Cost Estimate and Accounting in ERP
February 12, 2025
China has seen rapid development in the past two or three decades. It has become the export powerhouse of the world. However, Chinese companies were always considered to be the cheap imitators. Chinese companies were earlier contractors for American and European countries who provided cheap labor to assemble their high tech products. However, this has […]
Air India is a government-owned airline. Since airlines are a very competitive business, any airline which is even slightly mismanaged makes losses. Since Air India is heavily mismanaged, it is making a lot of losses. The Indian government has been mulling the divestment of this firm for a very long time. This is, in fact, […]
Emerging platforms are new technology developments and business models for which a theory is yet to be formulated, and yet there are rapid, radical innovations happening in their field. In this article, we will learn about one such platform – Cloud Computing by doing a critical assessment of its current trends, appreciate the challenges in […]
Just like there are many types of discrete data charts available, there are also many types of continuous control charts available. The Six Sigma process methodology prescribes which chart must be used when. The prescription in the case of continuous data points is largely based on sample size. Below is the list of the different […]
The Vikings were some of the most brutal people that the world has ever seen. The nations that they built were carved out of violence. However, their descendants have turned out to be the most caring and civilized people on the planet. Today, the Scandinavian way of life is a role model for the rest […]
When a proposal is put forward for implementing an ERP system, two questions are invariably asked i) How much it is going to cost ii) What is the pay back period. It is always preferable to have a cost benefit analysis before embarking on ERP project. A properly done ROI analysis builds a business case for the project. The organization is in a better position to make a decision, set goals and deadlines. This analysis will also create a base that can be used to measure future performance of the system.
A ROI for ERP project represents metric of completed due diligence and a time phased plan that define when money will be needed and what for it will be used. ROI calculation is made by dividing monetary gain by amount spent. While it is easier to calculate the expenditure for an ERP project, it is difficult to determine the gain, as several gains from the project are intangible and not quantifiable. Typically, ROI involves a pay back period, which is the length of time taken for the cumulative expenditure equals cumulative cost of investment.
Some of the quantifiable and tangible benefits of ERP system are mentioned below: Implementation of ERP, however, does not lead to headcount reduction (redundancies of few lower ended positions of payroll and accounts payable gets counterbalanced by additional higher paid IT staff).
In addition to tangible benefits, following intangible benefits also occur:
There is no standard method of calculation of ROI for an ERP project but a structured method of analysis is achievable. It may be too cumbersome and subjective to factor in intangible benefits. But these factors are important for creating an overall business case and in many instances, where ROI is not calculated, form a base line objective for the project.
First step is to determine cost of various components of the project such as consulting fees, license fees, modification and implementation cost, hardware cost etc. Maintenance fees for a pre determined period (say for three or five years) should be added to arrive at Total Cost of Ownership over the specified period. The estimated expenditure should be time phased over the period, used to calculate TCO.
Next step is the more difficult part which is to estimate expected benefits over a period of time. For estimating these figures, there should be wide consultation and reference to statistics emanating from various survey reports. Benefits will largely occur from the reduction of inventory level, operation cost, labor cost and improved production. Whereas the last three elements will have a direct impact on profit and loss account, the reduction in inventory will cause release of additional cash which can be assigned to a yearly value of saving, based on organization’s standard internal rate of return.
Relationship between time phased cost and benefit will project a time phased ROI, which will be negative at the outset and will turn positive over the pay back period.
ROI is a bit problematic particularly in term of unquantifiable figures. But it offer a measure of success or otherwise of the project. ROI measurements help in many circumstances specially buy in from project stakeholders, which enhance chances of a successful completion of the project.
Your email address will not be published. Required fields are marked *