CHAPTER 2

PRODUCT COSTING

2.1 Capital Investment

Capital Investment is the initial cost required by a project to design, to build, and to start a
manufacturing process. It is a single-occasion cost which will not happen periodically. Capital
investment includes all cost which must be spent in order for a project to start. Capital investment
can be gained either through investors or investment banks, or the combination of both. Before
making an estimation of capital investment, several assumptions must first be made, which are
listed as the following:

 The plant will be constructed by the beginning of 2020, with the consideration of
medium capacity and a few equipment.

 The manufacturing process is expected to be operational at the beginning of 2021

until the end of 2028, with the lifespan of 8 years.

 Exchange rate of currency is assumed to be the same value as it is on May 6th is

IDR 14.323,45/1 USD.

 One year of labor consists of 330 operation days.

 The production capacity is at 6.7 tons per day, calculated through benchmarking as
well as demand-driven approach.

The calculation for the capital cost estimation is conducted using the Modular Guthrie
method, with the formula as the following.

𝐶𝑇𝐶𝐼 = 𝐶𝐹𝐶 + 𝐶𝑊𝐶

𝐶𝑇𝐶𝐼 = 1.18(𝐶𝑇𝐵𝑀 + 𝐶𝑠𝑖𝑡𝑒 + 𝐶𝑏𝑢𝑖𝑙𝑑𝑖𝑛𝑔 + 𝐶𝑜𝑓𝑓𝑠𝑖𝑡𝑒 𝑓𝑎𝑐𝑖𝑙𝑖𝑡𝑖𝑒𝑠 ) + 𝐶𝑊𝐶
Whereas:
𝐶𝑇𝐶𝐼 = total capital investment
𝐶𝐹𝐶 = fixed capital
𝐶𝑊𝐶 = working capital
𝐶𝑇𝐵𝑀 = total bare module cost
𝐶𝑠𝑖𝑡𝑒 = site development cost
𝐶𝑏𝑢𝑖𝑙𝑑𝑖𝑛𝑔 = building cost
𝐶𝑜𝑓𝑓𝑠𝑖𝑡𝑒 𝑓𝑎𝑐𝑖𝑙𝑖𝑡𝑖𝑒𝑠 = offsite facilites cost
𝐶𝑊𝐶 = working capital cost
The nomenclature used in the formula interprets total bare module cost, site cost, building
cost, and offsite facilities cost to be classified as fixed capital. The factor of 0.18 implied from the
formula refers to the estimation cost of contingency and contractor fee. The calculation step used
later follows a more general classification system of capital investment, in which fixed capital
consists of direct cost and indirect cost, yet still following the formula provided by Modular
Guthrie method.
2.1.1 Fixed Capital
Fixed capital investment refers to the cost to design and build a plant after which it is ready
to start. Fixed capital investment is spent during the period of plant construction and can be
recovered in the end of the project by considering depreciation cost.
Fixed capital investment consists of two main parts, which are direct cost and indirect cost.
Direct cost refers to the expenses which are directly related to the manufacturing process, whereas
indirect cost refers to the supporting expenses needed indirectly to complete a design and building
process of plant.
2.1.1.1 Direct Cost
As mentioned earlier, direct cost covers technical aspect directly related to the process of
manufacture. It consists of equipment cost, land cost, building cost, supporting facilities cost,
utility installation cost, market research cost, also patent, industrial design, and brand cost.
A. Equipment Cost
Equipment cost refers to the cost needed to get the equipment until it can be operated
normally in manufacturing process. To do the equipment cost estimation by this method, the most
important data needed is the cost of equipment being delivered on the nearest port of the supplier,
known as Free on Board (FOB) price.
The FOB price obtained from the supplier must be adjusted to the time the equipment will
be bought, as the price of equipment might fluctuate in time. One approach to estimate the price
of equipment in a specific future time is by extrapolating strategy through Marshall & Swift Index.
 𝐼𝑛𝑑𝑒𝑥 𝑣𝑎𝑙𝑢𝑒 𝑎𝑡 𝑝𝑟𝑒𝑠𝑒𝑛𝑡 𝑡𝑖𝑚𝑒
𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝐶𝑜𝑠𝑡 = 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑐𝑜𝑠𝑡( )
𝐼𝑛𝑑𝑒𝑥 𝑣𝑎𝑙𝑢𝑒 𝑜𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑐𝑜𝑠𝑡 𝑜𝑏𝑡𝑎𝑖𝑛𝑒𝑑
The Marshall & Swift Index is generated through the real data from various industries, so it
is quite valid to be used. To estimate the price in specific time in the future, the trend of index
growth must first be modeled mathematically.
Table 2.1 Marshall and Swift Index

