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THE IMPORTANCE AND IMPACTS OFCOSTING
METHOD ON THE PROCESS OF MANAGERIAL
DECISION MAKING BY
PHAM THI HOAI THANH
E0700060
BARCHELOR OF BUSINESS (ACCOUNTING) HONS
HELP UNIVERITY COLLEGE

MARCH, 2011
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insightful suggestions, and constructive ideas are the essential inputs and encouragement
for me in order to complete this thesis.
Next, I would like to acknowledge to manager and all of employees in Ha Tinh Medical
Material Company who allowed and assisted me to collect all of necessary information
for me to get this thesis done. Without their contribution, I could not be able to gather
much information for my research.
Lastly, I would also like to extend my heartfelt gratitude to my friends for their
continuous support, encouragement and contribution, which have been crucial during the
presentation of this report.
My thesis cannot be finished without your supports.

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TABLE OF CONTENT DECLARATION OF ORGINALITY AND WORD COUNT Error! Bookmark not
defined.
ACKNOWLEDGEMENT Error! Bookmark not defined.
TABLE OF CONTENT iii
ABSTRACT vi
LIST OF FIGURES vii
LIST OF TABLES viii
CHAPTER 1: INTRODUCTION 1

4.1.3 Company’s mission statement 33
4.1.4 Potention on production of the company 33
4.1.5 Potention on marketing of the company 34
4.1.6 Structure of Ha Tinh Medical Materials’ management structure 35
Figure 3: Structure of management team 36
4.1.7 Accounting policy adopted 37
4.2 Difference when using different cost accounting methods 37
4.2.1 Incurred expenses during the period of 2008 – 2009 37
Table 1: Total revenue for Vitamin A of Ha Tinh Medical Materials 38
Table 2: Direct material cost of Ha Tinh Medical Materials 39
Table 3: Direct labor cost of Ha Tinh Medical Material 40
Table 4: Manufacturing overhead cost of Ha Tinh Medical Materials 41
4.2.2 Cost of goods manufactured under absorption costing method and variable
costing method 42
Table 5: Cost of Vitamin A using absorption cost and variable cost method 42
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4.2.3 A profit comparison using absorption costing and variable costing method to
calculate 43
Table 6: Cost of good sold for Vitamin A 43
Table 7: Gross profit for Vitamin A 44
Table 8: Variable cost of goods sold for Vitamin A 44
Table 9: Contribution margin for Vitamin A 45
Table 10: Difference between variable costing and absorption costing 45
CHAPTER 5: CONCLUSION AND RECOMMENDATION 47
5.1 Conclusion 47
5.2 Recommendation for calculating product cost of Ha Tinh 48
Medical Materials. 48
REFERENCE………………………………………………………………………… 51


method on decision-making process of managers. Cost accounting method can be
considered as the most concerning problem with an organization, according to different
costing methods will lead to different profit to a company, therefore choosing a suitable
costing method is very important for managers. There are three cost accounting
methods, namely absorption costing method, variable costing method, activity-based
costing method are analysis in this thesis. And SWOT model will be used to explore the
advantages and disadvantage of each method. After that, I make some recommendation
for calculating product cost of Ha Tinh Medical Materials Company.
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LIST OF FIGURES Figure 1: Absorption costing method
Figure 2: Variable costing method
Figure 3: Structure of management team
Historical documentation about the origins of cost accounting is limited due to a fire at
the headquarters of the National Association of Accountants (NAA) in 1984. Many
irreplaceable documents were destroyed in that fire (Cheryl Cunagin and JohnL. Stancil,
1992). Therefore, no one can ensure and know about the accurate time that the cost
accounting methods were born. The role of accounting in the ancient world is coming
into clearer focus with new archaeological discoveries and innovative interpretation of
the artifacts.
Cost accounting is the process of accounting for cost, which begins with regarding and
classifying costs and ends with the preparing periodical statements and reports for
ascertaining and controlling costs. Today, cost accounting may be defined as the process
of measuring, analyzing, computing, and reporting the cost. There are different cost
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accounting methods that managers can choose and help them to make better decision in
the future. These methods are absorption costing, variable costing, activity-based
costing, throughput costing, etc. Absorption costing is known as a traditional cost
accounting, this method makes no distinction between fixed and variable costs; in this
method, all manufacturing costs, both variable and fixed are treated as product costs
with non-manufacturing costs, for example, selling and administrative expenses, being
treated as period costs. Therefore, it is not well suited for cost volume profit
computation, which is important for good planning and controlling. So absorption
costing method might be the best costing method for the small company. However, there
are some managers and accountant think that using another method might better than
using absorption costing. One of these reasons might because the activity-based costing
is a modern accounting system, which segregates expenses based on specific activities
and then allocated the cost among individual items based on volume of activity, so this
method can reduce and allocate costs more efficiently. Different managers will not make
the same decision with the same information and report so making decisions will depend
on each manager’s philosophy. In fact, decision-making process is influenced by many
factors but in this thesis, we will put only intention on the importance and impact of cost

all of the advantages and disadvantages of each cost accounting method will be judged
fairly. This method often uses in management aspect, the managers applied SWOT
model to evaluate the effectiveness and efficiency of the companies, cost budget, and
operation process. Analyzing cost accounting methods follow SWOT model, managers
will be easier to see the importance and impact of them on the decisions making process.

