a study on impacts and effectiveness of abc costing method as a cost effective measurement in coal industry

ABC costing method: history and calculation method In the brief description, cost accounting can be considered as the way the accountants use to calculate the costs to create a base and

A STUDY ON IMPACTS AND EFFECTIVENESS OF ABC COSTING METHOD AS A COST EFFECTIVE MEASUREMENT IN

Declaration

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 12,236 Words

NGUYEN THI THU HUYEN

April, 2011

Acknowledgement

First of all, I am grateful to Ms Van Anh, the professor who gave lots of useful

advices as well as materials for this thesis And I would like to extent my thanks to all

managers from productions, marketing, and accounting departments and all of

employees in 50 manufacturing companies, who allowed and assisted me to collect all of

necessary information to finish this thesis My thesis can not be finished without your

supports

A STUDY ON IMPACTS AND EFFECTIVENESS OF ABC COSTING METHOD

AS A COST EFFECTIVE MEASUREMENT IN COAL INDUSTRY

BY NGUYEN THI THU HUYEN

APRIL, 2011

Supervisor: Ms Nguyen Van Anh

Abstract:

According to previous researchers, different costing method has different core

competitive advantages to organizations From the oldest to newest method, decision of

managers is still affected As a result, finding the best method to reduce the failure rates

and increase the effectiveness of cost allocation is a hard question for both managers and

accountants Based on the accounting history, there are many types of costing method

such as: traditional or absorption costing method, variable costing method, throughput

costing method, and ABC costing method Changes in business environments requires a

better method which can help managers control their performance while still enhance the

profit to organizations Compare to previous method, ABC costing method still inherent

some characters of other method but it changes a little bit to be suitable to the

accounting and business environment Instead of sharing costs equally among

departments, managers filtered the most profitable products to focus on and try to

increase the number of products within a cost limitation This is why the author thinks

that ABC can be evaluated as the best method to adopt in manufacturing firm especially

in coal industry Unlike developed countries in the World, Vietnamese business

environment changes rapidly but some characters still maintained the same Therefore, a

statistic about the number of companies who implement ABC can reflect the

effectiveness, applicability, and impacts of this method on both managerial decisions

and plants’ performance

Table of Content

Declaration ii

Acknowledgement iii

Abstract: iv

CHAPTER I: Introduction vii

1.1 Introduction about the topic 1

1.2 Need for Research 3

1.2.1 Research question 3

1.2.2 Research objective 3

1.3 Elements of the Research 3

CHAPTER II: Literature review 5

2.1ABC costing method: history and calculation method 5

2.1.1 History of cost accounting methods and ABC general review 6

2.1.2 Cost factors and calculation method 7

2.2SWOT or appreciation and criticism method 10

2.2.1 ABC appreciations 11

2.2.2 ABC critism 14

2.3 Impacts of this method on decision making process of manager as well as its influences on the organizations 15

CHAPTER III: RESEARCH AND METHODLOGY 20

3.1Research objective 20

3.2Research strategy 20

1.3Research hypothesis 21

3.3.1 Correspondence between ABC method and the capability of manufacturing companies 22

3.3.2 Impacts of ABC on performance: whether ABC is the best costing method to

measure the performance of companies? 25

3.4 Measurement of variables 28

3.4.1 Dependent variables (Plant performance) 28

3.4.2 Independent variables 29

3.4.2.1 Activity Based Costing (ABC) implementation 29

3.4.2.2 Plant-level control variables 33

3.5 Research methodology 33

3.6 Data sources and sampling 34

3.6.1 Sample selection 34

3.6.2 Data collection method 34

3.7 Limitation of research 35

CHAPTER IV: ANALYSIS 37

4.1 Results Analysis 37

4.1.1 Percentage method 37

4.1.2 Impact of ABC on plant performance 43

4.2 Discussion 45

CHAPTER V: CONCLUSION 46

5.1 Implication of research 46

5.2 Conclusion 46

REFERENCES 48

APPENDIX 55

CHAPTER I: Introduction

1.1 Introduction about the topic

For many researchers, cost accounting methods are still a major concern for them

Different method leads to different decisions of the managers therefore profits to the

organizations can not be the same Most of documents of cost accounting methods were

destroyed in a fire in 1984 (Cunagin, C., & Stancil, J., L., 1992) As a result, following

the sources of these methods is still important and difficult However, based on the

advantages of these methods, the affects on the decisions of managers can be obvious

