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Exploring the adoption and implementation of the ABC system

Promise of support for the ABC initiative from organisational members outside the accounting function may be critical to using ABC extensively and successfully within the organisation. Non-accounting personnel are essential for identifying activities and cost drivers. When the accounting function leads the ABC implementation, the project is viewed as an accounting project and not given sufficient commitment by other departments (Player and Keys, 1995). Also, ABC information may be used more by non accountants if they are part of its development. It is, therefore, expected that the higher the commitment to ABC from staff outside the accounting department, the more likely it will become used extensively. Therefore, the following hypothesis is formulated: Hypothesis 1 (HI): In those firms that have adopted ABC there is a positive relationship between non-accounting ownership and ABC success.

6.6.2 Clarity of objectives

Failure is more likely to occur with any actions without a clear aim. In business life, identifying goals is considered to be of vital importance. This also applies to ABC system adoption and implementation. A detailed and well-designed ABC model will not be used if it provides information that is not relevant to management. Some researchers (Cooper et al., 1992; Player and Keys, 1995a) have found that an important factor for implementation success is clearly defined goals relating to the scope of the ABC project. Cooper et al. (1992) found that the most successful ABC projects occurred when a specific target for change was identified early in the project. Early identification of goals helps implementation teams to have a clearer understanding of how the ABC system should be designed and used for management's needs. Researchers also point out that, if the goals of the system are in line with the organisation's goals, the managers will be more likely to accept the system (Schultez and Ginzberg, 1984). Furthermore, correspondence between users' goals and those of the organisation will more likely lead to achievement of both sets of goals. Under these circumstances acceptance and satisfaction with ABC system will be greater. Therefore, the following hypothesis is formulated: Hypothesis 2 (H2): In those firms that have already adopted ABC there is a positive relationship between agreed and clear objectives of ABC and ABC success.

6.6.3 Adequate training in implementing and operating ABC The training factor is considered to play a key role in the success of the ABC system. In relation to ABC, training relates to the design, implementation, and usage of ABC. Training in designing, implementing, and usage of ABC was important in explaining

ABC success in the Shields (1995) USA study. Shields and McEwen (1996) suggest that, if people do not know why or how the ABC system works, they are more likely to ignore or misunderstand it and less likely to design a more accurate costing model. Training in implementation will help the team to understand the correct way to install the ABC system. Training in the usage of ABC helps the members to know how to interpret ABC information and how to use it for target goals. If the resources provided for training are insufficient, then the normal development procedures may not be undertaken; this will increase the risk that firms may fail to successfully implement ABC. Thus, levels of training for designing, implementing and using ABC will play a key role in the successful adoption of ABC. Therefore, the following hypothesis is formulated: Hypothesis 3 (H3): In those firms that have adopted ABC there is a positive relationship between the level of adequate training and ABC success.

6.6.4 Top management support

Top management plays a key role in adopting and implementing any system. Operations are likely to be more successful when they are supported by top management. The need for top management support for ABC has been strongly recognised (Cooper et al., 1992; Shields, 1995; Player and Keys, 1995a). Many of the successful applications of ABC described in case study research were linked to the clear support of top-level management and some of the failures were attributed to a lack of this support (Friedman and Lyne 1999). In addition, Innes and Norris (1997) found that success of the ABC system was strongly linked to the support of senior management And/or a champion. Moreover, Cooper et al. (1992) conclude that, based on their study of eight implementations, top management sponsorship was a key success determinant.

Hankinson and Lloyd (1992) suggest that obtaining upper managers' support is

important for at least three major reasons. Firstly, they can provide sufficient time and resources to the ABC implementation. Secondly, ABC will generally be more successful if it supports the company's overriding strategies. It is, therefore, also important that management communicates what those strategies or directions are. Finally, they can communicate the importance of ABC throughout the organisation. In the case of a champion supporting the implementation of ABC, it is important that he or she should be someone with significant budgetary and organisational authority who will push the project and get the necessary funding to implement it. Naturally, this push will occur only if ABC fits with the over-riding strategies of top management. But, if this fit exists, top management can facilitate ABC implementation by making its success part of the evaluation criteria and by giving managers the time and resources necessary to implement ABC (Krumwiede and Roth, 1997). This theory suggests that there will be a relationship between the successful adoption of the ABC system and top management support. Therefore, the following hypothesis is formulated:

Hypothesis 4 (H4): In those firms that have adopted ABC there will be a positive

relationship between top management support and ABC success.

