ABC-based Actions and Operational Performance

Several studies (Banker, Bardhan & Chen 2008; Cagwin & Bouwman 2002; Frey & Gordon 1999; Ittner, Lanen & Larcker 2002) investigated the association between ABC use and organisational performance. The endeavour in these studies is to establish a link between ABC use and improvements in performance as a measure of ABC success. However, this study suggests the role of ABC-based actions as an intermediary between ABC use and organisational performance.

Frey and Gordon (1999) studied the impact of ABC use on business unit performance under a specific strategy. They found that ABC is associated with a higher ROI in business units following a differentiation strategy and not in those following a cost leadership strategy. The study used the dichotomous scale of ABC use or non-ABC use. They assumed a commonality among respondents regarding ABC use and they considered ABC as cost accounting systems. They defined performance as improvement in business unit profits over five years. The performance was measured by ROI as the common accounting measure.

Ittner, Lanen and Larcker (2002) investigated the association between extensive ABC use and plant performance. They used the term ‘extensive use’ without defining its meaning; therefore, respondents were left to decide on the extent of ABC use. Further, the study did not specify the characteristics of respondents and lacked an assessment of potential response bias. Plant performance in the study refers to the financial and operational performance as measured by return on net plant assets (ROA), product quality, manufacturing speed, changes in manufacturing costs, first-pass quality yield and manufacturing cycle time over five years.

Banker, Bardhan and Chen (2008) have also assessed the impact of ABC on manufacturing plant performance. They measured ABC use based on non-ABC implementation and extensive ABC implementation. Plant performance is related to improvement in plant-level performance as measured by changes in plant costs, quality and time-to-market over the last five years. The study by Banker, Bardhan

and Chen (2008) did not include financial measures; the difficulty in establishing a causal relationship between ABC use and financial measures may justify this exclusion. However, the data for the study was collected from a secondary data source.

Cagwin and Bouwman (2002) also investigated the association between ABC and improvement in financial performance. They determined ABC use by factors including functions using ABC, applications, integration of ABC into firm strategic and performance evaluation systems and time since implementing and using ABC. In contrast, organisation-level performance was measured financially as change in ROI relative to other companies in the industry over three (five) years.

Zaman (2009) investigated the impact of ABC in terms of strategic cost allocation method, increased efficiency and increased effectiveness on firms’ performance. He found that the perception of ABC has a significant effect on overall firms’ performance. The author employed the three measures of ABC benefits or success to predict the overall performance, while in this research performance was used as an intermediary to predict the overall success of ABC. Seventeen Australian companies listed by the ABC Learning Centers Ltd, were selected and eighty – two responses were received. This suggests that multiple responses were received from each company and raised concerns of response bias. Moreover, Cronbach alpha values were aligned up items rather than scales.

ABC is more concerned with process-orientated performance. The attributes of the processes usually determine the type of performance measures. These measures are often non-financial measures (for example, cycle time, quality and cost reduction). Previous studies have used cost, quality and cycle time as measures of operational performance. This study will use product quality, cycle time and activity efficiency to assess the operational performance. ABC systems assist managers in measuring and evaluating the various aspects of operational performance. Ittner, Lanen and Larcker (2002) found that ABC is associated with improvement in operational performance such as quality and cycle time. In contrast, Banker, Bardhan and Chen (2008) suggested that ABC impacts

operational performance indirectly through advanced manufacturing capabilities. However, the researcher tackles the relationship between ABC and operational performance differently by considering ABC actions as a mediatory and a key source of improvement in operational performance.

Gupta and Galloway (2003) view ABC as a means to identify value-added and non-value-added activities, and improve the process by eliminating or reducing non-value-added activities. Cooper & Kaplan (1992) suggest that resources reduction can occur by taking two types of actions. First, reducing the number of times activities are performed and second, increasing the efficiency of activities. For example, if ABC system shows a high rate of unit deficit and high costs of inspection activity. Management may decide to change the supplier relationships and have reliable parts which would increase products quality, reduce inspection costs and eventually increase process speed. Another example, using the numbers produced by ABC system to evaluate and compensate employees ensures that employees are on line with management objective to improve business unit performance. This idea can be captured in the following hypotheses:

H4: Quality improvement is positively associated with ABC-based actions.

H5: Cycle time improvement is positively associated with ABC-based actions.

H6: Activity efficiency is positively associated with ABC-based actions.