Many companies are facing a real competition in the global market nowadays. This is because of the fact that some companies are producing high quality products with low costs. Many organizational managers attempted in adopting a cost system that shall give accurate information and cost of each product so that managers can execute right decisions at a given time. (Johnson and Kaplan, 1987; Johnson, 1988; 1992).
Nowadays, traditional cost systems became unpopular among companies, since these cost systems were designed long time ago for different circumstances. For example, companies used to produce a small number of products and indirect cost (overhead) was quite small, compared to the total cost at that time overhead did not cause any problems to the managers. On the other hand, in the 1980s many companies started produce different variety of products and indirect cost started to play an important role. Therefore, the traditional cost systems are no longer desirable by managers. Managers started to think to change these systems after realizing that these systems are not reliable for managerial purposes anymore (Drury, 2000).
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During the 1980's a new cost system started to be developed in the United States. The system was named Activity Based Costing (ABC) (Jones and Dugdale, 2002). It was argued by Drury (2000) that this system is guarantees a better allocation for indirect costs. It also provides accurate information regarding the products' costs. Managers can use this information in making decisions and help in planning the organization's future.
Studying the concept of the ABC system can be related to the developed countries. There are three categories in studying the ABC system. The first category attempts to give the advantages and drawbacks of ABC and describe the adoption of ABC (Cooper, 1988, 1989; Kaplan and Atkinson, 1989). The second category uses a case study approach to show a real use of ABC in different companies (Lee, 1990; Fisher et al,1990). The third category goes further to cover the ABC practices in developed countries (Green and Amenkhienan, 1992 cited in Al-basteki and Ramadan,1997). There are various studies being carried out regarding the ABC system. However, there are very few studied that is regarding the system's effects on the returns of assets.
This research aims to adapt a positive philosophy with regards to the investigation of the ABC system's effects on the returns of assets. The survey approach shall be used in conducting the said investigation. The main aim of the researcher is to investigate the effect of ABC system on the assets returns on organization. Secondly, this paper also aims to illustrate the characteristics of these organizations in order to help other organizations in adapting the same system. The outcome of this paper shall be the comparative framework for such. Other organizations might consider this system if the benefits are well presented. In addition, managers can decide whether ABC is a suitable cost system for their organizations after considering the actual adoptions. The implementation of ABC requires investing a lot of many and needs some changes inside the organization itself. So, understanding the characteristics would help the managers to determine the benefits of ABC for their organizations.
Evidence for the Use of a Survey Method in Relevance to Prior Research
Several previous studies have used the survey method of data collection in order to investigate the adaption of ABC by organizations and its effects. In this regard, presentation of previous studies for this research shall be presented under the category of various studies only.
Various Related Studies
1. The ABC System
Kaplan and Cooper (1988) developed more effective alternative to traditional model of cost calculation. The method promoted by the two researchers gives more precise cost measure because it indirectly traces costs more carefully regarding various kinds of consumed activities. However, the common accounting method frequently used assigned overhead product cost by utilizing related volume allocation such as hours of labor, direct cost of labor, direct cost of materials, utility hours, etc. In circumstances where there huge diversified products, or there is a increased automation level, the distortion of overheads will be vital factor (Brimson (1991).
The major advantage of this method is based on the accuracy and precise cost computation, specifically in which diversity of product is vital and when the indirect costs is not traceable directly to the services or products. It also offers important proportions of its general costs. Additionally, ABC also facilitates a compound level analysis of cost by defining the relevance between activities and products. Several studies regarding the ABC implementation exists in different fields (Cropper and Cook, 2000. These studies concluded that ABC is an effective model of accounting and have the capacity to gain more valid and precise data regarding the structure of cost activities based on the manager's decision on the best drivers and defining activities. However, it is always assumed that there is no generally accepted accounting system best suited to all circumstances of organizations (Emmanuel, 1990).
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Many previous studies (Roberts and Sylvester 1996) suggested that organizations adopted the management initiatives such as ABC, JIT and TQM to obtain benefits that directly or indirectly impact financial performance measures. From the theoretical perspective many evidences regarding the benefits of ABC have been provided (Barnes 1991; Brimson 1991). Empirically researches on ABC have generally consisted of modeling the factors that lead to successful ABC system. Success has been defined as 'use for decision making' (Innes and Mitchell 1995; Krumwiede 1998), satisfaction with the costing system, perceived financial benefits or non financial benefits (Krumwiede 1998;McGowan, 1998). Also some researches such as Cagwin and Bouwman (2000) provided evidence that ABC improves financial performance. A local study done by (Khasharmeh 2002) about the practice of ABC in Jordanian manufacturing companies in 2002 revealed that only 10% of Jordanian manufacturing companies use the ABC system. It also revealed that 75% of the respondents agree and 25% strongly agree that the use of ABC improves the company's performance in general.
