Nghien cuu chung ve thuy san Vietnam

7/29/2019 Nghien cuu chung ve thuy san Vietnam

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2013

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