Cost management in bamboo airways status and solution for the development

ĐẠI HỌC QUỐC GIA HÀ NỘI
KHOA QUỐC TẾ
*****************

VÕ THỊ DIỆP ANH

COST MANAGEMENT IN BAMBOO AIRWAYS
STATUS AND SOLUTION FOR THE DEVELOPMENT

QUẢN TRỊ CHI PHÍ TẠI CƠNG TY CỔ PHẦN HÀNG KHƠNG
TRE VIỆT, THỰC TRẠNG VÀ GIẢI PHÁP HOÀN THIỆN

LUẬN VĂN THẠC SĨ

Hà Nội - 2020


ĐẠI HỌC QUỐC GIA HÀ NỘI
KHOA QUỐC TẾ
*****************

VÕ THỊ DIỆP ANH

COST MANAGEMENT IN BAMBOO AIRWAYS
STATUS AND SOLUTION FOR THE DEVELOPMENT

QUẢN TRỊ CHI PHÍ TẠI CƠNG TY CỔ PHẦN HÀNG KHƠNG
TRE VIỆT, THỰC TRẠNG VÀ GIẢI PHÁP HOÀN THIỆN
Chuyên ngành: QUẢN TRỊ TÀI CHÍNH
Mã số: 8340202.01QTD

LUẬN VĂN THẠC SĨ
Người hướng dẫn khoa học: PGS. TS. Nguyễn Văn Định

Hà Nội - 2020


ACKNOWLEDGEMENT

I declare that this master’s thesis is my own research and the data and the material
used in this thesis have clear sources and references to all the sources. The result of this
thesis is honest and derived from the actual situation of the organization.
In order to complete this master’s thesis, I owe a lot of people many thanks for their
supporting.
First of all, I would like to express my endless thanks and gratefulness to my
supervisor Assoc. Prof. Dr. Nguyen Van Dinh. His kindly support and continuous
advices went through the process of completion of my thesis. Without his assistance the
thesis would not have been done effectively.
So far, I would like to thank all the lectures and staffs of International school –
Vietnam National University Hanoi and International Faculty for their teaching and
supporting me to achieve knowledge and experience.
My special thanks to all staffs and management’s branch of Bamboo Airways for
their kind assistances and support in providing me data and advices to complete the
research.
Thank you!

1


ABSTRACT
Under the global trend of economic integration, cost management is playing an

extremely important role in business. As a result, cost management has become a matter
of special concern for any enterprise.
The dissertation with title: “Cost management in Bamboo Airways, status and
solution for the development”, is conducted with a focus on clarifying the following
matters:
- The dissertation has presented, analyzed, and clarified key contents of cost
management at Bamboo Airways Joint Stock Company.
- By analyzing facts at Bamboo Airways Joint Stock Company, the dissertation
presents an overview picture of actual cost management practices at Bamboo Airways.
- By conducting a field survey on actual cost management at Bamboo Airways Joint
Stock Company, the dissertation has identified the limitations in the organization of cost
management practices. This is an important foundation for developing a complete cost
management plan.
- The dissertation discusses the necessity and practical significance of the
organization of cost management at Bamboo Airways Joint Stock Company.
- It proposes a plan to improve cost management at Bamboo Airways Joint Stock
Company from two perspectives: The State and Bamboo Airways Joint Stock Company.
In general, cost management and business performance are relatively wide and
complex issues and Bamboo Airways Joint Stock Company has experienced certain
obstacles in dealing with these issues. Therefore, the author wants to learn more about
current state of cost management at Bamboo Airways Joint Stock Company to help
remove these obstacles.

