THE IMPLEMENTATION AND ADOPTING OF ACTIVITY BASED COSTING IN MANUFACTURING VIETNAMESE COMPANIES A CASE STUDY OF SAMSUNG VINA CORPORATION BY TO THI THUY HA 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 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 ii 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 iii 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 iv 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 Introduction 1.2 The objectives of research: 1.3 Problem statements: 1.4 The presentation: CHAPTER 2: LITERATURE REVIEW 2.1 Historical development: 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 2.6.1 Costing system 22 2.6.2 Traditional costing system 22 2.6.3 ABC versus Traditional costing 23 v 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 vi List of Figures Figure 1: Implementing of ABC 13 Figure 2: Theoritical research framework 31 vii CHAPTER 1: INTRODUTION 1.1 Introduction 1.2 The objectives of the research 1.3 Problem statements 1.4 The presentation 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 volumebased 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 information, which were to feed the new cost accounting system; construction of activity-based costing model – a new computer model of cost accounting was created; it was based on the revised cost recording system and the new cost accounting system; the computer model enabled calculation of product costs, variance analysis and creation of different types of reports needed in production and sales decision-making processes Activity based costing method was developed to overcome the failings of the current accounting method of Savina Instead of just one cost driver such as machine hours, ABC will use many cost drivers to allocate a manufacturer‟s indirect costs, a few of the cost drivers that would be used under ABC include the number of machine setups, the pounds of material purchased or used, the number of engineering change orders, the number of machine hours, and so on The considering of the following requirements will help Savina in implementing ABC Firstly, ABC requires complementary accounting systems that provide reasonably accurate cost organized by costs category and departments, the special software was useful but probably not essential Secondly, ABC requires precise information on the volume of services that is provided Thirdly, access to and strong cooperation from personnel are important Lastly, technical assistance and guidance on the ABC methodology may be necessary initially Generally the implementation of the activity-based costing in Savina enable creating better information regarding costs and profitability for the inner customers in order to make accurate decisions for the production, sales and controlling results of these decisions, ABC enable drawing up of the profitability analysis of products, groups of products, customers and groups of customers and the selection of sales areas in the enterprise All the information was used in Savina to explain the process of 43 generating costs and allowed the cause and effect analysis, undertaking activities targeting at cost reduction and providing accurate information about costs and profitability of products, customers However, the adopting and implementing of the ABC systems can be risked and the most probable problems that may occur may include implementing ABC with the use of EXCEL spreadsheet (apart from numerous advantages like small cost, widespread usage, the spreadsheet has its limits – highly individualized problem-solving system or low susceptibility for unauthorized modifications, in brief, the model prepared by one user can be used with great difficulty by the other user, who may not be knowledgeable enough and may “spoil” the model in the process); although activity based costing is a scientific approach, the method of implementation is complex, time consuming, and costly, the process of data collection and data entry requires substantial resources, and remains costly to maintain Savina want to follow ABC need to maintain two cost systems and accounting books, one for internal use and another for external reports, filings, and statutory compliance, this is a cumbersome duplication of efforts 4.1.5 The factors influencing ABC implementation Three types of positive factors and one type of a negative factor influenced the process of the implementation of the innovations within the area of the management accounting (in this case on the implementation process of the activity-based costing in Savina) They are motivators (having a continuous, long-term influence on the implementation of the innovations), catalysts (having a direct influence on the implementation of the innovations), facilitators (factors without which the implementation of the innovations would be impossible), obstructers (factors having 44 a negative influence on the implementation of the innovations) The list of the key factors influencing the activity-based costing implementation in Savine is presented in Table Table 1: The factors influencing the implementation ABC in Savina Type of Factor factor Motivators The increase of competitiveness and market strategy production strategy (the increase of diversity and complexity of products – the customers began to demand unconventional products, in short batches) The need for information reported by the managers Inaccuracy of data received from the present cost accounting Catalysts In-service training in the area of cost accounting Facilitators The management board support knowledge transfer into the company (in-service training) sufficient resources Medium-sized company, medium level of complexity of processes, good general condition of the company, the usage of the productive