A recent survey of Irish companies looked at the factors associated with success in both traditional and ABC costing systems. Amongst the findings, involvement of accountants in both traditional and ABC systems, emerged as a factor associated with success.
Intense competitive pressure has now become the norm for most organisations. Market conditions characterised by increasingly aggressive competition and ever more demanding customers pose serious questions about competitive strategies and underline the importance of a reliable and efficient management information system for effective pursuit of those strategies. The range and scope of information required to optimise corporate performance in these conditions continues to broaden, addressing diverse areas such as markets, competitors, customers, product / service innovation, possible strategic alliances, etc.. Not only the need for externally oriented information expands; the demand for accurate, reliable and versatile information on internal processes, and specifically costs, also increases in these circumstances. The quality of management decisions has been directly linked to the quality of costing information and issues relating to costing system effectiveness therefore become important, such as how that success is measured and what drives it.
Although accountants are typically heavily involved in design and implementation of costing systems, they are not necessarily good judges of what constitutes a successful system, often basing their judgements more on technical factors than on what managers find directly relevant to their needs.
Some research has examined issues around the success of costing systems, but to date this has been confined to ABC systems. Despite its claimed advantages, research findings have consistently shown that ABC is not widely used, with typical adoption rates of around 25% being reported from surveys in many different countries, including Ireland. One of the issues that has attracted the attention of researchers is the question of what factors are most strongly associated with successful ABC implementation. This was recently examined in an Irish context in a study which went beyond previous research and extended the investigation to cover not only ABC systems but also the more traditional systems which continue to be used by a large majority of companies.
Some potentially useful findings have been reported in earlier research in the US, UK and Australia and these provided an initial framework for the study. For example, support from top management has consistently been found to be a major factor associated with successful implementation of ABC systems. The degree to which the system is seen to be linked to performance evaluation and compensation has also been found to be strongly associated with success. Other factors for which significant associations were found were adequacy of training and resources, links with competitive strategies such as JIT and quality initiatives, and clarity of the objectives of the system. While no significant association has been reported for involvement by accountants, the degree of non-accounting ownership and user involvement have been identified as important determinants of success.
This earlier research into success-related variables has been confined to the implementation of ABC systems. Given that most organisations in Ireland are known to use more traditional systems, the current study covered both types of systems. Data were collected from 122 companies based in Ireland, 34 (28%) of which reported that they had adopted ABC. Consistent with previous research a large majority, in this case 72%, indicated that they use traditional costing systems. Separate tests were conducted for ABC systems and traditional systems to establish what factors were strongly associated with success of the system. The factors listed below were included in the statistical analysis and Table 1 shows which ones were shown to have a significant association with the success of ABC and traditional systems.
Analysis and results
The analysis showed that for both ABC and traditional costing systems, the factors identified as being significant explained a very high proportion of the success of the costing system (up to 77% for ABC systems and 55% for traditional systems). The results contained some unexpected findings that conflict with earlier results. For example, top management support, which has consistently been highlighted in prior studies as a key ingredient for ABC success, was not found to be significant for either system. Since it is unlikely that support from top management is unimportant, a likely explanation is that as systems become more firmly established, the level of such support does not vary significantly and was not therefore a determining factor as regards varying degrees of success of the costing system in the companies surveyed. This underlines an important aspect of the type of analysis used in the study. While the analysis is designed to identify the factors that help differentiate between successful and unsuccessful systems, it does not necessarily imply that other factors are unimportant.
A further unexpected finding was that only one variable was found to have a significant association with success of the costing system across the entire sample, i.e., regardless of whether the company used traditional or ABC systems. This was involvement by the companies' in-house accountants in the implementation and refinement of the system. This factor did not emerge from prior ABC studies as being significant and no prior findings exist for traditional systems. It was also noteworthy that non-accounting involvement, which was prominent in earlier research did not feature for either system in the current study. Combining this with the earlier finding regarding top management support a possible explanation is that support from the top and a high degree of user involvement are key differentiators when new systems are being introduced. The majority of companies that participated in this study are using well established traditional systems, and where ABC systems are being used they also tend to be fairly well established and have progressed well beyond the early stages of implementation.
The fact that a clear link with competitive strategies was not a significant factor for ABC systems was not surprising. By their nature, ABC systems provide ready access to information regarding activities and cost drivers in a form that can readily be associated with competitive strategies in areas of cost reduction, product/service quality, innovation, etc.. This is not therefore a key factor in differentiating successful systems. The position regarding traditional systems is very different, however. Frequently criticised for their inability to provide reliable information on cost drivers and critical success factors, the ability of traditional systems to demonstrate a clear link with competitive strategies was found to be strongly associated with their success. The study was not designed to examine how exactly this is achieved, but it seems likely that in some cases, traditional systems are being adapted and refined to incorporate more sophisticated cost driver information and non-financial performance indicators that better reflect key strategic priorities. Finally, for those companies using ABC, two factors strongly associated with success were the link with performance evaluation and compensation, and the provision of adequate training and resources. This confirms previous findings that the success of ABC systems is strongly associated with the level of resources invested in its implementation and also the uses made of information produced by the system.
What constitutes 'success'?
