TR NG IH CM TP.HCM UNIVERSITEÙ LIBRE DE BRUXELLES HO CHI MINH CITY OPEN UNIVERSITY SOLVAY BRUSSELS SCHOOL MBAVB2 VUONG THI THUY TRANG MANUFACTURING COST CONTROLLING AT UNITED INTERNATIONAL PHARMA FOR A PERIOD OF 2008 – 2010 MASTER PROJECT MASTER IN BUSINESS ADMINISTRATION (PART-TIME) Ho Chi Minh City (2011) VuongThiThuyTrang Final Project – MBAVB2 DECLARATION I hereby declare that this final project is my own work And that all the materials resources have accurately reported I enclosed here eight hard copy and two CDs of my final project “Manufacturing cost controlling at United International Pharma for a period of 2008-2010” to Solvay Business School and Ho Chi Minh City Open University VuongThiThuyTrang Final Project – MBAVB2 SUPERVISOR’S COMMENTS Ms Trang has been working hard for this thesis She applied her knowledge of manufacturing cost technique and working experience to present a detailed analysis activity of manufacturing cost performance in order to figure out manufacturing cost controlling experience of United International Pharma She has made much effort in collecting data and analysis to find out manufacturing cost controlling of the Company I approve this thesis for final presentation in front of the Examination Board Dr VÕ TH VuongThiThuyTrang Final Project – MBAVB2 ACKNOWLEDGEMENTS Firstly, I would like to express my deep gratitude and sincere thanks to my supervisor Dr Vo Thi Quy for her valuable advises, attentions, guidance and fast feedback which brought me to the right direction of the research In addition, I would like to send my big gratitude to Ms Le Thi Thanh Lan and all my colleagues in United International Pharma who assist me to complete this final project Finally, I wish to acknowledge and thank to all professors, co-ordinators Mr Serge Bywalski, Ms Tran, Ms Hien, Ms Ha and my classmates of MBAVB2 program who have delivered valuable experience, knowledge and assistance to me during the course VuongThiThuyTrang Final Project – MBAVB2 TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1: INTRODUCTION I Problem context II Statement of the problem III Objective of the research Study IV Scope and limitation of research study V Study methods VI Organization CHAPTER 2: REVIEW OF RELATED THEORY & LITERATURE I Cost Definition and Classification Definition Classification of the cost II Cost Control Definition of cost control The role of cost control Factors affecting the cost control Cost management 4.1 Standard costing method 10 4.2 Variance analysis .12 4.2.1 Direct material cost variances .13 4.2.2 Direct labor cost variances 14 4.2.3 Variable and fixed production overhead variances 14 4.3 Controlling cost 17 VuongThiThuyTrang Final Project – MBAVB2 4.3.1 Controlling material cost 17 4.3.2 Controlling labor cost 19 4.3.3 Controlling production overhead 20 CHAPTER 3: UIP AND ITS MANUFACTURING ACTIVITIES .23 I United International Pharma Inc (UIP) 23 Mother company – United Laboratories, Inc (Unilab) 23 UIP organization 24 UIP products 25 Channel 25 4.1 Wellness Channel 25 4.2 Illness Channel 25 4.3 Ethical channel 26 UIP position on Vietnam pharmaceutical market 26 UIP’s financial status 28 II The UIP’s manufacturing cost 29 The direct material 29 1.1 Price 30 1.2 Quantity .30 Labor cost 33 2.1 Labor cost items .33 2.2 Allocation labor cost .34 Factory overhead .41 3.1 Factory overhead items cost 41 3.2 Allocation of factory overhead 43 VuongThiThuyTrang Final Project – MBAVB2 CHAPTER 4: FINDINGS DISCUSSION 49 I Materials 49 Price 49 1.1 Variances analysis 49 1.2 Findings 49 1.2.1 Exchange rate .49 1.2.2 Consumer Price Index 50 Quantity 52 2.1 Variances analysis 52 2.2 Findings 54 II Labor cost .55 Variances analysis .55 Findings .56 III Overhead 57 Variances analysis .57 Findings .59 IV Manufacturing cost controlling performance 59 V Summary of factors negatively affecting to the manufacturing cost 60 CHAPTER 5: CONCLUSION AND SUGGESTION 63 I Conclusion 63 II Valuable lessons, further suggestions and further research 64 REFERENCES 69 APENDIX A 71 APPENDIX B 72 VuongThiThuyTrang Final Project – MBAVB2 LIST OF TABLES Table 1: Profit & Loss of UIP from 2008-2010 28 Table 2: Details of COGS versus net sales from 2008-2010 29 Table 3: Raw material formulation of Ceelin Syrup 31 Table 4: Packaging material formulation of Ceelin Syrup 31 Table 5: Material cost of Ceelin Syrup 32 Table 6: Main items of direct labor cost 2009 33 Table 7: Direct labor cost driver in workforce allocation 37 Table 8: Cost assigned in activities of Decolgen Forte box 100 37 Table 9: Cost assigned in activities of Obimin box 30 38 Table 10: Status of product in process, May 2009 – DL 39 Table 11: Actual direct labor allocation, May 2009 40 Table 12: Actual unit cost, May 2009 40 Table 13: Details of Factory expenses of 2008-2010 42 Table 14: Factory overhead cost per hour 44 Table 15: Factory cost assigned to Decolgen Forte box 100 45 Table 16: Factory overhead cost assigned of Obimin box 30 46 Table 17: Status of product