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



NGUYEN THI THU HUYEN
April, 2011

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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
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

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

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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,

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

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industry will be covered. This background will help the readers understand and draw a
big picture of this industry.
After this, a statistics about the number of companies which adopted ABC will
be explored. Based on this result, we can figure out whether all of advantages of ABC in
the theories are true or not and in what circumstances. Some evidences about the impacts
of ABC on the managers’ decision in the current year compare to the decisions by
adopting other cost accounting method will be mentioned. Depending on these, some
recommendations will be concluded in the next part. And this survey will ensure that the
advantages and disadvantages that the author wrote in the earlier part are correct.
In the last part, a short interpretation with the result of the survey will tell the
readers what 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

(Stenzel, C., & Stenzel, J., 2002).
In this thesis, the author will focus only in ABC method, its impacts and influences on
the managers’ decisions by using SWOT analysis and survey results.
2.1.1 History of cost accounting methods and ABC general review
A fire at the headquarters of the National Association of Accountants (NAA) in 1984
destroyed most of documents related to the costing methods (Cunagin,C., & Stancil, J.,
L., 1992) . Therefore, to identify exactly time when cost accounting were invested is
quite impossible. Previously, 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 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 when the globalization becomes a trend of the societies, ABC can be
considered as a popular and dominated costing method for most of organizations. In the
past, profit means you had a list of potential customers who can buy a huge quantity of

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products in many times. However, this might be not right in reality. Profitability not only
depends on the quantity but also the differences between the price and the costs. In fact,
the higher differences, the higher profitability. Unlike traditional method which allocates
costs equally among products, ABC divides costs based on the requirements of costs
objects like products, services and jobs (Cooper, R., & Slagmulder, R., 2005). In other
words, we can say this method is the best tool for refining cost systems. For instance, a
shampoo A needs 1hour to produce while shampoo B needs 1.5hours to manufacture.
This means different items will require different cost amounts. As a result, accountants

manufacturing. As a result, the name of this level is facility sustaining costs.
Since the costs are divided into different level of cost objects, calculation of ABC
method also differs with traditional and variable costs. As mentioned in the figure 1.2
below, the first step of this method identifies what resources that manufacturers need to
produce chosen products. For example, to make 1000 bottles of shampoo A and 2,000
bottles of shampoo B, manufacturers need to buy ginseng and olive oil. After defining
the necessarily resources, the quantity as well as costs of those should be computed
based on the number of products or services. This means all of costs such as direct
material; direct labor and manufacturing overhead will be included and allocated
separately. In the next step, all of activities during production process should be listed. It
helps to create a standard or foundation to allocate costs which are budgeted. Based on

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this action, managers can know how many activities required for a specific products or
services and establish in their mind a whole picture about cost pool with all of items. By
this way, the reliability of data and measurement will be increased rapidly and the
following cost allocation will be easier for both managers and shareholders. Finishing
identifying activities likes installing, running and maintaining, counted costs will be
traced to different required products or services’ activities. Various companies and
managers, criteria to allocate costs might be distinguished. For example, manufacturing
costs can be divided among products and services based on the cause and effect
relationship. When all of costs are distributed, the total costs for each products or
services as in the last step of this method. The fourth and the fifth step of ABC will help
managers diversify the risks of producing and figure out the best way to use costs more
effective and efficient. As a result, in fact, this method is a little bit more expensive and
complicated compare to traditional and variable method. However, it provides more
precise and useful information to managers therefore it is still the first choice for most
managers and companies.
cost allocating and operational process. And the precise accounting information
increases the improvements for managers through reports and shows them required
expenses to achieve those improvements. Based on these reports, accounting department
can corporate with marketing department to design an effective marketing plan using
limitation resources. The last but not the least, both managers and staffs can enhance
their ability in negotiating with the customers and locate the profitable products or
services better.

