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Presented By:Arfan M. AfzalMCH-15013

Presented To:Sir Hafiz Imran

Akram

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The Relationship between Activity BasedCosting, Perceived Environmental

Uncertaintyand Global Performance

Azzouz Elhamma1ENCG Ibn Tofail University, Kenitra, Morocco, Vol. 2, No. 1, January, 2015International Journal of Management, Accounting and Economics

3 Abstract

The aim of this paper is to present the main results of an empirical study done in Morocco and highlight the impact of the PEU on the ABC implementation and its performance according to the perceived environmental uncertainty (PEU).

Data were collected from 62 Moroccan firms, via a questionnaire survey.

Descriptive statistics, logistic regression and Student's t-test for a difference in means were used to analyses data. The results showed that 12.9% of the responding companies used ABC.

The results indicate that PEU influences significantly and positively the use of the ABC. This type of work is almost absent in African countries.

4 Introduction during the last decades, the Activity Based Costing (ABC) represents a major

innovation in management accounting.

According to Johnson (1990), “…ABC certainly ranks as one of the two or three most important management accounting innovations of the twentieth century”.

It was developed, by Cooper and Kaplan (Cooper, 1988; Cooper and Kaplan, 1988)

The Group of Advanced Manufacturing International (CAM-I) defined ABC as a “methodology that measures the costs and performance of activities, resources and cost objects”.

Innes, Mitchell & Sinclair (2000) and Turney (1996) defined ABC as method of measuring cost and performance of activities and cost objects.

Introduction This method is now one of the most-researched management

accounting areas, especially in developed countries: USA France UK Sweden

Norway Ireland Australia etc.

But a very few studies have been done in developing countries. The most of these researches focused on the relationship between the ABC adoption and several contingency factors like strategy, firm size, organizational structure, structure of charges etc.

The management accounting literature argues that ABC systems are “better” than traditional systems. But, the implementation rates appear low in several countries.

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6 Introduction

In this context, this article aims to present the results of an empirical study done in Morocco and attempts to answer the following questions:

What is the adoption rate of ABC model in Morocco? What is the impact of the PEU on the use of the ABC method? What is the impact of ABC method on competitiveness, profitability and

productivity? What is the impact of ABC method on competitiveness, profitability and

productivity according to the PEU?

7 Introduction The paper is divided into three sections.

1st section is dedicated to the development of theoretical framework & to the formulation of hypotheses.

3rd section exposes and discusses results of this research.

2nd presents the methodology of research

8 Methodology of Research

ABC: a new method of the management accounting ABC is a management accounting process that allocates resource

costs to products based on activities, The heart of ABC is the activity concept

According to Gosselin (1997), there are three levels of ABC adoption1) AA (Activity Analysis)2) ACA (Activity cost analysis) 3) ABC (Activity Base Costing)

“activities are a group of actions or tasks that add value to a product or a service and that generate costs and resource consumption".

9 Levels of Adoptions System

AA is the lowest level of adoption, it “consists of identifying the activities and procedures carried out to convert material, labor and other resources into outputs”

ACA is the next stage after AA. It “identify the costs of each activity and the factors that cause them to vary”

The final stage is the ABC. In this stage cost pools are created and applied to better inform decision makers.

A costing systems to allocate manufacturing overhead to specific

products. 

10Literature Review Table 1. The extent of ABC implementation in some developed countries

11 Literature Review

Over the last decade, many surveys show that the trend in developed countries has been an increase in the adoption and implementation of the ABC method

In the USA adoption rate of ABC method has increased11% (1993) to 52% (2003)

UK companies has increased from 6% (1991) to 23% (2001)

firms in France increased their ABC adoption from 15.9% (2002) to 33.3% (2008)

In Australia, the ABC adoption rate is very high in 1998 (56%) &

it is 27.9% in Ireland (2004)

12 Literature Review In recent years, some studies have been conducted on the adoption and

implementation of the ABC method in developing countries. The adoption rate of the ABC method is higher in Asian than in African countries. It is 20% in India (Joshi, 2001);

36% in Malaysia (Ruhanita and Daing, 2007)

35% in Thailand (Chongruksut and Brooks, 2005).