in process, May 2009 – FOH 47 Table 18: Actual FOH allocation, May 2009 47 Table 19: Actual FOH unit cost, May 2009 48 Table 20: Price variance from 2008-2011 49 Table 21: Historical data of exchange rate from 2007-2011 50 Table 22: Material usage variance 53 Table 23: Direct labor cost variance analysis 56 VuongThiThuyTrang Final Project – MBAVB2 Table 24: FOH variance analysis 58 Table 25: Manufacturing cost controlling performance 59 VuongThiThuyTrang Final Project – MBAVB2 LIST OF CHARTS Chart 1: UIP Organization 24 Chart 2: UIP position on Vietnam Pharmaceutical market 27 Chart 3: UIP position on Vietnam OTC Pharmaceutical market 27 Chart 4: Allocation of Direct labor schedules 35 Chart 5: Allocation of factory overhead cost schedules 43 Chart 6: Manufacturing cost controlling performance 60 58 VuongThiThuyTrang Final Project – MBAVB2 Table 24: FOH variance analysis In million ACT 2008 BUD Var ACT 2009 BUD Var ACT 2010 BUD Var Personnel cost 6,448 6,500 99% 9,148 7,497 122% 12,637 10,017 126% Depreciation 4,000 3,414 117% 4,419 3,263 135% 5,963 4,849 123% Power & Electric 3,349 3,831 87% 3,378 3,684 92% 5,376 4,714 114% Mainternances 2,626 2,478 106% 1,388 756 184% 2,678 1,399 191% 161 498 32% 519 636 82% 816 715 114% Employee welfare 1,453 1,211 120% 1,145 1,308 88% 2,143 1,879 114% Others 6,520 5,158 126% 8,964 5,275 170% 8,458 8,204 103% 24,558 23,091 106% 28,962 22,418 129% 38,071 31,777 120% 229,716 226,229 102% 297,702 237,718 125% 397,267 354,250 112% 107 102 105% 97 94 103% 96 90 107% Research & development Total FOH Production Volume (thousand) FOH/Unit It is mainly due to the fact that yearly production volume is increase lower than the expenditure increase, or some item costs may occur which is higher than the budgeted cost In practice, most of item costs are spread equilateral over twelve months of the year and the fact is that they occur once or twice a year, but the accountant is recorded once a month The total FOH cost is very high in some months Unfortunately, the low volume in the same month will lead to a very high unit cost for those products produced in that month As a result, most of actual unit FOH costs exceed the budget unit FOH cost about by 30% 59 VuongThiThuyTrang Final Project – MBAVB2 The FOH cost per unit was reduce year by year (107 in 2008, it was down 97 in 2009 and 96 in 2010 It shows that the capacity was maximize to get the highest efficiency of production It contributed to reduce the COGS, and cover the loss in materials Findings Company’s solution: Company has taken different actions to control and reduce the factory overhead expenses over the past two years 2009 and 2010 One of the actions is to increase production volume to maximize the production line utilization and capacity As shown in table 2, the overhead reduces from 12.4 in 2008 to 11.4 in 2009 and then keeps reducing to 0.6 in the year 2010 Utilization of the current resources is one of the key successes of the company It should be closely monitoring the budget cost for the factory and thoroughly conduct the analysis on actual costs so as to adjust the plan and correct the activities to suit the market changes and to assure the company to achieve its goals and targets IV Manufacturing cost controlling performance: Table 25: Manufacturing cost Performance Y ear Exchange Rate 2008 2009 2010 2011 CAGR 2% 8% 7% 8% 49% CPI 23% 7% 12% 18% (8%) % COGS 47% 49% 49% 49% 2% The above table consists of three factors which are Exchange rate, CPI, and % COGS Among those, the input factors: Exchange rate and CPI has been highly 60 VuongThiThuyTrang Final Project – MBAVB2 fluctuated in the recent years, while the output of manufacturing cost – COGS –was rather stable over the four years Specifically from 2008 to 2011, the Exchange rate increased 26%, CPI increased 60%; however the COGS keep the margin around 49% The following chart can depict the above situation better Chart 6: Manufacturing cost controlling performance 60% 50% 40% Exchange Rate 30% CPI % COGS 20% 10% 0% V Summary of factors negatively affecting to the manufacturing cost: Hours spent on direct labor for each product: This factor is in the category of the level of technology It will increase if company has not invested or improved to upgrade the technology used in manufacturing As a result, direct labor cost will be increasing accordingly which will make more wastage Labor skill: Low skill and competence of workers is one of the causes of high wastage which make materials costs increase, especially in packaging department 61 VuongThiThuyTrang Final Project – MBAVB2 Actual expenditure of direct labor cost: This includes the wages, social insurance and bonus An improper production planning will make a waste on the man power and make direct labor cost higher Working overtime too much will increase direct labor cost significantly while the company produce the same amount of output and may increase the wastage Numbers of direct labors used also directly impacts