6.6.5 Linkage to competitive strategy and performance evaluation According to Shields and Young, linkage to competitive strategy, performance evaluation and compensation are important to motivate and reward employees to focus

on and use ABC information appropriately to improve their firm's competitive position and profits. Employees are likely to pay more attention to ABC information if they perceive that it is linked to those measures of performance that affect their personal interest. Similarly, management are also likely to pay more attention to ABC information if they consider that it plays an important role in either/or implementing and monitoring competitive strategies. Therefore, the following hypothesis is formulated: Hypothesis 5 (H5): In those firms that have adopted ABC there will be a positive relationship between linkage to (a) competitive strategy and (b) performance evaluation, and ABC success

6.6.6 Provision of adequate resources

Shields and Young also identified the provision of adequate resources as an important variable in influencing the success of ABC. They state that sufficient internal resources are required so that employees do not believe that the ABC initiative is pressuring them to do more without adequate support. Resources should be provided so that employees have the opportunity to learn about ABC and to experiment with alternative designs and design methods. Based on the above discussion the following hypothesis is formulated: Hypothesis 6 (H6): In those firms that have adopted ABC there will be a positive relationship between the provision of adequate resources and ABC success.

6.6.7 Size of the organisation

The debate over whether small or large organisations are more successful in

implementing innovations has been discussed in the popular press (Business Week,1989). Despite many investigations of the relationship between organisational size and innovation success, little consensus on the magnitude, and even the direction, of the relationship however exists in academicc ircles (Fariborz, 1992). Many researchers have argued that organisational size facilitates the successful implementation of innovations (Aiken and Hage, 1971; Kimberly and Evanisko 1981; Ettlie et al., 1984). Large organisations have the necessary infrastructure and more complex and diverse facilities (financial slack, marketing skills, research capabilities, product development experience, etc. ) that aid the successful adoption of a large number of innovations (Nord and Tucker, 1987). According to Delone (1981) the size of the organisation plays a critical role in the success or failure of MIS operations systems. He concluded from his study of small firms that: " firm size alone can have an impact on MIS operations and may in fact be associated with the success or failure of those operations; therefore, MIS researchers should collect data on firm size as a potential control variable when they conduct management information systems experiments across multiple firms" Based on the above discussion the following hypothesis is advanced: Hypothesis 7 (117): In adopting firms, ABC is more successful in the larger firms.

6.6.8 Period of time that ABC has been, in operation

The period of time for using the ABC system would appear to have some benefits for the firms which have been using it because of the time the people who work with ABC they have had to become more familiar with it, and move down the learning curves. Even though advocates of ABC claim that it is potentially beneficial, they also point out that it

takes time before any potential benefit might show (Kaplan, 1998). Also, the results of empirical research on the success of ABC suggest that the benefits of an ABC system increase over time. Based on an analysis of their results, Foster and Swenson (1997, p. 128) conclude that the longer the time period that ABC is used, the higher the benefits. Therefore, the following hypothesis is formulated:

Hypothesis 8 (H8): In adopting firms, there is a positive. relationship between ABCsuccess and the period of time that ABC has been in operation

2.2.1. Organizational factors

Organizational factors are those that relate to the processes and environment

within the organization. Top management support, internal champion support,

Table 2 (

cont’d

)

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© AFAANZ, 2004

organizational size and use of consultants are the organizational factors considered

in the present paper. With the exception of organizational size, there has

been little research on these factors to date within the published ABC adoption

literature (Bjørnenak, 1997; Clarke

et al

., 1997; Van Nguyen and Brooks, 1997;

Booth and Giacobbe, 1998).

Top management support

Top management support is the active and open

promotion that upper level executives, such as the Chief Executive Officer or the

Chief Financial Officer, give to an innovation. Top management support signals,

within the organization, the significance of the innovation. If the decision to

adopt ABC is made by lower level management, the level of risk undertaken by

them is high (Premkumar and Potter, 1995). In contrast, if top management support

the adoption of ABC, the risk of the project is reduced as access to resources

and resolving issues across organizational boundaries is increased where senior

management explicitly support the project, reducing project uncertainty and

thereby making adoption easier. Prescott and Conger (1995) refer to several

studies in the published IS innovations literature that consistently find that top

management support is positively correlated with innovation adoption. Therefore,

consistent with the published IS literature findings, it is expected that top

management support will be positively associated with the adoption of ABC.

Internal champion support

Internal champion support is when an individual

within the organization significantly promotes the cause of the innovation. A

champion will educate senior managers and users about an innovation such as

ABC and create awareness about the organization’s need for it (Premkumar and

Potter, 1995). Because of the usually significant size of any ABC project and the

tendency to cut across internal organizational boundaries, a champion is needed

to drive the project and facilitate communication within the firm (Shields, 1995;

Foster and Swenson, 1997; McGowan and Klammer, 1997). Prescott and

Conger (1995) refer to several IS adoption studies where this issue had been

explored, with findings supporting this proposition. Therefore, consistent with

the published IS literature findings, it is expected that champion support will be

positively associated with adoption of ABC.

