Budgeting and standard costing practices in New Zealand and the United Kingdom

The findings of a survey of budgeting and standard costing practices in New Zealand (NZ) and United Kingdom (UK) manufacturers are reported. The results suggest that some commentators' predictions of a demise in standard costing and variance analysis are overstated. It has been found that standard costing systems continue to be popular and that the majority of accountants surveyed do not envisage abandonment of standard costing and variance analysis in advanced manufacturing technology environments. Comparisons between budgeting and standard costing practices used in NZ and the UK reveal a high degree of consistency. In the case of the few differences that have been observed, it appears that there is a greater lag behind prescribed practice amongst NZ manufacturers. The main differences noted are: a greater proportion of performance reports used in NZ budget centers fail to distinguish between controllable and non-controllable costs; NZ manufacturers are more reliant on historic data when setting standard costs; when distinguishing between variable and fixed costs, there is a greater tendency in NZ to simply treat direct costs as variable and overhead costs as fixed.     

COSTING NEEDS AND PRACTICES IN A CHANGING ENVIRONMENT: THE POTENTIAL FOR ABC IN THE NHS

This pisper explores the potential application of ABC in a situation of rapid change - the introduction of markets for health care in the UK. This changing environment places pressures on hospital units to refine their costing methods for product costing, budget construction and the pursuit of efficiency. These are areas of management accounting for which activity-based costing (ABC) has been proposed as a refinement to traditional costings. The merits of the ABC approach were examined by conducting four case studies of acute hospitatls. The results cast doubt on the benefits to be gained from ABC in product costing, but revealed potential applications in its wider roles of cost reduction and budget construction.     

Activity-based costing in the U.K.’s largest companies: a comparison of 1994 and 1999 survey results

This paper reviews the results of two U.K. surveys of activity-based costing (ABC) in the U.K.’s largest companies. These provide an opportunity to assess the changes that have occurred in the ABC adoption status of companies over a recent 5-year period. For the ABC users, some comparative information is provided on the nature of the ABC systems in use, their designers, the uses to which they have been put and the levels of success and importance that participants attribute to them. For the non-users, the reasons for their lack of commitment to ABC are explored.     

Activity-Based Costing in Universities—Five Years On

This article describes the current state of costing within the higher education sector, reviewing recent published literature and analysing the progress made by institutions in implementing activity-based costing (ABC). It draws on the findings of two cross-sectional surveys of all UK universities, undertaken in 1993 and 1998/99. The data collected suggests that while implementation of ABC systems has been slow, this might be about to change because of pressures being exerted by funding bodies and central government.     

Activity-Based Pricing in a Monopoly

In this article, I study the interaction between cost accounting systems and pricing decisions in a setting where a monopolist sells a base product and related support services to customers whose preference for support services is known only to them. I consider two pricing mechanisms—activity‐based pricing (ABP) and traditional pricing—and two cost‐accounting systems—activity‐based costing (ABC) and traditional costing, for support services. Under traditional pricing, only the base product is priced, whereas support services are provided free because detailed cost‐driver volume information on the consumption of support services by each customer is unavailable. Under ABP, customers pay based on the quantities consumed of both the base product and the support services because detailed cost‐driver volume information is available for each customer. Likewise, under traditional costing for support services the firm makes pricing decisions on cost signals that are noisier than they are under ABC. I compare the equilibrium quantities of the base product and support services sold, the information rent paid to the customers, and the expected profits of the monopolist under all four combinations of cost‐driver volume and cost‐driver rate information. I show that ABP helps reduce control problems, such as moral hazard and adverse selection problems, for the supplier and increases the supplier's ability to engage in price discrimination. I show that firms are more likely to adopt ABP when their customer base is more diverse, their customer support costs are more uncertain, their costing system has lower measurement error, and the variable costs of providing customer support are higher. Firms adopt ABC when their cost‐driver rates for support services under traditional costing are noisier measures of actual costs relative to their cost‐driver rates under ABC and when the actual costs of support services are inherently uncertain. I also show that cost‐driver rate information and cost‐driver volume information for support services are complements. Although the prior literature views ABC and activity‐based management (ABM) as facilitating better decision making, I show that ABC and ABP (a form of ABM) are useful tools for addressing control problems in supply chains.     

