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 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 1.1 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 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

1.1 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. 2

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 3

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. 4

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? company? 2, What are the effect on performance of Activity Based Costing of 3, What are the factors influencing the Activity Based Costing success? This paper will answer above questions to orient for the companies which want to adoption or implementation Activity Based Costing method. 5

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. 6

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 7

2.1 Historical development: Traditionally, cost accountants had arbitrarily added a broad percentage of expenses into the indirect costs, in addition, activities include actions that are performed both by people and machine. However, the incorrect of this technique is gradually rose with the using of indirect costs and overhead costs increasingly, because indirect costs were not caused equally by all products. For example, one product may take time in one expensive machine more than another product, but the costs of direct labors and materials may be same in the manufacturing these products, additional cost for use of the machine is not being recognized when the same broad 'on-cost' percentage is added to all products. Consequently, when multiple products share common costs, there is a danger of one product subsidizing another. ABC is based on George Staubus' Activity Costing and Input-Output Accounting [5], the manufacturing sector of the United States during the 1970s and 1980s, the concept of ABC was started to perform. During this time, the Consortium for Advanced Management-International provided a formative role for studying and formalizing the principles that have become more formally known as Activity-Based Costing [6]. Robin Cooper and Robert S. Kaplan, advocates of the Balanced Scorecard, brought notice to these concepts in a number of articles published in Harvard Business Review beginning in 1988. According to Cooper and Kaplan ABC is an approach which could solve some disadvantages of traditional costing systems, the actual costs of production and of the costs of related services was calculated inaccuracy by the costing systems. This led to the decisions making based on the inaccuracy information of managers was also increased. ABC investigates cause and effect relationships to objectively allocate costs as the alternative of using wide-ranging arbitrary percentages to allocate costs. After 8

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. 9

2.2 Definition and key concepts: 2.2.1 Definition: There are many factors affect to the capacity of the manufacturing potentially, Activity Based Costing is designed to provide managements the accurate information of costs for finding strategies and making decisions. ABC is a subset of activitybased management, which is used to identifying and evaluating activities of the firm s performance. 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. 10

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 11

specific project are really difficult to determine, for example, evaluation of the activities of directors of business to the result of projects is impossible. Whereas, direct costs are those for the activities that benefit particular project, for example, the salaries for project managers. 12

2.3 Implementing of ABC The companies will find implementing ABC a powerful tool in measuring operating of the company, they want to be successful in implementing this method, there are several steps must be taken which are summary in below figure. Figure 1: Implementing of ABC 1, The study processes and costs the first step in implementing Activity Based Costing is a research for all the aspects of business processing. Employee involvement is main factor to make the system perform effectively and efficiently, thus before the accounting system s results are relied truly by the employees at all levels, these results are needed to believe by employees. 2, Identify activities After understanding about the process of implementing ABC, selecting the business activities must be paid attention of the business, these activities will be center to the allocated costs. There will be many the system 13

activities become uncontrollable, too few that leads to no meaning of information. If activities are classified at different levels, it can supply better results: unit level activities which are those activities and a unit of output that have a one-to-one correspondence with each other, for example, in each final product of a camera manufacturing had to checked before packaging, thus, checking may be seen as an activity, batch level activities which are those activities relate to one or more units of product, but they still must be performed. Example of shipping could be considered as the outstanding of this level, in ebay one of the biggest online shops, some customers order only one good while others may order more than five at a time, the packing and shipping of ordered goods require the same activities no matter of how many goods are put in a box, product level activities which are run at the product level whatever the size of production. Product marketing, product design, which are considered as activities and the amount of the finished good have one to one correspondence, there are many forms of customer level activities, catalogs, lines, sales calls, and so on are helped by the technique in customer level activities. The investigation and finding the activities is unique to each company. A frame of reference is provided by the above levels to help the organizations estimate what activities are more important for performance of manufacturing. Experts who expertize in ABC can also be very helpful in training a company as it searches for its important activities that will become center to an ABC method. Generally, these experts advise the following, first every conceivable activity should be listed, second the activities according level should be segregated, and the last is similar activities should be combined logically within each level. 3, Identify traceable costs When a cost occurring that evolving to the particular cost object, that cost should be traced directly to the end of object, the 14

