The implementation of Activity Based Costing

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Activity-Based Costing system is considered as a level of activity management which divided to three levels, activity analysis, activity cost analysis, and ABC (Gosselin, 1997). Activity-Based Costing is a costing technique that traces costs (indirect costs) to different activity by using relevant cost drivers and then allocates costs to the product or services based on the level of activities consumed by the products produced or services performed, Kiani, and Sangeladji (2003). There are two stages in ABC model Cooper (1987) first, costs are assigned to cost pools within an activity center based on a cost driver. Second, costs are allocated from the cost pools to a product based on the product's consumption of the activities. This step is similar to traditional costing approach but in traditional costing approach there is no consideration for non-volume related characteristics. Advocates of ABC models strongly believe in the ability of the models to improve the overall profitability of organizations by allowing management to allocate cost properly, to cut most of not-value-added activities, and to reduce time and costs of running the operational activities. The major reasons of adopting ABC are: the traditional costing system does not provide non-finance measurement, inaccurate costing system, costing system should encourage improvements, and overhead cost is higher than labor cost, Gunasekaran and Singh (1999). The development and promotion of ABC have been stimulated and largely influenced by Cooper Kaplan 1991, Gunasekaran and Sarhadi (1998).Therefore, ABC has been gaining acceptance in an increasing number of organizations ranging from manufacturing to retailing, and from profit oriented businesses to government institutions Gunasekaran and Singh (1999).The a adoption of ABC among these sectors of businesses has been studied from various perspectives for quite some time in many countries that showed the level of adoption is still considered low.

1.2 Problem Statement

Industry sector (manufacturing companies) in Yemen generates about 8% of gross domestic production (GDP). Therefore, Yemeni government gives more considerations to this sector because it's become one important source to its recourses. To help these companies to improve their competitiveness by enabling them to make decisions based on a better understanding of their cost structure, they need to adopt ABC. This advantage will make all manufacturing companies (Yemeni) working to adopt this technique. However, the actual state of adoption this technique among Yemeni companies needs to invistegate.

Brown, Booth, and Giacobbe, (2004) no study has been able to establish a set of significant factors that influence the adoption of ABC. Therefore, the factors that affect ABC adoption in prior studies may affect differently in Yemeni manufacturing firms since Alsaeed (2005) in Saudi found negative relationship between ABC and product diversity.

1.3 Research Questions

What is the adoption status of ABC among Yemeni manufacturing companies?

What are the factures which influence that adoption?

What are the obstacles that faced ABC adoption among Yemeni manufacturing companies?

1.4 Research Objectives

To determine the adoption status of ABC system among manufacturing organizations in Yemen, thus establishing a foundation for future research on ABC adoption and implementation in this region.

To investigate whether certain factors (Top Management, Non-Accounting, organizational size, IT, and product diversity ) have any influence on the

adoption of ABC in manufacturing organizations in Yemen, thus adding to the

existing pool of research in this field from the perspective of a third world country.

To determine the factors that prevents ABC adoption among Yemeni manufacturing companies.

1.5 Significance of Study

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 unknown for manufactory Yemeni companies. 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 Yemen. Moreover, since there is sole study about ABC implementation in Middle East (third world countries) which conducted by Alsaeed (2005) in Saudi, and no study has been able to establish a set of significant factors that influence the adoption of ABC (Brown, Booth, and Giacobbe, 2004), this study will add contribution to ABC adoption's literature in that region.

The present paper is organized into five chapters. Second chapter discusses the literature review of ABC implementation. The research method is explained in the third chapter. Findings and discussions will be in forth chapter before conclusion and limitation in last chapter.



2.1 Implementation rate of ABC

ABC has helped many manufacturing and service organizations to improve their competitiveness by enabling them to make decisions based on a better understanding of their cost structure Raz and Elnathan (1999). However, if ABC does so, why more firms is not employing it. Kaplan suggested four explanations for the management accounting lag to adopting ABC: the lack of adequate role model, the prevalence of computer-based accounting system, the emphasis on financial accounting, and the top management does not emphasize the improvement of the relevance of their management accounting system Gosselin (1997).Therefore, several studies have been done to examine the adoption of ABC in different countries such as US by Kiani and Sangeladji(2003), UK by Innes (2000), New Zealand by Cotton and Brown(2003),Ireland by Pierce and Brown (2004), and Saudi Arabia by Alsaeed (2005).All this researches seek to establish respondents' perceptions regarding adoption, usage and success or ABC/M systems. The result of these studies shows in table 1.

