i PERFORMANCE MEASUREMENT AND COSTING SYSTEM IN NEW VIETNAMESE COMPANIES BY PHAM THI THU HANG E0600071 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 OCTOBER 2011 ii DECLERATION 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 12,778 words. PHAM THI THU HANG Date: iii ACKNOWLEDGEMENT This graduation thesis is the result of twelve weeks of research and writing during the autumn of 2011. It has been an interesting and learning experience. In fulfilling this thesis, I would like to give my special thanks to many people for their significant help, contribution, and recommendations during my writing process. First and foremost, special mentions and grate thanks must go to Mrs. Nguyen Van Anh , my supervisor at International School, Vietnam National University, Hanoi. With his master knowledge and experience in writing thesis, he has wholeheartedly helped me in writing this thesis. I could not have been able to complete this thesis without his positive suggestions and guidance. Secondly, I want to thank all the managers and staffs of Hungyen Garment Join stock Company, for their cooperation that helped and inspired me in writing. Thirdly, I would also like to give my heartfelt thanks to the authors who provided me with valuable books for my thesis. My appreciation is to my family and my friends for their supports and encouragements. Gratefulness is to the readers also, whose feedback will help much in improving the thesis. Hanoi, October 2011 Pham Thi Thu Hang iv PERFORMANCE MEASUREMENT AND COSTING SYSTEM IN NEW VIETNAMESE COMPANIES BY PHAM THI THU HANG OCTOBER 2011 Supervisor: Mrs. Nguyen Van Anh ABSTRACT The graduation projects the results of research performance measurement and costing system in new Vietnamese companies. The objectives of the project were to understand impact of performance measurement and costing system in new Vietnamese companies which show the importance of performance measurement and costing system. Benefits of performance measurement and costing system will be required to improve the competitiveness of new enterprises in the 21st century. A performance based costing system was discussed, highlighting its capability to measure performance in such areas as knowledge management and information systems, as well as performance across functions and organizations. The steps for setting up that Performance Based Costing system were described. Finally, a framework describing the relationship among Performance Based Costing system components was presented in the hope that it would provoke more thought on and development of the concept In this thesis, the researcher uses case study of Hungyen Garment Join stock Company because this Branch may be given more accurate information and able to take the right actions. v TABLE CONTENT DECLERATION ii ACKNOWLEDGEMENT iii PERFORMANCE MEASUREMENT AND COSTING SYSTEM iv IN NEW VIETNAMESE COMPANIES iv LIST OF FIGURES AND IMAGES vii LIST OF ABBREVIATION viii CHAPTER 1 - INTRODUCTION 1 1.1 Introduction 1 1.2 Problem statement 3 1.3 The objective of research 3 1.4 The structure of paper 5 2.1 Costing systems 6 2.1.1 The overview of costing system 6 2.1.2 The importance of costing systems 7 2.1.3 The type of costing systems 9 2.1.4 Design of a Performance Based Costing (PBC) system 13 2.2 A framework for measuring performance in new enterprise 17 2.2.1 Type of performance measurement 17 2.2.2 The importance of measurement performance 20 2.2.3 Issues with business performance measurement (BPM) 20 2.2.4 The framework for performance measurement in new company 24 2.3 Conceptual framework 26 2.3.1 Performance Reference Model (PRM) 26 2.3.2 Contingency theory 28 CHAPTER 3 - RESEARCH METHODOLOGY 31 3.1 Research objective 31 3.2 Research design 31 3.2.1 Research approach 31 3.2.2 Data collection 32 vi CHAPTER 4 - DATA ANALYZE 34 4.1 Case study of a textile company 34 4.1.1 The introduction of Hungyen Garment Join stock Company 34 4.1.2 The producing 35 4.1.3 Market share 36 4.2 The costing system and performance measurement of the Hungyen Join stock Company 36 4.2.1 The differences of costing systems 37 4.2.2 The set up of an accounting system of Hungyen Join stock company 38 4.3 The designing performance measurement system in Hungyen Join stock company 40 CHAPTER 5: CONCLUSION 44 5.1 Summary 44 5.2 The implementation 46 5.2.1 Accounting system 46 5.2.2 Costing system 47 5.2.3 Performance measurement 49 REFERENCE: 52 vii LIST OF FIGURES AND IMAGES Figures Title Page CHAPTER 2: Figure 1: Performance Reference Model 28 CHAPTER 5: Table: Business Performance measurement critical success factors 51 viii LIST OF ABBREVIATION Abbreviation Full name ABC Activity Based Costing PM Performance Measurement TDWI The Data Warehousing Institute BPM Business Performance Measurement SA Sustainability Analysis SCM Supply Chain Management ECR Efficient Consumer Response GAAP Generally Accepted Accounting Principles PBC Performance Based Costing VCA Value Creation Area CSFs Critical Success Factors PRM Performance Reference Model WTO World Trade Organization FMS Foreign Military Sales FMF Foreign Military Financing 1 CHAPTER 1 - INTRODUCTION 1.1 Introduction In the 21st century, firms need not just operate in different countries; they must develop global strategies to coordinate. Their operations at all phases of the value-adding chain (D‘Amours et al., 1999). Coordination of the supply chain has become strategically important as new forms of organization, such as virtual enterprises, global manufacturing and logistics networks, and other company-to-company alliances, evolve. The Japanese are often praised for the way they use information sharing to improve supply chain competitiveness. Information exchange has become a key component in their manufacturing strategies (Dyer and Ouchi, 1993). Companies in all sectors are examining ways to reduce costs, shorten product development times and manage risks. The transactions between companies in supply chains are characterized by adding value up through the chain and incurring costs (and consequent payments) down the chain. Supply chain management aims to reduce costs, risks and lead times associated with these transactions, thus releasing value. There is limited research on supply chain management in the low-volume Engineer to Order (ETO) sector. This is in stark contrast to the extensive literature on high-volume sectors, particularly the automotive sector (Hicks et al., 2000). Performance measurement is critical to the success of any ―for-profit‖ organization because it creates understanding, molds behavior, and improves competitiveness. World-class firms recognize the central role measurement plays in their success and are often compulsive about their