Year Index Value

2007 1353.8
2008 1393
2009 1487.2
2010 1446.5
2011 1476.7
2012 1536.5
2013 1552.8
2014 1566.9
2015 1598.1
2016 1582.3
2017 1593.7
(Source: Marshall & Swift Valuation Service, 2017)

Linear Regresion of Marshall & Swift Index

1800
1600 y = 23.694x - 46164
R² = 0.8889
1400
1200
Index Value

1000
800
600
400
200
0
2006 2008 2010 2012 2014 2016 2018
Year

Figure 2.1 Linear Regression of Marshall & Swift Index

Through the data obtained, the trend of index growth over time can be observed. It is
acceptable to be linear, with the value of R2 close to unity. Hence the mathematical model
representing index value over time can be formulated as follow.
𝐼𝑛𝑑𝑒𝑥 𝑣𝑎𝑙𝑢𝑒 = 23.694 𝑌𝑒𝑎𝑟 − 46164
 The model is then used to obtain index value of specific time in the future by linear
extrapolation described as follow.
Table 2.2 Extrapolating Result Determining Index Value in Year 2018-2020

Year M&S Index

2017 1593.7
2019 1674.186
2020 1697.88

The index value of year 2019 and 2020 provides comparison factor for the FOB price of
equipment in 2019 and 2020. In other word, the price of equipment in year 2020 can be estimated
by the price of equipment gotten in 2019. The estimation of FOB price of equipment in 2020 are
tabulated as follow.
Table 2.3. FOB Price of Equipment in 2020

2019 2020
equipment FOB Price FOB Price FOB Price FOB Price
(USD) (IDR) (USD) (IDR)
Centrifugal
Separator 17910 256532989.5 18163.47216 260163585.3
Milk Mixer 14000 200528300 14198.13569 203366286.7
Milk
Pasteurizer 2680 38386846 2717.928832 38930117.73
Two Stage
Homogenizer 4500 64455525 4563.686472 65367735
Cooling
Vessel 10000 143234500 10141.52549 145261633.3
Cooling Heat
Exchanger
Stage 1&2 5000 71617250 5070.762747 72630816.67
Ageing
Storage Tank 20000 286469000 20283.05099 290523266.7
Continuous
Freezing
Tank 10000 143234500 10141.52549 145261633.3
Packaging
and Sealer 8000 114587600 8113.220395 116209306.7
Belt
Conveyor 10000 143234500 10141.52549 145261633.3
 The FOB price will be adjusted in order to get the total cost needed until the equipment can
operate normally. A term bare module factor provides an estimation of FOB price plus all factors
needed such as piping, instrumentation, electrical, painting, and additional components.

For the equipment to product loxy healthy ice cream, bare module factor is used only for high
shear in-line mixer and mixing tank. Bare module factor for mixing tank is ranging from 1.5 to
1.9. Since the price spent after FOB purchase for that two equipment is only for piping and
pumping, the lower limit value from the range is used. Filling machine and labeling machine do
not require additional cost except for shipping. For the other equipment, the price listed is the
installed cost. The cost estimation for all equipment are tabulated as the following.

