Activity Based Costing (ABC) Adoption Among Manufacturing Organizations - The...

Ruhanita Maelah; Daing Nasir Ibrahim

International Journal of Business and Society; Jan 2006; 7, 1; Universiti Malaysia Sarawak
pg. 70

70

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

Activity Based Costing (ABC) Adoption Among Manufacturing

Organizations - The Case Of Malaysia
Ruhanita Maelah" and Daing Nasir Ibrahim')
a

Faculty of Economics and Business, Universiti Kebangsaan Malaysia

43600 Bangi, Selangor, Malaysia
b

School of Management, Universiti Sains Malaysia

11800 Pulau Pinang, Malaysia

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

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

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Activity Based Costing Adoption among Manufacturing Organizations

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I. INTRODUCTION
In the traditional accounting system, treatment of overhead fails to adequately capture causal
relationship between product and cost incurrence. Under the system, costs are best seen as
controlled by the departments. The traditional overhead costing system emphasizes on the
efficient use of resources, and focuses on product. Furthermore, traditional cost accounting
reports financial information such as ROI, profit and market share. In the 1980's much
criticisms were raised regarding the ability of traditional cost accounting to provide relevant,
timely, and accurate information to the management. ABC emerges in recognition that
traditional costing system produced inaccurate information. In ABC, costs are seen as best
controlled by managing activities. Emphasis is shifted to the effective use of resources.
ABC improves accuracy over traditional system by using multiple cost drivers including
set-up hours, number of orders, and number of shipping. In addition, it also integrates financial
and non-financial information in the reports.
ABC has been studied from various perspectives for quite some time in many countries.
Even though studies have shown that the adoption of ABC benefits the organizations, its
level of adoption is still considered low. Many organizations hang on to the traditional cost
accounting methods in dealing with overhead costs. This study attempts to investigate the
status of ABC adoption among manufacturing organizations in Malaysia, and the factors
influencing its adoption. It is also interesting to learn from the experience of two firms
already adopted ABC yet still at the initial stage, and another firm which has reached a
mature stage of ABC adoption.

II. RESEARCH OBJECTIVES

The general objective of this study is to increase the understanding of ABC adoption in
manufacturing organizations in Malaysia. Specifically, the objectives are as follows:
1.To determine the adoption status of ABC system among manufacturing organizations in
Malaysia, tliiis establishing a foundation for future research on ABC adoption and
implethentation in this region.
2.To investigate whether certain factors (Cost, Decision, IT, Top Management, NonAccounting, Training, and Performance Measurement) have any influence on the
adoption of ABC in manufacturing organizations in Malaysia, thus adding to the
existing pool of research in this field from the perspective of a developing country.

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Table

R
ep
ro
du
1:ceSummary of Selected Prior ABC Implementation Research
d
wi
th
pe
r
mi 72
International Journal of Business and Society
ss
io
n
of
3. To understand and explore further ABC adoption in specific manufacturing
th
organizations
e
co
py
rig
Swenson (1995)
Telephone Survey of 50 individuals
ht
III.
a t
2 5
f i r m s LITERATURE REVIEW
o
Innes and Mitchell
Survey of 251 UK manufacturing
w
(1995)
and non-manufacturing firms
review for this study includes
ne The literature
three
main
area
of
research:
ABC, organizational
r.
Gosselin (1997)
Mail survey of 161 Canadian
Fuchange, and
implementation literature
Manufacturing SBUs
rt
he
r ABC Literature
re
pr
odJones and Dugdale (2002) traced the development of ABC from as early as 1980's. They
uc explored the rise ofABC through the understanding of how management accounting theories
tio and practices come into being, and by identifying the relationship between the two. While
n
pr the primary focus of the study was on the construction of ABC between 1984-1992, their
ohstudy also established the link to other theories and practices such activity accounting, total
ibi cost accounting, Activity Based Budgeting, Activity Based Cost Management, and Activity
te Based Management.
d
wi
th
ouA review of literature on ABC looks into various variables that have been used in previous
t

research (refer to Table 1). ABC implementation studies have focused on factors leading to
ABC success as measured in various ways. Variables such as implementation success,
satisfaction, and attainment of ABC stages are commonly used in ABC literature. However,
most of these studies have not segmented the adoption stages of ABC. Their focus is mainly
on factors that lead to ABC success, which can be measured in various ways.
Independent Variable - Various User
- Organizational
- Technological
- External

- Adoption: Prospector strategy

- Implementation: Vertical organizational structure,
Centralized decision making, Formalized job procedures
- Shields (1995) variables
- Average years
- Primary applications
Organizational factors:
Compensation - Champion
McGowan and Klammer Survey of 53 employees from 4
- Cross functional support and commitment
(1997)
targeted states
- Culture
Top management support - Quality
- Shields (1995) variables

Evaluation/ pay
Objectives clarity - Quality of ABC info
- Training
- Preparers vs. users NSA
Use and Satisfaction with ABC
Involvement
- Resource adequacy
- Sales Revenue
- Top management support
- Continuous Improvement
Foster and Swenson
Survey of 166 ABC users at 132
of the
copyright
owner. Further reproduction prohibited without permission.
(1997)Reproduced with permission
companies, field
visits
to 15 sites

