i A STUDY ON IMPACTS AND EFFECTIVENESS OF ABC COSTING METHOD AS A COST EFFECTIVE MEASUREMENT IN COAL INDUSTRY BY NGUYEN THI THU HUYEN E0600083 Graduation Project Submitted to the Department of Business Studies, Help University College, in Partial Fulfillment of the Requirements for the degree of Bachelor of Business (Accounting) Hons APRIL, 2011 ii 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 iii 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. iv 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 v 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. vi 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 vii 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 1 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 2 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. 3 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 [...]... 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... 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... another cost accounting method COST clarify the distance about cost saving between ABC and non ABC adopting organizations By focusing into only 2 factors, the author can make a deeper research and have more precisely conclusions 28 3.4.2 Independent variables 3.4.2.1 Activity Based Costing (ABC) implementation In this survey, the evaluation of ABC will be made based on the level of ABC adopting in different... 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... 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... 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... 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 4 CHAPTER II: Literature review 2.1 ABC costing method: ... 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... 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... 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 . traditional or absorption costing method, variable costing method, throughput costing method, and ABC costing method. Changes in business environments. 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.