the impact of accounting information on management decision making process case study samsung electronic corporation

THE IMPACT OF ACCOUNTING INFORMATION ON MANAGEMENT DECISION MAKING PROCESS CASE TUDY: SAMSUNG ELECTRONIC CORPORATION BY BUI THI CAM DUYEN Graduation Project Submitted to the Department

THE IMPACT OF ACCOUNTING INFORMATION ON MANAGEMENT

DECISION MAKING PROCESS CASE TUDY: SAMSUNG ELECTRONIC CORPORATION

BY BUI THI CAM DUYEN

Graduation Project Submitted to the Department of Business

Studies, HELP University College, in Partial Fulfilment of the Requirements

for the Degree of Bachelor of Business (Accounting) Hons

OCTOBER 2011

DECLARATION OF ORIGINALITY AND WORD COUNT

I hereby declare that the graduation project is based on my original work except for quotations and citations which have been duly acknowledged I also declare that it has not been previously or concurrently submitted for any other course/degree at Help University College or other institutions The word count is 10, 286 words

BUI THI CAM DUYEN

17 October, 2011

ACKNOWLEDGEMENT

This project would not have been made possible without the assistance, support and encouragement of many people I wish to take this opportunity to thank all the people who have helped me during the time of completing the dissertation

Firstly, I would like to express my deep gratitude to my supervisor Dr NGUYN VAN ANH, she has kindly helped me and supported me all the way through For that, I am very grateful

I also would like to extend my special thanks to managers, accountants, my friends, and other people who have help me to carry out the survey I want to thank them for all their support, interest and valuable hints

THE IMPACT OF ACCOUNTING INFORMATION ON MANAGEMENT

DECISION MAKING PROCESS CASE TUDY: SAMSUNG ELECTRONIC CORPORATION

By

BUI THI CAM DUYEN October 2011 Supervisor: Dr NGUYEN VAN ANH

ABSTRACT

This paper aims to explore factors, which influence the process of accounting information implementation in the context of developing countries like Vietnam where the challenging are much more than opportunities, as well as analyze and explain the change area of methodology and organization of company, after accounting information implementation In this research, have finding for both theorical and practical are more importance Beside, according the accounting information will lead to different profits to a company, therefore choosing a suitable accounting information is very important for managers In additional, focuses on some of these tools, including the costing system, profitability, costing tools and budgeting, which will be presented in this thesis The costing system contributes to the available knowledge of costs, building the basis for several decisions, like determining prices Profitability is used especially for decisions concerning discontinuing operations, whereas budgeting deals with the evaluation of investments This financial information supports decisions making Various decision-making models have been identified in literature to examine this process of decision-making Out of this pool a sequential model was chosen to illustrate the decision-making

decision-making process into several stages that follow each other However, it will

be illustrated that the decision-making process in SAMSUNG is a bit more complex and cannot be easily squeezed into these steps It will become apparent in this paper that this process is influenced by many people, making it difficult to determine one final decision-maker as well as a certain decision-making point Besides, experiences, feelings, preferences and other qualitative factors can have an impact on decisions in SAMSUNG COPORATION

Nevertheless, financial information affects the decision-making process In the role

of management accounting information is interwoven and integrated in the whole decision course, having the ability to influence the process at almost every stage

