A COMPARATIVE EVALUATION OF FINANCIAL AND ACTIVITY-BASED
COST ACCOUNTING SYSTEMS IN A PRIVATE UNIVERSITY
by
DERRELL H. MOORE, B.B.A., M.B.A.
A DISSERTATION
IN
HIGHER EDUCATION
Submitted to the Graduate Faculty
of Texas Tech University in
Partial Fulfillment of
the Requirements for
the Degree of
DOCTOR OF EDUCATION
Approved
December, 1998
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ACKNOWLEDGMENTS
I wish to express my grateful appreciation to my committee
chairman, Dr. Albert B. Smith, for his continuing direction and
encouragement during my doctoral program and dissertation work. I would
also like to thank the other committee members, Drs. Suzanne Logan and
Lane K. Anderson for their encouragement and helpful suggestions.
Others who have contributed substantially to this project are: (1)
ICMS, Inc., 2261 Brookhollow Plaza, Suite 104, Arhngton, Texas, 76006,
provided CMS-PC™ 4.0 software and manual used in this study; (2) Mr.
Harold Preston, Senior Vice President for Finance and Management,
Hardin-Simmons University, who provided permission to use HardinSimmons University as the subject of this study and for providing access to
records, personnel, and other information; (3) Mr. Watson Moore, Controller,
Hardin-Simmons University, who provided financial and other data
required to compare the financial and activity-based costing systems; and
(4) Dr. Bob E. Waldrup, Assistant Professor of Accounting, Hardin-Simmons
University, who provided consultation in the experimental design and in the
interpretation of statistical findings.
Finally, I want to express my appreciation to my wife, Janice, who
provided indispensable assistance in editing this document.
ii
TABLE OF CONTENTS
ACKNOWLEDGMENTS
ii
ABSTRACT
viii
LIST OF TABLES
x
LIST OF FIGURES
xi
CHAPTER
I. INTRODUCTION TO THE STUDY
1
Introductory Comments
1
Hardin-Simmons University
4
Introduction of Activity-Based Costing
4
Statement of the Problem and Purposes
6
Research Question and Hypotheses
10
Research Question
10
Hypotheses
10
Need for the Study
13
Delimitations
17
Delimitation Number One
17
Delimitation Number Two
18
Delimitation Number Three
19
Delimitation Number Four
19
HI
Delimitation Number Five
Limitations
20
20
Limitation Number One
20
Limitation Number Two
21
Limitation Number Three
21
Assumptions
22
Assumption Number One
22
Assumption Number Two
22
Definition of Terms
23
Summary
29
II. REVIEW OF THE LITERATURE AND RESEARCH
32
History of the Development of Traditional
and Activity-Based Costing/Management
(ABC/M) Systems
32
Traditional System
32
ABC/M System
36
Research in ABC/M
92
III. METHODOLOGY
104
General Design
104
Graphical Depiction of the Split-Plot Factorial Design
106
Description and Purposes of the Study
107
Instrumentation
109
iv
Pilot Study
114
Sample Population
117
ABC/M System Design
117
Collection of Data
120
Analysis of Data
121
Research Question
121
Hypotheses
122
Computational Model
125
Summary
127
IV. FINDINGS
129
Summary
129
Findings Related to the Three Null Hypotheses Tested
129
Finding: Null Hypothesis Number 1
129
Finding: Null Hypothesis Number 2
132
Finding: Null Hypothesis Number 3
135
Interpretations of Significant Interactions Between
Levels of Treatments A and B
138
Computational Procedures and Data
144
Findings Related to Procedures For Estimating
Strength of Association, Effect Size, and Power
146
Findings: Strength of Association
146
Findings: Effect Size
148
V
Findings: Power
149
Summary
151
V. MAJOR FINDINGS, CONCLUSIONS, AND
RECOMMENDATIONS
152
Introduction
152
Major Findings
154
Finding: Hypothesis Number 1 Related to
Treatment A (Type of Accounting System)
154
Findings: Hypothesis Number 2 Related to
Treatment B (Decision Purpose)
156
Findings: Hypothesis Number 3 Related to
the Interactions of Treatments A and B and
Blocks
159
Recommendations
160
Policy
160
Practice
163
Research
165
Conclusions
166
REFERENCES
168
APPENDICES
A. F I N A N C L ^ ACCOUNTING SYSTEM
COST FLOW DIAGRAM
182
B. ABC/M SYSTEM COST FLOW DIAGRAM
186
VI
C. ORGANIZATION CHART FOR
HARDIN-SIMMONS UNiVERSITY
190
D. EXECUTIVES, MIDDLE MANAGERS, AND STAFF
FOR HARDIN-SIMMONS UNIVERSITY
192
E. GLOSSARY
198
F. EVALUATION INSTRUMENT AND ADMINISTRATION
PROCEDURES
209
G. COST ACCOUNTING PILOT PROJECT
220
H. EXPERIMENT DATA, COMPUTATIONAL SYMBOLS,
AND COMPUTATIONAL FORMULAS
239
Vll
ABSTRACT
Private higher education institution accounting systems provide
information to comply with external reporting standards of the Financial
Accounting Standards Board. The "official" system is described in a
National Association of College and University Business Officers (NACUBO)
publication. Although the system provides highly useful information for
external reporting purposes, it does not appear to provide highly useful
information for internal management decisions.
This study was designed to test if a complementary Activity-Based
Costing/Management (ABC/M) system would provide more useful
information for internal management decisions than the financial
accounting system. A secondary purpose was to define possibilities for
future research t h a t would relate ABC/M to other higher education
institutions of this type and to other public and private institutions of
higher learning.
A single case study was conducted at Hardin-Simmons University.
An ABC/M system was designed utilizing commercial software. The
internal management information produced by each accounting system was
evaluated by staff and administrators with financial management
Vlll
responsibilities as to usefulness for budgeting, financial management, and
strategic decision purposes.
ANOVA procedures for a split-plot factorial design were employed
with appropriate assumptions tests. Statistically significant differences
were found for each of the two independent variables and for the
interactions of the two independent variables.
The data supported a conclusion that information provided by the
ABC/M system was more useful than the NACUBO system for the decision
purposes tested. The data also supported a conclusion that information
from both accounting systems was more useful for budgeting than for
financial management, which in turn was more useful than for strategic
decisions dependent on accurate cost object costs.