2. Related Studies
In a study conducted by Tsai and Hsu (1994), it was found out that implementation of ABC in a hot spring inn can acquire reliable and clear information regarding the activities and its proportion costs. Managers can also utilize the data derived from ABC implementation for product and pricing decision mix (Tsai, 1994), designs of products, analysis of profits, etc. The ABC and traditional costing comparison presents the appropriate and practical application is regarded to ABC as it shows accurate information for pricing and management decisions.
Granof, Platt and Vaysman (2000) conducted a case study regarding the application of the ABC system in certain departments of higher education institutions. It was found out that the primary benefit of the ABC system is that it is an improvement upon a system that is already adequate. It also gives the establishment structure. It also gives true management-oriented system for an organization. It was also found out that a system must be flexible in order for it to be successful. Rigid allocation rules cannot readily be imposed upon organizations, like universities, characterized by decentralized management systems. Finally, this method assigned costs to unmeasured an factor which previously provides a full cost measure of activities and program regarding spending decisions.
Necula (2009) argues the use of ABC in a Total Quality Management (TQM) Environment. In her study, it was concluded that ABC allows managers to accurately track costs and determine the identification of excessive resources and thus support the implementation of TQM and other quality improvement programs processes. Managers can use information gathered by ABC analysis, Pareto analysis leading to the cost drivers' analysis of key cost, an important ingredient in most TQM initiatives. Model is a test in addition to the successful implementation of TQM.
ABC method can be associated with adoption of improved business processes, activities included in TQM programs (Ittner & Larcker, 1997, Anderson et al., 2002). Moreover Datar and Gupta (1994) talk about increasing costs and improve quality through increased cost specification errors in measuring the frequency of product costs. Banker and Potter (1993) and Christensen and Demski (1997) ABC method mentioned ability to produce accurate cost estimates, and other costs that depend on factors such as market competitiveness and quality of information technology infrastructure of the organization.
Roztocki and Schultz conducted a web based survey regarding the implementation and adoption of the ABC system. The results showed that familiarity with and adoption of ABC was found to be comparable across both the manufacturing and service sectors. Service firms that provide multiple services that use overhead at differing rates can benefit from the use of ABC, as can manufacture firms with multiple products that place different demands on overhead. In this study, adoption of ABC was found to be is significantly related to firm size, with larger firms being more likely to adopt this method than smaller firms. These results may reflect the fact that larger firms are more likely to have the diverse mix of products or services that makes the use of ABC advantageous. Also, smaller firms may be less likely to have specialized staff that are familiar with this method. Accountants and managers working for larger firms were more likely to be familiar with ABC than those working for smaller firms. As small firms develop greater familiarity with ABC, increased implementation would be expected. In addition, adoption of ABC by smaller companies might be supported by implementation procedures customized to their particular needs.
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Malmi (1997) conducted a research study in order to explain whys some ABC system fails. In the results, it was explained that some of the so-called ABC failures may not have been failures at all. Instead, these supposed failures may result from the fairly narrow decision making perspective adopted to assess ABC projects in firms. Consequently, discussion on ABC success and failure should acknowledge uses of accounting other than the currently dominant decision making perspective. The new ABC system was not in consonance with the local culture. Routines and firm-level institutions, and organization culture, were suggested to be worthy of consideration in explaining resistance to ABC, and ABC failure. The practical implication of this study hinges on the notion that although the resistance may originate from various sources, where sources appear fundamentally structural, they are unlikely to be dealt with through implementation based strategies.