common example of this is the direct labor and direct material, these costs usually do to the end of object, there are some other examples for the clearing, there are spending many hours of indirect labors, these costs later would be calculated to the activity cost pool, besides that that costs also relate to the printers so that cost could be traced to the "customer" cost object. 4, Assign remaining cost to activities - After classifying the costs that can be traced to cost objects, the others are allocated to activities, this work sometimes is logical and easy but sometimes difficult, for examples, there are some manufactures in industrial engineers that their productivity processes are automatic, the workings are based on the set up of the machine, the machine set-up activity is the activity that the cost of setup is assigned to, a variety of final goods will reallocated this activity. However, in industrial engineers the cleaning up after each machine setup will be required because of the massive and complexity of this industry. The considering of what activity will engage cost and what cost object shall cost ultimately be attributed are important for management. The allocated cost decisions are controversial even though that there are some, therefore, some costs will be not allocated by ABC, but that does not mean this system ignore to allocate these costs. For the purpose of identifying particular product s cost or other cost object, the leaving of unallocated cost of ABC is logical, but it would be reckless to forget about these unallocated costs, the management of organization must recover all of them. To recover the unallocated and allocated cost, the prices must be limited. 5, Determine per-activities allocations rate When the total costs for each activity have been measured, then the identifying the cost pools are necessary, for 15

example, the preparation of products catalog activity cost pool costs $400,000 and 400,000 catalogs were printed, hence the allocated catalog cost would be $1.00 each. 6, Apply costs objects to calculate the number of activity cost to allocate to each cost object, the using activity based rate is the final step. Following the above example of catalog, the allocated cost from the catalog preparation pool was $1.00 each, this cost is not the total costs, but the allocated amount, the total cost would also include the directly traceable amounts (printing, postage, etc.), the cost of catalog, along with other customer-related costs would be compiled in some form of summary report, managers then have a calculation of what the cost of supporting an additional customer is. 16

2.4 The critical factors for successfully applying the ABC This research will point out some factors that Vietnamese companies should consider when having the project on implementing ABC. The factors that will be considered include the developing of non-interest expenses management accounting policies and standards, picking a suitable and appropriate ABC methodology, identifying the scope of the project accurately, choosing the fitting ABC application, assembling and training teams that have responsibility of ABC in company, and developing and sustaining the ABC database. The first factor is the developing of policies and standards involve to the non interest expenses management accounting. How non interest expenses in the business is treated make the affirmation of the creation of costing consistently throughout the institution. When implementing an ABC method to get a more profit objective, the enhancing of management accounting policies and standards commands how assets, liabilities, revenues and expenses are treated in the profitability system. The buy in across the organization will be created by the establishing the policies and standards at the high level of management. The committee for the policies will be a factor for success of ABC approach. The second factor is the choosing the right methodology of ABC. The activity level costs and non-interest expenses of processing center to each activity are related to each other. To distribute these non - interest expenses, the need of a selecting the suitable method is critical, cost information is tied to business events directly as a result for managements usage. When the costs are linked to the business activities and changes in size, the relationship between costing information and profitability is immediately set. Hence, management will embrace the reliability of the information. 17

The third is the determining the scope of Activity Based Costing project, which is vary because it is depend on the size of financial department. The estimating the duration of project requires the accuracy because the need for setting the expectations. After the duration of the ABC project is predicted, the note for the leverage existing unit cost data should be considered. The selecting an ABC application is important because all the objectives and requirements ABC approach will be meet. The flexibility to create and build unit costs for both qualitative resource groups and for processing resource groups should be allowed by the ABC application. The survey in web-based which are functionality for units and positions also should incorporated by the application. Then the factor of assembling and training ABC team is analyzed because the size of this team depends on the expectation about ABC approach of the company. Initially, team should be received the guidance and instructions from the ABC resource. The transferring of this ABC knowledge should be quickly to develop team members into contributors to ABC process. The maintenance of ABC database is the last factor, which addresses that continuing maintenance of the unit costs is required. The changing in center operating expenses is reflected by the unit costs which are updated annually. New unit times must be developed when having the new systems or the changes in the procedures the unit times must be adjusted. The unit times still should be reviewed every several years for the accuracy even though there are no changes in procedures or installing new systems. Understanding these above factors, the organization will have the full view of many opportunities and the potential available in ABC method. When implementation the 18

activity-based costing is successful, this approach will classify the basis of resource management, profitability measurement, and strategic management. 19