The practical significance of these findings is that administrators of
institutions similar to the subject institution may find the ABC/M
information more useful than information provided by their financial
accounting system for the purposes tested. Also, administrators may make
more informed decisions and may have a better understanding of the
consequences of such decisions.
Recommendations about the policy and practice aspects of
implementation of ABC/M systems in institutions similar to the subject are
presented. Suggestions for additional research are also mentioned.
IX
LIST OF TABLES
3.1. Split-Plot Factorial Design-Treatment Level Combinations
106
3.2. Time Frame for the Experimental Study
121
4.1. Table of Findings for SpUt-Plot Factorial Design Using ANOVA . . . 130
4.2. Table of Findings for SpUt-Plot Factorial Design Using ANOVA . . . 133
4.3. Table of Findings for Split-Plot Factorial Design Using ANOVA
137
4.4. Description of the Six Combinations of Treatment Levels
of Treatments A and B
139
4.5. Findings Related to Interactions of Combinations of
Independent Variable Treatment Levels Using
ANOVA With Tests For Simple Main Effects
140
4.6. Findings Related to Interactions of Combinations of
Independent Variable Treatment Levels Using
ANOVA With Tests For Simple Main Effects
142
4.7. Summary Table of Evaluator Responses By Block
(Executive, Middle Manager, or Staff), Treatment A
(Financial Accounting and ABC/M), and by Treatment B
(Budgeting, Financial Management, and Strategic
Decisions Dependent On Accurate Cost Object Costs)
145
H.l. Detailed Table of Evaluator Responses By Block
(Executive, Middle Manager, or Staff), Treatment A
(Financial Accounting and ABC/M), and by Treatment B
(Budgeting, Financial Management, and Strategic
Decisions Dependent On Accurate Cost Object Costs
241
H.2. Descriptive Statistics Based On Detailed Table of
Evaluator Responses to Survey Instrument Statements
245
LIST OF FIGURES
4.1. Response Values by Accounting System Type
132
4.2. Response Values by Decision Purpose
135
A.l. Financial Accounting System Cost Flow Diagram
185
B.l. ABC/M Cost Flow Diagram
189
C.l. Organization Chart for Hardin-Simmons University
191
F.l. Sample of Financial Accounting System Information
218
F.2. Sample of ABC/M System Information
219
G.l. Partial Organization Chart, Christian College, Business Division. . 222
G.2. Cost flows-Traditional System
223
G.3. Partial Organization Chart, Christian College, Business Division. . 227
G.4. Cost Flows-ABC System
228
XI
CHAPTER I
INTRODUCTION TO THE STUDY
Introductorv Comments
Accounting for colleges and universities has followed the predictable
track of action and reaction to a point of consensus. Accounting systems for
colleges and universities have been designed to provide the data needed to
effect compliance with the generally accepted principles of accounting t h a t
were developed in a joint effort by the National Association of College and
University Business Officers (NACUBO), the American Institute of Certified
Public Accountants (AICPA), the Financial Accounting Standards Board
(FASB), and the Governmental Accounting Standards Board (GASB)
(Freeman & Shoulders, 1993). The FASB-GASB jurisdiction agreement of
1984 granted the FASB responsibility for generally accepted accounting
principles (GAAP) applicable to private not-for-profit colleges and
universities. The FASB issues three major types of pronouncements which
constitute the most authoritative literature regarding generally accepted
accounting principles. They are: (1) Statements of Financial Accounting
Standards (SFAS), (2) Interpretations, and (3) Statements of Financial
Accounting Concepts (Williams, Stanga, & Holder, 1995).
The preferred presentations of financial statements for private, not
for-profit institutions are not known with certainty since implementation
guidance has not been finalized by the FASB on the two most recent
statements of financial accounting standards (SFAS) on this subject,
numbers 116 and 117 (Freeman & Shoulders, 1996). SFAS 117 requires
financial statements to report the institution's financial resources that have
not been restricted externally for specific purposes and are expendable for
any legal and reasonable purpose as '^Unrestricted Current Funds." All
financial resources that have been externally restricted to specific operating
purposes must be reported as "Restricted Current Funds" (temporarily or
permanently restricted) (Freeman & Shoulders, 1996). The accounting
system must provide information that will enable the institution to comply
with these requirements. Financial analyses and other data intended for
internal management purposes are not required to be in compliance with
GAAP (FASB standards) on which the financial statements are based and,
indeed, may take any form deemed useful to the intended users. The only
limiting criterion applicable to internally generated information is that the
benefit of the information must justify the cost of providing it. During the
immediate past fifteen years, colleges and universities have increasingly
recognized the need to develop a system to compare operating results for
various programs of the subject university, with peer institutions, and with
the education industry, and also to see which institution is performing its
activities most efficiently and effectively. Control of costs, both monetary
and non-monetary, has become an important aspect of managing
institutions of higher learning (Freeman & Shoulders, 1993).
The basic budget control system in every institution including higher
education institutions is the financial accounting system. Its primary
purpose is to help the institution fulfill its fiduciary responsibility of keeping
track of funds received from third parties (the fund accounting system). The
system also serves as a financial control system, which is organized by
budget units that typically follow the organization of vice presidential areas
with academic and administrative departments and restricted grants and
contracts separately identified. Institutions are captives of their
financial
accounting systems. The financial accounting system is influenced greatly
by the fund accounting system and budget organization structure. The
financial accounting systems for private higher education institutions in
general do not provide information that supports decisions regarding the
effective and efficient allocation of resources. Thus, they do not highlight
productivity variances or provide the grist for thoughtful analysis and
decisions regarding changes that should be made (Turk, 1993).
Hardin-Simmons Universitv
Hardin-Simmons University (HSU), the subject of this experimental
research, employs an accounting system that shall hereinafter be referred to
as the financial accounting system, a system similar in many respects to
those found in the subject's peer group institutions. This accounting system
has been designated as the official system and is recommended for private
higher education institutions by NACUBO. KPMG Peat Marwick, an
international certified public accounting firm, designed the system and
provided documentation and instructions for implementation and operation
of the system in a publication titled, Financial Accounting and Reporting
Manual for Higher Education (McDonald, 1990). The model chart of
accounts presented in this system provides an eight digit coding structure
that organizes the accounts first by organizational unit and sub-units and
then by object of expenditure. A graphical design of the cost flows of the
financial accounting system employed at Hardin-Simmons is provided as
Appendix A.
