Study on ERP-Based Cost Control in SME

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1 Study on ERP-Based Cost Control in SME ZHANG Qingwei 1, LI Ziyao 2 1. HENAN Electric Power Training Center, P.R.CHINA, Economic and Management School, Zhongyuan University of Technology, P.R.CHINA, lilizqw@163.com Abstract: Aiming at problems of cost control in small-medium sized enterprise(sme), this paper first starts from ERP modules used by small-medium sized manufacturing enterprise and data source used for cost calculating, analyzing problems of traditional standard cost system. Then based on advanced information platform, the paper proposes that enterprise should focus on cost control measure. Finally paper emphasizes significance of activity-based cost pattern and does research about it. Keywords: ERP, SME, cost control, activity-based cost 1 Introduction With the profoundly widespread of global information and aggravation of business competition, companies try to provide customers with goods and services faster and cheaper than their competition. To a higher degree, they focus more on cost control. There are desperate needs to efficiently increase productivity, save operational expenses, reduce delivery times, and cut down costs to deal with shorter product life cycles. In the process of cost control, what s enterprise hope include to get actual cost in time in order to compare what s going on with the cost, to supervise the condition of actual cost and take measures timely. So a kind of tool or methodology is needed so that with the development of manufacturing process, actual cost can be automatically traced and accumulated. Obviously, implementing an enterprise resource planning (ERP) system can meet such requirement. ERP (Enterprise Resource Planning) is information-based, and attempts to integrate all activities (production, sales, purchase, logistic) and functions across a company into a single system. Thereby, it can manage efficiently inner resources such as human resource, production facility and finance etc. Meanwhile, ERP becomes a platform to optimize enterprise inner resource and increase market response ability. How to identify ERP s benefits from the perspective of finance is a problem faced by small-medium enterprise (SME). Measuring effect of ERP on such scale of enterprise is a key factor for SME to introduce this system and sustain to use it. Scholars studied on such fields from different perspective. Poston and Grabski (2001) [1] noted that a significant improvement in firm performance resulting from a decrease in the ratio of cost of goods sold to revenues was found three years after the ERP system implementation. Ping Kang [2] analyzed the necessity of DDS based on ERP cost control, and designed CCDSS to increase the feasibility of cost control. Congdong Li etc. [3] proposed conception of broad work center, constructing a novel integrated list-based and feed-forward cost control-based ERP, and doing research on its framework and method. Referring to actual productive process, Li Bai [4] integrated inventory management and inventory accounting to calculate compare analyze product cost. This way, she achieved the aim of pre-incident plan, concurrent control, ex post analysis. Congdong Li etc. [5] came up with a new method: process-oriented cost control in terms of improper existing cost control system. 2 Main Problems of Cost Control in SME SMEs is referred to those with and under medium-sized scale. SMEs have such characters as small-scale production, flexible operation, high rate of assets and liabilities, less competitive etc. With such characters, SMEs have different features and problems from large enterprises. 275

2 2.1 Lagging cost control measure Many enterprises use computer to deal with accounting problem, limited in entry accounting documents, account books of registration and the preparation of financial statements. Computer processing focus on accounting, afterwards, reimbursement, access to data and provision for depreciation, inventory valuation and costing etc., without such inter-communication function as accounting control, accounting analysis, accounting forecast, and decision. Such accounting computerization can not satisfy the information-dealing need, let alone modern measure of cost control. 2.2 Lagging cost control pattern and method Cost control pattern of many enterprises are always follow original ones, namely laying down aiming cost, then turn it into standard cost. Carrying out standard cost, controlling, analyzing and evaluating cost probably in the production process, taking improving measures, finally reward related responsible party. Such pattern stresses production phase, caring about concurrent and afterward control. Obviously, this kind of cost control neglects cost control in other phases, without reflecting cost information comprehensively. It may mislead decision of top management, hindering long-term competitive edge of enterprise [6]. 3 ERP s Roles Played in Cost Control 3.1 ERP modules Most companies have four main functional areas of operation: Marketing and Sales, Production and Material Management, Accounting and Finance, and Human Resources. Each area comprises a variety of smaller business functions which are activities specific to that functional area of operation. Because the major goal of an ERP system is to integrate a company s operations by a common database shared by all functional areas, most ERP vendors provide an ERP package that consists of numerous modules closely related to such functional areas. With limited funds, SME does not have to install all the modules and can implement some of the modules selectively according to its requirements. [7] The major contribution of an ERP system is to improve the quality of information in various aspects such as accuracy, availability, accessibility, and timeliness. Meanwhile, improved information drives efficiently business process and decision. 3.2 Data source used in calculation of ERP cost Material master Material master plays a role of identify and represent attribute and information of each material in the production process. It includes such data item as material code, information about design material control and plan. ERP system mainly gets standard price and default production lot from material master Bill of material(bom) As a basis of ERP, bill of material decides which materials are calculated into cost and which order to calculate. Bill of material may consist of semi-finished products, ones with bill of material Routing Routing is a kind of planning document stating processing sequence of each own product and standard norm of working hour, on behalf of mode of motion of an activity. Aided by ERP system, we can achieve standard activity consumption with the tool of formula and standard value in routing. At last, ERP can get standard manufacturing cost by activity price Work center Work center is production resource, covering machine, staff and facility. In ERP system, work center is a abstract organization, defined flexibly as various kind of actual work center, for example: a machine or a group of machines, a production line, or one workshop. In terms of cost calculation, work center is basis of counting labor cost and manufacturing cost. 276