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TABLE OF CONTENTS
ACKNOWLEDGEMENT ................................................................................................. 1
ABSTRACT ...................................................................................................................... 2
LIST OF FIGURES ........................................................................................................... 5

LIST OF TABLES............................................................................................................. 6
LIST OF ABBREVIATIONS ........................................................................................... 7
CHAPTER 1: INTRODUCTION ...................................................................................... 8
1. The necessity of the research ......................................................................................... 8
2. Research objectives ....................................................................................................... 9
3. Research Scope .............................................................................................................. 9
4. Research methodology ................................................................................................ 10
5. Structure of the thesis .................................................................................................. 10
CHAPTER 2: THEORETICAL BACKGROUND AND LITERATURE REVIEW OF
COST MANAGEMENT ................................................................................................. 11
2.1 Theoretical background of cost and cost management in business ........................... 11
2.1.1 Definition of cost management in business ............................................................ 11
2.1.2 Contents of cost management in business .............................................................. 15
2.1.3 Cost management in aviation company .................................................................. 25
2.2 Literature Review ...................................................................................................... 32
CHAPTER 3: RESEARCH METHODOLOGY ............................................................. 34
3.1 Secondary data collection method ............................................................................. 34
3.2 Data processing method ............................................................................................ 34
CHAPTER 4: COST MANAGEMENT AT BAMBOO AIRWAYS JOINT STOCK
COMPANY ..................................................................................................................... 35
4.1 General Introduction to Bamboo Airways Joint Stock Company. ............................ 35
4.1.1 Overview of Bamboo Airways Joint Stock Company ........................................... 35
4.1.2 Characteristics of organizational management structure........................................ 36
4.1.3 Business performance of Bamboo Airways from 2017-2019 ................................ 36
4.2 Cost management at Bamboo Airways Joint Stock Company .................................. 38
4.2.1 Cost management Organization ............................................................................ 38
3


4.2.2. Cost management at Bamboo Airways Joint Stock Company .............................. 40

4.3 Evaluation of cost management at Bamboo Airways Joint Stock Company ............ 51
4.3.1 Achievements ......................................................................................................... 51
4.3.2 Limitations and reasons .......................................................................................... 52
4.4 Solutions for development of cost management at Bamboo Airways Joint Stock
Company .......................................................................................................................... 54
4.4.1 Complete the classification method of costs .......................................................... 54
4.4.2 Development of cost estimation ............................................................................. 55
4.4.3 Implementation of cost management information .................................................. 56
4.4.4 Improvement of analysis and provision of cost information .................................. 57
4.4.5 Improvement of cost control .................................................................................. 61
4.4.6 Other improvement solutions ................................................................................. 62
CHAPTER 5: CONCLUSION ........................................................................................ 68
LIST OF REFERENCES................................................................................................. 69

4


LIST OF FIGURES
Figure 1.1 Workflow of collect cost management information ........................................21
Figure 3. 1 Company Organization chart ..........................................................................36
Figure 3. 2 Organization chart of Financial and Accounting Division ............................. 39
Figure 3. 3 Cost structure of Bamboo Airways .................................................................41
Figure 3. 4 Chart of fuel prices in 2018-2019 ...................................................................42
Figure 3. 5 Chart of Maintenance repair and overhaul expense in 2019........................... 44
Figure 3. 6 Chart of Ground handling Expense in 2019 ................................................... 45
Figure 3. 7 Chart of Aircraft rental expense in 2019 ......................................................... 46
Figure 3. 8 Integration flow of information.......................................................................50

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LIST OF TABLES
Table 1. 1 Structure of operating cost ...............................................................................26
Table 1. 2 Daily flight schedule ....................................................................................... 30
Table 1. 3 Cost estimation method for flight ....................................................................31
Table 3. 1 Business performance of Bamboo Airways from 2017-2019 .......................... 37
Table 4. 1 Cost estimation for flight- Financial Department ............................................49
Table 4. 2 Budget implementation report ..........................................................................59
Table 4. 3 Monthly Cost management report ....................................................................60
Table 4. 4 Cost management report by routing .................................................................60

6


LIST OF ABBREVIATIONS

AIMS

Airplane Information Management Systems

AMOS

Airline Maintenance and Operating Systems

Company/BAMBOO

Bamboo Airways Joint Stock Company (BAMBOO

AIRWAYS

AIRWAYS)