Other issues addressed in the study may be of interest to those involved in implementing ABC systems or in refining traditional systems. For example, what exactly constitutes success and what are reliable indicators of success are complicated issues for practitioners and researchers. For the purposes of research, many different measures of success have been used and the most popular of these, user satisfaction, was also used in this study. Each of the participating companies was invited to provide an overall assessment of the level of user satisfaction with the costing system. On a rating scale of 1 to 5, high levels of overall satisfaction were recorded for both systems, with ABC systems scoring slightly higher with an average score of 4.1 compared to 3.9 for traditional systems.
Given that most organisations do not regularly monitor user satisfaction in a formal manner, one of the issues examined was whether there was some readily available indicator that would provide a reasonably reliable barometer of user satisfaction. Frequency of use for particular applications was one such proxy examined in the study. The analysis reported below was designed to examine whether there was a link between the extent to which managers use the costing information for each of a number of specified applications and the overall assessment of user satisfaction with the costing system. This analysis was conducted for both ABC and traditional systems by comparing the frequency of usage in 19 specified areas of application with the overall satisfaction of the users with the costing system. The outcome of the analysis for both types of system is summarised in figure 1, which shows the correlation for each application on a scale of zero to one.
In general and as might be expected, there is a strong association between the extent to which managers use information from the costing systems for various purposes and the overall level of success they ascribe to those systems. For those involved in systems design and implementation, therefore, the question arises as to whether the level of usage is a reliable indicator of the perceived success of the system? The findings show that, while this is sometimes the case, levels of usage need to be interpreted with caution. Firstly, there is a major difference between the two types of systems, with the association being noticeably stronger for ABC systems than for traditional systems. This may suggest that managers in companies that use traditional systems sometimes use the information generated by these systems because they have little or no alternative, but they may nevertheless be aware of significant deficiencies in the information. There are some exceptions to this trend, most notably where the system is used to generate information for performance evaluation, where the pattern is reversed and the correlation between usage and success is actually higher for traditional systems. Secondly, the relationship shows wide variation across the range of applications. One of the most interesting findings is in the area of budgeting, which has been heavily criticised in recent years. Whereas for ABC systems, budgeting shows a higher usage/success correlation than any other application (correlation of 0.84), for traditional systems budgeting shows the lowest correlation of all applications (0.33). The fact that traditional costing systems are widely used to provide information for the purpose of budgeting is not necessarily a sign that the costing systems are perceived to be successful - managers may simply have no alternative. Similar wide variations were found for some other applications such as cost modelling (0.82/0.43), process/operating management (0.79/0.42) and activity performance measurement/improvement (0.81/0.47). These findings clearly demonstrate that whereas in many cases, the degree of usage may be taken as a reliable indicator of managers' perceptions of the overall success of the system, in some cases, this is very definitely not the case. Managers may be using the information because they have little or no alternative and may be using information from other sources to supplement or amend the information received from the formal costing system.
Even within a particular system, the strength of the relationship between usage and success varies considerably. For example, for ABC systems the correlation varies from 0.84 for budgeting down to 0.51 for stock valuation. In the case of traditional systems, the correlation varies from 0.69 for performance measures down to 0.33 for budgeting. The significance of this is that the validity of the common practice of using extent of usage as a proxy for success of the system varies widely depending on the type of system and the particular application, and caution therefore needs to be exercised in interpreting usage levels.
In terms of success for particular applications, one area stood out that may be of particular interest to practitioners. In several different areas of analysis, customer profitability analysis emerged as an application where ABC was seen as having significant advantages over traditional costing systems.
This is an area where ABC users generally expressed higher levels of usage and satisfaction than non-ABC users. It was also an area where those considering ABC adoption saw particular weaknesses in their existing system. One conclusion from the research was that, whereas other weaknesses in traditional costing systems can be overcome to some extent by using information from other sources, an increasingly competitive environment is creating a more urgent need for regular, complete and reliable information on customer profitability. Traditional systems are not well equipped to provide this information and often base it only on direct costs. Indirect costs, which for many companies constitute an increasing proportion of the total cost base, can only be accurately attributed to customers through some form of activity analysis.
The issue of technical validity
One of the conclusions of the study was to confirm that, whereas technical soundness and numerical accuracy are important, these characteristics do not necessarily deliver useful information or manager satisfaction. Of importance also is what is sometimes called organisational validity, or the extent to which information is suitably tailored and interpreted to reflect particular organisational circumstances. The degree to which this is achieved has been found to vary widely between organisations and between different applications in the same organisation. If cost information systems were to be used exclusively for stock valuation purposes, then a heavy emphasis on technical accuracy might be appropriate. However, falling stock levels, greater prevalence of service organisations and an ever increasing range of business decisions requiring many different interpretations of cost have reduced the relative importance of stock valuation and place greater demands on the cost information system than ever before. Cost information must now be produced as part of a versatile and flexible management information system, be easily adapted to suit a particular strategic or commercial context, and be sensitive to the sometimes conflicting demands for accuracy and timeliness. To achieve this in a complex and competitive environment, it seems clear that cost information requires regular input from a wide range of managers and is too important to be left entirely to finance specialists.
This article is based on research carried out in collaboration with
Dr. Richard Brown, Professor John Innes and Mr. Donald Sinclair from Dundee University and with financial support from The Irish Accountancy Educational Trust.
Charts have been omitted from the online version of this article.
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Bernard Pierce is Professor of Accounting at Dublin City University and is Dean of DCU Business School.
Hi, I'm doing research for my college paper on cost accounting. I'm wondering if you would give me an example of the company which swap from traditional costing system to ABC thank you