3 4 Defect of Standard Cost Pattern 4.1 Narrow cost management In the process of implementing standard cost method, enterprise neglects management on process and development cost before production. There is highly integrated cost information, with poor transparency. Although standard cost involves all manufacturing cost, this method does not make a distinction between value-added activity and no value-added activity, so not clearing away invalid activity. Also, even if managers realize problems, they hardly find out which process or activity has such problem. 4.2 No global optimization of resource With standard cost method assessing each department s performance, each department is easily to seek its own benefit without regard to other department s benefit, and then harm the interest of overall enterprise. For example, in order to run after better performance, purchasing department may purchase inferior material, harming interest of production department. Production department work overtime, decrease maintenance costs, resulting in frequent occurrence trouble to influence production of enterprise. So such practice make it impossible to realize overall optimization. [8] 5 Activity-based Framework for ERP System ABC 5.1 Activity based costing activity-based costing is called ABC for short. In a broad sense, activity includes various link in the process from R$D to sale. In a narrow sense, activity is referred to a specific work, activity or routine etc. ABC is method of accounting overhead expense based on activity, and it is a core content of activity management. 5.2 Comparative analysis between ABC and traditional cost accounting Main distinction lies in how to deal with indirect cost. With traditional cost accounting, cost of current period are collected, and distributed according to such criterion as work hour, operation hour etc. however, resource consumed by final production is not equal to such allocating data, thereby such result is not correct. For example, on the one hand, mature production is manufactured largely; on the other hand, a kind of novel production is taking pilot production. Due to technology immaturity, pilot production employs a lot of resource, while mature production hardly needs such activity. However, according to traditional cost accounting, pilot production only occupies less part, in such way, cost assess to mature production and pilot production is untruthful. With ABC, production or service are achieved through a sequence of activity, any activity with consuming resource and generating cost. After resource cost is transferred to each activity, this accounting method is gathered to object, and allocates indirect cost to production or production line in terms of various cost drivers. Basic steps are as follows: indirect cost basic cost pool cost driver ratio production or production line. 5.3 Application of activity-based cost pattern in ERP The goal of ABC is to distinguish value-added activity and no value-added activity. Its intention is to analyze rationality of resource and necessity of activity, thereby reducing or eliminating invalid activity to get cost reduction. Its essence is to build relation of activity cost pool and production cost through such related cost as purchasing, test, transport, quality check, design modification. Activity is intermediary agent of expense-generation and cost-generation. As a multi-layer conception related to activity, cost emphasizes feasibility of expense, in spite of whether it is related to output. 277

4 Enterprise expects to eliminate invalid expense by considering no value-added activity. This method makes enterprise grasp detail information, providing theory foundation in order to decrease cost. In the process of cost control, enterprise can propose to reduce no value-added activity, and increase value-added activity to optimize enterprise resource. In the following part, enterprise analyzes process of activity-based cost in ERP system. (Figure 1) After the enterprise implements ERP, the manufacturing expense in production is formulated with activity-based costing. The manufacturing cost drivers are formed through different productions; including material processing, quality check etc. Finally the costs will be distributed into the production. By subdividing the productions, analyzing the cost drivers could directly point out the key of cost controlling. This process needs the following steps. First make sure the processing procedure. Second make the budget of the total cost of each work. Third divide the work. Then confirm the main cost driver for each work. Last assign the work cost to the products. ERP resource ERP finance module ERP marketing and sales module ERP manufacturing module ERP human resource module application Internal business Finance credit Production ordering manufacturing purchasing client management etc Cost in a business Cost goal Manufacturing expense Various activity MP QC Cost driver Edge/incision Check frequency Production cost Production1 Production2 Production n Figure 1 Activity-Based Cost in ERP System 278

5 6 Conclusion SMEs use the activity-based costing when applying the ERP system to control the cost. It is not only in favor of controlling the cost to make each work activity link with the corporate whole producing operation, but also reflects the benefits of management. Aiming at the optimization objectives of enterprises whole process and management, the ERP system concludes the beforehand, concurrent and afterwards of cost controlling. It is an ideal model of cost controlling for small-and-medium-sized enterprises at the present time. References [1]. Poston, R.and Grabski, S. Financial impacts of enterprise resource planning implementations[j]. International Journal of Accounting Information Systems, 2, [2]. Kang, Ping. The Application of Decision Support System in ERP-Based Cost Control[J]. International Symposium on Intelligent Information Technology Application Workshops, 2008 IEEE [3]. Congdong Li, Hongliang Zhang. Novel ERP system based on BOX and feed-forward cost control[j].cims, 2004(5) [4]. Li Bai. Cost accounting and controlling method based on standard cost in ERP system[j].finance and accounting communication,2004(5) [5]. Congdong Li, Ershi Qi, Zixian Liu, Aijun Liu. Research on cost control based on process and cost drive theory [J]. Systems Engineering-Theory & Practice,1999(3) [6]. Zhiqun Wu. Analysis on cost control innovation in SME [J]. Friends of Accounting, 2009(3) [7]. Jipyo Kim. Activity-based framework for cost saving through the implementation of an ERP system[j]. International Journal of Production Research, 2009(4) [8]. Hongyan Jiang. Application of activity-based cost method in China manufacturing industry[eb/ol]

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