Manufacturing. Manufacturing Game : Participant s Guide Léger et al. (2012) ERPsim Lab, HEC Montréal.

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1 Manufacturing 1

2 CHAPTER 3 FINANCIAL BUSINESS PROCESSES This chapter explains various business processes required to run your organization in SAP. There are two types of business processes you will perform in the course of the simulation game. The financial business processes, which are processed as transactions in the general ledger. The operational business processes, which are used to manage the production of muesli cereal are the same as for the Introductory Manufacturing Simulation. In this chapter we examine the financial transactions that are processed to reduce setup time, increase capacity, and repay the bank loan. These actions are all performed using transaction FB50. Before we review the initial conditions for the Extended Manufacturing Simulation, we first review some basic accounting concepts and examine how SAP s financial accounting module is organized. The Financial Accounting (FI) module of SAP contains the necessary components to comply with all Generally Accepted Accounting Principles (GAAP). The financial module manages accounting related business transactions following the document principle; this insures that all postings are stored in the form of documents to ensure an unbroken audit trail throughout the financial statement. The FI module is tightly integrated with the other modules in SAP, and most postings to the FI module are performed automatically. For example, posting an invoice in the sales and distribution module will automatically create the associated financial accounting transactions in FI. There are two important organizational elements in the financial module: the company code and the chart of accounts. The company code is the smallest organizational unit for which a complete self contained set of accounts can be created to produce legal financial statements. In Manufacturing Simulation games, each team is represented by a unique company code. Each company code is assigned to a chart of accounts. The chart of accounts is a classification scheme consisting of a group of general ledger (G/L) accounts used in the preparation of financial statements. These accounts can be classified into five categories: Assets, Liability, Equity, Sales Revenues, Cost of Goods Sold and Other Costs. The main master data used in the FI module are the G/L accounts. G/L accounts are structures that record value transactions in a company code. The account holds the transactional data generated by the accounting transactions. All accounting relevant transactions are recorded in the appropriate G/L accounts. The followings tables present all of the balanced sheet and the profit and loss statement accounts that you will be using during the simulation game. 2

3 Table 3.1: Chart of accounts Balanced Sheet Account categories Accounts Account number Cash Weizen Bank Cash Account Current Assets Inventory Finished Goods Raw materials Receivables Customers Domestic Receivables Assets Land Land Buildings Long term assets Buildings Accumulated depreciation Buildings Machinery and equipment Machinery and equipment Accumulated depreciation Machinery and equipment GR/IR Clearing External procurement Liabilities Current liabilities Accounts payables Accounts payable Domestic Bank Weizen Bank Bank Loan Equity Common stock Common stock Retained earnings Calculated profit From P/L 3

4 Table 3.2: Chart of accounts Profit and loss statement Account categories Accounts Account number Sales Revenues Sales Revenues Domestic Cost of Goods Sold Other Costs Cost of Goods Manufactured Ending Inventory Gain / Loss from valuation of inventory Consumption Raw Materials Direct Labor Costs Factory Overhead Expenses Depreciation Expenses: Building Depreciation Expenses: Machinery and Equipment Warehousing costs Total Finished Products Sold Total Finished Products Produced Loss from Valuation of Own Materials Gain from Valuation of Own Materials SG&A Sales, General and Administrative Expenses Production Improvement Expenses Lean Manufacturing Program Expenses Marketing expenses Marketing expenses in northern Germany Marketing expenses in southern Germany Marketing expenses in western Germany Advertizing North Advertizing North Advertizing North Advertizing North Advertizing North Advertizing North Advertizing South Advertizing South Advertizing South Advertizing South Advertizing South Advertizing South Advertizing West Advertizing West