As a result, the author of this thesis hopes that the empirical study of advantages and

disadvantages of ABC in order to judge the effectiveness that this method can bring to

the organizations as well as the impacts of its on the decisions of the managers SWOTS

model will be applied to analyze this And a research on a real survey which is done by

20 specific companies in the coal industry can be more reliable and convince to readers

Based on the statistics, some recommendation about the importance and impacts of cost

accounting method on the managerial decision making process should be released

As mentioned above, to discuss about any thing, we need to know a little bit of

history of cost accounting methods Although it is quite difficult to follow exactly the

origin of each costing method, the estimation about the time period of absorption costing

method and variable costing method can be made according to different documents of

various fields (Vangermeersch, R., 1986) Based on most of researching documents,

absorption method can be considered as the leader for all kind of costing methods in

later on It is easier for both users and managers As a result, until now, this method is

still applied in many aspects such as administration works Timing and changes in the

business environment lead to the need for new costing methods for new cost objects

Variable costing was born as a result of the demand of this According to this method,

only costs which are adjusted to the production process should be concerned by the

managers However, in the long run, some fixed costs still need to change As a result, a

new cost accounting method is invented Instead of sharing equally among various

departments and maintaining the fixed costs in the long run, expenses are divided

differently based on some factors such as labor hours, direct materials and the fixed cost

can be changed based on the need of the production process None of products needs the

same quantity of direct materials as well as the direct labor hours So managers should

know how to use and allocate the costs more efficiency This does not mean the ABC

costing method is perfect, the latest cost accounting methods become more and more

beneficial to the companies

SWOTs model is the most familiar model which is used to analyze the

advantages and disadvantages fairly in management aspect This refers to the strengths,

weakness, opportunities and threats Since the author focus on the management

accounting, this model can be considered as the most useful one This is quite easy to

see that management accounting does not mean the managers only work with numbers

and calculation; it requires more specific characters from managers such as observation,

critical thinking and flexibility Through the numbers and statistics, managers should see

the signs that lead the organizations to the highest return when they invest their capitals

After drawing a draft in their mind, managers will make the best decisions to enhance

the operation process and allocate the right costs to the right departments at the right

time And comparing the results from year to year by using other costing accounting

methods and ABC can be the best way to implement

However, theory is still the theory if we can not use it in the real business

environment A real survey including 20 companies should be chosen as an evidence for

what the author said Based on their own number, the author as well as readers can

figure out how many percents this study is right and how they could apply when they

open a new company Wrong or unsuitable costing method can destroy a company so

easy As a result, considering and choosing the best cost accounting methods are really

important

1.2 Need for Research

1.2.1 Research question

What is the overall direct and indirect impact of ABC on manufacturing firm

performance? And can ABC be considered as the best costing method adopting in plant

to enhance the performance improvement

1.2.2 Research objective

Generally, most of previous researches only focus on impacts of ABC in theories But

none of them mentioned about the rate of adopting ABC method in Vietnamese

enterprisers In order to apply ABC, many

1.3 Elements of the Research

No theories can convince readers without the evidence As a result, in this part, a

real survey of manufacturing companies will be shown A short introduction of the

industry will be focused Core competitive advantages as well as disadvantages of this

industry will be covered This background will help the readers understand and draw a

big picture of this industry

After this, a statistics about the number of companies which adopted ABC will

be explored Based on this result, we can figure out whether all of advantages of ABC in

the theories are true or not and in what circumstances Some evidences about the impacts

of ABC on the managers’ decision in the current year compare to the decisions by

adopting other cost accounting method will be mentioned Depending on these, some

recommendations will be concluded in the next part And this survey will ensure that the

advantages and disadvantages that the author wrote in the earlier part are correct