Data Fixation and the Use of Traditional Versus Activity-Based Costing Systems

An important debate in the contemporary accounting literature relates to the relative merits of activity-based versus volume-based product costing methodologies. Traditional volume-based costing systems are said to be flawed and may seriously mislead strategic decision making. Such arguments assume that decision makers use such information in an unproblematic way. This article reports on an experiment designed to investigate whether decision makers are able to overcome data fixation in a setting involving the use of product cost information. In response to criticisms of previous accounting studies of data fixation, subjects received some feedback after each decision, and were rewarded based on performance. The experiment involved subjects making a series of production output decisions based on detailed case information of a hypothetical firm facing different market conditions for each decision. A between-subjects design was utilized with two cost system treatments: activity-based costing (ABC) and traditional costing (TC). It was hypothesized that the group provided with ABC cost data would make 'optimal' decisions and the group provided with TC cost data would overcome fixation. The results of the experiment indicated that there was, in general, evidence of data fixation among TC subjects, but a small number of subjects did adjust to ABC costs. These results are discussed in the light of previous research and some future directions are outlined.     

Full costing versus variable costing: Does the choice still matter? An empirical exploration of UK manufacturing companies 1988–2002

This paper explores the impact of the choice of full costing, as a basis for stock valuation (SSAP 9), on the reported profitability of UK manufacturing companies from 1988–2002. It does so by assessing the sensitivity of these companies' profits to the adoption of the variable costing alternative and so explores the potential for this accounting method choice to influence this important performance measure. Tests are undertaken to identify the accounting significance of the stock asset and the stock adjustment, the longer term effects of the choice on the time series of companies' profits and the shorter term effects as reflected in variation in the annual profit signal (particularly, profit vs loss and profit growth vs profit decline). The results indicate that stock remains a substantial variable in profit measurement and that there are likely to be a minority of companies whose reported profitability during the period changes significantly depending upon the basis of stock valuation used. Given the absence of any definitive case for full costing over variable costing, these findings suggest that further research and some consideration of the modification of the existing standard to permit financial statement users to ascertain variable costing based profits are merited.     

The influence of change agents' behavioral intention on the usage of the activity based costing/management system and firm performance: The perspective of unified theory of acceptance and use of technology

This study adopts the viewpoint of the Unified Theory of Acceptance and Use of Technology (UTAUT) model to examine the change agents' behavioral intentions in the implementation of an activity based costing/management (ABC/M) system. ABC/M is an important management system that emphasizes the allocation of overhead costs on the basis of cost drivers, in order to provide relevant information for improved decision-making. A change agent is a person chosen to cause organizational change. Senior managers and often chief executives usually play the role that implements change. The behavioral intentions have been identified as a proactive attitude and action for promoting the ABC/M system in this study. Since there is little evidence of ABC/M adoption outside the United States and European countries, this research used Taiwanese companies as the sample. Questionnaires were used to investigate the factors influencing change agents' behavioral intentions to promote ABC/M systems and the type of facilitating conditions that affected the extent of usage of ABC/M systems. The questionnaires were carried out through the perspective of user acceptance of information technology (IT). Furthermore, the aim of this paper is also to explore whether use of the ABC/M system will produce an improved effect on performance. The empirical results from 100 valid responses collected indicate that performance expectancy and social influence directly affect change agents' behavioral intentions. Both change agents' behavioral intentions and facilitation conditions are important constructs that affect the extent of usage of ABC/M systems. The extent of ABC/M usage is also significantly associated with relative financial and non-financial performance. The results demonstrate that the adaptive UTAUT model is applicable for measuring change agents' behavioral intentions in current implementations of ABC/M systems. The study also reveals the positive effect of change agents on the performance of ABC/M systems.     