FIN & ACC

Financial and Accounting Department

FO

Flight Operation Division

GO

Ground handling service Division

HR

Human resource Department

IT

Information and Technology Department

JSC

Joint Stock company

MAR

Marketing Department

MEDIA

Internal and Social media Department

OFFIC

Office Department

PLANNING

Planning Department

PROC

Procurement Division

SAP

Accounting system

SQA

Safety Quality Assurance Department

TECH

Technical and Maintenance Division

TRC

Training Center

VND

Vietnam Dong

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CHAPTER 1
INTRODUCTION
1. The necessity of the research
In order to survive and grow in today’s increasingly competitive market economy,
each enterprise must take its best efforts to find its own effective cost management way
to not only maximize operating costs, enhance the quality of services and products, but
also help the managers make the best and appropriate decisions in a sound and informed
manner to increase their competitiveness in the market.
Cost is always one of crucial concerns to corporate managers in the governance of
their business operations. Effective cost management is one of key elements that decides
the success of any enterprise. To perform their cost planning and management functions
well, it is essential that the managers should have the knowledge of cost information
from administration division. As a result, cost information is an essential input to the
managers.
The topic of cost management has received an increasing interest among
Vietnamese enterprises. Having the knowledge of cost information in a timely and
accurate manner is one of decisive factors to the success of the enterprise. Having such a
knowledge and understanding the nature of each cost will enable the managers easily
derive useful information and help make informed and sound business decisions. Thus,
timely developing a complete and effective cost management system is an urgent and
essential task of today’s enterprises.

Profit maximization is the top goal of any business in the economy. In addition to
finding the markets, boosting production capacity, and improving product quality, cost
and cost management are also very important to business managers. Today, in addition to
the tasks of collecting, processing, reflecting, and recording economic transactions,
administration department is also required to analyze financial situation and business
costs so that it may promptly give advice to the board of management. This need seems
to be indispensable for management purpose. In the world, cost management has evolved
over a long period consisting of four stages, including costing and financial control,
information planning and management, and reduction of waste resources in business

8


processes and until creation of value through efficient use of resources. In Vietnam, cost
management has only received attention for the last 30 years, but still that attention is
still inadequate. Although cost management is not required for all types of companies,
the insights derived from cost management will provide corporate managers valuable and
meaningful foundation for making short, medium, and long-term decisions. Such
information is helpful to corporate administrators as they will have a comprehensive,
specific, and detailed perspective to meet the requirements and objectives of their
companies.
Bamboo Airways operates as an independent enterprise and its main business is
transporting passengers and commodities by air. Like many other service businesses, cost
management and analysis are a very important factor for the company to increase its
competitiveness in the market. In the meanwhile, the departments entrusted with the task
of cost management have not provided necessary information to meet the requirements of
the Board of Directors yet. Recognizing those limitations, the author chooses the topic”
Cost management in Bamboo Airways, status and solution for the development” as the
subject matter of this study.
2. Research objectives

+ In term of theory: The study is conducted to investigate the theories and theoretical
issues on cost management in service enterprises.
+ In term of practice: The study is conducted as an actual survey on cost management at
Bamboo Airways Joint Stock Company and from which solutions will be proposed to
improve the cost management of Bamboo Airways.
3. Research Scope
+ Scope of content: The topic focuses on cost management practices at Bamboo Airways
Joint Stock Company.
+ Scope of time: The study is conducted to investigate current state of cost management
at Bamboo Airways Joint Stock Company in 2019.
+ Scope of place: Bamboo Airways Joint Stock Company.

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4. Research methodology
The topic uses a variety of research methods to take advantage of each methodology as
well as analyze the data more effectively, including Statistical method, analysis method,
comparative methods, and summarization method. Moreover, the data collected in the topic
is mainly secondary data from various sources, such as financial statements, business
operation result statements, documents and policies of Bamboo Airways, research works,
reference books, journals and legal policies of the Government related to cost management.
5. Structure of the thesis
In addition to the Introduction, Conclusion, List of References, Tables and Figures,
and Appendixes, this thesis is structured of 5 chapters as follow:
Chapter 1: Introduction
Chapter 2: Theoretical background and literature review of cost and cost management
Chapter 3: Research methodology
Chapter 4: Cost management at Bamboo Airways Joint Stock Company
Chapter 5: Conclusion

