THE EXTENT OF APPLYING THE ACTIVITY BASED ...journal-archieves18.webs.com/671-695.pdfTHE EXTENT OF APPLYING THE ACTIVITY BASED COSTING SYSTEM (ABC) IN THE FIELD OF IRON AND STEEL INDUSTRY

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INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS

COPY RIGHT © 2012 Institute of Interdisciplinary Business Research

671

MAY 2012

VOL 4, NO 1

THE EXTENT OF APPLYING THE ACTIVITY BASED COSTING

SYSTEM (ABC) IN THE FIELD OF IRON AND STEEL INDUSTRY IN

JORDAN

Dr. Khalil Mahmoud Al-Refa’ee

Associate Professor/ Department of Accounting

Al-Balqaa’ Applied University/Jordan Abstract

This research sought to identify the extent of applying the Activity Based Costing System

(ABC) in the field of iron and steel industry in Jordan. The research aims also at estimating the

viable accrued revenue as a result of implementing this system as well as at detecting crucial

obstacles encountering the execution of the ABC system in iron and steel industry in Jordan. In

order to achieve the goals of this study, a questionnaire was designed and distributed among the

body social consisting of nine iron and steel industrial companies in Jordan. Descriptive

Statistics was the basis of analyzing the feedback. The construed results showed that (71.4%)

of the selected body social does not employ the Activity Based Costing System (ABC). The

main reason for abstaining from applying the system is a firm conviction of the upper

management that conventional systems are proficiently sufficient to their immediate needs and

that there is no need to implement alternative new systems. However, another equally

important reason lies in the lack of tentative application in the field of iron and steel industry in

Jordan. The study concluded that iron and steel companies in Jordan ought to renovate and to

restructure their systems in order to comply with Activity Based Costing System (ABC). This

study also recommends to insistently promoting the (ABC) system within the upper

management of these companies, as the system comprises strategic edge upon other available

systems. Finally, the study also sponsors the idea of introducing and orienting these companies

with the system and to explain the benefits of implementing it.

Keywords: EXTENT ; APPLYING ; ACTIVITY BASED COSTING SYSTEM (ABC) ;

FIELD OF IRON AND STEEL INDUSTRY ; JORDAN

Introduction:

The iron and steel sector of Jordan is considered to be one of the major foundations that form

the national economy of Jordan. Due to the importance of this sector, and the increasing of the

competition, pressure to reduce the costs accompanying the rapid growth of technology, the

trend towards expansion which lead to the urgent need to increase the role of cost accounting

systems because it provides useful information for the management in the decision-making

process, and in adopting the appropriate strategies to ensure building of the organization and

it’s continuation.

All businesses seek to increase profitability both in short or long terms. In order to achieve that

it seeks to ensure the exploitation of available resources to achieve best value, benefit and the

lowest possible costs. It is customary in businesses that cost administration is applied through

dividing the organization into cost centers, and control costs within each center. Despite the

diversity of cost systems, they are all consistent in their approach to the direct costs. The main

controversy is the basis for allocating indirect industrial costs, which is what this research is

about.

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Accounting practice was applied to load product units its share of indirect costs through the

rate of single load, this method was appropriate at the time and circumstance when the value of

indirect industrial costs was small, in addition to the diversification of production was limited.

In the last decades, with the increasing lack of traditional cost accounting systems, especially

after the great technical development in various fields and global trends towards increasing the

facilities in trade which lead to the increase in competition where the need to find an alternative

cost system that loads each product including it’s own jurisdiction of the indirect costs

appeared in more depth and analysis.

Based on above, the urgent need to conduct a study to demonstrate the application of ABC

appeared, and to examine the risks that result from the continuation of applying the traditional

cost accounting system, because the ABC system enables businesses to determine the cost of

the product precisely, therefore the ability to set the optimal price for the product, which enable

competition and profitability at the same time.

Problem of the study:

The iron and steel sector occupies great importance in Jordan, in addition to its important role

in the national economy. It is also linked to the interests of a wide range of citizens. With the

entry of imported goods into the local market, this leads to increasing the competition, which

requires from facilities to work on improving the performance of the factors affecting the

profitability. One of its basic elements is reducing and rationalizing costs for its various

activities.

Nevertheless, the ABC system helps reduce and rationalize costs which till now isn’t that

urgent, which led these companies to lose many development opportunities in addition to

improving product and performance efficiency.

The problems of the study are summarized as followed: it is widely believed that many of the

iron and steel facilities of Jordan do not apply the activity based costs system, especially in the

field of reducing costs, due to the presence of some obstacles such as lack of technology and

hardware to apply the system, resulting the lack of application, which led to the loss of the

opportunity to develop their activities and improve the efficiency.

Objectives of the study:

This study aims to achieve the following objectives:

1- Identify the extent of applying the activity based cost system in iron and steel factories

in Jordan, from allocating and controlling costs, and taking benefit in reducing these

costs.

2- Identify the main obstacles that prevent the application of ABC.

3- Displaying the activity based cost system (ABC) in all its aspects and to clarify the

advantages of it applying it compared to traditional systems.

The importance of the study:

The importance of this study is to identify the most important and latest cost systems that can

raise the efficiency and increase the competiveness by presenting adequate data for planning,

controlling and making the wise administrative decisions when applying it in the iron and steel

companies of Jordan. Also, in applying the principle of matching costs and revenues at the

level of each product separately, in addition to identifying the profitability of the products. As

well as the importance of using the ABC system to external users such as shareholders,

investors and tax, through its impact on the profitability of the company.

