Barriers to Adopting Activity-based Costing Systems (ABC)

352 Pages·2017·1.26 MB·English

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Doctoral Business
2008-01-01
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EEmmppiirriiccaall IInnvveessttiiggaattiioonn UUssiinngg CClluusstteerr AAnnaallyyssiiss
Fawzi Abdalla Abusalama
Technological University Dublin
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Abusalama, F. (2008) Barriers to Adopting Activity-based Costing Systems (ABC): an Empirical
Investigation Using Cluster Analysis, Doctoral Thesis. Technological University Dublin. doi:10.21427/
D7701R
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Barriers to Adopting Activity-Based Costing Systems
(ABC)
An Empirical Investigation using Cluster Analysis

Fawzi Abdalla Abusalama
BSc in Cost Acc & MSc in Acc

A Thesis Submitted in fulfillment of the Requirements
for the degree of Doctor of Philosophy

Dublin Institute of Technology

Supervisor: Dr. Tadhg Barrett

School of Accounting and Finance
Faculty of Business

December 2008
ABSTRACT
This research seeks to establish why ABC adoption rates are low given the claimed
benefits of the system. The view is taken that there are likely to be two sets of interacting
variables influencing ABC adoption, contingent variables and the company’s ability or
willingness to address implementation barriers.

The contingency approach is a recent and important development in ABC research. From
the perspective that there is no one universally appropriate MAS system, but that the
appropriateness of any system is dependent on the factors facing the firm, it can be
argued that ABC system adoption and success will depend upon specific contingent
factors such as product diversity, cost structure, firm size, competition, and business unit
culture. A contingency model of ABC adoption has been developed in order to examine
and investigate the reasons why the take up or adoption of ABC systems remains low.
This model seeks to incorporate contingency theory relating to a set of variables which
will be identified from the literature as likely to be influential in ABC adoption.

The view is taken that such contingency variables will not of themselves explain ABC
adoption rates, rather such contingency factors may be viewed as rendering ABC suitable
or otherwise for adoption by companies but that there are also implementation issues
which influence adoption. The implementation factors can be classified based upon a
review of the literature into three main types Behavioural, Systems and Technical.

This study seeks to establish which of these three sets of factors constitutes the dominant
barriers to ABC implementation. Based upon the contingency model, companies are
classified into groups, each group having a different “profile” with regard to the
individually established contingent variables. Thus, one such group will have a “good
match” with the contingent variables and another will have a “poor match”, e.g. if “size”
is found to be a contingent variable, one group will comprise the larger firms, and another
group will comprise the smaller firms, with a number of intermediate groups. The
grouping is based on all established contingent variables. Each such group is subdividing
into ABC adoption or non-adoption, and the reasons for non-adoption establish for each
such group.
ii
A mail questionnaire survey was considered an appropriate method for this study. The
survey undertaken comprised all firms listed in Business and Finance (2004) Irelands
Top 1000 Companies (the total number of companies included in the list were only 925
companies). 218 questionnaires were returned, generates a 23.6% response rate. The
quantitative data were processed using a SPSS program, leading to appropriate
descriptive and inferential statistical analysis, including frequencies, means, standard
deviations, chi-square, t-test, Mann-Whitney and ANOVA tests. Cluster analysis was
used to profile the companies according to the individually significant contingent factors.

Seven contingent variables were identified from the literature, six of which were found to
be statistically significantly associated with ABC adoption. Companies were “clustered”
using these variables into three groups, and reasons for non-adoption were identified.
Based upon an analysis of the given reasons for non-adoption, Technical Issues were
dominant amongst these companies in the cluster which profile most closely matches the
contingent factors.

The findings suggest that in the adoption of ABC, two distinct sets of variables are at
work. The ‘Contingent Variables’ which likely render it appropriate or useful for the
company to adopt ABC, and the company’s ability, or willingness to address the
‘Barriers’ and difficulties associated with ABC adoption. The results show a strong
significant association between contingent variables and the adoption of ABC.
The results suggest that the contingent variables alone may not of themselves adequately
explain the actual take up of ABC systems. Moreover, it suggests that two companies
which have similar profiles with regard to contingent variables (with higher overheads,
more product diversity etc.) may yet reach different decision with regards to ABC
adoption, due to their differing abilities or willingness to address and overcome the issues
relating to ABC implementation, the results completely support this suggestion. The
results also show that ‘Technical Issues’ are the most common factor militating against
ABC adoption within companies who are rejecting and actively considering its adoption
within the cluster whose profile most closely matches the prime factors.
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DECLARATION

I certify that this thesis which I now submit for examination for the award of Doctor of
Philosophy, is entirely my own work and has not been taken from the work of others save
and to the extent that such work has been cited and acknowledged within the text of my
work.

The thesis was prepared according to the regulations for postgraduate study by research
of the Dublin Institute of Technology and has not been submitted in whole or in part for
an award in any other institute or university.