In the last part, a short interpretation with the result of the survey will tell the

readers what decisions that the manager made in two different circumstances: with and

without the ABC costing method they applied to calculate And some recommendations

will be made to managers to make sure that this can provide the readers an objective

view about the impacts and effectiveness of ABC as a cost effective measurement to

some companies in Coal Industry

CHAPTER II: Literature review

2.1 ABC costing method: history and calculation method

In the brief description, cost accounting can be considered as the way the accountants

use to calculate the costs to create a base and establish a price for products based on the

cost calculation foundation This means managers not only understanding about costs

which are occurred during the business runs such as what kinds of those costs, their

characteristics and classification (Weygandt, J., J.; Kimmel, P., D.; & Kieso, D., E.,

2009) Depending on this analysis of accountants, managers can know how to allocate

costs more effective and efficient However, bigger scales of business require better cost

accounting methods as well as more precise and probably accounting information As a

result, we can see that except ABC, there are many kinds of costing methods were

invented

Before the dawn of industrial century, costs and price of products only depended on

some directed costs which are classified as variable costs today such as: direct labor,

direct materials, and manufacturing overhead All of these will be divided equally based

on some fixed criteria such as direct labor hours However, when the accounting

scientists focused more on the costs study aspect, they discovered that except direct

costs as mentioned in documents, there are some other costs which can be considered as

indirect costs like maintenance, tooling, production control, purchasing, quality control,

storage and handling, plant supervision and engineering costs Unlike directed costs,

these did not be changed during a long period when any changes occurred in the volume

of products (Shim, J., K., Ph.D.; & Siegel, J., G., Ph.D.; 2009) Therefore, they named

these as “fixed costs” to identify the differences of these costs with directed or variable

costs Despite of attempt of many accounting researchers during a long time, the

importance of “fixed costs” are only really emphasized since the twenty-first century

(Stenzel, C., & Stenzel, J., 2002)

In this thesis, the author will focus only in ABC method, its impacts and influences on

the managers’ decisions by using SWOT analysis and survey results

2.1.1 History of cost accounting methods and ABC general review

A fire at the headquarters of the National Association of Accountants (NAA) in 1984

destroyed most of documents related to the costing methods (Cunagin,C., & Stancil, J.,

L., 1992) Therefore, to identify exactly time when cost accounting were invested is

quite impossible Previously, variable costing method was used as the only and easiest

way to calculate the costs This is because it is easy to accountants as well as managers

and shareholders understand the directions of costs since all of directed costs are treated

in the same manners Development of science brought another method which is called

traditional cost allocation methods or VBC (Volume Based Costing) when the fixed

costs were invented However, when the organizations want to expansion their business,

more costs are appeared This leads to a demand for a new costing method which can

adjust and treat both new and old costs in the same way As a result, ABC costing

method was born Time by time, this methods proofed more and more advantages since

the scale of businesses increasing as a requirement for industrial age

In a World when the globalization becomes a trend of the societies, ABC can be

considered as a popular and dominated costing method for most of organizations In the

past, profit means you had a list of potential customers who can buy a huge quantity of

products in many times However, this might be not right in reality Profitability not only

depends on the quantity but also the differences between the price and the costs In fact,

the higher differences, the higher profitability Unlike traditional method which allocates

costs equally among products, ABC divides costs based on the requirements of costs

objects like products, services and jobs (Cooper, R., & Slagmulder, R., 2005) In other

words, we can say this method is the best tool for refining cost systems For instance, a

shampoo A needs 1hour to produce while shampoo B needs 1.5hours to manufacture

This means different items will require different cost amounts As a result, accountants

should know which costs will be used for what cost object and at what rates In facts,

one indirect cost can be allocated for more than one cost objects By this way, managers

can follow costs streams for different costs objects and decide how to allocate those

costs precisely Moreover, shareholders can have more options when they want to invest

in the organization Hence, the effectiveness of the business will be enhanced

2.1.2 Cost factors and calculation method

With variable costing method, only direct costs are calculated, indirect costs will be

treated as expenses on the income statement This is different with traditional costing

method when both direct and indirect costs are included Compare to these two methods,

