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Activity Based Costing (ABC) Adoption Among Manufacturing Organizations - The... Ruhanita Maelah; Daing Nasir IbrahimInternational Journal of Business and Society; Jan 2006; 7, 1; Universiti Malaysia Sarawak pg. 70

70 International Journal of Business and Society, Vol.7 No.1, 2006: 70-101

Activity Based Costing (ABC) Adoption Among Manufacturing Organizations - The Case Of Malaysia

Ruhanita Maelah" and Daing Nasir Ibrahim')

a Faculty of Economics and Business, Universiti Kebangsaan Malaysia 43600 Bangi, Selangor, Malaysia

b School of Management, Universiti Sains Malaysia 11800 Pulau Pinang, Malaysia

ABSTRACT

The main purpose of this research is to study the adoption of ABC as an overhead costing system among manufacturing organizations in Malaysia. The stages of adoption and seven factors expected3 to influence ABC adoption are derived from previous studies in similar research area. This study uses two methods of data collection, a survey and a case study. The study shows that 36 percent of the organizations are ABC adopters while the remaining 64 percent are non-adopters. The regression analysis performed on the data showed that three factors which are decision usefulness, organization support, and internal measures had significant influence on ABC while the other four factors namely cost, IT, training, and learning and growth were not found to be of any significant influence. A case study was performed on three selected organizations that adopt ABC. Through the case study, a more detail information on organizations' overhead costing technique can be gathered. Apart from the seven factors investigated through the survey method, the case study includes aspects such as the background of change from traditional overhead costing system to ABC, barriers to change and the approaches used to handle them. The findings from the case study complement the findings from the survey by providing explanations to the information gathered through the survey method.

Keywords: Overhead costing; Manufacturing; Costing techniques.

* Corresponding author: Ruhanita Maelah, School ofAccounting, Faculty of Economics and Business, Universiti Kebangsaan Malaysia, 43600 Bangi, Selangor, Malaysia. E-mail: ruhanita@ plcrisc.cc.ulcm,my

Activity Based Costing Adoption among Manufacturing Organizations 71

I. INTRODUCTION

In the traditional accounting system, treatment of overhead fails to adequately capture causal relationship between product and cost incurrence. Under the system, costs are best seen as controlled by the departments. The traditional overhead costing system emphasizes on the efficient use of resources, and focuses on product. Furthermore, traditional cost accounting reports financial information such as ROI, profit and market share. In the 1980's much criticisms were raised regarding the ability of traditional cost accounting to provide relevant, timely, and accurate information to the management. ABC emerges in recognition that traditional costing system produced inaccurate information. In ABC, costs are seen as best controlled by managing activities. Emphasis is shifted to the effective use of resources. ABC improves accuracy over traditional system by using multiple cost drivers including set-up hours, number of orders, and number of shipping. In addition, it also integrates financial and non-financial information in the reports.

ABC has been studied from various perspectives for quite some time in many countries. Even though studies have shown that the adoption of ABC benefits the organizations, its level of adoption is still considered low. Many organizations hang on to the traditional cost accounting methods in dealing with overhead costs. This study attempts to investigate the status of ABC adoption among manufacturing organizations in Malaysia, and the factors influencing its adoption. It is also interesting to learn from the experience of two firms already adopted ABC yet still at the initial stage, and another firm which has reached a mature stage of ABC adoption.

II. RESEARCH OBJECTIVES

The general objective of this study is to increase the understanding of ABC adoption inmanufacturing organizations in Malaysia. Specifically, the objectives are as follows:

1.To determine the adoption status of ABC system among manufacturing organizations in Malaysia, tliiis establishing a foundation for future research on ABC adoption and implethentation in this region.

2.To investigate whether certain factors (Cost, Decision, IT, Top Management, Non-Accounting, Training, and Performance Measurement) have any influence on the adoption of ABC in manufacturing organizations in Malaysia, thus adding to the existing pool of research in this field from the perspective of a developing country.



72 International Journal of Business and Society

3. To understand and explore further ABC adoption in specific manufacturing organizations

III. LITERATURE REVIEW

The literature review for this study includes three main area of research: ABC, organizational change, and implementation literature

ABC Literature

Jones and Dugdale (2002) traced the development of ABC from as early as 1980's. They explored the rise ofABC through the understanding of how management accounting theories and practices come into being, and by identifying the relationship between the two. While the primary focus of the study was on the construction of ABC between 1984-1992, their study also established the link to other theories and practices such activity accounting, total cost accounting, Activity Based Budgeting, Activity Based Cost Management, and Activity Based Management.

A review of literature on ABC looks into various variables that have been used in previous research (refer to Table 1). ABC implementation studies have focused on factors leading to ABC success as measured in various ways. Variables such as implementation success, satisfaction, and attainment of ABC stages are commonly used in ABC literature. However, most of these studies have not segmented the adoption stages of ABC. Their focus is mainly on factors that lead to ABC success, which can be measured in various ways.