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Previous studies:

There are many studies in the field of cost accounting activities, the most important can be

summarized as following:

1- Abu Alhaijaa’ (2006) conducted a study entitled: “The activity based cost system (the

case of industrial companies in Jordan)” the study aimed to identify the extent of the

health outcomes of traditional cost systems used in industrial public shareholding

companies in Jordan. Where any wrong decisions made based on these outcomes, if

there is any waste of available resources in these companies as a result of seizure and

control according to traditional systems cost? The study found that there is weakness in

traditional cost systems used in industrial companies in Jordan, which is concluded

from the approval of most of the managements of public shareholding companies, and

the inaccuracy of the results of the cost of producing units calculated under these

systems. The results from approval are taking the wrong management decisions based

on these costs and that there is a waste of economic resources available in the company.

This leads to continue to monitor and adjust according to the traditional cost systems.

These systems do not take under consideration maintaining the beneficial activities of

the units produced and dispose the activities that are not useful for the units produced.

This study conducted that industrial public shareholding companies in Jordan apply the

activity based cost system, followed by the industrial companies in general.

2- Al-Khasharmah (2007) conducted a study entitled “Using the activity based cost system

in the Jordanian industrial companies”. The aim of this study was to measure the extent

of the use of activity based cost system in the Jordanian industrial companies to identify

the benefits that the companies using the ABC system can achieve. It also aims to

identify difficulties and obstacles that prevent the application of the activity based cost

system in the Jordanian industrial companies, the results of the study also showed that

10% of the study sample uses the activity based cost system, it also showed that the

main result behind the lack of using the ABC system is that the companies are

convinced with the cost system that they currently have. The study recommended the

need to alert the Jordanian companies to develop their cost systems and the need to hold

training companies for their employees to develop their abilities in dealing with

different cost systems. The need for the various Jordanian companies to adopt the

activities based cost system due to the great benefits they get as a result of these

companies.

3- Mohammad (2008) conducted a study entitled “The implications of the use of the ABC

system to reduce the costs in the insurance institutions (a field study in one of the

Jordanian insurance companies)”. The study aimed to identify the extent of using cost

accounting systems in Jordanian insurance companies in general and the activity based

cost system in particular in the allocation, control of costs and taking benefit in

reducing these costs. What are the obstacles that prevent the application of ABC, and

what are the means and necessary steps to implement the ABC system in insurance

companies in Jordan. This study found that it is possible to use the ABC system for the

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diagnosis and analysis of main and secondary activities, cost associated with each of

them in insurance companies. The study also recommended the need to review the main

and sub activities outlined by the study, which was characterized by high costs in

general , or high costs compared to its benefits anticipated, working on processing them

during the fiscal year through canceling, reducing, improving and measuring results for

the remainder of the year.

Hypotheses of the study:

Based on previous studies and the theoretical framework, through practical experience in

this sector, the hypotheses of the study can be formulated as following:

1- The iron and steel companies in Jordan apply the activity based cost system (ABC).

2- The application of the ABC system in the iron and steel companies in Jordan improves

profitability.

3- The application of the ABC system leads to making rational management decisions

(such as the decision of pricing, the decision to dispense a particular product, the

decision to expand, the decision to continue or close a product line and the decision to

measure productive efficiency).

4- There are obstacles that prevent the application of the ABC system in the iron and steel

companies in Jordan.

5- The following obstacles prevent the application of the ABC system in the iron and steel

companies in Jordan:

A- Lack of field experience when applying the ABC system.

B- Lack of qualified accounting and administrative systems that are eligible to apply

the ABC system.

C- High costs while applying the ABC system.

D- Lack of appropriate technology to apply the ABC system within the facility.

E- Management believes that the current system is sufficient and there is no need to

apply the ABC system.

F- Lack of sufficient information for applying the ABC.

G- The expected benefits from the system are less than the cost of its application.

Methodology of the study:

The methodology of the study is to conduct a comprehensive review of the literature of the

subject as well as a field survey of the body social- by distributing questionnaires- in the iron

and steel companies in Jordan to identify the cost systems used, especially the foundations of

distributing the indirect costs. Through this research, the extent of using the activity based cost

system in the steel and iron companies in Jordan was identified by collecting and analyzing

data then reaching conclusions ,making appropriate suggestions and recommendations.

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Data collection tool:

Data was collected from two main resources:

-Primary resources: through the developing a questionnaire to collect data, it was distributed to

the body social, the questionnaire consists two parts, part one for data and personal information

to the respondent, the second part consists questions to answer the hypotheses of the study.

-Secondary resources: by referring to the specialized scientific journals, references, literature

and previous studies related to the subject of the study.

Body social and study sample:

The body social consists the nine iron and steel companies operating in Jordan, since the

companies consisting the body social are limited, the body social will considered to be the

study sample.