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CHAPTER 2
THEORETICAL BACKGROUND AND LITERATURE REVIEW OF COST
MANAGEMENT
2.1 Theoretical background of cost and cost management in business
2.1.1 Definition of cost management in business
2.1.1.1 Definition cost management in business
Cost management is a new entrant in the terminology of management and is widely
used these days in business world. In the word of Horngren, cost management is used “to
described the approaches and activities of managers in the short-term and long-term
planning and control decision that increase values for customers and lowers cost of
products and services”.
According to Hansen and Moven, “Cost management identifies, collects, measures,
classified, and reports information that is useful to manager in costing, planning,
controlling and decision making”.
According to Kumar and Sreekantha, “Cost management is the system of allocating
costs to production/ service, thereby enabling and achieving cost control and cost
reduction”.
From the perspective of financial accounting, cost accounting department has the
tasks of calculating and measuring the costs incurred in enterprises in accordance with
accounting principles to provide information on production costs, costs of goods sold,
and operating costs as stated on the income statement in relation to value of inventories
on the Balance Sheet. From the perspective of international economy, cost accounting
department has the tasks of measuring, analyzing current state of production and business
costs, and measuring the profitability of each product, service, activities, and each
department of businesses to improve the efficiency of business activities
In general, the nature of cost management is an integral part of the enterprise

accounting system and an important tool to provide timely, appropriate, and necessary
cost information measures for administrative activities. In addition to past information,
cost information derived from cost management practices should be oriented (for
planning and estimation purposes), associated with targets, departments, units and

11


individuals (i.e. cost centers)) to enable the analysis, evaluation, and support in the
development of cost control measures.
Currently, there have also been many studies and perspectives on cost management
in Vietnam, which have outlined basic contents of cost management. For example,
according to Nguyen Thi Mai Anh (2014), basic contents of cost management includes 5
components: Classifications of costs for managers’ use and their intended uses;
Development and estimation of cost norms for purposes of controlling and monitoring
classified costs to comply with managers’ requirements; Definition of costs by subject to
determine accurate costs for each specific subject; Analysis of fluctuations to control
costs; Analysis of information on costs to support the manager’s decision-making
process. In the meanwhile, in Le Thi Minh Hue (2014), content of cost management is
defined to include following components: Cost identification, development of cost norms
and estimation of costs; allocation and definition of costs; analysis of costs for corporate
management purpose; Cost administration reporting system, etc.
Cost management is the process of analyzing necessary information related to
financial information for business management. This includes financial information
(revenue and costs), non-financial information (productivity, quality) and other factors of
the business.
Cost management helps businesses focus its capacities on developing its strengths
and identifying important business opportunities or issues. In addition, cost management
can help businesses improve the quality of its services without changing costs, helping
business leaders and strategic decision makers identify the least expensive resources in

the supply of goods and services, thereby improving its business performance.
2.1.1.2 Characteristics and role of cost management in business
According to Le The Anh (2017), from the perspectives and studies on cost
management, we can recognize following basic characteristics:
Firstly, cost management emphasizes the provision of data for internal use to
administrators through the use of initial accounting information, processing, analysis, and
provision of economic and financial information as required for corporate administration.
Those that use information on cost management are managers who directly run daily

12


business activities of enterprises and they usually have to make different decisions
related to business performance in both short term and long term. Cost management
provides internal financial information that are significant to the measurement and
monitoring of business performance and provision of information for management
decisions.
Secondly, cost management is primarily focused on the future, which is established
by information requirement in strategic planning and business operations. In a market
economy, as it is required to to be sensitive and quickly capture business opportunities,
cost management provides information to administrators that demand the flexibility,
speed, and appropriateness for each decision whenever the managers may require. As a
result, financial information is highly volatile as it does not require the compliance with
accounting laws.
Thirdly, cost management is flexible and suitable for information needs as
represented in the form of material value and reported in details with an in-depth focus
on each activity area. Cost management is based upon collecting, processing, and
analyzing information by using a mixture of historical data, current data, estimated data,
and future projects. In cost management, data source is the corporate accounting data
system along with other sources of information such as those on industrial development

