BUSINESS SCHOOL - NEU

FINAL PROJECT

CLASS: EMBA18 B

TOPIC: CLASSIFY ACTIVITIES AND COSTS INVOLVED

FOR VICOSTONE JOINT STOCK COMPANY

Authors: Le Ngoc Duc

Tran Thi Phuong Thuy
Tran Duc Vuong
Nguyen Xuan Hoa

HANOI, JANUARY 2020

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 A. INTRODUCTION
The cost structure is the proportion relationship of each variable cost and fixed
cost that accounts for the total cost.
For companies with a large proportion of fixed expenses and small amount of
variable expenses, the contribution margin will be high. If there is an increase or
decrease in revenue, the profit will increase or decrease more. The companies with large
proportion of fixed costs are usually the ones with large investment, if they are
favorable, the growth rate will be fast. On the contrary, if the revenue declines, the profit
will also decrease very quickly; or if the produced products cannot be sold, these
companies are likely to go bankrupt.
On the other hand, companies with low fixed costs are usually those with low
investment and slow growth rate. But, if there is a trouble, the damage will be lower.
Therefore, the company's cost structure is an extremely important indicator that
any successful accountant must be able to monitor and control. Depending on the
change of revenue, there should be an appropriate change in the cost structure.
Recognizing the importance of cost structure, my team has chosen the company
below to clarify their activities and associated costs, thus showing their cost drivers and
cost structure.

B. COST CLASSIFICATION OF VICOSTONE JS COMPANY

1. ABOUT VICOSTONE

Vicostone is one of the leading manufacturers of artificial quartz stones in the

world. Vicostone's product distribution network is present in all continents of the
world. The VICOSTONE® brand is protected in 60 countries. The revenue in 2019 of
Vicostone is 195.606.405 USD

Company name VICOSTONE JOINT STOCK COMPANY

Short name VICOSTONE

Authorized capital 69.076.609 USD

Address Hoa Lac Hi-Tech Park, Thach Hoa Commune, Thach
That District, Hanoi

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 2. VICOSTONE’S ACTIVITIES AND ITS COST
Vicostone has four primary activities namely Importing, Manufacturing,
Selling and Administrative / general activities. These activities will be consecutively
described and indicated with its costs and cost drivers in detail below
2.1. IMPORT ACTIVITIES

VICOSTONE’s raw materials are both domestically purchased and imported,

for some additives and materials are not available in the domestic market. Therefore,
the detailed list of costs for import activities will include several main types of cost as
follows:

COST COST CLASSIFICATION

Product cost

Fixed Variable Direct Direct Manufacturing

cost cost Material Labor Overhead

(1) Expenses for imported materials x x

(clay, kaolin, pigments, resin, silicate,
quartz, additives ... to create quartz
stone products)

(2) Expenses for imported chemical x x

additives

(3) Other material importing expenses x x

(local charge, storage charge, customs
charge, tax)

(4) Transportation expense (Trucking, x x

Sea/ Air freight) from supplier's
warehouse to the sea/ airport

(5) Transportation expense from the x x

sea/ airport to the distributor’s
warehouse

(6) Material insurance fee x x

(7) Inventory expense x x

(8) Salary for Shipping staff x x

To begin, the (1) Expenses for imported materials are Direct Material cost
and Variable cost because they depend on the amount of materials needed.

Also, the (2) Expenses for imported chemical additives are Variable costs
and Direct Material costs because the chemicals used to create additives must be
imported from overseas, and these costs vary depending on the products imported.

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 The (3) Other material importing expenses, (4) and (5) Transportation
expenses are Variable cost because they depend on the material quantity imported, or
the product (stone, brick) quantity of Vicostone. And they are expenses to directly
create the main products of Vicostone, so they are Direct Material cost
The (6) Material insurance fee (7) Inventory expense and (8) Salary for
Shipping staff are costs that may vary depending on the amount of imported goods so
they are variable costs and Manufacturing Overhead cost.

2.2. MANUFACTURING ACTIVITIES

This is the cost for workers who are directly involved in the product
manufacturing process. Specifically, they are the salaries of production workers in
factory workshops, material warehouses, involving in the process starting with putting
materials and cultivating in the formation of finished products. Also, manufacturing
activities involve some manufacturing overhead cost such as machine maintenance or
fuel expense, etc.

