The effect of CFO characteristics The effect of CFO characteristics and organizational factors on the and organizational factors on the use of activity –based costing in use of activity –based costing in

a service contexta service context

Dr Odysseas PavlatosAthens University of Economics an

BusinessDepartment of Accounting and Finance

Presentation Outline

1. Research objective2. Literature review3. Research hypotheses4. Research methodology5. Survey results6. Conclusions, limitations and future

research

Introduction

Over the last three decades a number of innovative management accounting (MA) techniques have been developed across a range of industries (Abdel-Kader and Luther, 2008)

The literature shows that important characteristics (contingencies) affecting organizational structure include size, environmental uncertainty, production technology, corporate strategy and market environment (Otley, 1995; Covaleski et al., 1996; Mitchell, 2002).

Activity Based Costing (ABC) is one of the most important innovations in the field of cost and management accounting (Bjornenak and Mitchell, 1999; Bjornenak, 1997)

Research objective

The purpose of this study is to examine the extent to which potential factors affect the

use of activity-based costing in a service context

Literature review (1)

Since the mid-1990s researchers have started to examine the contextual factors that influence the adoption and the implementation of ABC (see Gosselin 1997a for a review)

Various survey-based studies use selection and interaction approaches (e.g Bjornenak, 1997; Gosselin, 1997b; Krumwiede, 1998; Malmi, 1999; Clarke et al., 1999; Hoque, 2000; Cagwin and Bouwman, 2002; Abernethy et al., 2001)

Literature review (2) Kaplan and Cooper (1998) suggest that service companies are ideal

candidates for ABC even more than manufacturing companies

Chenhall (2003) reports that there is a need for more research into service organizations, such as hospitality industry, about cost system design and contextual variables, as these entities become increasingly important within most economies

There is an active interest in hospitality management and particularly in cost and management accounting practices of hotels and tourism enterprises (Pavlatos and Paggios, 2009a; 2000b; Guilding, 2003)

Within the hospitality context ABC has been studied in connection with customer profitability analysis (CPA) (Dunn and Brooks 1990; Noone and Griffin, 1999; Karadag and Wod Kim, 2006; and Harris and Krakhmal, 2008)

Pavlatos and Paggios (2009a; 2009b) found that Activity Based Costing diffusion in hospitality industry in Greece is considered very satisfactory (23.5%)

Research hypotheses (1)

H1q: There is a negative association between the CFO age and the use of ABC

H1b: There is a negative association between the CFO tenure and the use of ABC

H1c: There is a positive association between the CFO relatively business-oriented educational background and the use of ABC

Research hypotheses (2)

H2: Firms following a differentiation strategy use more activity-based costing than firms following a cost leadership strategy

H3: There is a positive association between the quality of information technology the use of ABC

H4: There is a positive association between the membership of multinational chain and the use of ABC

H5:There is a positive association between the extent of the use of strategic management accounting techniques and the use of ABC

Research Methodology

Sample characteristics and data collection The sample surveyed included the leading Greek

hotel enterprises (ICAP’s Directory 2007)

The research was realized in two phases

A pilot test took place (interviews)

The participation form was sent to 196 hotel companies

The response rate was 57% (112 hotels) The questionnaires were answered by Chief Financial

Officers (CFOs)

Research MethodologyVariables measurement (1)

CFO characteristics were measured as demographics used by Naranjo-Gil et al. (2009)

Age (AGE) and tenure (TEN) refer to the CFO age and tenure in the organization

Educational background (EDUC): Managers were asked to indicate their educational degrees, both regular university degrees and postgraduate programs. I translated these into years of education in one of two directions: business-oriented (e.g. Business, Economics, Accounting, Law) or operations-oriented (e.g. Medicine, Nursing, Biology, Chemistry). Then, I created the variable educational background as the ratio of the years of business-oriented education to the total number of education years

Membership of multinational chain (MULT) was measured using a binary variable (1 = member, 0 = otherwise)

Research MethodologyVariables measurement (2)Extent of the use of strategic management accounting techniques (SMA)

Items Factor loadings

Εigenvalue Percent of variance

Cronbach alpha

Benchmarking 0.824

Life cycle costing 0.732

Strategic pricing 0.698

Competitive position motoring

0.601

Competitor cost assessment

0.738

Strategic costing (strategic cost management)

0.624 3.842 52.4 0.85

Research MethodologyVariables measurement (3)Quality of information technology (TECH)

Items Factor loadings

Εigenvalue Percent of variance

Cronbach alpha

The hotels’ information systems (e.g. sales, reservations, etc.) are integrated with each other

0.714

The information system offers user-friendly query capability

0.812

The past year’s detailed sales and operating data are available

0.792

Many perspectives of cost and performance data are available

0.718

Operating data are updated ‘real time’

0.805

The quality of your cost management system is excellent

0.814 3.928 67.8 0.82

adopted by Cagwin and Bowman

(2002)

Research MethodologyVariables measurement (4)

Strategy (STRA) was measured by Abdel-Kader and Luther (2008):

Respondents were asked to indicate the percentage of their firms’s total sales accounted by services representing use of either cost-leadership or differentiation

The overall cost-leadership was assigned a value of -1 and a differentiation strategy was assigned a value of +1.

