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 … 1.2 Back ground…………………………………………………………… 1.3 Problem statements………………………………………………………2 1.3 Structure of paper……………………………………………………… Chapter 2: Literature review……………………………………………… 2.1 Decision making process…………………………………………………6 2.1.1 Planning process……………………………………………………… 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 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 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 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 Vinamilk will also be subjected to strong competition of Dutch Lady, Netsle, Moc Chau and Hanoimilk, Vinanmilk also need to research the cost, price and sale price, the quality of rival products because the consumers often compare prices of companies with products before to make purchasing decisions Table following indicates the different price of Vinanmilk and Dutch Lady Milk: Vinamilk Types Products Dutch Lady Price Products (VND) Milk Price (VND) DielacPedia (400g) 99,000 Dutch Lady 400g 118,000 - UHT milk no sugar 4,000 - Dutch Lady 180ml no 4,500 powder Milk 180ml - Fruit flavored yogurt sugar 4,500 180ml - Dutch Lady-CGHL 4,500 180ml- chocolate Table 4.4: Source from Dairy Vietnam 2010 In this table, the milk price of Vinamilk is lower than milk price of Dutch Lady The reason for this difference is due to the buying price of Vinamilk is 7,000VND/ kg This is much lower than Dutch Lady Moreover, the commission or bonus for the farmer is small while the bonus policy of Dutch Lady is maintained frequently Milk market may still be active by increased consumer demand in the urban market and competition between producers will become increasingly fierce The competitiveness of Vietnam's dairy products are not high because of relying mainly on raw materials and 35 imported equipment, the quality of milk, particularly milk powder types are very poor competitiveness compared to foreign dairy due to almost materials, equipment and technology are imported However, condensed milk, milk and yogurt have been rated as competitive by the rate of fresh milk production increasing Vinamilk have the advantage of the wide distribution system and diversified products So the fresh milk sector is expected to use by customers in the future However, Vinamilk is still competed by many competitors such as Dutch Lady, Netslé, Hanoimilk Following to market share value, Vinamilk and Dutch Lady are the two largest dairy manufacturing companies in the country and account for approximately 60% Milk imported from companies like Mead Johnson, Abbott, Nestle accounted for about 21% market share And the remaining 19% shares of the approximately 20 dairies are small size as Nutifood, Milk Hanoi, Ba Vi (www.dairyvietnam.org.vn) Others 20% Vinamilk 35% Imported milk 21% Dutch Lady 24% Figure 4.4: Source of Dairy Vietnam year 2010 Powdered milk segment is the fierce competition between domestic and imported products In the powdered milk market, the imported milk account for about 65% market 36 share, Vinamilk and Dutch Lady is captured market share respectively 16% and 20% Besides, in the market segment of condensed milk and fresh milk, the domestic companies hold primarily market share Particularly, Vinamilk and Dutch lady account for 72% market share of fresh milk and approximately 100% of condensed milk The competitiveness of domestic dairy products and imported condensed milk almost are insignificant The milk market is considered a potential market in the future, and this is a market with attractive profit margins The market for condensed milk products is expected to have slower growth due to the potential market is running out, and profit margin of milk products is relatively low compared with other dairy products Therefore, when making decision, the managers have to consider which segment to concentration and developing Vinamilk focus on the products which account for almost the market share such as fresh milk, yogurt, and condensed milk Moreover, exploitation and use the brand power of Vinamilk as a reputation and reliable brand of Viet Nam in order to gain more market share in condensed milk segmentation In addition, Vinamilk is also more actively in raw material and reducing the risk of price fluctuation in both the world and domestic 4.2.1.3 Profitability As mentioned above, Vinamilk considers profitability as the most important accounting tool The managing director underlined that Vinamilk has maintained a growth rate of revenue at a high level and tried to improve and highlight the profitable products Moreover, the financial manager also supported that gross profit; operating profit and working capital are the three most important tools within the company These are closely related to the profitability tool and thus match with the objective of Vinamilk Therefore, the manager can consider information about the