Introduction of Activity-Based Costing
In 1988, an alternative approach was proposed to the traditional
accounting and reporting systems in use by many types of organizations
that provided financial and nonfinancial data for management decision
making. Drs. Robin Cooper and Robert S. Kaplan suggested that ActivityBased Costing (ABC) would provide more accurate information than
traditional systems about production, support activities, and product costs
so t h a t management could focus its attention on the products and processes
with the most leverage for improving efficiency and effectiveness. It would
help managers make better decisions about product design, pricing,
marketing, and mix and would encourage continual operating improvements
(Cooper & Kaplan, 1988a). At the time of the writing of this article, Robin
Cooper was an associate professor of business administration at the
Harvard Business School and a fellow of the Institute of Chartered
Accountants in England and Wales. Robert S. Kaplan was the Arthur
Lowes Dickinson Professor of Accounting at the Harvard Business School
and professor of industrial administration at Carnegie Mellon University.
ABC takes its name from the basic premise of the approach. It is
about activities. More specifically it is about managing activities to gain
and sustain a competitive advantage. An activity is a combination of people,
technology costs, supplies, travel, occupancy costs, methods, and
environment t h a t produce a given service (output). Activities describe what
an organization does, the way time is spent, and the outputs of the process.
Some examples of activities common to higher education applications are:
1. Answering inquiries for admission.
2. Teaching classes.
3. Advising students.
Ultimately an organization can manage only what it does-its
activities. The management of activities begins with an understanding that
resources are necessarily assigned to activities and are consumed by
activities (activity cost). Ab appropriate activity measure, such as the
volume of output, must be determined, and how well the activity is
performed (performance measures) must be known. This information is
derived from the ABC system (Brimson & Antes, 1994).
Experience has now demonstrated that this emerging accounting
technology is also applicable to organizations in a number of settings in
addition to manufacturing and merchandising which may include insurance
agencies and underwriters, banks, government agencies, hospitals, colleges
and universities, and a variety of other service organizations (Brimson &
Antes, 1994). A graphical design of the cost flows of the ABC system
designed for the subject institution is provided as Appendix B.
Statement of Problem and Purposes
Cost accounting literature produced in recent years contains many
references to the deficiencies of traditional accounting systems. These
deficiencies focus on the usefulness of the data for management decisions
including budgeting, financial management, and financial reporting.
The following conclusions reported in recent doctoral dissertations
describe well the problem that prompted consideration of this topic for this
dissertation: (1) One major criticism of existing cost accounting systems is
t h a t they do not provide useful information for managing modern
manufacturing operations (Basuki, 1996). (2) While basic cost accounting
methods in common use have remained practically unchanged for 30 years,
health care providers have seen radical change take place in their industry.
(3) Use of the old accounting methods may distort costs and provide
inadequate managerial information for modern decision making (Baker,
1997). Although these researchers relate the deficiencies primarily to
commercial enterprises, all organization t5rpes may be subject to the same
accounting limitations.
Frederick J. Turk, a partner at KPMG Peat Marwick in New York
City, specifically applied these deficiencies to institutions of higher
education. He indicated that the most significant problem faced by most
higher education institutions is that they do not know much about their
costs. When these leaders, governing boards and other constituencies find
themselves with this deficiency, they have difficulty understanding why
costs continue to rise so rapidly and what they can do to change cost
behavior of their institutions (Turk, 1993).
ABC may be used in common parlance to indicate a degree of
simplicity; but as an acronym for Activity-Based Costing, it introduces some
revolutionary and fundamental changes in management accounting system
design. What originally appeared to be simply a new method of tracing
costs to products has led to the development of an entirely new management
accounting and control system referred to as Activity-Based Costing and
Management (ABC/M) (Glad & Becker, 1995).
Numerous examples of successful implementation of ABC/M in
various types of organizations exist in the literature (Player & Keys, 1995);
however, a careful search of the literature failed to produce a single specific
case of the implementation of an ABC/M system in a college or university.
The major problem identified for this study was to test this new system in a
private university setting. This was done by comparing the relative
usefulness of data provided by the financial accounting system used by this
university with the usefulness of the data provided by a complementary
ABC/M system. This complementary ABC/M system was designed by the
researcher for the subject institution and the system incorporated typical
ABC/M design components.
The primary purpose for conducting this study was to determine if
the ABC/M system, as a complementary (add-on) system to the financial
accounting system in use, produced more useful information t h a n the sole
use of the financial accounting system. Usefulness was defined as the best
combination of relevance and reliability and was judged by persons within
the university who have responsibility for: (1) budgeting, (2) financial
management (control), and (3) strategic decisions that are dependent on
accurate cost object costs.
ABC and the management system based on it have fundamentally
changed the approach to and methodology for accumulating costs in
commercial organizations with over 3,500 conversions to ABC already in
place (Player & Keys, 1995). This study sought to determine whether the
significant benefits experienced in commercial organizations by emplo5dng
ABC/M were also applicable to a private university.
An additional purpose was that this study may produce possibilities
for future research t h a t would relate ABC/M to other higher education
institutions of this tjrpe and to other public and private institutions of
higher learning (research universities, doctoral granting universities,
comprehensive colleges and universities, liberal-arts colleges, two-year
colleges, institutes, and professional schools).
Research Question and Hvpotheses
Research Question
Does the use of the complementary ABC/M system provide more
useful information t h a n the sole use of a traditional financial accounting
system for: (1) budgeting decisions, (2) financial management (control)
decisions, and (3) strategic decisions dependent on accurate cost object cost
as judged by executives, middle managers, and staff of a private university?
Hypotheses
Hypotheses are presented to test variances between the arithmetic
means of the evaluator response values relating to the usefulness of the
information for the two treatment levels of the independent variable
relating to accounting system used (financial accounting system and ABC/M
system), variances for the three treatment levels of the independent
variable relating to decision purpose of the information (budgeting, financial
management, and strategic decisions dependent on accurate cost object
costs) and the variances resulting from the interactions of the two
independent variables. The dependent variable was defined as the
usefulness of the information provided by the accounting systems for the
three expressed decision purposes as perceived by the members of the three
professional categories of evaluators. The subject participants were
10
randomly assigned to subgroups (blocks) according to their professional
classification (executives, middle managers, and staff). Hypotheses testing
statistical variances between and within those blocks are presented in the
following section.
