Case 11 Strategies and Cost-Benefit Analysis for Kicking Off an Abandoned Project Accounting information systems Management accounting Cost-benefit analysis Project management Process, systems and people strategy On 19 October 2008, Mr Yap Yee Peng, CEO of Microcon Engineering Malaysia, proposed to complete an abandoned boiler project that no one had dared to revive. He knew that the project was 60% complete before it was abandoned but after eight years of being neglected all the documents and the initial design were lost. How would Mr Yap kick off the project without any details of the initial design and documentation within five months? Company background Microcon Engineering is the main distributor for Forbes Marshall Boiler, EffiMax and other steam accessories in Malaysia. It also caters for the boiler room management system, EffiMax 4000, which increases fuel efficiency by reducing blowdown and oxygen content in fuel gas paths. The system has been installed in major food and beverage companies like Nestl and Pepsi Cola. With only four in-house workers, this company receives jobs through its relationship with various expert engineers in various fields. The idea Back in 2008, Mr Yap was handling a project to restore a polluted pond in a village. Near the village, there was an abandoned factory. Mr Yap wondered what happened to the factory. Mr Lee, the owner of the Case 11 Strategies and Cost-Benefit Analysis for Kicking Off an Abandoned Project 43 . factory, said that the only problem with the factory was that the boiler room was not finished because the boiler company that took the contract fell into bankruptcy while the project was 60% into completion. Th project was neglected for almost eight years before Mr Lee decided 2/5 look for another boiler company to finish the project. Due to eight years of abandonment, all of the initial design and important documents were lost and the chance of the boiler operating properly according to the initial design was almost zero. None of the local boiler companies dared to continue the project after learning of its condition. After a short visit to the factory's boiler room, Mr Yap knew what exactly had happened to it since it was his field of expertise. He told Mr Lee that he could make the boiler operate as it should. The factory The factory, Recycle Energy Sdn Bhd, was located near Sungai Lalang in Semenyih, Selangor. The nearby pond was polluted because the trash sent to the factory could not be fully used to generate electricity and the unused trash was accidently polluting the pond. Generally, the factory needed to supply 5.5 megawatts of electricity per hour to the national grid. This can be achieved by using trash as fuel to operate the boiler. In order to generate that much energy, the boiler needed to operate as originally designed. Recovering the boiler room In the beginning of the rebuilding process, a lot of effort was needed. The boiler room was in such a mess with fungus and dust all over the room and the boiler itself. The cleaning process took one week to complete. Most of the materials in the boiler room could not be used any longer and had to be replaced. In order to operate the boiler, a standard operating procedure was developed so that the boiler could function as planned. Mr Yap knew that he could not handle this project with his knowledge and expertise alone, so he called all his outsource teams which were experts in instruments, architecture and programming to visit the boiler room and to study the problem together. 44 Integrated Case Studies for Accounting The instrument expert team The replacing process was done by an instrument expert team. The team identified what needed to be replaced and what materials were needed for the boiler. A thorough inspection was done due the massive broken parts. Some rusty parts needed to be removed, and the removing and replacing process was done by Microcon Engineering's in-house workers. The architects The architects recreated the initial drawings for the boiler and the piping system. The drawing process was done carefully stage by stage. The first stage was the sketches of the overall view of the boiler. The details of each part of the boiler came after all the inspection was done. When all the data had been verified, the drawings were done using the AutoCAD software. All the sketches and details were transferred into multiple AutoCAD drawings which represented each detail of the boiler room and the piping system. The programming team The previous equipment installed in the boiler room were fully touchscreen devices, and programmers were needed to create the flow of the boiler process. A massive effort updating the documentation and analysing the boiler room process was executed. The documentation and analysis was completed within four months. The installation process of the boiler parts was completed by the company's in-house workers within 15 weeks. This is where Mr Yap's field of expertise played its part. All the equipment and knowledge in Microcon Engineering was utilized to recover the boiler. Costing assumptions Mr Yap submitted a proposal at the price of RM165,000 based on the last year-end results (see Appendix). The company was currently operating at 75% of practical capacity. 45 Case 11 Strategies and Cost-Benefit Analysis for Kicking Off an Abandoned Project The calculations were as follows: RM Estimated direct material BESTIL METHOD 29,200 Estimated direct labour 56,000 Estimated manufacturing overhead at 50% of direct labour 28,000 Estimated corporate overhead at 10% of direct labour 5,600 Estimated total costs excluding sales commissions 118,800 Add: 25% for profit and taxes 29,700 Suggested price with profit before sales commissions 148,500 Suggested total price 165,000 Application Questions 1 How would Mr Yap collect details of the initial design and the documentation before the project kick-off? Prepare a project schedule and plan for Mr Yap. 2 Mr Yap needed to propose estimated costs for this project to ensure the sustainability of the project. Based on this estimated costs, should Mr Yap proceed with the project? 3 What would be the impact on the company's net income if the proposal was accepted? 