profit in order to make right decision 37 The table below shows the profit of Vinamilk between year 2009 and 2010 Table 4.5: Adapted from annual reports 2010 The main revenue of Vinamilk is primarily milk production and consumption in recent year increasing constantly and become a market leader In 2010, Vinamilk achieved all targets of sales and profit The total sales increased by 49% as compared to 2009 (11% above the target), profit before tax increased by 56% as compared to 2009 (36% above the target) Vinamilk has main products which account for more than 95% gross profit of the company These are powdered milk, fresh milk, yogurt and condensed milk 3% 20% 25% Powdered milk Fresh milk Yogurt Condensed milk Others 17% 35% Figure 4.5: Revenue structure by product (source from Vinamilk.com) 2010 38 The figure above indicates that a fresh milk segment product is the biggest sales contributor to the local sales of Vinamilk with the contribution of approximately 35% All the fresh milk products are consumed in Vietnam’s market The competition in the market segment of fresh milk is highly intensive since there are many other local involving players, not mention to some UHT milk product brands imported In the coming years, fresh milk remains the focus in Vinamilk’s strategy for development The second largest product is condensed milk This is a traditional product of Vinamilk and the sales from condensed milk products have contributed 25% to the local sales of Vinamilk The condensed milk currently accounts for approximately 79% domestic market share of milk Majority of condensed milk products are consumed in Vietnam and a small part is exported to Cambodia and the Philippines Next is powdered milk This group is consumed at both local market and for exports These are the key products of Vinamilk for export to the Middle East Sales from these products make a contribution of 20% to local sales of the company This market segment of Vinamilk is under the severe competition with the imported products of international brands as well as from the other local competitors The potential for growth of this product range is great and in the coming years, this will be the ongoing emphasis of Vinamilk’s development strategy And the last one is yogurt segmentation The sales from this group account for 17.2% of Vinamilk’s local product sales Vinamilk has remained its dominant position in this market segment and the perspective for the development of this product range in the future is still great Currently, the market share of Vinamilk’s products respectively: yogurt 97%, condensed milk 79%, fresh milk 55% and powdered milk 35% (FAQ-vinamilk.com) Thus it is possible that with the advantage of size and 39 experience, condensed milk and yogurt are two items those competitors who can hardly compete with the company at the present time Vinamilk has strategy to change the direction of revenue from fresh and powdered milk to become the most important products, the condensed milk and yogurt will be lower because of the higher potential market of other dairy products Indeed, according to the annual report 2010, the powdered milk and nutritional milk is consumed in the domestic market and export This group contributes 20% of domestic revenue of the company, and growths 32.5% compared to 2009 The fresh milk product is consumed primarily in domestic market This product has contributed the largest 34.6% of domestic revenue and increased 47.8% over previous year Meanwhile, condensed milk is a traditional product of company It contributes 25% of domestic revenue, and growths 13.3% compared to year 2009 Yogurt product contributes 17.2% of domestic revenue and growths 51.7% over year 2009 (annual report 2010) 4.2.1.4 Financial ratio In order to understand more about the business activity of Vinamilk and provide more information to the management’s decision making, the financial ratios need to be discussed These based on some financial criteria such as liquidity, capital structure, operational capability, and profitability Liquidity The current ratio of Vinamilk is calculated as follow: Current ratio 2010 = Current assets / current liabilities = 5,919,802,789,330 / 2,645,012,251,272 = 2.24 (Source from financial statement) 40 Current ratio 2009 = Current assets / current liabilities = 5,050,274,123,753 / 1,711,593,056,787 = 2.95 (Source from financial statement) The ratio is 2.24 in 2010 and 2.95 in 2009 more than So it indicates that the company’s ability highly pays current obligations Moreover, short-term assets are more dominant when accounting for over 60% of the total assets of Vinamilk while short-term debt accounts for 20% of capital structure, thus the solvency of Vinamilk always guaranteed a good level The current ratio in 2010 is lower than in 2009 That means the liquidity in current year is slower than in previous year The reason is that in 