Null and Alternative Hvpotheses
The first hypothesis was designed to test the variances between the
two treatment levels of the independent variable. Treatment A (accounting
system).
Null hypothesis 1. Ho: /ua^ = ixa^Stated in words, there is no statistically significant difference
between the arithmetic means of the data scores for the two levels (a^
financial accounting system, and aj, ABC/M system) of the independent
variable. Treatment A. The alternate hypothesis was: Ha: ^a^ * ^a^.
Stated in words, there is a statistically significant difference in the
arithmetic means of the data scores for the two treatment levels of the
independent variable. Treatment A.
The second hypothesis was designed to test the variances between the
three treatment levels of the independent variable. Treatment B (decision
purpose).
Null hypothesis 2. Ho: yih^ - /uh^ = /^bg.
11
Stated in words, there are no statistically significant differences
between the arithmetic means of the data scores of the three treatment
levels (bp budgeting, bg, financial management, and h^, strategic decisions
dependent accurate cost object costs) of the independent variable,
Treatment B. The alternate hypothesis was: Ha: /^bj * ^bz ^ /^h^. Stated in
words, there are statistically significant differences in the arithmetic means
of the data scores of the three levels of the independent variable, Treatment
B.
The third hypothesis was designed to test the variances of the
interactions of the combinations of the two independent variables.
Treatments A and B, and the interactions of the blocks (professional
classification of the evaluator).
Null hypothesis 3. Ho: /ia^bi = /^a^bg = Ma^bg = fu.a2h^ = iJ^a^^ ~ ^^2^.3Stated in words, there are no statistically significant differences
between arithmetic means of the data scores of the combinations of the two
independent variables. Treatments A and B. The designations ajb^ aib2
and a^bg relate to the combinations of the financial accounting system (aj)
and the three decision purposes of the information (b^ budgeting, b2,
financial management, and bg, strategic decisions dependent on accurate
cost object costs). The designations ajb^ agbj, and agbg relate to the
combinations of the activity-based costing system and the three decisions
12
purposes of the information (b^ budgeting, bj, financial management, and
bg, strategic decisions dependent on accurate cost object costs). The
alternate hypothesis was: Ma^b, ^ /^ajbg ^ A^a^bg * ^a^^
* ^^^2
* /^^jbg.
Stated in words, there are statistically significant differences between
arithmetic means of the data scores of the various combinations of the two
independent variables. Treatments A and B, and the blocks.
Need for the Study
The level of inadequacy of information produced for management
decisions by the traditional financial accounting systems that are used by
virtually every organization type and the reasons for the allegations were
first described 1987. The seminal publication in which Johnson and Kaplan
presented their arguments is titled. Relevance Lost: The Rise and Fall of
Management Accounting.
Today's management accounting information produced by the
traditional costing system, driven by the procedures and cycle
of the organization's financial reporting system, is too late, too
aggregated, and too distorted to be relevant for managers'
planning and control decisions. With increased emphasis on
meeting quarterly or annual financial targets, internal
accounting systems focus narrowly on producing monthly
budget comparisons. Despite the considerable resources
devoted to computing a monthly or quarterly financial results
amount, the amount does not measure the actual increase or
decrease in economic value that has occurred during the period.
(Johnson & Kaplan, 1987, p.l)
13
To pursue the explanation of these failings further, three important
consequences are presented. First, management accounting reports are of
little help to operating managers as they attempt to reduce costs and
improve productivity. Frequently, the reports decrease productivity because
they require operating managers to spend time attempting to understand
and explain reported variances that have little to do with the economic and
technological reality of their operations. By not providing timely and
detailed information on process efficiencies, the management accounting
system not only fails to provide relevant information to managers but it also
distracts their attention from factors that are critical for process efficiencies
(Johnson & Kaplan, 1987).
Second, the management accounting system also fails to provide
accurate costs of services (products) provided. Costs are distributed to
services (cost objects) by simplistic and arbitrary measures that do not
represent the demands made by each cost object on the firm's resources.
These measures systematically bias and distort costs of individual cost
objects. When such distorted information represents the only available data
on "service costs," the danger exists for misguided decisions on service
pricing, service outsourcing, service mix, and responses to competitive
service. Many higher education institutions seem to be falling victim to the
danger of misguided decisions (Johnson & Kaplan, 1987).
14
Finally, managers' horizons are reduced to consideration of the shortterm cycle of the monthly financial results statement only. The financial
accounting system treats many cash outlays as expenses of the period in
which they are made even though these outlays will benefit future periods.
Discretionary cash outlays for new services, improved processes, preventive
maintenance, long-term marketing positioning, employee training and
morale, and for developing new systems can produce substantial cash
inflows for the future. Managers under pressure to meet short-term
financial goals can, on occasion, achieve these goals by reducing their
expenditures on such discretionary investments. Thus, short-term
financial
goal pressures can lead to a decrease in long-term investment. Yet monthly
accounting statements, using the practices mandated for external reporting,
can signal increased financial performance even when the long-term
economic health of the institution has been compromised (Johnson &
Kaplan, 1987).
Today's management accounting systems provide a misleading target
for managerial attention and fail to provide the relevant set of measures
t h a t appropriately reflect the technology, the services, the processes and the
competitive environment in which institutions operate. For many
organizations, financial measures have become the only measure of success.
Financial managers, relying exclusively on periodic financial statements for
15
their view of the organization, become isolated from the real value-creating
operations of the organization and fail to recognize when the accounting
numbers are no longer providing relevant or appropriate measures of the
organization's operations (Johnson & Kaplan, 1987).
Fortunately, the increased demands for excellent management
accounting systems occur at a time when the costs for collecting, processing,
analyzing, and reporting information has been decreasing by orders of
magnitude. The enormous expansion in computing capabilities has given
the designers of management accounting systems of today opportunities
t h a t could not have been dreamed about by their predecessors. Extensive
systems are now feasible to measure and attribute accurately the resource
demands made by each service offering (Johnson & Kaplan, 1987).
The time has come for self examination by higher education
institutions to determine if they are using their resources most effectively.
Competition is affecting higher education just as it affects other
organizations in our society. Ineffective use of resources drives up costs
which in t u r n causes tuition and fees to rise and requires ill-advised cuts in
academic programs and support activities. The long-term result is
institutional decay and loss of reputation in the competitive marketplace
(Turk, 1993).
