Tài liệu The impact and importance of activity based costing on financial performance of manufacturing firm

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THE IMPACT AND IMPORTANCE OF ACTIVITY BASED COSTING ON FINANCIAL PERFORMANCE OF MANUFACTURING FIRM BY NGUYEN THANH HOA 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 JUN 2010 1 DECLARATION OF ORIGINALITY AND WORD COUNT I hereby declare that the graduation project is based on my original work except for quotation 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 10,663 words. NGUYEN THANH HOA Date: 2 ACKNOWLEDGEMENT This research contains a lot of details and varieties, thus it would be difficult to carry out it on one‟s own. Receiving encouragement and help from many people I feel indebted to their aids, and wish to express my gratitude to them. First of all, I would like to thank our respected supervisor – Dr. Le Van Lien for his immense support throughout my research. I would like to express my indebtedness to Dr. Lien for his continuous guidance and support during my project. Without his support, my project would not be completed. I also reserved on priority of my special acknowledgement to Mr. Tran Huu Huan - Financial Director of Dutch Lady Vietnam Company, who gave me useful ideas for my questionnaires. Thanks also go to many financial managers of Dutch Lady Vietnam, Mr. Nguyen Trung Kien, Mr. Doan Le Minh, who had continuously guided me with all the valuable information for my research. And finally, I am extremely grateful to all the staff of Dutch Lady Company who cooperated with me during the survey. 3 THE IMPACT AND IMPORTANCE OF ACTIVITY BASED COSTING ON FINANCIAL PERFORMANCE OF MANUFACTURING FIRM BY NGUYEN THANH HOA Jun 2010 Supervisor: Dr. Le Van Lien Abstract The graduation project represents the results of research on impact and importance of Activity Based Costing (ABC) on financial performance of manufacturing firm. The contribution of this project is to improve the financial performance of manufacturing firm by measuring impact and importance of ABC - a way to measure changes in their productivity of manufacturing firms. The objectives of the project were to demonstrate chances in financial performance when manufacturing firms apply ABC approach. Benefits of applying ABC and factors affecting the successful performance of ABC approach will provide managers with useful information in making better decisions on evaluating the application of ABC. To achieve these above objectives, questionnaires were made and given to the financial staff of Dutch Lady Vietnam (DLV) Company. They were required to complete the questionnaires based on their understanding and perceptions of ABC related to financial performance. As can be seen, ABC has had a positive influence on improvement of financial performance at DLV. Thus by applying ABC, managers of manufacturing firms would be given more accurate information and able to take the right actions that would improve the profitability and the financial performance of a company. 4 TABLE OF CONTENTS Page Declaration of Originality and word count ii Acknowledgement iii Abstract iv Table of Contents v List of Figures x List of Abbreviations xi Chapter 1 INTRODUCTION 1.1 Introduction 1 1.2 The elements of the research 2 1.2.1 Research question 2 1.2.2 Research purpose 3 1.2.3 Research objective 3 1.3 Significant of research 4 1.4 Structure of research 4 Chapter 2 LITERATURE REVIEW 2.1 Overview 6 5 2.2 Conceptualization of financial performance 6 2.3 General look at ABC 7 2.3.1 What is Activity Based Costing? 7 2.3.2 Fundamental of ABC 8 2.3.3 Why is ABC needed? 10 2.4 Implementation of ABC 11 2.4.1 Cost classification in ABC 11 2.4.2 ABC in application management cost 13 2.4.3 Procedure of ABC cost allocation 13 2.4.4 Comparison with Traditional cost accounting 13 2.4.5 Benefits of ABC 16 2.4.6 Limitation of ABC 18 2.5 Case study from the Literature 19 2.5.1 Description of DLV 19 2.5.2 Application of ABC in DLV 20 2.5.3 Cost management in DLV 23 2.5.4 Cost allocation in DLV 24 2.6 ABC with financial performance 25 6 2.7 Initiative business strategies 25 2.8 Hypothesis 26 Chapter 3 METHODOLOGY 3.1 Overview 29 3.2 Research methodology 29 3.3 Approach 30 3.4 Population and sampling procedures 31 3.5 Data collection 32 3.6 Questionnaire design 33 3.7 Reliability 35 3.8 Data analysis method 35 Chapter 4 RESULTS OF THE RESEARCH AND ANALYSIS 4.1 Overview 36 4.2 Discussion of statistic analysis 36 4.2.1 Respondents 36 4.2.2 Data analysis method 37 4.2.3 Reliability and validity 37 4.2.4 Bias 37 7 4.3 Hypothesis analysis 38 4.3.1 Does the use of ABC impact financial performance? 38 4.3.1.1 General discussion 38 4.3.1.2 Figures 39 4.3.1.3 Discussion of results 40 4.3.2 Importance factors impact of ABC and Financial performance 42 4.3.2.1 General discussion 42 4.3.2.2 Figures 42 4.3.2.3 Discussion of results 43 4.3.2.3.1 Cost 43 4.3.2.3.2 Information technology 44 4.3.2.3.3 Business unit complexity 45 4.3.2.3.4 Intra company transaction 45 4.3.2.3.5 Competition 46 4.3.3 Does the benefits of using ABC lead to improve financial 47 performance? 