trends, competition, market fluctuations, interest rates, exchange rate, and so on.
Fourthly, cost management is not required by laws in order to comply with general
accounting standards. Enterprises can define their own basic principles and necessary
books and records in accordance with management practices without being restricted by
requirements of state management agencies This is true because the main goal of cost
Management is to provide internal information for managers to make sound business
management decisions.
To achieve the goals of operating and managing business activities as a part of
corporate governance, it requires a lot of information of various types. The first type is
information on the planning and supervision of daily business operations. These helps
corporate administrators recognize what is going on in their businesses and how the goals
are being implemented. Second type includes the information that is essential for

13


governance purpose in long-term planning. Cost management provides information for
making decisions on the corporate business plans.
Firstly, it provides information for planning purpose. To develop a plan, managers
are often required to give prediction and judgment of the outcome of economic indicators
based on available scientific facts. In doing so, managers often have to link economic
indicators together to clearly see the causes and results that will be materialized in the
future. First of all, cost managers have to prepare estimates, set up a system of indicators,
open up accounts and books to systematically record production and business activities
of the enterprise. Developing an indicator system and setting up accounts must be based
on the needs to use information and characteristics of production and business activities,
and only then newly derived information will be effective in all respects. For example, by
classifying raw materials by product to record and specify liabilities by due date and
subject, it is possible to accurately reflect costs by product and take appropriate debt
recovery measures.

Secondly, cost management provides cost information for the organization and
conduct of business operations. This function is intended to convey the planned
indicators of costs so established to relevant departments in the enterprise and organize
the operations of departments in a planned manner. Also, it requires the managers to link
different departments together and use reasonable personnel resources to maximize
potential resources for production purpose to achieve the planned targets. In this period,
cost managers reflect accounting information onto accounts and records that they have
designed for different levels of administration. Based on such information, cost managers
calculate indicators as required for internal administration and summarize them into
reports for different levels.
Cost managers must know how to summarize and use information from different
departments in the enterprise, combine internal and external, qualitative and quantitative
information to make forecasts and develop the plans. This is the most crucial stage as
business decisions must be very flexible and adapted to production factors to achieve the
objectives in the best manner.
Thirdly, cost management provides information on costs for checking and
evaluating business performance. Based on indicators of business performance, the
14


managers may compare them against planned targets to check and evaluate the
performance as well as current state. Then, they analyze and collect information for
proceeding with further businesses. In fact, they are doing a comparison of the
differences from the established plan and identifying the causes thereto so that they may
make appropriate adjustments to each individual and department to achieve the optimal
targets. Internal control system is adopted in place by means of assignment and
decentralization of authorities based on financial management regime and responsibilities
of individuals and departments in a specific organization.
Fourthly, cost management provides information on decision making process. This
is the most basic and common function of cost management. Decision making is usually

performed by managers that have influence on ultimate outcomes of any business.
Typically, a decision is made on the basis of information collected from different
sources, in which information from management accounting plays a crucial and highly
trusted role. The managers are usually facing a lot of different business options. Cost
management is conducted in order to check information on analysis reports and
assessment of business performance, and is intended to support the managers in making
sound decisions.
Fifthly, cost management helps businesses focus its capacities on developing its
strengths and identifying important business production opportunities or issues.
Sixthly, cost management helps enterprises improve the quality of their services and
products without changing the costs thereof.
Seventhly, cost management helps the decision makers realize the existence of
resources at lowest costs in the production and provision of products and services.
2.1.2 Contents of cost management in business
2.1.2.1 Identification costs
According to Dang Thi Hoa (2006): Cost is one of important factors that have an
impact on profits, assets, as well as the survival and development of businesses.
Therefore, managers at all levels should understand the concept, nature, and content of
costs in order to perform their administration functions appropriately.