The percentage breakdown a respondent provided for each item was used to construct a weighted-average strategy measure for the company

Use of ABC (ABC) was measured using a binary (dichotomous) variable by Chenhall and Langfield –Smith (1998) and used by Kallunki and Silvola (2008)

Data analysisDescriptive statistics for independent variables

Variable N Mean Std. Dev.Actual Minimum

Actual Maximum

CFO age 112 48.3 3.24 35 62

CFO tenure 112 9.24 2.21 2 14

CFO educational background 112 0.77 0.05 0.65 1

Extent of use of strategic management accounting techniques

112 25.10 5.03 10 32

Quality of information technology 112 26.14 4.13 14 36

Strategy 112 0.28 0.52 -1 +1

Size (€ mil) 112 10.1 11.4 3.5 101

Data analysisDescriptive statistics for independent variables

Variable AGE TEN EDUC STRA TECH MULTI SMA

AGE 1        

TEN 0.12 1

EDUC 0.15 0.07 1

STRA -0.18 0.12 0.20 1

TECH 0.13** 0.15 0.24** 0.04 1

MULTI 0.10 -0.09 0.02 0.18 0.21 1

SMA 0.21** 0.14 0.12* -0.05 0.15* 0.18 1

Note: * indicates Correlations is significant at the .05level (2 tailed) **indicates Correlations is significant at the .01 level (2 tailed)

Research FindingsHypothesis testing (1)

In order to test the hypothesis the following model was applied:

Y= b1 + b2 AGE+ b3 TEN + b4EDU + b5 STRA+

b6 TECH+ b7 MULTI+ b8 SMA+ e

where Y: is a dummy variable having a value of one if the

firm is using ABC, otherwise zero

Research FindingsHypothesis testing (2)

Collinearity statistics

B St. Er.

P Value Exp. B

Tolerence

VIF

CFO age -0.244 0.190

0.012 0.810 0.721 1.618

CFO tenure -0.170 0.177

0.201 0.921 0.892 1.211

CFO educational level 1.214 0.324

0.008 1.620 0.812 1.129

Strategy 1.784 0.459

0.002 2.824 0.892 1.151

Quality of inf. technology 0.284 0.787

0.304 1.208 0.495 2.022

Membership of multinational chain

0.312 0.124

0.215 1.114 0.712 1.132

Extent of the use of strategic management accounting techniques

1.012 0.099

0.018 0.958 0.833 1.201

Constant -6.656 3.673

0.070 0.001

Chi-square 0.000

Hosmer – Lemeshow goodness of fit

0.725

Cox & Snell R square 0.412

Nagelkerke R square 0.548

Per cent correctly classified 84%

Conclusions

The survey revealed that the CFO’s demographic (age and educational background) are predictors of the CFO’s willingness to innovate

There is a negative association between the CFO age and the use of ABC

There is a positive association between the CFO relatively business-oriented educational background and the use of ABC

Firms following a differentiation strategy use more activity-based costing than firms following a cost leadership strategy

The use of ABC is significantly positively associated with the extent of the use of strategic management accounting techniques

Structural determinants, including membership of multinational chain, CFOs tenure and quality of information technology are not significantly associated with the use of ABC

Limitations

Cross-sectional studies as this can establish associations, but not causality

Another factor that may affect these results is the noisiness of the measures

Sample size was small and we could not split it for validation purposes into analysis and holdout samples

The ABC adopters group contain little more (29 observations) the minimum size of 20 required for logistic regression (Hair et al., 1998)

Finally, the use of ABC was operationalized as a binary variable. The use of a Likert scale would probably result in less noise

Contribution

The results provide the first empirical evidence of the relation between the use of ABC, CFOs characteristics and organizational

factors in hotels

This study extends prior research in several ways: It has provided additional insights into areas relating to factors

influencing the use of ABC This research establishes the association between the extent of

use of strategic management accounting techniques with the use of ABC

It has provided additional insights into areas relating to factors influencing the adoption of ABC systems in services

This research adds to the limited body of knowledge of the design of cost systems in a service context (service cost system design)

The operational homogeneity of hotels enables powerful tests of the research questions and hypotheses

Future research

Incorporate other important variables from contingency theory that are likely to influence the use of ABC in a service context:

service process type organizational life cycle stage top management support etc.

Cost accounting systems of services that use ABC could be studied in depth in order to examine the perceived benefits and problems that arise from their implementation