Tài liệu The importance and impacts ofcosting method on the process of managerial decision making

THE IMPORTANCE AND IMPACTS OFCOSTING METHOD ON THE PROCESS OF MANAGERIAL DECISION MAKING BY NGUYEN THUY LINH E0600085 BARCHELOR OF BUSINESS (ACCOUNTING) HONS HELP UNIVERITY COLLEGE OCTOBER 2010 i DECLARATION OF ORGINALITY AND WORD COUNT 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 11436 words. NGUYEN THUY LINH 28 October 2010 i ACKNOWLEDGEMENT First of all, I would like to express my sincere appreciation to my supervisor, Dr. Le Van Lien who has guided me throughout this thesis. His constant guidance, insightful suggestions, and constructive ideas are the essential inputs and encouragement for me in order to complete this thesis. Next, I would like to acknowledge to manager and all of employees in Nghe An Joint Stock Company Medicine – Medical Materials who allowed and assisted me to collect all of necessary information for me to get this thesis done. Without their contribution, I could not be able to gather much information for my research. Lastly, I would also like to extend my heartfelt gratitude to my friends for their continuous support, encouragement and contribution, which have been crucial during the presentation of this report. My thesis cannot be finished without your supports. ii TABLE OF CONTENT DECLARATION OF ORGINALITY AND WORD COUNT ...... Error! Bookmark not defined. ACKNOWLEDGEMENT ..................................................... Error! Bookmark not defined. TABLE OF CONTENT ...................................................................................................................... iii ABSTRACT ............................................................................................................................................ vi LIST OF FIGURES ............................................................................................................................. vii LIST OF TABLES .............................................................................................................................. viii CHAPTER 1: INTRODUCTION ...................................................................................................... 1 1.1 Introduction of topic ........................................................................................................... 1 1.2 Problem statement ............................................................................................................... 2 1.3 Issues expansion ......................................................................................................................... 4 1.4 Structure of the research ........................................................................................................... 5 CHAPTER 2: LITERATURE REVIEW ......................................................................................... 6 2.1 Managerial decision-making process.................................................................................... 6 2.1.2 What is decision making process?................................................................................. 8 2.1.3 What is accounting information and its role in decision-making process? ..... 10 2.1.4 Managers and management accounting ..................................................................... 12 2.2 The importance and impacts of costs accounting methods on decision-making process of the managers using SWOT model analysis. ........................................................ 14 2.2.1 Absorption costing ........................................................................................................... 14 Figure 1: Absorption costing method ................................................................................... 14 2.2.2 Variable costing method................................................................................................. 16 Figure 2: Variable costing method ........................................................................................ 16 2.2.3 Activity based costing system (ABC) ........................................................................ 18 iii 2.2.4 The importance and impacts of accounting methods on managerial decision making process. ........................................................................................................................... 21 CHAPTER 3: RESEARCH AND METHODLOGY................................................................. 27 3.1 Aims of the project ................................................................................................................... 27 3.2 Research methodology ............................................................................................................ 28 3.3 Data sources ............................................................................................................................... 29 3.4 Limitation.................................................................................................................................... 29 CHAPTER 4: CASE STUDY ANALYSIS .................................................................................. 31 4.1 Introduction ................................................................................................................................ 31 4.1.1 Process of formation and development of the company ....................................... 32 4.1.2 Facilities of the company ............................................................................................... 33 4.1.3 Company’s mission statement ...................................................................................... 34 4.1.4 Potention on production of the company................................................................... 34 4.1.5 Potention on marketing of the company .................................................................... 35 4.1.6 Structure of Nghe An Joint Stock Medicine – Medical Materials’ management structure ......................................................................................................................................... 36 Figure 3: Structure of management team ............................................................................ 36 4.1.7 Accounting policy adopted ............................................................................................ 37 4.2 Difference when using different cost accounting methods .......................................... 38 4.2.1 Incurred expenses during the period of 2008 – 2009 ............................................. 38 Table 1: Total revenue for Vitamin C of Nghe An Joint Stock Company Medicine Medical Materials ....................................................................................................................... 