The Research Philosophy
Origins of the Positive Theory
The positivist theory was introduced in 1853 by the French philosopher Augusto Comte. According to him, "all good intellects have repeated, since Bacon's time, that that there can be no real knowledge but that which is based on observed facts". Comte has gained attention with regards to many issues by this statement. The first issue is that reality is objective and external to some point, and this is what is called as ontological assumption. The second issue is that knowledge requires the observation of reality, thus, this makes knowledge important (cited in Easterby-Smith et al., 2006). The positive approach gained acceptance in the United Kingdom and United States since the assumptions of this theory are understandable (Delanty, 2003). The main assumptions of positivism are independence, value-freedom, causality, hypothesis and deduction, operationalization, reductionism, generalization, and cross sectional analysis. Independence should have the researcher to be completely independent from the reality when doing the observations. Value-freedom should have the researcher take some objectives of the research, and when a topic is selected, the researcher should not follow the interests of the people. Causality focuses on the main target of social science which is to provide some explanations for the human behavior. Observations will be determined whether the hypothesis set by the researchers is right or wrong. Operationalization ensures that all facts are measured quantitatively, and that the researcher should operationalize all the concepts accordingly. Reductionism implies that any kind of problem should be simplified in order to give better understanding to the researcher; afterwards, the problem should be dealt with as a whole. Generalization ensures that the researcher shall be selecting sufficient samples so that the findings in the population can be generalized. The cross sectional analysis can make a comparison through the sample and can show regularities.
2. Basic Concepts of the Theory
The ontology of the positive theory is the world of objective. It is completely independent from human beings. The positive person assumes that the world is external and objective, and that people have no any influence on the social reality (Chua, 1986). Epistemology, it is concluded that all the assumptions are separate from theories, in other words positive researcher tend to test hypotheses and after that he/she can deduce future events (ibid.). Positive researcher can be inductive or deductive. Induction is a process starting from observations in order to develop theories. In contrast, deduction is a process where you start from theory (hypotheses), so the researcher will make further observations to ensure that the theories meet the findings (Drever, 2007).
Essentially epistemology concerns itself with how knowledge is accepted, how we know what we know. It is about how we can establish which truths are both adequate and legitimate. Western epistemologists have often distinguished between two types of knowledge which is gained through reason alone and that which is gained through application and experience. The epistemology that will be adapted in this research is the knowledge gained in the area of commercial contract through application of law and the experience of legal practitioners.
The central element in any philosophy is its epistemology which refers to the theory of knowledge and the fundamental epistemological question of how we know what we know. In epistemology one strives to generate truthful and justified descriptions and explanations of the world. Associated with epistemology is the philosophical framework of ontology, which Johnston (1986) describes as the nature of being, existence and reality, or 'what can be known'. The manner in which we answer the question of 'what exists' determines what can be accepted as fact and thus is the basis of every investigation. The divergent epistemologies and ontology's together inform the methodologies for any piece of research, which, in turn, must be appropriate to the questions or problems that prompt the research enterprise.
3. Relevance to the Current Research
The researcher will tend to be inductive in this paper. When this research is finished, the researcher will be able to set out theories after relevant observations have been made. The main reason in choosing this theory is that other related studies have used this theory as well. Other studies were inductive while some are deductive. Positive theory seems to be suitable for accounting management research and for this particular study.
The Research Design
1. The Survey Method
The survey method considered as on of the most popular methods in the social science. Survey can be used to study characteristics of sociological variables. Accounting surveys uses to collect information on different subjects for example, evaluating a new performance measurement system, or illustrate the workers opinion about a new cost system. For that reason surveys methods have used frequently in management accounting research (Hoque, 2006).
Survey methods have some underling assumption, the first assumption is that the respondents consider as the most reliable information source. The second assumption is that some perceptions of reality might be wrong due the fact that, explanations of reality are stronger than the reality since, respondents can act on the explanations. The third assumption is that all the perceptions "can be demonstrated to be linked to outcomes of interest to organization" (ibid.). Theses opinion and behaviors can have impact on the organization. Researchers argue that this assumption can be defended. Ajzen and Fishbein (1975) asserted that the individual's predictor with regards to his behavior is measured through his intention to execute that specific behavior.
Researchers will obtain some benefits, if they agree with the assumptions above and might find valuable information. On the other hand, to reach a high quality of fidelity researchers must overcome any barriers in the questions and to do so, researches should design an appropriate questions for the respondents in order to assess the research question adequately and also to evaluate the phenomenon correctly (Hoque, 2006).
2. Designing a Survey
The main target of surveys for management accounting is the evaluation of the samples certain opinion as well as the measurement of their behavior. Surveys can be used for either exploring issues or confirming some issues. Exploratory survey is used in discovering basic information regarding the concept or the aim to be familiar with the concept. On the other hand, the confirmatory survey is being used in asserting some theories (Hoque 2006).
3. Data Collection
Data will be collected by posting questionnaires to the selected sample companies on this research. Secondary data will be used as well.
