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 about 10,500 words NGUYEN THI HA Date: 30/6/2010 ACKNOWLEDGEMENTS Firstly, I want to send my thankfulness to my advisor Dr Le Van Lien for his continuous support in my thesis The advices of Dr Lien helped me so much in the accurate thesis structure, also the method to simplify the result He taught me as how to offer the right questions and express my ideas I also want to send my thankfulness to Ms Sumathi who guided me how to use the statistic method, step by step to this research enthusiastically Secondly, I want to thank to the sources such as a large amount of manufacturing firms that provide a lots of necessary information from responding mail to me The data is really significant for my result finding, integrated with some statistic methods, from that I could offer my conclusion effectively Thirdly, I also want to thank to the internet sources such as prior researches that really helped me in how to find the result, hypothesis setting, questionnaires making I also want to thank to the sources, other researchers that provide the conceptual theories that contributed to my literature review chapter In finally, I want to send my thankfulness to my friends, my family who has supported, encouraged and motivated me in doing this thesis THE IMPACT OF ABC (ACTIVITY BASED COSTING) ON MANUFACTURING FIRM PERFORMANCE IN VIETNAM BY NGUYEN THI HA June 2010 Supervisor: Dr Le Van Lien Abstract In this study, Based on the data from a large sample amount of Vietnam manufacturing plants and some research models, I want to demonstrate the impact of Activity-based costing (ABC) on manufacturing performance, especially is the plant performance regarded as operational performance rather than financial performance, is directly by the World-class manufacturing (WCM) practices adoption From the result of sample research, I can conclude that ABC has no significant or very little direct effect on performance of plant that is represented by the improvement of manufacturing cost, cycle time and the quality of product However, WCM present as a mediator that helps to explore the impact of ABC on plant performance clearly By using results and methods of many other researchers, I evaluate the relationship between ABC implementation, WCM adoption and plant performance From this evaluation, I can see that ABC can’t improve performance of plant by itself, and one of the ways to see overall impact of ABC is the implementation of WCM TABLE OF CONTENTS Page Declaration of Originality and word count i Acknowledgements ii Abstract iii Table of Content iv List of Figures vii List of Tables viii List of Abbreviations ix Chapter I INTRODUCTION 1.1 Introduction 1.2 Need for Research 1.3 Elements of the Research 1.3.1 Research Question 1.3.2 Research Objective 1.4 Scope of Research 1.5 Assumptions 1.6 Plan of Presentation Chapter II LITERATURE REVIEW 2.1 A General Look at ABC 2.1.1 The conceptualization of ABC 12 2.1.2 The importance of ABC 14 2.2 The ABC criticism 16 2.3 The fundamental of World-Class Manufacturing (WCM) practices 17 2.4 The relationship and the impact of ABC implementation & WCM practices 18 on plant performance Chapter III RESEARCH METHODOLOGY 3.1 Research objective 21 3.2 Research strategy 21 3.3 Research hypothesis 22 3.3.1 Impact of Activity-based Costing on World-class Manufacturing 23 3.3.2 Impact of World-class Manufacturing on Plant Performance 26 3.3.3 Impact of ABC on Plant Performance: A Mediation Mechanism 28 3.4 Measurement of variables 30 3.4.1 Dependent variables (Plant performance) 30 3.4.2 Independent variables 31 3.4.2.1 Activity Based Costing (ABC) implementation 