TABLE CONTENT

DECLARATION OF ORIGINALITY AND WORD COUNT……….…i

TABLE OF CONTENT……… … ii

ABSTRACT……… ….iii

TABLE OF CONTENIS……….v

LIST OF FINGURES & CHATS……… v

Chapter 1 Introduction 1

1.1 Introduction 2

1.2 Problem statement 2

1.3 The objective of research 4

1.4 Structure of research 5

Chapter 2: Literature review 7

2.1 Managerial decision making process 7

2.1.1 Planning process 8

2.1.2 Control process 10

2.2 The importance and impact of accounting information on decision making process 11

2.2.1 Accounting information and its role in decision making process 11

2.2.2 Management accounting and decision making 12

2.3 Financial statements, the importance source of accounting information for manager in electronics industry. 14

2.4 Tool for decision making 17

2.4.1 Cost accounting system 18

2.4.2 Pricing and competition 20

2.4.3 Profitability 23

Chapter3: Research and Methodology 25

3.1 Research objective 26

3.2 Research approach 26

3.3 Data collection 27

3.3.1Primary data 27

3.3.2 Secondary data 28

Chapter 4: Case study 29

4.1 Samsung background 30

4.2 Company vision and strategy 31

4 3 Case study analysis 31

4.3.1 Accounting applied in Samsung Company 31

Chapter5: Conclusion and recommendation 47

5.1 Conclusions: 48

5.2 Recommendations 49

5.3 Limitation of study. 49

5.4 suggestions for future research 50

LIST OF TABLE AND FIGURE Table 1: Structure cost of the Samsung Company 33

Table 2: the different prices of electronics customer of three companies Samsung, Sony and LG 35

Table 3: the different price of two companies Samsung and Sony 37

Table 4: competitive positioning of Samsung in DRAM market 39

Figure 1: target costing 22

Figure 2: revenue structure of product 43

Graph 1: adapted from DRURY’s model (2000) 8

Graph 2: adapted from DRURY’s model (2000) 19

1.1 Introduction

Nowadays, in the industry, accounting information is more and more importance And decisions making is part of our life In the competitive environment and develop manufacturing, reliability accounting information is important for all business, like manufacturing business, service business and merchandise business Considering organizational to organization, this is the main functions and actions of management Decision-making and management are usually regarded as belonging together as management in the company often makes the main decisions of the organization The diversity managers will make the different decision with the different information and report, so making decision will depend on manager’s policy To have successful, organization are need to make decisions, also to implement the right ones A decision

is concerned with the selection of an action often out of a number of alternatives To make the right decision, manager needs any guidance to making decision, which is a part provided by information assemble by management accounting In fact, there are many factors that influent to the management decision making, but in this contention, put only to the intention on the importance and impact of accounting information in decision making process

1.2 Problem statement

In this project, the main idea related to the impact of accounting information on decision making of manager The accounting information includes information applied to make ready financial statements that report the effects and financial position of an organization in order to help manager better making decision Owners and manager use this information to argue about the results and effects of business operations also make decision about their management External users such as suppliers, tax authorities, creditors also applied accounting information for their

decision making, i.e judging whether the business will be able to return loans, pay for goods sold, whether taxes are paid correctly, etc Management accounting tool also applied are may have contributed to some scale to the beneficial decision Thereby, the company needs to analyze their ability, benefit, costing Besides, they also need to consider to the factor that may be influence such as economy, sociality and environment So there are some problems statements of the paper as follow will

- The notion of accounting information hold by decision maker base on his idea or his opinion on what and how accountants will and accounting system determine weights significant attributes and how characteristic of agents affecting and affected by a decision, this will affect the weight when any information is available given to accounting information in the decision process

- A good of information is an element important to determine the weight of accounting information to the decision maker when decision making process

As deeper analysis of this thesis, this will reply above these questions to orient for the firms want to use accounting information to decision making and which want to adoption or implementation of accounting information

1.3 The objective of research

Accounting information is the main factors that directly affected to the assets,

profitability, and development of the company Moreover, accounting information

including information are applying to prepare financial statements which account the results and financial position of a business to help manager make the right decision

Hence, management accountings are playing a smarter role in the performance of the entity Accounting information is a tool that is very useful; it is used by all most of company in all over the world For instance, in Toyota motor sale (TMS), they have very successfully in the motor industry because of measuring, evaluating and rewarding performance Toyota Motor sale’s area and general manager’s are measured and evaluated by accounting information Wagner, the firm group vice president for Toyota sale Wagner use the performance of a region as a measure of performance of a regional and general manager is checked through various means that includes the balance scorecard The balance scorecards have become fertile fields of theories and scholastic research, as time past of balance scorecard was altered by various individual and in depending on the need of environment The balance scorecard was introduced to measure whether the activity of the company is meetings the objective The balance scorecard use financial and non financial measure With the balance scorecard TMS was able to see the financial situation and

problem of the company and it was able to see how this affects the non financial aspect of the firm

