Implementation Of Activity Based Costing In Developing Countries Accounting Essay


Activity based costing (ABC) is constantly replacing the traditional accounting system. ABC introduced by Professor Kaplan and Cooper of Business School of University of Harvard. ABC is method that lists and measures the cost of each activity that facilitates the production to deliver the product and service to customer. (Sohal and Walter, 1998)

The use of Activity-Based Costing (ABC) in the West is very common as it provides more reliable information about the cost associated with producing the product. But in comparison with the developing countries it is not so popular; this may be because of the complexity of the accounting system or the cost associated with the implementation or the knowledge required for the implementation of the system. (Liua and Panb, 2007)

Activity-based Costing (ABC) helps us to identify with the different cost activities for the each product, service, or customer by calculating the cost that arises from producing or making or delivering the product or service. ABC delivers more specific information than traditional accounting system because it identifies the relationship between the cost driver and the activities associated with the production of that product. It helps to discover those activities those are non-efficient and does not add value to the performance of the activity; therefore it helps the organization to exploit the opportunity to reduce cost and maximize profit. ABC is an ideal way to manage activities and improve the quality of activities by asking "why" and "how well" activities are adding value to products and services. (Moore, 2000).

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The main concern in the field of accounting is to discover the different factors that contribute the success of management accounting system. Activity Based Costing (ABC) is heavily used in the management accounting for more than a decade. The adoption rate of ABC is approximately 20% in the larger companies (Pike and Tayles). ABC is not only successful in the field of industrial manufacturing system but also it is successful in the field of health sector, public utilities, wholesale and retail organization. In addition to its application in a wide variety of commercial manufacturing business it has also been adopted by public utilities, by wholesale and retail organisations. The adoption rate in the Far East is not so mention worthy because of complexity in implementing the system; it deals with lots of technical issues. The most crucial drawback of ABC implementation is that, the users of ABC output are not much aware of this new system, they are more keen to use the traditional accounting system, therefore it is necessary to ensure that the member of management who uses it are well knowledge about the ABC system, providing training for the emphasising the logic, design, and implementation of ABC. There is no evidence that, the implementation of ABC will be successful, if the organization is big, the management understands the value of outcome, but it depends on how efficiently and effectively the management can make correlation with the system for the better outcome of the ABC system. (Pike and Tayles)

Article one: BANK OF CHINA

Bank of China, established in 1912, operating for about 100 years is the largest financial organization in China. It serves the Chinese economy for the well being of society by providing banking service. The main goal of Bank of China is to lure foreign investment and help in developing the Chinese economy as well as the market. The bank serves the country by it 1000 branches across the country (Abdallah and Wei, 2008).

Bank of China and ABC implementation

Every company finds way to minimize its cost. Bank of China is not an exception. For this reason the top management of Bank of China decided to introduce activity-based costing system with a view to minimize its cost in 2005. The introduction of ABC system was induced by several factors. First of all, from the mid 1990's different well renowned bank came to China to do business as Chinese economy started to boom and it was a attractive market for the foreign banks, Bank of China was facing challenge from those foreign banks. Secondly, it wanted to introduce share in the capital market. Thirdly, the advancement of foreign bank in China compelled Bank of China to manage its resource more effectively and efficiently. For the aforementioned study findings Bank of China wanted to implement ABC, although the implementation was very slow and in most branches the implementation was halted (Abdallah and Wei, 2008).

Reasons of failure ABC implementation in Bank of China

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The reason of failure ABC implementation in Bank of China can be viewed from the following discussions.

Vague business goal: The introduction of ABC was done by the department of accounting, but there were no representative from any other department who was the user of the ABC system, because lack of interest in ABC. This resulted loss of motivation and disappointment in the accounting department. On the contrary, most of the member of staff of different department of Bank of China was confused about ABC. Because, the goal of ABC was not clear among the employees and most of the employees thought that, it would just make a binding of the spending limit. Some employees thought that, it would help the organization to modify the process of work; on the other hand some employees thought that, the structure of the organization will be restructured. The general manager of the Bank of China thought that, ABC would help the company to increase the accountability in the different department of the organization. So, it is very much evident that, the goal of the implementation of ABC in Bank of China was not clear.