5 Advertizing West Advertizing West Advertizing West Advertizing West Interest expenses Interest expenses Pre game financial transactions The simulation game requires a number of financial transactions to be posted before the simulation begins: initial capitalization of the firm through both equity and liability and the acquisition of assets (land, building and equipment). These transactions are executed through postings to balance sheet accounts. For the Extended Manufacturing Simulation, these transaction have been completed to provide an opening balance sheet of total assets and of total liabilities and equity. (See Figures 3.1 and 3.2) The company s board of directors has approved the issue of 1,000,000 shares of common stock at 8 euros per share, so each team has an initial capitalization of 8 million euros (Total Shareholder Equity, see Figure 3.2). In addition, the board of directors has also approved the acquisition of a loan for 12 million euros to complete the financing of the firm (See Bank Loan, Figure 3.2) where this loan has been. Using this 20 million euro of funding, the company will acquire land for 2 million euros, a building for 10 million euros and an assembly line for 5 million euros, leaving the company with 3 million euros to begin operations. (See Figure 3.1, Total Assets) Remember that the investment of 5 million euro for the assembly line provides your company a daily production capacity of 21,000 boxes. You invest in production capacity and efficiency improvement using the FB50 transaction, which enters those decisions as posting in the G/L. These investments in your assembly line increase the daily production capacity. Whenever you post a transaction in the G/L, you need to provide certain information. On the header of the transaction, you need to input the date of the financial posting (Field Document Date) and to describe the posting (Field Doc. Header Text). For each line of the document, you then need to set the G/L account (Field ), determine if the line is a debit or credit (Field ) and input the amount posted in the account (Field amount). Remember that debits and credits must balance: when posting to the general ledger the values entered in all lines (a G/L transaction may involve postings to more than 2 lines) must conform to the double entry accounting principle. 5

6 Figure 3.1: Balance Sheet Assets. 6

7 Figure 3.2: Balance Sheet Labilities and Owners Equity Table 3.3 shows the posting for your bank loan. This illustrates how your team could increase your bank loan with additional borrowing. 7

8 Table 3 3: Posting for Loan from Bank FB50 Accounting / G/L Acct Pstg: Fields Posting bank loan Document Date Today Header Doc. Header Text Bank loan G/L (Weizen bank, cash) On the first line Debit Amount in doc. curr Loan amount G/L (Weizen bank, bank loan ) On the second line Credit Amount in doc. curr Loan amount You have 20 million euros in Total Assets and in Total Liabilities and Owners Equity. These include the purchase of the physical assets (land, building and assembly line). Table 3.4 explains how postings have been done for the acquisition of the land building. These were performed with the FB50 transaction. The building has a useful life of 20 years and is be used for production and inventory storage. Your firm uses simple straight line depreciation for the building. Note that it is customary to assume that land does not lose value and thus is not depreciated. 8

9 Table 3.4: Land and building acquisitions FB50 Accounting G/L Acct Posting Transaction FB50 Accounting G/L Acct Posting Transaction Fields Acquiring Land Acquiring Building Header On the first line On the second line Next the acquisition of the assembly line (Table 3.5) must be posted to the general ledger. The assembly line has a useful life of 10 years with no residual value. Your firm will also use simple straight line depreciation for the assembly line. Table 3.5: Assembly Line acquisition Fields Header On the first line On the second line Document Date Today Doc. Header Text Land Building 1000 (Land) 2000 (Building) Amount in doc. curr Debit 2 million euros 10 million euros (Weizen bank, cash) Credit Amount in doc. curr 2 million euros 10 million euros Document Date Doc. Header Text Amount in doc. curr Amount in doc. curr Acquiring Assembly Line Today Assembly line (Machinery and equipment) Debit 5 million euros (Weizen bank, cash) Credit 5 million euros 9

10 3.2 Recurring financial transactions The following section presents transactions that you will perform throughout the simulation game to reflect your business decisions. These transactions post expenses in profit and loss accounts. Because of this, you must also specify the appropriate cost center when posting these transactions (cost centers $$) Marketing expenses The next transactions involve the payment of marketing expenses. The marketing expenses must be posted in the appropriate account(s) and you should not spend more than a total of 100,000 euros in marketing for the first quarter. You can market each of your six products in the three areas (18 accounts numbered to ). The transaction ZADS (see Figure 3.3) allows you to enter your marketing expenses with are subsequently posted to these accounts. Remember, when you are marketing multiple products in a single marketing region, you are not only market against you competitors, buy you are also marketing against your other products (materials) in those marketing regions. Figure 3.3: Marketing expense entries 10