ABC method calculates costs in a unique way There are four levels which are included

in ABC costing method to classify costs which are output unit level, batch level, product

sustaining and facility sustaining cost Each level will reflect a specific way to identify

the cost objects At the first level, costs will be allocated individually to one unit of

products or services The higher volume of items, the higher costs required At the

higher level, cost of activities performed will be calculated on a specific group of

products or services In order to do this, managers or accountants will establish some

standards for these groups such as how many items in a group, what is the characteristics

to classify them into a batch and etc After allocating cost to a group, managers can

divide costs for each item as mentioned in the first level Different to two levels above,

product sustaining costs refers to other supporting product costs which are necessary for

the producing an individual product or service For example, when the manufacturer

want to make shampoo B, except ingredients as shampoo A, olive oil is required As a

result, this cost is still included as a manufacturing cost for shampoo B while it is not

occurred in producing shampoo A Additionally, this can be considered as a fixed cost

which is not changed when the number of units and batches of individual products or

services changes Similar the third level, the last level mentions about the costs that are

needed to support for producing but for the whole process These costs might be not

occurred for an individual product or service however, it is required to finish the

manufacturing As a result, the name of this level is facility sustaining costs

Since the costs are divided into different level of cost objects, calculation of ABC

method also differs with traditional and variable costs As mentioned in the figure 1.2

below, the first step of this method identifies what resources that manufacturers need to

produce chosen products For example, to make 1000 bottles of shampoo A and 2,000

bottles of shampoo B, manufacturers need to buy ginseng and olive oil After defining

the necessarily resources, the quantity as well as costs of those should be computed

based on the number of products or services This means all of costs such as direct

material; direct labor and manufacturing overhead will be included and allocated

separately In the next step, all of activities during production process should be listed It

helps to create a standard or foundation to allocate costs which are budgeted Based on

this action, managers can know how many activities required for a specific products or

services and establish in their mind a whole picture about cost pool with all of items By

this way, the reliability of data and measurement will be increased rapidly and the

following cost allocation will be easier for both managers and shareholders Finishing

identifying activities likes installing, running and maintaining, counted costs will be

traced to different required products or services’ activities Various companies and

managers, criteria to allocate costs might be distinguished For example, manufacturing

costs can be divided among products and services based on the cause and effect

relationship When all of costs are distributed, the total costs for each products or

services as in the last step of this method The fourth and the fifth step of ABC will help

managers diversify the risks of producing and figure out the best way to use costs more

effective and efficient As a result, in fact, this method is a little bit more expensive and

complicated compare to traditional and variable method However, it provides more

precise and useful information to managers therefore it is still the first choice for most

managers and companies

Figure 2.1.2: ABC in one

2.2 SWOT or appreciation and criticism method

SWOTs model is the most familiar model which is used to analyze the advantages and

disadvantages fairly in management aspect This refers to the strengths, weakness,

opportunities and threats Since the author focus on the management accounting, this

model can be considered as the most useful one However, in order to be suitable with

the characters of accounting, the author will divide this method into 2 parts only:

appreciation and criticism This is quite easy to see that management accounting does

not mean the managers only work with numbers and calculation; it requires more

specific characters from managers such as observation, critical thinking and flexibility