2.5 The ABC s criticisms and limitation Activity Based Costing is based on the arbitrary allocation of cost subjectively. The cost drivers or the number of allocations bases of ABC technique is the major different between ABC system and traditional costing system. ABC creates complex costing systems, sometimes these systems are not really useful and necessarily, while the traditional costing system focuses only on allocation criteria, absorption criteria, and the volume of assumptions [10]. It is difficult to make the decision because if there is a changing in production volumes, profits will not be predictable by ABC system. It is usually having problem in resource such as bottleneck of resource that make the exceed of capacity, but ABC cannot investigate this problem, it also ignores the constraint of firm s internal capacity, for example, the demanding from the market for its goods is higher than its capacity for production, the firm should determine the optimal product mix according to each product s contribution per unit of the limited resource [11]. The relationship between resource consumption and activities is regarded as a line and certain by ABC system, therefore, additional activities of additional costs will imply cost reductions. However, the fact that there still are discontinuous costs, i.e., if a train leaves the station with half empty seats, although that cost per passenger is calculated base on actual capacity or assumption of full capacity, this cost is relevant for managers in making decision. In case of cost per passenger based on full capacity is $20, the usual price of one ticket is 30$ for 500 seats in train. The managers can decrease the price to $19 to fill all empty seats in the last minutes before leaving station. Most of the costs are fixed, hence in this case, the cost per passenger is not relevant for decision making, a profit and loss per train report based on these data is similarly flawed. 20

Some overhead costs such as the wages of managers cannot to be divided on the usage basis per product. Similarly, workers usually do not contribute their working hours totally to product activities, and the end products of company are not added value by all the product activities, for example, the occurrence of cost leaks as the result in the failing of ABC in measuring the times that employees takes part in first campaign. The business sustaining costs are difficult to assign to products and. Finally, the paying too much attention to control and detail could make the picture is more obscure or make the company identify the wrong way to achieve their objective in a quest of small savings, making the firm penny wise and pound foolish, for example, ABC could identify an inspection as non-added value, or one distribution channel as non - remunerative. They still stand on the first place to achieve some other objectives of company, although such channels are non profitability. 21

2.6 The comparison between ABC and traditional costing system 2.6.1 Costing system Costing systems are considered as information systems. A particular type of information like units produced and direct labor dollars are required by these costing systems to be of value. The input data identified methodology, these data determine information and product costs according to specific costing system. Although the same input data are used in different ways, the outcomes still depend on the costing system used, in this case it could be an activity based costing system or the traditional costing system. The provided information should help in minimizing the waste, but always making affirmation that it is also not wasteful. In other words, the benefits are derived from the use of the costing system should be more than the designing, implementing, maintaining that system as the resources required. 2.6.2 Traditional costing system Traditional costing systems are any of the systematic costing methods that prevailed before the rise of activity-based costing in the 1990s. Because they rely on an essentially arbitrary allocation of indirect costs, such systems do not give managers accurate product cost information, which means that accurate calculation of product profitability is not possible. The overhead rate in a traditional costing system would typically be calculated using direct labor hours, machine hours, or units. This could lead to accurate product costs when direct costs were high and indirect costs were low, as was usually the case 50 years ago; however, modern organizations typically have low direct costs and higher indirect costs. 22

2.6.3 ABC versus Traditional costing In generally, the different between are firstly, traditional costing is obsolete whereas ABC is used more by various target-oriented companies, secondly, ABC methods help the company to identify the needs of keeping or eliminating certain activities to add value to the products but traditional costing does not, thirdly, traditional costing focus on the structure rather than on processes whereas ABC methods focus on the activities or processes rather than on the structure, ABC provides accurate costs whereas traditional costing accumulates value arbitrarily, and lastly, traditional costing is most obsolete whereas ABC are large in use since 1981. The following example will show more details for the above points. Example 1: Suppose that TH Company manufactures leather accessories and leatherette accessories. The running of each type is different but the equipment for both is same. To prepare for the next batch the equipment is maintained, set up and cleaned. Two types of product are packaged similarly, each packing has 20 units of products. TH Company expects to manufacture 1,000,000 units of leather type and 2,000,000 units of leatherette type. The allocation to activity pools of overhead costs as follows: Purchasing of materials $250,000 Setup of machines 345,000 Packaging 300,000 Cleaning and maintenance 285,000 Total overhead costs $1,180,000 23

