1

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

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.
3
THE IMPACT OF ABC (ACTIVITY BASED COSTING)
ON MANUFACTURING FIRM PERFORMANCE IN VIETNAM

BY

NGUYEN THI HA

June 2010 Supervisor: Dr. Le Van Lien

List of Tables
viii
List of Abbreviations
ix
Chapter I INTRODUCTION

1.1 Introduction
2
1.2 Need for Research
4
1.3 Elements of the Research
4
1.3.1 Research Question
4
1.3.2 Research Objective
4
1.4 Scope of Research
5
1.5 Assumptions
6
1.6 Plan of Presentation
6
Chapter II LITERATURE REVIEW

2.1 A General Look at ABC
8
2.1.1 The conceptualization of ABC
12
2.1.2 The importance of ABC
14

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
6
4.1.1 Percentage method
41
4.1.2 Results analysis for Hypothesis 1 to 3
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 Mechanism
50
4.2 Discussion

7
LIST OF FIGURES

Figure
Title
Page

Chapter 1 N/A
N/A Chapter 2 Figure 2.1
The Estimation of Activity Based Costing (ABC)
12
Figure 2.2
The proportion of material, direct labor and overhead costs in
today’s world
15


8 LIST OF TABLES

Table
Title
Page

45
Table 4.3
The WCM implementation
46
Table 4.4
Impact of WCM and ABC on Plant Performance
49

Chapter 5 N/A
N/A
1.2 Need for Research
1.3 Elements of the Research
1.4 Scope of Research
1.5 Assumptions
1.6 Plan of Presentation 11
1.1 Introduction
Along with the development of market economy, accounting information requires
precise, more detailed and updated. Previously, manufacturing companies only use
traditional cost allocation methods as VBC (Volume Based Costing) but until now, this
allocation method is gradually being replaced by activity based costing method ABC
(Activities Based Costing). The reason is that in according to the VBC method, the
distribution of overall production costs in manufacturing costs - cost factories are

for performance if it adopts and implements advanced manufacturing practices (Shields
and Young [1989], Kaplan [1992], Cooper [1994]). Base on that point, perceptual
measures of ABC success is used by prior studies such as find whether the relationship
between the adoption of advanced manufacturing practices and the success of ABC
implementation is positive (see Anderson and Young [1999] for a review).

Because ABC has a little direct impact on plant manufacturing performance, base on
prior research’s analysis methods, I do a research in a cross-sectional sample of Vietnam
manufacturing firms to survey the indirect impact of ABC on manufacturing
performance through the adopt of WCM practices . 13
1.2 Need for research
Today, the competitive world of business is so high, with using ABC method in
manufacturing performance, many firms have provided accurate information that is to
determine the optimal product mix so that management can make better decisions and
the result is to have company’s effectiveness. However, in fact, in Vietnam, not all firms
success with this method. The reason why is that businesses do not want to renew
method and try to get the traditional cost accounting, or do not want to change because
they have no understanding of this new method, but the main reason is that the lack of
advanced manufacturing practice. This research’s purpose is to provide the better
information to managers that can help them to understand the overall the positive
indirect impact of ABC on manufacturing plant performance through the WCM
practices implementation.

1.3 Elements of the research
1.3.1 Research question
What is the overall direct and indirect impact of ABC on manufacturing firm
performance? And can WCM mediate the impact of ABC on plant performance by the

needed by using many types of model and approaches. In difference with Ittner et al.
(2002) my result is that, on plant performance, ABC has a statistically indirect impact
15
that is showed by the mediation, advanced manufacturing capabilities is represented as
WCM.

1.5 Assumptions
I suppose that ABC implementation by itself is unable to provide the direct valuable
impactions, but will be enable to create the convenient condition for the advanced
manufacturing practices implementation and other capabilities, as the result, this
capacities may contribute into plant performance improvements. Previous studies that
have tried to explored the direct impact of ABC but almost, they have to conclude that
the organization needs the improvement.

