nghien cuu chung ve thuy san vietnam
TRANSCRIPT
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ACTIVITY BASED COSTING:XU JI ELECTRIC CO. LTD
MANAGERIAL ACCOUNTING
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Contents
I. Introduction: ................................................................................................................. 2
II. Xu Ji Electric Co. Ltd prior to ABC implementation: ..................................................... 2
III. Xu Jis ABC system at initial stage.............................................................................. 3
IV. Xu Ji Relay developed the ABC system and the outcomes ....................................... 5
a. The ABC development of Xu Ji Relay: ........................................................................ 5
b. The result of new ABC system: .................................................................................. 7
V. Reference: ..................................................................................................................... 8
Member Student ID
L Th Thu Huyn 1001010457
Chu Ngc Mai 1001010600
Bnh Ngc H 1001030109
Nguyn Huyn Trang 1001020154
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I. Introduction:This report will investigate the implementation of activity-based costing (ABC) at Xu Ji Electric
Co. Ltd (Xu Ji), a large Chinese manufacturing company. Xu Ji is a state-owned enterprise (SOE),
turned public limited company (PLC).
The company started to try ABC implementation in one of its main production divisions in
December 2001, when ABC concepts were at a theoretical level in China
Two more attempts to extend the use of ABC took place in 2005 and 2008.
Chinese management styles rely more on managing people and relationships Chinese
management ethos than on technological systems and management tools. The level of office
and accounting computerization and IT-enabled business solutions is not as advanced as those
in the west. Xu Ji started from a very basic level, building financial accounting systems and
office computerization before implementing the ABC system which captured direct costs andvariable manufacturing overheads before processing.
The main achievements of Xu Jis ten year ABC endeavor are that ABC radically changed the
SOE, turned PLCs traditional costing systems and induced standardization in their working
practices and processes. ABC also acts as a catalyst to Xu Jis IT developments first accounting
and office computerization and later the ERP implementation.
One distinctive feature of Xu Jis ABC experience is the top down instigation and enthusiasm of
trying out innovative ideas and inducing corporate-wide learning. While such a top-down
approach is not so popular in the west, it is fairly common amongst SOEs, particularly in thenorthern part of China. This approach worked well in Xu Ji, allowing them to move quickly from
imitating western ideas to developing their own independently developed Relays ABC system
and make informed decisions using sales activity analysis.
Due to the limit of information source because this must be internal information, our report
could not be so detailed and complete. Therefore, in this report, we will focus on Xu Ji before
and after the implementation of ABC.
II. Xu Ji Electric Co. Ltd prior to ABC implementation:Prior to the ABC introduction in 2001, Xu Ji operated a traditional Chinese state-enterprise
accounting system. A large amount of manual book keeping work was involved. Accounting was
driven predominantly by external financial reporting purposes and inaccuracy of product costs
became inevitable.
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At this time, Xu Ji underwent a series of flotation, following Chinas introduction of free market
competition. Xu Ji, as a former SOE used to produce products based on a state production
quota and was forced to face up the market competition. The inaccuracy of the traditional
costing information seriously impeded Xu Jis ability to compete on pricing.
The traditional costing system was much based on process costing system and had the
following problems:
This costing system cannot trace cost to product and client contracts. It cannot also allocate manufacturing overheads on the basis of up-to date direct labour
hours to contracts.
III. Xu Jis ABC system at initial stageThe inaccuracy of the traditional costing information seriously impeded Xu Jis ability to
compete on pricing. Xu Ji urgently needed a better costing system so commissioned ABC
implementation. The two main tasks for the ABC system were:
To trace direct labor costs directly to product and client contracts To allocate manufacturing overheads on the basis of up-to-date direct labor hours to
contracts.
The ABC system was successfully implemented in 2003 after some teething problems were
solved. Some problems included compatibility of information systems and misinterpretation of
ABC concepts by IT programmers.
Direct material
Direct labour
Overheads
Productiondepartment
1, 2,3
Productcontract1, 2,3
Directly charged to
Allocated based on standard
direct labour rate
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Figure:TheprocessofXuJisABCsystem2002
There have been continuous and rapid organizational structural and management changes
since 2003. For example, changes to the management structure led to a merger of panel
installation, panel wiring and wire labelling activity cost pool, to become one independent
profit center. A fixed value was decided between top and line managers to assign to each panel,
however managers claimed they referred to the original ABC cost to set the value. Nevertheless
some quantitative cost drivers e.g. number of leads faced threats of being non-recorded or
inaccurately recorded. Managers gradually moved to use profit and/or revenue measures to
monitor performances. These changes have limited the impact of ABC system and accuracy of
ABC information.
In 2004, the organization was restructured into independent companies i.e. electricity grid,
industrial electric and energy. Internal management structures were subsequently changed,
which resulted in abandonment of some activity cost drivers. For example, new management of
Resources: raw material, salaries, depreciation, other
expenditures and other data
Warehouse Payroll Fixed assets General
ledgersExternal
data
Activity cost pools
Activity cost pools
Contract costs
Not directly traceable to
product linesTraceable to product lines
Use activity cost drivers to allocate
Use relevant activity drivers to
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product line testing and engineering design activity cost centers switched to other forms of
monitoring front-line performance instead of using respective testing labor hours and design
hours. Therefore, testing labor hour and design hour information was not updated and
perceived to be extra work by front-line data input staff.
