Tài liệu Performance measurement and costing system in new vietnamese companies

PERFORMANCE MEASUREMENT AND COSTING SYSTEM IN NEW VIETNAMESE COMPANIES BY PHAM THI THU HANG E0600071 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 OCTOBER 2011 i DECLERATION 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 12,778 words. PHAM THI THU HANG Date: ii ACKNOWLEDGEMENT This graduation thesis is the result of twelve weeks of research and writing during the autumn of 2011. It has been an interesting and learning experience. In fulfilling this thesis, I would like to give my special thanks to many people for their significant help, contribution, and recommendations during my writing process. First and foremost, special mentions and grate thanks must go to Mrs. Nguyen Van Anh , my supervisor at International School, Vietnam National University, Hanoi. With his master knowledge and experience in writing thesis, he has wholeheartedly helped me in writing this thesis. I could not have been able to complete this thesis without his positive suggestions and guidance. Secondly, I want to thank all the managers and staffs of Hungyen Garment Join stock Company, for their cooperation that helped and inspired me in writing. Thirdly, I would also like to give my heartfelt thanks to the authors who provided me with valuable books for my thesis. My appreciation is to my family and my friends for their supports and encouragements. Gratefulness is to the readers also, whose feedback will help much in improving the thesis. Hanoi, October 2011 Pham Thi Thu Hang iii PERFORMANCE MEASUREMENT AND COSTING SYSTEM IN NEW VIETNAMESE COMPANIES BY PHAM THI THU HANG OCTOBER 2011 Supervisor: Mrs. Nguyen Van Anh ABSTRACT The graduation projects the results of research performance measurement and costing system in new Vietnamese companies. The objectives of the project were to understand impact of performance measurement and costing system in new Vietnamese companies which show the importance of performance measurement and costing system. Benefits of performance measurement and costing system will be required to improve the competitiveness of new enterprises in the 21st century. A performance based costing system was discussed, highlighting its capability to measure performance in such areas as knowledge management and information systems, as well as performance across functions and organizations. The steps for setting up that Performance Based Costing system were described. Finally, a framework describing the relationship among Performance Based Costing system components was presented in the hope that it would provoke more thought on and development of the concept In this thesis, the researcher uses case study of Hungyen Garment Join stock Company because this Branch may be given more accurate information and able to take the right actions. iv TABLE CONTENT DECLERATION .................................................................................................. ii ACKNOWLEDGEMENT .................................................................................. iii PERFORMANCE MEASUREMENT AND COSTING SYSTEM ............... iv IN NEW VIETNAMESE COMPANIES .......................................................... iv LIST OF FIGURES AND IMAGES ................................................................ vii LIST OF ABBREVIATION ............................................................................. viii CHAPTER 1 - INTRODUCTION ...................................................................... 1 1.1 Introduction ................................................................................................ 1 1.2 Problem statement ...................................................................................... 3 1.3 The objective of research ........................................................................... 3 1.4 The structure of paper ............................................................................... 5 2.1 Costing systems ........................................................................................... 6 2.1.1 The overview of costing system ............................................................ 6 2.1.2 The importance of costing systems........................................................ 7 2.1.3 The type of costing systems ................................................................... 9 2.1.4 Design of a Performance Based Costing (PBC) system ...................... 13 2.2 A framework for measuring performance in new enterprise .............. 17 2.2.1 Type of performance measurement ..................................................... 17 2.2.2 The importance of measurement performance .................................... 20 2.2.3 Issues with business performance measurement (BPM) ..................... 20 2.2.4 The framework for performance measurement in new company ........ 24 2.3 Conceptual framework ............................................................................ 26 2.3.1 Performance Reference Model (PRM) ................................................ 26 2.3.2 Contingency theory .............................................................................. 28 CHAPTER 3 - RESEARCH METHODOLOGY ........................................... 31 3.1 Research objective .................................................................................... 31 3.2 Research design ........................................................................................ 31 3.2.1 Research approach ............................................................................... 31 3.2.2 Data collection ..................................................................................... 32 v CHAPTER 4 - DATA ANALYZE .................................................................... 34 4.1 Case study of a textile company .............................................................. 