The work reported on in this thesis conforms to the principles and requirements of the
institute’s guidelines for ethics in research.

The institute has permission to keep, to lend or to copy this thesis in whole or in part, on
condition that any such use of the material of the thesis be duly acknowledged.

Signature ___________________________________ Date _______________

iv
To my great parents,
my lovely wife ‘Rasha’
and my beloved kids
Mohamed, Mumin and Maria

v
ACKNOWLEDGMENTS

Above all, I thank my God for everything he has given me and helping me in all stages of
my education.

The writing of this thesis has been assisted by the generous help of many people, among
whom I would like to thank especially:

First and foremost, I am indebted to my principal supervisor, Dr Tadhg Barrett, who has
been very supportive at all stages of this work. I wish to express my utmost gratitude to
him for his invaluable advice and patience in reading, correcting and commenting on the
drafts of the thesis, and more importantly, for his generosity which I have received
throughout my entire doctoral program. His kindness and spiritual support has made me
feel more confident during the study period. Without his generous assistance and
encouragement, this work could never have been completed.

I am especially grateful to Mr. Noel O’Brien, for his helpful comments, observations and
suggestions. I appreciate his reading, guidance and comments on this thesis.

A special thanks goes to Dr. Joseph Coughlan and Dr. Katrina Lawlor for their valuable
information, comments and useful feedback during the annual evaluations.

I would like to thank Dr. Pamela Sharkey-Scott, the internal reader for her great
observations, suggestions and perceptive advices.

I wish to express my appreciation to Dr. Malcolm Mitchell for his fantastic comments
and information on research methodology and statistical techniques adopted in this study.

I wish to express my thanks to Dr. Joe Condon, statistical advice unit at DIT for his
challenging comments on the analysis techniques used in this study.

I have also been lucky in the friendships I made with my other postgraduates at DIT,
most specially, Norah Campbell, Aidan Kelly, Kevina Cody and Daire Hooper. In
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addition, I would like to express my thanks to Ms. Anne Morgan, school secretary for her
great help in typing and organizing the questionnaire and other administration issues.

I am particularly indebted to my parents Mr. Abdalla Abusalama and Mrs. Aisha Mouner.
I wish to give my heartily thanks to them for their continuous support and encouragement
throughout my studies and my entire life, even though the value of my appreciation
cannot compare with everything they have done for me. This dissertation is lovingly
dedicated to them. Also, I would like to thank my brothers and sisters for their support
and encouragement.

My final and very special thanks and loves are directed to my lovely wife Mrs. Rasha
Eladouli for her unconditional love, care, and great support. In fact, no words can
describe how much I am indebted to her.

vi i
Table of Contents

ABSTRACT………………………………………………………………………..…….ii
ACKNOWLEDGMENTS….…………………………………….………………..…….vi

CHAPTER 1: INTRODUCTION...................................................................................................................8
1.1 Background...............................................................................................................................................8
1.2 Justification for the Research....................................................................................................................9
1.3 Aims of the research...............................................................................................................................10
1.4 Research questions..................................................................................................................................12
1.5 Research Methods...................................................................................................................................13
1.5.1 Literature review..................................................................................................................................13
1.5.2 Data Collection....................................................................................................................................13
1.5.3 Data analysis........................................................................................................................................14
1.6 Organisation of the study........................................................................................................................14

CHAPTER 2: ACTIVITY-BASED COSTING (ABC): REVIEW AND APPLICATION..........................18
2.1 Introduction.............................................................................................................................................18
2.2 Traditional Costing Systems (TCS): Treatment of overheads................................................................19
2.2.1 Purposes of cost allocation...................................................................................................................19
2.2.2 Predetermined overhead rates..............................................................................................................19
2.2.3 The Two-Stage Allocation Process in Traditional Costing Systems....................................................20
2.2.4 Limitations of Traditional Cost Systems..............................................................................................22
2.3 Development and Evolution of Activity-Based Costing (ABC).............................................................27
2.3.1 The Two-Stage Allocation Process in ABC.........................................................................................29
2.3.2 The Effect of product Volume and Size on reported product cost.......................................................35
2.3.3 The Benefits of ABC...........................................................................................................................45
2.4 Summary and Conclusion.......................................................................................................................48

CHAPTER 3: EMPIRICAL FINDINGS TO ABC IMPLEMENTATION..................................................51
3.1 Introduction.............................................................................................................................................51
3.2 Surveys conducted on the implementation of ABC systems..................................................................52
3.3 Case Studies on the implementation of ABC..........................................................................................63
3.4 Summary and Conclusion.......................................................................................................................69