Rep
rod
Table 1: uce
Summary of Selected Prior ABC Implementation Research (continued)
Mc Gowand(1998)
Survey of preparers and users. 69
- Attitude
Perceived benefits
respondents
- Technical characteristics
Studyat 4 sites.
Methodology
with
- Perceived
Field Study
of GM Usefulness
Corp (1986--1993)
Anderson (1995)
per
- Perceived Organization Changes
mis
sion
of Dependent Variable
Adoption
the Attainment of implementation stages: - Initiation
Attainment of stage - Adoption
A d o p t i o n - Adaptation cop
Acceptance Success as
- Implementation
yrig
measured by:
ht
own - Management evaluation
Shields (1995)
Survey of 143 firms that had- Dollar
Success as measured by: - Usage
er.
implemented
ABC
Decision Action
Furt
Management evaluation - Dollar
her Improvement
Improvement
repr
odu
ctio
Survey and interviews at 2 sites
Attainment of Anderson and Young
n
(i999)
(automobile manufacturer)
Success as measured by:
stage
pro
265 respondents
Employee satisfaction
hibit
Expansion of Cooper & Zmud (1990) Attainment of stage
Krumwiedeed
(1998)
Mailed Survey to Cost Management
1.
Not considered
Group
members.
225
usable
data
with
2.
Considering
out Contextual Factors
3.
Considered then rejected
per - Potential cost distortions
4.
Approved for implement
mis - Decision usefulness of info
5.
Analysis
sion - TQM
6.
Getting Acceptance
.
- Lean Prod System (LPS)
7.
Implement then abandon

- IT quality
- Job
Organizational factors
- Top management support
- Non accounting ownership
- Clarity and consensus with obj - Training
- No of Purposes identified Contextual
Factors:
Individual
- Change
- Commit
- Values
Organizational - Reward
- Competition - Info Quality - Turbulence Environmental Uncertainty
- Importance of Cost
Process Factor - Support

8.
9.
10.

Acceptance
Routine System
Integrated System

Evaluation Measures of ABC Implementation:

I. Overall
2.
Use
3.

Accuracy

In
te
rn
at
io
n
al
J
A
o
cti
ur
vit
yn
al
B
of
as
B
ed
us
C
in
os
es
tis
na
gn
A
d
d
o
pt
io
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a
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4
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in

Activity Based Costing Adoption among Manufacturing Organizations

75

Organizational Change Literature

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

Environmental forces
Internal forces

Need for change _ Initiate change

0. Implement change

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

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

Studies by Krumwiede (1998), Krumwiede and Roth (1999) illustrate the

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

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

Issues associated with implementations can be studied at two levels of analysis: an

organizational or macro level approach and an individual or micro level approach (McGowan
& Klammer, 1997). The researches that use micro level approach tend to focus on the
individual rather than the organization. Intended benefits of the implementation may be
defined as enhancing decision-making skills, productivity, or use of the system. System
success is measured in terms of perceptions of improvements in system quality, attitudes, or
satisfaction of individuals involved (Mc Gowan and Klammer, 1997).
The guidelines that are derived from the macro level perspective emphasize the importance
of planning and development to achieve organizational objectives. The emphasis may be on
users as a group or subsystem of the organization. Shields (1995), Swenson (1995) and
Anderson (1995) are among those who conducted their research through this approach.
They believe that macro level studies of ABC implementations have revealed several
interesting findings:
1.Managers, in general view ABC systems more favourably than their traditional overhead
costing systems (Shields, 1995; Swenson, 1995).
2.The degree of success of ABC implementation varies across circumstances. Shields
(1995) found success to be strongly linked with behavioural and organizational variables,
but not to technical variables such as the type of software or the nature of the system.
Anderson (1995) argued that the factors that influence implementation are context

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Activity Based Costing Adoption among Manufacturing Organizations

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specific. Anderson concluded that the extent to which specific organizational and
technological factors, individual and task characteristics, and environmental factors
influence implementation success vary across the stages of implementation.
Implementation research can be further characterized as factor or process studies (Schultz
& Ginzberg, 1984). The focus of factor research is on the contextual variables associated
with the implementation and their likely impact on the implementation success. The
contextual variables include the characteristics of the organization, problem, technology
and people involved in the implementation efforts. Process research focuses on the procedures
involved in system implementation. The goal is to identify characteristics of a process that
are most likely to lead to successful implementation. Hence implementation success is viewed
as a sequence of stages that must be attended. Research by Mc Gowan and Klammer (1997),
and Krumweide (1998) integrated both factor and process variables into one model.
The results of several case studies and surveys that document the implementation of ABC
indicate that organizations benefit from the system. For instance, Haedicke and Feil (1991)
described Hughes Aircraft Company's experience in ABC implementation and how it assisted
management of the company to achieve world class status. Foster and Gupta (1990) examined
the implementation ofABC at an electronic instrument manufacturing company and presented
information regarding the attitudes of managers and employees towards the system. Foster
and Gupta, however, found that the system had not been established long enough to assess
its behavioural consequences. A research by Bhimani and Pigott (1992) examined the impact
of changing the pattern and content of information on the behaviour of non-accounting staff
at British pharmaceutical company. Their findings show how management accounting
techniques can extend beyond technical use and be useful to break down functional barriers.
Agyris and Kaplan (1994), use ABC as an example to describe the necessary requirements
for successful implementation of a technical innovation. They focus on the importance of
education and sponsorship in enabling change to occur. Finally, Anderson (1995) presents a
case study of General Motors Corporation's experience with the adoption of ABC. She
developed a model of cost system change that eventually described the effect of individual
characteristics, and organizational, contextual and technological factors on the success of
ABC during six stages of implementation.
Other than case research, survey research has also contributed to the understanding of ABC
implementation in organizations. Mailed questionnaire by Bailey (1991), Innes and Mitchell
(1991), and Nicholas (1992) to managers of UK firms reported positive findings on benefits
and future ofABC. Swenson (1995) presented the results of a telephone survey of 50 financial
and operating managers' satisfaction with ABC at 25 manufacturing firms. It indicated that