31 3.4.2.2 World-Class Manufacturing practices (WCM) implementation 35 3.4.2.3 Plant-level control variables 35 3.5 Research methodology 36 3.6 Data sources and sampling 37 3.6.1 Sample selection 37 3.6.2 Data collection method 37 3.7 Limitation of research 38 Chapter IV ANALYSIS 4.1 Results Analysis 41 4.1.1 Percentage method 41 4.1.2 Results analysis for Hypothesis to 46 4.1.2.1 Impact of Activity-based Costing on World-class Manufacturing 46 4.1.2.2 Impact of World-class Manufacturing on Plant Performance 47 4.1.2.3 Impact of ABC on Plant Performance: A Mediation 50 4.2 Discussion Mechanism 51 Chapter V CONCLUSION 5.1 Implication of research 53 5.2 Conclusion 53 References 55 Appendixes 63 LIST OF FIGURES Figure Title Chapter N/A N/A Chapter Figure 2.1 Figure 2.2 Page The Estimation of Activity Based Costing (ABC) The proportion of material, direct labor and overhead costs in today’s world The proportion of material, direct labor and overhead costs where traditional cost systems focus their attention 12 15 Chapter Figure 3.1 Conceptual research model 23 Chapter N/A N/A Chapter N/A N/A Figure 2.3 15 LIST OF TABLES Table Title Page Chapter N/A N/A Chapter Table 2.1 The Changes in Manufacturing Environment 14 Chapter Table 3.1 Questionnaires’ result 32 Chapter Table 4.1 Table 4.2 Table 4.3 Table 4.4 The impact of ABC (percentage based) The descriptive statistic result The WCM implementation Impact of WCM and ABC on Plant Performance 42 45 46 49 Chapter N/A N/A LIST OF ABBREVIATIONS Abbreviation Full Name VBC Volume Based Costing ABC Activities Based Costing WCM World-class Manufacturing Practices TQM Total Quality Management JIT Just-in-time Manufacturing AMP Advanced Manufacturing Practices CHAPTER I: INTRODUCTION 1.1 Introduction 1.2 Need for Research 1.3 Elements of the Research 1.4 Scope of Research 1.5 Assumptions 1.6 Plan of Presentation 10 5.1 Implication of research In my study, existing quality of knowledge is enhanced base on the effectiveness of ABC in some ways Firstly, plant managers (e.g ABC project managers) provided the survey responses who have the more knowledgeable source that is presented in plant wide operations in comparing with many previous studies (Shields, 1995; Swenson, 1995) Secondly, in my research, the ABC non-adopters results were provided by responses of plant managers, unlike prior studies where non-adopters were identified based on the lack of public information on ABC implementation (Balakrishnan et al 1996; Gordon and Silvester, 1999) Thirdly, to observe the impact of the implementation of ABC on the changes of performance level and to eliminate the potential of confusion that the financial measure of firm are used, the manufacturing plant (or firm) can be treated as the unit of analysis 5.2 Conclusion Prior researcher as Ittner (2002) had a research that concentrated in the ABC’s direct impact of the performance of plant The difference of my research with prior research is my study investigates the ABC’s impact on performance of plant that is mediated by the mediator WCM practices In understanding better the WCM practices implementation that is supported by ABC, I got the prior research’s experiences on the relationship between business processes and management accounting systems Based on the sampling collection from the big amount of Vietnam manufacturing plants, I use data analyzing and found the 62 evidence demonstrates the model that show the AMP practices role as an important component to improve the performance of plant Since ABC by itself is inability in improving manufacturing performance, my finding help the firms that have the need of strengthening their capacities