the implementation and adopting of activity based costing in manufacturing vietnamese companies a case study of samsung vina corporation

For example, direct costs were decreased such as direct labor hours, but indirect costs were increased such as depreciations, maintenance cost by the increasingly using automatic systems

THE IMPLEMENTATION AND ADOPTING OF ACTIVITY BASED COSTING

IN MANUFACTURING VIETNAMESE COMPANIES

A CASE STUDY OF SAMSUNG VINA CORPORATION

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 10,346 words

Acknowledgement

I would like to express gratitude towards Dr Pham Duc Hieu and Dr Le Van Lien and to Ms Suemathi for their support and guidance I would also like to some my friends for their financial support for this project

Abstract:

This paper aims to explore factors, which influence the process of activity-based costing (ABC) implementation in the context of developing countries like Vietnam where the challenging are much more than the opportunities, as well as analyze and explain the changes in the area of methodology and organization of a company, after activity-based costing implementation The research findings are of both theoretical and practical importance From the practical point of view, companies considering implementation of ABC should be aware of the positive and negative factors conditioning the process of implementation; in addition, they should be familiar with methodological and organizational changes, which might stem from the ABC implementation, according the case of previous companies had project in implementation it in all over the world to get the solutions for each challenging or difficulty From the theoretical point of view, this research might be helpful in determining a more general tendency: although modifications in cost accounting systems and implementation of modern methods of management accounting in manufacturing Vietnamese companies come later than in more developed economies, the tendency heads in the same direction

Table of content

Page

Declaration of originality and word count ii

Acknowledgement iii

Abstract: iv

Table of content v

List of Figures vii

CHAPTER 1: INTRODUTION 1

1.1 Introduction 2

1.2 The objectives of research: 3

1.3 Problem statements: 5

1.4 The presentation: 6

CHAPTER 2: LITERATURE REVIEW 7

2.1 Historical development: 8

2.2 Definition and key concepts: 10

2.2.1 Definition: 10

2.2.2 Keys concept: 11

2.3 Implementing of ABC 13

2.4 The critical factors for successfully applying the ABC 17

2.5 The ABC‟s criticisms and limitation 20

2.6 The comparison between ABC and traditional costing system 22

2.6.1 Costing system 22

2.6.2 Traditional costing system 22

2.6.3 ABC versus Traditional costing 23

CHAPTER 3: METHODOLOGY 28

3.1 Conceptual framework 29

3.1.1 Contingency theory 29

3.1.2 Shield‟s model 31

3.2 Qualitative case study design 33

3.3 Data collection 35

3.4 Data analyze 37

CHAPTER 4: ANALYZE 39

4.1 Samsung Vina Corporation Ltd (Savina) 40

4.1.1 The background of Savina 40

4.1.2 The technology industry 40

4.1.3 Estimating the accounting system of Savina 41

4.1.4 The ABC method in the context of Savina 42

4.1.5 The factors influencing ABC implementation 44

4.2 The factors influencing the implementation ABC in Vietnam 46

CHAPTER 5: CONCLUSIONS AND RECOMMENDATIONS 49

5.1 Conclusions 50

5.2 Recommendations 53

REFERENCE: 54

List of Figures

Figure 1: Implementing of ABC 13 Figure 2: Theoritical research framework 31

1.1 Introduction

In today‟s advanced manufacturing and competitive environment, accurate costing information is vital for all businesses, like manufacturing businesses, service businesses, and merchandizing businesses In the past, companies supposed that, customers who buy the high volume of products, and loyal customers are profitability The researches of profitability indicate that this view of companies is not completely right Innovations in producing and communication technologies have changed the ways businesses conduct their activities extremely The major changes in the manufacturing cost structure which have led instructors and doctors to argue that the traditional costing methods are no longer sufficient traditional volume-based cost model to new costing methods such as Activity Based Costing (ABC) [2] because of the implementing the advance in manufacturing technologies like robots and computerized ABC is a technique for developing cost estimates in which the project is subdivided into discrete, quantifiable activities or a work unit The activity must be definable where productivity can be measured in units After the project is broken into its activities, a cost estimate is prepared for each activity These individual cost estimates will contain all labor, materials, equipment, and subcontracting costs, including overhead, for each activity Each complete individual estimate is added to the others to obtain an overall estimate Contingency and escalation can be calculated for each activity or after all the activities have been summed

