Standard Costing for FIEs in China

1. Standard Costing for FIEs in China Benefits & Challenges Nov, 2010 Jeanette Yu Senior consultant Juan_yu@abic-is.com www.abic-is.com

2. 1. 2. 3. 4. About ABiC and the speaker What and why? - Benefits How? - Challenges & Tips Case study Contents ABiC information systems (Shanghai) Co.,Ltd

3. ABiC Information Systems Shanghai Co.Ltd. • Established in 2009 • Currently 15 consultants, 30 for 2011 HR plan • The only authorized platinum partner of Kingdee software specializing in foreign enterprise market • Founded and managed by German partners with long and profound experiences in ERP systems • Service covers: • management consulting • product features evaluation • implementation project management and consultation • customization and maintenance ABiC information systems (Shanghai) Co.,Ltd

4. Jeanette Yu • Profession area: • ERP consulting, esp. standard cost consultation and implementation • project management • Work experience: • 7 years experience of Kingdee ERP consultation and implementation • Over 15 projects with standard cost consultation and implementation • One of the pioneers to design, develop and implement standard cost functions at Kingdee ABiC information systems (Shanghai) Co.,Ltd

5. What is standard cost? • Not plan cost • Not a figure for reference only • A management tool for controlling, esp. for manufacturing companies • All stock movements booked at standard cost • Cost variances booked to P&L ABiC information systems (Shanghai) Co.,Ltd

6. Who need std. cost? ABiC information systems (Shanghai) Co.,Ltd

7. Why do we need standard cost? ABiC information systems (Shanghai) Co.,Ltd

8. Under a cross-cultural context Std. cost vs. Actual cost Actual costing Inventory value fluctuates on B/S Deviation not separated and analyzed Stock value not available in real time No benchmark for horizontal comparison Prolonged month-end closing No ground for pricing Std. costing Inventory value stable on B/S Deviation separated, analyzed and controlled Stock value available in real time Transparency and comparability for global controlling Fast month-end closing Support cost forecast and pricing decision ABiC information systems (Shanghai) Co.,Ltd

9. A sample of cost simulation and comparison ABiC information systems (Shanghai) Co.,Ltd

10. To implement std. cost in China • Where std. cost is a strange concept to most local people: financial controllers, accountants, even managers • Where actual costing is officially recommended and commonly practiced ABiC information systems (Shanghai) Co.,Ltd

11. Challenges in China Do people understand std. cost? How is std. cost practiced? Is std. cost allowed? Environment People Techniques ABiC information systems (Shanghai) Co.,Ltd

12. Is std. cost allowed in China? • Std. cost is not an officially accepted costing method in China. • It is stipulated by the tax audit that tax report must be based on actual costing. ABiC information systems (Shanghai) Co.,Ltd

13. Tips: • Talk to your local tax and finance auditor and try out the boundary. • Find a good std. cost system which can help you convert std. cost-based stock value to actual cost-based for tax reporting. ABiC information systems (Shanghai) Co.,Ltd

14. A sample of cost reversion ABiC information systems (Shanghai) Co.,Ltd

15. Do people understand std. cost? • For a long time in China, finance dept. is seen as only a statistics function rather than a controlling function. • Managers don’t know how to design a good std. cost structure • Managers don’t know how to read and use std. cost report • Costing is viewed as only the job of accountants rather than related to all operational depts. • Operation users don’t know how their own work is relevant to costing ABiC information systems (Shanghai) Co.,Ltd

16. Tips: • Give local people sufficient education on std. cost • Basic concept of std. cost • Std. cost is a management tool for controlling instead of purely accounting • Std. cost is a benchmark to evaluate different operations’ performance • What kind of cost structure serves controlling purpose best? • How to read and use std. cost reports? • Make people believe that std. cost is relevant to their work and helps improve their work. • Find an experienced external consultant to help you accomplish the education ABiC information systems (Shanghai) Co.,Ltd

17. How is std. cost practiced? • Std. cost process is different from actual cost process, which the local users have taken for granted since accounting school. • Special accounts for std. cost transactions • Hourly rate calculation • Different financial transactions, eg. • PO-Goods receiving-Invoice • Absorbed cost • Cost variances • Customs duty, transportation, etc. • … ABiC information systems (Shanghai) Co.,Ltd

18. Tips: • Have an internal std. cost expert/controller to support local implementation • Get a professional consultant from system supplier who: • Understands both std. cost and actual cost, and therefore understands local users’ difficulties • Gives valuable advice from business perspective • Provides feasible and logical system solution • Is patient to give intensive training before go-live • Is experienced to support 1st month-end closing after go-live • Encourage end users to write manual by themselves ABiC information systems (Shanghai) Co.,Ltd

19. Case study 1 GSI Group Precision Technologies Suzhou Co. Ltd. • Factory founded in 2005, as the Chinese subsidiary of Westwind UK, the branch of GSI Group. • 5000 m2, more than 100 staff • World leading manufacturer of air bearing spindle systems, laser products, etc. • Started Kingdee implementation in Feb., 2007 • System go-live from Jan., 2008 • Application scope: FI, SCM, MRP, MO, SFC, CRP, Std. Cost • One of prototypes of Kingdee std. cost solution ABiC information systems (Shanghai) Co.,Ltd

20. Milestones about std. cost May., 2007 Jun-Sept, 2007 Oct., 2007 - Re-evaluation of Kingdee functions. Standard cost: go or not go with Kingdee Requirement study, proposal of solution, and development of std. cost. Std. cost onsite testing, UAT and go live. ABiC information systems (Shanghai) Co.,Ltd

21. Success factors • Strong support from UK mother company • Enough education and training to local users • Good sense and knowledge of GM to make use of std. cost • “A good manager does not rely on std. cost report to know what is happening on the shop floor. He should be aware of everything around him. But std. cost can help quantify problems.” • Strong support from supplier team • Willing to listen, learn and communicate • Quickly understand requirements • Flexible and capable customization ability • Good project management & commitment ABiC information systems (Shanghai) Co.,Ltd

22. Case study 2 WashTec Car Cleaning Equipment Shanghai Co. Ltd. • HQ at Augsburg Germany, WashTec group is a worldwide leading producer of vehicle washing equipment. • As a WOFE of WashTec Germany, WashTec Shanghai has started since 2008, Nov. • More than 30 employees now in China. • Undergoing a fast business development and expansion. • Started Kingdee implementation in Jul., 2010 • Plan to go live from Jan., 2011 • Application scope: FI, SCM, MO, MPS, e-Kanban, feature configuration, Std. Cost • More complicated Kingdee std. cost solution ABiC information systems (Shanghai) Co.,Ltd

23. Customer requirement about std. cost • 1 machine, i.e. 1 material code, has different std. cost according to different configuration • Different configuration of BOM and routing needs to be automatically generated and calculated based on product feature configuration, i.e. customer selection of height, color, card reader, etc. on sales order ABiC information systems (Shanghai) Co.,Ltd

24. ABiC customization solution • MTO tracking for configurable machines • Develop std. cost identification by material code + MTO No. • Feature configuration function on sales order • Automatic cost calculation from sales order • Cost variance reports by material code + MTO No. ABiC information systems (Shanghai) Co.,Ltd

25. Q&A ABiC information systems (Shanghai) Co.,Ltd

26. Thank you Jeanette Yu Senior consultant | juan_yu@abic-is.com | www.abic-is.com ABiC information systems (Shanghai) Co.,Ltd