Tài liệu The impact of accounting information on management’s decision making vinamilk case study

THE IMPACT OF ACCOUNTING INFORMATION ON MANAGEMENT’S DECISION MAKING – VINAMILK CASE STUDY TRUONG THUY CHUNG BACHELOR OF BUSINESS (ACCOUNTING) HONS HELP UNIVERSITY COLLEGE October 2011 i THE IMPACT OF ACCOUNTING INFORMATION ON MANAGEMENT’S DECISION MAKING – VINAMILK CASE STUDY By TRUONG THUY CHUNG Graduation Project Submitted to the Department of Business Studies, HELP University College, in Partial Fulfilment of the Requirements for the Degree of Bachelor of Business (accounting) Hons OCTOBER 2011 ii DECLARATION 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 10,036 words. _____________________ TRUONG THUY CHUNG Date: 17 October 2011 iii ACKNOWLEDGEMENT First and foremost, my sincere gratitude is dedicated to my supervisor – Ms Nguyen Van Anh. Thanks for your strong support, guidance, intuitive comments and also motivation through the process of completing this thesis. In addition, I would like to send my gratitude to the International School and HELP for giving me an opportunity to conduct my study in my favorite area. Thanks to all my family and friends for your supports, helps and motivation and made it possible for me to complete this study iv THE IMPACT OF ACCOUNTING INFORMATION ON MANAGEMENT’S DECISION MAKING – VINAMILK CASE STUDY By TRUONG THUY CHUNG October 2011 Supervisor: Ms. Nguyen Van Anh This thesis “The impact of accounting information on management’s decision making – Vinamilk case study” is conducted to provide some purpose tools and select the appropriate information for decision making of the Vinamilk Company. This study also emphasizes on the important of accounting information in making decision. In addition, accounting tools such as cost accounting system, price and competition and profitability provide the useful information manager to make the financial and economic decision as well. The core method to implement the research is qualitative research. The data is collected in secondary sources and case study. v TABLE OF CONTENTS Page Declaration i Acknowledgement ii Abstract iii Table of contents iv Chapter 1: Introduction...........................................................................…...1 1.2 Back ground……………………………………………………………...1 1.3 Problem statements………………………………………………………2 1.3 Structure of paper………………………………………………………..4 Chapter 2: Literature review………………………………………………..6 2.1 Decision making process…………………………………………………6 2.1.1 Planning process………………………………………………………..8 2.1.2 Control process…………………………………………………………9 2.1.3 Limitations of Drury model……………………………………………9 2.1.4 Long term and short term decisions………………………………….10 2.2 Management accounting and decision making………………………..10 2.3 Defining the cost terms………………………………………………….11 2.4 Tools for decision making……………………………………………….12 2.4.1 Cost accounting system………………………………………………...12 2.4.2 Price and competition…………………………………………………..14 2.4.3 Profitability……………………………………………………………..15 2.4.4 Financial ratio………………………………………………………….16. vi Chapter 3: Methodology…………………………………………………….19 3.1 Qualitative research……………………………………………………..19 3.2 Case study………………………………………………………………..20 3.3 Data resources………………………………………………………… 20 Chapter 4: Analysis…………………………………………………………23 4.1 Company presentation…………………………………………………..23 4.1.1 Vision, mission and objectives………………………………………..24 4.1.2 History…………………………………………………………………25 4.1.3 Organization and management structure…………………………...26 4.2 Analysis case study……………………………………………………...27 4.2.1 Accounting tools are used in Vinamilk………………………………27 4.2.1.1 Cost accounting system……………………………………………..28 4.2.1.2 Pricing and competition…………………………………………….32 4.2.1.3 Profitability………………………………………………………….37 4.2.1.4 Financial ratio……………………………………………………….40 Chapter 5: Conclusion………………………………………………………46 5.1 Summary…………………………………………………………………46 5.2 Recommendation………………………………………………………...47 5.3 Limitation and further research………………………………………...47 Reference……………………………………………………………………..49 vii Chapter 1: Introduction 1.1 Back ground The Vietnam Dairy Products Joint Stock Company (Vinamilk) was established in 1976 and it has grown to become the leading corporation of the dairy industry, currently has 75% market share of milk in Vietnam. Vinamilk always provides with the quality products, most nutritious and delicious for health. Vinamilk always satisfies and be responsible for customers by diversifying products and services, quality assurance, food hygiene and safety with competitive prices, business ethics of respect and obey the law. In generally, management accounting usually provided the decision-making functions to the managers. It involves functions through from planning, organizing to test the evaluation stage. The function of decision is applied continuously during operation of the business. The decision making process is the choice of many different alternatives. In which each option is considered including accounting information, particularly information on the investment costs to achieve optimal business benefit. Each action plan is a different situation, with the type, amount, expense items and other investment income. But they only have one thing in common that are associated with accounting information. Therefore, the management is required to consider carefully making a right decision. However, in order to make a right decision, the management should have the tools to help them distinguish the proper accounting information relating to each plan. Based on this, the plan chosen will give the highest profit or lowest cost. In recent year, there are many companies which have gone to bankruptcy because of the mismanagement. So today, the management is required to train more with experienced and professional’s skills. Moreover, the management is also able to see right things to 1 make decisions and choose the plan that set out on the basis of selecting the appropriate information. This thesis “The impact of accounting information on management’s decision making – Vinamilk case study” is conducted to provide some purpose tools and select the appropriate information for decision