1.2 The objectives of research:

Costing is one of the most important factors that affect directly to the profitability, assets, existence, and development of the company, so management accounting is play an important role in the performance of the company Activity Based Costing is

a powerful tool, and it is used by many big companies in all over the world For example, Ford Motor Company in historical, the view of focusing on the value creation processes more than assets and organization But facing with the dramatically development of the others manufactures, especially Toyota Motor Corporation, and realize of the impractical of exist accounting system, Ford decided using the new one After, researching and developing ABC system, positive changing in productivity are improved like it can identify inefficient product, allocation more profitability on the resources, reduce unnecessary cost However, the suggestions of most of firms are experiencing difficulties in implementing ABC and,

in some extreme cases, ABC implementation is not successful [3], these suggestions are inherence by the mounting of evidences, in highly developed countries in the first decade of the 21st century revealed that the number of companies using ABC ceased

to grow and stopped at an average, lower than anticipated, level [4] Moreover, the number of companies planning or considering the implementation of ABC dropped; simultaneously, the number of companies, which quit implementation after analyzing costs and benefits, rose With the developing countries like Vietnam, management accounting has been developed recent year, but there are not enough conditions for the implementing ABC because the using of ABC run the risks of spending too much effort, time, and money

This research aims to discuss the applicable uses of ABC The discussion is about

how a company can adopt the ABC in its accounting system The objectives of research are to analyses the opportunities and threats when using ABC in Vietnam, therefore, the companies can minimizing the risk for themselves by solving the problems based on the theory of this method The failure of using this method of some companies will be considered avoiding the material mistakes when managements make the decisions

1.3 Problem statements:

Although there are many advantages of ABC method, but it cannot actually be applied by all the companies The limitation of ABC is that while it institutes a complex methodology to assign costs to activities, the system remains far from perfect Some overhead costs such as the CEO's salary remains difficulty to separate and allocate on a unit of product Added value to product is not needed for all the productions For instance, an employee taking part in a first aid consciousness campaign or a fire safety drill indulges in a productive activity, but the added values are not calculated to the end product or service by these activities Most ABC methods allocate such 'business sustaining' costs to products on a proportionate basis

or based on assumptions, and this makes the system far from perfect Thereby, before changing to this method, company need to analyze their ability, benefits – costing The factors of the economy, sociality, and environment are also need to be considered So the problem statements of the paper are:

1, How is Activity Based Costing applied in the company?

2, What are the effect on performance of Activity Based Costing of company?

This paper will answer above questions to orient for the companies which want to adoption or implementation Activity Based Costing method

1.4 The presentation:

This research is divided to five chapters, each chapter has own responsibility Chapter one briefly will talk about the aim of study, chapter two will about the general view of Activity Based Costing, the traditional costing system and the comparison between two these methods to helping for the analyzing the adoption of ABC, chapter three will orient for the research by theories and models, how the data can be collected and analyzed, the result of the above data, information will be conducted in chapter four, it also supported by the case study, and the last chapter will summarized the main ideas of the research and the recommendations are possible for the implementing ABC‟s conditions in Vietnam – developing country

CHAPTER 2: LITERATURE REVIEW

2.1 Historical development

2.2 Definition and key concepts

2.3 Implementation of ABC

2.4 The critical factors for successfully applying the ABC

2.5 The ABC’s criticisms and limitation

2.6 The comparison between ABC and traditional costing system

of production and of the costs of related services was calculated inaccuracy by the costing systems This led to the decisions making based on the inaccuracy information of managers was also increased