34 4.1.1 The introduction of Hungyen Garment Join stock Company .............. 34 4.1.2 The producing ...................................................................................... 35 4.1.3 Market share ........................................................................................ 36 4.2 The costing system and performance measurement of the Hungyen Join stock Company ....................................................................................... 36 4.2.1 The differences of costing systems ...................................................... 37 4.2.2 The set up of an accounting system of Hungyen Join stock company ........................................................................................................ 38 4.3 The designing performance measurement system in Hungyen Join stock company ................................................................................................. 40 CHAPTER 5: CONCLUSION .......................................................................... 44 5.1 Summary ................................................................................................... 44 5.2 The implementation.................................................................................. 46 5.2.1 Accounting system............................................................................... 46 5.2.2 Costing system ..................................................................................... 47 5.2.3 Performance measurement................................................................... 49 REFERENCE: .................................................................................................... 52 vi LIST OF FIGURES AND IMAGES Figures Title Page CHAPTER 2: Figure 1: Performance Reference Model ............................................................. 28 CHAPTER 5: Table: Business Performance measurement critical success factors ................... 51 vii LIST OF ABBREVIATION Abbreviation Full name ABC Activity Based Costing PM Performance Measurement TDWI The Data Warehousing Institute BPM Business Performance Measurement SA Sustainability Analysis SCM Supply Chain Management ECR Efficient Consumer Response GAAP Generally Accepted Accounting Principles PBC Performance Based Costing VCA Value Creation Area CSFs Critical Success Factors PRM Performance Reference Model WTO World Trade Organization FMS Foreign Military Sales FMF Foreign Military Financing viii CHAPTER 1 - INTRODUCTION 1.1 Introduction In the 21st century, firms need not just operate in different countries; they must develop global strategies to coordinate. Their operations at all phases of the value-adding chain (D‘Amours et al., 1999). Coordination of the supply chain has become strategically important as new forms of organization, such as virtual enterprises, global manufacturing and logistics networks, and other company-to-company alliances, evolve. The Japanese are often praised for the way they use information sharing to improve supply chain competitiveness. Information exchange has become a key component in their manufacturing strategies (Dyer and Ouchi, 1993). Companies in all sectors are examining ways to reduce costs, shorten product development times and manage risks. The transactions between companies in supply chains are characterized by adding value up through the chain and incurring costs (and consequent payments) down the chain. Supply chain management aims to reduce costs, risks and lead times associated with these transactions, thus releasing value. There is limited research on supply chain management in the low-volume Engineer to Order (ETO) sector. This is in stark contrast to the extensive literature on high-volume sectors, particularly the automotive sector (Hicks et al., 2000). Performance measurement is critical to the success of any ―for-profit‖ organization because it creates understanding, molds behavior, and improves competitiveness. World-class firms recognize the central role measurement plays in their success and are often compulsive about their performance measurement efforts (Fawcett and Cooper, 1998). Activity Based Costing (ABC) is a product costing technique that has gained attention. Turney,(1996) defined ABC as a method of measuring the cost and performance of 1 activities and cost objects. It assigns costs to activities based on their consumption of resources and then allocates costs to cost objects based on their required activities. The focus of ABC is on accurate information about the true cost of products, services, processes, activities, distribution channels, customer segments, contracts and projects. ABC helps identify problems and opportunities and formulate solutions to problems or ways to take advantage of opportunities. It does so by providing financial and nonfinancial information about activities and cost objects. Numerous articles address the design and implementation of ABC systems (Shank and Govindarajan, 1993; Alan, 1995; David and Robert, 1995; Booth, 1996). According to Innes and Mitchell (1990), ABC provides process control information. A measure of the volume of each activity (cost driver) is used to generate a cost rate for estimating production cost, and as a performance measure for the activity concerned. In practice, most applications of ABC make arbitrary allocations of common costs. The search for the activities which connect costs to products and processes, and for the cost drivers which proxy for them, involves compromise between accuracy and manageability. The result is that some indirect costs are excluded from the cost-pools associated with a practical set of cost drivers (Armstrong, 2002) Strategic performance measurement defines the focus and scope of management accounting. Specifically the requirement is that management accounting practice recognize and