Activity-Based Costing in Manufacturing Company

1.0

COMPANY BACKGROUND- CENTRAL SUGARS REFINERY (CSR)

Central Sugars Refinery (CSR) commenced business in 1965 under the name of United
Malay State Sugar Industries with an initial raw melting capacity of 150 metric tons a
day. Today, after decades, of expansion and modernization, the refinery achieves a
melting capacity of 1,500 metrics tones a day. It is a singular feat that can be solely
attributed to the dedication and commitment of employees.
Situated at Batu Tiga, Shah Alam in Selangor with a land area of about 66,320 sq.
meters (16.4 acres), CSR was initially led by a group of Taiwanese investors when it was
established. The major controlling stakeholders, however, were Malaysians, who
comprised more than 55% of the shareholding.

In 1968, a corporate maneuver resulted in the takeover of the Company by Malayan

United Industries Berhad (known as MUI). Central Sugars Berhad (CSB) was thus listed
as a public-listed company under the flagship of the MUI Group of Companies with a
paid-up share capital of RM30 million floated in the then Kuala Lumpur Stock Exchange
(KLSE).
Subsequently, in early 1983, CSB was de-listed from the KLSE Main Board due to a
corporate maneuver by Perbadanan Nasional Berhad (PNB). On March 23rd 1983,
Central Sugars Refinery Sdn Bhd (CSRSB) was incorporated to take over CSB assets.
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Activity-Based Costing in Manufacturing Company

The holding company is Tradewinds (M) Berhad, a public-listed company on the Main
Board of Bursa Malaysia. CSRSB's authorized capital is RM50 million with a paid-up
capital of RM33 million.
Like other manufacturing company, Central Sugars Refinery (CSR) also has its own
vision and mission:
Vision
To become the leading sugar refinery in Malaysia by 2020
Mission
We are committed to achieve our vision by:

Providing premium quality products and services to our customers at competitive price
Providing sound technical expertise and customization
Optimizing and creating long term value to our stake holders
Fostering sustainable development
Values (B.E.S.T.)
B-

Believe in self and be confident to attain individual and corporate goals

E-

Encourage an enterprising spirit by being innovative and knowledgeable as to

foster a sense of belonging

S-

Support with care as to strengthen team building

T-

Trust and instill integrity and accountability by having confidence in people

responsible for the tack

Products
Central Sugars Refinery (CSR) has four (4) types of products which are: 1) General
Grade Sugar, 2) Brown Sugar, 3) Industrial Grade Sugar and 4) Liquid products. Most of
the products are used in beverage industries, dairy industries, baking industries,
confectioneries and chocolate product.
Customers

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Activity-Based Costing in Manufacturing Company

Some of customers of Central Sugars Refinery (CSR) are Nestle, Coca Cola, F&N,
Kimball, Live and Munchys.

2.0

WHY AN ACTIVITY-BASED COSTING (ABC) SHOULD BE IMPLEMENTED?

Since Central Sugars Refinery (CSR) did not applied an Activity-Based Costing (ABC) in
their costing system, we had decided to gave them a consultation about Activity-Based
Costing (ABC). Firstly, we explained to them about the differences of Traditional costing
and Activity-Based Costing (ABC). A traditional costing allocates overhead using a single
predetermined rate while ABC allocates overhead to multiple activity cost pools and
assigns the activity cost pools to products or services by means of cost drivers.
Activity-Based Costing (ABC) has three (3) elements which are the activity; activity cost
pools and cost drivers. An activity is any event, action, transaction or work sequences
that cause a cost to be incurred in producing a product or providing a service.

An

activity cost pool is a distinct type of activity such as, ordering materials or setting up
machines. Whereas, a cost driver is any factors or activities that have a direct causeeffect relationship with the resources consumed.
Besides that, we also explained to the management of Central Sugars Refinery (CSR)
that ABC allocates overhead costs in two stages:
Stage 1: Overhead costs are allocated to activity cost pools.
Stage 2: Assigns overhead allocated to the activity cost pools to products, using cost
drivers.
We also stressed to the management that, the more complex a products manufacturing
operation, the more activities and cost drivers are likely to be present.

Other than that, we also had brief the four (4) steps involves in Activity-Based
Costing (ABC) which include:
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Activity-Based Costing in Manufacturing Company