Through the numbers and statistics, managers should see the signs that lead the

organizations to the highest return when they invest their capitals After drawing a draft

in their mind, managers will make the best decisions to enhance the operation process

and allocate the right costs to the right departments at the right time And comparing the

results from year to year by using other costing accounting methods and ABC can be the

best way to implement

2.2.1 ABC appreciations

As mentioned in the calculation part, ABC method brings many benefits to organizations

but in this thesis, the author only summarizes these into some points such as: identifying

key customers and products and services, establishing the most useful pictures about

high and low profitable items and directing the whole companies in the best way to

enhance the profit Moreover, costs can be considered as the major factor which can

proof the ability of managers in maintaining the efficiencies of financial activities By

following annually reports, managers can predict the trend of products in next year as

well as figure out the reasons for inefficient financial issues in case it occurs If the

managing way is suitable, companies can maintain and develop the current directions for

cost allocating and operational process And the precise accounting information

increases the improvements for managers through reports and shows them required

expenses to achieve those improvements Based on these reports, accounting department

can corporate with marketing department to design an effective marketing plan using

limitation resources The last but not the least, both managers and staffs can enhance

their ability in negotiating with the customers and locate the profitable products or

services better

None of cost accounting methods can compete with ABC about the ability in

determination the customers as well as the products and direct the whole organizations

in the most profitable way Since all of direct and indirect costs are computed and

assigned to each products and services, manufacturing expenses are definitely

determined In order to measure the profitably for each customer, products or services

expenses should be deducted This will create the correlative relationship between

products or services and customers’ expenses and enhance the effective of the business

As a result, not only accountants or managers, normal staffs also can grasp, analyze

related expenses of producing and define the way to deliver the value added to the

customers Moreover, a good understanding foundation can help these ones feel more

confident about their products or services explain and convince the customers better

according to the real facts This can be mentioned as a continuously process which

includes costs analysis and deduction non value added activities to reach the higher level

of an effective organization operation as a whole (Ittner, 1999, Cooper et al 1992)

Moreover, with better understanding about allocating costs effectively, R&D department

can create new products or services within a competitive cost compare to other brand

names in the same market Potential products or services will be focused more if the

organization applies this method Using a more complicated but high detailed

calculation method, ABC plays an important role in decisions making process as well as

operational process of managers Cost cutting and cost control savings characters

enhances the position of ABC in developing value added products or services while still

maintain an effective cost resources One of the most popular implementation of ABC is

scorecard balance which provide a fairly judgments among various products and

services In other words, this is a flexible, precise and detailed costing method

In previous researches, ABC is referred as a task for accountants to identify the key

products or services, costs drivers and related activities costs assigning (Cooper, 1988;

Ittner et al 2002) Not only direct materials, direct labors and direct manufacturing

overhead costs but also indirect cost such as indirect materials and installing and

maintenance costs are also distributed depending on the required activities of each

products or services However, during the production process, there are some other

sustaining costs This can be individual or group Therefore, these expenses should be

divided separately to related activities of products or services based on a factor which is

called cost driver rate (Cooper and Kaplan, 1991) This will increase the reliabilities of

data and help managers make the best decisions for specific support productions

activities

Another benefit that the author wants to discuss in this thesis is evidences for financial

management and operation process Applying a more detailed calculation, ABC

provides economists a better database with higher level of accuracies and reliabilities

compare to traditional and variable costing methods (Cooper and Kaplan, 1991; Ittner,

1999) In the industrial age, information is the core advantage to all of organizations

The winners will be the ones who can access and hold the most useful and reliable

information especially accounting information This enhances the importance of ABC in

the eye of managers From earlier of the century, many researchers declared that

organizations can gain lots of benefits when they implement ABC costing method

(Anderson and Young, 1999; Cooper and Kaplan, 1991) Other benefits of ABC such as

manufacturing improvement, better product information, allocating limited sources and

products mix strategies also emphasize in many different studies of various accounting

scientists (Anderson, 1995; Shields, 1995)