making of the Vinamilk Company. Besides, the necessary of this thesis not only serve for the commercial organizations but also non commercial organizations which need the accounting information to survival and development. The commercial organizations such as private companies, joint venture, and limited companies need the accounting information to determine the production and business efficiency in the period. While non-commercial organizations such as clubs, associations with the main objective is social activity, charitable activities which need accounting information to determine the level of service. And State institutions also need accounting information to assess the provision of security and social services. To sum up, accounting information is a key factor which plays an important role over the activities of an organization and impact on decisions to achieve the level of the target set. 1.2 Problem statements:  Which are accounting tools available used to support decision making process? Accounting tools play a vital role in business decision making process. Management accounting consists of a set of tools that have been proven to be useful in making decisions involving cost data, price and profit. The costing system provides to the obtainable knowledge of costs, and it builds the basis for numerous decisions like as determining prices, estimating the profit. Profitability is used especially for making decisions relating to suspended operations of organization. Nowadays, accounting tools 2 apply differ from organization. A tool that proves to be very effective in an organization, however, it may fail in another organization. Different information is required for different purposes, so the organization must focus on the different accounting tools to support the decision making process.  Which accounting tools are applied in Vinamilk? How does the company use those in the decision making process? As mentioned above, Vinamilk uses an old way of classifying costs, which considers all administration and selling cost as fixed costs and all production costs as variable although within the production costs there would be fixed costs, like depreciation. Thus labor costs of the production are also seen as variable. In addition, Vinamilk produces a lot of vary products and buys the ingredients such as milk from outside supplier. Milk imported nowadays accounts 70% raw materials of Vinamilk. Hence, the manager has to evaluate and calculate the cost in the future due to the management cannot consider the price of materials in the future. Furthermore, Vinamilk manages indirect cost and overhead cost, selling costs and administrative costs as well. Base on costing system, manager should determine the price. Vinamilk uses both of cost plus pricing and target costing such as it decides first how much it costs and then its department works together with the production to stay within this cost structure. Prices of competitors and their reaction also effect on prices for the valuation of the company. Consumers assess the value and price of a product based on price and value of similar products. A strategy of high prices, high profitability levels, may attract competition, while a strategy of low cost, low-can discourage the competition or do they withdraw from the market. Companies need to know price and quality of the opponent. This can be done in several ways. Companies can send personnel to study and compare the prices of the competing 3 products. Companies can search by price of competitors, looking to buy their equipment and analysis. The company may ask the buyer to see how they feel about the price and quality of competitors. Another tool often used in Vinamilk is profitability, which is defined as the price customers paid minus the cost of production. In Vinamilk, they split up the products in different groups of product and they also distinguish the cost of the machine for each product. Hence, they can calculate the gross profit for each product group every month. By this system, Vinamilk knows which products are profitable. In order to attaining a better profit, the managements also made the most difficult decision in his career. Vinamilk maintains high profit margins; this suggests that the ability to manage costs and price of company is very good. Furthermore, besides information of managerial accounting provided, the managers should consider the financial information such as financial ratio in order to understand the business activities of company. 1.2 Structure of paper The paper is conducted to find out the accounting tools which are applied in Vinamilk and how these tools affect to the decision made by the company. This paper contains five chapters as follow: Chapter 1: Introduction Chapter 2: Literature review Chapter 3: Methodology Chapter 4: Analysis Chapter 5: Conclusion In the chapter 1, the information of Vinamilk and the importance of this thesis are introduced. In chapter 2 and chapter 3, the basic theory which includes the ideas of 4 different accounting tools and steps for decision making is recommended. The methodology will provide the process of how this study is conducted. After collecting data and information, the analyzing process would be implemented in chapter 4. Finally, the chapter 5 will draw the conclusion as well limitation and recommendation. 5 Chapter 2: Literature review Nowadays, financial information and non financial information provided by management accounting can help managers in making decisions as well. In order to clarify the relationship between management accounting and decision-making, the both of concepts will be proved independently in the following. 