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participants view ABC as an improvement over their old cost management systems. Shields
(1995) reported the results of applying a comprehensive model to the study of the behavioural
consequences associated with ABC. He concluded that attending to the technical aspects is
insufficient to achieve general success with ABC implementation. The findings highlight
the need to focus on behavioural and organizational variables in the implementation process.
Libby and Waterhouse (1996) examined the relationship between management accounting
and control systems and several organizational and contextual variables at 24 Canadian
organizations. They presented evidence of strong positive relationship between changes in
management accounting control systems and organizational capability to learn.
A comprehensive study on ABC among developing countries, especially from the Asian
region is limited. In Singapore Ghosh and Chan (1997), in a longitudinal study surveyed
companies from various industries in Singapore on the management accounting practices
used in their organizations. ABC was ranked twelfth in terms of management accounting
techniques used. ABC was used by 12 percent of their sample from organizations in various
industries. ABC however was not included among the management accounting practices
surveyed in their earlier study in 1984-1985. Based on the findings, they concluded that
ABC is slowly being accepted and used by various organizations in Singapore. The study
however did not test for any variation between industries.
In Malaysia, an extensive study on ABC is non-existent. The studies are limited to surveys
of firms on the use of various management accounting tools including ABC. The study,
however focused specifically on the adoption of ABC among organizations in manufacturing
industry. Chun, Kassim, & Minai (1996) conducted a study on management accounting
practices among manufacturing organizations in Malaysia by using the Federation of
Malaysian Manufacturers (FMM) Directory as the sampling frame. The study did not focus
on ABC and issues in relation to this system. Instead, the study adopted a more general
approach by looking at the extent of usage for various traditional and non-traditional
management accounting systems.
Chun et al. (1996) in their survey on 92 companies from food, textile, chemical, fabricated
metal and electrical and electronics industries in Malaysia found that on the average overhead
cost represents 17 percent of total production cost. Their study found that ABC is relatively
infrequently encountered in Malaysia. The reasons cited that firms were slow to adopt ABC
because they neither not convinced of its benefit nor felt comfortable with the existing cost
system. They also found that dual or multiple costing systems are common among ABC
adopters. The traditional system was used to cater for financial accounting reporting while
ABC is used for cost management and strategic decisions. Chun et al (1996) findings also

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Activity Based Costing Adoption among Manufacturing Organizations

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show that 89 out of 92 respondents believed that information generated by management

accounting systems was useful. A significant percentage of the respondents found the
information important to perform management functions - planning, control and decisionmaking. Abdul Rahman et al. (1998, 2003) did two consecutive studies on ABC practices in
Malaysia by using survey method. The first study found that ABC adoption rate among
public listed companies in Malaysia was 4.2 percent. In another study, they found that 18.3
percent of the small and medium industries in Klang Valley area introduced some forms of
ABC method in their business. The same study found that two most important problems
cited by the respondents were high cost (69.2 percent), and impossibility to use ABC to
prepare financial statements (53.8 percent)
Gunasekaran et al. (1999) concluded that ABC system was not used much in European
countries. ABC was used by 4 percent of companies in Belgium and The Netherlands. The
system was used mainly as a secondary cost system. The study cited four cases using a
conceptual model for decision to adopt ABC that was influenced by conditions favouring
ABC applications, factors against ABC implementation, implementation of ABC, and timing
of ABC. In other countries, Ghosh and Chan (1997) reported that overhead represented an
average of 12 percent of production costing various industries. Murphy and Braund (1990)
reported 34 percent, and Kerremams (1991) reported 31 percent in UK and Belgium
respectively.
IV. FRAMEWORK OF THE STUDY
Figure 2 shows the theoretical framework of this study which consists of seven independent
variables and a dependent variable.
U
U

EXTERNAL FACTOR:
COST
TECHNOLOGICAL FACTOR:
D E C I S IO N
U
I
T
_________________________________
ABC

ORGANIZATIONAL FACTOR:
ADOPTION
U TOP MANAGEMENT
U NON-ACCOUNTING
U T R A IN IN G
U P E R F O R M A N C E M E A S U R E M E N T _____________________________

