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PDM2

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PDM2

Merloni TermoSanitari ( Wuxi ) Co., Ltd.

BPCS System Implementation - Phase II

     Project Definition Memorandum

    Arthur Andersen Business Consulting

    April 20, 1999

    Merloni TermoSanitari PDM

    Project Definition Memorandum

    I. Background and Project Objectives

    1. Background

Merloni TermoSanitari (Wuxi) Co., Ltd. (‘MTS Wuxi’), a wholly foreign owned

    investment entity of Merloni TermoSanitari Group (MTS), was set up in 1996. MTS

    Wuxi is engaged in the manufacture and sales of electric water heaters.

In BPCS V6.02 Implementation Project Phase I, Distribution Modules has been

    implemented and went live in September 1998. In order to improve the financial

    management efficiency and integrate with distribution modules, MTS Wuxi

    management decided to implement BPCS finance modules in 1999.

    2. Objectives

The objectives of the project - Phase II can be specified as follows:

    ? Implement BPCS Finance Modules as specified below with necessary

    customization;

    ? Develop relevant business operation policies and procedures to enhance the

    finance management system;

    ? Provide BPCS system training to end users;

    ? Obtain accounting software certificate approved by local Finance Bureau

According to the project plan from Mr. Mario Cioccolo, MTS IT Manager, the second

    phase of BPCS implementation will cover the following modules:

    ? Configurable Enterprise Accounting

    ? Currency Translation

    ? Multiple Currency Translation

    ? Accounts Receivable

    ? Accounts Payable

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    Merloni TermoSanitari PDM

    As specified in the proposal from Arthur Andersen dated on December 15, 1998, Arthur Andersen will provide implementation services to achieve the objective of the project. We also understand that MTS has recruited a programmer to develop customization. Arthur Andersen is not responsible for the customization.

    II. Current Situation

    1. Accounting Unit

    MTS has set up a manufacturing plant in Wuxi, which is also acting as the China’s headquarter. It has two branches in Shanghai and Nanjing respectively and several representative offices in China.

    MTS Wuxi and branches maintain their own books and prepare their own sets of statutory reports. Representative offices record expenses manually and send to MTS Wuxi. MTS Wuxi combines these information on Wuxi’s book. At month end and year end, MTS Wuxi consolidates the books of branches and headquarter.

    MTS group is setting up a Trading Company in Waigaoqiao Free Trade Zone. This company will buy raw materials from oversea’s vendor or MTS Italy and sell to MTS Wuxi. At the same time this company will buy finish goods manufactured by MTS Wuxi and sell to customers in China for tax purpose.

    2. Accounting system and General Ledger

    MTS Wuxi, Shanghai and Nanjing branches maintain general ledgers manually and the base currency is RMB. Reports required by local finance department and tax bureau, e.g. Balance Sheet and Income Statement, are prepared manually at the month end. Consolidation report is also prepared manually.

    Chart of account currently applied in MTS Wuxi and branches follows the Accounting Rules and Regulations for Foreign Investment Enterprise.

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    Merloni TermoSanitari PDM

    3. Currency

    Foreign currency transactions occur during purchase raw material from oversea’s vendor. Foreign currency is mainly denominated in US Dollar. Exchange rate on the first day of the month is adopted to translate foreign currency into RMB. At the month end, month end exchange rate is adopted to adjust the balance of foreign currency accounts. The exchange rate gain/loss is calculated manually.

    4. Sales and Accounts Receivable

    In MTS Wuxi, goods can be issued to the customer only after the customer payment has been fully confirmed. There is no accounts receivable issue at the moment.

    Customer Payment is recorded manually. Each month, AR clerk prepares Sales Report and Sales Mixture Analysis Report in Access or Excel for management reference.

    Sales discount is not handled by the BPCS system. It is instead included in the manual VAT invoice by inserting discount amount under original sales amount.

    There is no transaction between branches now. MTS Wuxi sells finish goods to Shanghai and Nanjing branches. Finance department offsets the sales and cost of sales figures between Wuxi and branches during consolidation.

    5. Purchase and Accounts Payable

    After distribution modules have been implemented, raw material and semi finished goods purchase are managed by BPCS system. Other purchasing activities are recorded manually. For raw material purchase with purchase order, payment is based on the payment terms on the purchase order, goods receipt note and invoice. For other purchase without purchase order, payment is based on the due date on the invoice. Accounts payable and settlement is recorded in EXCEL file.

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    Merloni TermoSanitari PDM

    III. New System Description

    1. Accounting Unit

Four organization units will be set up in the system namely, Wuxi, Shanghai,

    Nanjing and the Trading company in Free Trade Zone (FTZ). In BPCS system, a

    company code will be assigned to each organization. Each organization will have its

    own ledger and book. Shanghai and Nanjing branches maintain their own

    accounting transactions. Expenses occurred in representative offices will be entered

    by Wuxi finance department and record in Wuxi’s book classified by cost center.