COST COST CLASSIFICATION

Product cost

Fixed Variable Direct Direct Manufacturing

cost cost Material Labor Overhead

(8) Salary for manufacturing workers (running x x

machines in the process of mixing components,
compression, cooling and grinding stones)

(9) Salary for finishing workers (packaging, x x

label attaching…)

(10) Salary for imported raw material inspectors x x

(11) Machine maintenance costs x x

(12) Electricity, water and fuel costs x x

(13) Waste treatment costs: Dust treatment x x

system, exhaust system, domestic wastewater
treatment system…

(14) Depreciation on manufacturing facilities x x

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 In the manufacturing process, the (8) Salary for manufacturing workers and
(9) Salary for finishing workers are both variable cost and direct labor cost, because
they contribute directly in the making of products, from raw materials to finished
goods. And their salary varies depending on the quantity of products they proceed
with.
Meanwhile, the (10) Salary for imported raw material inspectors is fixed
cost since the inspectors are paid an unchanged amount of money per month, even
when their amount of work is variable.
The (11) Machine maintenance cost, (13) Waste treatment costs and (14)
Depreciation on manufacturing facilities are fixed cost, and discretionary fixed cost
in particular, which are fixed in their relevant ranges, but can be changed if the
production expands or diminish vastly. They are also manufacturing overhead costs.
Lastly, the (12) Electricity, water and fuel costs are variable costs since they
change with the amount of product manufactured. This cost is classified as
manufacturing overhead

2.3. SELLING ACTIVITIES

COST COST CLASSIFICATION

Period cost

Fixed Variable Selling Administrative Sunk

cost cost
cost

(15) Salary for salesman x x

(16) Sale Commission x x

(17) Expense for team building x x

activities

(18) Marketing expense for x x

stone products

(19) Distributor selling cost x x x

(20) Expenses for researching x x x

domestic and international
markets

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 As the selling costs include advertising, sales salary, commission and benefits,
so all the costs from (15) to (20) which relates to sales department and other costs to
promote the product are classified as selling cost. Almost all of these costs are fixed
costs which do not change or depend on the product quantity. They are paid with a
fixed amount per month or period.

But the (16) Sales commission is variable cost which increases or decreases
accordingly to the export quantity/ activity.

Some of them are sunk costs as they are paid in the beginning of the period, no
matter how many products will be exported. Those are (19) Distributor selling cost
and (20) Expenses for researching domestic and international markets

2.4. ADMINISTRATIVE AND GENERAL ACTIVITIES

COST COST CLASSIFICATION

Period cost

Fixed Variable Selling Administrative Sunk

cost cost
cost

(22) Salary and benefit for x x

Administrative Council, executive
board, and department of secretary,
accounting, import, legal, receptionist,
IT, HR, Marketing, security guard,
sanitation employees.

(23) Expenses for the holiday bonus x x

(24) Team building for functional x x

department and manager

(25)Equipment purchase for functional x x

department (table, chair, stationary,
computer, printers….) and their
depreciation

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(26) Expenses for Training x x
management and function employee
and Expenses for recruiting new
employees

(27) Expenses for organizing charitable x x

activities.

(28) Infrastructure expense (building, x x

parking, road, internet, tree,…) for the
head office

(29) Maintenance and depreciation x x

expense on head office facilities

(30) Electricity and water expense for x x

the head office

(31) Annual License tax x x x

(32) Income tax x x

All the costs above are Administrative costs because they associate with the
general management/ activities of the head office as a whole, rather than with a specific
department like manufacturing or selling. Also, all of them are fixed costs, except for
the (32) Income tax, which is variable because it depends on the revenue and expense
of a period.

Besides, (31) Annual License tax can be considered as a sunk cost, as it is paid
in the beginning of the year, regardless the company runs with more or less quantity
during that year.

D. COMMENTS OF COST STRUCTURE AND CONCLUSION.

From the analysis above, It can be seen that most of the costs of Vicostone is
fixed cost. Except for the materials cost, some of the labor cost, electricity and fuel
expense, insurance and tax are variable cost. In fact, these fixed costs are much greater
than the variable cost.

With this structure, the break even point is high, therefore the targeted revenue
and the contribution margin needs to be high to cover the fixed cost.

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 Also, the degree of leverage is high, meaning the profit of the company is highly
sensitive to the revenue. As a result, the company profits well when the revenue
increases, but will suffer badly when it goes down.

For a greater profit, the company needs to increase the product quantity as a
whole and increase the product quantity of each stone surface model to utilize the fixed
cost and obtain the economy of scale advantage.