ABC investigates cause and effect relationships to objectively allocate costs as the alternative of using wide-ranging arbitrary percentages to allocate costs After

identifying the costs of activities, the cost of each is attributed to each product to the extent that the product uses the activity By this way, ABC often classifies areas of high overhead costs per unit and then constitutes the solving by decreased the costs

or replaced costly produts Activity-based costing was first obviously defined in

1987 by Robert S Kaplan and W Bruns as a chapter in their book Accounting and

Management: A Field Study Perspective [7] They originally focused on areas of

advanced technology and productivity improvements, especially in manufacturing industry, where have reduced the relative proportion of the direct labor costs and materials, but have increased relative proportion of indirect costs For example, direct costs were decreased such as direct labor hours, but indirect costs were increased such as depreciations, maintenance cost by the increasingly using automatic systems Cross-product, cross-customer subsidies are also occurred in manufacturing industry because managements diverse their products and customers

to reduce financial risk Since private expenses such as withdrawals of directors represent the largest single component of non-interest expense in financial institutions, the accurately allocation in products and customers of these costs must

be took more care Although activity based costing initially developed for manufacturing industries, it may even be a more useful tool for doing this [8] Then,

in 1999 Activity Based Costing were explained more details by Peter F Drucker in the book Management Challenges of the 21st Century [9] He states that traditional cost accounting focuses on what it costs to do something, in contracts, ABC also records the costs of doing nothing, for example, to cut a screw thread; activity-based costing records the cost of not doing, such as the cost of waiting for a needed part, but traditional costing system ignores it

2.2 Definition and key concepts:

activity-In companies with multi goods and services for customers, the absolutely accurate costing information is vital factor in determine whether the profitability products or they are making loss Activity Based Costing is most appropriate method for these companies, but the effort required to successfully implement ABC is spending the time and resources ABC can identify high overhead costs per unit and having the solving to reduce the costs, avoiding inaccurate allocation of costs, and measurement profitability with higher accuracy than traditional that uses direct-labor hours as the only cost driver ABC works firstly with identifying the main activities of process Next to allocate the groups of activities together the cost pools are created Following this cost drivers is identified After that, rates are calculated Which are then applied

to the respective cost drivers for each product or service that is being considered Lastly, originating the overhead cost per unit by dividing the total costs of products

to the numbers in unit of products

2.2.2 Keys concept:

There are some concepts will be used in this research, to having more clearly view, this part‟s talk is to explain these concepts such as cost pools, cost driver, direct and indirect costs The cost pool is the term of accounting, it can be defined as the groups

of accounts serving to express the cost of goods and service locatable within a manufacturing organization The volume of cost pools are different from this organization to others, for example, there may be hundreds of employee in the cost pool for order processing of big companies, whereas there may not have a separate cost pool for this activity in small companies, because this activity only related to one or two employees There are some costs too minor or difficult to allocated, they may not be included in any cost pool

Each activity cost pool has relevant cost drivers which are used in allocating cost Cost driver is defined as any activity that makes the cost incurred A business occupies in many different activities The cost driver is the factor that influences the amount of the resources that will be spent by a specific activity The cost driver is use to determine the activity of the work that is already done, the resource is what the activity uses to do the work, i.e., people, equipment, services, it is important because resources always are expensive

ABC method is related to the indirect cost of the activities, which cannot accountable for the cost objects Indirect costs may include taxes, administrations, personal, contingent and security costs, it can be known as overhead costs In contrast, traditional costing system focus on the direct costs, which directly relate to the products, it includes direct labors, direct materials, direct expenses Indirect costs are those for activities that benefit more than one project, because the exact benefits of

specific project are really difficult to determine, for example, evaluation of the activities of directors of business to the result of projects is impossible Whereas, direct costs are those for the activities that benefit particular project, for example, the salaries for project managers

2.3 Implementing of ABC

The companies will find implementing ABC – a powerful tool in measuring

operating of the company, they want to be successful in implementing this method, there are several steps must be taken which are summary in below figure

