Research on Implementation of ABC and its contribution to business innovation and performance improvement

Researchon Implementation of ABC and its contribution to business innovationand performance improvement



Oflate, activity – based costing (ABC) has gained concern and interestamong both scholars and administrative accountants, from the time itwas introduced. Researchers and scholars believe that ABC is a newmanagement accounting model that can improve the commercialorientation of administrative accounting and assist institutionchoices through regulating progressively cultured methods. In spiteof the great concern shown by researchers, institutions appear to beunwilling to implement ABC model. Various examinations indicate thatthe spreading of ABC has not been penetrating as anticipated. The aimof this research is to explore the contribution of activity-basedcosting (ABC) to business performance, how it was assumed and appliedinternationally and within Romanian institutions establish the keyencounters recognized when embracing and applying ABC establish thekey benefits and drawbacks of such a cost method. To attain this aim,the scrutiny of the prevailing literature in the field and earlierstudies made at global standard started, then a survey – centeredexperimental research and exploration of ABC adoption within Romanianenterprises is paramount.

Keywords:administrativeaccounting, activity – based costing, implement,research,Romania, model

Alterationsin the business atmosphere like globalization and scientificrevolution new encounters concerning products, facilities,superiority, distribution conditions are having substantial effect onmanufacturing procedures, administration, pricing and administrativeaccounting structures. In the current competitive businessatmosphere, institutions have to pinpoint and remove actions andprocedures that are worthless they should be “client focused”they require appropriate economic and non-economic, qualitative andquantitative data to direct their calculated choices clientgratification should be utmost concern. The traditional cost methodsare considered to be incomplete as they do not offer detailed data tothe company administrators they can result to incorrect choices bydisregarding the fact that compound products require more inputs thansimple designed products. It may further lead to the majority ofmanagements characterized by inefficiency and incapability ofadapting to the needs of the fluctuating atmosphere (Anderson &ampYoung, 2001).

Dueto these challenges researchers have responded by turning to themanagerial explorations and cost accounting incentives. Somemanagement accounting methods, such as strategic managementaccounting, ABC, and aim costing among others were recognized andproposed. Several of them like ABC acquired great reputation amongstresearchers and professionals. The inventors of activity-basedcosting suggested it for economic, formal, accurate and determinablemotives they argue that ABC target at helping business choices andregulating progressively cultured methods, and demonstrate to be aflexible and updated choice sustenance method that could tackle thechallenge of growing operating cost and concurrently offer deliberatedata. Lastly, ABC is considered for stimulating rationality,effectiveness and, finally, productivity, being the reasonprospective utilizes express willingness. As seen today ABC hasgained interest of researchers, scholars and professional at asignificant rate in recent past, but regardless of the solid supportapproving activity-based costing the adaptability is not inspiring.Research indicated that majority of the companies and professionalsappear to be unwilling to adopt the ABC model(Coners, 2007).


Theaim of the research “implementationof ABC and its contribution to business innovation and performanceimprovement” isto explore, investigate and show how ABC was received byorganizations and professionals the main encounters recognized whenadapting and applying activity-based costing: main benefits anddrawbacks of such stylish cost method.

Significanceof the study

Toexplore implementation of ABC and suggest ways in which the rate ofadoption maybe increased among the companies. The research alsoexpounds more on the slow rate of adoption of ABC. The informationacquired through the research can be used by companies whenimplementing ABC system.

Anoverview of activity-based costing

Activity-basedcosting is considered amongst the most significant incentives in costcalculation and administrative accounting. It originated from theUnited States of America as an outcome of numerous theoretic andapplicable explorations of the U.S researchers. Among the notableresearchers included Robin Cooper and Robert Kaplan. Both wrotevarious literatures and articles concerning proposal, application,benefits and drawbacks of ABC. ABC was established as a strategy tohandle challenges related to outdated cost management structures thatexhibited inability to correctly decide real creation and facilityexpenses, or give the necessary data for functional choices. With theincreased overhead costs, old methods continually prove to beincorrect since the indirect costs were not mutually as a result ofall products. Accordingly, when various products have mutual costs,there is a threat that one of the products funds the other, and beingthe reason managers were making choices established on incorrectinformation (Fei&amp Isa, 2010).

ABCis founded on the idea of the activity as well as on the notion thatactivities utilize resources, not products and numerous activitiesare utilized in the manufacturing practice. Implying that in anyenterprise the subdivision of activities is more essential than thesubdivision of products or roles. If the cost of particularactivities is known, the cost of every activity is distributed amongallproducts andto the degree the products utilize the activity. Inthis manner, ABC usually recognizes parts of major operating costsfor every item and so focus on devotion to getting the best methodsto minimize the costs or increase prices for costly products. ABCemphases on the origins of indirect costs assigning each product’scost into two step stages. Indirect costs such as rent, services, andindirect work are first included to the total costs. Later on, thecosts are subdivided to individual product cost. In this manner,activity scrutiny is allowed, cost alteration is avoided, waste isreduced, and valueless activities are escaped (Hoozze&amp Hansen,n.d.).