4.3.3.1 General discussion 4.3.3.2 Figures 4.3.3.3 Discussion of the results 47 47 48 8 Chapter 5 CONCLUSION 5.1 Conclusion 51 5.2 Limitations 52 5.3 Recommendations 52 BIBLIOGRAPHY 54 APPENDICES 59 9 LIST OF FIGURES Figure Title Page Figures 2.1 Activity Based Costing model 10 Figures 2.2 Application of ABC in DLV 22 Figures 2.3 Diagram of cost management in DLV 24 The perception of respondents about Activity Based Costing 39 Chapter 2 Chapter 4 Figure 4.1 system Figure 4.2 Component bar charts showing the response of yes 40 and no for in questionnaire A Figure 4.3 The opinion of respondents about factors that affect of Activity 42 Based Costing system on Financial Performance Figure 4.4 Component bar charts showing the response of yes 43 and no for in questionnaire B Figure 4.5 The reaction of respondent about benefits of firm when 47 applying Activity Based Costing method Figure 4.6 Component bar charts showing the response of yes 48 and no for in questionnaire C 10 LIST OF ABBREVIATIONS Abbreviation Full Name ABC Activity Based Costing DLV Dutch Lady Vietnam IT Information Technology JIT Just - in - time TCA Traditional Cost Accounting TQM Total Quality Management 11 Chapter 1 INTRODUCTION 1.1 Introduction In the 1990s business strategy played an essential part in financial operation. With the expansion of productivity, and the complexity of business management, efficient financial performance has become a very common term. Researches have shown that cost accounting has been one of the most vital parts of managerial accounting. It is used to control a company‟s cost and provide management with accurate information on financial operation and performance. At that time Traditional Costing system trace overhead costs to the product based on the assumption that product cause costs. It takes a total cost and assigns it to each part of the process. It is the fact, it relies on an essentially illogical allocation of indirect costs, and thus systems do not give managers accurate product cost information, which leads to inaccurate calculation of product profitability. Therefore Traditional Cost Accounting (TCA) has not reflected the realities of financial performance of manufacturing firm and can mislead and increase production costs and have major negative effects on a company‟s profits. Introduced by Robin Cooper and Robert S. Kaplan (1991) Activity Based Costing (ABC) was described as a potential approach to solve traditional costing problems. It soon claimed its major advantages and overcame limitations of TCA despite of a rising number of questions 12 concerned with adoption and implementation ABC. However Ittner ET all (2002) stated that ABC would only have indirect effect on financial efficiency. Since then various studies have been conducted on the real benefits and the actual influences of ABC on performance of accounting system and production of a company in order to see whether or not applying ABC was the right solution. This project will illustrate the impact and importance of ABC on financial performance of manufacturing firms. In addition, it will focus on the empirical testing of the impact of ABC in Dutch Lady Vietnam (DLV) and the effect of ABC to financial performance. DLV Company is a subsidiary of Friesland Foods – a firm operating based on profits. All business activities in DLV are aimed to increase additional values to investors. Its business activities are supposed to gain a profit that can cover its capital cost. This project is based on certain perceptions and experiences on implementing this method in this firm in order to verify these following hypotheses. 1.2 The elements of the research 1.2.1 Research question Can the application of ABC on manufacturing firm lead to impact on financial performance? 13 1.2.2 Research purpose The purpose of this research is to provide managers with relevant information, for them to be able to make better decisions regarding the usage of ABC on their firms. 1.2.3 Research objective The objective of this project is to demonstrate hypotheses arising from the use of ABC and how it would play a very significant part in financial performances and the relationships between them. Various researches about ABC have been conducted but none of these studies indicated identical view toward the use ABC. It is shown that financial performance of a firm applying ABC could be different from those who use TCA. Certain factors affecting ABC were also analyzed. Therefore, hypotheses were conducted to study ABC‟s impact and in order to understand ABC and its role in financial performance. Hypotheses on ABC will be also analyzed by studying manufacturing firms which have been applying ABC for several years. Quantitative research was used to obtain information which focuses on numerical data, financial reports; survey was given to auditors and financial executives of a company to gather information on ABC and its relation to financial performance. This was carried out by discussing the research questions, questionnaire design, the data collection, population and sampling, variables, data analysis and reliability. 14 After the statistical analysis was conducted, based on the data gathered, results will reveal the positive effect of ABC and will demonstrate the strong connection between ABC and efficient financial performance. 1.3 Significance of research This project will verify the benefits of ABC which provides accurate information and precise costs and updates daily for financial managers in decision-making, production controls and business operations. Moreover, this project also contributes to other previous researches by studying the impact of using ABC not in general manner but in depth of how ABC influences a firm‟s accounting process. Being aware of applying ABC successfully, managers can improve their business operations, thereby improving the quality and management activities, increasing competitiveness and economic power in open market economy; and as a result this may also have a great effect on the success of a company. In addition, this project will demonstrate the current limitations of ABC which may enable future researches to make improvements to this model. 1.4 Structure of research The project is organized as follow: Chapter 1 introduces the problem of research. It identifies the research question, the purpose, the objective and the significance of the project; a structure of the project is also included in this chapter. 