Table 1: Summary of Selected Prior ABC Implementation Research

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NSA Use and Satisfaction with ABCSwenson (1995) Telephone Survey of 50 individualsa t 2 5 f i r m s

Innes and Mitchell Survey of 251 UK manufacturing(1995) and non-manufacturing firms

Gosselin (1997) Mail survey of 161 Canadian Manufacturing SBUs

Foster and Swenson Survey of 166 ABC users at 132(1997) companies, field visits to 15 sites

McGowan and Klammer Survey of 53 employees from 4 (1997) targeted states

StudyAnderson (1995)

MethodologyField Study of GM Corp (1986--1993)

Shields (1995) Survey of 143 firms that hadimplemented ABC

Activity Based Costing Adoption among A4antrfitcturing Org

Independent Variable - Various User- Organizational- Technological- External

Organizational factors:- Top management support - Quality- Evaluation/ pay- Training- Resource adequacy

- Sales Revenue- Top management support- Continuous Improvement- Adoption: Prospector strategy - Implementation: Vertical organizational structure, Centralized decision making, Formalized job procedures- Shields (1995) variables- Average years- Primary applications- Compensation - Champion- Cross functional support and

commitment- Culture- Shields (1995) variables- Objectives clarity - Quality of ABC info- Preparers vs. users - Involvement

Dependent Variable Attainment of implementation stages: - Initiation- Adopt ion - Adaptation - Acceptance Success as measured by:- Management evaluation- Dollar Improvement

Attainment of stage- Adoption

Attainment of stage - Adoption- Implementation

Success as measured by: - Usage- Decision Action- Management evaluation - Dollar Improvement

Success as measured by:- Employee satisfaction

Krumwiede (1998) Mailed Survey to Cost ManagementGroup members. 225 usable data


Table 1: Summary of Selected Prior ABC Implementation Research (continued)Mc Gowan (1998) Survey of preparers and users. 69 - Attitude Perceived benefits

respondents at 4 sites. - Technical characteristics- Perceived Usefulness- Perceived Organization Changes

Anderson and Young Survey and interviews at 2 sites(i999) (automobile manufacturer)

265 respondents

International Journal of Business and Soci

Contextual Factors- Potential cost distortions- Decision usefulness of info- TQM- Lean Prod System (LPS)- IT quality- JobOrganizational factors- Top management support- Non accounting ownership- Clarity and consensus with obj - Training- No of Purposes identified Contextual Factors:Individual- Change- Commit- ValuesOrganizational - Reward- Competition - Info Quality - Turbulence - Environmental Uncertainty- Importance of CostProcess Factor - Support

Expansion of Cooper & Zmud (1990) Attainment of stage1.Not considered2.Considering3.Considered then rejected4.Approved for implement5.Analysis6.Getting Acceptance7.Implement then abandon8.Acceptance9.Routine System10.Integrated System

Evaluation Measures of ABC Implementation:I. Overall2.Use

3.Accuracy


_► Initiate change

Environmental forcesNNeed for change —0. Implement change

Organizational Change Literature

ABC has also been linked to the theory of organizational change that can be classified into technology, products, structure, and culture. Like other changes in accounting systems, ABC adoption and implementation in organizations can be considered as an administrative procedure. Therefore it can be classified as a structural change which success depends on the top-down approach. According to Daft (1991), the overall model of a planned change is made up of four events: (1) Forces for change (2) Need for change (3) Initiating change, and (4) Implementing change. For the purpose of this study, this model (Figure 1) is used as the basis to guide the researcher in the data collection process.

Internal forces

Figure 1: Sequence of events in model of planned change (Daft, 1991)

According to the organizational change theory, change occurs in stages. Lewin (1952) suggested that three stages of change are involved; (1) Unfreeze, (2) Change, and (3) Refreeze. Kwon and Zmud (1990) adopted the organizational change theory to develop the IT implementation stage model. Instead of using the three-stage model as proposed by Lewin (1952), Kwon-Zmud the model describes IT innovation as a sequence of six stages; (1) initiation, (2) adoption, (3) adaptation, (4) acceptance, (5) routinization, and (6) infusion. It further suggested that success in achieving each stage is influenced by various factors such as (1) individual characteristics, (2) organizational factors, (3) technological factors, (4) task characteristics, and (5) external environment. Kwon and Zmud argued that stage differentiation is not distinct, and the significance of the above factors might vary across stages.

Studies by Krumwiede (1998), Krumwiede and Roth (1999) illustrate the adaptation of Cooper and Zmud (1990) IT Stage model to the adoption and implementation of ABC. Krumweide (1998) study divided ABC adoption and implementation into ten stages as follows: (1) not considered (2) considering (3) considered then rejected (4) approved for implementation (5) analysis (6) getting acceptance (7) implemented then abandoned (8) acceptance (9) routine (10) integrated. Krumweide argued that while contextual factors may indicate that ABC adoption is appealing, implementation issues are more related to the




organizational factors. Studies done by Krumweide looked into organizational factors after ABC adoption was made.

The study by Krumweide and Roth (1999) divided the ABC stages into the followings; (1) initiation (2) adoption (3) analysis (4) acceptance (5) action (6) Activity Based Management (ABM). Initially, the organizations that face pressure to improve their costing system will consider a change from traditional costing system to ABC. The proponents of ABC will then campaign to get approval for ABC adoption. Once the management has granted their approval, an ABC team will determine the scope of the system and develop a model for implementation. They will seek acceptance from other parties that will be affected by the system. At this stage, there is a general consensus that ABC system provides better information to the organization as compared to the traditional system used. The information generated from ABC system will then begin to be used. At the final stage, ABC is perceived as a normal part of organization's information system. Its continuous usage is expected to lead to the organization towards process improvement.

Implementation Literature

Issues associated with implementations can be studied at two levels of analysis: an organizational or macro level approach and an individual or micro level approach (McGowan & Klammer, 1997). The researches that use micro level approach tend to focus on the individual rather than the organization. Intended benefits of the implementation may be defined as enhancing decision-making skills, productivity, or use of the system. System success is measured in terms of perceptions of improvements in system quality, attitudes, or satisfaction of individuals involved (Mc Gowan and Klammer, 1997).

The guidelines that are derived from the macro level perspective emphasize the importance of planning and development to achieve organizational objectives. The emphasis may be on users as a group or subsystem of the organization. Shields (1995), Swenson (1995) and Anderson (1995) are among those who conducted their research through this approach. They believe that macro level studies of ABC implementations have revealed several interesting findings:

1.Managers, in general view ABC systems more favourably than their traditional overhead costing systems (Shields, 1995; Swenson, 1995).

