Why ABC is not widely implemented?

International Journal of Business Research, Jan, 2007 by Davood Askarany, Hassan Yazdifar

ABSTRACT

This paper uses the results of two survey studies to explore the most important contextual factors influencing the implementation of activity based-costing across firms. The results of the first survey, carried out in 1997 within the Plastics and Chemicals Industries Association (PACIA) in Australia proposed the perceived advantages and disadvantages of management accounting techniques as the most influential contextual factors influencing the implementation of accounting changes. The findings of the second survey carried out in 2002 within industries registered with CPA Australia as well as with PACIA highlight the significant impact of attributes (advantage/disadvantage) of innovation on decision to implement or not management accounting innovations. Using the results of above surveys, this paper examines the level of association between attributes of innovation and the diffusion of activity based-costing. The findings suggest that the relatively low implementation of ABC across firms implies that decision makers remain unconvinced that whether ABC's advantages over traditional accounting techniques are high enough to pursue them to implement ABC in practice. In other words, this study suggests that one of the main influential factors significant to the implementation of ABC links to its attributes in terms of its relative advantage over traditional techniques; its complexity; its compatibility; the observability of its results and its trialibility.

Key words: ABC; management accounting; diffusion and innovation.

INTRODUCTION

Activity based costing is one of the most talked about and popular accounting innovations in last two decades (e.g., Askarany & Smith 2004; Chenhall, 2003; Chenhall & Langfield-Smith, 1998; Gosselin, 1997; Krumwiede, 1998; Maiga & Jacobs, 2003). The introduction and popularity of activity-based costing is largely linked to the notion that information provided by ABC is more accurate and detailed than those provided by traditional costing systems (Kaplan, 1986 & 1994; Johnson & Kaplan, 1987; Innes & Mitchell, 1991 & 1995). However, despite such proposed advantages of ABC, survey evidence suggests that the take-up of activity based costing has been low in practice (Askarany & Smith 2004; Chenhall & Langfield-Smith, 1998; Innes & Mitchell, 1995).

The finding of low application rates of ABC appears to be at odds with the notion that proposed advantages of ABC (as suggested by the advocates of ABC such as: Johnson & Kaplan, 1987; Kaplan, 1986 & 1994) are higher than those of traditional techniques. On the one hand a substantial body of literature suggests that traditional management accounting techniques cannot cope with the requirements of today's managerial needs, but on the other hand new management accounting technique such as ABC, as potential solution to this problem, has not been highly diffused and adopted by potential users. These findings raise an important question whether (or not) the proposed advantages of ABC are significant enough to pursue its implementation in terms of replacing traditional techniques.

Using the results of two survey studies carried out in Australia, this study examines the level association between attributes of innovation and the diffusion of activity-based costing. The first survey study reports on the significant importance of advantages/disadvantages of implemented accounting techniques as a motivation for implementation of accounting changes. The second survey study reports on the significant influence of attributes of innovations on decision(s) to implement (or not) management accounting innovations.

BACKGROUND

The efficiency and capability with which traditional cost and management accounting practices can cope with the requirements of technological changes in manufacturing practices have been of major concern in the cost and management accounting literature and also the main impetus for the introduction of activity based costing (ABC) (Gosselin, 1997; Madison & Power, 1993). However, the literature suggests that the take-up of activity based costing is still low, though it has been suggested that ABC's advantages could overcome some shortcomings of traditional accounting techniques (e.g., Askarany & Smith, 2004; Chenhall & Langfield-Smith, 1998). This situation raises an important question of whether (or not) there is something wrong with ABC or whether (or not) the potential users of ABC remain unconvinced that proposed ABC's advantages over traditional accounting techniques are high enough to pursue them to implement ABC in practice.

Given the above, Malmi (1999: 654) suggests that "an explorative study is needed to find out which perspective( s) drive the diffusion of management accounting innovations in its various phases", a suggestion which further motivated Askarany and Smith (2000) to explore attributes of innovations as the main motivation for accounting changes (from the users' point of view). Their study was carried out within one sector of the Australian manufacturing industry (the Plastics industry), one recognised for its high levels of product and process innovation. Besides exploring the main motivating factors for accounting changes, their study also explored the scope and speed of diffusion of cost and management accounting changes and innovations over a ten-year period. Confirming previous studies, the findings indicated a slow change in terms of application of new cost and management accounting techniques. The results of the study highlighted the importance of advantages/disadvantages (characteristics) of accounting techniques as the main driver for the diffusion of management accounting innovations and supported further research for better understanding of the relationship between characteristics of innovation and the diffusion of accounting innovations. The results of Askarany and Smith's (2000) study support Rogers (2003) opinion that majority of variance in the adoption rate of innovations can be explained by the characteristics of innovations, suggesting that it is these that have the most significant influence on their diffusion. According to Rogers (2003), characteristics of an innovation includes five attributes: its "relative advantage" over the current practice, its "compatibility" with other aspects of the culture, its "complexity" of understanding, its "trialability" to experience, and its "observability" to see the results.