The body social of the study is as follows:

1. The iron and steel industry company of Jordan.

2. National company for the steel industry.

3. Jordan steel company.

4. The international company for the manufacture of iron.

5. Middle East Company for steel industries.

6. Philadelphia industrial group company.

7. The united company for the manufacture of iron and steel.

8. The Arab company for the manufacture of iron and steel.

9. Petra Company for the manufacture of iron.

Analysis tool:

Using descriptive statistics on the data collected from various sources, hypotheses has been

tested by finding duplicates, percentages, mean and standard deviation of the data collected,

using one sample T test to test the acceptance of the hypotheses of the study

The theoretical framework:

What are cost systems?

Cost accounting appeared with the association of the appearance of industries, due to the urgent

need for accurate information that financial accounting systems can not provide, because the

tastes of the consumers changed to increase diversification in products, increasing the demand

for quality and right price. The increase of mechanization of production in increasing the

industrial indirect costs, resulting the interest in cost accounting to provide more accurate

information. Cost accounting uses a set of principles and procedures that help in determining

the cost of production, these principles and procedures are known as cost systems, which can

be defined as “a set of principles and procedures governing a certain way to do the compilation,

allocation and distribution of costs to units of production.” (1)

Goals of cost systems:

Cost systems can serve managements in the following areas:

1- Determine the cost of the product.

2- Reduce cost.

3- Provide information for management decision making.

4- Assistance in preparing planning budgets.

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Activity based cost system:

The idea of applying the ABC system was when the two researchers (Robert Kaplan and Robin

Cooper) presented a new system in distributing indirect costs. It was later known as the activity

based cost system. This system showed a more unique, clear and precise way to distribute the

indirect costs than the traditional way. It got the attention of academics and administrators; it

also became popular in Europe and America, and opened a wide scope for research and

innovation, making changes in the control systems, evaluating performance, making decisions

related to product prices, organizing productivity and more.

Due to the recent address, and since the concepts upon which the system is still in the stage of

development, many practical definitions were provided for the activity based cost systems.

Regardless of all that, the entrances to the activity based cost system are all involved in the

same principles.

They can be summarized in the following definition:

The activities based cost system for cost accounting, which is based mainly on considering that

all products need a company that performs a set of activities, and these activities result in cost

that should be borne by the facility, so it designs activity based cost systems based on the costs

that are difficult to link to the recent products which are directly loaded to the activities that

cause these products, then followed by the need to allocate the cost of those activities on the

products according to the degree that they benefit from those activities. (4)

The reasons for applying the activity based cost system (ABC): (5)

There are some reasons and situations that become feasible when applying the ABC system:

1 - The great diversification in the products:

The need for applying the ABC system shows whenever there are a large number of products

involved in the indirect costs. The inability of the traditional system shows in distributing the

indirect costs accurately. The reason is due to the variation in the distribution of indirect costs

between the products, especially when the sizes and weights of products vary.

2- The increase of industrial indirect costs, as it became a large portion of total costs.

3- The increase of competition in the market in which the company operates, whether it was

local or global.

4- The complexity of the production process that goes through many stages and production

lines, as well as using support activities such as engineering designs, programming, marketing,

accounting and others.

5-Some product’s profitability is difficult to interpret, whether it was low or high.

6-Administrations believe that the prevailing cost systems that are based on direct labor costs

distort the cost of the product when calculating the loading rates.

The benefits of implementing the activity based cost system: The activity based cost system achieves many advantages when implementing it:

1- Determining the cost based on activities increases the number of cost

complexes that the additional costs are added, instead of collecting the

company’s additional costs in one compound as a whole, or collecting

them in complexes, costs are gathered on the basis of activities. As a

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result, several compounds are created according to the number of driving

costs that can be identified. (6)

2- ABC system helps reduce costs by reducing time and effort required for

the activity, in addition to eliminating unnecessary (useless) activities, and

choosing low-cost activities.

3- ABC provides an accounting system with data acquisition, accurate and

detailed information for the purposes of identifying and quantifying the

relationship between cost and its causes is affordable with low cost.

4- ABC reduces uncertainty and lack of trust; it also provides reliability in

information when making important decisions in the field of pricing,

production strategy, profitability of the consumer and the product, cost

management, continuous improvement that achieves development.

(Atkinson 2001)

Determinants of the activity based cost system:

There are some limitations accompanied with the application of the ABC system:

1- Expensive cost centers related to the measurement of various

activities, as well as cost engines. (7)

2- The difficulty of collecting data related to activities, and drive costs

due to the wide implementation of the ABC system in companies

with a high degree of automation, where computers can be

programmed in such companies to collect data related to the numbers

of machines and inspections routinely.

3- The problem of selecting a justified cost for each activity. This

problem appears when compiling a set of ancillary operations -which

may not be coordinated- which calls for the need to use appropriate

basis for the distribution of the costs of activities collected then

loading them on the products. (Abdullah 2003)

Steps to implement the activity based cost system (ABC): (8)

There are several steps to be followed when applying the ABC system, where most of the

analysts indicate the increase of implementing this system in the future. After winning the

satisfaction of managers in the developed world, these steps are summarized as following:

1- Identifying the main activities of the productive process that the

product needs in order to become ready from the beginning of

manufacturing to customer service.

2- Identifying and defining the cost engines for each activity as they are

considered to be variable factors that affect costs that have a clear

and strong causal relationship.

3- Merging similar activities in terms of cost engines (causes of cost),

this step is necessary in the process of applying the ABC system.

4- Creating or causing cost compounds by determining the indirect

industrial costs pertaining to each activity.