2.The degree of success of ABC implementation varies across circumstances. Shields (1995) found success to be strongly linked with behavioural and organizational variables, but not to technical variables such as the type of software or the nature of the system. Anderson (1995) argued that the factors that influence implementation are context


specific. Anderson concluded that the extent to which specific organizational and technological factors, individual and task characteristics, and environmental factors influence implementation success vary across the stages of implementation.

Implementation research can be further characterized as factor or process studies (Schultz & Ginzberg, 1984). The focus of factor research is on the contextual variables associated with the implementation and their likely impact on the implementation success. The contextual variables include the characteristics of the organization, problem, technology and people involved in the implementation efforts. Process research focuses on the procedures involved in system implementation. The goal is to identify characteristics of a process that are most likely to lead to successful implementation. Hence implementation success is viewed as a sequence of stages that must be attended. Research by Mc Gowan and Klammer (1997), and Krumweide (1998) integrated both factor and process variables into one model.

The results of several case studies and surveys that document the implementation of ABC indicate that organizations benefit from the system. For instance, Haedicke and Feil (1991) described Hughes Aircraft Company's experience in ABC implementation and how it assisted management of the company to achieve world class status. Foster and Gupta (1990) examined the implementation ofABC at an electronic instrument manufacturing company and presented information regarding the attitudes of managers and employees towards the system. Foster and Gupta, however, found that the system had not been established long enough to assess its behavioural consequences. A research by Bhimani and Pigott (1992) examined the impact of changing the pattern and content of information on the behaviour of non-accounting staff at British pharmaceutical company. Their findings show how management accounting techniques can extend beyond technical use and be useful to break down functional barriers. Agyris and Kaplan (1994), use ABC as an example to describe the necessary requirements for successful implementation of a technical innovation. They focus on the importance of education and sponsorship in enabling change to occur. Finally, Anderson (1995) presents a case study of General Motors Corporation's experience with the adoption of ABC. She developed a model of cost system change that eventually described the effect of individual characteristics, and organizational, contextual and technological factors on the success of ABC during six stages of implementation.

Other than case research, survey research has also contributed to the understanding of ABC implementation in organizations. Mailed questionnaire by Bailey (1991), Innes and Mitchell (1991), and Nicholas (1992) to managers of UK firms reported positive findings on benefits and future ofABC. Swenson (1995) presented the results of a telephone survey of 50 financial and operating managers' satisfaction with ABC at 25 manufacturing firms. It indicated that




participants view ABC as an improvement over their old cost management systems. Shields (1995) reported the results of applying a comprehensive model to the study of the behavioural consequences associated with ABC. He concluded that attending to the technical aspects is insufficient to achieve general success with ABC implementation. The findings highlight the need to focus on behavioural and organizational variables in the implementation process. Libby and Waterhouse (1996) examined the relationship between management accounting and control systems and several organizational and contextual variables at 24 Canadian organizations. They presented evidence of strong positive relationship between changes in management accounting control systems and organizational capability to learn.

A comprehensive study on ABC among developing countries, especially from the Asian region is limited. In Singapore Ghosh and Chan (1997), in a longitudinal study surveyed companies from various industries in Singapore on the management accounting practices used in their organizations. ABC was ranked twelfth in terms of management accounting techniques used. ABC was used by 12 percent of their sample from organizations in various industries. ABC however was not included among the management accounting practices surveyed in their earlier study in 1984-1985. Based on the findings, they concluded that ABC is slowly being accepted and used by various organizations in Singapore. The study however did not test for any variation between industries.

In Malaysia, an extensive study on ABC is non-existent. The studies are limited to surveys of firms on the use of various management accounting tools including ABC. The study, however focused specifically on the adoption of ABC among organizations in manufacturing industry. Chun, Kassim, & Minai (1996) conducted a study on management accounting practices among manufacturing organizations in Malaysia by using the Federation of Malaysian Manufacturers (FMM) Directory as the sampling frame. The study did not focus on ABC and issues in relation to this system. Instead, the study adopted a more general approach by looking at the extent of usage for various traditional and non-traditional management accounting systems.

Chun et al. (1996) in their survey on 92 companies from food, textile, chemical, fabricated metal and electrical and electronics industries in Malaysia found that on the average overhead cost represents 17 percent of total production cost. Their study found that ABC is relatively infrequently encountered in Malaysia. The reasons cited that firms were slow to adopt ABC because they neither not convinced of its benefit nor felt comfortable with the existing cost system. They also found that dual or multiple costing systems are common among ABC adopters. The traditional system was used to cater for financial accounting reporting while ABC is used for cost management and strategic decisions. Chun et al (1996) findings also


show that 89 out of 92 respondents believed that information generated by management accounting systems was useful. A significant percentage of the respondents found the information important to perform management functions - planning, control and decision-making. Abdul Rahman et al. (1998, 2003) did two consecutive studies on ABC practices in Malaysia by using survey method. The first study found that ABC adoption rate among public listed companies in Malaysia was 4.2 percent. In another study, they found that 18.3 percent of the small and medium industries in Klang Valley area introduced some forms of ABC method in their business. The same study found that two most important problems cited by the respondents were high cost (69.2 percent), and impossibility to use ABC to prepare financial statements (53.8 percent)

Gunasekaran et al. (1999) concluded that ABC system was not used much in European countries. ABC was used by 4 percent of companies in Belgium and The Netherlands. The system was used mainly as a secondary cost system. The study cited four cases using a conceptual model for decision to adopt ABC that was influenced by conditions favouring ABC applications, factors against ABC implementation, implementation of ABC, and timing of ABC. In other countries, Ghosh and Chan (1997) reported that overhead represented an average of 12 percent of production costing various industries. Murphy and Braund (1990) reported 34 percent, and Kerremams (1991) reported 31 percent in UK and Belgium respectively.

