Costing System At Malaysian Government Agencies Accounting Essay

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This chapter aims to provide the review of literature related to the discussion on the emergence of costing system within the public sector context and further reviewing the past study on the implementation of Activity Based Costing (ABC) particularly at the public organizations. This chapter organized in several sub-topics which aim to furnish richer overview on this research area. The first sub-topic provides an overview of ABC adoption as accounting innovation in public sector, followed by discussion on the ABC in public sector in general based on previous studies. The next sub-topic presents the motives of ABC adoption by the public organizations which commonly being discuss by previous studies. Subsequently, the ABC implementation issues and the ABC usefulness in public sector are discussed. Finally, the challenges and critiques towards ABC in public sector being debated in the last part of this chapter.

2.1 ABC in Public Sector: Accounting Innovation

In the eras of new public management reform, public sector has continuingly demanded to increase their efficiency and effectiveness in managing the use of resources. The notion of "new public management" (NPM) has driven the transformation in the public sector to be more focus on managerial issues and give greater emphasis in the management control (Jarvinen, 2009). Under the new management reform, the adoption of private sector techniques into public sector is prominence to accomplish the NPM agendas and become one of its key reformations (Hood, 1994; Wright and Lapsley, 2004). The adoption of many private sector accounting techniques into public sector such as balance scorecard, key performance indicator, activity based management, and activity based costing transform the images of public sector from a static and inefficient management looked into more dynamic and flexible public management style (Siddiquee, 2006). The adoption of private sector accounting techniques into public sector use also referred as "accounting innovation" meant to increase public sector transparency, efficiency, and effectiveness.

As Hood (1991, 1995) emphasis on the important roles of accounting in facilitates the public sector reform, new accounting innovation adopted in public sector become significant concern for the researchers to study it in different angel of adoption or implementation process. In response towards the new accounting changes in public sector, there are growing numbers of research capturing the issues of the management accounting innovation within the public sector context (Wright and Lapsley, 2004). However, Jackson and Lapsley (2003) clearly noted that there are lacks of comprehensive knowledge on the new management accounting changes transpired in public sector.

One of the important areas of accounting innovation in the public sector that has given considerable attention among the researchers is the adoption of new costing technologies, Activity Based Costing (ABC) (Arnaboldi and Lapsley, 2005). Due to the vital roles play by the costing information in facilitating the decision making, planning, and control process within the organizations, public sector organizations are forced to look into better costing techniques that can produce much accurate costing information (Brown, Myring and Gard, 1999).

2.2 ABC in Public Sector

The idea of Activity Based Costing (ABC) system has been introduced by Cooper (1988) and Cooper and Kaplan (1988) for the purpose of better cost measurement as cited in Baird (2007). ABC was initially designed for the use of private sector industries, particularly for the manufacturing companies as an alternative solution to overcome the distortion of costing information produce by the traditional costing system. However, as reported by Kaplan (1994), ABC technique also further being utilized in the service sector since 1980s. Later, the discussion of ABC application were expanded into the public sector context, where ABC adoption was seen as a new accounting innovation by means to improve the public management efficiency and effectiveness (Brown et al, 1999; Arnaboldi and Lapsley, 2005; Baird, 2007; Fortin et al, 2007; Carmo and Padovani, 2012 ). Thus, studies of ABC within the public sector contextual setting are the emerging research areas which subjected to further exploration to grasp many important issues within the perspective of new government management reform.

Previous research that studies the ABC system in the public sector setting mostly exploring the ABC application for the purpose of product costing determination in the healthcare industries (see Arnaboldi and Lapsley, 2004, 2005; King, 1995) and higher education sector (Granof et al, 2000). In addition, the adoptions of ABC in the public sector are quite dominant in the developed countries like US, UK, and Australia. Miller (2009) has done her study on the widespread application of ABC in the federal government agencies in US and found that many of those government agencies benefited from the ABC implementation. However, there is relatively small numbers of studies that highlighted the adoption of ABC in the public agencies in the developing countries (Carmo and Padovani, 2012).

2.3 Motives of Adoption of ABC in Public Sector

Though the application of ABC in private sector has shown mixed trend between the successful and failure of ABC implementation in the past studies, many government agencies especially in developed countries like US, UK and Canada has showing great interest in the ABC concept (Brown et al, 1999). However, past studies has shown many different motives in adoption of ABC by the public sector agencies. Malmi (1999) explored the diffusion of innovation of ABC system in the Finnish firms and draw several motives of ABC adoption in different adoption stages in four perspectives (efficient-choice, forced selection, fad and fashion perspectives).