Activity-BasedCosting in Various Countries

Initiallythe ABC attracted a lot of interest among both researchers andprofessionals. Many literatures were written praising it since mostpeople believed it could be the best remedy towards solvingcompanies’ challenges and improve their business operations:promoting rationality, effectiveness, and gross profit. Othersbelieved that ABC has a worth-increasing consequence on costingdecision and income performance enabling improved cost distinctionbetween products, consumers and markets. In spite of the warmreception of ABC, the implementation extent of the system withincompanies is not pleasing. Study conducted indicated that, over thelast ten year, there has been increasing knowledge of ABC though thetotal rate of application is still low. In the 1990’s the rates ofapplication in the USA and Europe were very low. In US, only 18% hadimplemented the system while about 5% were on the process. Ten yearslater a research indicated that about 20% to 25% US organizations hadadapted the system and a similar number regarded it as positive. InEurope, the rates were lower than in the US, in 1994 it was 12%while in 2000 it had shifted to 13%. Apart from France and Belgium inEurope continent, where adoption rates were about 20%, othercountries recorded rates of less than 10%. In Finland the rate ofadoption shifted from zero in 1986 to 17% in 1995. The gradual changeis attributable to mistrusting the traditional system of informationand failure of it to meet modern administrative requirements. Asiarecorded minimal ABC adoption rates of 13% in Singapore, 4% inMalaysia and 2% in China. The rates were comparatively high in Indiaabout 20%. The high rates in India were as a result of the need bycompanies to comprehend activities well and recognize activities thatincreases costs (Robinson-Backmon, 2011).

Anonline survey conducted by professional business managers and ITexperts, in various countries, also indicated that ABC model is nothighly adopted and implemented. The survey involved 628 companiesfrom 33 countries. Among the main reasons for the low adoption andimplementation in developing countries were the small sizes ofcompanies, low competition, and inadequacy of resources. Somemanagers whowere requested to participate exhibited low awareness ofABC or no information of it at all. The majority of the managersdeclined to participate this was an indicator that they did not findthe importance of ABC or it was a new term to them. However, all themanagers of companies that implemented the ABC system praised thesystem of its effectiveness as compared to other old systemshowever, they complained of it being expensive to implement andsustain (Anderson &amp Young, 2001).

Activity-BasedCosting in Romania

Thereexist several studies that scrutinize the development ofadministrative accounting in Romania the administrative accountingprocedures, tools and skills utilized within Romanian organizationsthe significance, quality and utility of administrative accountingdata in choice procedures. Study conducted in 2010 targeted to findthe attitude of administrators of Romanian organizations concerningthe data acquired by administrative accounting, and to recognize theexact calculation and reporting instruments employed for gatheringand scrutinizing administrative accounting statistics. The data wasobtained as follows: manufacture (17%), facilities (39%), delivery(37%) or other activity spheres (7%)(Wnuk-Pel, 2010).

Figure1:Graphical representation of sectors involved in data collection.


Aquestionnaire was designed and presented to the skilled accountantswho were members of a professional body. During the study therespondent were required to show if the companies adopted old ormodern administrative cost accounting procedures, tools and skillsdetermine the role of managerial accounting and cost systems withintheir businesses, and to determine to what degree they depended ondata concerning administrative and cost accounting when deciding. Acovering letter clarified the need of the research and guaranteedprivacy of the statistics given. Instruction set required to fill theinquiry form appropriately was also included. The questionnairestargeted about 1879 skilled accountants. The mailing attempts accrued202 replies, producing a reaction rate of 9.4%. Of 202 replies, 33replies were excluded, remaining with 169 helpful reactions. The dataacquired was administered using SPSS style and was evaluated with theassistance of elaborative information(Wnuk-Pel, 2010).


Thedata obtained from the 169 institutions indicated that 22.51% of theinterviewed utilized the universal absorption process 27.64%employed work costing 9.69% used direct costing 14.85% adopted ABC6.26% employed objective costing and 19.05% of the interviewed werenot aware of the methods they utilized or they utilized none at all.The conclusion drawn from the data was that administrative accountingdata is significant for Romanian administrators for corporateprogress for controlling and lowering costs for determining theselling costs of products and services or to improve the worth ofproducts and services but they too employed old administrativeaccounting procedures, tools, methods and cost structures to“produce” this kind of data (Robinson-Backmon, 2011).

Figure2: Graphicalrepresentation of methods applied by companies.


Oldmanagerial and cost accounting tools and methods.

