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GROUP 4 - ACCOUNTING FOR DECISION MAKING 3

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SEMESTER 2013/2014
CASE 6 : SAP FOR ATLAM
BACKGROUND OF THE COMPANY
Company Name : Akademi Teknikal Laut Malaysia (ATLAM)
Principal Activities : Education & Training
Commenced Operation : 15
th
August 1981
Number of Employees :Approximately 200 employees
Office : Melaka & Terengganu
Main Problem : Asked to upgrade its accounting system with the PETRA group-
wide SAP system which takes up a very high initial investment compared to ACCPA
Introduction on SAP
SAP is an Enterprise Resources Planning (ERP) and stands for Systems,
Applications and Products in data processing. It is a system that handles almost all
departments in an organization. SAP has several modules as illustrated below.

ISSUES/CHALLENGES AND SOLUTION
1. Upgrading accounting system with the PETRA group-wide SAP system or
ACCPA
GROUP 4 - ACCOUNTING FOR DECISION MAKING 3
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Upgrading to the SAP system requires a lot of money and based on the current
cash flow, ATLAM has negative cash flow. Hence, the reluctance of a few
meeting members to show green light on the implementation of SAP. However,
since the initial investment will be partially funded by the PETRA group, lack of
fund should not cause worry among the committee members.

SOLUTION : A detailed cost benefit analysis should be done to determine
whether ACCPA or the SAP system should be used as ATLAMs accounting
system.

COST BENEFIT ANALYSIS
A. Initial Investment
As required by Mr. Zulkifli, a cost benefit analysis is done to determine whether the
implementation of the new system, SAP will benefit ATLAM. First we will look into
the initial investment.
2001 Capital Expenditure for ATLAM
Initial Investment Amount
Cost of hardware 2,000,000
SAP licence 1,000,000
Cost of training 1,271,550
Customisation work 72,840
TOTAL FOR EACH YEAR 4,344,390
Internal Funds 1,188,841
Funded by Petra Group 3,155,549

The initial investment that is required to implement the SAP system is RM4,344,390
which is higher compared to the ACCPAC system (RM50,000). However,
implementing the SAP may reduce cost in technical expertise and process and
procedures. Other than that, it will also save the accountants time and improves
efficiency which implicates costing as well.
B. After-tax Cash Flow
GROUP 4 - ACCOUNTING FOR DECISION MAKING 3
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Using the estimated cost that is provided by the PETRAs group-wide SAP system,
we have constructed a table to predict the after-cash flows. First, the total savings
and cost for the first year to the 6
th
year is calculated. After that, depreciation cost at
34% out of the initial investment (RM 4,344,390) using the straight-line method is
determined. This is done to reduce the tax rate which stands at 25%. After deducting
the tax from earnings, reversal of depreciation is done for income statement.

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Year 1 2 3 4 5 6
Accountant's time and efficiency 400,000 800,000 1,200,000 1,600,000 2,000,000
Technical expertise cost savings 600,000 1,200,000 1,400,000 1,600,000 1,800,000 2,000,000
Process and procedures cost savings 500,000 900,000 1,200,000 1,500,000 1,800,000
Working capital savings 900,000 1,200,000 1,500,000 1,500,000 1,500,000 1,500,000
Total Savings 1,500,000 3,300,000 4,600,000 5,500,000 6,400,000 7,300,000
Average SAP licence cost 150,000 200,000 225,000 250,000 250,000
Cost to convert old data to new data 100,000 160,000 180,000 560,000 600,000 640,000
Cost of overheads 300,000 420,000 490,000 560,000 600,000 640,000
Cost of system maintenance and
firewalls
60,000 120,000 130,000 140,000 150,000 160,000
Cost of hardware expansion 260,000 300,000 340,000 380,000 400,000
Cost of training 500,000 800,000 900,000 1,000,000 1,100,000 1,300,000
Total Costs 960,000 1,910,000 2,200,000 2,825,000 3,080,000 3,390,000



GROUP 4 - ACCOUNTING FOR DECISION MAKING 3
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Year 1 2 3 4 5 6
Total Savings 1,500,000 3,300,000 4,600,000 5,500,000 6,400,000 7,300,000
Total Costs 960,000 1,910,000 2,200,000 2,825,000 3,080,000 3,390,000
Earnings before tax and depreciation 540,000.00
1,390,000.0
0
2,400,000.0
0
2,675,000.0
0
3,320,000.0
0
3,910,000.0
0
Depreciation cost at 34%
1,477,092.6
0
974,881.11 643,421.53 424,658.21 280,274.42 184,981.12
Net book value after depreciation
2,867,297.4
0
1,892,416.2
9
1,248,994.7
6
824,336.55 544,062.13 359,081.01
Earnings before tax (937,092.60) 415,118.89
1,756,578.4
7
2,250,341.7
9
3,039,725.5
8
3,725,018.8
8
Suggested Tax Rate 25% (234,273.15) 103,779.72 439,144.61 562,585.45 759,931.40 931,254.72
Earnings after tax (674,706.67) 298,885.60
1,264,736.5
0
1,620,246.0
9
2,188,602.4
2
2,682,013.5
9
Depreciation Reversal
1,477,092.6
0
974,881.11 643,421.53 424,658.21 280,274.42 184,981.12
After-tax cash flows 802,385.93
1,273,766.7
1
1,908,158.0
3
2,044,904.3
0
2,468,876.8
4
2,866,994.7
1