39 Table 2: Direct material cost of Nghe An Joint Stock Company Medicine – Medical Materials........................................................................................................................................ 39 Table 3: Direct labor cost of Nghe An Joint Stock Company Medicine – Medical Material ......................................................................................................................................... 41 Table 4: Manufacturing overhead cost of Nghe An Joint Stock Company Medicine – Medical Materials ....................................................................................................................... 42 4.2.2 Cost of goods manufactured under absorption costing method and variable costing method ............................................................................................................................. 43 iv Table 5: Cost of Vitamin C using absorption cost and variable cost method ........... 43 4.2.3 A profit comparison using absorption costing and variable costing method to calculate ......................................................................................................................................... 44 Table 6: Cost of good sold for Vitamin C ............................................................................ 44 Table 7: Gross profit for Vitamin C ...................................................................................... 45 Table 8: Variable cost of goods sold for Vitamin C ......................................................... 45 Table 9: Contribution margin for Vitamin C ...................................................................... 46 Table 10: Difference between variable costing and absorption costing..................... 46 CHAPTER 5: CONCLUSION AND RECOMMENDATION............................................... 48 5.1 Conclusion .................................................................................................................................. 48 5.2 Recommendation for calculating product cost of Nghe An ......................................... 49 Joint Stock Company Medicine – Medical Materials. .......................................................... 49 REFERENCE…………………………………………………………………………...51 v THE IMPORTANCE AND IMPACTS OFCOSTING METHOD ON THE PROCESS OF MANAGERIAL DECISION MAKING BY NGUYEN THUY LINH OCTOBER 2010 Supervisor: Dr. LE VAN LIEN ABSTRACT The purpose of this paper is to analysis the importance and impacts of cost accounting method on decision-making process of managers. Cost accounting method can be considered as the most concerning problem with an organization, according to different costing methods will lead to different profit to a company, therefore choosing a suitable costing method is very important for managers. There are three cost accounting methods, namely absorption costing method, variable costing method, activity-based costing method are analysis in this thesis. And SWOT model will be used to explore the advantages and disadvantage of each method. After that, I make some recommendation for calculating product cost of Nghe An Joint Stock Company Medicine – Medical Materials. vi LIST OF FIGURES Figure 1: Absorption costing method Figure 2: Variable costing method Figure 3: Structure of management team vii LIST OF TABLES Table 1: Total revenue for Vitamin C of Nghe An Joint Stock Company Medicine Medical Materials Table 2: Direct material cost of Nghe An Joint Stock Company Medicine – Medical Materials Table 3: Direct labor cost of Nghe An Joint Stock Company Medicine – Medical Materials Table 4: Manufacturing overhead cost of Nghe An Joint Stock Company Medicine – Medical Materials Table 5: Cost of Vitamin C using absorption cost and variable cost method Table 6: Cost of good sold for Vitamin C Table 7: Gross profit for Vitamin C Table 8: Variable cost of goods sold for Vitamin C Table 9: Contribution margin for Vitamin C Table 10: Difference between variable costing and absorption costing viii CHAPTER 1: INTRODUCTION In this chapter, the whole picture about the ideas of this thesis will be depicted, and these help users easy to follow and link them to each other to figure out the potential relationship between cost accounting methods and managerial decision making process. This chapter will cover the structure of this thesis, an introduction about the topic as well as related issues. 1.1 Introduction of topic Historical documentation about the origins of cost accounting is limited due to a fire at the headquarters of the National Association of Accountants (NAA) in 1984. Many irreplaceable documents were destroyed in that fire (Cheryl Cunagin and JohnL. Stancil, 1992). Therefore, no one can ensure and know about the accurate time that the cost accounting methods were born. As Richard Vangermeersch, a leading accounting historian explains that a problem in cost accounting is that many accountants feel that they have no past. As a result, nowadays-costing management accounting is not a new problem but their impacts and importance are the central issues to be researched. Cost accounting is the process of accounting for cost, which begins with regarding and classifying costs and ends with the preparing periodical statements and reports for ascertaining and controlling costs. Today, cost accounting may be defined as the process 1 of measuring, analyzing, computing, and reporting the cost. There are different cost accountings methods that need managers can choice and based on their results manager can use for making better decisions in the future. These methods are absorption costing method, variable costing method, activity-based costing method, throughput costing, etc. Absorption costing is know as traditional cost accounting, this method makes no distinction between fixed and variable costs; therefore it is not well suited for cost volume profit computation, which is important for good planning and control. Therefore, absorption costing method might be the best costing method for the small company. However, other managers and accountants think using another costing method is better than using absorption costing. For example: activity-based costing is a modern accounting system, which segregates expenses based on specific activities and then allocated the cost among individual items based on volume of activity, so this method can reduce and allocate costs more efficiently. Different managers will not make the same decision with the same information and report so making decisions will depend on thinking of each manager. In fact, managers have decision-making process by many factors but in this thesis, only impact and importance of cost accounting methods on the process of managerial decision-making are discussed. 