The reason behind the implementation of ABC was to more effective costing system, this view was from the accounting department of Bank of China. But the effecting costing system was a generic term which cannot be followed. Interestingly, employees from different departments of Bank of China had different meaning of ABC. The member of the organization was confused and they lost their motivation in ABC implementation. At the end of the day, the employees of accounting department lost their interest when their effort was not welcomed by the other departments.

No academic knowledge about ABC: Most of the employees had no academic knowledge about ABC. Very few employees had a sound knowledge about ABC. The accounting department made an effort to know about the level of knowledge of ABC in different departments. The effort revealed that, one of the managers from the corporate banking department does not know about the ABC. In the same study, it revealed that, two managers know about ABC, but only one of them know details about the ABC system. The accounting department, who were in charge of designing the model the ABC, have gathered knowledge from the book rather than real experience. In a nut shell, no one in the organization showed confidence in making the ABC model fruitful. The study also revealed that, a proper meticulous learning about ABC was important for the employees of Bank of China (Abdallah and Wei, 2008).

Inaccurate ABC model design: For making a project successful the design of that project should be such that it makes a better outcome. In the same way, for the implementation of ABC a well design model is necessary. But for the Bank of China, the model of ABC implementation was not found, the study revealed that, the model was complicated to maintain as well as it was very difficult to understand for the managers. Moreover, the design that was made by accounting department was not up to the mark and it needed more modification. (Abdallah and Wei, 2008). As the employees had not enough knowledge about ABC, they failed to provide valuable suggestions for the redesign of the model.

No support from the other department: A major drawback of the accounting department was that, they did not get top management support. The other department of the bank did not pay attention to the new system as it was solely done by the accounting department. (Abdallah and Wei, 2008). For this non cooperation between the departments, the accounting department had no knowledge about the functions of departments, as a result the model of ABC was not so good and they were unsuccessful in modifying the model.

Obstacles in the implementation of ABC: Although managers welcomed the new accounting system, but personally this new system was not welcomed by managers. Most managers thought that this would limit their control over operating costs. Many employees thought that, it will make their daily work complex and will create problems. Moreover, individuals thought that the current system is user friendly as the system allowed them to keep the extra money for their own department rather than returning the money to the general account (Abdallah and Wei, 2008). But the introduction of ABC will take away their extra money.

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No support from outside the organization: To implement a new system support from expertise is needed not only from the own organization but also from outside the organization. But for the Bank of China there were limited scope of support from the outside of the organization. The bank was in quest for help from the banking expertise accountant, but it failed (Abdallah and Wei, 2008).Moreover, as the system was new, no other bank implemented the ABC from where they can have some knowledge about the implementation of ABC.

Article Two: TM

Company background

Telecom Malaysia is (TM) is Malaysia's leading mobile service operator. It was established in 1986. It is a listed company in Malaysia.

The study was conducted with TM's manager of Network Strategic Cost Management. The manager was a member of ABC implementation process at the initial stage. TM is a successful company which was able to implement ABC through the country.

The ABC implementation was initiated by the finance division of TM in 1996.The introduction of ABC in TM started in 1996 and was initiated by the finance division.

ABC is implemented in every department of TM. The international implementation of ABC is still under process.

Reasons of ABC implementation

The main reason for the introduction of ABC was price competition. TM was losing its market share. It had no option but to reduce cost, the only way to increase market share is to reduce the price of service. For this reason it wanted to identify different cost drivers so that it can identify where the company is losing its money in comparison to other telecommunication company. As the traditional accounting system could not identify appropriate cost of each service it motivated the authority to implement ABC.

ABC implementation process

At the beginning stage a working committee was formed, it included members from the costing, engineering and other concerned department. The head of the committee was an experienced manager who specialized in the field of accounting.