Figure 2: Theoretical framework

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V. DEVELOPMENT OF HYPOTHESIS
The development of hypotheses in this study is based on organizational change theory and
IT implementation stage model. Organizational change is typically classified into four;
technology, products, administrative, and culture (Daft, 1991). A shift from traditional cost
accounting system to ABC system is considered as an administrative change. Anderson
(1995) and Anderson and Young (1999) surveyed the literature on ABC and information
technology implementation and compiled a list of variables used in ABC implementation
research. The variables are grouped into five categories of factors as explained by the IT
implementation stage model in the literature review section.
A study by Shields and Young (1989) developed a comprehensive theoretical model that
was applicable to ABC based on the assumption that ABC is an administrative innovation
in organizations. They argued that the adoption decision and implementation was determined
more by specific behavioral and organizational variables. Similarly, earlier studies have
shown that implementation issues may emerge if organizations neglect the organizational
factors involved in making the change in cost management systems (Agyris & Kaplan,
1994; Cooper et al., 1992; Shields, 1995). Anderson and Young (1997) have argued that
certain contextual variables may affect both adoption and implementation stages of ABC
while organizational factors may affect implementation stages only. Accordingly, Krumweide
(1998) tested organizational factors on ABC adopters only. Her findings showed that although
the model overall predictive accuracy was 72.4 percent, the Likelihood Ratio Index for the
logistic regression analysis is relatively low at 0.22. Based on that, Krumweide suggested
that firms considering ABC adoption should give special consideration to organizational
factors as well. Therefore, the present study tested all groups of independent variables
(external, technological, and organizational) for their influence on ABC adoption.
The theoretical and empirical research suggests a number of variables that may affect ABC
adoption. Seven independent variables chosen are Cost, Decision, IT, Top management,
Training, and Performance Measurement. Consistent with the stage model of IT
implementation, the variables are grouped into external, technological, and organizational
factors. Table 2 shows a summary of the independent variables used in the present study.

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Activity Based Costing Adoption among Manufacturing Organizations

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Table 2: Summary of Independent Variable* Definitions

1
2
3
4
5
6
7

VARIABLE
Cost
Decision
IT
Top Management
Non Accounting
Training
Performance Measurement

DEFINITION
Degree of potential cost distortion
Degree of decision usefulness of cost information
Quality of existing IT in the organization
Level of top management support
Level of non-accounting ownership towards ABC
Level of ABC training provided
Use of financial and non-financial measures

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

A set of questionnaire was distributed to the accountants and head of accounts of

manufacturing organizations identified from the sampling frame. Both the nominal and
interval scales are used in this questionnaire. Nominal scale qualitatively distinguishes groups
by categorizing them into mutually exclusive and collectively exhaustive sets. In the
questionnaire, the nominal scale is used to capture respondents' and organizations'
background, and their overhead costing method. The information that can be generated
from nominal scaling is to calculate the percentage, frequency, mean, and standard deviation
of the data.
On the other hand, the interval scale is used to capture the significance of independent
variables listed in Table 2. For each variable, the questionnaire lists at least three statements
and the composite score is used to represent each variable. The interval scale groups
respondents according to certain categories and taps the order of these groups. It also
measured the magnitude of differences in preferences among the respondents. Respondents
were asked to indicate their responses to various aspects of ABC. Their responses were
captured on a five point Likert scale that utilizes the followings: (1) Strongly Disagree (2)
Disagree (3) Somewhat (4) Agree and (5) Strongly Agree. In responding to the questions,
the respondents indicated the extent to which they agree or disagree to a variety of statements
on factors that were expected to have influence on ABC adoption.
In identifying themselves with the types of overhead costing techniques used, definitions of
plant-wide overhead rate, departmental overhead rates, and ABC were provided. In addition,
the respondents also indicated the extent of usage of such techniques using a five point
Liken scale that utilizes the followings: ( 1 ) None at all (2) A little (3) Moderate Amount (4)
Quite a bit and (5) Very much.

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Abernethy, Lillis, and Brownell (2001) acknowledge the influence of product diversity in
the choice of costing system design. They indicated that the technology that is used to
manage diversity also influences the costing system. The study provided insights by proposing
a framework of how product diversity, cost structure, and advanced manufacturing technology
influence the design of a costing system. Potential cost distortion, which was included as
one of the variables (Cost) in the present study was defined as the degree of potential for
cost distortions. Cost is related to the diversity in product, support, processes, volume and
degree of overhead costs. Anderson (1995) and Estrin et al (1994) found this variable might
affect ABC adoption. Cost was also found to be an important motivator in adoption and
routinization of ABC (Krumweide, 1998). Krumweide found that a firm's potential for cost
distortion was a highly significant factor in ABC adoption. The present study examines this
relationship relative to the following hypotheses:
H 1: There is a positive relationship between high potential of cost distortion and ABC
adoption.
ABC system generates a more detailed and accurate accounting information. The information
is useful in assisting the management in making various decisions. The more informed
management makes better decisions for the organization. In the present study, the degree of
decision usefulness of cost information was included as one of the variables (Decision). It
is affected by the competitive environment, and the organization's need for cost data in
strategic decisions and cost reduction efforts. A study by Cotton et al. (2003) is a replication
in New Zealand of Innes et al. (1999) UK survey of ABC usage and comparison of both
findings. The study found that the importance of ABC applications include cost reduction,
pricing, performance measurement or improvement, and cost modelling. The study found
that more than 60 percent of the ABC adopters use the system for such purposes. The
present study examines this relationship relative to the following hypotheses:
H2: There is a positive relationship between decision usefulness of cost information and
ABC adoption.
Previous literature on the impact of information technology on ABC varies. Managers with
higher quality IT may feel more comfortable to implement ABC than their less sophisticated
counterparts because of lower costs of measurement (Cooper, 1988). However, Anderson
(1995) pointed out that managers who were satisfied with information provided from existing
system might be reluctant to invest their resources in ABC, and found evidence that the
quality of IT is negatively related to management's evaluation of overall value of ABC.
Krumweide (1998) found that strong existing IT might encourage either rejecting or