Table 2.4 Equipment Cost Estimation

2020 FOB Price

equipment Qty BMF BM Cost (IDR)
(IDR)

Centrifugal Separator 260163585.3 1 2.03 528,132,078.2

Milk Mixer 203366286.7 1 4.16 846,003,752.5
Milk Pasteurizer 38930117.73 1 4.16 161,949,289.8
Two Stage Homogenizer 65367735 1 4.16 271,929,777.6
Cooling Vessel 145261633.3 1 4.16 604,288,394.7
Cooling Heat Exchanger Stage
1
1&2 72630816.67 3.17 230,239,688.8
Ageing Storage Tank 290523266.7 5 4.16 6,042,883,947
Continuous Freezing Tank 145261633.3 1 4.16 604,288,394.7
Packaging and Sealer 116209306.7 1 1 116,209,306.7
Belt Conveyor 145261633.3 1 1.61 233,871,229.7
TOTAL EQUIPMENT COST 9,639,795,859

B. Land and Building Cost

The plant will operate at Kawasan Industri Citeureup, Bogor, West Java with the excessive
total are of 10.494 m2. The buildings are mainly classified as the main plant site, the offices, RnD
Facility, Storage Warehouse, the Praying Room and Canteen, and also the Parking Area. The Main
Plant site consists of the unloading zone where suppliers unload the raw materials, storage tank to
store the raw materials, separator, mixer, pasteurizer, homogenizers, cooling vessel, ageing tanks,
freezing and mixing tank, filler and labeler, boxing zone, controlling room, quality assurance
room, and the loading area.

The land cost is calculated by the price provide for industrial area in Kawasan Industri
Citeureup, Bogor at the value of IDR 2.500.000 per m2. The price per are of building for plant and
storage sectial and standard semi-housing section is estimated to be IDR 1.500.000 per m2 and
1.300.000 per m2 respectively.

2.5 Land Cost Estimation

Cost Per Area Land Cost

m2 (m2) (IDR)
3,000,000 10,494 31,482,000,000
(Source: Rumah123.com, 2019)

Tabel 2.6 Building Cost Estimation

Cost per m2 Area Building Cost

Description
(IDR) (m2) (IDR)
Main Plant Site 1,500,000 650 975,000,000
Office 1,300,000 180 234,000,000
Rnd Facility 1,300,000 228 296,400,000
Storage Warehouse 1,500,000 260 390,000,000
Praying Room 195,000 30 5,850,000
Canteen 195,000 30 5,850,000
Security Offices 195,000 40 7,800,000
Parking Area 195,000 472 92,040,000
TOTAL BUILDING COST 2,006,940,000
(Source: Rumah123.com, 2019)

C. Utility Installation Cost

Installation of utility is needed as the technical support to the manufacturing process. The main
utilities in the plant site for manufacturing loxy healthy ice cream consists of water and electricity,
with additional utilities for telephone and internet. The calculation of utility installation cost is as
tabulated below.
 Table 2.7 Utility Installation Cost Estimation

Installation Note Cost (IDR)

PLN Cost in May 2019 for 6800 vA-
Electricity Installation 14,775,000
200kvA
Water Installation PDAM - Golongan Industri 2 20,745,000
Network Installation Indihome Paket Premium 1,750,000
Telephone Installation Telkom 2017 Business Subscription 1,500,000
TOTAL COST 38,770,000

D. Market Research Cost

The initial research on market is needed to achieve the maximum profit of the project. To do
this, an amount of cost must be expended, and the estimation is calculated from the regulation of
Presidential Decree number 16 on 2018. Which is tabulated as the following.

Table 2.8 Market Research Cost Estimation

Activity Cost (IDR)

Survey and Research 5,000,000
Consultant Service 25,000,000
TOTAL MARKET RESEARCH COST 30,000,000

E. Patent and Brand Cost

The investment regarding patent, industrial design, and brand cost is needed to be calculated. The
data for calculation is obtained from regulation of Peraturan Pemerintah No. 45 Tahun 2016. The
calculation for patent and brand cost is conducted as the following.