reflect choices made in organizations for management accounting to be relevant (Atkinson, 1998). For the purpose of strategic performance measurement, the organization‘s objective can be entirely financial, social, or a mix of both financial and social objectives. It is widely believed that the large-scale use of EDI leads to improvements in the communication infrastructure between organizations, and that this, in turn, strengthens the economy of a nation and possibly a group of nations. It is also 2 widely recognized that EDI enables organizations to redesign their processes significantly, because of its main capabilities: high speed, reliability and ease of data capture (Sheombar and Wagenaar, 1991). Hoogeweegen et al. (1998) describe a comprehensive approach for evaluating the value of various courses of action involved in implementing EDI. The first relies on ABC and quantifies the costs and benefits that are to be expected from the information processing when EDI is being used. The second uses discrete-event computer simulation to quantify the costs and benefits to be expected in the physical logistic processes. 1.2 Problem statement This paper describes a framework for measuring costs and performance in new forms of business organization that are evolving to meet the competitive challenges of the 21st century. Therefore, the research questions will be as the following: 1. What are the advantages and disadvantages of performance measurement and costing system? 2. How to estimate the most suitable performance measurement and costing system in new Vietnamese companies? 3. What is the threat for a new enterprise in implementation performance measurement and costing system? 4. What are the solutions for the above problems? 1.3 The objective of research This paper highlights the importance of costing system and performance measurement in the current manufacturing and market environment. Giving the guidance for the new companies which are confused the suitable system for their operation. 3 Costing is basically the ascertainment of cost whether for a specified thing or activity. To ascertain cost, we need to apply accounting and costing principles, methods and techniques. In view of the complexity of businesses and increasing changes in industry, trade and commerce, costing is becoming very important. It assist management to make decision for example make or buy, whether to accept a special order and others, it assist management in planning and control, costing assists management to appreciate scarce resources in the increasingly complex business operations, understanding costing assist in cost awareness, cost control / management, is vital to an organization‘s survival re: using marginal cost in competitive tendering and others. Improvement in individual, group, or organizational performance cannot occur unless there is some way of getting performance feedback. Feedback is having the outcomes of work communicated to the employee, work group, or company. For an individual employee, performance measures create a link between their own behavior and the organization's goals. For the organization or its work unit's performance measurement is the link between decisions and organizational goals. It has been said that before you can improve something, you have to be able to measure it, which implies that what you want to improve can somehow be quantified. Additionally, it has also been said that improvement in performance can result just from measuring it. Whether or not this is true, measurement is the first step in improvement. But while measuring is the process of quantification, its effect is to stimulate positive action. Managers should be aware that almost all measures have negative consequences if they are used incorrectly or in the wrong situation. Managers have to study the environmental conditions and analyze these potential negative consequences before adopting performance measures. 4 1.4 The structure of paper This research is divided to five chapters, each chapter has own responsibility. Chapter one briefly will talk about the aim of this paper. Chapter two will about the general view of costing systems and performance measurement and their importance in a new company, chapter two will also orient for the research by theories and models. Chapter three will give the answer of 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 costing system and performance measurement in Vietnam – a developing country. 5 CHAPTER 2 - LITERATURE REVIEW 2.1 Costing systems 2.1.1 The overview of costing system Costing systems are components of a broader accounting system used by a given company or organization. The main function of the costing system is to keep a focused eye on expenditures made by the company. While the data that is collected and generated by the costing system is also integrated into the overall accounting system, the costing approach allows for easy extraction of the data for reports to upper management. The information that typically is gathered by a costing system allows owners and managers to quickly identify the current status of two key factors that are relevant to the success of the company. Operational costs are often the foundation of the data collected by a costing system. Here, management is able to get a snapshot of all expenditures that are directly connected with the general operation of the organization, especially in terms of production costs. A second important bloc of information that is retrieved with the use of a costing system is performance cost. Here, management is able to view any and all expenditures that are related to helping the companies remain profitable, less the direct cost of operations. Expenses associated with marketing, public relations, and sales efforts are examples of the type of expenditures that are captured in the performance cost module. A costing system is not intended to replace an accounting system. Instead, the systems actually work within the broad framework of general accounting systems to extract specific data for quick and easy analysis. By making use of a costing system, it is possible to quickly identify expenditures that were intended to benefit the company, but 6 are failing to do so in a significant way. This makes it possible for owners and managers to make the necessary adjustments to the company‘s working strategy and thus exercise a more responsible use of available resources. From this perspective, it can be said that regular use of a costing system can help to minimize waste and also make it possible to direct available resources in more productive directions rather than continuing to spend money on items that are accomplishing little or nothing for the company. 