2.1 Decision making process Before explain the concept decision making process, the decision should be determined. A decision is a choice leading to a certain desired objective (Holsapple, pp. 35 – 36). A person or other different participants that are included in decision-making can be called decision makers. Individual decisions can be made by a computer or a single person while the various decision makers can be divided into independent and negotiated decisions. The first one is that the single person who has the power to decide and the other people can greatly influence how the decision will be. In negotiated decisions, the different decision makers will share the right of making a decision. That means the people have practically equal rights and discuss their different ideas in various meeting and organization decisions. The second one is that the right of making a decision is unequally shared due to the organizations hierarchy and the management between the decision participants is highly structured. Table 1 will give more information about the types of decision makers: 6 Distinguishing Individual Team One Multiple Vested in one Vested in one person person Group Organization Multiple Multiple More or less Can be equally shared distributed by all unequally participants among traits Participants Authority (deciding participant) participants Formal None communication Relatively Relatively few Can be quite structured restrictions structured among participations Table 2.1: adapted from Holsapple, C.W., Whinston, A.B. (1996) p. 69 Making decision is the one of main functions of the managers. The management often faces some decisions such as what to produce? How to produce? How to distribution? In order to successful in making decision, the managers need have relevant information in some circumstances. There are many types and context of decision and the outcome of decision often depend on the decision maker. In some model of decision making process, every decision has to follow some common steps. These steps can be applied for decision making process usefully (Holsapple , p.71). Figure 1 indicates the diagram of decision making process. There are seven stages in Drury’s model. The first five stages show the planning or decision making process. It is 7 described as making choices between options and it is mainly decision making activity. The final two stages present the control process that should measure and correct the detailed performance of the alternatives chosen. (Drury, p.6-9) Figure 2.1: Adapted from Drury C. (2000), p. 6 2.1.1 Planning process 1. Identify objectives: This is a first step of planning process; the managements need to identify the specific of the goals or objectives of organizations. They will give to decision makers some guidance or directions and enable decision makers to estimate the action desirability compared to another action. In economic, maximizing profitability of company’s owners and shareholders wealth should be a main objective. 2. Search for alternative courses of action: This is not only the most important but also difficult step in the decision-making process. The management has to look for alternative ways of action that enable goals to be achieved. Thus the organization has to look at its environment for challenges and opportunities. 3. Gather data about alternatives: The managers should access the potential growth rate of activities, potential areas of company in order to gain market share and cash flow. 8 Furthermore, the decision makers have to differentiate between certainty, uncertainty problem that are difficult to control such as inflation, competitions strength etc. Data and information are gathered by both short term and long term decision. 4. Select alternative courses of action: The decision making includes the choosing between competing alternative courses of action and best satisfies objectives of the company. For example, if the profit maximization is main objective, all options should be planned in terms on differences in profit. The option that seems to achieve the goal best then it should be selected by the decision makers. 5. Implement the decision: This is final steps of planning process. After choosing the best alternatives, the decision would be conducted through the planning process. The management has to consider carefully and communicates with other people in the organization who work closely together before to implementation decision. 2.1.2 Control process 6. Compare actual and planed outcomes: This is the first stage of control process. The managers should compare actual implementation and budgeting, and then determine what the difference is. An accountant has to set up presentation reports which provide feedback by comparing results with plans. 7. Respond to divergences from plan: After the alternatives chosen should be frequently checked and if the results of the decisions made differ from the designed one, corrective actions should be taken. 2.1.3 Limitations of Drury model There are several reasons criticized Drury model. Firstly, the right decisions are easily and clearly identifiable. Secondly, it does not include factors, like emotions, imagination, memories, culture and mindset of the decision-makers. Finally, it is built on 9 the idea that each step can be clearly separated from the other that does not correspond to the reality of decision making. (Langley, pp.261-264) 2.1.4 Long term and short term decisions The decision can classify into long term and short term decisions. Long term decision refers to the decision that impacts on the longer periods of time (Ibid. p. 8). In organization, long term decision may be a capital investment such as buying machinery, building factory and so on. On the other hand, short term decision is the decision that affect on one year or less than one year (Ibid. p. 233). This decision is based on currently data and be easily to changes. The one of example of short term decision is determining of acceptation or rejection order. 