on the direct labor cost Hours spending of machinery for each product: This factor depends on the quality standard of each product Outdated technology used will increase the duration of making one product Machine hour includes processing hours and change-over hours Processing hours is the actual duration that a product is made Change-over hours is duration of cleaning, doing adjustments to and setting up the machinery to produce another product from one Products with small volume will need the same changeover hours as high volume products, so its unit cost of FOH will be higher The change-over hours used for low volume products, allocated to less number of units of products will make cost of factory higher than that of the high volume ones The actual expense of the factory related to operations such as the quality control, research & development, warehouse, and admin service department Purchasing activities have many influences on the manufacturing cost Firstly the direct materials cost, the high price of materials increase the manufacturing cost in a direct manner Secondly, the services and indirect material cost of other factory department such as spare parts for equipment and machinery, material costs for R&D activities, laundry services for worker uniform will lead to the high factory overhead cost, and finally all of them will be added to the unit cost as well One of the most important objectives of purchasing department is to purchase material at a stable 62 VuongThiThuyTrang Final Project – MBAVB2 price during the year to stabilize the COGS As the fact that the prices of materials price increased too fast during the last three years due to the high inflation in the year 2008 and the increase of foreign exchange rate The inventory policy also has high influence on the manufacturing cost If the inventory level is low, the company will face the problem of material shortage, and when material price increases, it has to purchase more at a higher price level, leading to the increase in the cost of manufacturing 63 VuongThiThuyTrang Final Project – MBAVB2 Chapter CONCLUSION AND SUSGGESTION I Conclusion: Cost control is one of the most important ways to bring success to a business and make it more competitive It is a system wide, integrated approach that centralizes management’s attention on activities with the goal of improving customer values, reducing costs, and resulting in more profit To be competitive, management always keeps in mind the fact of how to cut down products’ costs to bring immediate savings by eliminating wasteful activities At UIP, material usage variance is about 2% of the total value of production cost (table 22) Standard costs are established for achieving objectives; consideration is paid to what resources are needed, how much the resources cost It relates to the budget costs which are price and quality of service The formulation is set up by standard quantity and standard price, but raw materials are calculated by weightedaverage costing, as it does not make fluctuation of the cost in period Comparison between actual costs with standard costs and budgeted costs may indicate chances to reduce costs in the short term In general, the larger the cost overrun, the wider scope there should be for savings Costs that are higher than standard costs usually indicate the business to reduce costs in the longer term Lower costs may indicate good management, but might also reflect quality failings or impending problems Several factors have been defined as a contribution to materials cost The first one is quantity of raw materials & packaging materials The highest wastage comes from 64 VuongThiThuyTrang Final Project – MBAVB2 packaging materials due to low automation of machinery and labor skills Second one is the price of materials Price is computed by the weighted-average costing method And the inventory level of materials is the factor affecting the price The negotiation skill of purchasing people is directly affecting to materials’ price as well Besides that, consumer price index and foreign exchange rate are external factors affecting the price of materials Effective use of a systematic approach will highlight opportunities to control costs with low risk In some cases, there will be much savings such as cutting the cost of supplies Key factor affecting to direct labor are payroll costs Other factors which may change the direct labor cost is the time spending In addition to raw materials and direct labor, the factory overhead expenses By comparison between standard cost and actual cost, it is easy to find out the difference of ingredients affecting the production cost One of the factors that affecting overhead is machinery techniques now is outdated, consuming high maintenances cost and electric but with low efficiency II Valuable lessons and further suggestions and further research: Standard cost for material items should be applied at a higher level: First and foremost is to minimize the material