5- Using cost engines to load products with costs according to the

benefit from these activities.

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Statistical analysis:

Properties of the study sample:

The study sample consists 14 respondents from the targeted body social of the iron and steel

factories of Jordan, seven out of nine companies are the body social.

The tables from (1) to (5) consist some basic information about the study sample.

1- Description of the research sample according to the index of gender:

Table (1) Distribution of study sample by gender

Gender Frequency Percentage

Male 13 92.9 %

Female 1 7.1%

Total 14 100%

Table (1) shows that 92.9% of the study sample were male, while 7.1% were females; the study

sample was bias towards males due to the nature of work in steel and iron factories.

2- Description of the research sample according to age index:

Table (2)Distribution of study sample by age

Class Frequency Percentage

Less than 25 years 0 0%

25-less than 35 years 3 20.4%

35-45 years 4 28.6%

More than 45 years 7 50%

Total 14 100%

Table (2) shows that 50% of the study sample are more than 45 years; this will be talked about

later on in the results while linking it with the appearance of the system.

3- Description of the sample according to the function:

Table (3) Distribution of the study sample according to the career center

Career Frequency Percentage

Financial manager 7 50%

Chief accountant 2 14.3%

Accountant 4 28.6%

Internal auditor 1 7.1%

Total 14 100%

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Table (3) shows that 50% of the respondents are financial managers, 14.3% are headmasters,

28.6% accountants, 7.1% are internal auditors. The highest proportion is managers, which

gives more confidence value of the result, because they have accurate information about their

company.

4- Description of the sample according to the years of experience:

Table (4) Distribution of the sample according to the years of experience

Years of experience Frequency Percentage

Less than 5 years 1 7.1%






Total 14 100%

According to table (4) the years of experience for the study sample vary, the highest rate was

from 15-less than 20 years, it is a sufficient period that an individual has in order to have full

knowledge of the challenges and problems facing the process of work development, and the

noncurrent needs with the growth of production volume.

Description of the study sample according to the degree:

Table (5)

Distribution of the study sample according to qualification

Degree Frequency Percentage

Bachelor 13 92.9%

Master 1 7.1%

Total 14 100%

Table 5 shows that most of the study sample are people who have bachelor degree (92.9%),

while master degree (7.1%). These ratios have a good impression, as this table indicates that all

members of the sample are educated, and are scientifically aware of the importance of the

scientific systems that save effort, time and material.

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Displaying the results of the study:

Using descriptive statistics to find frequencies, percentages, mean and standard deviation for all

of the questions of the questionnaire. The results are shown in the following tables, classified

by the related hypothesis:

First hypothesis:

Iron and steel companies in Jordan apply the ABC system.

The questions from (1-4) include the extent of knowing and applying the ABC system by the

sample of the study, which are especially for the first hypothesis. Number (1) if the answer was

“No”, (2) if the answer was “Partly yes”, (3) if the answer was “Totally yes”.

The answers were as followed:

Table (6-A):

Table of frequencies and percentages of questions (1-2)

Question No Partly yes Totally yes Total

Frequency Percentage Frequency Percentage Frequency Percentage Frequency Percentage

Do you have

knowledge of

the ABC

system?

0 0% 10 71.4% 4 28.6% 14 100%

Do you

knowledge of

the importance

of the ABC

system?

0 0% 8 57.1% 6 42.9% 14 100%

Table (6-B):

Table of frequencies and percentages from questions (3-4) sorted by companies

Question No Partly yes Totally yes Total

Frequency Percentage Frequency Percentage Frequency Percentage Frequency Percentage

Does your

company apply

the ABC

system?

5 71.4% 1 14.3% 1 14.3% 7 100%

Does your

company have

the intention to

apply the ABC

system?

2 28.6% 3 42.8% 1 14.3% 6 92.9%

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Table (7):

Table of the arithmetic mean and standard deviation of the questions (1-4):

Question The arithmetic mean Average

measurement tool

Standard deviation

Do you have

knowledge of the

ABC system?

2.29 2 0.47

Do you have

knowledge of the

importance of

applying the ABC

system?

2.43 2 0.51

Does your company

apply the ABC

system?

1.43 2 0.79

Does your company

have the intention to

apply the ABC

system?

1.71 2 0.76

As shown in tables (6-A), (6-B), (7) the answers to the questions (1-4):

The percentage of knowledge of the sample system given in question one was 100%, and

varied the extent of this knowledge between partial knowledge and full knowledge, where

71.4% of the respondents have knowledge of a partial system, while 28.6% have full

knowledge, and that the arithmetic mean was 2.29 which is higher than the average

measurement tool (2) with a standard deviation of (0.47), that is a strong indication that all of

the chosen study sample from the Jordanian iron and steel companies have knowledge of the

system.

The percentage of knowing the importance of the ABC system reached 100%, that is shown in

the answers of the second question, this knowledge varies between partial knowledge and full

knowledge, 57.1% of the study sample have partial knowledge, 42.9% have full knowledge,

and that the arithmetic mean was 2.43, which is higher than the average measurement tool (2),

standard deviation of 0.51, that is another indication that the sample has full aware of the

importance of the system.

71.4% of the respondents said that their companies do not apply the ABC system, at the rate of

five companies out of seven companies, while 28.6% apply the system, at the range of two

companies; they vary in partial application and full application. The percentage that partially

applies it 14.3% while 14.3% fully apply it. The third question had the mean of 1.43, which is

less than the average measurement tool, with the standard deviation of 0.79.