ABC in the US

First, in the US, the adoption of ABC rate and rejected rate were very high when it compared with it similar study. The dominating characteristics of participating companies are; these companies engaged in variety of operations including manufacturing as well as customized service (27%) with large-batch size (29%), companies that hire over 5000 employees were 75.6% and report sales of over one billion dollars were 91.8%, and companies that operate in a high competitive environment with a short production life cycle and a need to modify their products within three years. This study specified eight important factors to determined the importance of using ABC and the reasons of not implementation, after using 5-point linkert scale the result got average 3.82 out of 5 to importance and the lack of support by top management was the most important factor for the companies not implementing ABC, it is the same reason for those who reject ABC. The purposes of adopting ABC are, to improve the overall profitability, to reduce manufacturing cost, to develop more profitable products.

ABC in the UK

Another major study in this filed is in the UK, with regards to ABC adoption status, no significant increase of ABC adaptors, current considerations, and rejecters rates. However, the rate of those who have no consideration to ABC is significantly large. The adoption of ABC in the UK has positive relationship with financial sector and large companies. In additional, there are different purposes of use of ABC indicates respondent's views of the important and success for each type of application, and there is relationship between individual users and the overall success witch was significant with new product or services design and insignificant with budget. The overall success of ABC was rated on average at 3.9 from 5-point scale in the same manner with the US study. Moreover, top management support has significant impact on the success rating of ABC. Finally in contrast with the US result, the main reasons of those who reject were, its lack of relevance their business, and its perceived demonstrative and technical complexity.

ABC in New Zealand

Third, in the New Zealand, it was an exact replica of the survey instrument that used by Innes and Mitchell, (2000) in the UK It was found that adoption rates were broadly similar, with implementation rates for New Zealand companies being slightly lower than those reported in the UK. Fewer companies were found to be considering ABC and fewer companies also had rejected ABC after assessment. A further difference was found regarding adoption rates among company sectors, with a higher rate of adoption in manufacturing and non-manufacturing sectors and a lower rate in the financial sector.

ABC in Ireland

Forth in Ireland, this study was repeated the UK study, in contrast with the UK study the results show higher levels of ABC adoption among manufacturing companies than finance companies. Adoption rates based on company size and with large number of employees (consistent with US result) are more likely to adopt ABC. With regards to use of ABC, usage and success are very strongly linearly related and consistently high overall ratings for users of ABC systems. However, consistent with prior studies, Lack of support top management and the complexity of ABC are the main reasons for those who considering ABC but reject it. Moreover, No significant difference in the product costs on an ABC basis vs. current methods is the reason for those how reject ABC. Consistent with UK and New Zealand findings, high success ratings were awarded for customer profitability analysis and product/service pricing.

ABC in Malaysia

The implementation and those who not considered ABC rates (36.11% and 48%) are quiet high compare with other studies both come in the second stage after the US and Ireland respectively. The rejecting rate 3% of ABC among Malaysian manufacturing is the lowest. The study found the main factors that positively associated with ABC are decision usefulness of cost information, organization support, information technology, and performance measurement (internal measures). Form the other hand, it found negative relation for potential of cost distortion, and performance measurement (learning and growth) and ABC adoption.

ABC in Saudi

In Saudi Arabia, found significantly increase of the rate of those who currently adopting ABC and those who never considered. Likely with prior studies, there is positive relationship between ABC adoptions with the size of firms, moreover this study found positive relationship between ABC adoption and diversity of products. Consistent with the UK and Ireland findings, the firms adopting ABC in order to measure customers' profitability incentive and to measure cost accurately. Unlikely with the US results, the main difficulties that may faced ABC adopters is insufficiency of adequate expertise and determine cost driver (technical issue) more than top management supports (organizational issue). With regards of the use of ABC the result found similar with prior studies that using of ABC enable firms to measure cost accurately and these firms have been successful in using ABC to pare down costs. On the other hand, the reasons for those who rejected were ABC unconfirmed to the firms' operations and adequacy of current system being used.

