Tài liệu A study on impacts and effectiveness of abc costing method as a cost effective measurement in coal industry

A STUDY ON IMPACTS AND EFFECTIVENESS OF ABC COSTING METHOD AS A COST EFFECTIVE MEASUREMENT IN COAL INDUSTRY BY NGUYEN THI THU HUYEN E0600083 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 i Declaration I hereby declare that the graduation project is based on my original work except quotations and citations which has been duly acknowledged. I also declare that it has not been previously or concurrently submitted for any other course/degree at Help University or other institutions. The word count is 12,236 Words. NGUYEN THI THU HUYEN April, 2011 ii Acknowledgement First of all, I am grateful to Ms Van Anh, the professor who gave lots of useful advices as well as materials for this thesis. And I would like to extent my thanks to all managers from productions, marketing, and accounting departments and all of employees in 50 manufacturing companies, who allowed and assisted me to collect all of necessary information to finish this thesis. My thesis can not be finished without your supports. iii A STUDY ON IMPACTS AND EFFECTIVENESS OF ABC COSTING METHOD AS A COST EFFECTIVE MEASUREMENT IN COAL INDUSTRY BY NGUYEN THI THU HUYEN APRIL, 2011 Supervisor: Ms Nguyen Van Anh Abstract: According to previous researchers, different costing method has different core competitive advantages to organizations. From the oldest to newest method, decision of managers is still affected. As a result, finding the best method to reduce the failure rates and increase the effectiveness of cost allocation is a hard question for both managers and accountants. Based on the accounting history, there are many types of costing method such as: traditional or absorption costing method, variable costing method, throughput costing method, and ABC costing method. Changes in business environments requires a better method which can help managers control their performance while still enhance the profit to organizations. Compare to previous method, ABC costing method still inherent some characters of other method but it changes a little bit to be suitable to the accounting and business environment. Instead of sharing costs equally among departments, managers filtered the most profitable products to focus on and try to increase the number of products within a cost limitation. This is why the author thinks that ABC can be evaluated as the best method to adopt in manufacturing firm especially iv in coal industry. Unlike developed countries in the World, Vietnamese business environment changes rapidly but some characters still maintained the same. Therefore, a statistic about the number of companies who implement ABC can reflect the effectiveness, applicability, and impacts of this method on both managerial decisions and plants’ performance. v Table of Content Declaration..............................................................................................................ii Acknowledgement ..............................................................................................iii Abstract: ................................................................................................................... iv CHAPTER I: Introduction ............................................................................... vii 1.1. Introduction about the topic ........................................................................................ 1 1.2 Need for Research ........................................................................................................ 3 1.2.1 Research question ..................................................................................................... 3 1.2.2 Research objective .................................................................................................... 3 1.3 Elements of the Research ............................................................................................. 3 CHAPTER II: Literature review ..................................................................... 5 2.1ABC costing method: history and calculation method ................................................. 5 2.1.1 History of cost accounting methods and ABC general review ................................. 6 2.1.2 Cost factors and calculation method ......................................................................... 7 2.2SWOT or appreciation and criticism method ............................................................. 10 2.2.1. ABC appreciations ................................................................................................. 11 2.2.2 ABC critism ............................................................................................................ 14 2.3 Impacts of this method on decision making process of manager as well as its influences on the organizations ........................................................................................ 15 CHAPTER III: RESEARCH AND METHODLOGY ............................................... 20 3.1Research objective ...................................................................................................... 20 3.2Research strategy ........................................................................................................ 20 1.3Research hypothesis .................................................................................................... 21 3.3.1. Correspondence between ABC method and the capability of manufacturing companies ........................................................................................................................ 22 vi 3.3.2. Impacts of ABC on performance: whether ABC is the best costing method to measure the performance of companies? ......................................................................... 25 3.4 Measurement of variables .......................................................................................... 