CHAPTER 2

PRODUCT COSTING

2.3 Economic Analysis

2.3.1 Product Pricing per Unit
The price of the product is determined by analyzing the NPV (Net Present
Value). To get the minimum pricing, the NPV must equal to zero. This minimum
price is the lowest price of the product to avoid loss. The NPV is formulated as
follows.

n T
CFn
NPV    TCI
n 1 1  i 
n

Information:
• CFn = net cash flow during the period t
• TCI = total initial investment costs
• i = discount rate
• n = number of period
By making a cash flow and doing a trial and error test to the product price
to get NPV equal to zero, hence the minimum price of the product can be obtained.
From this calculation, the minimum price of the product is IDR 21,707. This price
does not include the profit, so the final product price is set to IDR 26,000. For this
final price, the NPV become IDR 94,898,371,497 with IRR 59.62%.
2.3.2 Cash Flow
Cash flow consist of income and outcome cash flow. The sources of income
are revenue, before tax income, after tax income, and salvage value. Meanwhile,
the sources of outcome are investment, operation cost, loan payment, and
depreciation. To calculate cash flow the value of MARR is needed. MARR is the
minimum rate of return on a project a manager or company is willing to accept
before starting a project, given its risk and the opportunity cost of forgoing other
project. However to find MARR of the project, the WACC value was assumed.
WACC or Weighted Average Cost of Capital is the rate that company is expected
to pay on average to all its security holders to finance its assets. WACC is
formulated as follows.
𝐸 𝐷
𝑊𝐴𝐶𝐶 = ( × 𝑅𝑒) + ( × 𝑅𝑑 × (1 − 𝑇𝑐))
𝑉 𝑉
Information:
 Re = cost of equity
 Rd = cost of debt
 E/V = financing for equity percentage
 D/V = financing for debt percentage
 Tc = corporate tax rate
The data used in WACC calculations is obtained from “US Company Cost
of Equity and Capital” data for construction supplies company. The calculation is
done as follows.
𝑊𝐴𝐶𝐶 = (70.14 % × 15.56 %) + (29.86 % × 9 % × (1 − 25 %)
= 10.32 %
Based on calculation, the WACC has a value of 10.32%. This value will be
used as a reference in determining MARR value. MARR value should be equal or
higher than WACC value. Thus, the value of MARR used is 15%.
2.3.2.1 Loan Interest
Capital can be obtained by applying for a loan to the bank. The loans
obtained from BCA Bank because the interest rate is only 10.75%
(https://www.ojk.go.id/id/kanal/perbankan/Pages/Suku-Bunga-Dasar.aspx) slightly
lower than other banks. Money is assumed to be borrowed for 5 years with uniform
annual payments. The payment will be given to the bank starts from the end of the
first year. The loan interest and payment is calculated in the table below.
Table 2.1 Total Loan from the Bank
Loan
Initial Loan Payment Total Payment Loan after
Year Interest
(IDR) (IDR) (IDR) Payment (IDR)
(IDR)
0 37,543,407,657 - - - 37,543,407,657
1 37,543,407,657 4,035,916,323 7,508,681,531 11,544,597,854 30,034,726,126
2 30,034,726,126 3,228,733,058 7,508,681,531 10,737,414,590 22,526,044,594
3 22,526,044,594 2,421,549,793 7,508,681,531 9,930,231,325 15,017,363,063
4 15,017,363,063 1,614,366,529 7,508,681,531 9,123,048,060 7,508,681,531
 5 7,508,681,531 807,183,264 7,508,681,531 8,315,864,796 -

