ACCOUNTING MANAGEMENT

Performance Evaluation PT. Sopanusa

By: Eka Darmadi Lim May Eka Saputri Steven Auryn Hendro Muhamad Restu Utomo Julian Giovanni Kevin Hanske 3094802 3094814 3105812 3104014 3104812 3104007

Class: Y
University of Surabaya Faculty of Business and Economics International Class IBN & PA 2012

I.

General Description about PT Sopanusa Tissue and Packaging

The founder of PT Sopanusa is Mr. Dermawan Soeparsono. He built it on May 1995 when he was 21 years old and under his rules, PT Sopanusa now has three sister companies. Those sister companies are Star Paper Supply Co., Sun Paper Source Co., and Superior Prima Sukses Co. Star paper supply is a business in the major of papers, sun paper source is on the major of tissue, while superior prima success is on the major of light brick. In the early period, PT Sopanusa run with only one machine and a land of 20 hectares. It is located on Raya Ngoro 100 streets, Manduro Manggungajah village, Ngoro, Mojokerto district, which is around 50 kilometres from Surabaya. Now, PT Sopanusa has five power mills. The markets for PT Sopanusa is 87% export and 13% domestic. The products is divided into two types, parent roll or work-in-process goods and finished goods. The parent roll consists of facial tissue, toilet tissue, napkin or serviettes, paper towel and MG paper. While the finished goods consist of cocktail, lunch, and dinner napkins, bathroom roll (include coreless), facial tissue box and soft pack, multifold hand towel, and kitchen towel. The sales proportions are 27% of jumbo roll, 27% of napkins, 27% of towel, 11% of facial, 3% of finished goods, 3% of MG paper, and 1% of toilet recycle. PT Sopanusa has acquired several achievements, including that PT Sopanusa is set forth as a bonded area and get the certificates of ISO 9001:2008, FSC Chain of Custody Certification, Proper Biru, and so forth.

PT Sopanusa has 644 people working there, which consists of 181 staffs and 463 non-staffs. The staffs minimum education is bachelor degree, while the non-staffs do not any minimum requirement. The payroll systems are using banktransferred. If staffs, PT Sopanusa uses Bank Central Asia to transfer, while if non-staffs, PT Sopanusa uses Mandiri Bank. The cultures of the company are family and professionalism, the underlying reason is that the CEO wants to create a comfort workplace without ignoring the importance of professionalism. Good attitude, high integrity, smartness, loyalties, and passion are the values of the

company. With those values and cultures as the basis, PT Sopanusa continues to grow its business. Three missions and a vision are therefore established. The missions are PT Sopanusa commits their product quality and is willing to create value for customers, continuously developing and upgrading every aspects and divisions of the business, and developing stronger relationship to its stakeholders.While the vision is to be recognized internationally as one of the leading providers of quality tissue paper products. Today, 80%-90% of their productions capacity serving customers in more than 60 countries across 5 continents.

2. Relevant Theoretical Framework

There are some activities in order to evaluate the performance, the activities are named: A. Responsibility center B. Segmented Report C. Transfer price D. Performance investment E. Budget Analysis Lets us discuss one by one from the whole activities in performance evaluation. A. Responsibility center Meaning: Responsibility center is entity within an organization that gives responsible to accountable manager to manage revenue, expenses, and investment funds. The four major types of responsibility centers are as follows: Cost center = the manager is responsible only for costs

Revenue center = the manager is responsible only for sales Profit center = the manager is responsible for both sales and costs Investment center = the manager is responsible for sales, costs and capital investments.

This responsibility center is reflecting the actual situations and the type of information available to the manager, in responsibility center the key is information. The function of information is to appropriate the managers responsible for outcomes.

B. Segmented report

Meaning: Segmented report is the report of the operating segments of a company in divisions, departments, product lines, customer classes and so on. However the fixed costs are defined into avoidable fixed expenses and common fixed expenses. This condition is controllable and uncontrollable costs that the responsibility for managers to evaluate and contribute each segments to overall firm performance.

Common fixed expense: Jointly caused by two or more segments Direct fixed expense: Fixed expense that directly traceable to a segment.