11 Table 3.6 shows the G/L account number that represents a marketing expenses for a specific product in a specific marketing region. Table 3.7 illustrates the direct entry of the expense into the G/L. Table 3.6: Marketing account table Area / Product $$ F01 $$ F02 $$ F03 $$ F04 $$ F05 $$ F06 North South West For instance, a posting in account , would correspond to a marketing investment for product $$ F05 in southern Germany. Table 3.7: Marketing expense G/L entries table FB50 Accounting G/L Acct Posting Transaction Fields Header Document Date Doc. Header Text Marketing Expenses Today Advertising (Wiezen Bank) On the first line Amount in doc. curr Credit 100,000 euros maximum for the first quarter. In later quarters, you must decide how much to invest 11

12 FB50 Enter the appropriate G/L accounts for the products and area you wish to invest in. You can use multiple lines to post all marketing investments in a single transaction, as long as the total of the debits equals the credit amount. On the next lines Cost center $$ Debit Amount in doc. curr Advertising Press Enter and then click Simulate to test the transaction. Click Back to return to the transaction screen. Save by clicking and note the document number. Please note that a customized transaction has been developed to simplify the marketing investment during the game. The technical name of this transaction is ZADS. You will be using that transaction for the Extended Manufacturing Simulation Interest payment transaction Please note that for the first quarter of the game, the interest on the bank loan will be at a rate of 5%. Your future interest rates are determines automatically by your company s performance in the Extended Manufacturing Simulation. 12

13 Table 3.7: Interest expense G/L entry table FB50 Accounting / G/L Acct Pstg: Single Screen Trans. Fields Header Document Date Doc. Header Text Interest payment Today s date Interest payment (Weizen bank) On the first line Credit Amount in doc. curr Loan amount x Quarterly interest rate (122, for first 30 days) (Interest expenses) On the second line Cost center $$ Debit Amount in doc. curr Loan x Quarterly interest rate (122, for first 30 days) Press Enter and then click Simulate to test the transaction. Click Back to return to the transaction screen. Click (Save) and note the document number. IMPORTANT: You are playing a game where interest payment is automated, you do not need to manually process this transaction. The simulator will automatically post the interest expense in each of the quarters/rounds. 13

14 3.2.3 Depreciation expenses We recognize that our building and equipment have a finite life by making postings to the appropriate depreciation expense accounts. While depreciation is not an actual cash expense like labor or raw material expenses, it is important to recognize the use of these finite resources to get an appropriate picture of the company s profitability. Table 3.8 shows the postings that occur automatically by the simulator for posting the building and equipment depreciation expenses. Table 3.8 Building and equipment depreciation expense posting FB50 Accounting / G/L Acct Pstg: Single Screen Trans. Fields Building depreciation Machinery depreciation Document Date Today s date Header Doc. Header Text Building depreciation Machinery depreciation On the first line Credit Amount in doc. curr 2010 (Accumulated Depreciation Building) 68, euros per 30 days (5% annually) (Accumulated Depreciation Machinery) 68, euros per 30 days (10% annually) (Depreciation Expenses Building) (Depreciation Expenses Equipment) On the second line Debit Cost center $$ Amount in doc. curr 68, euros per 30 days (5% annually) 68, euros per 30 days (10% annually) IMPORTANT: You are playing a game where depreciation is automated, you will not need to manually process this 14