IV. FRAMEWORK OF THE STUDY

Figure 2 shows the theoretical framework of this study which consists of seven independent variables and a dependent variable.

EXTERNAL FACTOR:U C O S T

TECHNOLOGICAL FACTOR:U DECISIONU I T _________________________________►

ABCORGANIZATIONAL FACTOR: ADOPTION

U TOP MANAGEMENTU NON-ACCOUNTINGU TRAININGU PERFORMANCE MEASUREMENT _____________________________

Figure 2: Theoretical framework




V. DEVELOPMENT OF HYPOTHESIS

The development of hypotheses in this study is based on organizational change theory and IT implementation stage model. Organizational change is typically classified into four; technology, products, administrative, and culture (Daft, 1991). A shift from traditional cost accounting system to ABC system is considered as an administrative change. Anderson (1995) and Anderson and Young (1999) surveyed the literature on ABC and information technology implementation and compiled a list of variables used in ABC implementation research. The variables are grouped into five categories of factors as explained by the IT implementation stage model in the literature review section.

A study by Shields and Young (1989) developed a comprehensive theoretical model that was applicable to ABC based on the assumption that ABC is an administrative innovation in organizations. They argued that the adoption decision and implementation was determined more by specific behavioral and organizational variables. Similarly, earlier studies have shown that implementation issues may emerge if organizations neglect the organizational factors involved in making the change in cost management systems (Agyris & Kaplan, 1994; Cooper et al., 1992; Shields, 1995). Anderson and Young (1997) have argued that certain contextual variables may affect both adoption and implementation stages of ABC while organizational factors may affect implementation stages only. Accordingly, Krumweide (1998) tested organizational factors on ABC adopters only. Her findings showed that although the model overall predictive accuracy was 72.4 percent, the Likelihood Ratio Index for the logistic regression analysis is relatively low at 0.22. Based on that, Krumweide suggested that firms considering ABC adoption should give special consideration to organizational factors as well. Therefore, the present study tested all groups of independent variables (external, technological, and organizational) for their influence on ABC adoption.

The theoretical and empirical research suggests a number of variables that may affect ABC adoption. Seven independent variables chosen are Cost, Decision, IT, Top management, Training, and Performance Measurement. Consistent with the stage model of IT implementation, the variables are grouped into external, technological, and organizational factors. Table 2 shows a summary of the independent variables used in the present study.


Table 2: Summary of Independent Variable* Definitions

VARIABLE DEFINITION

1 Cost Degree of potential cost distortion2 Decision Degree of decision usefulness of cost information3 IT Quality of existing IT in the organization4 Top Management Level of top management support5 Non Accounting Level of non-accounting ownership towards ABC6 Training Level of ABC training provided7 Performance Measurement Use of financial and non-financial measures

Note:* Composite score of five point Likert scale is used to operationalise the variables.

A set of questionnaire was distributed to the accountants and head of accounts of manufacturing organizations identified from the sampling frame. Both the nominal and interval scales are used in this questionnaire. Nominal scale qualitatively distinguishes groups by categorizing them into mutually exclusive and collectively exhaustive sets. In the questionnaire, the nominal scale is used to capture respondents' and organizations' background, and their overhead costing method. The information that can be generated from nominal scaling is to calculate the percentage, frequency, mean, and standard deviation of the data.

On the other hand, the interval scale is used to capture the significance of independent variables listed in Table 2. For each variable, the questionnaire lists at least three statements and the composite score is used to represent each variable. The interval scale groups respondents according to certain categories and taps the order of these groups. It also measured the magnitude of differences in preferences among the respondents. Respondents were asked to indicate their responses to various aspects of ABC. Their responses were captured on a five point Likert scale that utilizes the followings: (1) Strongly Disagree (2) Disagree (3) Somewhat (4) Agree and (5) Strongly Agree. In responding to the questions, the respondents indicated the extent to which they agree or disagree to a variety of statements on factors that were expected to have influence on ABC adoption.

In identifying themselves with the types of overhead costing techniques used, definitions of plant-wide overhead rate, departmental overhead rates, and ABC were provided. In addition, the respondents also indicated the extent of usage of such techniques using a five point Liken scale that utilizes the followings: ( 1 ) None at all (2) A little (3) Moderate Amount (4) Quite a bit and (5) Very much.




Abernethy, Lillis, and Brownell (2001) acknowledge the influence of product diversity in the choice of costing system design. They indicated that the technology that is used to manage diversity also influences the costing system. The study provided insights by proposing a framework of how product diversity, cost structure, and advanced manufacturing technology influence the design of a costing system. Potential cost distortion, which was included as one of the variables (Cost) in the present study was defined as the degree of potential for cost distortions. Cost is related to the diversity in product, support, processes, volume and degree of overhead costs. Anderson (1995) and Estrin et al (1994) found this variable might affect ABC adoption. Cost was also found to be an important motivator in adoption and routinization of ABC (Krumweide, 1998). Krumweide found that a firm's potential for cost distortion was a highly significant factor in ABC adoption. The present study examines this relationship relative to the following hypotheses:

H 1: There is a positive relationship between high potential of cost distortion and ABC adoption.

ABC system generates a more detailed and accurate accounting information. The information is useful in assisting the management in making various decisions. The more informed management makes better decisions for the organization. In the present study, the degree of decision usefulness of cost information was included as one of the variables (Decision). It is affected by the competitive environment, and the organization's need for cost data in strategic decisions and cost reduction efforts. A study by Cotton et al. (2003) is a replication in New Zealand of Innes et al. (1999) UK survey of ABC usage and comparison of both findings. The study found that the importance of ABC applications include cost reduction, pricing, performance measurement or improvement, and cost modelling. The study found that more than 60 percent of the ABC adopters use the system for such purposes. The present study examines this relationship relative to the following hypotheses:

H2: There is a positive relationship between decision usefulness of cost information and ABC adoption.