A. The Questionnaire
The researcher will utilize a survey based on a postal questionnaire. This will be divided into three parts. The first part will cover the company's basic information such as its name, length of stay in the market, number of branches, if any, and number of employees. The second part shall cover certain issues such as the methods currently being used by the company in assigning indirect costs. The last part shall then cover the extent of applying the ABC system, the reasons behind for the application of the same, and the reasons why the system is not rejected.
A pilot test shall be implemented in order to ensure that the questions are all applicable for the respondents. Robson (2002) emphasized that a pilot test is a small version of the real thing. It is the try-out of what the researcher is proposing so that the feasibility can be checked. A small population will be tested by answering the questions. The feedback from the pilot test shall be used by the researcher if there is a need in modifying the questionnaire.
The researcher selected food companies in Libya. These companies shall meet certain standards in order to be considered. The organization should be listed in the Ministry of Industry of Libya. Secondly, the total number of employees shall be at least 100. Finally, the company shall have at least 10 years of experience in the food industry. The researcher plans in posting 500 questionnaires, after which, the researcher shall select the appropriate samples as per the mentioned criteria.
B. Secondary Data
Most researchers ignore the benefits of utilizing secondary data for research. It is therefore imperative in using secondary as an initial step in conducting research. Looking for reverent researches that are related to the research questions before collecting any other data is very important. The most important sources in collecting secondary data are government studies and reports; published materials such as textbooks, journals and government publications (Saunders et al 2007).
Rejecting Other Rejected Research Theories
1. Interpretive Theory
The interpretive theory was used by Johann Fichte between 1762 and 1814. However, the fact that the positive theory was more popular then, researchers neglected its use. During the 1920's, this theory was redeveloped by Karl Mannheim and Alfred Schutz (Laughlin 1995). The ontology of this theory assumes that social reality created by people's interactions. Interpretive theory does not change the status quo; it is just gives interpretations of the reality. Interpretive researchers tend to use qualitative methods when they study any phenomena, they use case study more often. It is obvious that interpretive approach is not relevant to the research question of this study; since the researcher needs to be part of the study then he/she will not be independent and might affect the outcome of the research (Chua, 1986).
2. Critical Theory
Max Horkheimer became the leader of the Social Research Instituion in the 1930's. During this time, the critical theory has been popular. The main aim of critical philosophers is to unmask the domination in the society by means of criticizing some phenomena. It is their hope that social order will reform problems. It is assumed by this theory that every state has inner potentiality which is unfilled. It also assumes that the truth is very much in the process of being hammered out and grounded in social and historical practice (Chua 1986).
The methodology of this model is that it doesn't have any statistical model. It also doesn't use any quantitative methods in analyzing or collecting data. From this point, the researcher rejected the use of this theory since it is concerned in criticizing the phenomena by means of historical events. It is apparent that this philosophy could not help this research in answering the set questions, since this aims in explaining the phenomena.
The researcher aims in answering the research question by adapting the positive theory. The researcher shall also be inductive while conducting the research. This shall start with observations and when the research is finished, theories will be set. It is in the strong belief of the researcher to be positive, based on the fact that the positivist theory makes the researcher to be independent from the population like cultural or political influence. These mentioned influences might affect the findings of the study. Two main sources of data will be used, the postal questionnaires and the secondary data from published works. Previous studies have used these methods as well. Further, the researcher plans in consulting related literature first in order to understand the problems related to the research question. This research shall fill a gap in the literature as mentioned. The researcher rejected two other philosophies because these philosophies have other purposes and, they would not address the question in a proper way.
The activity-based costing method (ABC) shows higher level of accuracy regarding the cost measure as it outlines indirect costing more definitely.
Granof, Platt and Vaysman (2000) conducted a case study regarding the application of the ABC system in certain departments of higher education institutions. It was found out that the primary benefit of the ABC system is that it is an improvement upon a system that is already adequate. It also gives the establishment structure. It provides an organization of a true management-oriented system. It was also found out that a system must be flexible in order for it to be successful. Rigid rules allocations cannot be imposed readily to different organizations, like universities, characterized by decentralized management systems. Finally, activity based costing method helps define circumstances with spending decisions lined with its goals and objectives.
As the empirical evidence is beginning to accumulate regarding the usage of ABC, there is a clear picture that is emerging. ABC has varying benefits to various business units. It is strongly suggests that one aspect of the ABC's property is the business units' competitive strategy. This finding has important implications in designing and implementing the system, as well as others (Frey and Gordon 1999).