Cost Management in Sri Lanka: A Case Study on Volume,Activity and Time as Cost Drivers

Despite its theoretical superiority, the activity-based costing (ABC) model has had only moderate success in replacing the traditional volume-based absorption costing models in complex organizations worldwide. Even in organizations that have launched ABC projects, the implementations often do not sustain. In response to this general lack of enthusiasm worldwide for ABC, accountants developed the time-driven activity-based costing (TDABC) model as an alternative cost allocation model. This paper presents a comparison of the TDABC model with ABC, and considers if this alternative cost allocation model (1) is easier to implement from an international perspective and (2) provides comparable cost information for decision making. We use a case study in a country outside the model's country of origin to understand the similarities and differences in absorption costing systems that use ‘volume,’ ‘activities,’ and ‘time’ as the drivers of indirect cost allocations. We also use the case study to ascertain if any country‐specific factors impede ABC implementation. We conclude the following: the TDABC model has similar implementation complexities to ABC if modelling conditions are strictly adhered to; these complexities are independent of country‐specific factors; and in its simplest form, the model generates the same decision information errors of traditional costing.     

Teaching note: Traditional and activity based costing systems

A significant portion of the current managerial accounting literature contrasts the benefits and importance of activity based costing (ABC) systems with the more traditional cost accounting systems. This paper questions this tendency of making such a stark contrast, by placing ABC systems within a wider cost accounting framework. Initially, the framework is developed by providing an overview of the product costing, control and decision making process. Also outlined are the various costing systems in terms of their objectives, advantages and deficiencies. A schema for integrating the costing process with decision making and performance evaluation criteria is then conceptualized. The role of ABC is recognized and integrated within this framework. The link between ‘traditional’ and ABC systems is also studied via an analysis of the conventional wisdom in some of the leading texts in managerial accounting. The analysis demonstrates that there is still much ambiguity in both the contrasting and the linking of ABC with the more traditional costing systems.     

Activity-based costing user satisfaction and type of system: A research note

This paper examines user perceptions of Activity-based costing (ABC) performance for three different types of system in a major information and communication provider in South East Asia. Few prior ABC studies have considered the effect of system type on ABC performance. The study draws on a survey of 54 developers and 181 users of 16 different ABC systems within the organisation to produce five performance constructs (cost accuracy, cost-benefit trade-off, ABC impact, information use, and decision action). The results show that both the development inputs and user performance perceptions varied with the type of system (embedded, stand-alone, ad-hoc). While embedded systems enjoyed far stronger inputs (e.g. top management support, rewards and recognition, task significance) and greater development team cohesion than stand-alone systems, they were perceived by users to perform significantly less well. These findings suggest that system type is an important factor in assessing ABC performance.     

Identifying operational improvements during the design process of a time-driven ABC system: The role of collective worker participation and leadership style

This paper shows how collective worker participation and leadership style influence the emergence of operational improvements during the design process of a time-driven activity-based costing (ABC) system in a case study setting. In particular, in the case company, the costing project was initiated at different warehouses, which allowed us to distinguish two types of design processes. With the first type, the participation of all organizational members, especially at the lowest levels, fostered dialogue about the input parameters of the costing model. In addition, when these discussions about costing data were held in groups guided by a superior with a considerate, people-oriented leadership style, operational improvements appeared. With the second type, operational employees were not involved in the design process; they feared the new costing system, because it was used to enforce compliance, and no operational improvements emerged. Hence, the case findings suggest that, for operational improvements to appear during the design process of a time-driven ABC system, collective worker participation and appropriate leadership styles are indispensable.     

The impact of contextual and process factors on the evaluation of activity-based costing systems

This paper investigates associations between evaluations of activity based costing (ABC) systems, contextual factors, and factors related to the ABC implementation process using interview and survey data from 21 field research sites of two firms. Structural equation modeling is used to investigate the fit of a model of organizational change with the data. The results support the proposed model; however, the significance of specific factors is sensitive to the evaluation criterion. The model is stable across firms and respondents, but is sensitive to the maturity of the ABC system.     

Cost-System Choice and Incentives—Traditional vs. Activity-Based Costing

We incorporate information and managerial incentives into the analysis of a common cost-management tool—activity-based costing (ABC). We study the choice of a costing system in a firm where the owners contract with a manager to use either a traditional or an ABC system and make production decisions. We show that, as commonly argued in managerial-accounting literature, in a first-best setting with no informational asymmetries the ABC system is always preferred to the traditional costing one. However, when the firm's manager has relevant private information, the owners' choice of a costing system is not as clear. We demonstrate that the firm earns higher expected profits under the ABC system when the uncertainty about the manager's private information is high. Conversely, the firm's expected profit is higher under the traditional costing system when the uncertainty surrounding the manager's private information is low because the gross benefits of better information provided by ABC are exceeded by the additional informational rents the owners must pay the manager under this system. Our results provide a formal explanation of the coexistence of traditional and ABC systems in practice.     