Previous literature on the impact of information technology on ABC varies. Managers with higher quality IT may feel more comfortable to implement ABC than their less sophisticated counterparts because of lower costs of measurement (Cooper, 1988). However, Anderson (1995) pointed out that managers who were satisfied with information provided from existing system might be reluctant to invest their resources in ABC, and found evidence that the quality of IT is negatively related to management's evaluation of overall value of ABC. Krumweide (1998) found that strong existing IT might encourage either rejecting or


abandoning ABC. However she also found that IT was integral in reaching the highest level of ABC implementation. The dimensions for IT quality include the accessibility of information, user friendliness of the information system, availability of detailed information, the variety of cost data, and timeliness of the information provided by the system (Krumweide, 1998). The present study examines this relationship relative to the following hypotheses:

H3:There is a negative relationship between information technology and ABC adoption.

Shields and Mc Ewen (1996) found in their survey that top management support is the most important factor in determining how successful an ABC implementation is. Shields and Mc Ewen (1996), and Krumweide (1998) stated that linkage to corporate strategy and adequacy of resources are assumed to be closely related to top management. The decision to adopt ABC should be well considered because the change required resources in terms of man-hours, capital and involvement of employees. Top management might resist ABC system because it includes financial investment in terms of purchasing ABC software and hardware, training of employees, and documentation of detailed cost data (Gunasekaran et al, 1999). The present study included both items, linkage to strategy and adequacy of resources to explain one of the variables, top management. The present study examines this relationship relative to the following hypotheses:

H4:There is a positive relationship between top management support and ABC adoption.

Cooper et al. (1992) provided insight on why eight organizations in his study experienced delay and difficulty in getting ABC used for decisions and actions despite using high technical approaches in the design. In most of these organizations, ownership of ABC remained with the accounting employees. They suggested that the implementation of ABC can be more effective if non-accountants are involved since the early stage. Since ABC can provide important economic information about all parts of a company, broad ownership increases the chances that non-accountants will support and promote ABC and be committed to its use and success. When ABC is owned by accountants, there is the danger that it might be used only to satisfy their needs, which often relate to status within the accounting profession and external reporting. The consequence can be a cycle of ABC designs without corresponding management action. The present study examines this relationship relative to the following hypotheses:




H5:There is a positive relationship between non-accounting ownership and ABC adoption.

Tait and Vessey (1998) argued that the internal constraints of an organization including the availability of trained manpower influence the impact of its projects. They found that training is an important element toward the efficient use of the information provided by a system, and it is also vital in promoting acclamation to the system. They suggested that organizations should have sufficient training resources available to prevent their employees from feeling pressured by the process of change. Training reflects the level of training involved in the design, implement, and use of ABC. These three training phases were combined by Krumweide (1998) who considered Shields (1995) finding that high correlation exist among the phases as well as with the ABC success. She found that training relates to reaching the highest stage ofABC implementation. Similarly, Shields (1995) and McGowan and Klammer (1997) found that user satisfaction of ABC system is positively influenced by the adequacy of training provided. The present study examines this relationship relative to the following hypotheses:

H6:There is a positive relationship between training and ABC adoption

Linkage between the use of ABC and performance measurement is important to motivate and reward employees to accept ABC and to use the information it generates. Schultz and Ginzberg (1984), and Agyris and Kaplan (1994) suggested the degree to which user's personal stake were linked to may affect behavior towards the system. Therefore, individuals who believe that performance evaluation is associated with ABC are expected to be more motivated to work towards the successful change from traditional overhead costing system to ABC. Studies by Mc Gowan and Klammer (1997), and Shields (1995) supported the positive relationship between ABC and performance measurement system. The present study examines this relationship relative to the following hypotheses:

H7:There is a positive relationship between performance measurement and ABC adoption.

In terms of dependent variable, ABC adoption will be used. Although previous studies suggest that it is best to look at ABC implementation in its various stages, preliminary study done by the researcher showed that ABC practices in Malaysia are still at an infancy stage. The preliminary study also indicated that there are a small number of adopters in Malaysia and the concentration is at the early stages. Therefore, for the purpose of this study, the differentiation is made based on whether the organization is ABC adopter or non-adopter. However, the status of ABC adoption will be determined based on the implementation stage models discussed earlier. This will provide insights on the usage of ABC system


among manufacturing organizations in Malaysia. In order to further explain the independent variables from the perspective of organizations that adopted ABC, a case study approach has been used. The case study will capture the ABC adoption and implementation process as experienced by specified organizations.

Cooper and Zmud (1990) implementation stage model has consistently been used as dependent variable in previous studies on ABC. Their model include six stages; (1) Initiation (2) Adoption (3) Adaptation (4) Acceptance (5) Routinization (6) Infusion. Krumweide (1998) further refined them into ten stages; (1) Not considered (2) Considering (3) Considered then rejected (4) Approved for implementation (5) Analysis (6) Getting acceptance (8) Implemented then abandoned (9) Acceptance, and (10) Routine system. Cooper and Zmud (1990) provided definitions to each stage used in their study in relation to process and product while Krumweide (1998) provided descriptive definitions on the ABC stages used in her study. Krumweide (1998) admitted that in her (and any other) model, stage distinctions are not as clear-cut. Organizations may lie somewhere between two stages or even reside in more than one stage simultaneously. It is assumed that organizations go through these stages in such sequence. The later classification of ABC implementation stages by Krumweide (1998) is seen as very comprehensive. It is also highly comparable with that of Cooper and Zmud (1990).

