Activity based costing

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Activity Based Costing

Summary

The study was carried out to provide empirical evidences on the existence of business environment variables in firms, such as production diversity, production complexity, cost structure, Size of firm and the level of competition, which adopt ABC in compare to those who don't adopt ABC.

The evidence was a feed back from a questioner that was received from 10 manufacturing companies.

The characteristics examined are related to the firm characteristics and business environment variables, which are related cost structure, production complexity, production diversity, size of firm and the level of competition.

Previous studies by researchers such as cooper and Kaplan (188), and baker (14) have documented the benefit of using ABC and who should use it.

Those studies shed the light on the characteristics that should be considered before deciding to adopt ABC. These characteristics such as the percentage of overhead cost in total manufacturing costs, firm size, level of competition and degree of complexity and diversity .the classic aim of adopting ABC is to obtain better information about product costs. Therefore, it was considered as a model of cost allocation. Barker (14) and Jenkinson & Hui (14) suggested that companies with more over head costs would feel the necessity of adopting ABC.

Another factor is found by Cooper & Kaplan (188) that is the more complex and diverse is the product lines, the larger the number of departments needed to support its transaction.

Cooper (188), banker and Johnson () suggested that the diversity in production volume, size, complexity, setup and martial costs would increase the distortion of product cost information and therefore, firms, with this kind of characteristics, should use cost drives as a mean of tracing cost product to have useful and effective cost measure and therefore, the use of ABC would be possible.

Another study was done (Estrin, Albert 14) to suggest that the implementation of ABC needs comprehensive and complex process, that is costly and time consuming, which lead to the increase of the company cost. This would imply that large firms would be using and affording ABC.

Additional reason for implementing ABC, as cooper suggested, is companies who are in highly competitive environment should consider ABC as ABC would provide better product cost information.

Five hypotheses were established from previous studies discussion related to issue of adopting ABC.

1. Firms which have a greater proportion of overhead in total manufacturing cost are no more likely to adapt ABC then firms which are smaller proportion of over head in total manufacturing cost

. "Firms which have more production complexity are no more likely to ABC then firms that have less production complexity."

. "Firms which have more production diversity are no more adopt likely to ABC then firms that have less production diversity"

4. Large firms are no more likely to adopt ABC then small firms

5. Firms which operate in highly competitive industries are no more likely to adapt ABC than firms which operate in less competitive industries.

Finally, the outcome of the study indicates that there would be major differences between companies, which adopt ABC, and those not adopting ABC in regard to product complexity and diversity and level of market competition. In turn there would appear to be insignificant difference in relation to the proportion of overheads costs .

Mail questionnaire was sent to 50 Victorian manufacturing companies of which 14 companies responded. The aim of the questionnaire is to collect information from those companies, which adopted and had not adapted ABC. The targeted 50 companies were asked to return it within two weeks. The response rate of 4% .

Evaluation

Objectives, Motivation

This paper was another way to explore how several variables like high production diversity, high production complexity, large cost structure, the larger Size of firm and the high level of competition can be an indicator for companies who adopt ABC.

There is no a clear heading on the paper for justification or motivation. However, it is easy to be depicted by reading it. Some previous research were quite beneficial for this research so we can deduce that this research might open the door for future research and certainly will add to the existing literature of ABC. The researchers haven't mentioned clearly if their motivation is to supersede previous studies or to stress or ensure their validity.

Research question

The research question wasn't explicit. It wasn't stated laterally in the beginning of the paper as a question.

Literature review

There are prior literatures for this paper as it was mentioned above.

I believe the literature was quit rational and comprehensive, it seems to indicate that researchers did a lot of studies and review for the topic. The literature review is in chronologically order and is quite supporting to their hypotheses. Most of the recommendation is so clear except the last point mentioned "highly competitive environment " it would be good if researchers have defined what do they mean by highly competitive environment.Article Review

Author Sheilds, M.15

Title An empirical firms' implementation experiences with activity based costing'

The study was based on the theoretical model developed by shields and young (18).

An exploratory research, using a quantitative approach to test 5 prediction concerning firm's variation in the degree of success with activity based costing. Mailed questionnaire was sent to companies and 14 responded. It is not be able to judge the responds rate since we were not told the total number of firms that were initially involved in the survey.

Predictions tested were

· The significant variation in the degree of success firm have with activity based costing

· The relationship between behavioral variables (top management support competitive strategy quality and JIT/speed, etc)

· Technical variable (canned software, custom software) its relationship with activity-based costing

· Activity-based costing implementation variable (behavioral organization & technical used in subset.

The result having been statistically analyzed, were found to be in line with the 5 prediction tested thus it could be said that the study totally support the technical models of ABC implementation developed by shields and Younge 18 and Argyris and Kaplan(14)

The primary objective of ABC system is to provide accurate product cost information. High-level accuracy is beneficial when introducing new products, adopting new markets, developing new product strategies, and making product mix and outsourcing decisions. Companies with homogenous products and labor-intensive operation gain little from ABC (Tatikonda, lakshmi, 00).

Activity based system that aims at reduction of product cost distortions, which is in turn cased by old cost accounting system is its aim.

Conclusion/comments

The paper is well presented and organized. The research topic is very interesting, being an exploratory research; it has created awareness and led the foundation for further research to be done on this topic. An important contribution of this research is to highlight the need for additional research work especially with first hypotheses. Further studies, in different geographic areas, and with applying the test on different industries may well bring all the limitations of this research in ways that would be more agreeable by a wider audience. Finally, the paper did not allow the reader to know whether or not the pilot test was conducted. I would highly recommend this test to be conducted and clearly stated in the paper as well as recommending a face to face interviews with the respondents instead of the questionnaires.

The paper is an exploratory study that tends to provide evidence related to the characteristics of companies who adopt ABC in comparing to those who don't adopt.

These evidences are corresponding to some past research work that gave the impression that companies, which adopt ABC, would have different characteristics in compare to those who don't adopt ABC.

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