Organizational size

A number of prior ABC adoption studies (Bjørnenak,

1997; Clarke

et al

., 1997; Van Nguyen and Brooks, 1997; Krumwiede, 1998)

5

found that the level of adoption was higher among larger firms. Booth and

Giacobbe (1998) found a positive relationship at the initiation of interest in

ABC stage, but no relationship for the later evaluation and adoption stages.

There is a wide range of explanations for these findings. Van Nguyen and

Brooks (1997) reason that larger firms are more likely to have greater access to

5

Krumwiede (1998) included size as a control variable in his study.

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individuals with the knowledge to design and implement ABC. In addition, as

ABC implementation is costly, larger firms are more likely to obtain economies

of scale, with the cost spread across several products. Also, they argue that

smaller firms have proportionately lower levels of overhead and, therefore, do

not suffer the same problems with cost distortions as larger firms (see also,

Clarke

et al

., 1997). Bjørnenak (1997) argues that larger firms have larger information

fields (i.e. contacts and communication channels) and the necessary

infrastructure, and are therefore more likely to adopt innovations. Booth and

Giacobbe (1998) reason that larger firms have more discretionary resources

(such as personnel, computing facilities and time), and are therefore more

inclined to adopt ABC. Whatever the mixture of these reasons that apply, the

consistent finding in both the ABC adoption and IS innovations published literatures

is that larger organizations are more likely to adopt innovations.

Consultants

Companies are increasingly using outside experts or consultants to

help them deal with problems (Cohen, 1999). Anderson (1995) found that once

the problem with the current costing system in her case site had been identified,

‘. . . the choice of ABC was profoundly influenced by opinions of external

experts’ (p. 42). Bjørnenak (1997) examined the issue of consultants as an

innovation information source and while he did not test the use of consultants

statistically, he did find that all the firms that implemented ABC had used

consultants. Arguing that active propagation of ABC by consultants leads to the

adoption of ABC, Booth and Giacobbe (1998) found that while there was a

higher use of consultants by firms adopting ABC than those that rejected it, this

difference was not statistically significant.

The use of consultants at the various stages of the adoption process may be

somewhat similar to that of an internal champion, in that they actively propagate

the problem that the firm has (such as increased level of overhead, product

complexity and diversity leading to costing problems), and promote the solution

of ABC. Firms that have not considered ABC may have had less exposure to

consultants, and therefore have not been alerted to their problem. Consequently,

in keeping with published IS literature findings for internal champions and the

limited findings from the published ABC adoption literature, it is expected that

the use of consultants will be positively associated with adoption of ABC.

2.2.2. Technological factors

Technological factors are those that relate to the problems that the application

of ABC is supposed to rectify. This is the major set of factors that have been

explored in ABC research to date (Bjørnenak, 1997; Clarke

et al

., 1997; Van

Nguyen and Brooks, 1997; Booth and Giacobbe, 1998). Higher levels of overhead

and product complexity and diversity are frequently put forward as the

primary reasons that firms need more accurate costing systems such as ABC

(Cooper, 1988a; Cobb

et al.

, 1992; Bjørnenak, 1997; Clarke

et al

., 1997; Gosselin,

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/ Accounting and Finance 44 (2004) 329–356

© AFAANZ, 2004

1997; Van Nguyen and Brooks, 1997; Booth and Giacobbe, 1998). Under a

rational decision-making model, expectations are that these factors would be

the dominant reasons for adopting ABC (Wolfe, 1994).

Level of Overhead

The early published ABC literature argued that overhead

was becoming an increasingly larger component of product cost, that this led to

the distortions inherent in traditional volume-based costing systems becoming

more problematic and, therefore, that ABC, as a more accurate method of overhead

allocation, was a better costing system for contemporary companies (Cooper

and Kaplan, 1988; Cooper, 1988b; Drury, 1989; Mitchell, 1994). Clarke

et al

.

(1997) and Van Nguyen and Brooks (1997) found no relationship between the

level of overhead and the adoption of ABC. Bjørnenak (1997), however, observed

a positive relationship. Booth and Giacobbe (1998) found that companies with

higher levels of overhead were more likely to initiate interest in ABC. However,

they did not find a relationship for the later adoption stages of evaluation and

adoption. The apparent contradiction between these findings may stem from the

fact that each study operationalized this variable differently, as well as using

different definitions of adoption. To address these concerns, the present study

uses well-developed measures and a clearer categorization of the adoption stages.

Therefore, consistent with the arguments of prior work, it is expected that higher

levels of overhead will be positively associated with the adoption of ABC.