As noticed from the answers of the questions (1-2), all study sample have knowledge of the

ABC system, they also have knowledge of the importance of the ABC system. If we compare it

with the answers to the third question, it is clear that 71.4% of respondents companies do not

apply the ABC system, which is an indication of the presence of an obstacle or problems to

implement the ABC system that is what will be addressed in the fourth hypothesis.

28.6% of the member’s of the participated companies do not intend to apply the ABC system

at the rate of two companies out of seven. While 64.3% who have the intention to convert to

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the application of the ABC system, between partial and full transformation at the rate of four

companies. And that 7.1% of the sample (one company) has not mentioned whether there is an

intention to transfer to the application of the ABC system. The arithmetic mean was 1.71%

which is less than the average measurement tool, which is a negative indication. The standard

deviation is 0.76. According to results of the analysis of the fourth question, it is obvious that

there is an obstacle to apply the system. Whether to identify if this hypothesis is accepted or

not, question 3 (Does your company apply the ABC system?) will be referred to.

It is clear from table (6-A), (6-B) that 71.4% of the study sample do not apply the ABC system

at the rate of 5 companies out of 7. While 28.6% of the sample use the system, at the rate of 2

companies. The application varies from partial and full application. From table 7 the mean of

the third question is 1.43, standard deviation is 0.79 this shows that we reject the hypothesis.

Iron and steel companies do not apply the ABC system in general.

Second hypothesis:

Applying the ABC system in the Jordanian steel and iron companies leads to increasing

the profitability:

The questions (1-4) in the second part of the questionnaire included the relationship between

applying the ABC system and improving the profitability.

(1): if the answer is I strongly don’t agree

(2): if the answer is I don’t agree

(3): if the answer is neutral

(4): if the answer is I agree

(5): if the answer is I strongly agree

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Table (8)

Frequency table and percentages for the questions (1-8)

Question Strongly agree Agree Neutral Disagree Strongly disagree

Frequency Percentage Frequency Percentage Frequency Percentage Frequency Percentage Frequency Percentage

1-ABC system

excludes

unnecessary

activities

4 28.6% 9 64.3% 1 7.1% 0 0% 0 0%

2-The application

of the ABC

system leads to

selecting low cost

activities.

3 21.4% 8 57.2% 2 14.3% 1 7.1% 0 0%

3-ABC system

provides

information that

contributes in

determining the

best profitability

products of that

company

9 64.3% 3 21.4% 2 14.3% 0 0% 0 0%

4-ABC provides

accuracy in the

interpretation of

profitability for

certain products

of the company

7 50% 7 50% 0 0% 0 0% 0 0%

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Table (9) Table of the arithmetic mean and standard deviation of the questions (1-4)

As shown in table (8), (9) the answers to the question (1-4) of the study sample for the second

paragraph:

1-The rate of approval to the first question (ABC system excludes unnecessary activities)

reached to (92.9%) at the rate of “agree” and “strongly agree”. The proportion of 7.1% was

neutral. This confirms that applying the ABC system excludes unnecessary activities, also the

arithmetic mean was 4.2, which is greater than the measurement tool, this confirms what has

been inferred, and that the standard deviation was (0.58).

2- That 78.6% of the study sample agreed to the second question (The application of the ABC

system leads to selecting low cost activities), at the rate of “agree” and “strongly agree”. While

7.1% don’t agree that the system selects low cost activities, 14.2% of the sample is neutral, the

arithmetic mean 3.93, which is greater than the measurement tool, the standard deviation for

this question was 0.83, and this leaves a positive impression that the ABC system selects low

cost activities.

3- 85.7% of the study sample agreed on the third question that “ABC system provides

information that contributes in determining the best profitability products of that company”

between agree and strongly agree. Only two companies showed disagreement, or refused the

contribution of the system in determining the profitability products, which were 14.3%, their

answer was neutral. The arithmetic mean for this question was 4.5, which is a high value, and

higher than the measurement tool. The standard deviation was 0.76. These results show that

applying the ABC system leads to providing information that determines the best profitability

products in the company.

4-There is a total unanimity in the fourth question that “the ABC system provides accuracy in

the interpretation of profitability for certain products of the company”, the positive percentage

reached 100%, 50% agree and 50% strongly agree, the arithmetic mean was 4.5, which is a

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high value and higher than the measurement tool. The standard deviation was 0.52, which

confirms the contents of the question.

As shown in table (8) and table (9), there is an inevitability acceptance in this hypothesis, as

the averages of the questions were positive and greater than the average measurement tool.

To illustrate this result, we will use the (one sample T-test).

Four answers for four questions will be collected, the acceptance or rejection of the hypothesis

will be tested, and the average measurement tool will be 12.

The following table shows the results of the test:

Table (10)

Views The arithmetic mean Standard deviation

14 17.14 1.66

Calculated T Tabulated T SIG T

11.61 1.771 0.008

According to the previous results, calculated t=11.61, which is higher than the tabulated value,

which is 1.771, and according to the rule we accept the hypothesis which states that applying

the ABC system in the iron and steel companies in Jordan improves profitability. The level of

significance of calculated T reached (0.008), which is less than 0.05; this confirms what’s

stated in the hypothesis that applying the ABC system improves profitability.