C. Transfer price Meaning: Transfer price is the price used for intra-company transfer, for example between segments of a company, could be used in any situation where the output of one segment becomes the input of another segment within the same company ( department, operations, and process ) An example of

ABKY makes this point with an automobile dealership. A transfer price, or value for a used car is needed when it is transferred from the new car department (as a trade-in) to the used car department. The new car department would like for the value to be high, while the used car department would prefer a low value. In transfer pricing policies, there are two definitions for each division, as follow: Minimum transfer price: Transfer price that would leave the selling division no worse off if the good were sold to an internal division than if the good were sold to an external party. This is sometimes referred as the floor of the bargaining range. Maximum transfer price: Transfer price that would leave the buying division no worse off if an input were purchased from an internal division than if the same good were purchased externally. This is sometimes referred to as the ceiling of the bargaining range. In transfer pricing there is also market price, cost based transfer prices, and negotiated transfer prices. Market price: If there is a competitive outside market for the transferred product, then the best transfer price is market price. Before we used market price, there is some question to answer it, like will the two divisions transfer at the market price? Is it really does not matter, since the divisions and the company as a whole will be as well of whether or not the transfer take place internally?

 Cost based transfer prices: Is a method of setting prices when goods are sold to divisions within in one company. Several factors that affect the price like, production costs, managers review, international taxation and competitors pricing. Before we used cost based transfer prices, there is a question to answer it, if the policy is cost based transfer pricing will the transfer take place? Negotiated transfer prices this negotiated transfer prices are useful in cases with imperfections market, such as the ability of an in-house division to avoid selling and distribution costs.

D. Performance investment To measuring the performance investment, we can use ROI, Margin and turnover, Residual income and economic value added. Return on investment Meaning: Return on investment (ROI) is profit or investment. ROI = Operating income/average operating assets

Advantages using ROI: It encourages managers to focus on the relationship among sales, expenses, and investment as should be the case for a manager of an investment center. It encourages managers to focus on cost efficiency It encourages managers to focus on operating asset efficiency

Disadvantages using ROI:

It can be produced a narrow focus on divisional profitability at the expense of profitability for the overall firm

It encourages managers to focus on the short run at the expense of the long run.

Margin and Turnover

Margin: the ratio of operating income to sales, it expresses the portion of sales that is available for interest, taxes and profit. Turnover: different measure, it is found by dividing sales by average operating assets. Residual income and Economic value added

Residual Income : the difference between operating income and the minimum money return required on a companys operating assets Residual income: Operating income (Minimum rate of return * Average operating assets)

Economic value added: net income (operating income minus taxes) minus the total annual cost of capital. Economic value added: EVA After tax operating income (actual percentage cost of capital * total capital employed).

E. Budget Analysis A master budget is a company's plan setting anticipated sales, production, and distribution and financing goals over a year. Managers create the master budget by preparing separate budgets in departments such as sales, production and labor. A well-planned master budget will clearly describe what the company expects to accomplish in the upcoming year and how it intends to finance its business operations. Preparing a master budget requires a high level of planning and preparation by managers. 3. Management Accounting Application on Company

Because PT. Sopanusa is adopting the centralized strategy, so there are only two factors that we will discuss in this section that are budget analysis and segmented report for comparing the performance of exporting and domestic selling. Below are the steps that PT Sopanusa used for making the master budgeting:

1. Prepare a sales budget. A sales budget shows how many products that they expects to sell in the coming year and the unit selling price. Multiply the unit selling price by the total number of units expected to be sold to arrive at the project's sales budget.

2. Prepare a production budget. A production budget list the number of units to be produced for sale during the budgeted time period plus the number of units to be left available in company inventory. Add to the sales number the desired year-ending inventory and subtract the inventory available at the beginning of the period to arrive at their production budget figure.

3. Prepare a materials budget outlining the amount of raw materials needed to achieve the total production figure as well as ending inventory. The amount of raw materials needed for production plus the desired ending balance of raw materials yields the total materials required. Subtracting the inventory of raw materials available at the beginning of the period yields the materials budget figure.