Thepartakers of the research were derived from different industries:services, 52.4%, manufacturing, 27% trading, 12.8%, and the remaining7.8% included activities sectors such as hospitals, schools, andbanking among others. From the data, Romanian companies seemed tovalue the significance and need of administrative accounting and costcalculation since they adopted administrative managerial accountingprocesses. Despite adopting administrative accounting systems thecompanies did not follow the established technique they preferred todevelop their own means and practices. Furthermore, Romaniancompanies’ concentration on cost determination they relateadministrative accounting with cost determination, and thedetermination of production costs. Several companies consider thatadministrative accounting expands production procedures and internaloperations as well as recognize and eradicate redundant actions. Duethese features old managerial and cost accounting methods, such asprocedure costing or overhead costing, were established to be morebroadly implemented than the lately and modern establishedtechniques(Khodadadzadeh, 2015).

Figure3: Graphicalrepresentation of sectors involved in data collection.

Utilizationof ABC within Romanian organizations

Theresults indicated that for modern cost techniques, only 15.5% of theparticipants had fully implemented the ABC system, 10.7% of theparticipants indicated that they had adopted ABC but later left itwhile 73.8% of the respondents were either aware of existence of suchsystem and ignored while others were not aware at all. Theparticipants were requested to give the major reason for adoptingABC while those who had not adopted it or were not aware of it wererequested to give their reasons that made them not adopt the system.Among the given reasons for implementation included to get moreaccurate costing data, proper distribution of overhead costs, andproper determination of clients’ profitability, managementrequirement and progression of performance signs. Major drawbacksfor the adoption included: high adoption and maintenance costs, lackof administrative and staffs’ willingness and fulfillment of thecurrent cost structures. The results indicated low implementationrates of ABC among Romanian organizations. Romanian organizationstill favor old cost structures but it appears that theglobalization, the development of international corporationsrequiring to get more accurate data on costs, economic andnon-economic performances are aspects that cause the employment ofcurrent and advanced costing systems and skills. It is evidenced thatthe Romanian companies are at the initial level of the utilization ofadvanced cost structures such as ABC, but the fact that mostcompanies are aware ABC system, they may employ it in the future(Robinson-Backmon, 2011).

Figure4: Graphicalrepresentation of ABC implementation.

Benefitsand drawbacks of ABC

Thecompanies that apply ABC have two significant benefits. The firstbeing the allowance of ABC to fully scrutinize the whole productionprogressions. The scrutiny analysis may lead to productionprogression, more effective resource utilization, cost decline,administrative performance, and profound planned choices on pricing,product specification and market fragments. Second, ABC enablescorporations to alter the combination of products manufactured andclients attended, enabling them to concentrate on the gainfulproducts and productive consumers. Furthermore, upgraded productcosts enables profound estimations of work costs for cost setting,accounting and preparation. In addition, it enhance the correct costdata, managers can acquire non-economic information so as to improvethe judgment procedure: enhanced product strategy choices, improvedcustomer sustenance choices, and nurturing value development plans(Jones, 1996).

Despitethe benefits, the administrators should know the system has somerestrictions. At times it is hard to openly differentiate the variousactivities, resource utilization or product cost. Exclusion of anycost related to the product or service, is another challenge thatmight appear. Activities costs such as distribution, promotion,research and enlargement, product trade are also usually excluded inproducts’ cost. Although these kinds of cost are direct, and can beattributable to certain product or service, ABC application isexpensive and at times it may pose a challenge in appearance ofseveral activities. ABC application is a combined course, it poolsnew cost control instructions and may result to the change ofattitude and behavior. If the application procedure doesn’tanticipate on the manner of perception of the staffs, the formationsrelated to clients, and internal procedures, and then the outcomewill just be a minimal enhancement of competence with no developmentin competitive benefits of the company (Kang, 2015).


Fromthe research, the adoption and implementation of ABC system is lowamong the Romanian companies. The low adoption is attributable toignorance, initial and maintenance of the system. For the purpose ofincreasing the rates, the awareness of existence of the ABC should becreated. Also, providing data of companies that have succeeded byadopting the ABC will heighten adoption rate. It is clear from theresearch the companies that have implemented the system acquiredbenefits like product and client productivity scrutiny progressionof internal organization procedures. However, the companies with ABCsystem were also faced by various challenge such as lack ofwillingness and co-operation between management and staffs (Kang,2015).The research indicated that the Romanian organizationsare on their initial stages of implementation. Romanian professionalsappear to continue to work with the old methods they appear to besatisfied with the old administrative accounting processes, methods,and skills regardless of the fluctuations in the economicsurroundings. They also prefer work under costing or procedurecosting instead of ABC since they have minimal or lack options orbecause there is no willingness or assistance offered to them by theadministrators or workers. The administrators should not be contendedwith unexceptional outcomes they must be willing to adjustparticularly when there is an opportunity to improve resourceutilization and to progress products and internal organizationprocedure’s effectiveness (Jones, 1996).

Itis clear that the adoption and implementation of activity basedcosting varies among different countries from company to company anddo not give the same impression to all companies. However,inconsideration of the globalization, scientific advancement, andincreased competition Romanian organizations’ will be forced toadopt and implement activity-based costing so as to progress costdetermination accuracy to resolve major challenges, and to acquireorganizational advantages at a multi-dimensional level (Nachtmann&ampNeedy, 2001).


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