2.2 Management accounting and decision making According to investorwords.com, accounting is defined as the systematic recording, reporting and analyzing of financial transactions of a business. There are two types of accounting which are management accounting and financial accounting. In this project, management accounting would be focused. Management accounting refers to the process of preparing management reports and accounts that provide accurate and timely financial and statistical information required by managers to make day to day and short term decisions (www.businessdictionary.com). The management accounting information plays a vital role in decision making of the managers. Accounting can be viewed as the process of identifying; measuring and communicating economic information to permit informed and predicted decisions for the user of information. (Horngren pp.18.182). This means that understanding clearly of accounting information will help the management to give out better decisions for the organization. Management accounting is a division of information systems of an 10 organization. Managers rely on accounting information for management planning and control activities of the organization (Hilton, 1991). Therefore, the reported and collected accounting information can influence on making management’s decision and it will result in the management to make decisions that are consistent with the organization’s goals. Moreover, the decision maker often decides what information is inputted and considers information as relevant for the decision. Using accounting information depends on different decisions and it often relies on the choices of decision maker whose may be affected by experience, perceptions and objectives. Apparently, accounting information is used for decision-making rises if the information provided is relevant for the decision, and again. The increasing decision making is also relies on the decision maker who regards the accounting information as reliable and trustiness. 2.3 Defining the cost terms: 1. A cost is known as the resources are in place to complete a special reason. It is very common to determine the amount the cost of money to obtain goods and services. (Horgngren, p. 133) 2. A cost object is looked as a cost of products and as well as costs of a department or service. (Drury, p. 21) 3. Fixed cost and variable cost: Fixed cost refers to the cost that does not increase or decrease when level of activities decrease or increase. So the cost per unit will decrease when the level of activities increase and again. On the other hand, variable cost is the increasing or decreasing cost when the activities increase or decrease. But for per unit, the level of activity is constant cost, and it will disappear when stop working. (Ibid., pp. 29 – 30) 11 4. Direct cost and indirect cost: Direct cost is known as the cost that is easily and conveniently monitored to the particular cost object under consideration. Meanwhile, indirect cost is known as all the other costs that cannot be related to or identified with, a particular cost object under consideration. (www.accountingformanager.com) 5. Relevant and irrelevant cost: Relevant costs are those costs that can be affected by decisions whereas irrelevant costs cannot be affected through a certain decision. It may be irrelevant for some situations, but relevant for others. Examples of irrelevant costs involve fixed overheads, notional costs, sunk costs and book values (www.businessknowledgesource.com). 2.4 Tools for decision making In order to make a better decision by using accounting information, management has to rely on the tools of accounting system. There are many tools of accounting, but in this thesis, three accounting tools are discussed. Firstly, the cost accounting system determines the costs that are accounted in goods produced of company. Hence, management needs to understanding about the information of costs that occur in an organization. This tool is considered as the most important tool in guiding decision. Because the management would be able to set prices and estimate profit based on information about costs. Secondly, pricing and competition tool would be discussed It involves the ideas of target costing and cost plus pricing, competition. Finally, profitability tool would be recommended. 2.4.1 Cost accounting system Cost accounting refers to a part of accounting that evaluates the overall costs associated with conducting business. The main aim of cost accounting is basically providing product costing information for financial statements, control, and decision making 12 (www.wisegeek.com). A cost accounting system includes two steps, the cost gathering by classifying costs into categories and the assignment of costs to cost objects. The first one refers to the collection of costs by using classification criteria, like the relevance of costs or the cost behavior. Different types of costs are available for different decisions. Hence, as first step is useful for decision-making to sort out costs as fixed or variable, relevant or irrelevant and direct or indirect. For example, when the management wants to make-or-buy machinery, decisions will concentrate on relevant costs in a particular decision situation. The second one is cost allocation related to indirect costs that are allocated to a cost object. It is related to methods of classifying the direct and indirect cost, and determining which is important for cost accounting system. In generally, there are two main methods of allocating indirect cost: traditional accounting system and activity based costing (ABC). The first one refers to the allocation of factory’s indirect cost to product manufactured. That means traditional accounting system allocates the indirect cost to cost centers. It is rely extensively on the volume based allocation such as the direct labor hours, number of units produced, or machine hours. For example direct labor hours are used as a basis to allocate costs of materials to a cost object (Drury, p 52-53). Otherwise, the second one refers to assign the costs to activity cost centers. Activity based costing system is based on cause and effect allocations. By identifying the costs driver that cause the cost to changes and assigning the costs to cost objects on the basis of cost driver usage, so the cost can be more accurately traced (Drury, p 221). The major difference between two methods is collecting of the cost driver. Traditional costing system relies on arbitrary allocation while activity based costing is based on cause and effect allocation. The traditional costing system will be applied when the production process is very simple and clearly, 13