2.2 Factors relating to the implementation of ABC

A number of researches examined the implementation of ABC and factors influencing success. Shields (1995), Anderson (1995), McGowan and Klammer (1997), Krumwiede and Roth (1997), Krumwiede (1998), Innes and Mitchell (1995), Kiani, (2003), Cotton, (2003), Alsaeed, (2005) and Maelah, and Ibrahim (2006).

Anderson (1995) found that technological factors impacted on the success of ABC whereas the study results of Shields (1995), who examined the relationship between a diversity of behavioral, organizational and technical factors, and the success of implementation of ABC, show that variables influencing the success of implementing ABC involve behavioral and organizational variables, as opposed to technical variables. These variables comprise top management support, linkage of the ABC system to competitive strategies, linkage of the ABC system to performance evaluation and compensation, sufficient internal resources, training in designing and implementing ABC and non-accounting ownership, which is the commitment of non-accountants to use ABC information. Krumwiede (1998) surveyed U.S. manufacturing firms to study how contextual factors, such as the potential for cost distortion or size of firms; and organizational factors, such as top management support, training or non-accounting ownership, affect each stage of the ABC implementation process. He found that the different factors affected the various stages of implementation of ABC and the degree of importance of each factor varies according to the stage of implementation. He concludes that firms considering or implementing the ABC system should take organizational and contextual factors into account. Table 2: show the various factors that effect the implementation of ABC.

Moreover, all these surveys found that adoption rates for large companies were significantly higher than for small companies because these firms are better candidate for the use of ABC Alsaeed (2005) and they have more complex operations, various products, and large overhead. Its better to cite here only Saudi survey found positive relationship between product diversity and ABC adoption. In contrast with Bjornenak (1997), no study found a relationship between ABC adoption and overhead level, this is because the ABC helps firms to improve their competitiveness Raz and Elnathan, (1999) not only to allocate overhead moreover, Saudi survey found negative relationship between them.

Research to date has identified the most important areas of application of activity-based information among adopters of ABC as understanding cost behavior, measuring cost accuracy, Alsaeed, (2005), cost reduction Kiani and Sangeladji (2003) Cotton et al., (2003); pierce and Brown (2004), cost management, Innes and Mitchell, (2000); Cotton et al., (2003), performance measures (Innes and Mitchell, (2000); Cotton et al., (2003), product/service pricing, Innes michell, (2000); Cotton et al., (2003); Pierce and brown, 2004 ), cost modeling (Innes and Mitchell, (2000); Cotton et al., 2003; Pierce and brown, 2004), improve profitability, Kiani and Sangeladji, (2003) Alsaed, (2005),measure customers profitability, (Alsaeed, 2005; Cotton et al,(2003); Innes and Mitchell, (2000) eliminate non-value added Alsaeed, (2005). Although these surveys specifically addressed ABC, it is clear from the range of applications that the reported uses of activity-based data go well beyond more accurate costing. However, the researchers argue about the difficulties that faced ABC adopters (Innes and Mitchell, (2000) and kiani and Sangeladji (2003) found the top management support and unwilling to change (organizational issue) are most challenge factors for ABC adopters while, Alsaeed, (2005) found insufficient in adequate expertise and difficulties to determine cost drivers (technical issues) the main problems of ABC adaptors. This means, the technical variable in modern countries does not have significant important to ABC adaptors rather than organizational issues. Moreover, New Zealand and Ireland surveys found high adoption rate in manufacturing companies rather than financial companies in the UK surveys.

With regards to reject ABC the surveys give the similar reasons for reject ABC; lake of top management support, unsuitable of ABC to their business, and the existing costing system is satisfactory. In additional, those who reject ABC after it's assessment, there are a several reasons for this rejection "if ABC has demonstrated benefits, why are more firms not actually employing it": ABC may not be suitable for every firm. A large strand of recent research shows that successful implementation depends on many aspects; successful implementation depends on organizational and technical factors; adoption depends on several factors including firm size, production type, and degree of centralization, product (Kennedy and Graves, 2001)diversity, and the ratio of indirect to total costs; and Gosselin, (1997) suggests that specific characteristics in their business strategy and organizational structure lead certain firms to adopt and implement ABC and, by implication, other firms not to implement ABC.