16
Activity-based management of scarce resources helps ensure
that all activities are operating at peak effectiveness and
efficiency to achieve enterprise excellence. Both, this approach
to management and ABC, should be integral parts of the
accounting system for colleges and universities as they face the
twenty-first century. (Turk, 1993, p. 34)
This study provided empirical research that supported the quotation above
of Frederick J. Turk, a Certified Public Accountant and partner of a
prestigious international public accounting firm, KPMG Peat Marwick in
New York.
Delimitations
Delimitation Number One
The researcher limited this research experiment to a single case
study partially because the single case study is considered an appropriate
research strategy for exploratory, descriptive, and explanatory (causal)
inquiries. The case study strategy is indicated when control over behavioral
events does not require researcher control and when the focus of the study is
on contemporary events (Yin, 1994). Both of these elements were present in
this study. "Some of the best and most famous case studies have been both
descriptive and explanatory" (Yin, 1994, p. 3). A computer search of the
Dissertation Abstracts International compact disc file at the Texas Tech
University Library revealed that during the period 1861 to 1997, 21,566
17
dissertations were written using the case study design of which 548 were
related to finance and 245 were related to accounting. The date period 1993
through 1997 included 7,337 case study dissertations of which 175 were
related to finance and 72 were related to accounting. A single-case study
was appropriate for this dissertation also because comparison of alternative
accounting processes within this specific context provided new insight
and new knowledge that may be applicable to the more than 900 other
similar institutions in the United States.
Delimitation Number Two
The researcher limited this study to Hardin-Simmons University (see
Appendix C for the organization chart) because the physical presence of the
researcher on this campus facilitated the significant amount of interaction
between the researcher and certain University personnel that was required
due to the depth and complexity of the ABC/M design. Public institutions
and large, more complex private institutions were excluded as possible
subjects because public institutions have less local discretion in the adoption
of alternate accounting procedures; and large complex private institutions
would have unnecessarily complicated the design, installation, and
operation of the test ABC/M system.
18
Delimitation Number Three
Only the fiscal year which ended May 31, 1998, was included in the
study because that period fell within the time line planned for this
dissertation. The budget process for the fiscal year to end on May 31, 1999,
was accomphshed before the end of the fiscal year that ended on May 31,
1998.
Delimitation Number Four
This study was limited to consideration of the determination of the
comparative advantages of ABC/M over the financial accounting system in
regard to only three decision purpose areas (budgeting decisions, financial
management [control] decisions, and strategic decisions dependent on
accurate cost object costs). Consideration of comparative advantages in
other areas such as financing, auditing, and financial accounting reporting
could have diffused the focus into areas of financial management in which
expert financial or accounting judgment of the institution participants
would have been required. If expert financial or accounting judgment had
been required, the number of participants would have been severely limited.
19
Delimitation Number Five
Only the expenditure transactions of current funds classified as
unrestricted, temporarily restricted, and permanently restricted were
included in this study. The transactions included constituted a very large
majority of the transactions recorded in the accounting system of the subject
institution. Revenue transactions were excluded because they are not an
element of cost. In addition, only the unrestricted current funds were
budgeted and subject to distributive financial management. To ensure
compliance with applicable restrictions, the Hardin-Simmons University
Controller monitored current funds that were temporarily restricted or
permanently restricted.
Limitations
Limitation Number One
With a college administration of 88 persons (executives, middle
managers, and staff as presented in Appendix D), nearly everyone in this
population was needed to participate in the evaluation process in order for
the subgroups (blocks) to have an adequate number of subjects to ensure
statistical validity that would have been threatened by smaller sample
sizes. If a large number of potential participants had been unwilling to
cooperate in responding to the statements on the instrument used for data
20
collection in this research, generalizability of the experiment could have
been threatened.
Limitation Number Two
The data collection instrument was not externally validated for its
expressed purpose in this research or in other studies. The researcher
formulated the instrument statements to address the purposes expressed in
the research question. Partial validation was accomplished by use of the
instrument in a pilot study using accounting students conducted prior to the
actual experiment. Also, the experimental design that was used at least
partially controlled for the lack of demonstrated validity. True experimental
designs, however, do control for nearly all sources of internal and external
invalidity because sample subjects are randomly selected and assigned
(Gay, 1992).
Limitation Number Three
Actual accounting transactions were used in the evaluation of both
accounting system types. However, proprietary or highly sensitive data
were replaced by representative data by agreement with the Senior Vice
President of Finance and Management. No significant differences in
accounting results were experienced as a result of such substitutions.
21
Assumptions
Assumption Number One
Assumption one relates to the first limitation presented. The staff
and administration of the subject institution have a history of cooperating in
all material respects to reasonable requests for necessary information. The
Senior Vice President for Finance and Management and the Controller were
correct in their expectation that this cooperation would extend to this
project.
Assumption Number Two
The second assumption relates to the second limitation, that of the
untested validity of the instrument. It was assumed that the validation of
the instrument could be accomplished by use in a pilot study. Knowledgeable students were asked to respond to the same questions in related to a
hypothetical situation similar to that of the case study. The 20 knowledgeable students were accounting and finance majors enrolled in a cost
accounting class at HSU. This test was conducted in March, 1998, which
preceded the actual single case study experiment. As anticipated, the
responses were very definitive concerning the preference of the ABC/M
process over the financial accounting approach. This preference result
serves to support the validity of the questions for the purposes stated.
22
Definition of Terms
Definitions of the terms presented in this section are contextual. For
the most part, they relate to accounting or management situations and are
intended to assist the reader in understanding the vocabulary commonly
employed in those contexts. Terms defined in this section constitute key
terms used in this study. Definitions of statistical terms used in this study
are meanings normally attributed to them when used in studies in
behavioral science, and are not defined in this section. Additional terms
used in this report with definitions are included in Appendix E, Glossary. A
reader may either wish to review the Glossary terms prior to continuing or
may refer to the Glossary for definitions of terms to be introduced as the
reader continues through the remaining pages of this dissertation.
ACCOUNTING SYSTEM. A system used to identify, analyze,
measure, record, summarize, and communicate relevant economic
information to interested parties (Ainsworth et al., 1997).
ACTIVITY. An event, task, or unit of work with a specified purpose
(Horngren, Foster & Datar, 1997).