Variables like implementation success, satisfaction, and attainment of ABC stages are commonly used in ABC literature. However, most of these studies have not segmented the implementation stages of ABC. Their focus is mainly on factors leading to ABC success as measured in various ways. Two problems emerged as the result of using a combined multiple stages:1. Factors not found significant may have been significant for certain stages but masked

by less significant (or significant in different direction) for other stages.2. Factors that were found significant may have had coefficients that were biased by varying

parameter estimates in different stages. Thus it is possible that no single stage had the parameter coefficients that were reported.

In other words, important differences between specific stages would have been missed if only binary dependent variables (adopt/ non-adopt, user/ non-user) were used (Krumwiede, 1998).

While understanding the importance of differentiating the stages of ABC implementation, the present study was unable to classify the stages according to either one of the studies mentioned earlier. Instead, the present study classifies ABC application into adoption and




non-adoption. This is due to the infancy of ABC in Malaysian manufacturing environment. It is anticipated that in manufacturing industry in Malaysia, most organizations are non-adopters of ABC. Furthermore, among those who adopt the system, the majority is at their early stage of implementation. Therefore it is anticipated that differentiating the stages further is not statistically justified. The ABC adoption used as dependent variable is defined in Table 3.

Table 3: Comparison of ABC Stages

Cooper and Zmud (1990) Krumweide (1998) Present StudyInitiation Not considered

ConsideringConsidered then rejected

Adoption Approved for implementationAdaptation Analysis

Getting AcceptanceImplemented then abandoned

Acceptance AcceptanceRoutinization Routine systemInfusion Integrated system

Non- adoption

Adoption

VI. METHODOLOGY

Prior to conducting the actual survey, a pilot study was conducted. It was done mainly to assess the appropriateness of the questionnaire, and to gain preliminary knowledge of the area under study. Data from the pilot test was incorporated as part of the overall findings. The initial findings from the survey in the pilot study showed that most manufacturing organizations in Malaysia still use traditional overhead costing method. The pilot study also revealed that those that those who adopt ABC are still at the preliminary stage of implementation. Therefore it is anticipated that a survey of manufacturing organizations across the country will reveal similar situation. Since the focus of the present study is on ABC adoption, the lack of data on ABC adopters became a concern that can limit the analysis. In order to overcome this limitation, the data collection methods of this study include both survey and case study. The focus is to describe and understand the ABC adoption at these organizations with regard to similar issues discussed in the survey.


Survey

The sampling frame for the survey method is organizations listed on KLSE main and second boards, and the organizations listed in the Foreign Companies in Malaysia Yearbook directory. Companies listed on KLSE are categorized into thirteen types of industries; Consumer products, Industrial products, Construction, Trading/ Services, Infrastructure, Finance, Technology, Hotels, Properties, Plantation, Mining, Trust, and Closed-end fund. The first two industries mainly comprised manufacturing companies. The listing requirement assured that the companies have a minimum issued and paid up capital of RM60 million for listing on Main Board, and RM40 million for listing on Second Board. As of June 30, 2000, a total of 347 companies fall in this category.

The Foreign Companies in Malaysia Yearbook (2002) classified organizations into 32 industries, one of which is manufacturing. Companies listed under this category are used as part of the sampling frame for this study. A total of 910 companies from the manufacturing industry from the 2001 Yearbook are included in the survey.

Most of the questions used in this study are adopted from studies conducted by Krumweide (1998), Shim and Stagliano (1997), and Shields and Mc Ewen (1996). In order to strengthen construct validity, the survey instrument includes multiple questions for all the variables tested. The composite scores of these variables have the advantage of capturing more of a construct's multi-dimensionality than individual questions (Foster & Swenson, 1997). In this study, the composite factors are measured by converting the raw responses to Likert five-point scales for each factor's set of questions into a composite score.

A total of 1,257 questionnaires were mailed. The questionnaires were directed to the accountants or heads of accounts of selected manufacturing organizations in Malaysia. Follow-up reminders were sent to the organizations after two weeks. A total of 145 sets of questionnaires were returned to the researcher. This represents 11.54 percent response rate. The unreturned questionnaires were 1112 or 88.46 percent. Of the responses received, only 108 questionnaires are usable for analysis. Others are excluded from the analysis due to one of the followings:

qIncomplete - omit crucial parts of the questionnaireqClosed downqSeized manufacturing operationsqDo not belong to the intended industry (manufacturing)qMoved to an unknown location




Data analysis was performed on 108 responses. The analysis includes descriptive analysis on the respondents and the organizations, determination ofABC adoption status, descriptive study on ABC adopters, Factor Analysis, Test of Response Bias (industrial- Consumer Industries, and Early and Late Responses), Test of Reliability, and Logistic regression to determine the influence of various variables on ABC adoption.

Case Study

The research site for this study is identified through responses from the survey questionnaire. Initially, three organizations indicated their willingness to participate in the case study. However, one decided not to participate when approached. Another organization was solicited for replacement. Due to the confidentiality of the information shared by the organizations, this study does not reveal the identities of the representatives and the three organizations. Throughout this study, these organizations are addressed as Casel, Case2, and Case3. The researcher has some information regarding the background of organization and respondent, the organization overhead costing system and its ABC application prior to conducting the case study. The data collection methods are interview, review of documents, and visits to the organizations. The accountant is the sole representative or the provider of the information for each organization. He shared the experience of the organization in ABC adoption. A descriptive case study is written for each case based on the model of change sequence. The aspects covered in the case study are the background of the organization, the forces and need for change, initiating change, implementing change, and factors influencing adoption. This model was used as the basis to guide the researcher in the data collection process.

Yin (1987) identified six sources of evidence that can be the focus of data collection for case studies: documentation, archival records, interviews, direct observations, participant-observation, and physical artifacts. Of these', the first four are found suitable for this study and discussed below.