15


According to international accounting standards (i.e. IAS 27), cost is the amount of
cash or cash equivalents paid or the fair value of the other consideration given to acquire
an asset at the time of its acquisition or construction, or, when applicable, the amount
attributed to that asset when initially recognized in accordance with the specific
requirements of other IFRS, e.g. IFRS 2.
According to Vietnamese Accounting Standards - Standard No. 01 (VAS 01), Costs
are the total value of amounts which reduce economic benefits in the accounting period

in the forms of amounts spent, asset depreciation amounts, or give rise to liabilities
leading to a decrease in the owners’ equity, excluding amounts distributed to
shareholders or owners.
From the perspective of financial accounting, costs are considered as actual
expenses incurred in connection with production activities of the enterprise, including
expenses incurred in the normal course of business and production, as well as and other
expenses to produce a certain type of product or service, or to achieve a specific purpose
of business. Expenses are quantified and expressed in value as the amount of money
spent, property depreciation, service debt, reduction of owner's equity of enterprise, etc.
From the perspective of cost management: As the purpose of cost management is to
provide appropriate, useful, and timely information for decision-making process of the
managers, costs as defined from the perspective of identifying information to serve
decision making process comprise of actual costs incurred in production and business
activities, which are summarized by division and cost center, and used to determine the
value of inventory in each stage of production and consumption process. Costs can be
classified into fixed and variable costs, so that cost estimation equations can be
developed at different levels of activity. Costs can comprise of estimated or expected
costs in order to carry out a business operation, an economic contract, etc. Therefore, for
recognition of costs as a part of cost management, attention should be paid to the choice
and comparison of purposes of use and business decisions rather than focusing only on
supporting documents to ensure the validity as in financial accounting.
Definitions may be different in terms of expression or level of generality, but they
all represent the nature of costs as the expenditure spent in return of material,
quantifiable benefits, such as a number of delivered products or rendered services.
16


2.1.2.2 Classification of costs
 Classification of costs by cost behavior
Under this classification method, total costs of an enterprise are classified into:

- Variable costs: The costs that are varied by a proportion to the change of business
activity level. Nevertheless, there are variable costs that are in direct proportion to the
levels of activities such as costs of direct materials, costs of direct labor, etc. as well as
variable costs that are only varied by the magnitude and clarity of change in activity
level, for example costs of indirect labor or costs of equipment maintenance, etc.
- Fixed costs: Total amount of which are unchanged when there is a change in activity
level, while the average cost of an unit of activity may be varied in a negative proportion
to the change in activity level. Fixed costs are unchanged in term of absolute total
amount within a reasonable scope of activity, but when that reasonable scope is
exceeded, depreciation costs of machines and equipment will be increased due to
additional investment in production machines and equipment.
- Mixed costs: The type of costs that consist of both variable and fixed costs. At the
fundamental level of activity, mixed costs demonstrate the characteristics of fixed costs,
and beyond that level, mixed costs demonstrate the characteristics of variable costs,
while at another certain level of activity, mixed costs may reflect both fixed and variable
costs, such as telephone costs, rental costs, etc. Mixed costs are very important as they
are common in business activities of any enterprise. Fixed component in mixed costs
reflect the fundamental, minimum costs to remain to be active in business, while variable
component reflects the level activity beyond fundamental level. Therefore, in order to
control and regulate mixed costs, the managers must classify these costs into fixed and
variable components.
The classification of costs into variable, fixed, or mixed costs will depend on each
manager’s perspective and specific purpose of use. Costs are not classified in this manner
under the perspective of financial accounting, but this is essential to help the managers
have a method to recognize costs, production, and profit to make reasonable managerial
decisions.
 Classification of costs by the relationship with performance period.
Under this method, costs are classified into product costs and period costs.
17

