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Accounting in ERP Systems
rough allocation procedures. Although not all overhead costs can be linked to products by
their activities, many can be. Activity-based costing is often used when competition is stiff,
overhead costs are high, and products are diverse. A company using activity-based costing
can determine which products have the highest profit margin, information that is crucial
for making strategic decisions on product lines.
Consider this example from Fitter’s operations. Suppose that storage of raw materials
is considered an activity. Also assume that storage activities differ between NRG-A and
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NRG-B bars because the ingredients are different, and that some of these storage activities
are more labor-intensive than others. In an ERP system, Fitter would track the various
storage activities (how often they occur) and the cost of each. When determining the
profitability of each kind of bar, Fitter cost accountants calculate storage costs based on
the number of storage activities required by each type of bar. This costing is more precise
than computing an average storage cost based on total storage costs and machine hours,
and then allocating that amount to each kind of bar. Conceivably, if the activities differ
enough from one bar to the next, one could be significantly more or less profitable than
the other. This fact would be revealed by the activity-based costing approach, but not by
traditional cost-accounting approaches. An information system that supports activity-
based costing allows managers to see that difference.
Activity-based costing requires more bookkeeping than traditional costing methods
because a company must do activity-based costing in addition to traditional costing, and
because activity-based costing requires a company to keep track of instances of activities,
not just the costs. For many companies, the cost and effort required to implement activity-
based costing is justified by the value of the information yielded. Companies often use
activity-based costing for strategic purposes, while using traditional costing for
bookkeeping and taxes. Having an integrated information system allows a company to do
both kinds of accounting much more easily. One study of companies with and without
ERP revealed that: (1) ERP companies had nearly twice as many cost-allocation bases to
use in management decision making, and (2) the ERP companies’ managers rated their
cost-accounting system much higher. ERP companies also have more faith in the numbers
from their accounting systems.
A survey of management accountants revealed some interesting findings in regard to
how they perceived their ERP systems. Researchers conducting this survey solicited
responses from approximately 500 members of the IMA, the association for accountants
and financial professionals in business. ERP systems were looked at by accounting
managers as being better than not having ERP systems in the areas of having the attributes
of a “single, comprehensive database, providing data on a real-time basis, and making
relevant information available to operations management.” In addition, ERP systems were
found to help in resolving conflicts in goals, standardizing basic processes, and controlling
product costs. ERP systems in the accounting field also help shorten the time for making
decisions and improve that decision making. On the negative side, the respondents
thought the ERP systems were overly complex and took too long to implement.

Problems Consolidating Data from Subsidiaries
Some companies have special operations that make closing their books at the end of an
accounting period a challenge. Companies that have subsidiaries or branches face such a
challenge, and most large companies have more than one legal entity. Because a
company’s executive team must understand the big picture in terms of overall operations

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