performance measurement efforts (Fawcett and Cooper, 1998). Activity Based Costing (ABC) is a product costing technique that has gained attention. Turney,(1996) defined ABC as a method of measuring the cost and performance of 2 activities and cost objects. It assigns costs to activities based on their consumption of resources and then allocates costs to cost objects based on their required activities. The focus of ABC is on accurate information about the true cost of products, services, processes, activities, distribution channels, customer segments, contracts and projects. ABC helps identify problems and opportunities and formulate solutions to problems or ways to take advantage of opportunities. It does so by providing financial and non- financial information about activities and cost objects. Numerous articles address the design and implementation of ABC systems (Shank and Govindarajan, 1993; Alan, 1995; David and Robert, 1995; Booth, 1996). According to Innes and Mitchell (1990), ABC provides process control information. A measure of the volume of each activity (cost driver) is used to generate a cost rate for estimating production cost, and as a performance measure for the activity concerned. In practice, most applications of ABC make arbitrary allocations of common costs. The search for the activities which connect costs to products and processes, and for the cost drivers which proxy for them, involves compromise between accuracy and manageability. The result is that some indirect costs are excluded from the cost-pools associated with a practical set of cost drivers (Armstrong, 2002) Strategic performance measurement defines the focus and scope of management accounting. Specifically the requirement is that management accounting practice recognize and reflect choices made in organizations for management accounting to be relevant (Atkinson, 1998). For the purpose of strategic performance measurement, the organization‘s objective can be entirely financial, social, or a mix of both financial and social objectives. It is widely believed that the large-scale use of EDI leads to improvements in the communication infrastructure between organizations, and that this, in turn, strengthens the economy of a nation and possibly a group of nations. It is also [...]... and costing system? 2 How to estimate the most suitable performance measurement and costing system in new Vietnamese companies? 3 What is the threat for a new enterprise in implementation performance measurement and costing system? 4 What are the solutions for the above problems? 1.3 The objective of research This paper highlights the importance of costing system and performance measurement in the current... portion of overheads, and these costs are used in the costing of that particular job In examining what are the different costing systems based on the same principle as job costing, systems such as batch costing and contract costing could also be considered When these costing systems are used, the costs relating to a particular batch or a particular contract are identified and used in costing that batch or... ideas of the research and the recommendations are possible for the implementing costing system and performance measurement in Vietnam – a developing country 5 CHAPTER 2 - LITERATURE REVIEW 2.1 Costing systems 2.1.1 The overview of costing system Costing systems are components of a broader accounting system used by a given company or organization The main function of the costing system is to keep a focused... manufacturing and market environment Giving the guidance for the new companies which are confused the suitable system for their operation 3 Costing is basically the ascertainment of cost whether for a specified thing or activity To ascertain cost, we need to apply accounting and costing principles, methods and techniques In view of the complexity of businesses and increasing changes in industry, trade and. .. accuracy of the system will increase, but at the same, the time measurement cost will increase The cost of implementing and maintaining a complex system can become excessive If the product cost is higher using this new system than with the traditional costing systems (due to measurement cost and complexity of system) , then PBC system should be reexamined, starting with identification of value creating areas... availability of information technology, including ERP software, and improved database and analytic capabilities (Krell, 2002) Despite the widespread understanding of the link between strategy, measurement and success and the need for some balance between internal/external, leading/lagging indicators, internal, lagging metrics dominate performance measurement, rather than external and leading indicators... level of profit Costing that is based on variable costs per unit, without taking fixed costs into account at that stage, is known as marginal costing Marginal costing is a tool for management decision-making, as it shows the effect on contribution and therefore on profit of increasing sales by one further unit Decisions on expanding or discontinuing product lines may be taken by analyzing the contribution... service and deciding which product lines should be expanded and which should be discontinued 10 The main disadvantage of marginal costing is that the distinctions between fixed and variable overheads are not as clear-cut in reality as they are in theory The price, fixed cost and variable cost can all vary frequently within an accounting period, and stepped costs are very common in reality, becoming relevant... Activity Based Costing (ABC) When using different costing systems, you shouldn't rule out ABC, if absorption costing isn't for you ABC also attempts to allocate to the products and services, all the costs incurred in producing them, including the overhead costs However ABC aims to overcome some of the problems encountered by absorption costing, in terms of allocating overhead costs to products and services... pre-specified and measured and a deterioration of performance In contrast, the firms in the anomalous cases used a performance measurement approach that was based on ambiguity and intrinsic motivation In these approaches, information quality tends to be high and require dialog across levels in the organization to determine what the right thing to do in a particular context Moreover, since individuals . measurement and costing system in new Vietnamese companies which show the importance of performance measurement and costing system. Benefits of performance measurement. accounting and costing principles, methods and techniques. In view of the complexity of businesses and increasing changes in industry, trade and commerce, costing