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

THE IMPLEMENTATION AND ADOPTING OF ACTIVITY BASED COSTING IN MANUFACTURING VIETNAMESE COMPANIES A CASE STUDY OF SAMSUNG VINA CORPORATION BY TO THI THUY HA Graduation Project Submitted to the Department of Business Studies, HELP University College, in Partial Fulfillment of the Requirements for the Degree of Bachelor of Business (Accounting) Hons APRIL 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 10,346 words ii 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 iii 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 iv 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 Introduction 1.2 The objectives of research: 1.3 Problem statements: 1.4 The presentation: CHAPTER 2: LITERATURE REVIEW 2.1 Historical development: 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 v 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 vi List of Figures Figure 1: Implementing of ABC 13 Figure 2: Theoritical research framework 31 vii CHAPTER 1: INTRODUTION 1.1 Introduction 1.2 The objectives of the research 1.3 Problem statements 1.4 The presentation 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 volumebased 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 whether the use of Activity-Based Costing has an effect on firm‟s performance, and 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 16 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 17 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 18 activity-based costing is successful, this approach will classify the basis of resource management, profitability measurement, and strategic management 19 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 20 Some overhead costs such as the wages of managers cannot to be divided on the usage basis per product Similarly, workers usually 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 21 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 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 22 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: Purchasing of materials $250,000 Setup of machines 345,000 Packaging 300,000 Cleaning and maintenance 285,000 Total overhead costs 23 $1,180,000 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) Unit Cost per Total Cost Cost Driver (3) = (2) (2)÷ (1) Activity Cost Driver Purchasing of materials #purchase orders 100 $250,000 $2,500.00 Machines‟ set up #setups 250 345,000 1,380.00 Packaging #containers filled 150,000 300,000 2.00 Maintenance and cleaning #of runs 250 285,000 1,140.00 The following table shows activity by product: Expected Use Activity Cost Driver ABC Cost Assigned Unit Cost Leather Leatherette Leather Leatherette (3) (4) (5) (3) × (4) (3) × (4) Purchasing # purchase orders $2,500.00 50 50 $125,000 $125,000 Set up # setups 1,380.00 125 125 172,500 172,500 Packaging # containers filled 2.00 50,000 100,000 100,000 200,000 1,140.00 100 150 114,000 171,000 $511,500 $668,500 Maintenance #runs and cleaning Totals Under ABC method, the overhead cost per unit is calculated by overhead costs assigned to each product are divided by the number of unit of that product, therefore 24 overhead cost per unit of leather accessory is $0.51 ( of leatherette accessory is $0.33 ( ), overhead cost per unit ) 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: The predetermined overhead rate is calculated as total overhead costs are divided by total direct labor dollars 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 $0.787 x $0.30 = $0.24 overhead per unit Leatherette accessories 25 $0.787 x $0.60 = $0.48 overhead per unit Hence, there are different results on calculating overhead costs per unit in two methods TH Company 2010 Overhead per unit Activity Based Traditional costing Costing Leather accessories $0.51 $0.24 Leatherette accessories $0.33 $0.48 This example showed that using ABC method the leather accessories‟ overhead cost of $0.51 is higher than $0.24 by using traditional costing method The overhead cost of $0.52 supply more accuracy in decision makings about production and pricing than the traditional one For the leatherette accessories, the ABC method gives the overhead costs of $0.33 and the traditional method gives the overhead costs of $0.48 per unit Only using direct labor dollars to determine the allocated costs of traditional costing system make these differences, thus higher allocation of the overhead cost is result of higher direct labor dollars of a product, and the lower direct labor dollars gets less allocated of overhead costs When overhead costs are allocated by the direct labor dollars, the number of purchasing, set up, or packing that the product actually uses does not impact the allocation of overhead costs When overhead costs are incurred at the different rate as direct labor dollars, ABC method provides a way for allocated costs more accurately, it is very useful in estimating of costs for use in making management decisions [12] The costing systems become more complicated because the more activities are found, so 26 computer system is really needed for a complex system such as ABC Some companies want to keep the system manageable, the numbers of activities are limited in their costing system Tải FULL (file word 64 trang): bit.ly/2Ywib4t Dự phòng: fb.com/KhoTaiLieuAZ 27 CHAPTER 3: METHODOLOGY 3.1 Conceptual framework 3.2 Qualitative case study designs 3.3 Data collection 3.4 Data designs 28 This chapter provides a discussion of the methodology used in this research, it begins by talking about conceptual framework, and the second part is describing the advantages, limitations, and sampling selection of the qualitative case study design 3.1 Conceptual framework 3.1.1 Contingency theory Contingency theory and Organizational theory will be adopted in this research to develop the framework of research Management accounting field adopt Contingency theory widely to conduct their research [13] In the environment of the organizational setting where controls systems operate and function, these systems are designed and application contingently by the affirmation of Contingency theory [13] The characteristics of management accounting system are explained by this theory widely [14] Waterhouse and Tiessen [15] stated that on the numbers of factors such as product diversity, cost structure, size, level of competition and degree of customization [16, 17], management control system‟s structure and design is contingent The relationship between the contingency factors and ABC was explained in the example that given by Sartorius, Eitzen and Kamala [17] The manufacturing firms, specially the firm that produce more than one type of products and each type also uses different amount of resources today need for more accuracy information of cost allocation because of the increasing of fixed cost, ABC is one of the technique improve the accuracy of allocated costing [18] There are many factors that lead to the emergence of more sophisticated costing system such as ABC, one of them is competitions, and in addition, the number of activities and the volume of overhead needs to be coordinated, as the result ABC method is adopted by larger companies more than smaller companies as well as limited resources [17, 19] However, the differences always occur in implementing and adoption of an Tải FULL (file word 64 trang): bit.ly/2Ywib4t Dự phòng: fb.com/KhoTaiLieuAZ 29 innovation [20] Thus, in explanation of ABC implementation stages Contingency theory is not adequate Organizational theory is theory supported for Contingency theory, it supposes that there are four categories in the changing of an organization are classified, they are culture, technology, structure and products The stages of implementing ABC are categorized as the administrative procedure by Gosselin [21], therefore, success of ABC is determined by top-down approach because it is considered as the structural changing 1134979 30 ... 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... 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. .. many factors affect to the capacity of the manufacturing potentially, Activity Based Costing is designed to provide managements the accurate information of costs for finding strategies and making