capacity up to 100% Obstructers Corporate culture objecting any changes The predicted changing in Savina after implementing ABC can be summary in the following Table 45 Table 2: The changes of management accounting in Savina after implementing ABC Before After low accuracy of direct cost tracing to products high accuracy of direct cost tracing to products costs established only for a group of products costs established for products as variable cost according to activities and resources plus fixed cost according to activities and resources profitability analysis of the whole company and profitability analysis of the whole company, very inaccurate analysis of products profitability products, groups of customers and customers, etc., established basing on activity-based costing no planning of the production capacity in order costs of products calculated for normal to determine its influence on the unit price production capacity management accounting function distant from management accounting function close to production and sales function production and sales function low approach to information delivery needed for higher approach to information delivery needed decision making for decision-making no specified responsibility centers specified centers responsible for costs and profits information from the management accounting information from the management accounting rarely used by the managers of production, sales frequently used by the managers of production, and other positions in the company sales and other positions in the company 4.2 The factors influencing the implementation ABC in Vietnam Recently years, Vietnam is one of the most attractive countries for the foreign companies to investing Special when Vietnam became 150th member of World 46 Trade Organization (WTO) in 2007, the economy of Vietnam grow rapidly The foreign companies invest in Vietnam increasingly and there are many companies have diverse business, but almost of Vietnamese companies are using traditional costing method in accounting system because the advantages of simplicity and saving cost There are many disadvantages of this method are exposed, especially in supply wrong or inaccuracy information for the management, the need for alternative costing system are necessary, in this case Activity based costing is the best alternative to consider The implementation of a new cost system involves investment in time and money A cost system based on ABC requires organizational changes, employee acceptance, investment in software and hardware, equipment for data collection, and so on Although, ABC has been successfully used in many large companies it does not guarantee a payback in a short period of time Some factors that affect to the implementing ABC will be discussed - Time – the actual and the expected are usually different, and the fact that it always takes more time to applying ABC method than the expected of the company Suppose that ABC is implemented, to using the conclusions of this system in making the decisions of the business are even takes longer period to confirm these results are actually utilized, For the purpose of differentiating non - usage and usage companies, time become one of the most important factors - Other major initiatives – analyze the data stated that if there are other initiatives of higher priority to the organization, there will be some difficulties in adoption of ABC at the present time Examples include such priorities as the entering of new products or markets or implementation of new information systems, many companies find themselves in a position where they have too many good ideas and far too few resources to put them into action 47 - Information technology sophistication - improvements to the information system often precede both ABC adoption and the reaching of the usage-level of ABC in the decision-making process The implementation of ABC should be simpler if an organization‟s IT system has the following characteristics: good sub-system (e.g sales system, manufacturing system, etc.) integration; user-friendly query capability; available sales, cost, and performance data going back 12 months; and real-time updates of all these types of data Although a strong IT system appears to be useful in implementing ABC, it is not required because there are many organizations utilize ABC successfully with weak IT systems Top management support - commitment from upper-level management is necessary for any ABC system to survive and be successful, support includes active participation, adequacy of resources provided, and ties to the competitive strategies of the business unit Integration into financial system - Using ABC cost information in financial reporting generally will lead to its use in decision making (the ultimate goal for ABC), managers often tend to pay attention to the information that is used for outside reporting Part of the Budgeting process - The use of ABC information for budgeting purposes appears to be another good way to increase organizational usage As a general rule, companies should report actual costs using the same method that is used to develop their budget 48 CHAPTER 5: CONCLUSIONS AND RECOMMENDATIONS 5.1 Conclusions 5.2 Recommendations 49 5.1 Conclusions This papers has developed the factors how can manufacturing companies in Vietnam can implement the Activity based costing method to alternative the traditional costing method which has many disadvantage that affect directly to the decision making of the managements Based on the research carried out in some companies in Vietnam, the following conclusion shall be dawn The most significant, continuous and long-term factors which greatly influenced the activity-based costing were the need for information