Management accounting has been developed in recent year, and accounting information is more importance with every company, special in developing countries like Vietnam This research aim is to discuss the practicable use of accounting information The discussions is about whether use accounting information has an influence on firm’s activities and performance, and how company can accept information in accounting system The aims of research are to analyzes the chance and threats when choose the accounting information in Vietnam, so, the companies can minimizing the risk for themselves by solving the matter based on the theory of this method The failure also the success of using wrong and right information of any company also will be considered to avoiding the material will be meet mistake when management makes the decision

1.4 Structure of research

There are five chapters in this research, in each chapter has own major problem

Chapter one introduces about any problem of the research It identified the research question, purpose, objectives, and the significant and the structure of the project

Chapter two gives the relevance of literature review Specifically, it gives the information about accounting information, decision making process, management accounting, chapter two also covers the tool of decision making that indicate the impact and importance of accounting information in management decision making process

Chapter three presents research methods It is orient by theories and data will be collected and analyzed

Chapter four will discuss by the case study: Samsung Electronics Corporation in Vietnam

And the last chapter will summarized the main ideal of research, and conclusion derived contribution of this research to existing body of knowledge Beside, the limitation of research will be discuss and tells more about the future research opportunities

Chapter 2: Literature review

2.1 Managerial decision making process

2.1.1 Planning process

2.1.2 Control process

2.2 The importance and impact of accounting information on decision making process

2.2.1 Accounting information and its role in decision making process

2.2.2 Management accounting and decision making

2.3 Financial Statements –The Important Source of Accounting Information for manager in electronics industry

2.4 tool for decision making

2.4.1 Cost accounting system

2.4.2 Pricing and competition

make efficient decisions

2.1 Managerial decision making process

Decision can be made in any ways depending on different purpose of various group

or organization Based on Drury’s model the steps in this may be used as a whole

picture for the decision making process, it is very useful in defiance of decision type and maker (Holsapple, C.W., Whinstone, A.B)

Drury’s model includes seven stages; planning process belong to the decision making process, it may be described as “making choices between choices” “Control process” is the last step of decision making process, which should measure and correct the material performance of the alternative chosen

Graph 1: adapted from DRURY C (2000)

2.1.1 Planning process

In today, the competitive business environment are very high, so the company should

be engage the strategic planning process that clearly defined about the objective, strategic, value of the company on both internal and external situation

We will discuss five steps in the strategic planning process:

The first steps will defined about the goals and objective, with the guiding direction, the decision maker will estimate the desirability of fixed way of action compared with any another The objective of the company should be challenging but achievable Besides, they should be measure so that the company can monitor its progress And from economic point of view profit maximization for the company’s owner or shareholder assets should be the main objective

The second steps are finding for choosing course of action, manager has to find for chosen courses of actions that make it may be achieve the goals The change

of external environment also usually has more potential risk and new opportunity So the company must know the ability also the limitation in order to the company can be achieved with a higher profitability success The most importance and also the most difficult on the management decision making process that is the entity should concentrate on product of themselves and the market development

The third steps is gather data about alternative, to attain the superior profitability, the company should make a competitive advantage In this step, management accounting information contributes a large importance Based on the collect of data and costing information, and management accounting can able to predict likely effect on decisions such as the change in value, price change…as potential growth rate, profit in market share, areas of activities, and more important information is compose for every idea

The next step is the select qualify alternative course of action, the selection that

“best satisfies the target of an organization” (Idem) will be accepted The strategy implementations are based on the programs, budgets and procedures If the main aim

is profit maximization, all choice should be listed in terms on differences in profit

The selective that seems to achieve the goal best should then be picked by the decision makers

And the last step is the implementation of decision, it includes defined parameter to be measure, defined target value for those measured, perform measurements, compare measured result to the pre-design standard, and make necessary changes All decision will be complex investigation and put into through

financial plan

2.1.2 Control process

Control process is statistic process and engineering discipline that deals with architecture, mechanisms, and algorithms for maintaining the output of specific process within a design range