Identifying the cost drivers, estimating the total numbers of each product that are expected, calculating each cost drivers units cost are the tasks of accountants and managers of production based on the activity pools. Activity Purchasing of materials Machines set up Packaging Maintenance and cleaning Cost Driver #purchase orders Total Expected Units for Cost Driver (1) Total Cost (2) Unit Cost per Cost Driver (3) = (2) (1) 100 $250,000 $2,500.00 #setups 250 345,000 1,380.00 #containers filled 150,000 300,000 2.00 #of runs 250 285,000 1,140.00 The following table shows activity by product: Activity Cost Driver Purchasing # purchase orders Unit Cost (3) Expected Use Leather (4) Leatherette (5) ABC Cost Assigned Leather (3) (4) Leatherette (3) (4) $2,500.00 50 50 $125,000 $125,000 Set up # setups 1,380.00 125 125 172,500 172,500 Packaging # containers filled Maintenance and cleaning 2.00 50,000 100,000 100,000 200,000 #runs 1,140.00 100 150 114,000 171,000 Totals $511,500 $668,500 Under ABC method, the overhead cost per unit is calculated by overhead costs assigned to each product are divided by the number of unit of that product, therefore 24

overhead cost per unit of leather accessory is $0.51 ( ), overhead cost per unit of leatherette accessory is $0.33 ( ). Under the traditional method, the allocation of overhead is based on direct labor dollars, to calculate the total costs for all the products will be divided by the total direct labors dollars of all products. The total direct labor costs of $1,500,000 in which $300,000 for leather accessories and $1,200,000 for leatherette accessories are estimated during the year. The direct labor costs per unit for leather accessories are $0.30 ($300,000 1,000,000) and $0.60 for leatherette accessories ($1,200,000 2,000,000). There are two steps to calculate the costs per unit to produce: 1. The predetermined overhead rate is calculated as total overhead costs are divided by total direct labor dollars. 2. Overhead is allocated to each type as the overhead cost per direct labor dollar is multiplied by the per unit direct labor dollars for leather and leatherette accessories. Step 1: Calculate overhead per direct labor dollar = $0.787 per direct labor dollar Step 2: Allocation of overhead Overhead cost per direct labor dollar x Direct labor dollars per unit Leather accessories $0.787 x $0.30 = $0.24 overhead per unit Leatherette accessories 25

$0.787 x $0.60 = $0.48 overhead per unit Hence, there are different results on calculating overhead costs per unit in two methods TH Company 2010 Overhead per unit Activity Based Traditional costing Costing Leather accessories $0.51 $0.24 Leatherette accessories $0.33 $0.48 This example showed that using ABC method the leather accessories overhead cost of $0.51 is higher than $0.24 by using traditional costing method. The overhead cost of $0.52 supply more accuracy in decision makings about production and pricing than the traditional one. For the leatherette accessories, the ABC method gives the overhead costs of $0.33 and the traditional method gives the overhead costs of $0.48 per unit. Only using direct labor dollars to determine the allocated costs of traditional costing system make these differences, thus higher allocation of the overhead cost is result of higher direct labor dollars of a product, and the lower direct labor dollars gets less allocated of overhead costs. When overhead costs are allocated by the direct labor dollars, the number of purchasing, set up, or packing that the product actually uses does not impact the allocation of overhead costs. When overhead costs are incurred at the different rate as direct labor dollars, ABC method provides a way for allocated costs more accurately, it is very useful in estimating of costs for use in making management decisions [12]. The costing systems become more complicated because the more activities are found, so 26

computer system is really needed for a complex system such as ABC. Some companies want to keep the system manageable, the numbers of activities are limited in their costing system. 27

CHAPTER 3: METHODOLOGY 3.1 Conceptual framework 3.2 Qualitative case study designs 3.3 Data collection 3.4 Data designs 28