ACTIVITY MANAGEMENT. Planning, improvement, and control of
an organization's activities to meet internal, customer, and other external
requirements (Brimson & Antes, 1994).
23
ACTIVITY MAP. Flowchart or diagram showing the hierarchy of
relationships between activities within an organization.
ACTrVITY-BASED COSTING. Approach to costing that focuses on
activities as the fundamental cost objects. It uses the cost of these activities
as the basis for assigning costs to other cost objects such as products,
services, or customers (Horngren, Foster & Datar, 1997).
AUDITOR. Certified Public Accountant, government agent or an
organization employee who performs financial statement audits, comphance
audits, or operational audits (Arens & Loebbecke, 1994).
BUDGET. The quantitative expression of a plan of action and an aid
to the coordination and implementation of the plan (Horngren, Foster &
Datar, 1997).
BUSINESS UNIT. Subdivision such as a department or subsidiary
(Wilhams, Stanga & Holder, 1995).
CERTIFIED PUBLIC ACCOUNTING FIRM. An organization made
up of persons with the professional designation reserved for persons who
have satisfied certain education and experience requirements and have
passed a rigorous uniform examination that the American Institute of
Certified Public Accountants prepares and grades.
COST. Resource sacrificed or forgone to achieve a specific objective
(Horngren, Foster & Datar, 1997).
24
COST ACCOUNTING. System that measures and reports financial
and other information related to the organization's acquisition or
consumption of resources. It provides information for both management
accounting and financial accounting (Horngren, Foster & Datar, 1997).
COST ALLOCATION SYSTEM. System for assigning indirect costs
to the chosen cost object (Horngren, Foster & Datar, 1997).
COST OBJECT COSTS. Costs of anything for which a separate
measurement of costs is desired (Horngren, Foster & Datar, 1997).
COSTING SYSTEM. In this context, the system suggested by
NACUBO and adopted by many private colleges and universities.
CROSS-FUNCTION ANALYSIS. An analysis of an organization that
cuts across the functional lines. Examples of functions in a commercial
organization may include sales, manufacturing, finance, and research
(Brimson & Antes, 1994).
DEPARTMENTAL ACTIVITY-BASED MANAGEMENT (DABM).
Application of the principles of ABC/M at the departmental level of the
hierarchy of an organization.
EFFECTIVENESS. The degree to which a predetermined objective
or target is met (Horngren, Foster & Datar, 1997).
EFFICIENCY. The relative amount of inputs used to achieve a given
level of output (Horngren, Foster & Datar, 1997).
25
EXPENSE. Cash outflow or other use of assets or incurrence of
liabilities during a period as a result of delivering or producing goods,
rendering services, or carrying out other activities that constitute the
organization's operations (Wilhams, Stanga & Holder, 1995).
FINANCIAL ACCOUNTING. System that focuses on external
reporting that is guided by generally accepted accounting principles
(Horngren, Foster & Datar, 1997).
FINANCIAL ACCOUNTING SYSTEM. In this context, the system
designed and developed by NACUBO for use by private colleges and
universities.
FINANCIAL MANAGEMENT. Employment of budgeting,
accounting, reporting, and auditing techniques to predict and control the
activities of an organization (Freeman & Shoulders, 1996)
FUND ACCOUNTING. Accounting approach defined as a fiscal and
accounting system with self-balancing accounts that record cash and other
financial resources, together with all related liabilities and residual equities
or balances, and changes therein, which are segregated for the purpose of
carrying on specific activities or attaining certain objectives in accordance
with special regulations, restrictions, or limitations (Freeman & Shoulders,
1996).
26
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. Principles
of accounting that have substantial authoritative support. They represent a
consensus at any time as to which economic resources and obligations
should be recorded as assets and habihties, which changes in them should
be recorded, when those changes should be recorded, how the recorded
transactions should be measured, what information should be disclosed, how
the information should be disclosed, and which financial statements should
be prepared (Wilhams, Stanga & Holder, 1995).
HIGHER EDUCATION INSTITUTIONS. Institutions offering more
advanced academic courses of instruction to qualified applicants beyond the
high school level (Clark, 1987).
INTERNAL AUDITOR. Person whose responsibility it is to ensure
that the organization's assets are safeguarded, its accounting information is
reliable, it operates efficiently, and it adheres to management's policies
(Arens & Loebbecke, 1994).
INSTRUMENT. Questionnaire or survey designed to provide
responses from experiment subjects for the purpose of effect measurement
(Gay, 1992).
27
MANAGEMENT ACCOUNTING. System that measures and reports
financial information as well as other types of information that assist
managers in fulfilhng the goals of the organization (Horngren, Foster &
Datar, 1997).
MANAGEMENT CONTROL SYSTEM. Means of gathering and
using information to aid and coordinate the process of making planning and
control decisions throughout the organization and to guide employee
behavior (Horngren, Foster & Datar, 1997).
MANAGEMENT DECISION. Manager response to a situation
requiring resolution. A specific answer to an operational or strategic
question. (Brimson & Antes, 1994)
PERMANENTLY RESTRICTED FUNDS. Current funds that are
expendable but restricted by donors, grantors, or other outside agencies to
be expended for specific operating purposes only (Freeman & Shoulders,
1996).
PHILOSOPHY. A theory underlying or regarding a sphere of activity
or thought (Webster's, 1963).
PLANNING. Process of choosing goals and predicting results under
various ways of achieving those goals and then deciding how to attain the
desired goals (Horngren, Foster & Datar, 1997).
28
RESTRICTED FUNDS. Current funds that are expendable but are
either permanently or temporarily restricted externally to expenditure for
specific operating purposes (Freeman & Shoulders, 1996).
SINGLE CASE STUDY. Project that is analogous to a single
experiment in which only one case represents a critical test of the research
question (Yin, 1994).
TEMPORARILY RESTRICTED FUNDS. Resources that are
expendable but restricted for a specific period of time or until the
satisfaction of certain requirements by donors, grantors, or other outside
agencies to expenditure for specific operating purposes (Freeman &
Shoulders, 1996).
UNRESTRICTED FUNDS. Financial resources of the institution
t h a t have not been restricted externally and are expendable for any legal
and reasonable purpose agreed upon by the governing board in carrying out
the purposes of the institution (Freeman & Shoulders, 1996).