Generally, cost reducing, products quality improvements and saving manufacturing time

can be listed as three main benefits that ABC can bring to organizations in operational

performances aspect (Anderson and Young [1999]; Ostrenga et al [1992]) Many

researchers affirmed that using cost driver to allocate costs will bring more detailed and

precise information to users (Cooper and Kaplan [1991, chapter 5]; Ostrenga et al

[1992]; Carolfi [1996]) By this way, wasted are unnecessarily costs during production

process will be reduced and saved Additionally, potential products or services with

higher profitability will be focused and the company can keep the right development

tract The relation with customers will be enhanced since more valuable products are

invented and brought to them

However, in order to explore all of ABC benefits, managers should choose a suitable

management method Until now, for most of people, TQM or total quality management

is still a favorable method since it can help ABC provide listed benefits as discussed

above

2.2.2 ABC critism

It is a fact that none of accounting methods can be considered as perfect Therefore, even

ABC has lots of benefits, there are some problems still exist Although it is a benchmark

to evaluate the effectiveness of the business, seven steps are not so easy to implement It

requires time to train the employees and build a complicated facility (McGowan and

Klammer, 1997) Without understanding about the tool that we use, none of business can

be successful In order to achieve this, companies must have a good and safe financial

issue Moreover, for most of shareholders, traditional costing method is the best method

when all of costs are calculated in a simple way among different products As a result,

they might be confused since companies apply a new form of costing method to do

annually reports Although more detailed and precise information is a huge strength of

ABC, it is also a weakness of this method In case that too many products or services

are produced at the same time, number of cost pool, costs bases and cost drivers also

increase This might lead to some small errors and mistakes during the calculation

process (Datar and Gupta, 1994) Too much information will distract the judgments

ability of managers and lead to unsuitable decisions at specific circumstances (Itnner and

Larcker, 2001; Gordon and Silvester, 1999) Moreover, implementing ABC method also

needs many objective factors such as market competitiveness, core business and the

information technology infrastructure quality (Banker and Potter, 1993; Christensen and

Demski, 1997) Lastly, differences about financial situations and operation performance

between adopting and non adopting companies are not so clearly (Shields, 1995;

McGowan and Klammer, 1997; Foster and Swenson, 1997) Therefore, it is quite

difficult to declare that companies should consider ABC as the only one costing method

to apply

2.3 Impacts of this method on decision making process of manager as

well as its influences on the organizations

According to benefits that ABC owns, influences and impacts of this method on

decisions making process and operational performance can not be denied Business

environment changes so rapidly As a result, cost accounting methods also need to

develop more to adapt with these changes In table 3.1, compare to the past, lots of

changes occurred

Table 2.3.1: The changes in manufacturing environment (Sullivan, William G., 1992)

High volume, long production runs,

long product life cycles

Low volume, short product runs, short product life cycles

Small number of product variations in a

Domestic market

Large number of product variations in

an international market Large direct labor component; high cost

of processing information

Relatively high technology costs;

relatively low information processing costs Small indirect/overhead costs in

relation to direct labor

Large indirect/overhead costs in relation to direct labor

Globalization becomes a dominated trend in World make business battle more furious

From a long run manufacturing trend only focusing on the quantity of products with long

life cycles, now, most of companies choose short term production with higher profitable

products or services By this way, even the quantity of items is much lower than in the

past, profit of the companies still maintain and develops solidly To achieve this,

information about market and responses as well as expectations from customers should

be updated daily and rapidly (Sullivan, William G., 1992) Based on this comparison, it

is quite easy to see that, other costing methods still can be applied but it will face with

lots of problems since it can not adapt with the changes of the environment Broaden

market environment means that the variability of products and services will be higher

