This project investigated the implementation of activity-based costing (ABC) at Xu Ji Electric Co. Ltd (Xu Ji), a large Chinese manufacturing company. Xu Ji is a state-owned enterprise (SOE), turned public limited company (PLC). The company piloted ABC implementation in one of its main production divisions in December 2001, when ABC concepts were at a theoretical level in China (Liu and Pan, 2007). Two more attempts to extend the use of ABC in one of its subsidiaries and sales functions took place in 2005 and 2008. Major events took place during the latter research Endeavour, including two major acquisitions – first by a pension fund and later by the national grid and recent decision to implement an enterprise resource planning (ERP) system.

Xu Ji started from a very basic level, building financial accounting systems and office computerization before implementing the ABC system which captured direct costs and variable manufacturing overheads before processing. One distinctive feature of Xu Ji’s ABC experience is the ‘top down’ instigation and enthusiasm of trying out innovative ideas and inducing corporate-wide learning. This approach worked well in Xu Ji, allowing them to move quickly from imitating western ideas to developing their own – independently developed Relay’s ABC system – and make informed decisions using sales activity analysis.

Prior to the ABC introduction in 2001, Xu Ji operated a traditional Chinese state-enterprise accounting system. A large amount of manual book keeping work was involved. Accounting was driven predominantly by external financial reporting purposes and inaccuracy of product costs became inevitable. . Xu Ji used to produce products based on a state production quota and was forced to face up the market competition. The inaccuracy of the traditional costing information seriously impeded Xu Ji’s ability to compete on pricing. Xu Ji urgently needed a better costing system so commissioned ABC implementation. The two main tasks for the ABC system were:

·         to trace direct labour costs directly to product and client contracts

·         to allocate manufacturing overheads on the basis of up-to date direct labor hours to contracts

ABC system at the Relay subsidiary

Xu Ji Relay company manufactures many different relay products and sells internally to other Xu Ji subsidiaries as well as outsiders. The organizational structure is independent to the rest of the group and has full financial autonomy. Relay operates in a highly competitive and saturated market, so its main aim has been to survive and avoid closure. An urgent need was to get their product costs right, as commented by one of its managers that, ‘Our selling prices were all over the place as we did not know exactly how much it cost us to make one relay, would one type of relay cost more or less, to top it all, we were making losses, large unsold stocks…’

With the lessons learnt from the ABC implementation, Xu Ji’s ABC team, together with Relay accountants and the software company – which developed FPD’s ABC system – embarked on developing its own ABC system at Relay in late 2004. The cost structure in Relay comprised 85% direct materials and 15% direct labor, variable and fixed overheads. During the implementation, the team realized the main inaccuracy of product costs was not the use of out of date planned material cost information but the lack of standardized working practices and lack of inventory control. Relay still recorded inventory manually. Huge discrepancies between accounting figures and physical stock were treated as monthly manufacturing overheads. Xu Ji’s top management decided to invest in office computerization at Relay. The first step was to develop a computerized material cost recording system in order to capture the actual material quantity information and stock movements between warehouse and assembly lines. In addition, standardized procedures for recording and inventory control were put in place and enforced by building into employees’ personal key performance indicators (KPIs). It took Relay nearly four years between 2005 and 2008 to fully embed these changes.

After a trial run in 2009, Relay’s ABC system started to produce monthly ABC reports. The ABC system matched its organizational structure. In 2010 Relay achieved a record annual sales increase of 50% higher than 2009 and a net profit margin increase of 13%. Staff members at Relay gained positive experience from the ABC implementation. The Relay accountant commented, ‘I am now very confident at our product costs. In turn our marketing people can compete faster and better in our market places.’