Summarv
In this chapter, the researcher has introduced the study for which
this proposal has been prepared. Significant detail has been provided to
familiarize the reader with the background of the subject; major
participants; problem and purposes; research question and statistical
29
hypotheses; need for the study; delimitations and limitations; assumptions;
and finally, a list of terms for which definitions have been provided.
The need for the consideration of ABC/M for application in higher
education is based largely on the demonstrated need for consideration by
commercial enterprises. This study and other empirical research further
clarifies the contribution ABC/M can make to higher education institutions
in the near and long term.
A considerable amount of authoritative literature on ABC/M has been
produced since the suggestion in 1988 that perhaps ABC/M data should
replace traditional costing data for internal management decisions. This
researcher reviewed 2,312 articles that have been written during the last
ten years, including popular press articles, journal articles, and research
articles. The next chapter will present the primary arguments, findings,
and conclusions from some of these sources in an attempt to trace the brief
history, to trace the variety of possible applications and benefits, and to
determine the effect of empirical research on the various aspects of this new
cost accounting system. Chapter III presents a more detailed explanation of
the methodology used along with a more complete explanation of the various
items of the prescribed agenda adopted for this study.
Upon completion of the experiment and the collection and statistical
analysis of the data. Chapters IV and V were prepared. These chapters
30
contain the findings of this research, interpretation of these findings,
conclusions supported by the findings, and recommendations prompted by
the conclusions.
I
31
CHAPTER II
REVIEW OF THE LITERATURE
AND RESEARCH
This chapter traces the development of the history of the both the
financial accounting and activity-based cost accounting systems as
presented in the extensive literature available. First the development of the
traditional financial accounting system is presented, then the ABC/M
system with comments on how the two systems are fundamentally different.
Historv of the Development of
Traditional and Activitv-Based
Costing/Management (ABC/M)
Svstems
Traditional System
Governmental and nonprofit (university) accounting and reporting
principles and standards have evolved separately from those for business
enterprises. Furthermore, unique principles and standards have evolved
separately for each of the several major types of organizations which are
subject to governmental and nonprofit accounting rules (Freeman,
Shoulders & Lynn, 1988). The governmental and nonprofit area of
accounting provides authoritative guidance for state and local governments.
32
nonprofit and governmental universities, hospitals, voluntary health and
welfare organizations, and other nonprofit organizations. Accounting and
reporting standards for most of the organizations listed above are now
within the jurisdiction of the Governmental Accounting Standards Board
(GASB); however, authority for establishing accounting and reporting
standards for private colleges and universities remains with the Financial
Accounting Standards Board (FASB). The present financial accounting
system h a s evolved from a rudimentary set of rather informal general
practices t h a t first appeared in publications as early as 1905. The sections
t h a t follow will trace the history beginning with the first attempt at
standardization in 1935.
Authoritative Sources of
Universitv Accounting Standards
Regional associations of college and university business officers
published the first writings constituting an attempt at standardization of
governmental and nonprofit accounting policies and procedures in 1935.
This was followed by a series of interpretive and advisory studies by the
American Council on Education (ACE) during the 1935-1942 period. A twovolume work. College and Universitv Business Administration, published by
ACE in 1952 and 1955 respectively, was the first authoritative publication
33
covering all areas of higher education business administration. A onevolume 1968 revised edition of College and Universitv Business
Administration (CUBA) found widespread acceptance in practice and in
academia (Freeman & Shoulders, 1997).
The Committee on College and University Accounting and Auditing of
the American Institute of Certified Public Accountants (AICPA) prepared
and industry audit guide in 1973 with the title. Audits of Colleges and
Universities. In the audit guide, CUBA was endorsed as the primary
authoritative source of generally accepted accounting principles; however,
the audit guide presented differing conclusions concerning several
important concepts suggested or supported in the CUBA guide. In an
a t t e m p t to achieve consensus on numerous matters related to higher
education accounting and reporting, the National Association of College and
University Business Officers (NACUBO) issued the third edition of CUBA
which dealt with financial accounting and reporting. In response, the
AICPA amended its audit guide to complete the reconciliation of differences
between the 1974 edition of CUBA and the audit guide (Freeman &
Shoulders, 1997).
In 1979, the FASB assumed responsibility for all accounting and
reporting standards for all colleges and universities. The standards
presented in the AICPA audit guide were designated as "preferable"
34
pending issuance of comprehensive, authoritative guidance by the FASB.
NACUBO replaced CUBA with its Financial Accounting and Reporting
Manual for Higher Education. The manual describes a comprehensive
system t h a t comphes with the audit guide rules. This loose-leaf manual has
become the "official" system for private institutions and has been widely
adopted (Freeman & Shoulders, 1997). The system suggested in this
manual is the source for nearly all of the information provided for financial
accounting (external reporting) and for managerial accounting (internal
analysis) purposes.
Financial Accounting
Standards Board
In 1984, the FASB-GASB jurisdiction agreement granted the GASB
authority of establishing standards for governmental colleges and
universities, but the FASB retained authority for private institutions. Since
1984, the accounting and reporting standards for the governmental and
private institutions have begun to differ. Recognition of Depreciation bv
Not-for-Profit Organizations (FASB Statement No. 93) requires private
institutions to report depreciation. GASB guidance to the governmental
institutions instructs those institutions not to change their accounting
practices to comply with t h a t statement. In addition, the FASB issued
35
Statements of Financial Accounting Standards (SFAS) No. 116 and No. 117
in 1993 which apply only to private institutions. The AICPA incorporated
the requirements of those SFASs in its 1996 audit and accounting guide for
private institutions. The audit guide is used extensively by independent
CPAs in audits of private colleges and universities.
For the present, the FASB approach to accounting and reporting for
higher education institutions will be followed. The subject institution for
this study complied with the requirements of SFASs 116 and 117 for the
fiscal year which ended May 31, 1995.
ABC/M System
Presented in this chapter is a somewhat overlapping, chronologically
imprecise history of the introduction and development of ABC/M. It starts
with the early beginnings (about 1988 to about 1992) during which time
business and the related professions became aware of the basic concepts
embodied in this new costing system. Those experiences are presented in
the section titled, "Conceptual/Awareness Phase of ABC/M, 1988-1992."