The third hypothesis:

The application of the ABC system leads to rational management decisions, (the decisions

related to pricing, expansion, dispense a particular product, continuing or closing a

production line, measuring product efficiency).

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Questions (5-12) included that applying the ABC system leads to rational management

decisions; tables (11), (12) show the answers:



5-Applying the ABC system

distributes indirect costs on

the products in an accurate way

in determining the cost of products.

9 64.2% 4 28.6% 1 7.1% 0 0% 0 0%


while determining the cost of products leads to making

a more adequate

pricing decision

6 42.9% 5 35.7% 3 21.4% 0 0% 0 0%


helps provide more accurate information for

the purposes of product pricing

5 35.7% 7 50% 2 14.3% 0 0% 0 0%

8-One of the advantages of applying the ABC system is making rational expanding decisions in opening more profitable product lines in the long term

2 14.3% 7 50% 4 28.6% 1 7.1% 0 0%

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9-Applying the ABC system leads to dispensing a specific product

5 35.7% 3 21.4% 5 35.7% 1 7.1% 0 0%

10-The application of the ABC system leads to determining the cost of products with high accuracy, which helps management in making decisions about the sustainability of a particular product line or closing it.

8 57.1% 4 28.6% 2 14.3% 0 0% 0 0%

11-Applying the ABC system helps saving time required for the productive process

2 14.3% 8 57.1% 4 28.6% 0 0% 0 0%

12-Applying the ABC system helps provide more accurate information for the purposes of measuring the productive efficiency

3 21.4% 11 78.6% 0 0% 0 0% 0 0%

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Table (12)

The arithmetic mean and standard deviation of the questions (5-12)

Questions Arithmetic mean Average measurement

tool

Standard deviation


distributes indirect costs on the

products in an accurate way in

determining the cost of

products.

4.57 3 0.65


while determining the cost of

products leads to making a

more adequate pricing decision

4.21 3 0.8


helps provide more accurate

information for the purposes of

product pricing

4.21 3 0.7

8-One of the advantages of

applying the ABC system is

making rational expanding

decisions in opening more

profitable product lines in the

long term

3.71 3 0.83


leads to dispensing a specific

product

3.86 3 1.03

10-The application of the ABC

system leads to determining the

cost of products with high

accuracy, which helps

management in making

decisions about the

sustainability of a particular

product line or whether it

should be closed.

4.43 3 0.76


helps saving time required for

the productive process

3.86 3 0.66


helps provide more accurate

information for the purposes of

measuring the productive

efficiency

4.21 3 0.43

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It is clear in table (11), (12) for the questions (5-12):

The rate of approval in the questions are (92.9%, 78.6%, 85.7%, 64.3%, 57.1%, 85.7% 71.4%,

100%) respectively. They are all higher than the accepted percentage. The arithmetic mean

(4.57, 4.21, 3.71, 3.86, 4.43, 3.86. 4.21 respectively), was higher than the average measurement

tool (3). This confirms what was mentioned in these questions from the contributions and

advantages of the ABC system in achieving business development and providing the basic

factors of time, effort, material and information.

The least approval rate for the questions pertaining to this hypothesis in the ninth question,

which states “Applying the ABC system leads to dispensing a specific product” were 57.1%

neutral 35.7%, while 7.1% of the sample did not approve the question, at the mean of 3.86.

We will deal with this hypothesis with the same method that was dealt with in the second

hypothesis. We will use the one sample T-test.

Eight answers will be collected; the test of acceptance or rejection will be tested. The average

measurement tool 24, the following table shows the results:

Table (13)

One sample T-test results

Views Arithmetic mean Standard deviation

14 33.07 3.75


9.048 1.771 0.009

According to the previous results, calculated T=9.048 is higher than its tabulated value (1.771),

and according to the rule we accept the third hypothesis which states that “Applying the ABC

system leads to rational management decisions (decisions related to pricing, expansion,

continuing or closing a specific productive line, dispensing a particular product, measuring

productive efficiency).

This means that the average answers to the questions (5-12) is not equal to the average

measurement tool 25 (it is higher).

The arithmetic mean was 33.05; the level of significance of calculated T reached 0.009 which

is less than 0.05. This confirms what was stated in the hypothesis: that applying the ABC

system leads to making rational management decisions.

Fourth hypothesis: There are obstacles that prevent the application of the ABC system in

the iron and steel companies of Jordan.

As for the fourth hypothesis that is about obstacles that prevent applying the system, this

following table has the sample’s answers to the question:

Table (14)

Answer Frequency Percentage

Yes 13 92.9%

No 1 7.1%

Total 14 100%

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As shown in table (14), 92.9% of the study sample stated that there are obstacles that prevent

the application of the ABC system in their factories; this proves the fourth hypothesis which

states that “there are obstacles that prevent the application of the ABC system in the iron and

steel companies of Jordan. While 7.1% stated that there aren’t any obstacles.