- Product costs are costs associated with the production process or procurement of
products for resales. Product costs are always associated with the products and can only
be recovered when the products are consumed. When they are not consumed yet, product
costs are included in products in stock. In manufacturing enterprises, product costs are
costs closely associated with production process, including: Costs of direct materials,
costs of direct labor, and general production costs. When products are consumed, these
costs will be included in the costs of goods sold
- Period costs: These are costs that are incurred during the accounting period and
directly decrease the returns in the incurring period. Period costs include selling expenses
and general and administration costs.
So, product costs are only charged to the period when the products are consumed
while period costs are charged to the period when they are incurred and they have a
direct influence on the returns in that period.
 Classification of costs by intended use:
Costs are classified by their intended use into two following types: production costs
and non-production costs.
Production costs of an enterprise comprise of all costs of living labor and material
labor incurred during the production and composition of cost prices of the products.
Production costs comprise of three items: costs of direct materials, costs of direct labor,
and general production costs. These are costs comprising the cost of goods sold of
finished products for consumption.
Non-production costs are costs incurred outside production processes and not
related to the consumption of products or intended for general management practices.
Non-production costs include: selling expenses, general and administration costs,
financial costs, and other costs. General and administration costs include all of costs for
the organization and management of business production in general. These items include
such costs are office costs, salary and salary deductions for business managers,
depreciation of fixed assets for business management, and costs of other external
services.

18


 Classification of costs by the relationship with cost subjects.
Under this method, costs are classified into direct costs and indirect costs.
- Direct costs: Direct costs are specific costs incurred directly from each subject of costs
(product type, job, purchase order, etc.). These costs may be directly charged to each
subject of costs such as costs of direct materials, direct labor, etc.
In some businesses, these costs usually account for a significant part of total costs
and may be the cause to the fluctuation of costs. Therefore, they also result in
misinformation of costs in each department or business production process.
- Indirect costs: These are general costs incurred in relation to different subjects of costs,
including costs of additional materials, sub-works, advertisements, etc. Since these costs
are related to different subjects of costs, the reasons that cause indirect costs should be
summarized and selected by using appropriate criteria for distribution of indirect costs to
each subject. However, each subject of costs is usually suitable for certain criteria of
distribution. On the other hand, each indirect cost may also be related to other subjects.
For this reason, the calculation and distribution of general costs by using the same
criteria may result in differences in costs for each type of product, department, and
production process, and it may result in different decisions made by the managers.
Based on the classifications under this method, the managers may recognize and
select an appropriate method to collect and distribute costs in an appropriate manner so
as to make more accurate decisions.
In addition to above-mentioned classification methods, for purpose of managers’
decision-making processes, costs may also be classified as follows: Costs of goods sold,
operating costs, selling expenses, general and administration costs, and other costs, etc.
Summary: Recognizing and classifying costs is the pre-condition for enforcing
managers’ decisions. This requires the managers and accountants to appropriately
address the nature and notion of costs from different perspectives.

2.1.2.3 Cost estimation
Regarding the estimation of cost, it should be based on the estimates of following
production costs:

19


- Estimation of costs of direct materials is made on basis of material norms for each type
of product and expected unit price of each material.
- Estimation of costs of direct labor is made on basis of norm of working hours and
salary for each type of workers involved in production processes.
- Estimation of general costs, selling expenses, and general and administration costs is
determined on basis of data in previous periods and expectations for planning period of
relevant department. Estimations should be prepared for each production line, purchase
order, or product batch.
The estimation of operating costs should be effective performed for each cost element,
then summarized by each item of costs, including:
- Estimation of selling expenses;
- Estimation of general and administration cost;
- Estimation of financial expense;
- Estimation of other costs;
2.1.2.4 Collection of cost information
It can be said that information is the means to unify all activities of the
organization. It is considered as the means to provide business inputs and communicate
with each other in the organization in order to achieve the common goal of the business.
Information is the basis for making management decisions and, especially, it is required
in the development and communication of the organization's goals of operations,
business

planning,

organization,

personnel

management,

inspection,

and

the

implementation of plan. Collecting information will facilitate good governance functions
and connect internal business operations with external environment. It is through the
exchange of information that businesses, especially their managers, may understand
consumers’ needs, vendors’ abilities, and problems arising in their organizations. By
means of collecting information, an organization may become an open system that
mutually and beneficially interacts with its environment. Therefore, information plays an
important role in corporate governance.