CHAPTER 4: TECHNICAL ISSUES IN THE IMPLEMENTATION OF ABC SYSTEMS......................75
4.1 Introduction.............................................................................................................................................75
4.2 Steps in designing and implementing ABC systems...............................................................................75
4.2.1 Selecting specific objectives of the ABC system.................................................................................77
4.2.2 Developing the ABC team...................................................................................................................78
4.2.3 Organisational issues...........................................................................................................................79
4.2.4 Defining the major activities in an organisation..................................................................................80
4.2.4.1 The major approaches to identifying activities.................................................................................81
4.2.4.1.1 Activity Dictionary........................................................................................................................81
4.2.4.1.2 Functional decomposition..............................................................................................................81
4.2.4.2 Grouping and aggregating activities.................................................................................................83
4.2.4.2.1 The activity centre..........................................................................................................................83
4.2.4.2.2 Activity Hierarchy.........................................................................................................................84
4.2.4.2.3 Business process............................................................................................................................87
4.2.5 Assigning costs to each activity...........................................................................................................88
4.2.6 Determining Secondary Activity Drivers.............................................................................................90
4.2.6.1 Types of activity cost drivers............................................................................................................92
4.2.6.2 The optimal cost driver selection......................................................................................................93
4.2.7 Assigning the cost of activities to cost objects.....................................................................................95
4.3 Summary and Conclusion.......................................................................................................................97
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CHAPTER 5: CONTINGENCY THEORY AND MANAGEMENT ACCOUNTING SYSTEMS.........102
5.1 Introduction:..........................................................................................................................................102
5.2 An overview of contingency theory of Management Accounting........................................................103
5.3 The nature of the contingent variables..................................................................................................116
5.3.1 The external environment..................................................................................................................116
5.3.2 Organisational structure and cultural factors.....................................................................................122
5.3.3 Technology........................................................................................................................................127
5.3.4 Competitive strategy..........................................................................................................................130
5.3.5 Organisational Size............................................................................................................................131
5.4 Summary and Conclusion.....................................................................................................................134

CHAPTER 6: A MODEL OF ABC ADOPTION.......................................................................................136
6.1 Introduction...........................................................................................................................................136
6.2. Potential Contingent Factors................................................................................................................137
6.2.1 Company Sector.................................................................................................................................137
6.2.2 Firm Size............................................................................................................................................138
6.2.3 Nationality.........................................................................................................................................142
6.2.4 Type of Competition..........................................................................................................................144
6.2.5 Product Diversity...............................................................................................................................147
6.2.6 Cost structure (Level of Overhead)....................................................................................................152
6.2.7 Business Unit Culture........................................................................................................................155
6.3. Developing the Research Model..........................................................................................................157
6.4. Summary and Conclusion....................................................................................................................162

CHAPTER 7: RESEARCH METHODOLOGY.........................................................................................164
7.1 Introduction...........................................................................................................................................164
7.2 Unique features of this research............................................................................................................165
7.3 Research Philosophy and Paradigms....................................................................................................166
7.4 Research Questions...............................................................................................................................169
7.5 Research Hypotheses:...........................................................................................................................170
7.5.1 Contingency factors hypotheses:........................................................................................................171
7.5.2 Technical issues hypotheses...............................................................................................................175
7.6 Data Collection.....................................................................................................................................178
7.6.1 Rules on Ethics and Confidentiality...................................................................................................180
7.6.2 Research design and variables...........................................................................................................181
7.6.3 Questionnaire, problems of data collection, and response rate..........................................................186
7.6.3.1 Problems of data collection.............................................................................................................186
7.6.3.1.1 Missing data.................................................................................................................................186
7.6.3.2 Response rate and a comparison with the previous research..........................................................188
7.6.3.3 Reliability, Validity and Non-response Bias Analysis....................................................................189
7.7 Statistical analysis techniques...............................................................................................................192
7.7.1 Univariate analysis.............................................................................................................................192
7.7.2 Bivariate Analysis..............................................................................................................................193
7.7.2.1 Parametric tests...............................................................................................................................193
7.7.2.1.1 The independent t-test (2-sample t-test):......................................................................................193
7.7.2.1.2 Analysis of variance (ANOVA):..................................................................................................194
7.7.2.2 Non-parametric tests:......................................................................................................................195
7.7.2.2.1 Mann-Whitney U tests:................................................................................................................196
7.7.2.2.2 Kruskal-Wallis:............................................................................................................................196
7.7.2.2.3 Assumptions underlying the Mann-Whitney U test and Kruskal-Wallis:....................................196
7.7.2.2.4 Chi-square:...................................................................................................................................197
7.7.2.2.5 Crosstabulations (Contingency tables):........................................................................................197
7.7.3 Cluster analysis method.....................................................................................................................198
7.7.3.1 K-means cluster analysis:................................................................................................................200
7.7.3.1.1 Assumptions of the K-means Cluster Analysis:...........................................................................200
7.8 Summary and Conclusion.....................................................................................................................201
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