Department Activity cost pools Cost drivers
Production Panel installation Number of panels
Panel wiring Number of leads
Set of terminals Number of panels
General Basic research and
development
Forecasted product line revenue
Marketing Finished contract revenue
General administration Number of employees at each product line
Table: Sample of activity cost pools and cost drivers 2002
IV. Xu Ji Relay developed the ABC system and the outcomesXu Ji Relay is one of Xu Jis subsidiaries after the restructure. We only use Xu Ji Relay as an
example for ABC implementation of Xu Ji after this restructure.
a. The ABC development of Xu Ji Relay:Relay operates in a highly competitive and saturated market, so its main aim has been to
survive and avoid closure. An urgent need was to get their product costs right, as commentedby one of its managers that: Our selling prices were all over the place as we did not know
exactly how much it cost us to make one relay, would one type of relay cost more or less, to top
it all, we were making losses, large unsold stocks
Xu Jis top management decided to invest in office computerization at Relay. The first step was
to develop a computerized material cost recording system in order to capture the actual
material quantity information and stock movements between warehouse and assembly lines. In
addition, standardized procedures for recording and inventory control were put in place and
enforced by building into employees personal key performance indicators (KPIs). It took Relay
nearly four years between 2005 and 2008 to fully embed these changes.
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Relays activity cost centres and cost drivers
Departments Activity cost pools Cost drivers
Facility sustaining costs
General Executive office Number of assemble line employees
Finance Number of assemble line employees
Technical support Chief engineer office Proportion of product revenue of assemble lines
Technical support office Proportion of product revenue of assemble line
Production Production Proportion of product revenue of assemble line
Facility sustaining costs
Product costs
Assemble lines
Raw materialsUse appropriate cost drivers to allocate
Directly traced to
ABC process at Relay
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b. The result of new ABC system: With ABC systems, Xu Ji Relay can work more effectively and produce a higher profit.
Despite of the traditional costing system which was not even able to directly match
direct labour costs to products, the ABC implementations in Xu Ji Relay have made
significant improvement and allowed the company to have some accurate product cost
information. The sales activity analysis was a good attempt, in that the ABC information
enabled Xu Ji top management to understand sales activities better and provide them
with an effective tool to have more informed control over sales expenses and sales
companies.
In January 2000, the need for uniformed technology and accounting system increased
and Xu Ji has implemented its computerised accounting system advancement the ERPsystem - in order to match with the needs. This is one of the things which makes Xu Ji
Relay accounting system took the advantages of ABC systems in managing and operated
more effectively compared to the Xu Ji Corporation. However it is too early to say
whether or not the latest ERP advancement will be the catalyst for further ABC
enhancement.
Warehouse Proportion of product revenue of assemble line
Marketing Marketing Proportion of product revenue of assemble line
After-sales Proportion of product revenue of assemble line
Assemble line costs
Assemble lines Direct relay Direct labour hours
Intermediate relay Direct labour hours
Transformer Direct labour hours
Timer relay Direct labour hours
Wring assemble Direct labour hours
WGB assemble Direct labour hours
Transform relay Direct labour hours
Intermediate transform replay Direct labour hours
Signal relay Direct labour hours
Packaging Direct labour hours
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On the other hand, Relays ABC implementation is also different from the ABCimplementation in Xu Ji Corporation. The Relay production process and techniques
involved are rather stable while Xu Ji Corporation faced with many unstable occurences
such as the merge and acquistion, the changes in the organisational structures. As an
independent subsidiary, Relay has relative autonomy over its value-chain i.e.
purchase, production and sales. Relays ABC system is able to account for the entire
process. The most benefit Relay has gained from the ABC implementation is that ABC
induces standardised procedures and inventory control.
In term of internal benefits, ABC implementation also was a unique chances for staff of
Xu Ji Relay get study and do research. It has changed accountants perception of
accounting. An experienced accountant commented, This [ABC] allows me to use
accounting information for internal purposes. Moreover, it offers fresh graduate
students the opportunity to pratice in real things in Xu Ji Relay. A junior accountant
noted, I learnt ABC theory at my western accounting module at the university. I never
thought that we would be implementing this system.
Operations managers from engineering backgrounds accepted the new system quicker
than the accountants. They fully embraced the initial ABC implementation and adapted
ABC concepts to improve their operations. The concept of non-value added activities
and process mapping were conveyed and led operations managers to look into ways to
identify waste in their processes. For example, reorganisation of assembly line layout to
reduce the moving time and consciously incorporation of standardised components at
product designs.
Finally, top management became more confident of the accuracy of their core direct
costs and accepted ABC methodology as an analytical tool for new/re-organised
business functions. ABC system definitely changed and improved the operation of Xu Ji
Relay.
In 2010 Relay achieved a record annual sales increase of 50% higher than 2009 and a net
profit margin increase of 13%. Staff members at Relay gained positive experience from
the ABC implementation. The Relay accountant commented: I am now very confident
at our product costs. In turn our marketing people can compete faster and better in our
market places.
V. Reference:Dr Lana Yan Jun Liu, Professor Fei Pan, 2011, Activity based costing in China: a case study of Xu
Ji Electric Co. Ltd, Research executive summary series. Available at:
http://www.cimaglobal.com/Documents/Thought_leadership_docs/6Activity-based-costing-
China.pdf