

Process cut (rough)

2. (4 hole mould)

Process of clearing 4 wood surface

3. (marking)

Process of marking to wood to be cut

4. (cut marking)

Process of sawing base on marking


Process of wood shaping


Process of scouring the wood

7.(table saw)

Process of specific cutting


Process of hole

9.(edge clean)

Process of clearing the sharp edge.

10.(profile clean)

Process flatten of profile component form


Process assemble the dowel


Process of component finishing

Figure 4: ABC labour cost graph

Refer to decision that achieved, it found that there are labour cost difference of value between different process or activity due to different process time factor to different process. Apart from time factor influence process, there are other factors that also influenced labour cost value that achieved namely determination data distribution type time which represents every process. With quantify every labour cost at every activity, total labour cost for ABC costing method is RM385.51 for period 480 minutes (8 hours) operation. In traditional costing method, total labour cost that used within the period of 480 minutes is almost the same which is RM385.92.

Machine cost is referred by usage of electrical energy to enable machine that used operating in performance level of necessity in operation term during 8 hours. Electric costing for each activity are predicated rate or electricity tariff to proportional factory on the other hand with performance machine power and the use in activity time. Figure 5 show machine cost (electric).

Figure 5: Cost graph machine (electric) for ABC

In ABC costing method, depreciation cost machine admitted directly in cost for daily production activity product. Hence, accurate costing method can be achieved. Figure 6 show cost decision machine depreciation for ABC costing method.

Figure 6 : Graph of machine depreciation

After clarify all results before, it can be decided cost to rear knee component per unit that produced. Here main focus was to costing for component per unit based on ABC costing method and traditional costing method referring to same product number that is to 473 component unit. Figure 7 showing results that obtained with total cost elements ABC namely labour cost, electricity cost, depreciation cost machine and overhead cost.

Figure 7: Cost component per unit (ABC) does not include material cost

5. Recommended solution.

From the result in Figure 7, ABC main concept namely from cost distribution aspect source which encompasses overhead cost to individual activity cost have shown. Detectable difference is cost value per unit for ABC method are predicated to activity or process, not to percentage from total direct cost. Analysis this show ABC method is better costing method compared traditional costing method because can take into account production cost every aspect especially overhead cost by more accurate and detailed. Other than overhead cost ' distribution more accurate, company can identify process or activity that consumed the highest cost. For example, Figure 7 show process 4 has highest value and potential per unit cost for cost reduction programme. Company can integrate ABC concept in achieving cost reduction programme.

ABC method that were implemented on calculation rear knee seat component cost is more accurate because it based on overall cost calculation source that used to develop component that and distributed according to activity and process. Managers who use result information of ABC method is more understand precisely of performance every activity or production process. This Information is so useful to identify cost reduction programme and can be integrated in more orderly manner.