    Trading company will also keep a set of manual book. At the same time transactions

    will be entered by Wuxi related departments and record in Trading company’s own book. Following is the reporting structure:

    MTS China

    MTS WFOEMTS Trading

    WuxiShanghaiNanjing

    2. Accounting system and General Ledger

BPCS system will generate automatic vouchers from subsystem such as sales,

    purchase, inventory, shop floor control, accounts receivable and payable modules

    through Advance Transaction Processing (ATP). Users can enter manual vouchers

    directly in General Ledger. BPCS system will generate allocation vouchers according

    to predefined allocation rules, etc.

BPCS system will provide data for Balance Sheet, Income Statement and other

    statutory reports. MTS need to engage a programmer to develop customizing for

    generating reports. Arthur Andersen will design statutory report format and

    perform system testing together with MTS.

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The Chart of accounts in the BPCS system will compose 14 segments. MTS will

    prepare segment value. Following is the definition of segments:

    Group For preparing consolidation reports to Italian Headquarter ,

    the value is 89 which stands for MTS china in MTS group

    Company Company code for each accounting unit

Cost Departmental income & expenses

    Center

    Account The account codified by MTS is seven digits, the first 4 digits

    follows the requirement of Chinese Accounting rule, the other 3

    digits are coded to meet analysis requirement. As for expenses

    accounts, please refer to section V on the limitations.

    Sub Intercompany in Italy and bank classification account

    Market Geographical regions and export markets

    Product Item group, defined by Italian Headquarter Line

    7 Optional For future requirement

    segments

    3. Currency

Foreign currency accounts will include cash, bank deposits, accounts receivable,

    accounts payable, paid in Capital, dividends payable and etc.. Foreign currency

    transactions will be recorded in the system using exchange rate on the first day of the

    month. At the month end, the exchange rate gain/loss will be calculated by the

    system.

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    4. Accounts Receivable

Credit limit will be set up for each customer. The system will check the credit limit

    and put the customer on hold if the order amount exceeds credit limit. User can also

    manually hold or release the order. When receive the customer payment, user can

    match the payment to the corresponding invoices. Accounts receivable from the

    customer will then be updated automatically.

Customers are coded into four types namely, domestic, interbranch, external and

    intercompany. At the month end, system will provide sales and accounts receivable

    data by customer type for analysis and consolidation.

When referring to the cash discount, system will inform the AR clerk discount

    amount and the due date of cash discount. The discount will be printed on the VAT

    invoice by customized program.

    5. Accounts Payable

Invoice for purchase activities will be entered into the system. System will perform

    Three-way-match’ for invoices with purchase order to enhance internal control in

    the purchase cycle. The inventory valuation will be calculated by standard cost.

    Purchase price variance will be recorded in PPV accounts divided by item class.

    User can also enter invoices without purchase order, the system will keep the record

    to control the payment.

Material vendors are coded into four types namely, domestic, interbranch, external

    and intercompany. At the month end, the system will provide data by vendor type to

    manage accounts payable and payment more effectively.

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    V. Limitations and Recommendations

    1. BPCS V6.02 has a system bug that invoice entry with purchase order can not end

    normally. The impact of this bug is that the average cost of the item can not be

    updated. According to SSA’s technical consultant there is no patch to recover. BPCS

    V6.04 also has bugs, which have impacts on normal business processing. In view of

    the serious impact on V6.04, it may more efficient to design walk around procedures

    to overcome bugs in V6.02.

    2. Manufacturing Data Maintenance and Shop Order Maintenance/Release was

    implemented in phase I. Other modules in Manufacturing such as routing, operation,

    labor ticketing and etc. will be implemented together with Costing Management in

    Phase III. Vouchers related to labor and overhead cost still need to be prepared

    manually and then entered in General Ledger.

    3. Some of the financial reports, tax reports, and management report can not be

    generated directly in the system through Financial Report Writer (FRW).

    Customization is requested for necessary document and statutory and management

    reports.

    4. In order to separate transactions for four companies in one environment, proper

    transaction types and reason codes are very critical. Strict and clear specification

    procedures and trial reports need to be developed to minimize clerical errors.

    5. Arthur Andersen suggested MTS to codify expense accounts as defined on

    Accounting Rules and regulations for Foreign Investment Enterprise. However, MTS

    finance department insisted on grouping sales expenses, finance expenses and

    general & administration expenses together to avoid duplication. Another segment

    cost center will be used to identify the nature of expenses. MTS finance department

    has clarified that they have confirmed with Wuxi Finance Bureau on such groupings.

    Arthur Andersen also advised MTS finance department to obtain written

    confirmation from the Finance Bureau.

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