Tài liệu 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 1.1 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 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 1.1 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. 2 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 3 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. 4 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? 3, What are the factors influencing the Activity Based Costing success? This paper will answer above questions to orient for the companies which want to adoption or implementation Activity Based Costing method. 5 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. 6 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 7 2.1 Historical development: Traditionally, cost accountants had arbitrarily added a broad percentage of expenses into the indirect costs, in addition, activities include actions that are performed both by people and machine. However, the incorrect of this technique is gradually rose with the using of indirect costs and overhead costs increasingly, because indirect costs were not caused equally by all products. For example, one product may take time in one expensive machine more than another product, but the costs of direct labors and materials may be same in the manufacturing these products, additional cost for use of the machine is not being recognized when the same broad 'on-cost' percentage is added to all products. Consequently, when multiple products share common costs, there is a danger of one product subsidizing another. ABC is based on George Staubus' Activity Costing and Input-Output Accounting [5], the manufacturing sector of the United States during the 1970s and 1980s, the concept of ABC was started to perform. During this time, the Consortium for Advanced Management-International provided a formative role for studying and formalizing the principles that have become more formally known as Activity-Based Costing [6]. Robin Cooper and Robert S. Kaplan, advocates of the Balanced Scorecard, brought notice to these concepts in a number of articles published in Harvard Business Review beginning in 1988. According to Cooper and Kaplan ABC is an approach which could solve some disadvantages of traditional costing systems, the actual costs 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 8 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. 9 2.2 Definition and key concepts: 2.2.1 Definition: There are 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 decisions. ABC is a subset of activitybased management, which is used to identifying and evaluating activities of the firm‟s performance. 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. 10 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 11 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. 12 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 will be center to the allocated costs. There will be many the system 13