Another committed was formed which included top management. TM also hired specialized consultants to train the concerned employees to make knowledgeable about the ABC. Then they identified the different cost drivers. The company also wanted to make sure everyone knows about the new system that's why they invited relevant departments staff to work with them and to know about the system. The top management supported them in every way. They also provided computer training for the employees. (Majid and Sulaiman, 2008)

TM used ABC for pricing of the product, making decisions about product output, managing of cost, for reducing cost, designing new product, profitability analysis of customer, improvement in the process and for designing new product. Moreover, they used ABC for evaluating performance.

Implementation problems

At the very beginning, the top administration of the company was not so motivated. They perceived that, it was same accounting system that was prevailing then. So, it would just be a waste of time and money above all the waste of company resources. They also thought that, there was more serious problem than the introduction of new accounting system. For the better understanding of the benefit of the introduction of ABC, costing manager made a pilot test to arouse interest among the top authority. The lower level of the company was also not convinced to accept the new accounting system. As employees did not have knowledge about the ABC accounting system. As technology changes more rapidly, new cost drivers had to be introduced by the end of primary identification of cost drivers. (Majid and Sulaiman, 2008)

Advantage of using ABC

ABC helped the company to know about the non-value added activity and the jobs which was done non-effectively. With the use ABC managers were able to make more precise decisions. Moreover, TM managed to reduce the time and waste of resources. They also identified that they were paying high cost for the overtime costs (Majid and Sulaiman, 2008). By the introduction of ABC, TM developed a process flow. ABC helps relevant department managers to identify those costs which are high. After the introduction of ABC, TM was able to maintain its resources more efficiently and effectively.

Article three: Xu Ji Electric Co. Ltd.

Company background

Xu Ji is public limited company on Shen Zhen Stock Exchange in China. The company produces different electrical products. The Xu Ji was always wanted to keep pace with the latest management ideas; it took those ideas which were successful in the west. As ABC was successful in the west Xu Ji was also interested to implement the ABC.

Implementation process in Xu Ji

As competition was growing in the electronics sector, Xu Ji felt the need to introduce ABC. The traditional accounting system is unable to identify the departmental profit but in contrast to this ABC is able to find out profit of individual department. The traditional accounting system use direct labour hour cost, distribute overhead across the production lines, which give wrong product cost and wrong idea about the profit of each product category. As the market demands products in cheap price, it was really absurd for Xu Ji to sell products in a cheap price as they did not know about the cost driver of each product.

The ABC implementation in Xu Ji was conducted by a team; it included all the members from each department. For the successful implementation of ABC a model was designed to identify manufacturing cost drivers and different cost activities.

To do it more efficiently, computer automated system was introduced. But it was not so fruitful as the firm which was assisting in ABC automation was inexperienced. This drawback was solved by the Xu Ji by attaching the relevant personnel with the software automation team.

The main drawback of the automation system was that it needed manual input of the data.

Success factors of Xu Ji

Xu Ji was successful in the implementation of for several reasons.

All the department was working together to make a fruitful outcome.

The automation of ABC was a great challenge as all the parties involved in the automation process were unaware of ABC but this challenge was successfully met by the joined effort of all the parties.

Proper training was made for the relevant personnel who were in charge of implementing the ABC.

The goal of the group and the company was similar.

Before full implementation of the ABC, a pilot test was done to judge the outcome of the ABC.


For the better implementation of ABC it is necessary that, the support of the top level of management is very important. As ABC is a new system for many organization and there must be a knowledge sharing process throughout the organization. The user who will implement the ABC must be associated with the decision. Training for the employees is necessary. The cost drivers must be identified accurately. Before full implementation of ABC, every organization should run a pilot test. The cost of system i.e. the computer automation system cost must be taken into account. The new system must check what would be financial impact of implementation of ABC. The reason behind the non-popularity of ABC in developing country is that it needs a lot of effort to implement, as well as cost is associated with the implementation. Last but not the least, for successful implementation of ABC a perfect model, plan, appropriate knowledge and expertise is required.