4. Prepare a labor budget. A labor budget describes the amount of money required to pay for the number of labor hours necessary to achieve the budgeted production level. Multiply the amount of labor required in hours per unit produced by the total production figure to arrive at total labor hours. Multiply the total labor hours by the hourly labor cost to arrive at the labor budget figure.

5. Prepare the overhead budget, which describes all costs of production other than materials and labor. Include in this figure management salaries and money paid to the company's sales force and all other employees not directly related to production of the finished product.

6. Prepare a cash budget. The cash budget describes how the company will use its cash resources during the budget period. Identify all cash receipts to be collected during the budget period except for any finance funding. Identify all cash disbursements to be paid during the budget period. Subtract total disbursements from cash receipts and add the beginning cash balance to arrive at the excess or deficiency cash position. If the company operates at a cash deficiency, it will probably require some form of financing to support operations.

7. Prepare a budgeted income statement that describes the amount of profit the company expects to make based on its level of production and sales. The budgeted income statement is different from the income

statement and allows management to evaluate the company's progress during the year.

SAMPLE MASTER BUDGET FOR PT. SOPANUSA

SALES BUDGET No of Units Sold Cost per unit Sales PRODUCTION BUDGET Budgeted Sales Desired Closing Stock Total Units Needed Less Opening Stock Units to produce COST OF GOODS SOLD Budgeted Unit Sales Direct Materials Direct Labor Manufacturing Overheads Total OPERATIONAL EXPENSES BUDGET Units to be produced xxx xxx x per unit x per unit x per unit xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx

Cost of Materials Cost of Direct Labor Cost of Overheads SELLING EXPENSE BUDGET Commission Rent Transportation Advertising Depreciation of Machinery and Office Others Less Depreciation Net Selling Expenses ADMINISTRATIVE EXPENSE BUDGET Salaries Insurance Telephone & Communications Supplies Bad Debts Others

x per unit x per unit x per unit

xxx xxx xxx

x per unit

xxx xxx xxx xxx

xxx xxx xxx xxx

xxx xxx xxx xxx xxx xxx xxx

INCOME STATEMENT Sales Cost of Goods Sold Operating Expenses xxx xxx

.- Selling .- Administrative Net Income from Operations Interest Expense Net Income Before Tax Federal Income Tax (25%) Net Income CASH BUDGET Opening Balance Cash Recepits Total Cash Cash Payments .- Direct Materials .- Direct Labor .- Manufacturing Overhead .- Selling Expense .- Administrative Expense .- Income Tax .- Interest Expenses Total Cash Payments Net Cash Avaliable

xxx xxx xxx xxx xxx xxx xxx

xxx xxx xxx

xxx xxx xxx xxx xxx xxx xxx xxx xxx

BALANCE SHEET ASSETS Current Assets Accounts .- Cash .- Accounts Receivables xxx xxx Payable Total Liabilities xxx xxx LIABILITIES

.- Raw Materials .- Finished Goods

xxx xxx Net Income Retained xxx

Total Current Assets

xxx

Earnings Owner's Equity

xxx xxx

Fixed Assets .- Land .- Building Less Deprecation Total Fixed Assets Total Assets xxx xxx xxx xxx xxx Total Liability xxx

After we take a look at how they make the budgeting, now we will take a closer look at the segmented reporting to compare how the performance of the company about domestic selling compared to export is.

4. Analysis Based on the Theory

PT. Sopanusa use centralized system in managing their operation. This centralized operation system makes them difficult to develop their business to a larger one. For the long run of the business of the company, they should make segmented operation on doing business. In doing business with segmented operation they should make new branch operations which will that care of producing their own raw material for the manufacture. The purpose of making branch of PT. Sopanusa is for producing their own raw material to support their manufacturing process to suppress the long run cost from buying raw material, flexibility, and control. If they use decentralized decision making they will have several benefit which are (1) ease of gathering and using local information; (2) focusing of central