The use of multiple approaches in examining the research issues also increases the reliability of common findings across these approaches (Birnberg et al., 1990). Therefore, in addition to survey, structured interviews were conducted with the accountants of the organizations. The researcher followed a certain set of questions derived from a self-developed question guide. The interviews allow verbal exchanges between the two parties and more importantly it allows the respondents to provide explanations to issues in hand. Furthermore, the researcher can acquire better understanding of these organizations in areas such as accounting systems, operations, products and consumers. Clarifications can also be made during interviews to avoid any possible misunderstandings. The researcher made two visits to each


research site thus creating opportunity for direct observations of the manufacturing environment of the organizations. Observational evidence is often useful in providing additional information about the topic being studied. A tour around the production facility was also incorporated to get a clear understanding of the production process. In addition, the accountants were also contacted through numerous telephone calls and e-mails to verify information, and to gather additional information. The secondary data was gathered from the publications and internet sources. The accountant also provided various documents as mentioned above during the visits.

Three types of data have been collected; background of the organization, ABC adoption process, and factors influencing ABC adoption. Information on the background of the organization includes organization structure, operations and performance. In relation to ABC adoption process, the overall model of a planned change as discussed in Chapter 2 of this study is used. The model outlines four sequential events in any change process; forces for change in the organization's accounting system, the need for change, initiating change, and implementing change. In addition, the study also gathered more information regarding the factors influencing ABC adoption (Cost, Decision, IT, Top Management, Non-Accounting, Training, and Performance Measurement).

VII. RESTATEMENT OF HYPOTHESIS

The factor analysis conducted on the survey data resulted into the formation of new variables. This gave rise for the need to restate the hypotheses. The hypotheses for further analysis are as follows:

Table 4: Hypotheses Tested

H 1: There is a positive relationship between potential of cost distortion and ABC adoption.H2:There is a positive relationship between decision usefulness of cost information and ABC

adoption.H3:There is a negative relationship between information technology and ABC adoption.H4:There is a positive relationship between organization support and ABC adoption.H5:There is a positive relationship between training and ABC adoption.H6:There is a positive relationship performance measurement and ABC adoption.

H6A: There is a positive relationship performance measurement (learning and growth) and ABC adoption.

H6B: There is a positive relationship performance measurement (internal measures) and ABC adoption.




VIII. FINDINGS

Findings - Survey

From the descriptive analysis in Table 5, it can be seen that 39 organizations (36.11percent) of the organizations adopt ABC. The remaining 69 organizations (63.89 percent) do not adopt ABC. Among the non-adopters 48 percent have not considered using ABC in their organizations while only 3 percent had considered but rejected its adoption. Most of the ABC adopters (11 percent) are at the analysis stage. Another interesting finding from the survey is that none of the adopters that implemented ABC abandon the system.

Table 5: ABC Adoption Status

ABC Adoption Status Frequency (N=108) Percentage ABC Adoption

Not considered 52 0.48Considering 14 0.13 Non-adoptionConsidered then rejected 3 0.03 N = 69Approved for implementation 6 0.06Analysis 12 0.11Getting acceptance 2 0.02Implemented then abandoned 0 0 AdoptionAcceptance 8 0.07 N= 39Routine system 4 0.04Integrated system 7 0.06

From the Classification Table in Table 6, it can be said that for 8 cases, the model predicted the value 0-non adopt, but the actual value (observed value) was 1- adopt. It also shows that if the model were to predict the Y-values as 0 or 1, the model would be correct 87% times. This is a high percentage compared to the naïve model of 50 percent.

Table 6: Classification Table*

Observed

PredictedAdopt Percentage Correct

0.00 1.00Adopt 0.00 63 6 91.3

1.00 8 31 79.5Overall percentage 87.0

Note:* The cut value is .050.



Table 7: Variables in the Equation

B S.E Wald df Sig Exp(B)

95.0% C.I. for

Lower Upper

Stepla VI 1.03 0.64 2.52 1 0.11 2.80 0.78 9.97V2 1.59 0.76 4.37 1 0.03 4.91 1.10 21.81V3 0.40 1.00 1 0.31 0.66 0.30 1.47V4 3.24 1.10 8.69 1 0.00 25.65 2.96 221.81V5 0.70 0.72 0.94 1 0.33 2.02 0.48 8.37

V6A - 0.79 0.82 1 0.36 0.48 0.10 2.30V6 1.15 0.55 4.39 1 0.03 3.17 1.07 9.35

Constant - 6.43 12.19 1 0.00 0.00

Note:a Variable(s) entered on step 1: VI, V2, V3, V4, V5.

Based on this finding, the logistic regression equation is as follows:

LnIProb(Y=1) / (1-Prob(Y=1)l =

0.00+ 2.801 (X1)+ 4.911 (X2)+ 0.665 (X3)+ 25.651 (X4)+ 2.022 (X5)+ 0.488(X6A)+ 3.176 (X6B)(0.112) (0.036) (0.315) (0.003) (0.331) (0.365) (0.036)

where: (Y=1) = The probability of ABC adoption.X 1 = CostX2 = DecisionX3 = ITX4 = Organization SupportX5 = TrainingX6A = Performance measurement - Learning and GrowthX6B = Performance Measurement - Internal Measures

The finding suggests that Decision, Organization Support and Internal Measures have significant influence on the adoption ofABC among manufacturing organizations in Malaysia analysed in the present study. The value in parentheses denotes the significant value of each variable. Therefore hypotheses 112, H4, and H6B cannot be rejected while hypotheses H1, H3, H5, and H6A were rejected.