2.3.1 Adoption of ABC for efficiency reason

As referring to many studies within the new public management context, the accounting innovation spread in the public sectors has mainly driven by the efficiency reason (Hood, 1995; Jackson and Lapsley, 2003; Siddiquee, 2006). Public sector organizations are continuingly demanded by the stakeholders to improve their organizations efficiency and effectiveness. Sherratt (2002) and Melese et al (2004) indicates the usefulness of activity based management in public sector organizations on the matter to increase the management efficiency by providing proper assessment on the service cost consumed in every activity involved. Motive of adoption for efficiency reason is the most substantial reason when denoting the application of modern costing technologies into public sector organizations. This is due to the reason that the roles of modern costing techniques like ABC and ABM is usually convey more useful function in profit orientation organizations, but past studies also recommended its application into public sector organizations. Baird (2007) denotes this reality by clearly mentioned that these modern costing techniques are "relevant for public sector organizations as they are for the private sector".

2.3.2 Adoption of ABC to look as "modern organization" and legitimacy exercise

There are also past studies that relate the reason of ABC adoption in the public sector organizations is in order to be appeared as "modern organizations" (see Arnaboldi and Lapsley, 2003, 2004). As the public sector organizations when through a transformation eras towards better management, the uses of modern techniques like ABC system will create new images of public organizations to be looked as modern corporation (Amstrong, 2002; Jones and Dugdale, 2002, as cited in Arnaboldi and Lapsley, 2004, p.3). The forced created by the new public management reform to adopt modern costing techniques also represents the legitimating exercise to appear as modern organizations (Arnaboldi and Lapsley, 2004).

2.3.3 Adoption of ABC through regulation and pressure

There are also evidences from the previous studies that mentioned the reason for ABC adoption in public sector organizations is through enforcement from regulation made by the higher authorities (Jackson and Lapsley, 2003; Lapsley and Wright, 2004). Public organizations also under pressure when there are enforcement from the higher authority to adopt new accounting system.

2.3.4 Adoption of ABC as mimicking other government agencies

As accordance to Arnaboldi and Lapsley (2004), motives for ABC adoption in public sector also driven by the action in mimicking other government agencies. Since the reason of adoption more towards mimicry of other organizations action, there is potentials failure in adoption of ABC system cause by no clear reason for adoption in view of the difficulties in implementing it.

2.4 ABC implementation issues: Determinant of Successful implementation

Within the implementation context, past studies also discusses some of the determinant of successful implementation on ABC in government organization. Fortin et al (2007) studies the measurement of success of ABC in Canadian government organizations and found that control and cultural factors are highly contributed to the successful implementation of ABC. Control within the ABC implementation in public sector context referring to the organizational structure that supports the implementation ABC system. Horizontal organization structures offer more flexibility and encourage cross-functional teamwork (Sheilds and Young,1989 as cited by Fortin et al, 2007) and thus can support the ABC implementation which require more teamwork and flexibility during the execution process.

Other studies also pinpointing other determinant of success of ABC implementation including commitment of managers and employees as well as top management support (Foster and Swenson, 1997; Arnaboldi and Lapsley, 2003). In addition, continuing learning also being highlighted by several studies being another ABC successful implementation factor in the public organizations (Sheilds, 1995; A Arnaboldi and Lapsley, 2003)

2. 5 Various use of ABC in public sector

Within the private sector perspectives, the uses of ABC are predominantly in the context of products pricing and product mixed decision (Brown et al, 1999). However, the used of ABC system might be extended to more broad context when referring to its usefulness in public sector organizations. Past studies has shown great attention on the usefulness of ABC system in the public sector organizations in term of overhead allocation to provide more accurate costing information (Brown et al, 1999; Arnaboldi and Lapsley, 2005; Vazakidis et al, 2010). Though, there are many other literatures discusses the usefulness of ABC system in more broad context including for strategic purposes such as resource planning and budgeting, cost control and cost reduction, and performance measures in public sector organizations (Baird, 2007; Fortin et al, 2007). However, as highlighted by Fortin et al (2007) in their study, the assessment on the usefulness of the ABC system in public sector organizations still in lacking though there are many possibilities on various use of ABC in public sector as investigated by many researchers previously.

Challenges and Critiques towards ABC in public sector

As there are growing numbers of studies that explore the positive impact and potential of ABC adoption in public sector, there are also emergence research that discus on the possible challenges and critiques towards ABC implementation in public sector organizations.

2.6.1 Cost and benefit issues

The critiques towards ABC system in the past literature mainly in term of cost and benefit issues in implementing this new costing technologies (Amstrong, 2002). Therefore, this point of view also significant to the public sector organizations as the cost and benefit issues are among the important consideration particularly when dealing with the uses of public resources. Fortin et al (2007) found that the usefulness of ABC implementation in government organizations do not amount to the efforts invested to implement it.