Figure 1: Implementing of ABC

1, The study processes and costs – the first step in implementing Activity Based Costing is a research for all the aspects of business processing Employee involvement is main factor to make the system perform effectively and efficiently, thus before the accounting system‟s results are relied truly by the employees at all levels, these results are needed to believe by employees

2, Identify activities – After understanding about the process of implementing ABC, selecting the business activities must be paid attention of the business, these

activities become uncontrollable, too few that leads to no meaning of information If activities are classified at different levels, it can supply better results: unit – level activities which are those activities and a unit of output that have a one-to-one correspondence with each other, for example, in each final product of a camera manufacturing had to checked before packaging, thus, checking may be seen as an activity, batch – level activities which are those activities relate to one or more units

of product, but they still must be performed Example of shipping could be considered as the outstanding of this level, in eBay – one of the biggest online shops, some customers order only one good while others may order more than five at a time, the packing and shipping of ordered goods require the same activities no matter

of how many goods are put in a box, product – level activities which are run at the product level whatever the size of production Product marketing, product design, which are considered as activities and the amount of the finished good have one – to – one correspondence, there are many forms of customer – level activities, catalogs, lines, sales calls, and so on are helped by the technique in customer – level activities The investigation and finding the activities is unique to each company A frame of reference is provided by the above levels to help the organizations estimate what activities are more important for performance of manufacturing Experts who expertize in ABC can also be very helpful in training a company as it searches for its important activities that will become center to an ABC method Generally, these experts advise the following, first every conceivable activity should be listed, second the activities according level should be segregated, and the last is similar activities should be combined logically within each level

3, Identify traceable costs – When a cost occurring that evolving to the particular cost object, that cost should be traced directly to the end of object, the

common example of this is the direct labor and direct material, these costs usually do

to the end of object, there are some other examples for the clearing, there are spending many hours of indirect labors, these costs later would be calculated to the activity cost pool, besides that that costs also relate to the printers so that cost could

be traced to the "customer" cost object

4, Assign remaining cost to activities - After classifying the costs that can be traced to cost objects, the others are allocated to activities, this work sometimes is logical and easy but sometimes difficult, for examples, there are some manufactures

in industrial engineers that their productivity processes are automatic, the workings are based on the set up of the machine, the machine set-up activity is the activity that the cost of setup is assigned to, a variety of final goods will reallocated this activity However, in industrial engineers the cleaning up after each machine setup will be required because of the massive and complexity of this industry

The considering of what activity will engage cost and what cost object shall cost ultimately be attributed are important for management The allocated cost decisions are controversial even though that there are some, therefore, some costs will be not allocated by ABC, but that does not mean this system ignore to allocate these costs For the purpose of identifying particular product‟s cost or other cost object, the leaving of unallocated cost of ABC is logical, but it would be reckless to forget about these unallocated costs, the management of organization must recover all of them To recover the unallocated and allocated cost, the prices must be limited

5, Determine per-activities allocations rate – When the total costs for each activity have been measured, then the identifying the cost pools are necessary, for

example, the preparation of products‟ catalog activity cost pool costs $400,000 and 400,000 catalogs were printed, hence the allocated catalog cost would be $1.00 each

6, Apply costs objects – to calculate the number of activity cost to allocate to each cost object, the using activity based rate is the final step Following the above example of catalog, the allocated cost from the catalog preparation pool was $1.00 each, this cost is not the total costs, but the allocated amount, the total cost would also include the directly traceable amounts (printing, postage, etc.), the cost of catalog, along with other customer-related costs would be compiled in some form of summary report, managers then have a calculation of what the cost of supporting an additional customer is

2.4 The critical factors for successfully applying the ABC

This research will point out some factors that Vietnamese companies should consider when having the project on implementing ABC The factors that will be considered include the developing of non-interest expenses‟ management accounting policies and standards, picking a suitable and appropriate ABC methodology, identifying the scope of the project accurately, choosing the fitting ABC application, assembling and training teams that have responsibility of ABC in company, and developing and sustaining the ABC database

