Ensuring the profitability of projects implemented in an enterprise, and thus the profitability of the entire organization, requires constant control of costs and performance. This control usually boils down to comparing planned costs with current ones (i.e., those incurred to date). The value of cost variance, in relation to the progress of work, is the basis for analyzing the profitability of a given project. However, such an approach only allows for determining the variance between planned costs and current costs related to recorded consumption. It does not take into account expected costs resulting from newly incurred liabilities that were not included in the original plan.
The purpose of this article is to present a method for determining expected costs, embedded in integrated ERP (Enterprise Resource Planning) management information systems. This method is based on the concept of modeling quantitative and value flow streams in an enterprise.
Problem formulation
The comparison of costs in an enterprise can take place in both a subjective and objective layout. The subjective layout includes so-called cost centers (e.g., procurement, production, or sales departments), and the objective layout includes cost or result carriers (e.g., products, projects). The remainder of the article focuses on the objective layout referring to two types of production: serial and unit (project) production.
Genesis of the problem – the classical approach
The classical approach to cost control boils down to determining the variance between the plan and execution, i.e., planned costs and current costs. Table 1 presents an example of determining variances for serial production and project costs. A 70% progress of implementation was assumed for both types of production.
In the considered example, the following types of costs were distinguished: “materials”, “purchased components”, “production costs”, and “design”, which were allocated to the considered types of production. The variance determined according to the classical approach, compared with the assumed progress of implementation, does not indicate any threats. However, it does not take into account costs resulting from liabilities incurred during implementation that were not included in the plan.
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Source: Logistyka Magazine