2010 the account payable is increased It leads to increase liabilities over the previous year In the past, Vinamilk maintained large amounts of cash and short-term receivables, but the company recently takes the advantage of these cash stored to increase the inventory to avoid price fluctuations of raw materials on world markets and increased financial investment Capital structure Debt to equity in 2010 = Liabilities / owners’ equity = 2,808,595,705,578 / 7,964,436,590,282 = 0.35 (Source from financial statement) Debt to equity in 2009 = Liabilities / owners’ equity = 1,967,829,451,949 / 6,462,351,012,673 = 0.31 (Source from financial statement) 41 The ratio is approximately 35% in 2010 and 31% in 2009 It indicates that the entity’s capital comes from debt and company is able to meet its debt obligations on the long term basis In addition, Long-term debt accounts for only about 3% of total capital that means financial capacity of Vinamilk is really strong Vinamilk does not have to borrow capital from outside to operation This leads to company be more active in implementing its investment projects, reducing significantly borrowing costs and increasing profit for the shareholders Operational capability Receivable turnover 2010 = Credit sales / receivables = 15,752,865,999,425 / 1,124,862,162,625 = 14.01 (Source from financial statement) Receivable turnover 2009 = Credit sales / receivables = 10,613,770,890,800 / 728,635,028,515 = 14.57 (Source from financial statement) The account receivable is turned over 14.01 times during a year 2010, and 14.57 times in 2009 This indicates that the receivables tend to turn over faster more and more and this demonstrates the ability to use working capital better and better Inventory turnover 2010 = Cost of good sold / inventory = 10,579,208,129,197 / 2,351,354,229,902 = 4.50 (Source from financial statement) Inventory turnover 2009 = Cost of good sold / inventory 42 = 6,735,061,693,184 / 1,311,765,054,881 = 5.13 (Source from financial statement) The ratios represent the ability to manage inventory well Inventory turnover is so fast 4.50 in 2010 and 5.13 in 2009 round per year This results in creating more profit and reducing cost and capital In 2010, inventory turnover is faster than in 2009 by 0.63 or 63% This shows that the management of inventory in 2010 is more effectively than 2009; the profit is also higher than previous year In fact, the profit of Vinamilk increase approximately 20% per year Profitability Profit margin 2010 = Net income / net sales = 4,251,207,423,608 / 15,752,865,999,425 = 0.2698 (Source from financial statement) Profit margin 2009 = Net income / net sales = 2,731,358,267,542 / 10,613,770,890,800 = 0.2573 (Source from financial statement) The profit margin ratio measures the entity’s profitability These ratios indicate that the profitability next year better than last year because of controlling the cost of advertising, promotion and distribution support the reduction, enterprise management costs are also reduced Furthermore, the company develops priority of the high value products such as fresh milk and yogurt So the cost material of powdered milk tends to reducing 43 Debt accounts for small proportion of Vinamilk’s capital, so taking advantage leverage to increase return on equity is little Return on equity 2010 = Net income / shareholders’ equity = 4,251,207,423,608 / 7,964,436,590,282 = 0.5338 (Source from financial statement) Return on equity 2009 = Net income / shareholders’ equity = 2,731,358,267,542 / 6,455,474,592,983 = 0.4231 (Source from financial statement) Return on equity in 2010 is 53.38% is higher than 42.31% in 2009 This is because of the increasing profit over the year The return on equity shows the return on the resources contributed by the shareholders The net income increases more than 2.5 billion VND from 2009 to 2010 while the equity increases more than 1.5 billion VND Return on assets 2010 = Net income / total assets = 4,251,207,423,608 / 10,773,032,295,860 = 0.3946 (Source from financial statement) Return on assets 2009 = Net income / total assets = 2,731,358,267,542 / 8,482,035,850,502 = 0.3220 (Source from financial statement) The return on assets indicates the return earned on the resources invested by both creditors and the shareholders The return on assets is 39.46% in 2010 higher than 44 32.20% in 2009 The proportion of asset takes part in production is large and highly effective So the profit and operation are better more and more In short, the profit of the company is growing due to the improved management cost of inputs well, business expenses are used effectively In the coming years as new plants come into operation, if the company remain to manage good cost of inputs then the company's profits may also optimistic 45 Chapter 5: Conclusion 5.1 Summary As the mentioned above, the accounting information always plays an essential role in decision making of the managers related to the financial and economic issues It also affects to the survival of an organization The purpose of this study is point out the important of accounting information and answers the questions as follow:  Which are accounting tools available used to support decision making process?  