1. Identify and classify the activities involved in the manufacture or specific products,
and allocate overhead to cost pools.
2. Identify the cost driver that has a strong correlation to the costs accumulated in the
cost pool.
3. Compute the activity-based overhead rate for each cost driver
4. Assign overhead costs to products, using the overhead rates determined for each
cost pool (cost per driver)
The management of Central Sugars Refinery (CSR) told us that they cannot do an
Activity-Based Costing (ABC) because of the process of the sugar is continuously with
no cut-off point. So, we explained to them that to apply Activity-Based Costing (ABC) in
their manufacturing, they needs an expert in this field to leads them in proper accounting
system. In fact, they told us that, since the new management takes place in CSR, the
new management also suggest to implement an Activity-Based Costing (ABC) but, it
may takes time. Since Central Sugars Refinery (CSR) manufacturing is an old
manufacturing company since 1965, it does not divided the activity in each of the
processing involved. Thus, it is hard for CSR to implement the Activity-Based Costing
(ABC).
Besides that, we informed the management of Central Sugars Refinery (CSR) about the
benefits, advantages and importance of implementing an Activity-Based Costing (ABC).
The main benefit of ABC is more accurate product costing. The use of Activity-Based
Costing (ABC) use more cost pools as to assign overhead costs. Instead of one plant
wide pool or departmental pools and a single cost driver, some companies use
numerous activity cost pools with more relevant cost drivers. Costs are assigned more
directly on the basis of costs drivers used to produce each product. With ABC, CSR can
know the cost of overhead in each activity involved.
The second benefit of ABC is enhanced control over overhead costs. Under ABC, CSR
can trace many overhead costs directly to activities that allowing some indirect costs to
be identified as direct costs. Thus, managers are more aware of their responsibility to
control the activities that generate those costs. With these, CSR can control the costs in
each activity so that the cost assigned is not excessive and over-costs.
The last benefit of ABC is, it leads to better management decisions. The accurate
product costing should contribute to setting selling prices that can help achieve desired
product profitability levels. Moreover, more accurate cost data could be helpful in
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Activity-Based Costing in Manufacturing Company

deciding whether to make or buy a product part or component, and sometimes even
whether to eliminate a product. If CSR apply an Activity-Based Costing (ABC), it will
assists the management to make better decision to set the selling price. For example,
after calculating using ABC, the cost per unit is RM 7.90. With that, the management can
decide the suitable selling price that should be sold to the customer. The price should not
be too low or too high. Other than that, the management of CSR also can decide to
make, buy or eliminate the product with proper ABC system.
Apart from that, we also give a short briefing on factor to consider on when to use ABC.
There are five (5) factors to be considered which are:
1) Product lines differ in volume and manufacturing complexity. If CSR experienced
the difference in product line and manufacturing complexity, they can implement
Activity-Based Costing (ABC) because ABC is designed to solve manufacturing
complexity.
2) Product lines are numerous and diverse. If CSR has more than one product, they
can implement Activity-Based Costing (ABC) so that all of the product lines has an
accurate accounting system.
3) Overhead costs constitute a significant portion of total costs. If the overhead costs
in CSR has a portion on a total costs, the suitable costing system that should be
used is Activity-Based Costing (ABC) because the overhead cost will be calculated
accurately.
4) The manufacturing process or the number of products has changed significantly. If
the products in CSR are changing, they should implement Activity-Based Costing
(ABC) so that their products are managed in a well accounting system.
5) Production or marketing managers are ignoring data provided by the existing
system. If the production and marketing managers in CSR did not put an attention
on the data provided by the existing system, CSR should implement Activity-Based
Costing (ABC) so that the production and marketing managers in CSR are not
ignoring the data provided.

There are few reasons why Central Sugars Refinery (CSR) resists implementing Activity
Based Costing (ABC). There are:
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Activity-Based Costing in Manufacturing Company

1. ABC can be complicated

One of the reasons why Central Sugars Refinery (CSR) does not implement ABC
is too complicated. The activities involved in CSR too complicated which are the
process to produce the product is continuously and it involves for the whole usage
of machines within the factory for 24-hour. The production time for these sugars
involve for 24-hour so that it is considered too complicated to implement the
activities. Too many machines involved to produce the products and the machine
run for 24-hour and there are no cut-off point to determine for every stations costs.
There are involved for five stations altogether and each of the station involves too
complicated activities to produce the sugar. It means that the complicated part is
on how to keep record from each of activities which is it is unknown because all the
works done by the sophisticated machines.
2. Do not have any insufficient information
Insufficient number of information on how to conduct ABC is one of the limitations
for this company not implements this activity. However, they are about in the
middle to consolidate all the information related in order to do the activity in future.
In addition, to conduct ABC the company needs to have sufficient information such
as all the related costs to calculate and in turn the overhead costs for every station
can be determined. All related costs such identify and classify the activities
involved in the production and allocate overhead to cost pools. Then, identify cost
driver that has a strong correlation to the costs accumulated in the cost pool. After
that, compute the activity based overhead rate for each cost driver and lastly
assign overhead costs to products by using the overhead rates determined for
each cost pool (cost per driver). But all these costs information was not determined
by the management team from earlier and that is why this company do not
implement the activity based costing.
3. Involves huge number of costs
The reasons why they are not committing with the ABC is because it involves huge
number of costs. It should have a focal person to view each of the activity involves
in each of the station so that he/she can record all the costs incurred. The focal
person should be the expertise which is outsider or the person within the company.
It means, when the company hire the outsider they need to pay high for the

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Activity-Based Costing in Manufacturing Company

salaries of the person. Then, in order to determine the numerous cost drivers also
discourage this company from using activity based costing.
4. No expertise to conduct the ABC for the company
To conduct the ABC, Central Sugars Refinery (CSR) need to have expertise to
keep record every each of the costs involves so that it would be more organized
and can be trace easily when they want to determine the overhead costs involved
within the company. The company does not have any enough time to find the
suitable person in order to conduct the activity based costing for the company. It is
also wasting their time to find the focal person to in-charge to keep record all the
data for doing the activity as their company from earlier was not implement the
activity based costing concept.

