Design of a Cost Model for Joint Costs Allocation to Recoverable Waste in a Wooden Furniture Manufacturing Plant. The PT SAS Kreasindo Utama case.

Details

Supervisors

Dispas, Christophe

Faculty

Louvain School of Management

Degree label

Master [120] en Ingénieur de gestion

Abstract

In a context of markets globalization, characterized by intense competition, the efficiency of companies’ production process is a key factor to thrive in such an environment. This concern is incontestably present in the wood industry as well. The main particularity of wood working is the large volume loss generated along the production process. As wood is often the main expense related to this business, many efforts are directed to optimize their wood recovery rate. A major improvement happened when the factory PT SAS Kreasindo Utama located in Indonesia started to recover off-cuts and reprocessed them into usable wood planks, but with a lower aesthetic value. These products bear the name of finger joints. How to cost these short off-cuts? Should they support some costs? What is the exact cost to transform these off-cuts into longer components? Finally, with this further processing, what is the full cost of finger joint panels and is it profitable to invest the extra cost to recover the off-cuts into new material? This last question is the core of this research paper. As off-cuts are produced simultaneously with the sawn timbers, the common costs of production have been allocated thanks to specific methods identified in the revue of literature. Market value methods were proved inapplicable and the two other possible methods, the physical and the by-product, were giving unsatisfying results. The finger joint material costs were either too low or too high according to the business logic behind this material, which would lead to bad decision-making. Indeed, from an operational point of view, the process to create off-cuts or sawn timbers is the same. A new approach, based on the physical logic was developed, considering finger joint material as mean to improve the recovery rate of the raw material processing business unit. Therefore, common costs have been allocated according to the output volume of sawn timbers and finished finger joint panels. With this approach, finger joint material total cost equals IDR 30 million, or € 1900, per cubic meter. However this amount is not appropriate to judge the profitability of finger joint material. Indeed, only the further processing costs are relevant, since the common cost would be incurred anyway, which is less than what SAS should disburse to produce additional regular timbers or buy finger joint panels on the market, proving the profitability of this operation. Nevertheless, SAS will soon not be able to sustain the off-cuts demand to support its finger joint panels need. In this case, buying finger joint panel is actually cheaper than producing off-cuts on purpose because common costs would be engaged for off-cuts production only and should therefore absorb the entirety of it. Finally, the recommendation for the pricing of such a product according to SAS cost plus pricing strategy advocate to improve the value perceived by the customer in order to follow the benefit-received criterion which is the base of this pricing strategy, or to adapt its pricing for the product concerned. In the end, this paper allows a better visibility on induced costs and profit generated by finger joints production. Moreover, with the obvious environmental benefits of such product, namely waste recycling and efficient resource utilization, this product fits perfectly into a SAS sustainable development policy and society at large.