The first factor is the developing of policies and standards involve to the non – interest expenses‟ management accounting How non – interest expenses in the business is treated make the affirmation of the creation of costing consistently throughout the institution When implementing an ABC method to get a more profit objective, the enhancing of management accounting policies and standards commands how assets, liabilities, revenues and expenses are treated in the profitability system The buy – in across the organization will be created by the establishing the policies and standards at the high level of management The committee for the policies will be a factor for success of ABC approach

The second factor is the choosing the right methodology of ABC The activity level costs and non-interest expenses of processing center to each activity are related to each other To distribute these non - interest expenses, the need of a selecting the suitable method is critical, cost information is tied to business events directly as a result for managements‟ usage When the costs are linked to the business activities and changes in size, the relationship between costing information and profitability is immediately set Hence, management will embrace the reliability of the information

The third is the determining the scope of Activity Based Costing project, which is vary because it is depend on the size of financial department The estimating the duration of project requires the accuracy because the need for setting the expectations After the duration of the ABC project is predicted, the note for the leverage existing unit cost data should be considered

The selecting an ABC application is important because all the objectives and requirements ABC approach will be meet The flexibility to create and build unit costs for both qualitative resource groups and for processing resource groups should

be allowed by the ABC application The survey in web-based which are functionality for units and positions also should incorporated by the application

Then the factor of assembling and training ABC team is analyzed because the size of this team depends on the expectation about ABC approach of the company Initially, team should be received the guidance and instructions from the ABC resource The transferring of this ABC knowledge should be quickly to develop team members into contributors to ABC process

The maintenance of ABC database is the last factor, which addresses that continuing maintenance of the unit costs is required The changing in center operating expenses

is reflected by the unit costs which are updated annually New unit times must be developed when having the new systems or the changes in the procedures the unit times must be adjusted The unit times still should be reviewed every several years for the accuracy even though there are no changes in procedures or installing new systems

Understanding these above factors, the organization will have the full view of many opportunities and the potential available in ABC method When implementation the

activity-based costing is successful, this approach will classify the basis of resource management, profitability measurement, and strategic management

2.5 The ABC’s criticisms and limitation

Activity Based Costing is based on the arbitrary allocation of cost subjectively The cost drivers or the number of allocations bases of ABC technique is the major different between ABC system and traditional costing system ABC creates complex costing systems, sometimes these systems are not really useful and necessarily, while the traditional costing system focuses only on allocation criteria, absorption criteria, and the volume of assumptions [10] It is difficult to make the decision because if there is a changing in production volumes, profits will not be predictable by ABC system It is usually having problem in resource such as bottleneck of resource that make the exceed of capacity, but ABC cannot investigate this problem, it also ignores the constraint of firm‟s internal capacity, for example, the demanding from the market for its goods is higher than its capacity for production, the firm should determine the optimal product mix according to each product‟s contribution per unit

of the limited resource [11] The relationship between resource consumption and activities is regarded as a line and certain by ABC system, therefore, additional activities of additional costs will imply cost reductions However, the fact that there still are discontinuous costs, i.e., if a train leaves the station with half empty seats, although that cost per passenger is calculated base on actual capacity or assumption

of full capacity, this cost is relevant for managers in making decision In case of cost per passenger based on full capacity is $20, the usual price of one ticket is 30$ for

500 seats in train The managers can decrease the price to $19 to fill all empty seats

in the last minutes before leaving station Most of the costs are fixed, hence in this case, the cost per passenger is not relevant for decision making, a profit and loss per train report based on these data is similarly flawed

Some overhead costs such as the wages of managers cannot to be divided on the usage basis per product Similarly, workers usually do not contribute their working hours totally to product activities, and the end products of company are not added value by all the product activities, for example, the occurrence of „cost leaks‟ as the result in the failing of ABC in measuring the times that employees takes part in first campaign The business sustaining costs are difficult to assign to products and Finally, the paying too much attention to control and detail could make the picture is more obscure or make the company identify the wrong way to achieve their objective

in a quest of small savings, making the firm “penny wise and pound foolish”, for example, ABC could identify an inspection as non-added value, or one distribution channel as non - remunerative They still stand on the first place to achieve some other objectives of company, although such channels are non – profitability