20


Collecting and providing information on the results of the implementation of
proposed estimates and goals by preparing the management reports is an important task.
A management report shows the differences and deviations between actual and estimated
figures, and identifies relevant causes to the problem.
The process of collecting information on cost management is shown in Figure 1.1
as follows:

Accounting cycle

Economic activities

Processing workflow

Cost information

Decision
Figure 1.1 Workflow of collect cost management information

From above figure, it can be seen that information from economic activities are
collected and processed (including following steps: classification, arrangement,
calculation, and storage) to provide useful and necessary accounting information for
managers.
In addition to using information on economic transactions that are enforced,
completed, and reflected on accounting records to collect past information on
management objectives, it is also necessary for cost management practitioners to select
and develop additional criteria on documents to ensure the consistence with cost
management practices, design necessary accounting documents to reflect appropriate
information as may be required by corporate managers, and collect, process, and provide
information for evaluation of the enforcement of norms, plans, and estimations.
While an enterprise may have many different accounting subjects, it is necessary to
use different accounts for collecting, processing, analyzing, and providing information to
meet the requirements of business managers.
Accounting book system, especially detailed journals, should be designed
appropriately to comply with the requirements on form, quantity, category, and indicators
to be reflected in compliance with corporate management and equipment of information

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technology for processing information at the enterprise. Accounting books should reflect
different indicators to comply with different management requirements so as to produce
useful information for use on reports of specific cost management and summarization
into required reports.
Cost management is a part of accounting system and it must also comply with the
principles and procedures of assessment for subjects of past information collection in the
same manner applicable to financial accounting. However, because of the objectives of
cost management, such principles and procedures are specifically associated with costs in
certain cases under the perspectives of cost estimation, management, and control. In
these cases, costs are usually classified into fixed costs and variable costs for purposes of
equilibrium analysis, cost and benefit analysis, volume and profit analysis, etc.
Depending on the requirements and level of management, price may be determined on
basis of total fixed costs or reasonably allocated variable costs.
Requirements on cost information for decision making purpose
- Accurate:
Accurate cost information will ensure to provide accurate results of cost calculation,
which will be the basis for managers to make appropriate decisions about the production
and business strategies for enterprises. Cost information is usually obtained from
accounting data. Thus, in order to meet the requirements on accuracy, enterprises need to
adopt a strict internal accounting inspection system. Such a system is the collection of
policies and procedures for handling financial data in order to avoid mistakes.
- Timely.
Cost management information must be provided in a complete and timely manner upon
the requests. Any delay in providing this information can lead to huge waste of
production. For example, information on products in the production line is not timely
provided and, as a result, it may lead to increased rate of defective products, increased
production costs, and if these products are distributed to the market, enterprise reputation
will be affected.

2.1.2.5 Analysis and provision of cost information

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Depending on the purpose of use, cost management may use different analysis
methods as follows:
- Difference method
Difference method is used to determine the fluctuations of quantity and price in the
process of analyzing cost fluctuations by the following formula:
-Cost fluctuation
Volume fluctuation = (Actual consumption - Rated consumption) x Rated unit price
Price fluctuation = (Actual unit price - Rated unit price) x Actual consumption
- Appropriate information analysis method
By using information provided by sale departments, cost management unit proposes
business plans for the upcoming period. Then, cost management unit removes
inappropriate information (information on hidden costs and similar costs among different
plans, etc.) for the plan under consideration, remaining appropriate information will be
used for analysis and preparation of analysis reports for relevant plans, which will be
used to make business decisions. Therefore, to make sure that short-term decisions are
appropriate and the most effective, it requires the managers to have an understanding of
the nature and how to select and use accounting information for each plan. Unnecessary
information must be eliminated from the structure of information to be considered, and
only necessary information may be retained for making business decisions.
Normally, to make a highly reliable decision, the managers must take the following
steps:
Step 1: Summarize all information about costs, fees, and expenses related to
relevant input costs
Step 2: Retain appropriate information and remove inappropriate information
Step 3: Analyze and evaluate appropriate information so retained.

Step 4: Make a decision based on appropriate information so analyzed in step 3.
- Provision of actual cost
Depending on management requirements, cost management unit establishes a

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