1.6 Plan of presentation
My research is organized in five chapters. In chapter II, the literature will 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, I present methodology that shows the description of my research data,
hypothesis, variables’ measurement and limitations. Next, in chapter IV, I analyze
results of the statistical estimation, and a discussion. Finally, in chapter V, I summarize
my findings and the study implications for future research. 16
CHAPTER II: LITERATURE REVIEW


method can help managers to have the optimal investment value of shareholders and
increase the effectiveness of company’s activities.
The costing methods based on counting on indirect expenses. The benefits of ABC
method can be mentioned as: Determine customers, products, delivery channel that
create the most profit and least profit. Determine factors that make increase or decrease
financial activity’s efficiency. Forecast exactly the original causes of the financial
activity’s bad effectiveness. Keep track of activity expenses and operational processes.
Equip for managers reporting data of the valuable expenses for operational
improvement. Support management and adjust marketing combination. Increase the
ability of customer negotiating. Locate products better.
With ABC method, the service expenses can be determined definitely. After minus the
product expenses and services expenses for each customer, the customer profitability
will be calculated. The ABC method calculates customer expenses and help to locate
correlative products or services. In addition, ABC application can help staff to grasp all
related expenses, help them to analyze the expenses and specify the plus value and no
18
plus value activities, from that, improve effectively activities. This is a complete process
continuously starting from the cost analysis, to reduce the activities that do not create
added value and thus achieve the overall performance effectiveness. Moreover, ABC
also helps companies create better products that meet the needs of the market with a cost
competitive. Analysis of profitability by product and customer profitability, this
approach has contributed positively to the decision making process of grant
management; company can improve efficiency and reduce operating costs without
sacrifice to bring value to customers. Many companies also use the ABC method in the
implementation of the card balance (balanced scorecard). ABC method helps companies
model the impact of cost cutting and cost control savings. Overall, ABC is a dynamic
method to promote continual improvement. With ABC, any company can create
competitive advantage on costs and continuously create value for shareholders and
customers.
In addition, also talk about the benefits of ABC, prior studies found and affirmed that:

existing activities, the non valued added activities id eliminated to customers, and from
that, the coordination of customers and suppliers is improved.

20
In relation to the similar conclusion about the benefit of ABC in cost reducing to non
value added activities, Carolfi also said that since ABC provide better business processes
visibility and the cost drivers, it might help managers to reduce and eliminate cost of
activities that related to non value added and from that, the efficiencies of existing
process are improved (Carolfi, 1996). Moreover, from the information visibility
improvement, it may also support the quality-related initiatives deployment by realize
the activities that combined with poor product quality, and their cost drivers (Ittner,
1999, Cooper et al. 1992). Hence, prior researchers suggest that in the activities process
improvement such as total quality management (TQM) programs, ABC adoption will
have the valuable association (Ittner and Larcker, 1997a, 1997b; Anderson, Hesford, and
Young, 2002).

21
2.1.1 The conceptualization of ABC

been associated with particular activities and thus are directly calculated to each
product. However, the ABC method is complicated and takes more effort than
traditional methods. But, with the scientific development of information technology
today has reduced much time and effort for the application of this method. Thus, the
method of accounting based on operating costs would be indispensable to the
application of corporate governance. 23
2.1.2 The importance of ABC
In according to Sullivan, the lists of the new manufacturing environment’s
characteristics is shown in table 2.1,
Table 2.1: The changes in manufacturing environment (Sullivan, William G., 1992)
Yesterday
New Paradigm
High volume, long production runs,
long product life cycles
Low volume, short product runs, short
product life cycles
Small number of product variations in a
Domestic market
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

As a result, product cost will be distorted if we use traditional based costing method,
the reason is the allocation of overhead costs to the products based on each product’s
direct labor hours used (Harsh, Mary Frances., 1993, Liggett, H. R., J. Trevino, and
Materials, 55%
Direct Labor, 10%
Overhead, 35%
Materials
Direct Labor
Overhead
Materials, 10%
Direct Labor, 75%
Overhead, 15%
Materials
Direct Labor
Overhead
25
J. P. Lavelle ., 1992). Several situations that Cooper report can lead to occurrence of
distortion, they include: the diversity of production volume, complexity, material and
setup (Cooper, Robin .,1988).

The cost distortion can be solve by the using of ABC method that provides
information to identify the overhead’s component precisely such as better grounded
product design, development, production, and distribution decisions. The resource
costs that ABC help to assign to products is more accurately and the it also the main
tool that serve for companies’ decision support. (Harsh, Mary Frances., 1993,
Johnson, H. T. and Robert S. Kaplan., 1987). In according to Ioannou and Sullivan
who also affirm that the ABC can make better decision making in manufacturing firm