28 3.4.1 Dependent variables (Plant performance) ............................................................... 28 3.4.2 Independent variables ............................................................................................. 29 3.4.2.1 Activity Based Costing (ABC) implementation .................................................. 29 3.4.2.2 Plant-level control variables ................................................................................ 33 3.5 Research methodology ............................................................................................... 33 3.6 Data sources and sampling......................................................................................... 34 3.6.1 Sample selection ..................................................................................................... 34 3.6.2 Data collection method ........................................................................................... 34 3.7 Limitation of research ................................................................................................ 35 CHAPTER IV: ANALYSIS .......................................................................................... 37 4.1 Results Analysis ......................................................................................................... 37 4.1.1 Percentage method .................................................................................................. 37 4.1.2. Impact of ABC on plant performance .................................................................... 43 4.2 Discussion .................................................................................................................. 45 CHAPTER V: CONCLUSION ..................................................................................... 46 5.1 Implication of research............................................................................................... 46 5.2 Conclusion ................................................................................................................. 46 REFERENCES ............................................................................................................... 48 APPENDIX .................................................................................................................... 55 vii CHAPTER I: Introduction 1.1. Introduction about the topic For many researchers, cost accounting methods are still a major concern for them. Different method leads to different decisions of the managers therefore profits to the organizations can not be the same. Most of documents of cost accounting methods were destroyed in a fire in 1984 (Cunagin, C., & Stancil, J., L., 1992). As a result, following the sources of these methods is still important and difficult. However, based on the advantages of these methods, the affects on the decisions of managers can be obvious. As a result, the author of this thesis hopes that the empirical study of advantages and disadvantages of ABC in order to judge the effectiveness that this method can bring to the organizations as well as the impacts of its on the decisions of the managers. SWOTS model will be applied to analyze this. And a research on a real survey which is done by 20 specific companies in the coal industry can be more reliable and convince to readers. Based on the statistics, some recommendation about the importance and impacts of cost accounting method on the managerial decision making process should be released. As mentioned above, to discuss about any thing, we need to know a little bit of history of cost accounting methods. Although it is quite difficult to follow exactly the origin of each costing method, the estimation about the time period of absorption costing method and variable costing method can be made according to different documents of various fields (Vangermeersch, R., 1986). Based on most of researching documents, absorption method can be considered as the leader for all kind of costing methods in later on. It is easier for both users and managers. As a result, until now, this method is still applied in many aspects such as administration works. Timing and changes in the 1 business environment lead to the need for new costing methods for new cost objects. Variable costing was born as a result of the demand of this. According to this method, only costs which are adjusted to the production process should be concerned by the managers. However, in the long run, some fixed costs still need to change. As a result, a new cost accounting method is invented. Instead of sharing equally among various departments and maintaining the fixed costs in the long run, expenses are divided differently based on some factors such as labor hours, direct materials and the fixed cost can be changed based on the need of the production process. None of products needs the same quantity of direct materials as well as the direct labor hours. So managers should know how to use and allocate the costs more efficiency. This does not mean the ABC costing method is perfect, the latest cost accounting methods become more and more beneficial to the companies. SWOTs model is the most familiar model which is used to analyze the advantages and disadvantages fairly in management aspect. This refers to the strengths, weakness, opportunities and threats. Since the author focus on the management accounting, this model can be considered as the most useful one. This is quite easy to see that management accounting does not mean the managers only work with numbers and calculation; it requires more specific characters from managers such as observation, critical thinking and flexibility. Through the numbers and statistics, managers should see the signs that lead the organizations to the highest return when they invest their capitals. After drawing a draft in their mind, managers will make the best decisions to enhance the operation process and allocate the right costs to the right departments at the right time. And comparing the results from year to year by using other costing accounting methods and ABC can be the best way to implement. 