1.3 Issues expansion
After joining the World Trade Organization (WTO) in 2007 Vietnam has increasingly
opened the economy and trade. Vietnam pharmaceutical industry faces many challenges
so pharmaceutical companies will be innovated management strategy and reduce costs to
ensure competitiveness and survival. In this context, companies have actively deploying
innovative management method and running production, with particular emphasis on the
management for production costs. Therefore, in chapter 4 of this thesis, a real case of Ha
Tinh Medical Materials Company – one medicine manufacture will be use for analysis.
From this chapter, it is easy to understand about importance and impact of cost
accounting method on decision-making process of managers.
The chapter 4 will introduce about Ha Tinh Medical Materials Company, and then from
the collected cost information of this company, absorption costing method and variable
costing method will be applied.
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1.4 Structure of the research
In this thesis, there are five chapters as follow:
 Chapter 1: Introduction
 Chapter 2: Literature review
 Chapter 3: Research and methodology
 Chapter 4: Case study analysis
 Chapter 5: Conclusion
In this thesis, five chapters will be linked each other in order to express the ideas that the
author would like to share. Chapter 1 and chapter 3 will consider as a background to

 Decision in nature.
 Step in decision-making.
 Role of accounting information in decision-making.
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 Managers and management accounting.
2.1.1 Decision in nature
A decision is an act requiring judgment that is translated into action. Decision-making is
the process by which people respond to opportunities and threats by analyzing options,
and making decisions about goals and courses of action.
Decision process could be associated from internal and external information and people
need to choose the best alternative for a good result.
Making decision is very important and everyone make many decisions everyday. For
example, we decide what to buy for our family when going to supermarket; we decide
what kinds of sports for good health. In another case we make another difficult decision
to go such as we are surrounded by the fire: to jump through the windows and risk to
killing yourself or to wait the firemen and risk being burned to death if they come too
late? What should we do? This is an important decision for us at the moment. More
important than these cases, we have to decide what kinds of job in the future to earn a lot
of money.
Our business or the affairs in our life is experiencing development and growth, we are
often faced with difficult decisions. We need to choose among many decisions; it is not
possible for us to do everything that we would like to do because time and resources are
always limited. In fact, our actions will have long reaching consequences, and will affect
the lives of others. Sometimes the pressure of having to act forces us to make a decision
that we may regret later. Sometimes this pressure causes us to waver and miss an
opportunity. For example: the representative of the UN and the general who commanded
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the UN forces had been unable to make up their mind about the need for an air force

determining consequences of alternatives and choosing a course of action.
The first step and arguably the most important step in the decision-making are
establishing goals (or what are we trying to achieve?). It is a primary importance that we
should first determine or specify our task; we must identify each situation in which a
decision is needed and determine the goals we wish to achieve. Depending on then
values, motives, desires, and different situation help us have different decisions.
Once a decision maker has established the goal, it is necessary to gather available
information on alternatives. In this step, we determine what information we need as
information can help change our attitudes, beliefs or expectations. Gathering information
before making a decision helps managers get a better handle on the uncertainties.
We can gather some kind of information that we are prepared to making a choice. There
are: what is relevant and what is not relevant to the decision? What do you need to know
before you can make a decision or that will help you make the right one? Who knows,
who can help, who has the power and influence to make this happen (or to stop it)?
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After gathering available information to help us determine the alternative available, then
the third step is determining consequences of alternatives. This step is the stage when we
have to assess each alternative we have come up with. We have to find out the
advantages and disadvantages of the information. At this stage, we can also select out
the information’s that is thought unfeasible or not serve our goal.
The final step deals with choosing a course of action. Once we have gone through the
previous 3 steps, after taking the alternatives available and the consequences of those
alternatives into consideration, we must choose a course of action and start to make the
goals that we wish to achieve realistic.

2.1.3 Accounting information and its role in decision-making
process
The need for a decision arises in our life and business because we are faced with a
problem and alternative courses of action are available, and we need more information

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of accounting information will be updated and filed day by day. It is necessary
information for a potential investor.
Finally, accounting information is prepared and reported in a standard way. In other
words, it is not biased towards a particular user group or vested interest.

2.1.4 Managers and management accounting
In business, managers (as internal decision makers) require special-purpose financial
reports to help in planning and controlling the operations of an entity (Hogget, Edward,
& Merlin, 2006). Following Hoggett, Edward, and Merlin in 2006, the manager need
answers to some questions as:
 How much profit is being earned?
 What product should be produced?
 What resources are available?
 What is the most efficient production process?
 What will be the effect of increasing or decreasing selling price?
 How much is owing to outsiders?
 Will cash be available to pay debts as they fail due?
 What are the comparative effects of owning or leasing facilities?
In order to answer theses and many other questions, managers must base on a lot of
information systems processed by different sciences; one of them is management
account.
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Management accounting (also referred to as managerial accounting) is a specialized sub-
set of accounting concerned with focusing on internal needs of businesses, they provide
financial and other information to all levels of management (as managers, chief
executive officers, general managers, and account managers) in an organization to assist
them to carry out their planning, controlling, decision making responsibilities.

All
Manufacturing
overhead
When
costs
are 
incurred
Work in
process
inventory
on Balance
Sheet
When
goods
are 
finished
Finished
Goods
Inventory
on Balance
sheet
When
goods
are 
sold
Cost Of
Goods
Sold

For example, Company A produces and sales shoes, to make shoes, during 2009, this

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and are treated as a period cost, there are deducted totally from income in the period they
incur to calculate net profit.
Figure 2: Variable costing method
Direct material
Direct labor
Variable
Manufacturing
overhead
When
costs
are 
incurred
Work in
process
inventory
on Balance
Sheet
When
goods
are 
finished
Finished
Goods
Inventory
on Balance
sheet
When
goods