Product complexity and diversity

Similar to the arguments for the level of

overhead, early proponents of ABC claimed that high product complexity and

diversity increased the costing distortions arising from traditional cost systems

(Cooper and Kaplan, 1988; Cooper, 1988b). Bjørnenak (1997) and Krumwiede

(1998) both found a positive relationship between the level of product complexity

and diversity and the adoption of ABC, Clarke

et al

. (1997) found a negative

association and Van Nguyen and Brooks (1997) did not find any relationship.

Booth and Giacobbe (1998) found a positive connection at the initiation of

interest stage and no association at the evaluation and adoption stages. As with

the level of overhead, the apparent inconsistencies in findings may stem from

different definitions of the stage of adoption, as well as in the measurement of

product complexity and diversity. To address these concerns, the present study

uses well-developed measures and a clearer categorization of the adoption

stages. Therefore, consistent with the arguments of prior work, it is expected

that higher levels of product complexity and diversity will be positively associated

with the adoption of ABC.

Relative Advantage

Relative advantage is defined by Kwon and Zmud (1987)

as ‘. . . the degree to which an innovation is perceived as providing greater

organizational benefits than other innovations or the status quo. These cost

benefits may reflect economic legitimacy and or social or political legitimacy’

(p. 237) (see also Rogers, 1995; p. 212). Therefore, relative advantage can have

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both economic profitability and social prestige elements. Relating this to ABC,

relative advantage would lie in the perception that an ABC system is superior

to an existing costing system in terms of either providing higher quality information

that enables better decision-making and/or in providing a symbol of the

up-to-dateness of an organization’s IS. Social prestige or legitimacy issues are

difficult to research in adoption studies as adopters ‘. . . may be reluctant to

admit that they adopted a new idea in order to secure the status aspects associated

with the innovation’ (Rogers, 1995; p. 214). Because of this difficulty, the social

prestige of ABC adoption is not examined in the present study. However, the

more tangible aspects of economic and organizational advantage are considered.

The published IS innovation literature has explored this issue in depth.

Review papers by Tornatzky and Klien (1982), Kwon and Zmud (1987), Wolfe

(1994) and Prescott and Conger (1995) all report positive associations with

innovation adoption. Anderson (1995), the only ABC adoption study to have

considered this factor, found positive associations with both the initiation and

adoption stages of ABC.

In view of the attention given to ABC in both the academic and practitioner

published literatures, and the consistent claims made about its advantages over

traditional costing systems, there is a strong prima facie case that relative

advantage may influence the adoption of ABC. Intuitively, it would seem logical

that an organization will initiate interest in, and adopt ABC where it is perceived

to provide advantage. Organizations where the decision-makers do not perceive

that there is relative advantage may not consider ABC, or reject it after evaluation.

Therefore, consistent with the arguments of the published IS innovations

literature, it is expected that higher perceptions of the relative advantage of

ABC as a costing system will be positively associated with adoption of ABC.

In summary, as in prior ABC adoption research, the research question posed

in the present paper is: What factors influence the adoption of ABC? In posing

this question, we focus on seven factors across two major categories: organizational

(top management support, internal champion support, organizational

size and use of consultants) and technological (level of overhead, product

complexity and diversity, and relative advantage) factors. For all seven factors,

it was proposed that there would be a positive association with the general

adoption of ABC.

In considering the adoption decision it was proposed that two broad steps

in the decision process need to be considered: initiation of interest in ABC

(stage A to B and beyond), and then adoption or rejection of ABC (stage C or

D). As Krumwiede (1998) argued, different factors may influence the progression

towards interest in ABC or its adoption or rejection. Also, where a factor

influences more than one stage its extent of impact may be different for each stage.

The former proposition is consistent with the general arguments and findings of

other prior studies that some factors are more important at some stages than

others (e.g., evaluation versus adoption). The latter has only previously been

considered by Krumwiede (1998), who found some support for this proposition.

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Accordingly, consistent with the Krumwiede (1998) approach the positive

association of the seven organizational and technological factors will be examined

at each of the two broad steps in the ABC adoption decision process: initiation of

interest in ABC initiatives and the decision to adopt or reject ABC. Therefore,

two general hypotheses are proposed:

H

1

: The organizational factors (top management support, internal champion

support, organizational size, and use of consultants) and the technological factors

(level of overhead, product complexity and diversity, and relative advantage)

are positively associated with interest in ABC initiatives.

H

2

: The organizational factors (top management support, internal champion

support, organizational size, and use of consultants) and the technological factors

(level of overhead, product complexity and diversity, and relative advantage)

are positively associated with the decision to adopt ABC.


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