the implementation and adopting of activity based costing in manufacturing vietnamese companies a case study of samsung vina corporation

THE IMPLEMENTATION AND ADOPTING OF ACTIVITY BASED COSTING IN MANUFACTURING VIETNAMESE COMPANIES A CASE STUDY OF SAMSUNG VINA CORPORATION... From the theoretical point of view, this re

THE IMPLEMENTATION AND ADOPTING OF ACTIVITY BASED COSTING

IN MANUFACTURING VIETNAMESE COMPANIES

A CASE STUDY OF SAMSUNG VINA CORPORATION

Declaration of originality and word count

I hereby declare that the graduation project is based on my original work except for quotations and citations which have been duly acknowledged I also declare that it has not been previously or concurrently submitted for any other course/degree at HELP University College or other institutions The word count is 10,346 words

Acknowledgement

I would like to express gratitude towards Dr Pham Duc Hieu and Dr Le Van Lien and to Ms Suemathi for their support and guidance I would also like to some my friends for their financial support for this project

Abstract:

This paper aims to explore factors, which influence the process of activity-based costing (ABC) implementation in the context of developing countries like Vietnam where the challenging are much more than the opportunities, as well as analyze and explain the changes in the area of methodology and organization of a company, after activity-based costing implementation The research findings are of both theoretical and practical importance From the practical point of view, companies considering implementation of ABC should be aware of the positive and negative factors conditioning the process of implementation; in addition, they should be familiar with methodological and organizational changes, which might stem from the ABC implementation, according the case of previous companies had project in implementation it in all over the world to get the solutions for each challenging or difficulty From the theoretical point of view, this research might be helpful in determining a more general tendency: although modifications in cost accounting systems and implementation of modern methods of management accounting in manufacturing Vietnamese companies come later than in more developed economies, the tendency heads in the same direction

Table of content

Page

Declaration of originality and word count ii

Acknowledgement iii

Abstract: iv

Table of content v

List of Figures vii

CHAPTER 1: INTRODUTION 1

1.1 Introduction 2

1.2 The objectives of research: 3

1.3 Problem statements: 5

1.4 The presentation: 6

CHAPTER 2: LITERATURE REVIEW 7

2.1 Historical development: 8

2.2 Definition and key concepts: 10

2.2.1 Definition: 10

2.2.2 Keys concept: 11

2.3 Implementing of ABC 13

2.4 The critical factors for successfully applying the ABC 17

2.5 The ABC‟s criticisms and limitation 20

2.6 The comparison between ABC and traditional costing system 22

CHAPTER 3: METHODOLOGY 28

3.1 Conceptual framework 29

3.1.1 Contingency theory 29

3.1.2 Shield‟s model 31

3.2 Qualitative case study design 33

3.3 Data collection 35

3.4 Data analyze 37

CHAPTER 4: ANALYZE 39

4.1 Samsung Vina Corporation Ltd (Savina) 40

4.1.1 The background of Savina 40

4.1.2 The technology industry 40

4.1.3 Estimating the accounting system of Savina 41

4.1.4 The ABC method in the context of Savina 42

4.1.5 The factors influencing ABC implementation 44

4.2 The factors influencing the implementation ABC in Vietnam 46

CHAPTER 5: CONCLUSIONS AND RECOMMENDATIONS 49

5.1 Conclusions 50

5.2 Recommendations 53

REFERENCE: 54

List of Figures

Figure 1: Implementing of ABC 13 Figure 2: Theoritical research framework 31

1.1 Introduction

In today‟s advanced manufacturing and competitive environment, accurate costing information is vital for all businesses, like manufacturing businesses, service businesses, and merchandizing businesses In the past, companies supposed that, customers who buy the high volume of products, and loyal customers are profitability The researches of profitability indicate that this view of companies is not completely right Innovations in producing and communication technologies have changed the ways businesses conduct their activities extremely The major changes in the manufacturing cost structure which have led instructors and doctors to argue that the traditional costing methods are no longer sufficient traditional volume-based cost model to new costing methods such as Activity Based Costing (ABC) [2] because of the implementing the advance in manufacturing technologies like robots and computerized ABC is a technique for developing cost estimates in which the project is subdivided into discrete, quantifiable activities or a work unit The activity must be definable where productivity can be measured in units After the project is broken into its activities, a cost estimate is prepared for each activity These individual cost estimates will contain all labor, materials, equipment, and subcontracting costs, including overhead, for each activity Each complete individual estimate is added to the others to obtain an overall estimate Contingency and escalation can be calculated for each activity or after all the activities have been summed

1.2 The objectives of research:

Costing is one of the most important factors that affect directly to the profitability, assets, existence, and development of the company, so management accounting is play an important role in the performance of the company Activity Based Costing is

a powerful tool, and it is used by many big companies in all over the world For example, Ford Motor Company in historical, the view of focusing on the value creation processes more than assets and organization But facing with the dramatically development of the others manufactures, especially Toyota Motor Corporation, and realize of the impractical of exist accounting system, Ford decided using the new one After, researching and developing ABC system, positive changing in productivity are improved like it can identify inefficient product, allocation more profitability on the resources, reduce unnecessary cost However, the suggestions of most of firms are experiencing difficulties in implementing ABC and,

in some extreme cases, ABC implementation is not successful [3], these suggestions are inherence by the mounting of evidences, in highly developed countries in the first decade of the 21st century revealed that the number of companies using ABC ceased

to grow and stopped at an average, lower than anticipated, level [4] Moreover, the number of companies planning or considering the implementation of ABC dropped; simultaneously, the number of companies, which quit implementation after analyzing costs and benefits, rose With the developing countries like Vietnam, management accounting has been developed recent year, but there are not enough conditions for the implementing ABC because the using of ABC run the risks of spending too much effort, time, and money