This chapter provides a discussion of the methodology used in this research, it begins by talking about conceptual framework, and the second part is describing the advantages, limitations, and sampling selection of the qualitative case study design. 3.1 Conceptual framework 3.1.1 Contingency theory Contingency theory and Organizational theory will be adopted in this research to develop the framework of research. Management accounting field adopt Contingency theory widely to conduct their research [13]. In the environment of the organizational setting where controls systems operate and function, these systems are designed and application contingently by the affirmation of Contingency theory [13]. The characteristics of management accounting system are explained by this theory widely [14]. Waterhouse and Tiessen [15] stated that on the numbers of factors such as product diversity, cost structure, size, level of competition and degree of customization [16, 17], management control system s structure and design is contingent. The relationship between the contingency factors and ABC was explained in the example that given by Sartorius, Eitzen and Kamala [17]. The manufacturing firms, specially the firm that produce more than one type of products and each type also uses different amount of resources today need for more accuracy information of cost allocation because of the increasing of fixed cost, ABC is one of the technique improve the accuracy of allocated costing [18]. There are many factors that lead to the emergence of more sophisticated costing system such as ABC, one of them is competitions, and in addition, the number of activities and the volume of overhead needs to be coordinated, as the result ABC method is adopted by larger companies more than smaller companies as well as limited resources [17, 19]. However, the differences always occur in implementing and adoption of an 29

innovation [20]. Thus, in explanation of ABC implementation stages Contingency theory is not adequate. Organizational theory is theory supported for Contingency theory, it supposes that there are four categories in the changing of an organization are classified, they are culture, technology, structure and products. The stages of implementing ABC are categorized as the administrative procedure by Gosselin [21], therefore, success of ABC is determined by top-down approach because it is considered as the structural changing. 30

3.1.2 Shield s model Technical factors, such as identification of main activities, problem in accumulating, and cost data selection of cost drivers are focused by the early researches of implementing and adoption of ABC. But to explain the factors influencing ABC success implementation just use these technique only, it could lead to the adequate, therefore, the others factors such as behavioral and organization, contextual, organization structure, and culture are also concentrated, predicted by figure 2. Figure 2: Theoritical research framework To examine the impact of organizational, behavioral variables on the success of Activity Based Costing, this study is also based on the model of Shield. Gosselin [21] states that two others variables are structure and organizational culture should not be ignored because they are also effect to the success of ABC. Young and Shield [22] identified seven important organizational and behavioral variables to cost managements practices. The seven variables include top management support, performance evaluation and compensation, linkage to competitive strategies, sufficient resources, non-accounting ownership, consensus about the clarity of the 31

objectives of the cost management system, training in designing, and implementing and using cost management system. The technical used by the past researches about the factors of success in implementing are reviewed and summarized by Fei and Lana [23], these techniques are identifying activities, software packages, knowledge of data requirement and data collection, the participation of external consultants, and gathering data on cost drivers. Measurement and definitions for technique variables of Fei and Lana are used in some current researches of companies looking for ABC system. Organizational structure always affects the adoption and implementation a new management control systems of the company significantly [24]. Organizational structure was classified into organic and mechanistic by Stalker and Burns [25], organic organizations have lower level of formalization and centralization than that of mechanistic structure [21]. In mechanistic organizations, the implementing of ABC can be more successful, it was found by Gosselin [21]. In many researches, formation and centralization will be treated as organizational structure s indicators. ABC success is also produced significantly by organizational structure, Skinner [26] pointed out that the failure of ABC can be the result of careless culture. The relationship between organizational culture and the success in implementing was examined by Baird et al. [19], team orientation, outcome orientation, innovation, and attention to detail were used in this examination. 32

3.2 Qualitative case study design This research used a qualitative case study design to determine how Vietnamese organizations used ABC information to improve processes and performance. Qualitative case study research is defined as an intensive, holistic description and analysis of a single entity, phenomenon, or social unit. [27] It is useful for an indepth analysis of problems to understand processes or situations in context, compared to survey research, case study research seeks holistic description and explanation by examining a small number of units over a large number of variables and conditions [28]. Because it is intensive, it provides insights into the variables, processes, and interactions that merit further attention. The inductive and descriptive aspects of case studies make them the ideal choice for insight, discovery, and interpretation rather than hypothesis testing[29]. Case study results, however, can lead to the development of abstractions, concepts, hypotheses, and theories for future research. Despite its advantages, case study research does have several limitations, foremost, the narrow focus on one or a few units of analysis does not allow generalizations to the population from which the units came [30]. Generalizability refers to the ability to extend the results of a study to other persons or situations [31]. Many qualitative researchers reject the concept of generalization [32]. One selects a case study approach to gain an in-depth understanding of processes or situations in context, not because one wants to know what is generally true of a population [33]. Before generalizing case study results to a population, one must accomplish followon research utilizing valid sampling techniques to test specific hypotheses derived from the results of the initial case study. A second limitation is that case study research is vulnerable to subjective biases since the researcher is the primary instrument for data collection and analysis, a researcher s subjective interpretation 33

