Analysis of Determining Cost of Production Using Full Costing Method at UMKM Cakwe Bang Ican in Mejasem Village

Introduction

The accurate determination of production costs is crucial for any business, particularly for micro, small, and medium enterprises (MSMEs) that operate in competitive markets. In Indonesia, MSMEs play a significant role in economic development, contributing substantially to employment and income generation. However, many of these businesses, including traditional food enterprises like UMKM Cakwe Bang Ican, often lack formal accounting systems, leading to potential inefficiencies in cost management and pricing strategies.

This case study focuses on UMKM Cakwe Bang Ican, located in Mejasem Village, which produces cakwe a traditional Chinese-style fried dough snack popular throughout Indonesia. The business faces the challenge of accurately determining its production costs to establish appropriate selling prices that ensure sustainability and profitability.

By implementing the full costing method, this study aims to provide UMKM Cakwe Bang Ican with a systematic approach to cost accounting that can enhance decision-making processes related to pricing, production planning, and overall business management.

Background of UMKM Cakwe Bang Ican

UMKM Cakwe Bang Ican is a family-owned business that has been operating in Mejasem Village for over a decade. The business specializes in producing cakwe, a popular snack among locals and visitors alike. Cakwe is made from a dough mixture primarily consisting of flour, water, yeast, and occasionally other ingredients such as baking powder and salt, which is then deep-fried until golden brown.

Despite its established presence in the community, UMKM Cakwe Bang Ican faces several challenges typical of small-scale food businesses:

• Difficulty in tracking and calculating precise production costs
• Limited knowledge of formal cost accounting methods
• Pricing based on competitors' rates rather than internal cost analysis
• Inconsistency in product quality due to varying ingredient proportions

These challenges necessitate the implementation of an appropriate costing method to improve the business's operational efficiency and financial management.

The Full Costing Method

The full costing method, also known as absorption costing, is a cost accounting approach that allocates all manufacturing costs to the product being produced. Unlike variable costing, which only includes direct materials, direct labor, and variable manufacturing overhead, full costing also incorporates fixed manufacturing overhead as product costs.

The components of the full costing method include:

• Direct Materials: The raw materials that can be directly traced to the finished product, such as flour, yeast, and oil for UMKM Cakwe Bang Ican.
• Direct Labor: The wages or salaries of employees directly involved in the production process.
• Variable Manufacturing Overhead: Indirect production costs that vary with production volume, such as electricity for cooking equipment.
• Fixed Manufacturing Overhead: Indirect production costs that remain constant regardless of production volume, such as depreciation of equipment and rent for production space.

For UMKM Cakwe Bang Ican, implementing the full costing method enables a comprehensive understanding of all costs associated with production, providing a solid foundation for pricing decisions and profitability analysis.

Methodology

This study employed a qualitative approach, gathering data through:

• Direct observation of the production process at UMKM Cakwe Bang Ican
• Interviews with the business owner and employees regarding production costs, pricing strategies, and operational procedures
• Analysis of existing financial records and documents
• Comparison of current costing practices with the full costing method

Data were collected over a period of three months, ensuring that varying production volumes and costs were documented to account for operational fluctuations.

Findings and Analysis

Current Costing Practices at UMKM Cakwe Bang Ican

Before the implementation of the full costing method, UMKM Cakwe Bang Ican determined product costs by primarily considering direct material costs with a rough estimation of labor costs. Fixed overhead costs were not systematically allocated to the product, leading to incomplete cost information.

The business owner set selling prices based on competitors' prices and perceived market rates, with minimal consideration of the actual production costs incurred. This approach resulted in potential profit erosion during periods of increased overhead expenses or reduced sales volume.

Implementation of the Full Costing Method

The study identified and categorized all production-related costs at UMKM Cakwe Bang Ican:

• Direct Materials: Flour, yeast, baking powder, salt, cooking oil, and packaging materials averaged at IDR 15,000 per kilogram of finished cakwe.
• Direct Labor: The business owner and two employees spent approximately 4 hours daily producing an average of 20 kilograms of cakwe, with labor costs calculated at IDR 25,000 per kilogram.
• Variable Manufacturing Overhead: Electricity for cooking equipment and occasional additional water usage averaged at IDR 3,000 per kilogram.
• Fixed Manufacturing Overhead: Equipment depreciation, monthly rent for the production space, and allocated portion of general administrative expenses amounted to IDR 7,000 per kilogram.

Using the full costing method, the total production cost per kilogram of cakwe was calculated as:

• Direct Materials: IDR 15,000
• Direct Labor: IDR 25,000
• Variable Manufacturing Overhead: IDR 3,000
• Fixed Manufacturing Overhead: IDR 7,000
• Total Production Cost: IDR 50,000 per kilogram

Comparison with Previous Costing Method

Under the previous costing approach, UMKM Cakwe Bang Ican had been estimating the production cost at approximately IDR 35,000 per kilogram, considering only direct materials and direct labor with a rough estimation. The full costing method revealed an additional IDR 15,000 per kilogram in overhead costs that had previously been unaccounted for.

This discrepancy had significant implications for pricing decisions. At an average selling price of IDR 45,000 per kilogram based on market conditions, the business was effectively selling its products at a loss when all costs were considered, as revealed by the full costing method.

Pricing Strategy Adjustment

With the accurate cost information provided by the full costing method, UMKM Cakwe Bang Ican developed a revised pricing strategy. To ensure profitability, the business implemented the following approach:

• Setting a minimum selling price of IDR 60,000 per kilogram to cover production costs and achieve a reasonable profit margin.
• Implementing tiered pricing for bulk orders to encourage larger purchases while maintaining profitability.
• Exploring opportunities to reduce costs through improved ingredient procurement and production efficiency.

Conclusion

This study demonstrates the importance of implementing appropriate costing methods for MSMEs like UMKM Cakwe Bang Ican. The full costing method provides a comprehensive view of production costs by incorporating direct materials, direct labor, and both variable and fixed overhead expenses.

For UMKM Cakwe Bang Ican, the application of the full costing method revealed that the business had been underpricing its products, leading to potential losses when all production costs were considered. This knowledge enabled the business to adjust its pricing strategy to ensure profitability.

The findings suggest that MSMEs in the food industry could benefit significantly from adopting formal cost accounting methods such as full costing. These methods provide critical information for pricing decisions, cost control, and overall business management, ultimately contributing to business sustainability and growth.

Future research could explore the implementation of the full costing method in other sectors of the MSME economy, examining its impact on business performance over the long term. Additionally, digital solutions for cost accounting tailored to the needs and capabilities of small businesses could further enhance the adoption of such methods.

References

1. Horngren, C. T., Datar, S. M., & Rajan, M. V. (2015). Cost accounting: A managerial emphasis (15th ed.). Pearson Education Limited.

2. Drury, C. (2018). Management and cost accounting (10th ed.). Cengage Learning EMEA.

3. Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2019). Managerial accounting: Tools for business decision making (8th ed.). Wiley.

```