1.2 Problem statement Main ideas of this thesis are related to cost accounting methods, their advantages and disadvantage, as well as their impact on the decision on making process of managers. 2 In management accounting, cost accounting is that part of management accounting which establishes standard and actual cost of operations, processes, departments or product and the analysis of variances, profitability or social use of funds. Managers use cost accounting information to make their decision making to reduce a company’s costs and improve its profitability. As a form of management accounting, cost accounting need not follow requirement of GAAP, because its primary users are internal managers, rather than external users, and what to compute is instead decided pragmatically. Cost accounting includes many methods but in this thesis, there are three cost accounting methods that the author wants to focus: absorption costing method, variable costing method, and activity-based costing method. Although many irreplaceable documents were destroyed in a fire at the headquarters of the National Association of Accountants (NAA) in 1984, some historical researchers thought that absorption costing method can be regarded as the earliest of cost accounting method. After that, variable costing method was invented. Using traditional cost accounting methods is difficult for companies with complex processes and manufacturing practices; therefore later activitybased costing method was created out of the need to overcome these difficulties by dividing production into its core activities. Depending on each case that manager will choose best cost accounting method for their company, however nothing can be perfect, and each method contain both advantages and disadvantages. SWOT analysis is a strategic method for identifying business’s strengths and weaknesses, and to examine the opportunities and threats in the wider environment (market, industry, global situation). Using SWOT model, all of the advantages and disadvantages of each cost accounting method will be judged fairly. This method often 3 uses in management aspect, the managers applied SWOT model to evaluate the effectiveness and efficiency of the companies, cost budget, and operation process. Analyzing cost accounting methods follow SWOT model, managers will be easier to see the importance and impact of them on the decisions making process. 1.3 Issues expansion After joining the World Trade Organization (WTO) in 2007 Vietnam has increasingly opened the economy and trade. Vietnam pharmaceutical industry faces many challenges so pharmaceutical companies will be innovated management strategy and reduce costs to ensure competitiveness and survival. In this context, companies have actively deploying innovative management method and running production, with particular emphasis on the management for production costs. Therefore, in chapter 4 of this thesis, a real case of Nghe An Joint Stock Company Medicine – Medical Materials – one medicine manufacture will be use for analysis. From this chapter, it is easy to understand about importance and impact of cost accounting method on decision-making process of managers. The chapter 4 will introduce about Nghe An Joint Stock Company Medicine – Medical Materials, then from the collected cost information of this company, absorption costing method and variable costing method will be applied. 4 1.4 Structure of the research In this thesis, there are five chapters as follow:  Chapter 1: Introduction  Chapter 2: Literature review  Chapter 3: Research and methodology  Chapter 4: Case study analysis  Chapter 5: Conclusion In this thesis, five chapters will be linked each other in order to express the ideas that the author would like to share. Chapter 1 and chapter 3 will consider as a background to crease the general ideas of this thesis. Chapter 2 will focus on the theory of cost accounting method and chapter 4 is a real case, playing a supplementary role for chapter 2. And last but not least, chapter 5 will conclude the findings after analyzing a real case compared to the theory, and some recommendations for the company. 5 CHAPTER 2: LITERATURE REVIEW Chapter 2 will provide information about managerial decision-making process, and introduce about the history, calculation and contents of absorption costing, variable costing, and activity-based costing method. Understanding managerial decision-making process and cost accounting methods can help the managers know what kind of information and how much of information they need to make efficient decisions. After that, SWOT model will be applied to evaluate advantages and disadvantages of each cost accounting method. 2.1 Managerial decision-making process People make many decisions every day. From several perspectives that decisions can be made in different ways depending on different purposes of various groups of people. Therefore, decision-making is a reasoning or emotional process which can be rational or irrational, can be based on explicit assumptions or tacit assumptions. However, managerial decision making process can be only understood by four parts. They are:  Decision in nature.  Step in decision-making.  Role of accounting information in decision-making.  Managers and management accounting. 6 2.1.1 Decision in nature A decision is an act requiring judgment that is translated into action. Decision-making is the process by which people respond to opportunities and threats by analyzing options, and making decisions about goals and courses of action. Decision process could be associated from internal and external information and people need to choose the best alternative for a good result. People make many decisions everyday. For example, we decide what to buy goods for our family when going to supermarket; we decide what kinds of sports for good health. In another case we make another difficult decision to go such as we are surrounded by the fire: to jump through the windows and risk to killing yourself or to wait the firemen and risk being burned to death if they come too late? What should we do? This is an important decision for us at the moment. More important than these cases, we have to decide what kinds of job in the future to earn a lot of money. Our business or the affairs in our life is experiencing development and growth, we are often faced with difficult decisions. We need to choose among many decisions; it is not possible for us to do everything that we would like to do because time and resources are always limited. In fact, our actions will have long reaching consequences, and will affect the lives of others. Sometimes the pressure of having to act forces us to make a decision that we may regret later. Sometimes this pressure causes us to waver and miss an opportunity. For example: the representative of the UN and the general who commanded the UN forces had been unable to make up their mind about the need for an air force support and 7000 people were badly slaughtered. 