3.0

ILLUSTRATION OF TRADITIONAL COSTING AT CENTRAL SUGARS REFINERY

(CSR)

Illustration (Calculation):

CSR produces sugar per kilo

Sugar: a high volume item with sales totaling 600,000 ton annually
10 kilos requires 1 hour of direct labor
Expected annual manufacturing overhead costs RM30,000,000.00
Direct labor cost RM0.50 / kilo
Direct materials cost RM1.50 / kilo
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Activity-Based Costing in Manufacturing Company

(1)

(2)

(3)

Converting 600,000 ton into kilograms:

600,000 tons * 1000kg = 600,000,000 kilos
Total annual direct labor hours (DLH):
600,000,000 kilos / 10 = 60,000,000 (DLH)
Total cost overhead per kilo:
RM30,000,000.00 / 60,000,000 (DLH) = RM0.50 / DLH

Illustration (Overall Costs):

Manufacturing costs
Direct materials
RM1.50
Direct labor
RM0.50
Overhead
RM0.50
Total Unit Cost
RM2.50

The company is using the traditional costing method in order to determine the overhead
cost. As per illustration above, the direct materials given per kilogram by the company
are RM1.50 and the direct labor cost is RM0.50 per kilo.
So, to discuss further about overhead rate and the overhead cost lets take a look into
how many ton annually this company produces. CSR produce a very huge number of
tons per year which is 600,000 ton. So, to make it simple during the calculation we need
to convert the numbers into kilogram. It is because the costs given for each production is
in a kilogram. Later, 600,000 ton times 1000 kilo as a ton equal to one thousand kilo so
that we get 600,000,000 kilos per year.
Then, to get total annual direct labor hours, we have to divide the total production per
annual with number in kilo requires to produce in one hour of direct labor which is
600,000,00 kilos per year divided with 10 kilos require one hour to produce the sugar
and it is equal to 60,000,000 per year.

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Activity-Based Costing in Manufacturing Company

After that, to get the overhead costs per kilo the expected annual manufacturing costs
should be divided with the total annual direct labor hours which is 60,000,000 direct labor
hours divide with RM30,000,000.00 and we will get RM0.50 per kilo.
Lastly, to calculate the overall costs of manufacturing overhead costs per kilo, list all the
costs incurred and sum up all the costs given. As the direct materials given by the
respective company is RM1.50 and the direct labor costs per kilo is RM0.50 and the
costs of overhead by using traditional method which is equal to RM0.50. So, the overall
cost of manufacturing overhead per kilo of sugar is RM2.50. The calculation above
mentioned that this company only using traditional method in order to determine the
overhead cost per kilo of sugar production.

4.0

CONCLUSION
In a nutshell, Activity-Based Costing (ABC) should be implemented in Central Sugars
Refinery (CSR) manufacturing. It is because, not only it give ease to CSR in managing
the costs, but also ensure that the costs is accurate and precisely. With that, CSR
manufacturing would not incur any loss during the business.
As mentioned earlier, the use of Activity-Based Costing (ABC) has several benefits which
are: 1) The use of Activity-Based Costing (ABC) use more cost pools as to assign
overhead costs. 2) Enhanced control over overhead costs and 3) Leads to better
management decisions.
To implement Activity-Based Costing (ABC), CSR manufacturing must alert on some
factors that needs to be considered which are: 1) Product lines differ in volume and
manufacturing complexity. 2) Product lines are numerous and diverse. 3) Overhead
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Activity-Based Costing in Manufacturing Company

costs constitute a significant portion of total costs. 4) The manufacturing process or the
number of products has changed significantly and 5) Production or marketing managers
are ignoring data provided by the existing system. Besides that, to implement ABC in
CSR manufacturing, there must be an expert to leads the costing systems so that it runs
smoothly.
Even though the new management in CSR manufacturing had suggested that ABC
should be implemented, there are many preparation that needs to be done since the
factory of CSR is an old factory thus it did not divided the process according to activity. If
CSR wants to implement ABC, the process of the sugar needs to be divided to several
activities so that it can be calculated according to each activity.
The Head Factory Operation, Mr. Hasmanan Zaquier Salleh told us that, he already
knew about Activity-Based Costing (ABC), but since the sugar is in continuously process,
it is hard to implement ABC. He added, ABC is planning to be implemented sooner. He
really want to have this activity based costing within the factory so that he can see the
result in future. In his final comment also hoping that with the activity based costing it will
help the management team of CSR to do better decision through manufacturing
overhead costs which can be minimize and will maximize profit with least costs
allocation.

In short, ABC is better costing than traditional costing. With all of the benefits stated, it is
proven that ABC is more accurate and reliable type of costing system. Even though it
requires a careful preparation, it will give the accurate result in the future. CSR can learn
from other manufacturing company that had implemented ABC as their benchmark. With
that, they can see the consequences of ABC implementation in that company whether it
gives positive or negative consequences.

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