Uncompetitive products or services will be eliminated Locally competing trend turns

into international competition

Instead of paying more money in gathering the information as in the past, internet and

technologies development free companies to access various sources of information

nowadays Manual works in manufacturing has a negative relation with the number of

machines that are equipped in factories For example, in the past, a car needs 10 people to

make; but now, to produce a car, only 2-3 persons to control a machine However, this

increased the indirect manufacturing overhead costs compare to the past As in figure

3.2, overhead costs are about 35% in total of manufacturing costs compare to 15% if

companies still apply traditional way Direct labor costs are also reduced from 75% to

10% This is a big change in the business environment

Figure 2.3.2: The proportion of material, direct labor and overhead costs in

today’s world

Figure 2.3.3: The proportion of material, direct labor and overhead costs where

traditional cost systems focus their attention

Materials, 55%

Direct Labor, 10%

Overhead, 35%

Materials Direct Labor Overhead

Materials, 10%

Direct Labor, 75%

Overhead, 15%

Materials Direct Labor Overhead

Through these explanation and comparison, ABC is really a suitable method for most of

companies in this modern World Accurately, updated and detailed information help

manager design the best portfolio with the most profitable products or services This not

only contributes to the development of companies but also proof the ability of managers

with their customers and shareholders fairly (Harsh, Mary Frances., 1993, Johnson, H T

and Robert S Kaplan., 1987)

CHAPTER III: RESEARCH AND METHODLOGY

3.1 Research objective

In order to make the best decision, adopting a suitable costing method is more and more

important for managers today Facing with new business environment with lots of

changing, traditional, variable and other types of costing method seems difficult to

integrate and helps the companies survive As a result, holding key advantages, ABC

easily become the most popular cost accounting method which is applied in different

companies especially in Vietnam However, none of research or surveys mentioned

about this Therefore, the author wants to carry out this study to discover the reality of

this declaration Based on the result of this survey, both author and readers can judge

whether ABC is the best cost measurement for managers in coal industry in Vietnam and

some comments about cost method that apply in most of Vietnamese companies overall

3.2 Research strategy

In order to achieve aims of this project, the author will use two hypotheses which

include the correspondent relationship between ABC and some plant level control

variables and ABC’s impacts on performance of companies In the next part, a briefly

description about hypotheses will be released After that, variables will be discussed In

the third part, research methodology as well as other factor as data sources and sample

collections will be explained And in the final one, some limitations of this project will

be given

3.3 Research hypothesis

This study focus on the interactions among three factors: ABC, production capabilities

and performance as in the figure 3.3 This includes 2 relations between ABC and

determination factors of companies in choosing the best costing method, and between

ABC and the improvements in the quality as well as the costs of products or services

Based on the determination factors of manufacturing ability of companies, it will easier

to identify the impacts of applying ABC in the performance of manufacturers through

cost and quality improvements

3.3.1 Correspondence between ABC method and the capability of

manufacturing companies

ABC method can be successful only when the managers can connect its advantages with

a scheduling hierarchy and strategic planning for production process This will solve the

bottleneck between scare resources and level of the inventories in the plant As a result,

for many accounting researchers ABC can create and brings more benefits to

organizations since it is adopted (Shields and Young, 1989; Kaplan, 1992; Cooper,

1994) This can be described as a positive relation However, adopting ABC is not so

easy As is mentioned above, capability of a manufacturing company is defined based on

plant age, size, volume, mix, discrete and downsize

Plant age can be considered as the time that a company was born and start running

Normally, it decides the size, volume, mix, discrete and downsize of an organization

Depending on this, people can evaluate the value as well as the potential about that

company since it can survive after a long term period For most of companies, in order

to develop and stand solid in the market, they have to figure out various ways to

compete and beat their rivalries As a result, a fact that older companies mean more

experienced and stronger companies seems easy to accept However, to adopting ABC

with such kind of too old companies will take more time because of bigger hierarchies

and personnel ABC will try to reduce all wasted costs and lead to some redundant

department fired In general, lots of old companies reject to approve the idea of adopting