2 However, theory is still the theory if we can not use it in the real business environment. A real survey including 20 companies should be chosen as an evidence for what the author said. Based on their own number, the author as well as readers can figure out how many percents this study is right and how they could apply when they open a new company. Wrong or unsuitable costing method can destroy a company so easy. As a result, considering and choosing the best cost accounting methods are really important. 1.2 Need for Research 1.2.1 Research question What is the overall direct and indirect impact of ABC on manufacturing firm performance? And can ABC be considered as the best costing method adopting in plant to enhance the performance improvement. 1.2.2 Research objective Generally, most of previous researches only focus on impacts of ABC in theories. But none of them mentioned about the rate of adopting ABC method in Vietnamese enterprisers. In order to apply ABC, many 1.3 Elements of the Research No theories can convince readers without the evidence. As a result, in this part, a real survey of manufacturing companies will be shown. A short introduction of the industry will be focused. Core competitive advantages as well as disadvantages of this 3 industry will be covered. This background will help the readers understand and draw a big picture of this industry. After this, a statistics about the number of companies which adopted ABC will be explored. Based on this result, we can figure out whether all of advantages of ABC in the theories are true or not and in what circumstances. Some evidences about the impacts of ABC on the managers’ decision in the current year compare to the decisions by adopting other cost accounting method will be mentioned. Depending on these, some recommendations will be concluded in the next part. And this survey will ensure that the advantages and disadvantages that the author wrote in the earlier part are correct. In the last part, a short interpretation with the result of the survey will tell the readers what decisions that the manager made in two different circumstances: with and without the ABC costing method they applied to calculate. And some recommendations will be made to managers to make sure that this can provide the readers an objective view about the impacts and effectiveness of ABC as a cost effective measurement to some companies in Coal Industry. 4 CHAPTER II: Literature review 2.1. ABC costing method: history and calculation method In the brief description, cost accounting can be considered as the way the accountants use to calculate the costs to create a base and establish a price for products based on the cost calculation foundation. This means managers not only understanding about costs which are occurred during the business runs such as what kinds of those costs, their characteristics and classification (Weygandt, J., J.; Kimmel, P., D.; & Kieso, D., E., 2009). Depending on this analysis of accountants, managers can know how to allocate costs more effective and efficient. However, bigger scales of business require better cost accounting methods as well as more precise and probably accounting information. As a result, we can see that except ABC, there are many kinds of costing methods were invented. Before the dawn of industrial century, costs and price of products only depended on some directed costs which are classified as variable costs today such as: direct labor, direct materials, and manufacturing overhead. All of these will be divided equally based on some fixed criteria such as direct labor hours. However, when the accounting scientists focused more on the costs study aspect, they discovered that except direct costs as mentioned in documents, there are some other costs which can be considered as indirect costs like maintenance, tooling, production control, purchasing, quality control, storage and handling, plant supervision and engineering costs. Unlike directed costs, these did not be changed during a long period when any changes occurred in the volume of products (Shim, J., K., Ph.D.; & Siegel, J., G., Ph.D.; 2009). Therefore, they named 5 these as “fixed costs” to identify the differences of these costs with directed or variable costs. Despite of attempt of many accounting researchers during a long time, the importance of “fixed costs” are only really emphasized since the twenty-first century (Stenzel, C., & Stenzel, J., 2002). In this thesis, the author will focus only in ABC method, its impacts and influences on the managers’ decisions by using SWOT analysis and survey results. 2.1.1 History of cost accounting methods and ABC general review A fire at the headquarters of the National Association of Accountants (NAA) in 1984 destroyed most of documents related to the costing methods (Cunagin,C., & Stancil, J., L., 1992) . Therefore, to identify exactly time when cost accounting were invested is quite impossible. Previously, variable costing method was used as the only and easiest way to calculate the costs. This is because it is easy to accountants as well as managers and shareholders understand the directions of costs since all of directed costs are treated in the same manners. Development of science brought another method which is called traditional cost allocation methods or VBC (Volume Based Costing) when the fixed costs were invented. However, when the organizations want to expansion their business, more costs are appeared. This leads to a demand for a new costing method which can adjust and treat both new and old costs in the same way. As a result, ABC costing method was born. Time by time, this methods proofed more and more advantages since the scale of businesses increasing as a requirement