Table 2.9 Patent Cost Estimation

Non-Tax Cost Total

No. Unit Qty.
Revenue (Rp) (Rp)
1 Patent request Per request 800,000 1 800,000
Additional cost
2 Per request 50,000 7 350,000
per claim
Request for
3 letter of priority Per request 250,000 1 250,000
right evidence
 Substantive
4 Per request 350,000 1 350,000
inspection
Cost for
Per
5 publishing 250,000 1 250,000
certificate
certificates
Admission for
liceso thense
6 Per request 1,000,000 1 1,000,000
agreement
registration

Request for
7 compulsory Per request 1,000,000 1 1,000,000
licensing
Request for
general list
8 Per request 300,000 0 0
excerpts of
patents
Request for
9 copies of patent Per sheet 10,000 0 0
documents
TOTAL PATENT COST 4,000,000

Table 2.10 Brand Estimation Cost

Non-Tax Cost Total

No. Unit Qty.
Revenue (Rp) (Rp)
Request for
1 trademark Per request 1,800,000 1 1,800,000
registration
Brand license Per
2 100,000 1 100,000
publishing costs certificate
License
3 agreement Per request 500,000 1 500,000
registration
Request for official excerpt and written statement about the
brand
a. Official
4
excerpt request
Per request 200,000 1 150,000
for brand
registration
 b. Request for
written statement
about the
Per request 200,000 1 200,000
similarity of a
brand with the
registered brand
c. Request for
written statement
about the
Per request 200,000 1 200,000
similarity of a
brand with the
registered brand
Cost for proof of
priority
5 Per request 300,000 1 250,000
trademark
application copy
Registration of
6 intellectual Individual 5,000,000 1 5,000,000
property rights
TOTAL BRAND FEE COST 8,200,000

2.1.1.2 Indirect Cost

Indirect Cost as the supporting cost to technical operation includes engineering and
supervision, construction expense, contractor’s fee, and contingency. Engineering and supervision
are estimated as a cost to design the whole product design. Construction expense is already
included in building cost. Contractor’s fee and contingency will be calculated by a factor of 0.18
to total fixed cost which is stated in the formula in the earlier section.

Table 2.11 Indirect Cost Estimation

Description Price (IDR)

Contractor's Fee 1,295,925,176
Contingency 6,479,625,879
Total indirect Cost 7,775,551,055

2.1.2 Working Capital Investment

Working capital investment refers to the cost needed to start the manufacture process. It
includes all operating cost expended until the project gets the first revenue. After the revenue is
obtained, the calculation of capital investment is over and operating cost starts to be calculated.
 The assumption used for calculation is that the plant will operate in a full month before the
first revenue is obtained. In this one-month operation, all the operating cost is calculated. The
calculation of working capital investment is tabulated as the following.

Table 2.12 Working Capital Investment Estimation

Expense Type Cost (IDR)

Direct Production Cost
Raw Material
Labor Salary
Utility
Maintenance
Fixed Cost
Local Tax
Insurance
General Expense
Executive Salary
Distribution
Marketing and Communication
TOTAL WORKING CAPITAL

2.1.3 Summary of Capital Investment

After the calculation of all expenses have been conducted, the total capital investment can
be estimated by the following formula provided by Modular Guthrie method. The summary of
capital investment is tabulated as the following.

Table 2.13 Summary of Capital Investment

Type of Expense Cost (IDR)

Direct Cost
Equipment 9,639,795,859
 Land 31,482,000,000
Building 2,006,940,000
Market Research 30,000,000
Utility Installation 38,770,000
Patent 4,000,000
Brand 8,200,000
Total Direct Cost 33,569,910,000
Indirect Cost (Excluding Contingency and Contractor’s
Fee)
Fixed Cost
Working Capital
TOTAL CAPITAL INVESTMENT

Referensi:

Rumah123. (2019). Rumah123. Retrieved from

https://www.rumah123.com/jual/bogor/citeureup/pabrik/

Rumah123. (2019). Rumah123. Retrieved from

https://www.rumah123.com/jual/bogor/citeureup/rumah/