7 There may be different styles associated with the way in which people make decisions, or certainly that we seek different information with which to make us decisions. In general, we ourselves, parents, children, sisters, friends, and bosses could affect our decision, besides that following the research of a variety of aspects of decision making, the decisions depend on sex, politics, consumers, economy, etc. Women tend to take decisions based on emotive factors, they tend to consider the opinions of others and weigh them up in relation to their own understanding of a decision and its causes and effects. However, men tend to learn towards an instant solution and can be wary of clouding issues by opening them up to too much discussion. Men tend to look at the rights of the individuals involved and make what they intend to be fair and just decisions. In business, decision-making is an important of business success. Decisions are based on a foundation of knowledge and sound reasoning can lead the company into long term prosperity, conversely, decisions that are made on the basic of flawed logic, emotionalism, or incomplete information can quickly put a business out of commission. Sometimes the managers could not know every thing of various aspects, therefore when it works, collective intelligence does come up with better solutions than could individuals. 2.1.2 What is decision making process? Decision-making is usually defined as the act of making up your mind about something. However, the process of decision-making is not as easy as it sounds. There are certain 8 important decisions that you have to make that have the ability to change the course of your life. Thus, it is important to take decisions in a systematic way, so that the decision you make has high chances of being successful (Proctor, R., 2009). According to Hoggett, Edward, & Merlin, 2006, decision-making follows four main steps, they are: establish goals, gather available information on alternatives, determine consequences of alternatives and choose a course of action. The first step and arguably the most important step in the decision-making are establishing goals (or what are we trying to achieve?). It is a primary importance that we should first determine or specify our task; we must identify each situation in which a decision is needed and determine the goals we wish to achieve. Depending on then values, motives, desires, and different situation help us have different decisions. Once a decision maker has established the goal, it is necessary to gather available information on alternatives. In this second step, we are determining what information we need as information can help change our attitudes, beliefs or expectations. We can gather some kind of information that we are prepared to commit to making a choice. There are: what is relevant and what is not relevant to the decision? What do you need to know before you can make a decision or that will help you make the right one? Who knows, who can help, who has the power and influence to make this happen (or to stop it)? After gathering available information to help us determine the alternative available, then the third step is determining consequences of alternatives. This step is the stage when we have to assess each alternative we have come up with. We have to find out the 9 advantages and disadvantages of the information. At this stage, we can also select out the information’s that is thought unfeasible or not serve our goal. The final step deals with choosing a course of action. Once we have gone through the previous 3 steps, after taking the alternatives available and the consequences of those alternatives into consideration, we must choose a course of action and start to make the goals that we wish to achieve realistic. 2.1.3 What is accounting information and its role in decisionmaking process? The need for a decision arises in our life and business because we are faced with a problem and alternative courses of action are available, and we need more information when making a decision. Therefore the information plays an important role in deciding which option to make decision process. In business, accounting information is needed before a decision is made. Accounting is concerned mainly with identifying transactions and recording the financial history of the transactions of an entity; therefore a major focus on accounting information is on actual financial events, not on future events (Hogget, Edward, & Merlin, 2006). Although accounting information is not future events, this information is used often as a guide to future estimates of the different alternative consequences. The managers of the business will want to know what things are being done so they need this 10 information in order to make plans for the future; they then need more updated information in order to check whether actual performance is on target. Accounting information is also very useful in providing decision makers with information about the outcomes or results of their decision (Hoggett, Edward, & Merlin, 2006). Accounting information could be used by internal and external decision maker, such as managers, investors, creditors, customers, etc. before it can be regarded as useful in satisfying the need of various user groups, accounting information should satisfy the following criteria: understandability, relevance, consistency, comparability, reliability, objectivity. Firstly, accounting information is understandability, which means the expression, with clarity of accounting information in such a way that it will be understandable to users – who are generally assumed to have a reasonable knowledge of business and economic activities. Secondly, it is relevance that means accounting information must help a user to form, confirm or maybe revise a view in the context of making a decision. For example: following accounting information of the business, we can understand their financial events, so we should invest or should not invest, we should lend money to this business or should not, and we should work for this business or should not. Thirdly, comparability of accounting information is very important for decision making of investors or creditors. This implies the ability for users to be able to compare similar companies in the same industry group and to make comparisons of performance over time. 11