management; (3) training and motivating of segment managers; and (4) enhanced competition. As for now PT. Sopanusa only has a subsidiary for the package of the tissue and PT. Sopanusa pays the package based on the market price. Segmented Reporting To evaluate the performance of each segment the company can use several ways depends on which responsibility center the company want to evaluate. There are four major types of responsibility centers: Cost center the manager is responsible only for costs Revenue center the manager is responsible only for sales Profit center the manager is responsible for both sales and costs Investment center the manager is responsible for sales, costs and capital investment If PT Sopanusa decides to use decentralize system they need to evaluate each division correctly. For example if they decide to build their own subsidiary to provide their raw material, this subsidiary will be evaluated as cost center because they need to evaluate the costs of producing raw material. There are different ways to measure the performance of each responsibility center. To measure profit center which is responsible for both sales and costs, the company can use variable and income statements. Variable costing only calculate absorption variable

manufacturing costs of the product while fixed overhead treated as a period expense. Absorption costing assigns all manufacturing costs to the product. Performance of investment center can be measured by using ROI (Return of Investment) which the profit is earned per dollar/rupiah of investment.

P.T Sopanusa, have many option and competitor in the market, our main product in P.T Sopanusa the Jumbo Roll that give us net profit 40%, and the final goods give us profit around 10 20%, but before we count one by one the detail of cost, we cant find which product that give us the higher profit, and which product give us lower profit. Responsibility Accounting System Responsibility accounting system is a system that measures the result of each responsibility center according to the information managers need to operate their center.

Because PT. Sopanusa is involved in producing paper tissue, they operate in an environment where change is fluctuated. This is happened because the demand from the buyer is various, from the texture, size, color, thickness, tissue flexibility, etc. Products and processes are constantly being redesigned and improved also the competitor always present. This means PT. Sopanusa must find cost efficient ways of producing high variety, but in high volume products. This usually means PT. Sopanusa must pay attention in improving cost, quality, and response times in value chains. So, PT. Sopanusa should improve in performance by reducing waste.

Budgeting and Budgetary Control

Because we suggest PT. Sopanusa to make subsidiaries companies, so PT. Sopanusa should make short term and long term objectives. We suggest, in short term objective PT. Sopanusa the budget is allocated for buying property for the subsidiaries company. In long term, the budget is allocated for waste reduction, and operational cost. In making budget decision they should use the information given by the income statement accompanied by sales budget, production budget, direct material purchases

budget, direct labor budget, overhead budget, selling and administrative expenses budget, ending finished goods inventory budget, and cost goods sold budget.

Transfer Pricing

Because one of the PT. Sopanusa raw material is imported from Scandinavia, so our group suggest PT. Sopanusa to expand their company to the Scandinavia to handle the selling division for the raw material.

The selling division in Scandinavia can pre-produce the raw material, for example drying the raw material before imported to Indonesia. Because the selling division operates in high tax country (Scandinavia) and the buying division operates in low tax country (Indonesia), the transfer price may be set low because the destination tax is quite low.

For now PT Supanusa already has subsidiary for the packaging of the goods produced. The transfer pricing method with this subsidiary is a market price system. Their decision of using market price method in their transfer pricing is right because market price method is best used when there are competitive outside market for the product. This decision will optimize the profit of both division and the firm.

5. Conclusion

In conclusion, PT Sopanusa have already did a great job in managing its Master budget.. PT Sopanusa well-planned their revenue budget, expenditure budget, production budget and payroll budget. A well-planned master budget will clearly describe what the company expects to accomplish in the upcoming year and how it intends to finance its

business operations. This will help their company to keep growing and also take some of our team recommendations by segmenting their operation. That somehow will make a positive impact for PT Sopanusa in the long run.

6. References Teaching material Managerial Accounting 8th edition by Don R Hansen and Maryanne M. Mowen Teaching material Cost Accounting 13th edition by Pearson International Edition http://www.businessdictionary.com/definition/responsibility-center.html http://www.accountingtools.com/questions-and-answers/what-is-segmentreporting.html

http://www.ehow.com/about_6299442_definition-cost_based-transferpricing.html

http://www.ehow.com/how_7732914_complete-master-budget-managerialaccounting.html

http://sopanusa.co.id/eng/