in manufacturing performance when making investment into ABC system implementation In combining advanced manufacturing practices deployment and ABC implementation, plants can also collect many important benefits In addition to, my evidence also supports to my prior research’s alternative theoretical perspective by using the concentration in the indirect impact of ABC I have concluded that ABC that may be regarded as a factor facilitates the implementation of WCM practices, and as the result, the association help to improve plant performance In contrast with prior researcher, Ittner et al (2002) who concentrate mainly in the ABC’s direct impact on plant performance By a big amount of plants sample data, in according to the role of variations’ explanation ability in plant performance, the results present an alternative conceptualization that is superior Moreover, my offered model can be useful information for future studies who want to use methodologies to explain the performance improvements by ABC implementations 63 REFERENCES: Anderson, S W (1995) A framework for assessing cost management system changes: the case of activity based costing implementation at General Motors, 1986–1993 Journal of Management Accounting Research, 7, – 51 Anderson, S W., & Young, S M (1999) The impact of contextual and process factors on the 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1= less than100; 2=100-249; 3=250-499; 4=500-999; 5= more than 1,000 employees PLANTAGE: How many years has it been since plant start-up? 1= less than years; 2=5-10 years; 3=11-20 years; 4= more than 20 years MIX, VOLUME: How would you describe the primary product mix at this plant? 1= high volume, high mix; = high volume, low mix, = Low volume, high mix; = Low volume, low mix DISCRETE: What is the nature of manufacturing operations for primary products at this plant? 1=Discrete; 0=Otherwise (hybrid or process) DOWNSIZE: What is the extent of downsizing at the plant in the past three years: = no change, = Extent of downsizing increased – 10%, = increased 11 – 20%, = increased 21 – 50%, = increased 51 – 75%, and = increased > 75% _ II ACTIVITY-BASED COSTING (ABC): Please indicate the status of implementation of activity based costing or activity-based costing systems in your plant Scale: = No implementation = Plan to implement 2=Extensive implementation 72 III WORLD-CLASS MANUFACTURING (WCM): Please indicate the extent to which each of the listed manufacturing practices has been adopted at your plant Scale: = No implementation = Some implementation = Extensive implementation Just-in-time (JIT) / continuous-flow production Total Quality Management (TQM) Formal Continuous Process Improvement Competitive Benchmarking Self-directed Teams IV PLANT PERFORMANCE Δ(QUALITY): How has finished product first-pass quality yield changed over the last three years? 1= Declined more than 20%, 2= Declined 1-20%, 3= Stayed the same, 4= Improved 1-20%, 5= Improved more than 20% Δ(TIME) or Δ(Cycle Time): By what percentage has manufacturing cycle time changed over the last three years? 1=No reduction, 2=Decreased 1-10%, 3= Decreased 11-20%, 4= Decreased 21-50%, 5= Decreased more than 50% 73 Δ(Lead Time): How has customer lead time changed over the last three years? 1=Increased more than 20%, 2=Increased 1-20%, 3=Stayed the same, 4=Decreased 1-20%, 5=Decreased more than 20% Δ(COST): How have unit manufacturing costs at this plant, excluding purchased materials, changed over the last three years? 