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Activity Based Costing Adoption among Manufacturing Organizations

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abandoning ABC. However she also found that IT was integral in reaching the highest level
of ABC implementation. The dimensions for IT quality include the accessibility of
information, user friendliness of the information system, availability of detailed information,
the variety of cost data, and timeliness of the information provided by the system (Krumweide,
1998). The present study examines this relationship relative to the following hypotheses:
H3:

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

Shields and Mc Ewen (1996) found in their survey that top management support is the most
important factor in determining how successful an ABC implementation is. Shields and Mc
Ewen (1996), and Krumweide (1998) stated that linkage to corporate strategy and adequacy
of resources are assumed to be closely related to top management. The decision to adopt
ABC should be well considered because the change required resources in terms of manhours, capital and involvement of employees. Top management might resist ABC system
because it includes financial investment in terms of purchasing ABC software and hardware,
training of employees, and documentation of detailed cost data (Gunasekaran et al, 1999).
The present study included both items, linkage to strategy and adequacy of resources to
explain one of the variables, top management. The present study examines this relationship
relative to the following hypotheses:
H4:

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

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

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H5: There is a positive relationship between non-accounting ownership and ABC adoption.
Tait and Vessey (1998) argued that the internal constraints of an organization including the
availability of trained manpower influence the impact of its projects. They found that training
is an important element toward the efficient use of the information provided by a system,
and it is also vital in promoting acclamation to the system. They suggested that organizations
should have sufficient training resources available to prevent their employees from feeling
pressured by the process of change. Training reflects the level of training involved in the
design, implement, and use of ABC. These three training phases were combined by
Krumweide (1998) who considered Shields (1995) finding that high correlation exist among
the phases as well as with the ABC success. She found that training relates to reaching the
highest stage ofABC implementation. Similarly, Shields (1995) and McGowan and Klammer
(1997) found that user satisfaction of ABC system is positively influenced by the adequacy
of training provided. The present study examines this relationship relative to the following
hypotheses:
H6:There is a positive relationship between training and ABC adoption
Linkage between the use of ABC and performance measurement is important to motivate
and reward employees to accept ABC and to use the information it generates. Schultz and
Ginzberg (1984), and Agyris and Kaplan (1994) suggested the degree to which user's personal
stake were linked to may affect behavior towards the system. Therefore, individuals who
believe that performance evaluation is associated with ABC are expected to be more
motivated to work towards the successful change from traditional overhead costing system
to ABC. Studies by Mc Gowan and Klammer (1997), and Shields (1995) supported the
positive relationship between ABC and performance measurement system. The present study
examines this relationship relative to the following hypotheses:
H7: There is a positive relationship between performance measurement and ABC adoption.
In terms of dependent variable, ABC adoption will be used. Although previous studies
suggest that it is best to look at ABC implementation in its various stages, preliminary study
done by the researcher showed that ABC practices in Malaysia are still at an infancy stage.
The preliminary study also indicated that there are a small number of adopters in Malaysia
and the concentration is at the early stages. Therefore, for the purpose of this study, the
differentiation is made based on whether the organization is ABC adopter or non-adopter.
However, the status of ABC adoption will be determined based on the implementation
stage models discussed earlier. This will provide insights on the usage of ABC system

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Activity Based Costing Adoption among Manufacturing Organizations

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among manufacturing organizations in Malaysia. In order to further explain the independent

variables from the perspective of organizations that adopted ABC, a case study approach
has been used. The case study will capture the ABC adoption and implementation process
as experienced by specified organizations.
Cooper and Zmud (1990) implementation stage model has consistently been used as
dependent variable in previous studies on ABC. Their model include six stages; (1) Initiation
(2) Adoption (3) Adaptation (4) Acceptance (5) Routinization (6) Infusion. Krumweide
(1998) further refined them into ten stages; (1) Not considered (2) Considering (3) Considered
then rejected (4) Approved for implementation (5) Analysis (6) Getting acceptance (8)
Implemented then abandoned (9) Acceptance, and (10) Routine system. Cooper and Zmud
(1990) provided definitions to each stage used in their study in relation to process and
product while Krumweide (1998) provided descriptive definitions on the ABC stages used
in her study. Krumweide (1998) admitted that in her (and any other) model, stage distinctions
are not as clear-cut. Organizations may lie somewhere between two stages or even reside in
more than one stage simultaneously. It is assumed that organizations go through these stages
in such sequence. The later classification of ABC implementation stages by Krumweide
(1998) is seen as very comprehensive. It is also highly comparable with that of Cooper and
Zmud (1990).
Variables like implementation success, satisfaction, and attainment of ABC stages are
commonly used in ABC literature. However, most of these studies have not segmented the
implementation stages of ABC. Their focus is mainly on factors leading to ABC success as
measured in various ways. Two problems emerged as the result of using a combined multiple
stages:
1. Factors not found significant may have been significant for certain stages but masked
by less significant (or significant in different direction) for other stages.
2. Factors that were found significant may have had coefficients that were biased by varying
parameter estimates in different stages. Thus it is possible that no single stage had the
parameter coefficients that were reported.
In other words, important differences between specific stages would have been missed if
only binary dependent variables (adopt/ non-adopt, user/ non-user) were used (Krumwiede,
1998).
While understanding the importance of differentiating the stages of ABC implementation,
the present study was unable to classify the stages according to either one of the studies
mentioned earlier. Instead, the present study classifies ABC application into adoption and

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non-adoption. This is due to the infancy of ABC in Malaysian manufacturing environment.