2.1.2 The importance of costing systems Managers rely on cost accounting to provide an idea of the actual expenses of processes, departments, operations or product which is the foundation of their budget, allowing them to analyze fluctuation and the way funds are used socially for profit. It is used in management accounting, where managers justify the ability to cut expenses for a company in order to increase that company‘s profit. As a tool for internal use, versus a tool for external users like financial accounting, cost accounting does not need to follow the GAAP standards (Generally Accepted Accounting Principles) because its use is more pragmatic. It creates a financial value out of the production of a product, measuring currency that is nominal into units that are measured by convention. By taking recorded historic costs a bit further, it allocates a company‘s fixed costs over a specific time period to what items are actually produced during that period of time, creating a total cost of product production. Products that were not sold during that period of time produced a "full cost" of those products, recording them in a complex inventory system that uses accounting methods of its own that are in compliance with the GAAP standards. Managers are then able to focus on each period's results as it relates to the "standard cost" of any product. 7 Any distortions in expenses that were caused by calculating what the overhead of a product is versus what a unit cost is for companies that specialize in only one specific product are very minor in industries that mass produce that product with a low fixed one. Understanding why it varies compared to what was actually planned helps a manager to save company money by taking actions that are appropriate to correct that variation in the future. Variance analysis is a very important part of cost accounting because it breaks down each variance into many different components of standard and actual one. Some of these components are material expenses variation, volume variation and labor expenses variation. It is a very important part of the management accounting process. In order for managers to determine the best methods to increase a company's profitability, as well as saving company money in the future, cost accounting is a necessary system in the management of a company's budget, providing important data to analyze fluctuation in company production expense. Executive level pay is based upon company performance. If the performance of a company is not reported in a proper manner, executives make money that far exceeds what the business is capable of and creates a false picture of a company's performance. This false reporting causes the stock market to balloon by rewarding stock to companies who do not deserve it, and these methods have a bad effect on our economy. Business accounting that honors the GAAP creates a transparent persona, an air of trust and respect, from the users of their financial statements. 8 2.1.3 The type of costing systems When considering a costing system which be the most suitable system for providing management information to the directors of a manufacturing company, it is necessary to bear in mind the purpose for which it is being set up. a. Process costing Process costing may apply in an industry where all units produced are identical and cannot be separately identified. The production activity is likely to consist of continuous, repetitive processes that may go through a number of different stages, for example the processes in the sugar manufacturing industry that produce molasses and refined sugar at different stages. In the case of process costing, the costs relating to each separate part of the process are computed and the output of each stage is transferred at cost to become the input of the following stage. The input materials of some of the stages in the process could be acquired from outside, as well as being produced inhouse, and these outside materials would form part of the cost for the next stage. It should be emphasizes that the type of costs used in costing each stage of the process will be depend on what technique of costing is used. For example where marginal costing is used only the variable costs will be used while if absorption costing is used the fixed overhead costs will be included in costing the product at each stage of process. The direct material and labor costs will be collected in the various departments, each of which is responsible for a particular process. Other direct expenses are allocated to the specific processes to which they related. The production overhead costs will be allocated to the product in a reasonable manner. b. Job Costing Job costing is used where each job is different and performed to the customer‘s specifications; examples being the construction industry or the motion picture industry, 9 or in services such as auditing where each job has its own particular characteristics and procedures agreed with the client. Here, the direct labor