2.3.2.2 Before Tax and After Tax Cash Flow

The before tax cash flow is not calculated with taxable expenses from
depreciation. It is only calculated with salvage for equipment, supporting
equipment and plant building. For calculating the cash flow, the product selling is
assumed. For the first year, the product is assumed to be sold as much as 85 % and
as much as 90% for the second year. In the third year to the eighth year sales are
assumed to be 100% of production capacity. Then, for ninth and tenth year, the
product is assumed to be sold as much as 90% and 85%. Meanwhile, after tax cash
flow is cash flow after deducting taxes. Because it is after tax, the cash flow will
have the lower cumulative income, this after tax cash flow is used for calculating
the profitability analysis such as ROI, IRR, BEP and Payback Period. Details of
calculation of the cash flow in and out can be seen in below.
 Table 2.2 Before Tax and After Tax Cash Flow Year 0-5
Year 0 1 2 3 4 5
Product sold 0 5379149 6011990 6328410 6328410 6328410
Rp Rp Rp Rp Rp Rp
Product price
26,000.00 26,000.00 26,000.00 26,000.00 26,000.00 26,000.00
Rp Rp Rp Rp Rp Rp
Revenue
- 139,857,861,000.00 156,311,727,000.00 164,538,660,000.00 164,538,660,000.00 164,538,660,000.00
Rp Rp Rp Rp Rp Rp
OPEX
- 123,121,537,057.61 122,312,677,490.84 121,503,933,177.92 120,695,344,164.75 119,886,801,445.51
Rp Rp Rp Rp Rp Rp
Maintenance cost
- 289,588,016.88 289,588,016.88 289,588,016.88 289,588,016.88 289,588,016.88
Rp Rp Rp Rp Rp Rp
Depreciation
- 360,512,416.88 335,260,425.20 312,209,655.18 291,149,703.98 271,890,917.48
Rp Rp Rp Rp Rp Rp
Cash expenses
- 123,411,125,074.50 122,602,265,507.72 121,793,521,194.80 120,984,932,181.63 120,176,389,462.40
Rp Rp Rp Rp Rp Rp
All expenses
- 123,771,637,491.38 122,937,525,932.92 122,105,730,849.98 121,276,081,885.62 120,448,280,379.88
Rp Rp Rp Rp Rp Rp
Gross profit
- 16,446,735,925.50 33,709,461,492.28 42,745,138,805.20 43,553,727,818.37 44,362,270,537.60
Net profit before Rp Rp Rp Rp Rp Rp
tax (37,543,407,657.99) 16,086,223,508.62 33,374,201,067.08 42,432,929,150.02 43,262,578,114.38 44,090,379,620.12
Net profit after Rp Rp Rp Rp Rp Rp
tax (37,543,407,657.99) 11,742,943,161.29 24,363,166,778.97 30,976,038,279.52 31,581,682,023.50 32,185,977,122.69
Rp Rp Rp Rp Rp Rp
Salvage value
- - - - - -
Rp Rp Rp Rp Rp Rp
Cash flow
(37,543,407,657.99) 12,103,455,578.18 24,698,427,204.17 31,288,247,934.69 31,872,831,727.48 32,457,868,040.17
Cummulative cas Rp Rp Rp Rp Rp Rp
flow (37,543,407,657.99) (25,439,952,079.81) (741,524,875.65) 30,546,723,059.05 62,419,554,786.53 94,877,422,826.70
 Table 2.3 Before and After Tax Cash Flow Year 6-10

Year 6 7 8 9 10
Product sold 6328410 6328411 6328412 5695569 5379148.5
Product price Rp 26,000.00 Rp 26,000.00 Rp 26,000.00 Rp 26,000.00 Rp 26,000.00
Revenue Rp 164,538,660,000.00 Rp 164,538,660,000.00 Rp 164,538,660,000.00 Rp 148,084,794,000.00 Rp 139,857,861,000.00
OPEX Rp 119,078,396,869.25 Rp 119,077,256,320.37 Rp 119,076,139,849.02 Rp 119,075,091,396.76 Rp 119,074,155,470.52
Maintenance cost Rp 289,588,016.88 Rp 289,588,016.88 Rp 289,588,016.88 Rp 289,588,016.88 Rp 289,588,016.88
Depreciation Rp 254,262,324.11 Rp 238,109,775.13 Rp 223,294,270.54 Rp 209,690,452.22 Rp 197,185,247.47
Cash expenses Rp 119,367,984,886.13 Rp 119,366,844,337.26 Rp 119,365,727,865.90 Rp 119,364,679,413.64 Rp 119,363,743,487.41
All expenses Rp 119,622,247,210.24 Rp 119,604,954,112.38 Rp 119,589,022,136.44 Rp 119,574,369,865.86 Rp 119,560,928,734.88
Gross profit Rp 45,170,675,113.87 Rp 45,171,815,662.74 Rp 45,172,932,134.10 Rp 28,720,114,586.36 Rp 20,494,117,512.60
Net profit before
tax Rp 44,916,412,789.76 Rp 44,933,705,887.62 Rp 44,949,637,863.56 Rp 28,510,424,134.14 Rp 20,296,932,265.12
Net profit after
tax Rp 32,788,981,336.52 Rp 32,801,605,297.96 Rp 32,813,235,640.40 Rp 20,812,609,617.92 Rp 14,816,760,553.54
Salvage value Rp - Rp - Rp - Rp - Rp 4,511,308,980.65
Cash flow Rp 33,043,243,660.63 Rp 33,039,715,073.09 Rp 33,036,529,910.94 Rp 21,022,300,070.14 Rp 19,525,254,781.67
Cummulative cas
flow Rp 127,920,666,487.33 Rp 160,960,381,560.42 Rp 193,996,911,471.36 Rp 215,019,211,541.50 Rp 234,544,466,323.17
 The before tax and after tax cash flow can be seen in the graph below.