3:1 Theoretical Framework

The theoretical framework of this study suggests five independent variables (Top management support, Non- accounting, Organizational size, IT, and product diversity) that may influence the ABC adoption. Figure 1 shows the theoretical framework of this study which include for independent variables

3:2 Hypothesis Developments

Anderson (1995) found that technological factors impacted on the success of ABC whereas the study results of Shields (1995) show that variables influencing the success of implementing ABC involve behavioral and organizational variables in addition, Krumweide, (1998) suggested that firms considering ABC adoption should give special consideration to organizational factors. Therefore, this study test the influence of two groups of independent variables (organization and technological) on ABC adoption.


Top management support

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. Therefore, this study examines this relationship based on the following hypothesis:

H1: There is a positive relationship between top management supp ort and ABC adoption

Non-accounting Ownership

Gurses, (1999) stated there is a danger when accountants only own ABC because they might use it to satisfy their need that may lead to negative implementation because of lack sharing between accountants and non-accountants. Therefore, accountants and non-accountants should be owners and involving in implementation of ABC. Therefore, this study examines this relationship based on the following hypothesis:

H2: There is a positive relationship between non-accounting ownership and ABC adoption.

Organizational size

The size of firms and ABC adoption relationship was examined by (Bjørnenak, 1997; Clarke et al., 1997; Van Nguyen Brooks, 1997; and Krumwiede, 1998,) 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. Moreover, Alsaeed, (2005); and Maelah, and Ibrahim, (2006) found positive relationship between firm size and ABC adoption. This is because ABC implementation is costly, larger firms is more likely to obtain economies of scale, with the cost spread across several products while the smaller firms have proportionately lower levels of overhead and, therefore, do not suffer the same problems with cost distortions as larger firms, Clarke et al, (1997). Therefore, this study examines this relationship based on the following hypothesis:

H3: There is a positive relationship between firm size and ABC adoption

Information Technology

ABC systems are more detailed than traditional cost systems. Because of the increased information needed to implement ABC, managers with more sophisticated IT may feel better able to implement it than companies with less sophisticated systems. On the other hand, companies that have a low opinion of their existing information system may be reluctant to try ABC until supporting systems are improved or replaced.

If management perceives that most or all of the information required for ABC is available and that the organization's information systems are integrated enough to minimize the costs of measurement, then there is a greater chance of ABC adoption. Thus, higher levels of IT sophistication may impact the adoption decision. Therefore, this study examines this relationship based on the following hypothesis:

H4: There is positive relationship between IT sophistication and ABC adoption

Products Diversity

Proponents of ABC claimed that high product complexity and diversity increased the costing distortions arising from traditional cost systems (Cooper and Kaplan, 1988). 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) and Alsaeed, (2005) found a negative association and Van Nguyen and Brooks (1997) did not find any relationship. Therefore, because of Yemen and Saudi have same environment; this study examines this relationship based on the following null hypothesis:

HO: There is negative relationship between product diversity and ABC adoption.

With regards of dependent variable (ABC adoption), previous studies suggest that it is best to look at ABC implementation in its various stages. For instance, 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. However, 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 non-adoption. This is due to the unknown stage of ABC adoption or in infancy stage if its available in Yemeni manufacturing environment

3:3 Data Collection


The population (93 firms) for the survey is manufacturing firms which listed in Yemeni chamber (2004) as well as some of foreigner manufacturing companies in Yemen


Data for this study collected by questionnaire which adopted from studies conducted by Krumweide (1998), Shim and Stagliano (1997), and Shields and McEwen (1996). This survey consists three parts. First part seeks general information for all firms (adopter and non-adopters. Second part addressed to seek information about ABC adopter firms only, (independent variables). Third part addressed to seek information for non-ABC firms only such as obstacles that make non-ABC firms to reject ABC.


A set of questionnaire was mailed to the accountants, head of accounts, and financial managers who know in depth how the cost information is used within their companies. Mail was used because it places less pressure on the respondent, provide them with sufficient time to look up records, and enable them to thoroughly read and answer the question conveniently.

3:4 Analyses

Both the nominal and interval scales will use 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 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.

Data analysis will perform on responses. The analysis includes descriptive analysis on the respondents and the organizations, determination of ABC 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.