46 Integrated Case Studies for Accounting Appendix Year-end operating result RM'000 25,000 2,500 22,500 Sales revenue Less: Sales commissions (10%) Net sales Expenses Direct materials Direct labour Manufacturing overhead-variable Manufacturing overhead-fixed Corporate administration-fixed Total costs Income before taxes Less: Income taxes (40%) Net income 6,000 7,500 2,250 1,500 750 18,000 sults in 4,500 1,800 2,700 Case 11 Strategies and Cost-Benefit Analysis for Kicking Off an Abandoned Project Accounting information systems Management accounting Cost-benefit analysis Project management Process, systems and people strategy On 19 October 2008, Mr Yap Yee Peng, CEO of Microcon Engineering Malaysia, proposed to complete an abandoned boiler project that no one had dared to revive. He knew that the project was 60% complete before it was abandoned but after eight years of being neglected all the documents and the initial design were lost. How would Mr Yap kick off the project without any details of the initial design and documentation within five months? Company background Microcon Engineering is the main distributor for Forbes Marshall Boiler, EffiMax and other steam accessories in Malaysia. It also caters for the boiler room management system, EffiMax 4000, which increases fuel efficiency by reducing blowdown and oxygen content in fuel gas paths. The system has been installed in major food and beverage companies like Nestl and Pepsi Cola. With only four in-house workers, this company receives jobs through its relationship with various expert engineers in various fields. The idea Back in 2008, Mr Yap was handling a project to restore a polluted pond in a village. Near the village, there was an abandoned factory. Mr Yap wondered what happened to the factory. Mr Lee, the owner of the Case 11 Strategies and Cost-Benefit Analysis for Kicking Off an Abandoned Project 43 . factory, said that the only problem with the factory was that the boiler room was not finished because the boiler company that took the contract fell into bankruptcy while the project was 60% into completion. Th project was neglected for almost eight years before Mr Lee decided 2/5 look for another boiler company to finish the project. Due to eight years of abandonment, all of the initial design and important documents were lost and the chance of the boiler operating properly according to the initial design was almost zero. None of the local boiler companies dared to continue the project after learning of its condition. After a short visit to the factory's boiler room, Mr Yap knew what exactly had happened to it since it was his field of expertise. He told Mr Lee that he could make the boiler operate as it should. The factory The factory, Recycle Energy Sdn Bhd, was located near Sungai Lalang in Semenyih, Selangor. The nearby pond was polluted because the trash sent to the factory could not be fully used to generate electricity and the unused trash was accidently polluting the pond. Generally, the factory needed to supply 5.5 megawatts of electricity per hour to the national grid. This can be achieved by using trash as fuel to operate the boiler. In order to generate that much energy, the boiler needed to operate as originally designed. Recovering the boiler room In the beginning of the rebuilding process, a lot of effort was needed. The boiler room was in such a mess with fungus and dust all over the room and the boiler itself. The cleaning process took one week to complete. Most of the materials in the boiler room could not be used any longer and had to be replaced. In order to operate the boiler, a standard operating procedure was developed so that the boiler could function as planned. Mr Yap knew that he could not handle this project with his knowledge and expertise alone, so he called all his outsource teams which were experts in instruments, architecture and programming to visit the boiler room and to study the problem together. 44 Integrated Case Studies for Accounting The instrument expert team The replacing process was done by an instrument expert team. The team identified what needed to be replaced and what materials were needed for the boiler. A thorough inspection was done due the massive broken parts. Some rusty parts needed to be removed, and the removing and replacing process was done by Microcon Engineering's in-house workers. The architects The architects recreated the initial drawings for the boiler and the piping system. The drawing process was done carefully stage by stage. The first stage was the sketches of the overall view of the boiler. The details of each part of the boiler came after all the inspection was done. When all the data had been verified, the drawings were done using the AutoCAD software. All the sketches and details were transferred into multiple AutoCAD drawings which represented each detail of the boiler room and the piping system. The programming team The previous equipment installed in the boiler room were fully touchscreen devices, and programmers were needed to create the flow of the boiler process. A massive effort updating the documentation and analysing the boiler room process was executed. The documentation and analysis was completed within four months. The installation process of the boiler parts was completed by the company's in-house workers within 15 weeks. This is where Mr Yap's field of expertise played its part. All the equipment and knowledge in Microcon Engineering was utilized to recover the boiler. Costing assumptions Mr Yap submitted a proposal at the price of RM165,000 based on the last year-end results (see Appendix). The company was currently operating at 75% of practical capacity. 45 Case 11 Strategies and Cost-Benefit Analysis for Kicking Off an Abandoned Project The calculations were as follows: RM Estimated direct material BESTIL METHOD 29,200 Estimated direct labour 56,000 Estimated manufacturing overhead at 50% of direct labour 28,000 Estimated corporate overhead at 10% of direct labour 5,600 Estimated total costs excluding sales commissions 118,800 Add: 25% for profit and taxes 29,700 Suggested price with profit before sales commissions 148,500 Suggested total price 165,000 Application Questions 1 How would Mr Yap collect details of the initial design and the documentation before the project kick-off? Prepare a project schedule and plan for Mr Yap. 2 Mr Yap needed to propose estimated costs for this project to ensure the sustainability of the project. Based on this estimated costs, should Mr Yap proceed with the project? 3 What would be the impact on the company's net income if the proposal was accepted? 46 Integrated Case Studies for Accounting Appendix Year-end operating result RM'000 25,000 2,500 22,500 Sales revenue Less: Sales commissions (10%) Net sales Expenses Direct materials Direct labour Manufacturing overhead-variable Manufacturing overhead-fixed Corporate administration-fixed Total costs Income before taxes Less: Income taxes (40%) Net income 6,000 7,500 2,250 1,500 750 18,000 sults in 4,500 1,800 2,700