15 Chapter 2 gives a review of the relevant literature. Specifically it gives information about the principles of ABC and the financial performance. Chapter 2 also includes the application of ABC in DLV; and covers the three hypotheses which indicate the impact and importance of ABC on financial performance. Chapter 3 presents the research methods, techniques as well as data collections. This chapter creates the perception of the staff regarding to the use of ABC in DLV. Chapter 4 presents the three results of the hypotheses which were discussed in chapter 2. All of the cases are based on the company‟s staffs. The first hypothesis shows the impact of ABC on financial performance; the second hypothesis demonstrates some factors affect of using ABC on financial performance of the company. Finally, the third hypothesis illustrates that using ABC leads to the improvement of financial performance. Chapter 5 includes the conclusions derived from this research and the contribution of this research to existing body of knowledge. It also discusses about limitations of current ABC model and future research opportunities. 16 CHAPTER 2 LITERATURE REVIEW 2.1 Overview This chapter consists of main sections such as general aspects of the impact and importance of ABC method on Financial Performance of manufacturing firm; the applying of ABC in DLV Company and the hypotheses. 2.2 Conceptualization of financial performance Financial performance is the measuring of the results of a firm‟s policies and operations in monetary terms. In the manufacturing firms, financial performance refers to the rate of return for a financial portfolio. The portfolio includes the financial instrument which is used with different level of risk of different rate of return (Cagwin and Bounman, 2002). In current business environment, financial performance has related to the profit of firm. Sales profit and cost was used to evaluate the value of business activities. These values will be measured with current budgets or sales forecast to create business strategy in which to answer the “big question “: how to maximize sales profit, reduce cost and better financial management. 17 2.3 General look at ABC 2.3.1 What is Activity Based Costing? Traditionally, the cost of manufacturing a product have categorized as direct material, direct labor and overhead. Traditional cost systems trace overhead costs to the product based on the assumption that products cause costs. (Turney, 1990). On the other hand, ABC focuses on activities in manufacturing the product. ABC is defined by Computer Aided Manufacturing - International (CAM-I) as “Activity Based Costing integrates financial and non – financial related to activities performed in a firm to produce goods and services”. In this instance, costs assigned to products are based on resource consumption of activities to produce goods. As defined in MBA venture line Business Dictionary: “Activity Based Costing is a costing system that identifies the various activities performed in a firm and use multiple cost drivers (non volume as well as volume based cost drivers) to assign overhead costs (or indirect costs) to product. ABC recognizes the casual relationships of cost drivers with activities”. According to Deepak Mohan & Hemantkumar Patil (2003), “Activity Based Costing is a costing model which to measure activity costs, results, resources and cost objects. ABC assigns resources to activities, activities to cost objects according to actual consumption by each and recognizes the 18 causal relationship of cost drivers with activities, ABC focuses more on costs and the cause based on process and activities rather than on departments and traditional functions”. From the view of Stewart, G.B (1991), “Activity Based Costing provides complete data on business activities in “financial metric form” It can be applied to business according to variable factors – thus it is more innovative compared with TCA, ABC has three main objectives: A tool to guide strategic decision making; insights in process of business to allowed resources to be efficiently allocated and minimize costs; an allocation technique in determining internal cost prices and selling prices” Therefore, ABC can be defined as a model of aggregated financial and non financial data related to operation activities in a firm to produce goods, by assigning resource consumption in a firm to products and services provided to customers. 2.3.2 Fundamental of ABC ABC is based on ideas: product design, productivity and distribution require diverse activities to be performed; the performance of the activities demands for the purchase and use resources, these generate costs (Cooper Robin, 1988). ABC includes that: resources lead to costs, activities consume resources and products consume activities (Novin, Adel M, 1992). Thus, a firm‟s activities are identified, then costs are assigned to those activities or 19 activities cost pools based on resources required. After that costs are allocated and traced from activity cost pools to products based on proportional use of each activity. In this theory, ABC is aimed at refining limitation of TCA or Inventory costing method. Activities are works, actions, or specific tasks performed in a firm (Novin, Adel M, 1992). For example, the transportation of raw materials from Warehouse to factory is the activity. Activities selected in establishing ABC system are main operating activities and often performed by a variety of supporting activities. For example, many different activities performed in purchasing such as order preparation, negotiating with suppliers, these activities will be organized within ABC system. Cost drivers are the qualitative measures of consumed resources to produce an activity, used to allocate cost of a consumed resource connected to one or more activities (Novin, Adel M, 1992). Activity drivers are the quantitative measures of the number of activity units performed with a cost pool object, used to allocate activity costs to output (Novin, Adel M, 1992). For example, the number of operating machine hours to produce Dutch Lady sweetened milk at DLV. Cost drivers and activity drivers are the same in nature. Each factor is the basic cause of costs. In general, anything that producer‟s activities causes‟ activity costs. These factors are related to changes in costs, measuring and determining cost volume. 20
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