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None of cost accounting methods can compete with ABC about the ability in
determination the customers as well as the products and direct the whole organizations
in the most profitable way. Since all of direct and indirect costs are computed and
assigned to each products and services, manufacturing expenses are definitely
determined. In order to measure the profitably for each customer, products or services
expenses should be deducted. This will create the correlative relationship between
products or services and customers’ expenses and enhance the effective of the business.
As a result, not only accountants or managers, normal staffs also can grasp, analyze
related expenses of producing and define the way to deliver the value added to the
customers. Moreover, a good understanding foundation can help these ones feel more
confident about their products or services explain and convince the customers better
according to the real facts. This can be mentioned as a continuously process which
includes costs analysis and deduction non value added activities to reach the higher level
of an effective organization operation as a whole (Ittner, 1999, Cooper et al. 1992).
Moreover, with better understanding about allocating costs effectively, R&D department
can create new products or services within a competitive cost compare to other brand
names in the same market. Potential products or services will be focused more if the
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

products mix strategies also emphasize in many different studies of various accounting
scientists (Anderson, 1995; Shields, 1995).
Generally, cost reducing, products quality improvements and saving manufacturing time
can be listed as three main benefits that ABC can bring to organizations in operational
performances aspect (Anderson and Young [1999]; Ostrenga et al. [1992]). Many
researchers affirmed that using cost driver to allocate costs will bring more detailed and
precise information to users (Cooper and Kaplan [1991, chapter 5]; Ostrenga et al.
[1992]; Carolfi [1996]). By this way, wasted are unnecessarily costs during production
process will be reduced and saved. Additionally, potential products or services with
higher profitability will be focused and the company can keep the right development
tract. The relation with customers will be enhanced since more valuable products are
invented and brought to them.
However, in order to explore all of ABC benefits, managers should choose a suitable
management method. Until now, for most of people, TQM or total quality management
is still a favorable method since it can help ABC provide listed benefits as discussed
above.
2.2.2 ABC critism
It is a fact that none of accounting methods can be considered as perfect. Therefore, even
ABC has lots of benefits, there are some problems still exist. Although it is a benchmark
to evaluate the effectiveness of the business, seven steps are not so easy to implement. It
requires time to train the employees and build a complicated facility (McGowan and
Klammer, 1997). Without understanding about the tool that we use, none of business can
be successful. In order to achieve this, companies must have a good and safe financial

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issue. Moreover, for most of shareholders, traditional costing method is the best method
when all of costs are calculated in a simple way among different products. As a result,
they might be confused since companies apply a new form of costing method to do
annually reports. Although more detailed and precise information is a huge strength of
ABC, it is also a weakness of this method. In case that too many products or services

Large number of product variations in
an international market
Large direct labor component; high cost
of processing information
Relatively high technology costs;
relatively low information processing costs
Small indirect/overhead costs in
relation to direct labor
Large indirect/overhead costs in
relation to direct labor

Globalization becomes a dominated trend in World make business battle more furious.
From a long run manufacturing trend only focusing on the quantity of products with long
life cycles, now, most of companies choose short term production with higher profitable
products or services. By this way, even the quantity of items is much lower than in the
past, profit of the companies still maintain and develops solidly. To achieve this,
information about market and responses as well as expectations from customers should
be updated daily and rapidly (Sullivan, William G., 1992). Based on this comparison, it
is quite easy to see that, other costing methods still can be applied but it will face with
lots of problems since it can not adapt with the changes of the environment. Broaden
market environment means that the variability of products and services will be higher.

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Uncompetitive products or services will be eliminated. Locally competing trend turns
into international competition.
Instead of paying more money in gathering the information as in the past, internet and
technologies development free companies to access various sources of information
nowadays. Manual works in manufacturing has a negative relation with the number of
machines that are equipped in factories. For example, in the past, a car needs 10 people to
make; but now, to produce a car, only 2-3 persons to control a machine. However, this


Materials, 55%
Direct Labor, 10%
Overhead, 35%
Materials
Direct Labor
Overhead
Materials, 10%
Direct Labor, 75%
Overhead, 15%
Materials
Direct Labor
Overhead