Based on the after-tax cash flow, ATLAM should implement the SAP system because it does give a positive cash flow for the
company. Furthermore, in the long run, more cash flow is expected as well.


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C. Payback Period

Payback period is a method that estimates the amount of time required for the cash
flows generated by the investment to repay the cost of the investment. This analysis
provides insight into the liquidity of the investment. An investment with shorter
payback period is preferred.


The initial outlay is RM 4,344,390.00. Up to year 3, the accumulated cash flow is RM
3,984,310.67 (RM 802,385.93 + RM 1,273,766.71 + RM 1,908,158.03). Hence, it is
requires RM 360,079.33 which is show at the calculation above to cover the initial
investment.
To determine the remaining period:
Payback Period = 3 + (Balance left in year 3 / Cash flow in year 4)
= 3 + (360,079.33 / 2,044,904.30)
= 3 + 0.18
Therefore, the payback period for the implementation of SAP is 3.18 years. This
means that ATLAM will be able to recover the cost of initial investment for SAP in 3
years and 3 months. This also shows that ATLAM can move into profit and do not
need to bear the cost of implementing SAP after 3 years and 3 months.



Year Cash Flow Cumulative Cash Flow

RM RM

(4,344,390.00) (4,344,390.00)
1 802,385.93 (3,542,004.07)
2 1,273,766.71 (2,268,237.36)
3 1,908,158.03 (360,079.33)
4 2,044,904.30 1,684,824.97
5 2,468,876.84 4,153,701.81
6 2,866,994.71 7,020,696.52
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D. Net Present Value
Year Cash Flow PVIF Present Value
0 4,344,390.00 - (4,344,390.00)
1 802,385.93 0.9091 729,449.05
2 1,273,766.71 0.8264 1,052,640.81
3 1,908,158.03 0.7513 1,433,599.13
4 2,044,904.30 0.6830 1,396,669.64
5 2,468,876.84 0.6209 1,532,925.63
6 2,866,994.71 0.5645 1,618,418.51
Total Present Value 7,763,702.77
Net Present Value 3,419,312.77

Since the projected net present value is positive, the implementation of SAP in
ATLAM does bring profit.

2. Lim, the user representative was terminated
The user representative, Lim was kicked out by Zulkifli due to his lack of
cooperation in terms of the implementation of SAP in ATLAM. As a person who is
very knowledgeable in the relevant industry, his service is needed to give a better
picture on the ongoing scenario.

3. Reluctance of the employees to the change
Some employees are less sophisticated users and the change of system may
overwhelm them. The change doesnt only involve the technology but also the
work process, culture and habits.

Solution: A comprehensive training should be provided to all the employees in
order to grasp and master the SAP system. A thorough training schedule should
be constructed for a better planning on the implementation as well.

4. Additional expense on cost of hardware to run the SAP programme
There are not enough PCs in ATLAM to run the SAP programme.
GROUP 4 - ACCOUNTING FOR DECISION MAKING 3
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Solution : As part of the SAP implementation, the expense on buying PCs
should be included as capitalizing. Alternatively, the PCs could be bought on
capital lease since it isnt really any different from buying the asset outright and
signing a note payable that will be paid off with interest, over the life of the PCs.
This liability will reflect in ATLAMs balance sheet. As for the income statement,
the cost of the leased asset will be reflected as depreciation expense and the
financing cost will be shown as interest expense. For example, if the hardware
expansion is estimated to be about RM200,000

Balance Sheet Income Statement
Assets = Liabilities + Owners
Equity
Net income
=
Revenues - Expenses
Computer
Equipment
+ 200,000
Note
Payable
+200,000


The purchase could be recorded as following:
Dr. Computer Equipment 200,000
Cr. Note Payable 200,000

CONCLUSION
As a conclusion, ATLAM should implement the SAP system as soon as
possible because it may reduce cost in technical expertise and process and
procedures. Besides that, based on the after-tax cash flow, ATLAM should
implement the SAP system because it does give a positive cash flow for the
company and in the long run, more cash flow is expected. Last but not least, since
the projected net present value is positive, the implementation of SAP in ATLAM
does bring profit. Lastly, Lim is expertise person in organization and as a good asset
to ATLAM, we are not suggesting Zulkifli to kick Lim out from the project team.

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