It is anticipated that in manufacturing industry in Malaysia, most organizations are nonadopters of ABC. Furthermore, among those who adopt the system, the majority is at their
early stage of implementation. Therefore it is anticipated that differentiating the stages further
is not statistically justified. The ABC adoption used as dependent variable is defined in
Table 3.
Table 3: Comparison of ABC Stages
Cooper and Zmud (1990)
Initiation
Adoption
Adaptation
Acceptance
Routinization
Infusion

Krumweide (1998)
Not considered
Considering
Considered then rejected
Approved for implementation
Analysis
Getting Acceptance
Implemented then abandoned
Acceptance
Routine system
Integrated system

Present Study
Non- adoption

Adoption

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

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Activity Based Costing Adoption among Manufacturing Organizations

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Survey
The sampling frame for the survey method is organizations listed on KLSE main and second
boards, and the organizations listed in the Foreign Companies in Malaysia Yearbook directory.
Companies listed on KLSE are categorized into thirteen types of industries; Consumer
products, Industrial products, Construction, Trading/ Services, Infrastructure, Finance,
Technology, Hotels, Properties, Plantation, Mining, Trust, and Closed-end fund. The first
two industries mainly comprised manufacturing companies. The listing requirement assured
that the companies have a minimum issued and paid up capital of RM60 million for listing
on Main Board, and RM40 million for listing on Second Board. As of June 30, 2000, a total
of 347 companies fall in this category.
The Foreign Companies in Malaysia Yearbook (2002) classified organizations into 32
industries, one of which is manufacturing. Companies listed under this category are used as
part of the sampling frame for this study. A total of 910 companies from the manufacturing
industry from the 2001 Yearbook are included in the survey.
Most of the questions used in this study are adopted from studies conducted by Krumweide
(1998), Shim and Stagliano (1997), and Shields and Mc Ewen (1996). In order to strengthen
construct validity, the survey instrument includes multiple questions for all the variables
tested. The composite scores of these variables have the advantage of capturing more of a
construct's multi-dimensionality than individual questions (Foster & Swenson, 1997). In
this study, the composite factors are measured by converting the raw responses to Likert
five-point scales for each factor's set of questions into a composite score.
A total of 1,257 questionnaires were mailed. The questionnaires were directed to the
accountants or heads of accounts of selected manufacturing organizations in Malaysia.
Follow-up reminders were sent to the organizations after two weeks. A total of 145 sets of
questionnaires were returned to the researcher. This represents 11.54 percent response rate.
The unreturned questionnaires were 1112 or 88.46 percent. Of the responses received, only
108 questionnaires are usable for analysis. Others are excluded from the analysis due to one
of the followings:
q Incomplete - omit crucial parts of the questionnaire
q Cl os e d dow n
q Seized manufacturing operations
q Do not belong to the intended industry (manufacturing)
q Moved to an unknown location

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Data analysis was performed on 108 responses. The analysis includes descriptive analysis
on the respondents and the organizations, determination ofABC adoption status, descriptive
study on ABC adopters, Factor Analysis, Test of Response Bias (industrial- Consumer
Industries, and Early and Late Responses), Test of Reliability, and Logistic regression to
determine the influence of various variables on ABC adoption.
Case Study
The research site for this study is identified through responses from the survey questionnaire.
Initially, three organizations indicated their willingness to participate in the case study.
However, one decided not to participate when approached. Another organization was solicited
for replacement. Due to the confidentiality of the information shared by the organizations,
this study does not reveal the identities of the representatives and the three organizations.
Throughout this study, these organizations are addressed as Casel, Case2, and Case3. The
researcher has some information regarding the background of organization and respondent,
the organization overhead costing system and its ABC application prior to conducting the
case study. The data collection methods are interview, review of documents, and visits to
the organizations. The accountant is the sole representative or the provider of the information
for each organization. He shared the experience of the organization in ABC adoption. A
descriptive case study is written for each case based on the model of change sequence. The
aspects covered in the case study are the background of the organization, the forces and
need for change, initiating change, implementing change, and factors influencing adoption.
This model was used as the basis to guide the researcher in the data collection process.
Yin (1987) identified six sources of evidence that can be the focus of data collection for
case studies: documentation, archival records, interviews, direct observations, participantobservation, and physical artifacts. Of these', the first four are found suitable for this study
and discussed below.
The use of multiple approaches in examining the research issues also increases the reliability
of common findings across these approaches (Birnberg et al., 1990). Therefore, in addition
to survey, structured interviews were conducted with the accountants of the organizations.
The researcher followed a certain set of questions derived from a self-developed question
guide. The interviews allow verbal exchanges between the two parties and more importantly
it allows the respondents to provide explanations to issues in hand. Furthermore, the
researcher can acquire better understanding of these organizations in areas such as accounting
systems, operations, products and consumers. Clarifications can also be made during
interviews to avoid any possible misunderstandings. The researcher made two visits to each