Fifth hypothesis: as for the last hypothesis that states that “the following obstacles

prevent the application of the ABC system in the iron and steel companies of Jordan”:

These seven obstacles prevent the application of the system:

1. Lack of field experience in applying the ABC system (Q13)

2. Lack of qualified accounting and administrative systems that are eligible to apply the

ABC system (Q14)

3. High costs of the application of the ABC system (Q15)

4. Lack of appropriate technology to apply the ABC system within the facility (Q16)

5. Management believes that the current system is sufficient and that there is no need to

apply a new system (Q17)

6. Lack of sufficient information to apply the system (Q18)

7. The expected benefits of the system are less than the cost of applying it (Q19)

The following tables show the sample studies answers about their degree of acceptance for the

importance of these obstacles:

Table (15)

Frequency and percentage table for the questions (13-19)



13- Lack of field

experience in applying the

ABC system

2 14.3% 7 50% 2 14.3% 2 14.3% 0 0%

14- Lack of qualified

accounting and

administrative systems that

are eligible to apply the ABC

system

3 21.4% 2 14.3% 4 28.6% 3 21.4% 1 7.1%

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15- High costs of the

application of the ABC system

2 14.3% 5 35.7% 4 28.6% 2 14.3% 0 0%

16- Lack of appropriate technology to apply the ABC system within the facility

1 7.1% 7 50% 3 21.4% 1 7.1% 1 7.1%

17-Management believes that the current system is sufficient and that there is no need to apply a new system

6 42.9% 4 28.4% 1 1.7% 1 1.7% 1 1.7%

18- Lack of sufficient information to apply the system

1 7.1% 4 28.6% 5 35.7% 1 7.1% 2 14.3%

19- The expected benefits of the system is less than the cost of applying it

4 28.6% 3 21.4% 1 7.1% 5 35.8% 0 0%

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Table (16)

Table of the arithmetic mean and standard deviation of the questions (13-19)

Question Arithmetic mean Average measurement

tool

Standard deviation

13-Lack of field experience

in applying the ABC system 3.69 3 0.95

14- Lack of qualified

accounting and

administrative systems that

are eligible to apply the ABC

system

3.23 3 1.3

15- High costs of the

application of the ABC

system

3.54 3 0.97

16- Lack of appropriate

technology to apply the ABC

system within the facility

3.46 3 1.05

17- Management believes

that the current system is

sufficient and that there is no

need to apply a new system

4.00 3 1.29

18- Lack of sufficient

information to apply the

system

3.08 3 1.19

19- The expected benefits of

the system is less than the

cost of applying it

3.46 3 1.33

As noticed there is only one condition of the study sample that did not indicate that there are

obstacles that prevent the application of the ABC system, its rate was 7.1%.

Answers varied about the importance of the given obstacles, the highest rate reached 71.5% in

the 17th

question that stated that “Management believes that the current system is sufficient and

that there is no need to apply a new system”, which is an actual obstacle to apply a new system

to the company, the reason to that could be the lack of knowledge in the elements of the new

system. Also, most of the management employees are older than 45, as they did not endure

programs and new systems, and they had no universal courses.

The least approval percentage in the 14th

and 18th

questions state that:

Question 14- Lack of qualified accounting and administrative systems that are eligible to apply

the ABC system, as the acceptance percentage reached 35.7%, but the obstacle will be accepted

because the arithmetic mean reached 3.23. The reason why the arithmetic mean was high is that

28.6% of the study sample answered neutral. Only 28.5% of the sample was rejected.

Question 18: Lack of sufficient information to apply the system, the acceptance level reached

35.7%, but the obstacle will be accepted because the arithmetic mean for the answers was 3.08,

which is in the acceptance region, as it is higher than the average measurement tool. 35.7% of

the study sample answered neutral, 21.4% rejected. As noticed from table (16), all of the

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questions were positive and larger than the average measurement tool, so the hypothesis is

accepted.

To illustrate this result, we will use the one sample T-test.

Answers of the sample will be collected depending on the approval of the seven obstacles, and

testing the acceptance or rejection of the hypothesis. The average measurement tool will be 21.

The following table shows the results:

Table (17)

Results of the one sample T-test

Views Arithmetic mean Standard deviation

13 24.46 1.15


3.018 1.782 0.011

According to the previous results, calculated T=3.018 is greater than its tabulated value

(1.782). According to the rule the fifth hypothesis is accepted which states that the seven

obstacles mentioned have an affect on applying the ABC system in the iron and steel

companies.

This means that the average answers for the questions (13-19) were higher than the average

measurement tool (21). The arithmetic mean for the questions (13-19) 24.46 and that the

significance level for the calculated T reached 0.011, which is less than 0.05, this confirms

what was mentioned in the hypothesis.

Results and recommendations: Results:

According to the statistical analysis and the hypothesis tests, there are the results:

Most iron and steel companies of Jordan do not apply the activity based cost system ABC; this

is what the statistical analysis shows, as 71.4% of the study sample does not apply the system.

There is an impact on profitability in applying the activity based cost system in the iron and

steel companies of Jordan. As the average answers for the questions related to improving

profitability and its relationship with applying the system was positive and higher than the

average measurement tool.

Applying the ABC cost system in the iron and steel companies of Jordan leads to making

rational management decisions (decisions related to pricing, expansion, dispensing a particular

product, continuing or closing a specific product line, measuring product efficiency), this is

what the data statistical analysis confirms, as the arithmetic mean for the answers reached

33.05 which was higher than the average measurement tool (24).

There are obstacles that prevent the application of the ABC system in the iron and steel

companies of Jordan, as 92.9% of the sample reported that there are obstacles that prevent the

application.