2% in South Africa (Sartorius, Eitzen and Kamala, 2007).

Also, 9.3% of the Cameroonian companies adopt this method of the management accounting (Ngongang, 2010).

Unfortunately, we could not find statistics for Moroccan firms.

13 Literature Review

Impact of the PEU on the use of ABC Defined environmental uncertainty as: “an individual’s perceived inability

to predict an organization’s environment accurately because of a lack of information or an inability to discriminate between relevant or irrelevant data”.

The relationship between PEU and managerial innovations is still not explored The literature relating to the managerial innovations has found generally a

positive relationship between organizational innovation and uncertainty (Russel and Russel, 1992).

The empirical researches on the impact of PEU on ABC adoption are relatively few and the results obtained are generally conflicting

14 Develop hypothesis

Hypothesis H1: environmental uncertainty has a significant and positive impact on the use of ABC.

By the Shields (1995) an empirical study conducted in the United States, showed that 75% of respondents said that the use of ABC resulted in improving in financial performance, and only 25% who said the opposite.

This result was confirmed later by McGowan and Klammer (1997) and Foster and Swenson (1997). The first researchers examined whether employees’ satisfaction levels associated with ABC. They found employees’ satisfaction with ABC implementation was positively correlated with clarity of objectives, quality of ABC information.

15 Literature ReviewAuthors Year

sCountry Sample

SizeResults

Ittner et al. 2002 US 2789 Firms ABC is associated positively and significantly with reducing of the costs

Pizzini 2006 US ABC approach usually results in an increase in profitability, competitiveness and shareholder value

Banker et. Al. 2008 US 1250 Firms ABC method has an indirect positive impact on the industrial performance

Zaman 2009 Asturlia ABC method results in a better overall performance for enterprises

Pavlatos and Paggios

2009 146 Enterprises

use of ABC is very satisfactory

Yi Fei and Ruhana

2011 China Use of ABC have improvement in manufacturing performance and business performance.

16 Formulate Hypothesis

Hypothesis H2: the use of the ABC model results in an increase in firm's competitiveness better than the use of traditional management accounting systems.

Hypothesis H3: the use of the ABC model results in an increase in firm's profitability better than the use of traditional management accounting systems.

Hypothesis H4: the use of the ABC model results in an increase in firm's productivity better than the use of traditional management accounting systems.

17 Conflict Arises Among the use of ABC

(Al-Omiri & Drury, 2007; Askarany & Smith, 2008) several researchers found that the traditional costing system is still increasingly implemented in several companies.

Bergeron and Bélaïd (2006) not confirm the expected relationship between the use of ABC and performance

Abdel-Kader and Luther, 2008; Rasiah, (2011) Recently, some researchers asserted that the ABC model is in crisis, because its implementation rate is still low.

Byrne, Stower and Torry (2009), if ABC implementers find it unsuccessful, the low adoption rate could be justified.

According to our analysis developed above, we can formulate this hypothesis:

18 Formulate Hypothesis Hypothesis H5: There is a significant positive effect of ABC adoption on

firm’s competiveness in firms operating in an uncertain and dynamic environment. There is not a significant effect of ABC adoption on firm’s competiveness in firms operating in a certain and stable environment.

Hypothesis H6: There is a significant positive effect of ABC adoption on firm’s profitability in firms operating in an uncertain and dynamic environment. There is not a significant effect of ABC adoption on firm’s profitability in firms operating in a certain and stable environment.

Hypothesis H7: There is a significant positive effect of ABC adoption on firm’s productivity in firms operating in an uncertain and dynamic environment. There is not a significant effect of ABC adoption on firm’s productivity in firms operating in a certain and stable environment.

19 Research Methodology

This study is based on a questionnaire survey conducted among Moroccan companies. Describe Sub-section for data collection

Questionnaires were sent to 412 companies located in different regions of Morocco.

After a telephone reminder and physical contacts, seventy-six (76) questionnaires were received for a response rate of 18%.

these, 14 questionnaires were eliminated for various reasons (incomplete questionnaires; companies not adopting the management control, etc…). The total number of responses analysed is 62, making a response rate of 15%.

Q? were completed by18 chief financial officers (29%), 23 management controllers (37%), 17 accountants (27%) and 4 other managers (6%).