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Activity Based Costing Adoption among Manufacturing Organizations

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research site thus creating opportunity for direct observations of the manufacturing
environment of the organizations. Observational evidence is often useful in providing
additional information about the topic being studied. A tour around the production facility
was also incorporated to get a clear understanding of the production process. In addition,
the accountants were also contacted through numerous telephone calls and e-mails to verify
information, and to gather additional information. The secondary data was gathered from
the publications and internet sources. The accountant also provided various documents as
mentioned above during the visits.
Three types of data have been collected; background of the organization, ABC adoption
process, and factors influencing ABC adoption. Information on the background of the
organization includes organization structure, operations and performance. In relation to
ABC adoption process, the overall model of a planned change as discussed in Chapter 2 of
this study is used. The model outlines four sequential events in any change process; forces
for change in the organization's accounting system, the need for change, initiating change,
and implementing change. In addition, the study also gathered more information regarding
the factors influencing ABC adoption (Cost, Decision, IT, Top Management, NonAccounting, Training, and Performance Measurement).

VII. RESTATEMENT OF HYPOTHESIS

The factor analysis conducted on the survey data resulted into the formation of new variables.
This gave rise for the need to restate the hypotheses. The hypotheses for further analysis are
as follows:
Table 4: Hypotheses Tested
H 1: There is a positive relationship between potential of cost distortion and ABC adoption.
H2:There is a positive relationship between decision usefulness of cost information and ABC
adoption.
H3:There is a negative relationship between information technology and ABC adoption.
H4:There is a positive relationship between organization support and ABC adoption.
H5:There is a positive relationship between training and ABC adoption.
H6: There is a positive relationship performance measurement and ABC adoption.
H6A: There is a positive relationship performance measurement (learning and growth)
and ABC adoption.
H6B: There is a positive relationship performance measurement (internal measures) and
ABC adoption.

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VIII. FINDINGS
Findings - Survey
From the descriptive analysis in Table 5, it can be seen that 39 organizations (36.11percent)
of the organizations adopt ABC. The remaining 69 organizations (63.89 percent) do not
adopt ABC. Among the non-adopters 48 percent have not considered using ABC in their
organizations while only 3 percent had considered but rejected its adoption. Most of the
ABC adopters (11 percent) are at the analysis stage. Another interesting finding from the
survey is that none of the adopters that implemented ABC abandon the system.
Table 5: ABC Adoption Status
ABC Adoption Status
Not considered
Considering
Considered then rejected
Approved for implementation
Analysis
Getting acceptance
Implemented then abandoned
Acceptance
Routine system
Integrated system

Frequency (N=108)
52
14
3
6
12
2
0
8
4
7

Percentage
0.48
0.13
0.03
0.06
0.11
0.02
0
0.07
0.04
0.06

ABC Adoption
Non-adoption
N = 69

Adoption
N= 39

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

0.00
1.00
Overall percentage

Percentage Correct

Adopt
0.00
63
8

1.00
6
31

91.3
79.5
87.0

Note:

* The cut value is .050.

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Activity Based Costing Adoption among Manufacturing Organizations

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Table 7: Variables in the Equation

Stepla

VI
V2
V3
V4
V5
V6A
V6
Constant

B
1.03
1.59

S.E
0.64
0.76
0.40
1.10
0.72
0.79
0.55
6.43

3.24
0.70
1.15
-

Wald
2.52
4.37
1.00
8.69
0.94
0.82
4.39

df
1
1
1
1
1
1
1

12.19

Sig
0.11
0.03
0.31
0.00
0.33
0.36
0.03
0.00

Exp(B)
2.80
4.91
0.66
25.65
2.02
0.48
3.17
0.00

95.0% C.I. for

Lower
Upper
0.78
9.97
1.10
21.81
0.30
1.47
2.96
221.81
0.48
8.37
0.10
2.30
1.07
9.35

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

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

LnIProb(Y=1) / (1-Prob(Y=1)l =
0.00+ 2.801 (X1)+ 4.911 (X2)+ 0.665 (X3)+ 25.651 (X4)+ 2.022 (X5)+ 0.488(X6A)+ 3.176 (X6B)
(0.112)
(0.036)
(0.315)
(0.003)
(0.331)
(0.365) (0.036)

where:

(Y=1)
X1
X2
X3
X4
X5
X6A
X6B

= The probability of ABC adoption.