Discussion of Survey Findings

This study provides empirical evidence that Decision, Organization Support and Internal Measures are statistically related to the adoption ofABC among manufacturing organizations in Malaysia. The findings are based on the logistic regression analysis performed on the data. The results provide support for hypotheses H2, H4, and HMI

Usefulness of cost information for decision making was one of the three factors found to have a significant positive influence on the adoption of ABC. This finding is consistent with previous studies that test such relationship. Cooper (1988) argued that the decision usefulness of cost information is related to the cost of errors associated with it. He further explained that the degree of competition caused the changes in cost of errors faced by the firms. Several forms of cost of errors are as follows:

1.Making poor product related decisions, such as aggressively selling unprofitable products, setting prices inappropriately, and introducing products into an unprofitable niches;

2.Making poor product design decisions, such as increasing the number of unique parts in a product or reduce its direct labor content when the cost of maintaining those parts exceed labor savings.

3.Making poor capital investment decisions based on overhead savings that do not materialize.

4.Making inaccurate budgeting decisions about the level of operating expenses required.

The importance of decision usefulness of cost information is also apparent during the ABC adoption exercise at GM and Harris Semiconductor. One of the many important conclusions drawn by Anderson (1995) was the two criteria that GM set: that the ABC system should be broadly applicable to many different processes, and that ABC results in better decision making. Similarly, at Harris Semiconductor, ABC was initiated to obtain better product costs. The data was later used in other decisions such as whether to continue to make certain products, and negotiate prices with their customers.

ABC may generate product or service line costings that differ from those produced by a traditional system primarily associated with their indirect cost content. In situations where the element of cost is material and the traditional methods of overhead costing do not adequately capture resource consumption, the use of ABC would improve product cost information. There is also some evidence that suggest those who implemented ABC experienced of the short-term benefits in the area of cost control (Innes & Mitchell, 1990).

ActivityBased Costing Adoption among Manufacturing Organizations 93

The use of ABC would. generate information of relevance to cost control because overheads are made more visible through pooling by activity and their underlying cause, to the extent it is reflected in their cost driver. In addition, budgets and responsibility accounting can also be conveniently incorporated within the ABC framework (Brimson & Fraser, 1990). However, recognition should be made of the nature and variation in the system as the creation of a system designed is intended to meet the needs of the specific organization concerned. ABC should not be viewed, as a complete general-purpose system that will meet all cost information needs. Therefore, it should be noted that any system has some limitations and if not carefully designed and monitored will have the potential for dysfunctional consequences for the adopting organizations.

Organization support was another factor found to have a significant positive influence on the adoption of ABC. Organization support in this study relates to the support received from management and the non-accounting departments. This finding is consistent with many earlier studies. In a study that was guided by field observations, Cooper et al. (1992) concluded that based on their study of eight implementations, top management sponsorship was a key success determinant. Anderson (1995) found that ABC system should reside in manufacturing, not in accounting. She also found that knowledge of production process is very important in ABC success.

Performance Measurement - Internal measures was also found to have a significant positive influence on the adoption of ABC. The finding is consistent with Abu Kassim et al. (1989) who found that manufacturing organizations in Malaysia place a great emphasis on financial measures. Their findings showed that sales and product quality were the most used financial and non-financial measures. In a later study, You and Rabani (1998) examined the nature of competition and other firm related variables influence performance indicators of manufacturing firms in Malaysia. They found that emphasis on financial measures was not significantly different from non-financial measures. The level of emphasis placed on financial and non-financial measures varied with the perceived competition.

Krumweide (1998) found that a firm's potential for cost distortion is a highly significant factor in decision to adopt ABC. The present study however, concludes otherwise. Data from the survey revealed that 65.7 percent of the organizations manufacture industrial products, 78.7 percent of them produce multiple products and only 26 percent incur overhead cost of less than 25 percent. This provides evidence that a high potential for cost distortion exist among these organizations. Even though the potential for cost distortion exist, research have shown that firms seldom redesign their cost systems. Normally, a cost system would last for several years because the cost to redesign a cost system is perceived to be very high.


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An organization would change when the net present value of the benefits from improved product cost is greater than its redesign costs (Cooper, 1988).

According to Cooper (1988), traditional cost systems tend to report distorted product costs when the products consume a variety of inputs. In addition, product diversity also reduced the accuracy of reported cost. The distortion occurred because traditional cost systems reports average product cost based on limited allocation bases (direct labor and machine hours). The system was not able to capture an accurate overhead cost consume by each product. As a result, certain product may be overstated while another understated. Volume based cost systems are unable to differentiate adequately between overhead consumed by low and high volume products (Cooper, 1988). As percentage of overhead to total product increases, it becomes more important to effectively manage the overhead cost. Traditional cost system uses few volume based allocation bases. Thus it was not able to show the relationship between a product and the overhead level it consumed. ABC, in contrast provides a better insights into this relationship.

The findings from logistic regression analysis of the present study showed that IT quality was not significant in ABC adoption. Krumweide (1998) made an interesting finding regarding V3- IT. While IT was found to be not significant in her logistic regression analysis, this variable emerged as a significant variable with a positive co-efficient in ordered logistic regression analysis. Her finding suggests that ABC adoption is positively associated with strong existing IT. Due to the small number of adopters, the present study did not include an ordered logistic regression on the variables.

In relation to V5 - Training, Krumweide (1998) found that training is related to reaching the highest stage of ABC implementation. She explained that her study reflected level of training relating to the design, implementation, and usage of ABC. However, she combined the three phases due to their high correlation with ABC success in the study by Shields (1995). In the present study, most of the ABC adopters are at the initial stage ofABC implementation. Therefore, it is expected that training is not an important factor of ABC adoption among these organizations. However, a significant relationship between training and ABC adoption would probably be seen should the sample represents a different group of ABC adopters.

Findings - Case Study

The case study used the Model of Change Sequence of Events as a guide in the data collection process. The model states that planned change is made up of forces and need for change, initiating change and implementing change. The case study revealed that for Case 1, Case2,

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