Iron and steel companies of Jordan face several obstacles that prevent the application of the

ABC system, most importantly:

1. Lack of field experience in applying the ABC system.

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2. Lack of qualified accounting and administrative systems that are eligible to apply the

ABC system.

3. High costs of the application of the ABC system.

4. Lack of appropriate technology to apply the ABC system within the facility.

5. Management believes that the current system is sufficient and that there is no need to

apply a new system.

6. Lack of sufficient information to apply the system.

7. The expected benefits of the system are less than the cost of applying it.

Recommendations:

Based of above, there are some recommendations that can be implemented by the concerned

companies and similar companies to take advantage of the results of the research:

Starting to examine the possibility of applying the ABC system in the future, and keeping the

thought of applying it, since it has many strategic advantages which we mentioned previously

in the research.

Restructuring the iron and steel companies of Jordan to comply with the activity based cost

system (ABC) since the system represents a revolution in the recent accounting systems.

Industrial and service companies are concerned about holding sessions by scientific institutions

and academic societies, to introduce them to the activity based cost system (ABC), and the

expected benefits from applying this system.

Industrial companies that do not apply the activity based cost system (ABC), should take

advantage of the field trials for the companies that apply this system, and take advantage of the

scientific and practical experiences in this field.

Companies should take advantage of the recent technologies, and information technology to lay

the foundations that suit its businesses, to enable them to accommodate the different systems in

developing their business, including the ABC system, as applying the activity based cost

system has a high degree of technical complexity. And because of the enormous need of data

and information, applying it manually increases the degree of implementation complexity.

List of margins:

Horngern Charles, Foster George, Datar sareecant, cost accounting, Hajaj translation, ahmad

hamed, Dar Al-mareekh, Saudia Arabia, 1997 page 20.

Abu Al-hayjaa’, Khaled Sobhi, “The activity based cost system, the condition of the industrial

companies of Jordan”, Master, Al-Albait university, 2006, page 16.

Abu Alhayjaa’, previous reference, page 16.

Hecks Charles, The cost system according to activities in small and medium sized projects, Al-

Jabali translation, Mohammad, Alzo’ubi, Lutfi, scientific publishing and printing in King

So’oud university, Saudia Arabia, 1998, page 41.

Jerrison, Administrative accounting, Issam Al-Dean translation, Mohammad, Dar Al-Mareekh,

Saudia Arabia, 2002 page 237.

Jerrison, previous reference, page 238.

Adams, management Accounting Information,2000, p832

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References

Abu Al-hayjaa’, Khaled Sobhi, (2006) “The activity based cost system, the condition of the

industrial companies of Jordan”, Master, Al-Albait university.

Jerrison, Administrative accounting, Issam Al-Dean translation, Mohammad, first edition, Dar

Al-Mareekh, Saudia Arabia, 2002.

Saleh, Reda Ibrahim, (2002), “The entrance to accounting about cost depending on activity as a

foundation to measure the cost of health services in hospitals”, General administration journal,

folder 42, first edition, Tanta university, page 43-95, Egypt.

Abed Al-Rahman, Atef Abed Al-Majeed, (1999), “Re-engineering systems for measuring the

cost to keep up with the requirements of industrial environment and modern management”,

modern trade research magazine, folder (13), edition (2), Souhaj university, page 59-112,

Egypt.

Abdullah, Salman Hassan, (2003), “Cost systems based on activities higher education in

Jordan” Jordanian magazine for applied sciences, folder (7), first edition, Applied Science

university, page 185-208, Jordan.

Al-Ghazzawi, Ali Mohammad, (2003) “The role of costs based on activities in productive

policies and improving profitability in industrial shareholding Jordanian companies field study”

master, Amman Arab University.

Mohammad, Moneer Shaker, (2008), “The contents of using the activity cost system to reduce

costs in insurance companies” International magazine for managerial sciences, folder 7,

edition, page 201-241.

Horngern Charles, Foster George, Datar sareecant, cost accounting, Hajaj translation, ahmad

hamed, Dar Al-mareekh, Saudia Arabia, 1997.

Hecks Charles, The cost system according to activities in small and medium sized projects, Al-

Jabali translation, Mohammad, Alzo’ubi, Lutfi, scientific publishing and printing in King

So’oud university, Saudia Arabia, 1998.

Adams, management Accounting Information, 2000.

Anderson, (1995) , " The Case OF Activity Based Costing At General Motors 1986-1993 " ,

Journal Of Management Accounting research , Volume (7) , University of South Florida , PP 1-

51.

Atkinson, Management Accounting, Prentic Hall , Third Edition, 2001.

Ittner, Larcker, And Randall , (1997), "The Activity Based Cost Hierarchy ,Production Polices

And Firm Profitability " Journal Of Management Accounting research , Volume (9) ,

University of South Florida , PP 143-162.

Khasharmeh, Hussein ,(2002), " Activity Based Costing In Jordanian Manufacturing

Companies " , Dirasat , Administrative Sciences , Volume29 , No1, The University Of Jordan

, PP 213-228 , Jordan.

Documents

THE EXTENT OF APPLYING THE ACTIVITY BASED ...journal-archieves18.webs.com/671-695.pdfTHE EXTENT OF APPLYING THE ACTIVITY BASED COSTING SYSTEM (ABC) IN THE FIELD OF IRON AND STEEL INDUSTRY