Rp50,000,000,000

Rp40,000,000,000

Rp30,000,000,000

Rp20,000,000,000

Rp10,000,000,000

Rp-
1 2 3 4 5 6 7 8 9 10 11
-Rp10,000,000,000

-Rp20,000,000,000

-Rp30,000,000,000

-Rp40,000,000,000

Net Profit Before Tax Net Profit After Tax

Figure 2.1 Before Tax and After Tax Cash Flow

The cumulative cash flow can be seen in the graph below.

Rp250,000,000,000

Rp200,000,000,000

Rp150,000,000,000

Rp100,000,000,000

Rp50,000,000,000

Rp-
0 1 2 3 4 5 6 7 8 9 10

-Rp50,000,000,000

Figure 2.2 Cumulative Cash Flow

2.3.3 Cost Breakdown
Cost breakdown aims to determine the percentage of each expenditure made. By
using the cost breakdown diagram, companies can determine which variables are most
widely affected production expenditure. The data for cost breakdown calculation is shown
in table and diagram below.

Table 2.4 Operation Cost Breakdown

Type of Cost Annual Percentage
Raw Material Rp 107,720,422,835.12 83.75%
Utilities Rp 2,071,690,591.92 1.61%
Labor Salary Rp 8,379,816,000.00 6.52%
Insurance Cost Rp 251,394,480.00 0.20%
Local Tax Rp 298,254,550.00 0.23%
Plant Overhead Cost Rp 61,580,000.00 0.05%
Communication Cost Rp 15,000,000.00 0.01%
Printed Advertisement Cost Rp 56,694,000.00 0.04%
Online Media Cost Rp 1,900,000.00 0.00%
Campaign Cost Rp 110,000,000.00 0.09%
Distribution Cost Rp 80,066,468.57 0.06%
Financial interest Rp 1,766,851,495.23 1.37%
Maintenance Rp 289,588,016.88 0.23%
Patent and Brand Registration Rp 4,638,616.25 0.00%
Plant Insurance Rp 29,335,475.87 0.02%
Total Capital Invesment Rp 7,480,601,409.79 5.82%
 0.00% 5.82%
0.02%
0.23%
0.04%
1.37%

0.01%
0.06%
0.05%
0.09%

0.20%
0.00%
0.23%

6.52%

1.61%
83.75%

Raw Material Utilities Labor Salary

Insurance Cost Local Tax Plant Overhead Cost
Communication Cost Printed Advertisement Cost Online Media Cost
Campaign Cost Distribution Cost Financial interest
Maintenance Patent and Brand Registration Plant Insurance
Total Capital Invesment

Figure 2.3 Cost Breakdown

Based on the diagram above, variable that determine the product’s price
most is raw material. The cost of raw materials covers 83.75% of the total operating
cost. The second biggest variable is the total salary for workers with consist up to
6.52% of total operating cost. This result indicates that there should be other
strategies to improve the cost of raw materials, such as optimizing the buying price,
by finding another supplier or optimizing the raw materials distribution cost by
finding another supplier that are closer to the plant.