15 transaction after the first quarter. In other words, you will only post depreciation in the first quarter of the game and the simulator will automatically post the depreciation expense for all of the remaining quarters Production improvement transactions Production improvements will increase the actual production throughput of your plant. More specifically, this transaction will reduce the time to perform the allergen cleanup and set up the assembly line. In the first quarter, all firms must invest euros to reduce the setup time. You must do this transaction. Table 3.9: Setup time reduction investment FB50 Fields Lean manufacturing investments Accounting / G/L Acct Pstg: Single Screen Trans. Header Document Date Doc. Header Text Today s date Lean manufacturing (Weizen bank) On the first line Amount in doc. curr Credit For the first quarter, you must invest 50,000 euros. After that, it s up to you! (Lean manufacturing expenses) On the second line Cost center $$ Amount in doc. curr Debit For the first quarter, you must invest 100,000 euros. After that, it s up to you! 15

16 3.2.5 Other expenses The other expenses in producing muesli cereals can be classified as direct labor, manufacturing overhead (in addition to assembly line depreciation and building depreciation) and SG&A. Table 3.10 illustrates the information related to the posting of these expenses each quarter/round. Table 3.10: Other expense G/L transactions FB50 Accounting / G/L Acct Pstg: Single Screen Trans. Fields Direct labor expenses Factory overhead expenses SG&A expenses Header On the first line On the second line Document Date Doc. Header Text Amount in doc. curr Today s date Direct labor cost Factory overhead SG&A (Weizen bank) Credit Debit Cost center $$ 126,720 euros per 30 days 86,400 euros per 30 days 278,400 euros per 30 days (Direct labor expenses) (Factory overhead) (SG&A) Amount in doc. curr 126,720 euros per 30 days 86,400 euros per 30 days 278,400 euros per 30 days IMPORTANT: You are playing the Extended Manufacturing game where these expenses are automated, you do not need to manually process this transaction. Simulator automatically posts these expenses. 16

17 3.3 Other Initial Conditions Other initial conditions are established for the Extended Manufacturing Simulation. These include your team s initial inventory, forecast, purchase orders, product (material) prices, and production schedule. These are examined individual to show those initial conditions. You should confirm your initial conditions and prepare your decision prior to the beginning of the initial quarter/round of the Extended Manufacturing Simulation Initial inventory There is no initial inventory of either finished goods or raw materials (Figure 3.4). This means that on Day 1 of the simulation you have no product to sell. You must manufacture the product before sales can occur. Figure 3.4: Initial inventory 17

18 3.3.2 Initial forecast There is no initial forecast for any of the finished goods (Figure 3.5). This means that on you must forecast products you expect to sell in order to begin the manufacturing process. Remember, you forecast must be placed in the second column for the forecast months. This is the arrangement for the Manufacturing Simulation. Figure 3.5: Initial forecast Initial purchase orders There are no initial purchase orders for any of the finished goods (Figure 3.6). Purchase orders are created from the purchase requisitions of the MRP processing. Without a forecast, the MRP process does not create any purchase requisitions. This is the situation throughout all Manufacturing Simulation. 18

19 Figure 3.6: Initial purchase order process Initial production schedule There is no initial production schedule for any of the finished goods (Figure 3.7). No planned order were created from the MRP processing. Without a forecast, the MRP process does not create any planned order because there are no materials available for production. This is the situation throughout all Manufacturing Simulation. Figure 3.7: Initial production schedule 19

20 3.3.5 Initial product pricing Initial product prices are provided as suggested prices for each of the finished goods in each distribution channel (Figure 3.8). These prices are your team s default pricing and should be adjusted based on your strategic plans. Figure 3.8: Initial product pricing suggested by distribution channel 3.4 Conclusion The Extended Manufacturing starts with no inventory. This means, that during the beginning days of the simulation, your team will have no products to sell. You must have a focus on the production process to produce the products so they can be sold. You initial production capacity is 21,000 boxes per day with 12 hours of setup time between a change from one product to another. You can increase your production capacity and it efficiency with reduced setup time by investing in these production improvements. Your team must organize to handle these increased decisions in reaching your goal to maximize your net income. 20