Beside, control process is continuous flow between comparing, measuring and action There are two steps are establishing performance standard such as: compare actual and plan outcome, responding to divergences from plan,

With the compare actual, plan outcome: The family budget department provide the present figures for each month to the management group As seen in the test part the management team looks at the picture and compares them every month So the financial department plays an importance role in general issues areas and also in terms of measuring the own performance between the control process Profit is most commonly used to feedback-tool It allows for a comparison of different stages and

an assessment of their performances

In the next step, responding to divergence from plan: the functions in accounting control are plays a leading role to indentify whether or the firms is moving in the right direction The managing director further added that sometimes it is difficult to admit a mistake

When management accounting in the company provides information to supports the steps on the process of the decision-making, somehow, they may be seen as collected and classify through the decision making process Moreover, the control processes also are difficult without the data share out from the financial department, which compares between planned and actual outcomes Thus, it helps in gathering data about possible selective, and actual financial information about the possible outcomes and finally it gives financial feedback during the implementation and in the future

2.2 The importance and impact of accounting information on decision making process

2.2.1 Accounting information and its role in decision making process

Accounting is commonly concern with recognition dealing and recording the historical financial of the transaction in a company, so the main concentrates on accounting information of present financial events, but not events in the future (Hogget, Edward, & Merlin, 2006) Though, accounting information is not an event

in the future, this information is usually used as a leading to later estimates of the any alternative nets effect Managers on the organization often wish for know which or what kinds are being done thus, this information are very important for manager to

do decision for the afterward plans, then they need continuous fast updated information in order to control whether actual performance in objective

Beside, accounting can be identified same as the process of estimating, recording and communicating economic information to authorized informed rules and economic decisions The basic objectives of accounting are to help persons in an organization make economic decisions Moreover, accounting information provides the basis elements for decisions making of resource allocation

In the economic activity, Accounting information’s are also seen as financial information All economic entities for example, government agencies, business, families, charitable entities need information because they are very useful for making economic decisions about those entities activity

The financial information is needed when making economics decision It concentrates on the real events For the aim on decision making process, the past is use as an instruct to future estimates of the after-effect of any choices With the use

of both internal decision maker and external decision maker, the accountant may support important in the domain of investigating, interpreting, budgeting, and communicating

2.2.2 Management accounting and decision making

Management accounting is an unusual subset of accounting essential mass up in house needs of business, they offer information about financial also any other information of all levels of management (including CEO, manager, account managers, or general managers) in an business organization to assist them to go their planning, controlling, and decision making responsibility

The activity of management accounting are usually cost volume profit and cost behavior relationship, manager often make decision for financial control and plan through incremental analysis, budgeting, capital budgeting, flexible budgeting for redeem evaluation, the established of manufacturing coast, costing systems, accounting and referring for business segment operation

Decision making on management accounting

Decision-making is the main on managerial function Manager makes decision which can be distributed like marketing, production, and financial In addition, it also classify like strategic and tactical or long run and short run A major goal of the

decision-making is to achieve best condition use of capital or deposits of the business

Doing effective decision claims qualify information and unusual analysis of the data

In addition, decision-making could be simply defined as choosing a course of behave from any selective If no alternatives, then there is no decision is required One assumption seen as basis of the best decision related to sale or least amount of cost The duty of manager wills helps management accountant to find the best solution

Making investment decision

The systems to evaluate the investment project are usually found on the quantitative information and provide quantitative indicators However, both quantitative and qualitative factors are considered to make decision Thus, although capital investment is not common made in without an assessment by using several systems, the decision will not made alone on the main of this assessment between alternative Other factors (Crothers, D (2004)) that need to considered , this is the aims of the business, the on hand of financial resources, the cash flow effects and business incorporation into the whole cash budget and non-quantifiable cost, qualitative elements and benefits

2.3 Financial statements, the importance source of accounting information for manager in electronics industry

The purposes of financial statements are providing useful information about the financial position, performance and changes of financial position in business organization which is useful for variety of users and manager in making economic

decisions

The following are the main financial under accounting standard:

 The balance sheet

The balance sheet is one of the financial statements that are very important to business; it reflects overall value of existing assets and a part of assets formed of an organization at a fixed time By balance sheet, manager or every user analyses, evaluates the potential and future prediction

 Income statement

Income statement tells ingorm the business activities and results of business operations Through the result income statement, managers hold financial information as profit, cost of goods sold, interest, revenue, etc are apply to count the financial ratios as bias for recount the financial situation of an organization Manager will seeks suitable information and help company make decision investment

 Cash flow statement

Operating activities, financial activities and investing activities that cash flow statement provided are three main activities to generate and use money

Manager using cash flow statement to assess the quality and result of income that entity generates It helps managers discard doubles about the use of accounting method to make profit for the company

Two point of information are disclosure under public companies in accordance with Vietnam accounting standard

Firstly, are periodical disclosures of information? Within 10days from the date of expiry of deadline for finished the annual financial statements, a public company need disclosure information about its annual financial statements by an independent auditing firm which satisfies practicing conditions in accordance with regulations of ministry of finance

The subject matter of information to be periodically disclosed about financial statements are the following:

 If public entity is a parent company of other entity, the disclosure of annual financial statement will cover the financial statements of parent entity as well

as consolidated FS in suitable with the learning objective accounting

 The dates to completion of annual financial statements are in ninety (90) days from the last days of accounting period in accordance with learning objective accounting

Secondly, extraordinary disclosures of information, a public company have made special disclosure information amongst twenty four hours of the occurrence of one of the following events:

 Temporary suspension of business;

 There is change in personnel of the firm (such as member of managing board, assembly of controllers, and board of the general director or chief accountant)

 There must making decision in the general conference of shareholders or the board of management on share dividends to be paid

Public company must also take particular disclosure information amongst seventy two (72) hours of appearance in the following events:

 The boards of management will make decision on development strategies or

on the day’s business plan of the company; or a decision to renew the useable accounting network

 The company receives a notice from court accepting jurisdiction of a petition

to commence enterprise bankruptcy proceedings

When public company disclosure particular information, it have determines the event happened also its reason, and a plan and solution for make good the problem (if applicable)

 Financial ratio

Analyzing about financial ratios, it will show full meaning of relationship between individual values in financial statement Analyzed this ratio, investor have important comparisons in order to consider and evaluate the results of business operation in relation to the overall economy, the key competitors in the domain of industry, and the previous performance of the business There is any financial ratio as following:

a Liquidity ratio

Liquidity ratio provides information about the ability’s firm operation to meets in short term financial objectives The expanding provisional credit to the firm is interested in specifics liquidity ratio Two popular liquidity ratios are current ratio and quick ratio

Current ratio = current asset / current liability

Short term creditor’s risk can be reduced if high current ratio But, shareholders are more concern in a lower current ratio to secure that firm’s assets are used to make the development of business Standard values are used to estimate the current ratio by

company and industry For instant, company in cyclical industry may retain a higher current ratio in order to keep solvent during recession

The current ratio remain at disadvantage that inventory may include some items which have low liquidity ability and the value is not clear Quick ratio is the best alternative to estimate the solvency of a company with no inventory of existing asset The quick ratio can be calculated as following formula:

Quick ratio = current asset – inventory/ current liability

The current assets would be cash, notes receivable and account receivable This asset could be accounted as current assets less inventory The quick ratio usually regarded

as the acid test

b Profitability ratio

Profitability ratio reflects to the success of organization in making profit It will takes into account the various individual measures: gross profit margin, return on assets, return on equity, earning per share, price earnings ratio The gross profit margin is a measure as profit earn on sales The gross profit margin considers the firm’s cost of goods sold, but does not cover other cost It is defined as follow:

Gross profit margin = sales – cost of goods sold / sales

2.4 Tool for decision making

Manager must to know about the cost incurred in an organization Because of this, the cost accounting system specifies the costs to produce cargo in a company So, it can be seen as the main basic tool in leading decisions, and it will be clarified first Lack of information about price, costs, manager would not be established prices or making investment decisions Therefore, more and more management accounting notions continued applied for decision-making is based on the platform cost Several

of those equipments will be debated comprising the opinion of target costing, cost plus pricing, and profitability