Which accounting tools are applied by Vinamilk? How does the company use those tools in the decision making process? Management accounting sets the tools to support decision making process involving cost data, price and competition and profitability Vinamilk regards profitability as the most important tools for making management decisions In addition, other important tools such as cost accounting system and price and competition are useful for managers to consider the financial and economic information Another thing that the managers have to determine is financial ratio This helps management understand more about the business activities through some financial criteria such as liquidity, capital structure, activity ratio and profitability The core method to figure out the solution to these questions is qualitative research The data is collected in secondary sources and case study The secondary sources involve annual reports, note to financial statement of company, accounting reports, internet source and other books like management accounting books, business activities analysis 46 5.2 Recommendation Throughout this study, some suggestions would be made for Vinamilk to develop in the future Firstly, Vinamilk can build more profit by reducing the cost of advertising Because Vinamilk is a famous trademark and it has many stores and distributors around the country Thus advertising products appeared fully in television and broadcast is unnecessary The company should reduce advertising of product to increasing profit Secondly, Vinamilk should control materials actively and to avoid risk of price fluctuations by investing and developing domestic sources of materials And the last one is that the management should focus on more financial information for decision making aims 5.3 Limitation and further research The major limitation of this study is using of secondary sources It is mainly books, sources in internet and other reports The information and data gathered may not be accurate and out of date So it is not enough to make successful decisions The management needs to have detail information for making decision as well Another limitation is that there are many amount of accounting tools available, this study only focuses on three accounting tools: cost accounting system, pricing and competition and profitability Therefore, it does not express of all impacts of accounting tools on decision making And the last limitation of this thesis is that the research only focuses on specific company, in case Vinamilk So, it does not show the general view of the impact of accounting information on decision making process As the limitation discussed above, further research would be considered The management can get more information when the research is implemented in depth The 47 data and information would be gathered by both primary and secondary sources Moreover, the further research should focus on other accounting tools such as capital budgeting, investment analysis It will express all the influence of accounting tools on decision making And finally, the researches should be conducted in other companies It may be research of two or three companies in order to get more in depth of view about the important of accounting information in decision making 48 REFERENCE Colin Drury, Management and cost accounting 7th edition Donald R Cooper, Pamela S Schindler, Business research methods 6th edition Drury, C (2000), Management & Cost Accounting, 5th edition, London: Thompson Business Press Horngren, C T Sundem, G L Stratton, W O (2002), Introduction to Management Accounting, 12th edition, Englewood Cliffs, NJ: Prentice-Hall International Homepage of Vinamilk available: http://vinamilk.com.vn/?vnm=about&id=37 http://vinamilk.com.vn/?vnm=DownloadFile&m=5 http://vinamilk.com.vn/?vnm=download&id=46 http://vinamilk.com.vn/?vnm=share_faq http://www.businessdictionary.com/definition/management-accounting.html http://www.finpipe.com/equity/finratan.htm http://www.experiment-resources.com/qualitative-research-design.html http://www.qsrinternational.com/what-is-qualitative-research.aspx http://www.accountingformanagement.com/Direct_costs_and_indirect_costs.htm http://www.businessknowledgesource.com/finance/what_is_the_difference_between_irr elevant_and_incremental_costs_024543.html http://lnu.diva-portal.org/smash/get/diva2:207165/FULLTEXT01 49 ... 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. .. 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. .. 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