determines the inclusion, importance, contextual placement, and completeness of the data. In qualitative research, sampling is usually purposeful rather than random [34]. Since one uses purposeful sampling to select information-rich cases for in-depth study, this research used it to select the organizations under study. The criterion was simply that the organizations had used their ABC models, but not all the organizations are successful in applying this method because applying new systems always has risk and high cost especially in the developing countries like Vietnam where ABC still is new system. Therefore, the survey is sent to 15 manufacturing firm about the implementing ABC model, there are 11 firm do not know this accounting system, 3 firms know its advantage but there are not enough conditions to apply it, the last company, which is considering the ABC project, research will outline the factors that Samsung Vina Corporate Ltd should study in how they adopt and implement ABC method. 34

3.3 Data collection Unlike other forms of research, case study research does not rely on any particular data collection method, one can employ any or all methods to gather data, although certain methods such as interviews are more popular [35]. The general interview is used to guide approach to collect the data. This approach entails having an outline of topics to be discussed during the interview, but the order of topics is not set and the interviewer does not formulate the questions beforehand [36], the outline is a guide to ensure that the researcher covers all the topics for each participant (Appendix). The main disadvantage of this approach is that it is not as free flowing as the informal conversational interview, thus limiting the scope of topics covered compared to that of the informal conversational interview. Since qualitative investigation is vulnerable to subjective interpretation, the triangulation of multiple sources of information is a method one can use to attain valid and reliable information [37]. Triangulation of data sources refers to validating information from one source by comparing it to information gathered from another source. The main topic investigated in this research focused on how organizations can implement ABC model for their accounting system in the context of developing country like Vietnam. After reviewing the literature, the main topic areas to cover during the interviews include: characteristics of the industry that organizations have businesses, the accounting system that is using in organizations, the estimating the effectiveness of their accounting system. The industry characteristics are about the kind of production, the market share, the competitions. The second part which seeks the information about the accounting system that company is applying, this part supply the information about the most used accounting system in Vietnam today since the research can analyze the opportunities and threats when company changes 35

theirs. The last part which supply how companies react with their accounting system, it is really effective and efficient, this part also supports to enhance the above analyze. 36

3.4 Data analyze Analysis of data is a process of inspecting, cleaning, transforming, and modeling data with the goal of highlighting useful information, suggesting conclusions, and supporting decision making, data analysis has multiple facets and approaches, encompassing diverse techniques under a variety of names, in different business, science, and social science domains. An interview summary form will be helpful for analysis the date, which is completed as soon as possible after each interview has taken place, this includes practical details about the time and place, the participants, the duration of the interview or focus group, and details about the content and emerging themes. Analyze data is a complex task, especially with qualitative study design which is non-numeric. The following process should be applied for this task. 1, Reading and reviewing data this is an important in first step in any data analysis, whether qualitative or quantitative method, qualitative data often consist of interview notes or transcripts, notes from field observation, or written documents and records. 2, Writing notes as reviewing field notes, transcripts or other data, notes can be made in the margins or highlight key passages. The data in a qualitative study is voluminous, the key is to make it manageable, using file folders to organize data in a useful way. 3, Coding data - in qualitative studies, coding means identifying themes within interview notes, documents, or field observations that relate to the research questions in case study. Themes are common ideas and patterns that researchers observe repeatedly as read the data be collected, data be needed reading through multiple times to identify all of the themes. 37

4, Interpreting data by attaching significance to the themes and patterns researchers observed. Write lists of key themes and review the data again, consider alternative explanations by looking for differences in responses or observations that be recorded in data collection. 5, Drafting a report that details research s findings. In qualitative work, writing the research report is an extension of data analysis because writing is another way of making sense of the data by synthesizing and summarizing them. 38