ABC method On the other hand, many companies think this is a good chance to change

their operational machine therefore adopting ABC process is implemented logically and

effectively

Size is the second criteria that perform the capability of companies Bigger scale proofs

the bigger production ability This means to produce enough products for the demand of

the market, manufacturing need to have the best facilitates which can satisfy the required

number of products If the size is too small, none managers want to adopt ABC because

resources are managed quite closely If the companies have a big scale, the complicated

information system of ABC might lead to the overload and confusion to managers

Sometimes, this makes managers mistakes between products and costs Additionally,

training employees to be familiar with a new costing method also takes time and money,

therefore before making the final decision about adopting ABC or not, managers always

take into account all of related information about the size of companies to ensure that

replacing the old costing method is suitable and effective

Volume or quantity of products is decided by the plant age and the size of an

organization also In fact, big scale plant can produce more than small ones That

explains why most of plants are trying to broaden their capacity each year Generally,

small companies do not have so many capitals as a result; they can not expand their

capacity With such kind of this company, adopting ABC only costs more since without

this; operational machine is still running probably Instead with small scale companies,

big, famous and old companies have enough capitals for facilities therefore their

capacity also increases while the numbers of department are also enhanced In order to

operate a large number of different department precisely, ABC method can be

considered as the best method which can show managers how to use and allocate costs

effectively and efficiency

The same as volume, mix rate of products are determined by three factors mentioned

above In a small company, they can not bed their luck by putting afford on so many

kinds of products This will make them lose their core business and reduce the

competition compare to other rivalries As a result, for most of new and small

companies, the most popular strategy will be focused on only few kinds of products

This will help managers easier to control and allocate Moreover, time and money will

be saved since ABC does not need to be adopted However, this will be opposite with

big companies Higher products mix rate, higher level ABC adopting Different products

line with various seizes and requirements lead to a higher level in allocating costs

Managers should know which products lines should be focused at how many costs In

this case, needs for ABC is not avoided

Discrete is the next factor that the author wants to discuss in this thesis This refers to the

exploration period of the plants For some plants, they produce coal only few times per

year But other ones explore coal from year to year According to these characters,

managers can decide whether they should apply ABC or not If only exploring few times

per year, it is wasted time as well as money to train and applying a new costing system

without the ensuring about the successful rate of that implementation Therefore, in

general, only plants explore from year to year prefer ABC method than seasonal plants

The last but not the least, downsize rate refers to the percentage of changes in the

personnel In fact, most of expandable companies do not like to fire their employees

They need to recruit more to work at different departments This means more products

will be developed and more costs will be used As a supply to a demand, ABC will be

applied to solve problems which can be occurred during the expanding period and so on

in the future In another hand, for some companies who faced with losses and failures,

higher downsize rate lead to a shrinking in their operational hierarchy Best managers

will not choose ABC which takes times, money and personnel to adopt into this kind of

companies

In conclusion, manufacturing capability are and criteria and standards for managers to

decide whether implementing or not implementing ABC method Therefore, the author

can conclude that:

Hypothesis H1: Manufacturing capability will create the convenient condition for the

implementation of ABC practices

3.3.2 Impacts of ABC on performance: whether ABC is the best

costing method to measure the performance of companies?

It is quite easy for readers to see the effects of capabilities on the performance of a

manufacturer based on six factors: plant age, size, volume, mix, discrete and downsize

Different criteria will affect the performance of companies in different levels The same

as the impacts of these six factors on the way of implementing ABC to manufacturers,

each of factors defines a specific effect on the performance

Most of the time, older companies will establish a solider reputation in the eyes of both

investors and customers As a result, it is not so difficult to understand why they can

gather huge capitals from investors within a shorter time period to expand their business

and enhance the manufacturing capability compare to small ones Longer plan age

means better experiences Since their experiences are high, performances of these

companies should be better than small ones with lesser experiences If they apply ABC

costing methods, wasted costs from unnecessary departments will be canceled and