20 Variables measurement

three variables will be used: the use of the ABC, the PEU and the organizational performance

The use of the ABC Variable that takes the value “1” if ABC is adopted and “0” if another method is

used

The PEU (“an individual’s perceived inability to predict something accurately) PEU is interpreted as an individual’s inability to predict customer preferences and

competitors’ future behavior.

21 Variables measurement

Organizational performance the average contribution of the management accounting method

adopted in the improvement of three dimensions of performance:

Profitability

Competitiveness

Productivity

22 Results and Discussion

This part of study has three sub-sections. Main results and impact of environmental uncertainty on the use of ABC, According to the survey, 12.9% of companies have adopted the ABC

approach sample is divided into two groups: on the one hand, companies that

haven’t adopted ABC and on the other, those which are already using this method.

23 Results and Discussion

showed that the size of organizations that adopt the ABC is superior to the size of organizations that do not adopt it.

The logistic regression analysis was carried out by the Logistic procedure in SPSS

Logit (p) = Log [ p / (1-p)] = α+ β1 PEU + β2 LOGSIZE p / (1-p) is called the "odds ratio". log [p / (1-p)] is "log odds ratio" or "logit". "p" is the probability that a firm adopts the ABC method according to its

PEU. We can calculate "p" as follows: p = 1/ [1 + e (α+ β1 PEU + β2 LOGSIZE)]

24 Results and Discussion

logistic regression model indicates that Chi-square value is 3.266 (p<10%). value is significant

The hypothesis H1, which predicts a direct and positive relationship between PEU and the use ABC,

25 Results and Discussion

Performance of the ABC and the traditional methods of management accounting.

shown in table 4 (performance of ABC method) and table 5 (performance of classical methods).

we will code the responses (5: very high contribution; 4: high contribution; 3: moderate contribution; 2: low contribution and 1: very low contribution)

26 Results and Discussion

87.5% of the ABC adopters have considered that the use of the ABC method results in a “very high” or “high” improving in competitiveness and in profitability. Concerning the classical methods, this percentage is only 42.6% for the competitiveness and 44.4% for the profitability.

27 Results and Discussion

we will compare the means between ABC adopters and ABC non adopters. To do it, we will use the Student's t-test for a difference in means

28 Results and Discussion

Hypothesis H2: the use of the ABC model results in an increase in firm's competitiveness better than the use of traditional management accounting systems.

According to our data, the use of ABC results in an increase in competitiveness (t-value= 5.340; p<1%). Therefore, hypothesis H2 is accepted by our statistical analysis.

Hypothesis H3: the use of the ABC model results in an increase in firm's profitability better than the use of traditional management accounting systems.

Also, the use of ABC results in an increase in profitability (t-value=2.644; p<10%). Therefore, hypothesis H3 is accepted by our statistical analysis.

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Hypothesis H4: the use of the ABC model results in an increase in firm's productivity better than the use of traditional management accounting systems.

But, this difference in means is not significant for the productivity (t-value=1.488; ns). Therefore, hypothesis H4 is not accepted by our statistical analysis.

Results and Discussion

30 Results and Discussion Performance of the ABC method according to the PEU

Hypothesis H5: There is a significant positive effect of ABC adoption on firm’s competiveness in firms operating in an uncertain and dynamic environment. There is not a significant effect of ABC adoption on firm’s competiveness in firms operating in a certain and stable environment.

The hypothesis H5 is accepted by our statistical analysis

Hypothesis H6: There is a significant positive effect of ABC adoption on firm’s profitability in firms operating in an uncertain and dynamic environment. There is not a significant effect of ABC adoption on firm’s profitability in firms operating in a certain and stable environment.

The hypothesis H6 is accepted by our statistical analysis But the hypothesis H7 is not accepted

31 Results and Discussion

32 Conclusion

This article evaluated the relationship between ABC adoption, PEU and performance. only 12.9% of the responding companies had declared implementing the ABC method.

The PEU has not a significant impact on the use of ABC.

The use of ABC results in an increase in competitiveness and profitability in firms operating in an uncertain and dynamic environment, but those operating in a certain and stable environment are indifferent.

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