2.6.2. Absence of a cost control culture

Another challenges that may be faced by the public sector organizations to implement ABC system is because of the absent of a culture to control cost like in private sector organizations (Fortin et al, 2007). Since the private sector organizations have suffered to reduce the cost to face the highly competition pressure from the market, the public sector organizations face pressure to reduce the cost in different story. Public sector organizations are demanded to be more efficient in the use of public resources while at the same time produce better service delivery (Baird, 2007). Therefore, there are forced to control the operation cost in the public organizations under the new public management reform, however, the development of culture to control the cost remains as gray area which subjected to further explores (Fortin et al, 2007).

2.6.3 Difficulties in determining the cost driver

Identifying the cost driver plays a vital role in the operation of ABC system (Brown, 1999). However, given the complex structure in operation of public sector organizations, there are many possible difficulties in determining the accurate cost driver to represent the real activities that consuming the cost. This difficulty has been clearly highlighted in Arnaboldi and Lapsley (2003), where they found in one of the case study that mentioning the challenging part in implementing the ABC system was to determine the accurate cost driver. This is because, the major cost consumed in their organization comes from the payroll cost and this has caused an issue of ambiguity in determining the right cost driver for each activity.


3.0 Introduction

This chapter focuses on the evolution of costing system at the Malaysian government agencies, particularly focuses on the Jabatan Akauntan Negara Malaysia (JANM) which being the focus context in this study. Firstly, this chapter started with the brief introduction on the JANM and its function, followed by the discussion on the previous costing system developed and used by the JANM known as Micro Accounting System (MAS). Subsequently, the history of ABC development and adoption by JANM will be presented and finally, the literature gap concludes the discussion.

3.1 Background JANM and Its function

Jabatan Akauntan Negara Malaysia (Accountant General's Department of Malaysia) (JANM) established under Ministry of Finance and being authorized to handle the accounting procedures in regards to the account for federal government as well as state government (Ministerial Functions Act 1969). The main function of JANM as the government agency is to provide the accounting and finance services to all government ministries and agencies. JANM involved in the development of accounting procedures and accounting system to manage the government fund. The main office of JANM is located at Putrajaya and consists of eight (8) divisions. Currently, JANM has 25 branches throughout Malaysia to carry out the accounting and financial services for other government agencies.

Micro Accounting System (MAS)

Micro Accounting System (MAS) or Sistem Perakaunan Mikro (SPM) was introduced in the government administration system through the Public Administration Development Circular No. 3 (1992). This accounting system provides a method or process to compile, calculate and analyze the total actual cost of output for every program and government activity. Since the year of introduction in 1992, MAS has been used as a costing system by all government agencies and department. The main tasks of MAS are to bring in the cost awareness within the management function and assist in costing control such as variance cost analysis and output cost flow analysis.

However, there are very little empirical studies that highlighted the issues in Micro Accounting System (MAS) implementation in Malaysian government organizations (Abdul Rahman, 2001). Therefore, the successfulness of the system remains as gray area to the researchers and practitioners. Referring the current development of accounting system by the JANM, the MAS likely will be abandoning for uses at JANM due to the introduction of ABC system as a new costing technologies.

Introduction of Activity Based Costing (ABC) system at JANM

ABC system has been developed by the Jabatan Akauntan Negara Malaysia (JANM) since 2005 and has been successfully implemented by the early 2012. The development of ABC system therefore replace the old costing system known as Micro Accounting System (MAS) which previously has been used since 1992. By the 2012, the ABC system has been introduced for the uses at Jabatan Akauntan Negara Malaysia (JANM) including all its branches. The ABC system has been integrated with the Government Financial and Accounting Management System (GFMAS) as the main government accounting system. Previously, ABC system has been tested for used in 2009, however, due to several technical issues, the system has been further develops to make it ready for use at JANM.

Literature Gap

Based on the previous literatures that discuss the application of ABC system in the public sector organizations, there are still very little studies that highlighted the usefulness of the ABC system in public organizations (Fortin et al, 2007). Most of the studies focus on the diffusion process of ABC system in public sector organizations since the application of ABC system in public agencies still at the infancy level. In referring to the contextual setting, the new introduction of ABC system at JANM create opportunities to study this new changes in the government accounting system in examining how far the introduction of ABC system given impact to the management at the government agency. In addition, since the year of development of the ABC system at JANM has taken place from 2005, it given us the suitable time frame to examine the usefulness or possible usefulness of the system for the respective users and thus, can lead us for a better understanding towards the benefit of ABC system in public agencies in Malaysia.