for industrial age. In a World when the globalization becomes a trend of the societies, ABC can be considered as a popular and dominated costing method for most of organizations. In the past, profit means you had a list of potential customers who can buy a huge quantity of 6 products in many times. However, this might be not right in reality. Profitability not only depends on the quantity but also the differences between the price and the costs. In fact, the higher differences, the higher profitability. Unlike traditional method which allocates costs equally among products, ABC divides costs based on the requirements of costs objects like products, services and jobs (Cooper, R., & Slagmulder, R., 2005). In other words, we can say this method is the best tool for refining cost systems. For instance, a shampoo A needs 1hour to produce while shampoo B needs 1.5hours to manufacture. This means different items will require different cost amounts. As a result, accountants should know which costs will be used for what cost object and at what rates. In facts, one indirect cost can be allocated for more than one cost objects. By this way, managers can follow costs streams for different costs objects and decide how to allocate those costs precisely. Moreover, shareholders can have more options when they want to invest in the organization. Hence, the effectiveness of the business will be enhanced. 2.1.2 Cost factors and calculation method With variable costing method, only direct costs are calculated, indirect costs will be treated as expenses on the income statement. This is different with traditional costing method when both direct and indirect costs are included. Compare to these two methods, ABC method calculates costs in a unique way. There are four levels which are included in ABC costing method to classify costs which are output unit level, batch level, product sustaining and facility sustaining cost. Each level will reflect a specific way to identify the cost objects. At the first level, costs will be allocated individually to one unit of products or services. The higher volume of items, the higher costs required. At the higher level, cost of activities performed will be calculated on a specific group of 7 products or services. In order to do this, managers or accountants will establish some standards for these groups such as how many items in a group, what is the characteristics to classify them into a batch and etc. After allocating cost to a group, managers can divide costs for each item as mentioned in the first level. Different to two levels above, product sustaining costs refers to other supporting product costs which are necessary for the producing an individual product or service. For example, when the manufacturer want to make shampoo B, except ingredients as shampoo A, olive oil is required. As a result, this cost is still included as a manufacturing cost for shampoo B while it is not occurred in producing shampoo A. Additionally, this can be considered as a fixed cost which is not changed when the number of units and batches of individual products or services changes. Similar the third level, the last level mentions about the costs that are needed to support for producing but for the whole process. These costs might be not occurred for an individual product or service however, it is required to finish the manufacturing. As a result, the name of this level is facility sustaining costs. Since the costs are divided into different level of cost objects, calculation of ABC method also differs with traditional and variable costs. As mentioned in the figure 1.2 below, the first step of this method identifies what resources that manufacturers need to produce chosen products. For example, to make 1000 bottles of shampoo A and 2,000 bottles of shampoo B, manufacturers need to buy ginseng and olive oil. After defining the necessarily resources, the quantity as well as costs of those should be computed based on the number of products or services. This means all of costs such as direct material; direct labor and manufacturing overhead will be included and allocated separately. In the next step, all of activities during production process should be listed. It helps to create a standard or foundation to allocate costs which are budgeted. Based on 8 this action, managers can know how many activities required for a specific products or services and establish in their mind a whole picture about cost pool with all of items. By this way, the reliability of data and measurement will be increased rapidly and the following cost allocation will be easier for both managers and shareholders. Finishing identifying activities likes installing, running and maintaining, counted costs will be traced to different required products or services’ activities. Various companies and managers, criteria to allocate costs might be distinguished. For example, manufacturing costs can be divided among products and services based on the cause and effect relationship. When all of costs are distributed, the total costs for each products or services as in the last step of this method. The fourth and the fifth step of ABC will help managers diversify the risks of producing and figure out the best way to use costs more effective and efficient. As a result, in fact, this method is a little bit more expensive and complicated compare to traditional and variable method. However, it provides more precise and useful information to managers therefore it is still the first choice for most managers and companies. 9 Figure 2.1.2: ABC in one 2.2. SWOT or appreciation and criticism method SWOTs model is the most familiar model which is used to analyze the advantages and disadvantages fairly in management aspect. This refers to the strengths, weakness, opportunities and threats. Since the author focus on the management accounting, this model can be considered as the most useful one. However, in order to be suitable with the characters of accounting, the author will divide this method into 2 parts only: appreciation and criticism. This is quite easy to see that management accounting does not mean the managers only work with numbers and calculation; it requires more specific characters from managers such as observation, critical thinking and flexibility. 