= Cost
= Decision
= IT
= Organization Support
= Training
= Performance measurement - Learning and Growth
= Performance Measurement - Internal Measures

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

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Discussion of Survey Findings

This study provides empirical evidence that Decision, Organization Support and Internal
Measures are statistically related to the adoption ofABC among manufacturing organizations
in Malaysia. The findings are based on the logistic regression analysis performed on the
data. The results provide support for hypotheses H2, H4, and HMI
Usefulness of cost information for decision making was one of the three factors found to
have a significant positive influence on the adoption of ABC. This finding is consistent
with previous studies that test such relationship. Cooper (1988) argued that the decision
usefulness of cost information is related to the cost of errors associated with it. He further
explained that the degree of competition caused the changes in cost of errors faced by the
firms. Several forms of cost of errors are as follows:
1.Making poor product related decisions, such as aggressively selling unprofitable
products, setting prices inappropriately, and introducing products into an unprofitable
niches;
2.Making poor product design decisions, such as increasing the number of unique
parts in a product or reduce its direct labor content when the cost of maintaining
those parts exceed labor savings.
3.Making poor capital investment decisions based on overhead savings that do not
materialize.
4.Making inaccurate budgeting decisions about the level of operating expenses required.
The importance of decision usefulness of cost information is also apparent during the ABC
adoption exercise at GM and Harris Semiconductor. One of the many important conclusions
drawn by Anderson (1995) was the two criteria that GM set: that the ABC system should be
broadly applicable to many different processes, and that ABC results in better decision
making. Similarly, at Harris Semiconductor, ABC was initiated to obtain better product
costs. The data was later used in other decisions such as whether to continue to make certain
products, and negotiate prices with their customers.
ABC may generate product or service line costings that differ from those produced by a
traditional system primarily associated with their indirect cost content. In situations where
the element of cost is material and the traditional methods of overhead costing do not
adequately capture resource consumption, the use of ABC would improve product cost
information. There is also some evidence that suggest those who implemented ABC
experienced of the short-term benefits in the area of cost control (Innes & Mitchell, 1990).

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ActivityBased Costing Adoption among Manufacturing Organizations

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The use of ABC would. generate information of relevance to cost control because overheads
are made more visible through pooling by activity and their underlying cause, to the extent
it is reflected in their cost driver. In addition, budgets and responsibility accounting can also
be conveniently incorporated within the ABC framework (Brimson & Fraser, 1990).
However, recognition should be made of the nature and variation in the system as the creation
of a system designed is intended to meet the needs of the specific organization concerned.
ABC should not be viewed, as a complete general-purpose system that will meet all cost
information needs. Therefore, it should be noted that any system has some limitations and if
not carefully designed and monitored will have the potential for dysfunctional consequences
for the adopting organizations.
Organization support was another factor found to have a significant positive influence on
the adoption of ABC. Organization support in this study relates to the support received
from management and the non-accounting departments. This finding is consistent with many
earlier studies. In a study that was guided by field observations, Cooper et al. (1992) concluded
that based on their study of eight implementations, top management sponsorship was a key
success determinant. Anderson (1995) found that ABC system should reside in
manufacturing, not in accounting. She also found that knowledge of production process is
very important in ABC success.
Performance Measurement - Internal measures was also found to have a significant positive
influence on the adoption of ABC. The finding is consistent with Abu Kassim et al. (1989)
who found that manufacturing organizations in Malaysia place a great emphasis on financial
measures. Their findings showed that sales and product quality were the most used financial
and non-financial measures. In a later study, You and Rabani (1998) examined the nature of
competition and other firm related variables influence performance indicators of
manufacturing firms in Malaysia. They found that emphasis on financial measures was not
significantly different from non-financial measures. The level of emphasis placed on financial
and non-financial measures varied with the perceived competition.

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

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An organization would change when the net present value of the benefits from improved
product cost is greater than its redesign costs (Cooper, 1988).
According to Cooper (1988), traditional cost systems tend to report distorted product costs
when the products consume a variety of inputs. In addition, product diversity also reduced
the accuracy of reported cost. The distortion occurred because traditional cost systems reports
average product cost based on limited allocation bases (direct labor and machine hours).
The system was not able to capture an accurate overhead cost consume by each product. As
a result, certain product may be overstated while another understated. Volume based cost
systems are unable to differentiate adequately between overhead consumed by low and
high volume products (Cooper, 1988). As percentage of overhead to total product increases,
it becomes more important to effectively manage the overhead cost. Traditional cost system
uses few volume based allocation bases. Thus it was not able to show the relationship
between a product and the overhead level it consumed. ABC, in contrast provides a better
insights into this relationship.
The findings from logistic regression analysis of the present study showed that IT quality
was not significant in ABC adoption. Krumweide (1998) made an interesting finding
regarding V3- IT. While IT was found to be not significant in her logistic regression analysis,
this variable emerged as a significant variable with a positive co-efficient in ordered logistic
regression analysis. Her finding suggests that ABC adoption is positively associated with
strong existing IT. Due to the small number of adopters, the present study did not include an
ordered logistic regression on the variables.
In relation to V5 - Training, Krumweide (1998) found that training is related to reaching the
highest stage of ABC implementation. She explained that her study reflected level of training
relating to the design, implementation, and usage of ABC. However, she combined the
three phases due to their high correlation with ABC success in the study by Shields (1995).
In the present study, most of the ABC adopters are at the initial stage ofABC implementation.
Therefore, it is expected that training is not an important factor of ABC adoption among
these organizations. However, a significant relationship between training and ABC adoption
would probably be seen should the sample represents a different group of ABC adopters.
Findings - Case Study
The case study used the Model of Change Sequence of Events as a guide in the data collection
process. The model states that planned change is made up of forces and need for change,
initiating change and implementing change. The case study revealed that for Case 1, Case2,

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