and materials costs relating to a particular job are identified, with a relevant portion of overheads, and these costs are used in the costing of that particular job. In examining what are the different costing systems based on the same principle as job costing, systems such as batch costing and contract costing could also be considered. When these costing systems are used, the costs relating to a particular batch or a particular contract are identified and used in costing that batch or contract. c. Marginal Costing (or Direct Costing) When reviewing different costing systems, marginal (or direct) costing shouldn't be ruled out. When output is at any given level, it is normally possible to increase the level of output without increasing all costs proportionally, because a certain proportion of the costs will remain fixed at the same level even if the output increases. Therefore, only the variable costs will increase with an increased level of output, and it is only this increase in variable costs that needs to be taken into account by management, when taking decisions as to how to increase the level of output. The increase in these variable costs per unit of output is referred to as the marginal cost, and is an important item of information for management in calculating what effect an increase in the level of output of goods or services will have on the level of profit. Costing that is based on variable costs per unit, without taking fixed costs into account at that stage, is known as marginal costing. Marginal costing is a tool for management decision-making, as it shows the effect on contribution and therefore on profit of increasing sales by one further unit. Decisions on expanding or discontinuing product lines may be taken by analyzing the contribution to profit of each product or service and deciding which product lines should be expanded and which should be discontinued. 10 The main disadvantage of marginal costing is that the distinctions between fixed and variable overheads are not as clear-cut in reality as they are in theory. The price, fixed cost and variable cost can all vary frequently within an accounting period, and stepped costs are very common in reality, becoming relevant at various levels of output. It is therefore difficult to be certain of the marginal cost or the contribution made by an additional unit of output at a particular moment in time. d. Absorption Costing Another different costing system you can use is absorption costing. Absorption costing (or full absorption costing), aims to assign all the costs of production to the end product or service. Absorption costing therefore attempts to understand the extent to which costs are covered by sales revenue. An enterprise will need to look not just at direct costs or variable costs, but at all the overheads incurred by the business, because they are all elements in the cost of the products. Overhead costs such as the operating costs, depreciation of plant and equipment, and the salaries of employees engaged in administration, in addition to general office expenses, must be taken into account. As absorption costing depends on setting allocation criteria in advance, the costs will never be absorbed exactly as there will always be differences between budget forecasts of sales and costs and the actual results. The costs will therefore be under or over absorbed in any particular accounting period. Where the output is varying a lot from year to year, absorption costing will be less useful because of these differences between forecast and actual performance. Absorption costing also has the disadvantage that the cost of the inventory at the end of the accounting period contains overhead expenses, resulting in a carry forward of these expenses to the following period. Accounting principles would require such overheads to be written off to profit and loss account in the period in which they are incurred. 11 Where the closing inventory is higher than opening inventory, the profit will be higher under absorption costing as these overheads are being carried forward in the inventory figure on the balance sheet. e. Activity Based Costing (ABC) When using different costing systems, you shouldn't rule out ABC, if absorption costing isn't for you. ABC also attempts to allocate to the products and services, all the costs incurred in producing them, including the overhead costs. However ABC aims to overcome some of the problems encountered by absorption costing, in terms of allocating overhead costs to products and services. This method of costing therefore first identifies the activities that are being carried out in the organization, and allocates the costs to these activities. By then measuring the contribution of each of the activities to the products and services of the enterprise, it is possible to allocate the costs relating to each activity among the products or services which that activity is involved in producing. The intended result is that the costs are assigned to products on a rational basis, and the profitability of each product or service can be more accurately determined than, for example, by absorption costing which may use general allocation keys. Setting up an ABC system therefore requires observation and measurement of the various activities, of people or machines involved in putting together the end products of the enterprise. This detailed measurement results in accurate allocation of costs among activities and rational assignment of activities to the end products. Inefficiencies in procedures may be highlighted by this system and the real profitability of each product or service can be ascertained, leading to informed management decisions on expansion or discontinuance of product lines or services. A science of activity based management has arisen to take decisions based on the information provided by ABC 12