usage variance by strictly following the standard formulation set out beforehand by the product manager Also to standardize cost for basic products and to develope standards for new products should be built That is the way to achieve the target and benchmark product cost in the long term Secondly, the standards of costing behavior has been set in the ideal condition There is no consideration of the wastage or loss of material in process, or no inclusion of idle time when calculating labor unit cost As literature framework 65 VuongThiThuyTrang Final Project – MBAVB2 stating that “Perfect operating conditions are: no wastage, no spoilage, no inefficiencies, no idle time, no breakdowns Ideal standards are likely to have an unfavourable motivational impact because reported variances will always be adversethat the unit cost of material and labor unit cost will be lower than the actual numbers” In this case, the standards are not precise enough to depend on as the benchmark and target for adjustments To make the adjustment for the present ideal standard at the company, suggestions to apply changes in setting up the standards such as Changes in the way of product cost classification: the application of classification of manufacturing costs into costs of material, labor cost and overhead should be used to make the present procedure better and to improve the correctness in calculation as well Moreover, it’s necessary to separate overtime cost of labor from the direct labor one as it is indirect and needs to be put into overhead cost for calculation of unit expense By doing so, the unit cost of product is calculated more precisely and can help managers control product costs better and preventing the wastage of material and labor cost used Moreover in human resourse aspect of managing, ratios of efficiency applied will also help solve the problems of idle time as well as the inefficiency at work Besides that, a better system of managing stock inventory for material should be used, specifically by applying the functions and ratios to calculate the reorder quantity, reorder level, economic order quantity, minimum and maximum inventory control level so factory managers can forecast and budget the inventory by knowing exactly when to order as well as how much to order manufacturing need in the period each time according to 66 VuongThiThuyTrang Final Project – MBAVB2 Incentive programs: reward programs for purchasing achievements needs to be installed and applied together with other benefit and bonus packages such as bonus for sale performance done by the human resource department Develop local outsourced materials: Switching to local suppliers, or trying to develop contract in VND is so as to avoid the increase of foreign exchange rate This is also a way to control the price of materials the company is in the process of application Long-term contract of materials: with supplier to sign or renew long-term contract to stabilize the price for a period of time, or cooperate with Head Office to have regional contract to get a better price or special discount or longer credit term payment This way may help stabilize materials price in a longer period Develop alternative suppliers: Find out more suppliers, open alternative choice for the cheaper suppliers Minimize the risk that company depends on one supplier, and once there is something wrong with one supplier, there are still the alternatives Transfer price: When market is in much demand for the specific material the company needs during the financial crisis period, the inflation happens leading to all material prices increase It’s necessary to implement the policy that increases the price of the products The price increase of products should certainly be linked with the analysis of material price to assure the safety of the company income Improve direct labor productivity: It’s important to often the appraisal or redesign processes to eliminate duplication of effort and to cut out time wastage, make more use of technology and automation Rescheduling working time should be done to reduce overtime payment Motivating workers by providing them with 67 VuongThiThuyTrang Final Project – MBAVB2 monthly or quarterly rewards for best performers is also a good way to increase the productivity Process value analysis: is used so as to find out in what ways activities are performed and how well they are performed Functional lines should analyze and measure the manufacturing performance regularly Enhance the employee awareness: In reality, every employee, who comes to work, will cost the company a specific amount in the period of time If they are aware of the company working orientation and try to finish their responsibility in the best way, this will help to save the company expenditure Incentive and penalty policy should be set up to encourage personnel over the company Eliminate non-value added activities: the company can use the resources saved from eliminating non-value added activities to