CHAPTER 1

INTRODUCTION

1.1 Background of Research

A firm has many challenges in conducting business such as from internal and external.

The ability to innovate (continues improvement), maintain their uniqueness, and improve

product quality are some of internal challenges faced by Companies. The external

challenges, on the other hand, are the competition from other Companies. In order to

survive, Company has to prove that they are the best in the industry and maintain their

competitiveness.

In the business process in manufacturing industry, the uniqueness is because they

manufacture on their own, from raw materials to finished goods that are ready to be sold.

Production process which takes place in the factory becomes the essential part of the

business as a whole. Furthermore, there are three elements that need to be met during the

production process, which are cost, quality, and schedule. Cost allocation has to be done

properly to avoid over cost during the production process. The schedule is needed so that

all work is done as planned before, and quality control is to assure the products quality

meets customer expectation. These three elements are closely connected between one

another and are important in supporting the success of the industry.

To maintain its competitiveness, company has to be able to produce goods with the

lowest cost possible so that selling price will decrease as well. The management also has

to produce a schedule to be followed to make sure the production process is done within

schedule. This is to maintain good image and gain customer satisfaction. Last but not

least, quality control is an important factor because manufacturing Company sells

products. If the quality is poor then they will lose the customers.

The manager is responsible to control the cost in relation to the warehouse. These cost are

the controllable costs (can be controlled by manager) such as labor cost, material cost,

and equipment. In regard to the limitation, management has responsibility to take action

to assure that work is completed on time, meet the schedule, and the most important is

stays within budget. However, unavoidable conflicts may appear due to the

accomplishment of the management’s responsibility because there are certain things that

have to be sacrificed in order to achieve the other. For example, extra workers are needed

even though this would increase the budget in order to meet the date- line.

One way to meet the objectives stated above is to have strong internal control,

Management is responsible to create and maintain the internal environment for effective

and efficient use of resources. It is because failing to achieve it might harm the Company

(loss due to delays of goods, less profit, inability to gain customers’ trusts). In

manufacturing indus try, materials play important role because they are involved

throughout the production process. So, good internal control over raw materials

purchasing, production process, and delivery to customers should be achieved.

In order to develop good internal control system, it requires both cost and benefit

examination. What usually happens is company acquires such expensive internal control

system, but turns out the benefit is not like what is expected. That is why internal control

should only provided when the profit accruing from the control exceeds the cost spent.

Good internal control system will give efficiency and effectiveness for the Company in

conducting its business. On the other hand, it also has risks which has to be considered by

the management, for example if internal control which is being operated, impacts daily

operation processes, fails to safeguard assets, and does not comply with Company’s rules

and regulations.

Before continuing to scope and limitations of research, aims and benefits of research,

research methodology, and thesis structure, below is the brief background of the thesis

subject. PT. ILUVA GRAVURE INDUSTRY is a manufacturing Company focusing on

Flexible Packaging Industry, which office is located in west Jakarta. The Factory is

located in Cikampek. PT. ILUVA GRAVURE INDUSTRY is currently expanding by

continuously adding one production machine every year imported from Taiwan and Italy.

In the production process, they purchase raw materials from suppliers (local and

overseas) and process them to become a Plastic Packaging which support several big

names in food industries such as GARUDAFOOD Group, ORANG TUA Group,

PT.FORISA NUSA PERSADA (Pop Ice and Teh Sisri), PT.SINAR ANCOL and PT.

SAYAP MAS.

Looking at the importance of internal control over the materials and production process

especially in manufacturing industry, this thesis is titled “Evaluation of Internal Control

over Raw Materials Purchasing, Production Process, and Delivery to Customers in PT.

ILUVA GRAVURE INDUSTRY”, which focuses in the effectiveness of internal control

implemented in the Company.

1.2 Scope of Research

The scope and limitations for the research is necessary considering the wide range of

purchasing activities and the variety of raw materials. The scope of the research is limited

as the following:

• Evaluation of the procedures involved in the raw material purchasing, from

requesting for materials to suppliers, issuance of Purchase Order (PO), receiving

the materials, issuing the invoice, and allocation in the warehouse.

• Evaluation of the internal control system regarding the production process from

raw material to finished goods.

• Evaluation of the internal control system regarding the on-time delivery to

customers, as well as assurance that goods are arrived at the recipients’

warehouses in good quality and condition.

1.3 Aims and Benefits

The aims of this research are:

• To evaluate the process of raw material purchasing, production cycle, and goods

delivery to customers. Raw material purchasing and delivery to customers will be

focused on the documentation; meanwhile production cycle will be focused on the

goods being produced.

• To identify strengths and weaknesses in the materials purchasing, production

cycle, and goods delivery.

• To analyze the existence and implementation of internal control in the Company.

Furthermore, the benefits that are expected to be gained through this research are:

• To help management in evaluating the materials purchasing, production process,

and goods delivery.

• To give advices for improvement in the area of materials purchasing, production

process, and goods delivery.

1.4 Research Methodology

In gathering information needed for this research, several research methods are done, that

are:

• Field Research

In collecting data and to gain understanding of the internal control over materials

purchasing, production process, and goods delivery, field research is an effective

way because it gives us better picture as we directly observe to the field through:

1. Observation

Observation is conducted directly at the warehouse and office to gain

better understanding of the real conditions and daily operations.

2. Interview

Interview is done by direct inquiries with the management and employees

in the main office and factory. This aims to gain further understanding

about the topic being discussed.

• Library Research

This research is done by finding, reading, and discussing books with relevant

information that are contributable to the topic being discussed.

1.5 Thesis Structure

The thesis is divided into five chapters, generally described as below:

Chapter 1: Introduction

This chapter describes background of this thesis, scope and limitations, aims and benefits

of the research, research methodology used in the thesis; as well as the thesis structure.

Chapter 2: Theoretical Foundation

This chapter discusses theories that are relevant to the topic. Definition of the internal

control system is discussed, as well as the components and the objectives of the system.

Furthermore, the research continues to the process involved in this term production

process and the accounting documents related.

Chapter 3: Company Profile

This chapter describes the overall view about the industry, background of the Company,

together with its Organizational Structure and Job Description.

Chapter 4: Findings and Discussion

This chapter explains how purchasing and production functions operate, the policy and

procedures related, and the problems that happen. This section discusses the findings

regarding the internal control system over raw material purchasing, production process,

and goods delivery in PT. ILUVA GRAVURE INDUSTRY.

Chapter 5: Conclusion and Recommendation

This chapter concludes the evaluation done in this thesis and contains recommendation

that is proposed to the Company for future improvement.