2.4.1 Cost accounting system

Cost accountings are a reach to evaluating the all cost which is associated the overall with conducting business As the accounting standard practice, cost accounting is a tool that manager used to determine what and which type also how much expense related to maintaining the current business model By identify the production cost and continuous determine the cost to produced goods by and more consecutive business cycle It is may be to note any tendency that show an increase in production costs none any changes in valuable and rise in production of goods and services There are two steps in the cost accounting system:

The first step is cost accumulation by classifying costs into category; it is reduce the cost of collection by applying classification criteria, same the suitable of cost Dissimilar decision required the specification type of different cost So they are very useful for decision making process to category cost likely fixed cost or variable cost, relevant or irrelevant, direct or indirect For instant, make or buy decision should concentrate on relevance cost in a specific decision situation

The second step is the assignment cost to cost objective Costing system are consider

as information system, the information such as units produced; and dollars of direct labor are called by these costing system to be of value

Because accountant would need to delay the cost assignment process; and calculate until the actual data is available, so it is often impossible to use actual overhead cost

To overcome this problem, standard costs are used At the end of accounting period, under or over recovery of overheads that constitute the different among planed and

the actual cost This is general to treat this dissimilar as periodic cost and also to add

or delete it from profit or loss of period

As propose by Drury, both allocations can be described by using two steps framework

Overhead cost account

First step

Second step

Graph 2: Adapted from: Drury, C (2000)

The first step is indirect costs that allocate to cost centre that setup places and function etc to which indirect costs can be allocated Usually ABC determined more cost centre than traditional costing methods

In the second step are the cost allocate to cost target with the help the cost driver When using the Traditional Accounting System, they ought to talk about the relationship between a reasonable and realizable the cost driver and the sum of the indirect costs This system are often better than other when the production process is

Cost objective

(Activity) Cost centre

A

(Activity) Cost centre

B

(Activity) Cost centre

C

simplify and easy to use Besides, they are eliminating to apply this system when the ABC-method is too expensive and the benefits too low However, this case may quite rare, because the environment in today tends to be very compound what makes ABC often beneficial (Horngren, C et al (2002), p 140) They are also remarkable, which firm indicates an inclination towards not replacing an already operating system (Lambert, S.J et al (1996))

2.4.2 Pricing and competition

Pricing is the process that company determines what exchange will receive in its

products Pricing elements are often related to production cost, competition market, and quality of product Pricing are an important variable in microeconomic theory of price allot Pricing is a basis factor of financial modeling and is one of the fours Ps of the marketing mix Price is an element to create revenue in the four Ps, the rest being cost centers

Making decision on pricing may be in long-run and short run It is one of the major decision manager have to face There are many elements that affect to the pricing decision such as market, competitors, compatibility with other product, and competition from substitute products, suppliers…in this, the outcome pricing decision for the new product and competitor is primary because if the cost in the long time are not price, a firm can be reject of business easily Moreover, if making decision in pricing is limited by agents on the market like advantage market leaders, firm may be identified as a person taking the price These decisions are more essential if the company can acceptable the price Firms are market leaders and offer products or services that are highly customized or differentiated can be described as price setters In such company can be cost information with high impact on their

pricing decision (DRURY C (2000) PP 390, 378)

Target costing and cost plus pricing are two main common instruments for pricing

In reducing cost, Target costing are main an effective entrustment to keep customer value It is found on three installments:

1) Orienting products to customer affordability or market-driven pricing,

2.) Treating product cost as an independent variable during the definition of a product's requirements,

3.) Proactively working to achieve target cost during product and process development

This target costing approach is represented in Figure below:

Target price less profit

Balance target cost and requirement

Continuous cost reduction

Figure 1: target costing (source internet display 2011)

Before the target designed as a target cos, it is establised that is founed on the product’s expected price and company required profit Then task of manager control

DFMA & value analysis