10 Through the numbers and statistics, managers should see the signs that lead the organizations to the highest return when they invest their capitals. After drawing a draft in their mind, managers will make the best decisions to enhance the operation process and allocate the right costs to the right departments at the right time. And comparing the results from year to year by using other costing accounting methods and ABC can be the best way to implement. 2.2.1. ABC appreciations As mentioned in the calculation part, ABC method brings many benefits to organizations but in this thesis, the author only summarizes these into some points such as: identifying key customers and products and services, establishing the most useful pictures about high and low profitable items and directing the whole companies in the best way to enhance the profit. Moreover, costs can be considered as the major factor which can proof the ability of managers in maintaining the efficiencies of financial activities. By following annually reports, managers can predict the trend of products in next year as well as figure out the reasons for inefficient financial issues in case it occurs. If the managing way is suitable, companies can maintain and develop the current directions for cost allocating and operational process. And the precise accounting information increases the improvements for managers through reports and shows them required expenses to achieve those improvements. Based on these reports, accounting department can corporate with marketing department to design an effective marketing plan using limitation resources. The last but not the least, both managers and staffs can enhance their ability in negotiating with the customers and locate the profitable products or services better. 11 None of cost accounting methods can compete with ABC about the ability in determination the customers as well as the products and direct the whole organizations in the most profitable way. Since all of direct and indirect costs are computed and assigned to each products and services, manufacturing expenses are definitely determined. In order to measure the profitably for each customer, products or services expenses should be deducted. This will create the correlative relationship between products or services and customers’ expenses and enhance the effective of the business. As a result, not only accountants or managers, normal staffs also can grasp, analyze related expenses of producing and define the way to deliver the value added to the customers. Moreover, a good understanding foundation can help these ones feel more confident about their products or services explain and convince the customers better according to the real facts. This can be mentioned as a continuously process which includes costs analysis and deduction non value added activities to reach the higher level of an effective organization operation as a whole (Ittner, 1999, Cooper et al. 1992). Moreover, with better understanding about allocating costs effectively, R&D department can create new products or services within a competitive cost compare to other brand names in the same market. Potential products or services will be focused more if the organization applies this method. Using a more complicated but high detailed calculation method, ABC plays an important role in decisions making process as well as operational process of managers. Cost cutting and cost control savings characters enhances the position of ABC in developing value added products or services while still maintain an effective cost resources. One of the most popular implementation of ABC is 12 scorecard balance which provide a fairly judgments among various products and services. In other words, this is a flexible, precise and detailed costing method. In previous researches, ABC is referred as a task for accountants to identify the key products or services, costs drivers and related activities costs assigning (Cooper, 1988; Ittner et al. 2002). Not only direct materials, direct labors and direct manufacturing overhead costs but also indirect cost such as indirect materials and installing and maintenance costs are also distributed depending on the required activities of each products or services. However, during the production process, there are some other sustaining costs. This can be individual or group. Therefore, these expenses should be divided separately to related activities of products or services based on a factor which is called cost driver rate (Cooper and Kaplan, 1991). This will increase the reliabilities of data and help managers make the best decisions for specific support productions activities. Another benefit that the author wants to discuss in this thesis is evidences for financial management and operation process. Applying a more detailed calculation, ABC provides economists a better database with higher level of accuracies and reliabilities compare to traditional and variable costing methods (Cooper and Kaplan, 1991; Ittner, 1999). In the industrial age, information is the core advantage to all of organizations. The winners will be the ones who can access and hold the most useful and reliable information especially accounting information. This enhances the importance of ABC in the eye of managers. From earlier of the century, many researchers declared that organizations can gain lots of benefits when they implement ABC costing method (Anderson and Young, 1999; Cooper and Kaplan, 1991). Other benefits of ABC such as manufacturing improvement, better product information, allocating limited sources and 13