2.6 The comparison between ABC and traditional costing system

2.6.1 Costing system

Costing systems are considered as information systems A particular type of

information like units produced and direct labor dollars are required by these costing systems to be of value The input data identified methodology, these data determine information and product costs according to specific costing system Although the same input data are used in different ways, the outcomes still depend on the costing system used, in this case it could be an activity based costing system or the

traditional costing system The provided information should help in minimizing the waste, but always making affirmation that it is also not wasteful In other words, the benefits are derived from the use of the costing system should be more than the designing, implementing, maintaining that system as the resources required

2.6.2 Traditional costing system

Traditional costing systems are any of the systematic costing methods that prevailed before the rise of activity-based costing in the 1990s Because they rely on an essentially arbitrary allocation of indirect costs, such systems do not give managers accurate product cost information, which means that accurate calculation of product profitability is not possible The overhead rate in a traditional costing system would typically be calculated using direct labor hours, machine hours, or units This could lead to accurate product costs when direct costs were high and indirect costs were low, as was usually the case 50 years ago; however, modern organizations typically have low direct costs and higher indirect costs

2.6.3 ABC versus Traditional costing

In generally, the different between are firstly, traditional costing is obsolete whereas ABC is used more by various target-oriented companies, secondly, ABC methods help the company to identify the needs of keeping or eliminating certain activities to add value to the products but traditional costing does not, thirdly, traditional costing focus on the structure rather than on processes whereas ABC methods focus on the activities or processes rather than on the structure, ABC provides accurate costs whereas traditional costing accumulates value arbitrarily, and lastly, traditional costing is most obsolete whereas ABC are large in use since 1981 The following example will show more details for the above points

Example 1: Suppose that TH Company manufactures leather accessories and

leatherette accessories The running of each type is different but the equipment for both is same To prepare for the next batch the equipment is maintained, set up and cleaned Two types of product are packaged similarly, each packing has 20 units of products TH Company expects to manufacture 1,000,000 units of leather type and 2,000,000 units of leatherette type The allocation to activity pools of overhead costs

as follows:

Cleaning and maintenance 285,000

Identifying the cost drivers, estimating the total numbers of each product that are expected, calculating each cost drivers‟ units cost are the tasks of accountants and managers of production based on the activity pools

Total Expected Units for Cost Driver (1)

Total Cost (2)

Unit Cost per Cost Driver (3) = (2)÷ (1)

Purchasing of

materials

#purchase orders

The following table shows activity by product:

Expected Use ABC Cost Assigned

Activity

Cost Driver

Unit Cost (3)

Leather (4)

Leatherette (5)

Leather (3) × (4)

Leatherette (3) × (4)

purchase orders

containers filled

overhead cost per unit of leather accessory is $0.51 ( ), overhead cost per unit

of leatherette accessory is $0.33 ( )

Under the traditional method, the allocation of overhead is based on direct labor dollars, to calculate the total costs for all the products will be divided by the total direct labors dollars of all products The total direct labor costs of $1,500,000 in which $300,000 for leather accessories and $1,200,000 for leatherette accessories are estimated during the year The direct labor costs per unit for leather accessories are

$0.30 ($300,000 ÷ 1,000,000) and $0.60 for leatherette accessories ($1,200,000 ÷ 2,000,000) There are two steps to calculate the costs per unit to produce:

1 The predetermined overhead rate is calculated as total overhead costs are divided by total direct labor dollars

2 Overhead is allocated to each type as the overhead cost per direct labor dollar

is multiplied by the per unit direct labor dollars for leather and leatherette accessories

Step 1: Calculate overhead per direct labor dollar

= $0.787 per direct labor dollar

Step 2: Allocation of overhead

Overhead cost per direct labor dollar x Direct labor dollars per unit

Leather accessories

Leatherette accessories