1=Increased more than 20%, 2=Increased 11-20%, 3=Increased 1-10%, 4=No change, 5=Decreased 1-10%, 6=Decreased 11-20%, 7=Decreased more than 20% Note: In simplifying, Mix and Volume is integrated into two variables such that MIX=1 if high mix; 0=otherwise, and VOLUME=1 if high volume; 0=otherwise 2; For ABC implementation, I combined the first two categories into one Therefore, = no ABC implementation, while = extensive implementation For WCM implementation, I also combined the second and third categories into one Hence, = none or some implementation, while = extensive implementation 74 APPENDIX II: PERCENTAGE POINTS OF THE T DISTRIBUTION Tail Probabilities One Tail 0.10 0.05 0.025 0.01 0.005 0.001 0.0005 Two Tails 0.20 0.10 0.05 0.02 0.01 0.002 0.001 -+ -+ D | 3.078 6.314 12.71 31.82 63.66 318.3 637 | E | 1.886 2.920 4.303 6.965 9.925 22.330 31.6 | G | 1.638 2.353 3.182 4.541 5.841 10.210 12.92 | R | 1.533 2.132 2.776 3.747 4.604 7.173 8.610 | E | 1.476 2.015 2.571 3.365 4.032 5.893 6.869 | E | 1.440 1.943 2.447 3.143 3.707 5.208 5.959 | S | 1.415 1.895 2.365 2.998 3.499 4.785 5.408 | | 1.397 1.860 2.306 2.896 3.355 4.501 5.041 | O | 1.383 1.833 2.262 2.821 3.250 4.297 4.781 | F 10 | 1.372 1.812 2.228 2.764 3.169 4.144 4.587 | 10 11 | 1.363 1.796 2.201 2.718 3.106 4.025 4.437 | 11 F 12 | 1.356 1.782 2.179 2.681 3.055 3.930 4.318 | 12 R 13 | 1.350 1.771 2.160 2.650 3.012 3.852 4.221 | 13 E 14 | 1.345 1.761 2.145 2.624 2.977 3.787 4.140 | 14 E 15 | 1.341 1.753 2.131 2.602 2.947 3.733 4.073 | 15 D 16 | 1.337 1.746 2.120 2.583 2.921 3.686 4.015 | 16 O 17 | 1.333 1.740 2.110 2.567 2.898 3.646 3.965 | 17 M 18 | 1.330 1.734 2.101 2.552 2.878 3.610 3.922 | 18 19 | 1.328 1.729 2.093 2.539 2.861 3.579 3.883 | 19 20 | 1.325 1.725 2.086 2.528 2.845 3.552 3.850 | 20 21 | 1.323 1.721 2.080 2.518 2.831 3.527 3.819 | 21 22 | 1.321 1.717 2.074 2.508 2.819 3.505 3.792 | 22 23 | 1.319 1.714 2.069 2.500 2.807 3.485 3.768 | 23 24 | 1.318 1.711 2.064 2.492 2.797 3.467 3.745 | 24 25 | 1.316 1.708 2.060 2.485 2.787 3.450 3.725 | 25 26 | 1.315 1.706 2.056 2.479 2.779 3.435 3.707 | 26 27 | 1.314 1.703 2.052 2.473 2.771 3.421 3.690 | 27 28 | 1.313 1.701 2.048 2.467 2.763 3.408 3.674 | 28 29 | 1.311 1.699 2.045 2.462 2.756 3.396 3.659 | 29 30 | 1.310 1.697 2.042 2.457 2.750 3.385 3.646 | 30 32 | 1.309 1.694 2.037 2.449 2.738 3.365 3.622 | 32 34 | 1.307 1.691 2.032 2.441 2.728 3.348 3.601 | 34 36 | 1.306 1.688 2.028 2.434 2.719 3.333 3.582 | 36 38 | 1.304 1.686 2.024 2.429 2.712 3.319 3.566 | 38 40 | 1.303 1.684 2.021 2.423 2.704 3.307 3.551 | 40 42 | 1.302 1.682 2.018 2.418 2.698 3.296 3.538 | 42 44 | 1.301 1.680 2.015 2.414 2.692 3.286 3.526 | 44 46 | 1.300 1.679 2.013 2.410 2.687 3.277 3.515 | 46 48 | 1.299 1.677 2.011 2.407 2.682 3.269 3.505 | 48 50 | 1.299 1.676 2.009 2.403 2.678 3.261 3.496 | 50 55 | 1.297 1.673 2.004 2.396 2.668 3.245 3.476 | 55 60 | 1.296 1.671 2.000 2.390 2.660 3.232 3.460 | 60 65 | 1.295 1.669 1.997 2.385 2.654 3.220 3.447 | 65 70 | 1.294 1.667 1.994 2.381 2.648 3.211 3.435 | 70 80 | 1.292 1.664 1.990 2.374 2.639 3.195 3.416 | 80 100 | 1.290 1.660 1.984 2.364 2.626 3.174 3.390 | 100 150 | 1.287 1.655 1.976 2.351 2.609 3.145 3.357 | 150 200 | 1.286 1.653 1.972 2.345 2.601 3.131 3.340 | 200 75 76 ... doing this thesis THE IMPACT OF ABC (ACTIVITY BASED COSTING) ON MANUFACTURING FIRM PERFORMANCE IN VIETNAM BY NGUYEN THI HA June 2010 Supervisor: Dr Le Van Lien Abstract In this study, Based on. .. be reviewed on the fundamental of ABC, the conceptualization of ABC, advanced manufacturing practices, their relationship and their impact in according to the prior research Then, in chapter III,... that the relationship between ABC and performance is strengthened by the WCM implementation In this perspective, to know the impact of ABC on performance of plant, the interaction effects of ABC