provide greater service to customers Strategic cost analysis is the use of the cost data to develop and identify superior strategies that will produce a sustainable competitive advantage If the company can safely eliminate non-value added activities, then it should that By identifying and cutting them, the company can save more and more competitive Production processes need to be improved to minimize wastage of raw materials and energy Modern quality control tools should be considered to implement to reduce rejection rate and reworking costs Suggestion for further research: This study has identified some of the main findings that are causing the issues of the company’s present manufacturing costing controlling method as well as suggesting some solutions for it However due to the limitations as well as time budgeting, the research hasn’t been covered all of the wide dimension of the specific field of the 68 VuongThiThuyTrang Final Project – MBAVB2 manufacturing cost controlling of a factory in general, UIP in specifically, suggestion for further research in the field so that the study would be complete and applicable to other companies in the sector with the same situations: Suggestion for further research on variance analysis of the factory overhead: to get a better insight about the variance of the overhead, the variance should be analyzed both at the fix and variable overhead level instead of the total overhead variance as in the study Further and advanced research on other method of manufacturing cost controlling analysis such as ABC analysis, Break-even base analysis, target costing and life cycle costing to have a better knowledge of the present situation of the manufacturing and expenditure of the factory on production cost to have proper and in time measure to make good management decisions Last but not least, suggestion on other methods of costing controlling such as lean manufacturing and quantitative analysis and other more advanced methods to have a complete view on the production cost and how to manage it to bring the most profit to the manufacturing company 69 VuongThiThuyTrang Final Project – MBAVB2 REFERENCES A BOOKS Blocher, E., K Chen, and T Lin (1999) Cost management: A Strategic Emphasis The McGraw-Hill Companies, Inc Govindrajan V and John K Shank (1992), Strategic Cost Managerment John K Shank (1989), Strategic Cost Management Manoj Anand , Review of research on the theory and practice of Cost Management Michael J Ginzberg & Gordon Shilling Law (1984), Information System and Cost Control Mohamed M El-Dynasty, A Frame work to Accomplish Strategic Cost Mangement Ronald W Hilton (1994), Managerial Accounting B SLIDES OF THE COURSES Prof Claude Jottrand (2008), Corporate Finance Slide – From Business Planning to Financial Modelling and Evaluation Prof Jean-Paul Loozen & Michel Massart (2008), Accounting and Introduction to Corporate Finance C OTHERS http://www.thefreedictionary.com/cost http://classes.bus.oregonstate.edu 70 VuongThiThuyTrang Final Project – MBAVB2 http://www.wisegeek.com/what-is-cost-allocation.htm, date 17 Oct 2011 BPP Learning Media Ltd (2007), ACCA F2 BPP Learning Media Ltd (2007), Accounting for cost - CAT Paper BPP Learning Media Ltd ( 2007), Accounting management, ACCA F2 71 VuongThiThuyTrang Final Project – MBAVB2 APPENDIX A ACCOUNTING FUNCTIONS 1) Labor turnover rate Monthly turnover rate = 2) Labor efficiency Labor Efficiency rate = 3) Efficiency ratio: Efficiency ratio = 4) Capacity ratio: Capacity ratio = 5) Production volume ratio: Production volume ratio = x 100 72 VuongThiThuyTrang Final Project – MBAVB2 APPENDIX B BRIEF OF QUESTIONS & DISCUSSIONS USED IN INTERVIEW Note: The following document outlines the structure of the discussion and lists the type of questions to be asked However, the interviewing is aiming to define practicable controlling method that the company is applying Interview 1: Understand the manufacturing activities and production controlling their activities: How to manage the materials usage? Could UIP reduce the processing time for existing product? Interview 2: To discover the purchasing behavior: Could you please share some hint to get good price of materials? Interview 3: To identify the company’s management method: To control the direct labor, FOH, materials cost? What does the company to maximize the FOH expenses? How often we the analysis for production cost? ... also managing of material inventories It includes the process of material requisition, valuing materials and inventories and controlling material in stock All factories have to buy material for. .. UIP’s manufacturing cost: The direct material: The direct material includes raw material and packaging material Raw materials are ingredients for medicine such as riboflavin; acetaminophen, flavor…... analysis activity of manufacturing cost performance in order to figure out manufacturing cost controlling experience of United International Pharma She has made much effort in collecting data