A survey of factors influencing the choice of product costing systems in UK organizations

This paper reports on the findings of a postal questionnaire that examines the extent to which potential contextual factors influence the characteristics of product costing systems. Prior research has mostly used the adoption or non-adoption of ABC systems to capture the characteristics of product costing systems. This research has generally been inconclusive and has been unable to establish strong links between ABC adoption and those contextual factors that have been identified in the literature that are conducive to the adoption of ABC systems. Instead of using only the adoption or non-adoption of ABC systems as a measure of product cost system design this research uses four different proxy measures of cost system sophistication to capture the characteristics of the product costing systems. This allows for a more robust test of the relations among the predictor variables and cost system sophistication. Results indicate that higher levels of cost system sophistication are positively associated with the importance of cost information, extent of use of other innovative management accounting techniques, intensity of the competitive environment, size, extent of the use of JIT/lean production techniques and the type of business sector. No association was found between the level of cost system sophistication and cost structure, product diversity and quality of information technology.     

Factors influencing the performance of activity based costing teams: a field study of ABC model development time in the automobile industry

This paper examines how the group dynamics of activity based costing (ABC) development teams and the level of organizational resources devoted to model development affect model complexity and development time. A theoretical framework is developed based on the organizational literature on teams. The framework is tested using objective data from 18 ABC projects in two automobile manufacturing firms and survey data from ABC team members. Results show that ABC team cohesion is the key determinant of the time it takes to develop the first ABC model. Further, ABC models become more complex in the presence of an external consultant and as the level of competition increases.     

Sanac Inc.: From ABC to time-driven ABC (TDABC) – An instructional case

This case deals with the decision of Sanac Inc., a Belgian wholesale company, on whether to proceed with the implementation of an activity-based costing (ABC) system or switch to time-driven activity-based costing (TDABC). As a business consultant, you are hired to decide about the appropriate costing method. Your task is to decide which system the company should implement, given the desire of the president of the company to calculate profitability at the order and the customer level.     

The Impact of Refinement on the Accuracy of Time‐driven ABC

Recently, time‐driven activity‐based costing (ABC) has been developed as a cost modelling technique in which transaction times (that is, times required for particular occurrences of an activity) are calculated using time equations. This paper develops a model of the error structures in time‐driven ABC and examines the impact of adding terms to time equations on the accuracy of estimated transaction times. The results provide some fundamental insights into the balancing of errors when refining time equations and lead to some general recommendations that may be followed in the design process of a time‐driven ABC system to enhance the accuracy of times calculated by means of time equations.     

FIRM CHARACTERISTICS AND ANALYST FOLLOWING IN THE UK

Bhushan (1989) proposed a model of analyst following, which he tested for US companies in 1985. The model was successful, in that the eight variables considered likely to influence analyst following were found to be significant in the regression model used, and an adjusted R²of 70% was achieved. The aim of this paper is to adapt his model and test it for UK companies using survey and other data from 1991. Bhushan found that the level of analyst following for a firm was positively associated with level of institutional investment, variability of returns, the correlation between the firm return and the market return and firm size. There was a negative association with the level of insider shareholdings and industrial diversification. The industrial category of the firm also was significant. This study shows similar results using data on analyst following of UK quoted companies, although industrial diversification does not appear to be an important factor in the UK, and the overall explanatory power of the model is lower than in Bhushan's study. An additional variable, the number of overseas listings, was found to add to the explanatory power of the model.     

Technological and organizational influences on the adoption of activity-based costing in Australia

The present paper examines one set of potential reasons for the paradox as to why so few firms have adopted activity‐based costing (ABC) despite the demonstrated benefits of this costing system. A cross‐sectional survey of Australian firms is used to examine the influence of seven technological and organizational factors on firms’ initial interest in ABC and their decision to adopt it or not. The organizational factors of top management support, the support of an internal champion, and organizational size were shown to be associated with initial interest in ABC. The decision to adopt or reject ABC had one organizational factor associated with it, the support of an internal champion.