This research aims to discuss the applicable uses of ABC The discussion is about whether the use of Activity-Based Costing has an effect on firm‟s performance, and

how a company can adopt the ABC in its accounting system The objectives of research are to analyses the opportunities and threats when using ABC in Vietnam, therefore, the companies can minimizing the risk for themselves by solving the problems based on the theory of this method The failure of using this method of some companies will be considered avoiding the material mistakes when managements make the decisions

1.3 Problem statements:

Although there are many advantages of ABC method, but it cannot actually be applied by all the companies The limitation of ABC is that while it institutes a complex methodology to assign costs to activities, the system remains far from perfect Some overhead costs such as the CEO's salary remains difficulty to separate and allocate on a unit of product Added value to product is not needed for all the productions For instance, an employee taking part in a first aid consciousness campaign or a fire safety drill indulges in a productive activity, but the added values are not calculated to the end product or service by these activities Most ABC methods allocate such 'business sustaining' costs to products on a proportionate basis

or based on assumptions, and this makes the system far from perfect Thereby, before changing to this method, company need to analyze their ability, benefits – costing The factors of the economy, sociality, and environment are also need to be considered So the problem statements of the paper are:

1, How is Activity Based Costing applied in the company?

2, What are the effect on performance of Activity Based Costing of company?

This paper will answer above questions to orient for the companies which want to adoption or implementation Activity Based Costing method

1.4 The presentation:

This research is divided to five chapters, each chapter has own responsibility Chapter one briefly will talk about the aim of study, chapter two will about the general view of Activity Based Costing, the traditional costing system and the comparison between two these methods to helping for the analyzing the adoption of ABC, chapter three will orient for the research by theories and models, how the data can be collected and analyzed, the result of the above data, information will be conducted in chapter four, it also supported by the case study, and the last chapter will summarized the main ideas of the research and the recommendations are possible for the implementing ABC‟s conditions in Vietnam – developing country

CHAPTER 2: LITERATURE REVIEW

2.1 Historical development

2.2 Definition and key concepts

2.3 Implementation of ABC

2.4 The critical factors for successfully applying the ABC

2.5 The ABC’s criticisms and limitation

2.6 The comparison between ABC and traditional costing system

of production and of the costs of related services was calculated inaccuracy by the

identifying the costs of activities, the cost of each is attributed to each product to the extent that the product uses the activity By this way, ABC often classifies areas of high overhead costs per unit and then constitutes the solving by decreased the costs

or replaced costly produts Activity-based costing was first obviously defined in

1987 by Robert S Kaplan and W Bruns as a chapter in their book Accounting and Management: A Field Study Perspective [7] They originally focused on areas of

advanced technology and productivity improvements, especially in manufacturing industry, where have reduced the relative proportion of the direct labor costs and materials, but have increased relative proportion of indirect costs For example, direct costs were decreased such as direct labor hours, but indirect costs were increased such as depreciations, maintenance cost by the increasingly using automatic systems Cross-product, cross-customer subsidies are also occurred in manufacturing industry because managements diverse their products and customers

to reduce financial risk Since private expenses such as withdrawals of directors represent the largest single component of non-interest expense in financial institutions, the accurately allocation in products and customers of these costs must

be took more care Although activity based costing initially developed for manufacturing industries, it may even be a more useful tool for doing this [8] Then,

in 1999 Activity Based Costing were explained more details by Peter F Drucker in the book Management Challenges of the 21st Century [9] He states that traditional cost accounting focuses on what it costs to do something, in contracts, ABC also records the costs of doing nothing, for example, to cut a screw thread; activity-based costing records the cost of not doing, such as the cost of waiting for a needed part, but traditional costing system ignores it

2.2 Definition and key concepts:

activity-In companies with multi goods and services for customers, the absolutely accurate costing information is vital factor in determine whether the profitability products or they are making loss Activity Based Costing is most appropriate method for these companies, but the effort required to successfully implement ABC is spending the time and resources ABC can identify high overhead costs per unit and having the solving to reduce the costs, avoiding inaccurate allocation of costs, and measurement profitability with higher accuracy than traditional that uses direct-labor hours as the only cost driver ABC works firstly with identifying the main activities of process Next to allocate the groups of activities together the cost pools are created Following this cost drivers is identified After that, rates are calculated Which are then applied

to the respective cost drivers for each product or service that is being considered Lastly, originating the overhead cost per unit by dividing the total costs of products

to the numbers in unit of products

2.2.2 Keys concept:

There are some concepts will be used in this research, to having more clearly view, this part‟s talk is to explain these concepts such as cost pools, cost driver, direct and indirect costs The cost pool is the term of accounting, it can be defined as the groups

of accounts serving to express the cost of goods and service locatable within a manufacturing organization The volume of cost pools are different from this organization to others, for example, there may be hundreds of employee in the cost pool for order processing of big companies, whereas there may not have a separate cost pool for this activity in small companies, because this activity only related to one or two employees There are some costs too minor or difficult to allocated, they may not be included in any cost pool

Each activity cost pool has relevant cost drivers which are used in allocating cost Cost driver is defined as any activity that makes the cost incurred A business occupies in many different activities The cost driver is the factor that influences the amount of the resources that will be spent by a specific activity The cost driver is use to determine the activity of the work that is already done, the resource is what the activity uses to do the work, i.e., people, equipment, services, it is important because resources always are expensive

ABC method is related to the indirect cost of the activities, which cannot accountable for the cost objects Indirect costs may include taxes, administrations, personal, contingent and security costs, it can be known as overhead costs In contrast, traditional costing system focus on the direct costs, which directly relate to the products, it includes direct labors, direct materials, direct expenses Indirect costs are those for activities that benefit more than one project, because the exact benefits of