reported by the managers, inaccuracy of data received from the previous costing system, the increase of products variety and customers‟ demands and finally the increase of competitiveness In the company, the four factors facilitating the implementation of innovations could be observed (without them, the implementation would not be possible): the management board support, knowledge transfer, resources accessibility and susceptibility to fashion and trends The research allowed selecting a group of variables, which had negative influence on the activity-based costing implementation, the most significant among them were organizational culture presenting negative attitude towards any changes and insufficient level of knowledge of junior and senior management The changes produced by the activity-based costing implementation in the company could be observed in two areas – methodological and organizational, the research showed the following, basic methodological changes: improvement of accuracy regarding costs accounting (direct and indirect), improvement of accuracy regarding the calculation of the costs of products, improvement of accuracy and 50 frequency of use of the profitability analysis and the application of the information received from the ABC in decision-making processes The activity-based costing implementation revealed numerous organizational changes, which resulted from the process of implementation, such as closer connection between management accounting and other operational functions, more frequent transfer of information for decision-making processes and more frequent use of the information from the management accounting by the managers The criteria for successfully in implementation ABC method, such as recognizing the necessity for introducing ABC, being equipped with software, having the support of senior management, and providing training and education The organizations cannot meet these criteria because analyzing the stages of implementation are focused by the organizations than taking the actions to move The factors such as lack of linkage to performance incentives and evaluation are also prevent the success in adoption ABC, moreover, to implement ABC properly, considerable raw data needs to be collected and examined for accuracy In the conclusion, it should also be emphasized that the managers as well as the management accounting specialists of the company were prepared to question the current costs accounting and to plan and implement the new and better system, the managers questioned the quality of information provided by the previous system of cost accounting and management accounting specialists responded by activity-based costing implementation The management accounting specialists were aware of the changes occurring in the market and in the company as well as of new methods of cost accounting and cost management, consequently, they managed to adapt new tools of cost accounting used in problem-solving processes, which occurred in the 51 company The usefulness of ABC in developing countries probably depends on its incorporation into an ongoing information and management decision-making system One-time data collection efforts are unlikely to result in information that will be useful over time Furthermore, a major advantage of ABC is the trend data it provides on unit costs, but this requires an ongoing information system Thus, while the potential benefits of ABC in developing country manufacturing firms remain to be demonstrated, the Savina experience provides substantial evidence that the factor for implementing has both negative and positive 52 5.2 Recommendations Nevertheless the success of Activity Based Costing, if organizations are careless, they could lose the sight of the fact that ABC remains a tool, not an end, and working lives of organization are dominated by the allowance of this end up If the data requirements are alone, the data are daunting, leading to the easily to get caught up in mechanics and details of ABC, in turn, to minimize the level of detail, the recommendation of estimating some costs usually required ABC can be hopelessly time-consuming, indeed, unaided by technology no matter that the developing in computer software can help in automating process, ABC‟s petard can make ABC is hoist itself and exposed as wasting time extremely ABC and any other costing system are not static, it can be established, therefore, like organizations change and business conditions, ABC needs to be updated and maintained Finally, in transferring its clear picture, ABC has ability to make champions of individuals of specific goods or services Management team must first identify costs and grasp their impact on particular productions or process, if this team is to eliminate and reduce the costs Each direct or indirect costs that incur in the business operation, activity based costing can investigate and point out characteristics of that type of product, hence ABC can be a powerful tool for both guiding prompt and assessing current operations, and intelligent reactions as circumstances change, in fact, it's also known as activity based management (ABM) 53 REFERENCE: [1] Johnson, H.T and R.S Kaplan, Relevance Lost: The rise and fall of 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Estimating the accounting system of Savina After having analyze about accounting system information of Savina, the advantages and disadvantages are below The outstanding strengths of the current accounting... influenced the process of the implementation of the innovations within the area of the management accounting (in this case on the implementation process of the activity- based costing in Savina) They are... 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