Some experimentation with systems similar to the ABC/M system occurred
as early as 1984; however, most of the experimental installations of ABC/M
systems were done during the period from about 1991 to about 1995. Those
installations are discussed in the section titled "Implementation/Trial Phase
36
of ABC/M, 1991-1995." Since from about 1992 to about 1996, as the
installations matured, both benefits and problem areas surfaced. Numerous
articles were written to describe the advantages and disadvantages of the
systems installed with suggestions for further enhancement and refinement
of those systems. Those comments have been included in the section titled,
"Evaluation/Modification/Enhancement Phase of ABC/M, 1992-1995." The
final phase presented is the section titled, "Adoption/Rejection Phase of
ABC/M, 1994-Present," which began in about 1992 and continues to the
present. The dates assigned to each section overlap and cannot be defined
as specific by a study of the available literature. The literature indicates
t h a t ABC/M systems that have been installed have, for the most part, been
continued. The reader should be aware that the researcher discovered no
report in the literature of an actual installation of an ABC/M system in a
higher education institution. Mr. Tom Pryor of ICMS, Inc., a consulting
company specializing in ABC/M systems, reports that the number of casual
inquiries about ABC/M from higher education institution officers has
increased in recent months.
Historically, accounting practitioners and organizations responsible
for authoritative accounting literature have systematically studied issues
with the objective of improving financial accounting reporting. More
accurate and usable accounting reports produce better financial decisions by
37
higher education administrators (Nagarajan, 1985). The economic impact of
financial accounting results, that are dependent on logical and accurate
accounting procedures, has played an increasingly important role in the
determination of Generally Accepted Accounting Principles (GAAP) since
the 1970s (Williams, Stanga & Holder, 1995).
These accounting procedures also provide information critical to
internal operational decisions. The success of management accounting
depends on whether managers' decisions are improved by the accounting
information provided to them (Horngren, Foster & Datar, 1997).
In the early 1980s, accounting and management experts began
suggesting that traditional management accounting information did not
provide accurate, relevant, and necessary data for managerial operational
and financial decision making. Two Harvard University distinguished
professors, Drs. Robin Cooper and Robert Kaplan, authored a number of
articles pointing out the failure of traditional costing methods to produce
accurate product (service) costs and supporting the consideration of ABC/M
as a replacement or complementary extension of existing systems.
38
Conceptual/Awareness Phase
of ABC/M. 1988-1992
The articles presented in this section deal with some of the basic
deficiencies of the traditional accounting systems that ABC/M purportedly
addresses. Reasons were given to justify the redesign of the traditional
system and other articles presented what the authors considered to be
inherent advantages of ABC/M over the traditional system.
Johnson and Kaplan explored the business environments of the
nineteenth and early twentieth centuries that influenced cost system design
during these periods. Advancement in cost measurement appears to have
ceased during the 1920s, while business environments have continued to
change. The emergence of vertically and horizontally integrated companies
and their impact on early cost systems were also examined. The last portion
of the book addressed the "lost relevance" of these old systems to new
business environments (Johnson & Kaplan, 1987).
In an industry context, knowledge of production costs on the part of
managers is of vital importance in regard to marketed products since
distorted product cost information can cause the firm to follow an
inappropriate and unprofitable schedule. However, despite the importance,
disagreement still exists about whether product costs should be measured
by the full absorption or by the variable cost method. Managers in some
39
firms t h a t were the subjects of a study expressed serious concerns about the
accuracy of their product costing systems. The systems studied used a twostage cost allocation system, yet seemed to have problems in the failure of
marginal costing and fixed cost allocations. Other significant areas in the
cost systems include transaction costing and long term variable cost. A
comprehensive product cost system should provide a better basis for
managerial decisions on pricing, introducing, discontinuing, and reengineering product lines (Cooper & Kaplan, 1988b).
Managers in companies selling multiple products are making
important decisions about pricing, product mix, and process technology
based on distorted cost information. What is worse, alternative information
rarely exists to alert these managers that product costs may be badly
flawed.
Most companies detect the problem only after their competitiveness
and profitability have deteriorated. Distorted cost information is the result
of sensible accounting choices made decades ago when most companies
manufactured a narrow range of products. Back then, the costs of direct
labor and materials, the most important production factors, could be traced
easily to individual products. Distortions from allocating factory and
corporate overhead by burden rates on direct labor were minor. The
expense of collecting and processing data made it hard to justify more
40
sophisticated allocation of these and other indirect costs (Cooper & Kaplan,
1988a).
Today, product lines and marketing channels have proliferated.
Direct labor now represents a small fraction of corporate costs, while
expenses covering factory support operations (marketing, distribution,
engineering, and other overhead functions) have exploded. But most
companies still allocate these rising overhead and support costs by their
diminishing direct labor base or report them as current period expenses,
such as marketing and distribution costs. These simplistic approaches are
no longer justifiable, especially given the plummeting costs of information
technology. They can also be dangerous. Intensified global competition and
radically new production technologies have made accurate product cost
information crucial to competitive success (Cooper & Kaplan, 1988a).
An ABC/M system can paint a picture of product costs radically
different from data generated by traditional systems. These differences
arise because of the system's more sophisticated approach of attributing
factory overhead, corporate overhead, and other organizational resources
first to activities and then to the products that create demand for these
indirect resources (Cooper & Kaplan, 1988a).
Once executives are armed with more reliable cost information, they
can ponder a range of strategic options. Dropping unprofitable products is
41
one, so is raising prices. Strategic options relating to high volume products
become possible. Information generated by an ABC/M system can also
encourage companies to redesign products to use more common parts.
Likewise, ABC/M can change how managers evaluate new process
technologies. With all of these advantages, ABC/M is not designed only to
provide more accurate information about production and support activities
and product costs, but also to provide information that management can use
to focus its attention on the products and processes with the most leverage
for increasing profits. Rather, it helps managers make better decisions
about product design, pricing, marketing, and product mix, and encourages
continual operating improvements (Cooper & Kaplan, 1988a).
When Maskell (1988) interviewed Kaplan, Kaplan expressed concern
that managers use financial accounting figures designed for external
reporting to make important decisions for which that data are unsuitable.
Kaplan believes that the main problem is the incorrect use of available data.
Another important issue involves the problem of product costing. If current
systems are unreliable, the accounting manager needs to design an entirely
new method of capturing and calculating product costs. Additional study is
needed to answer the objection that ABC/M produces so many activity-based
cost factors that it becomes too complicated to be of practical value.
42
In another interview, Kaplan discussed the need for a separate,
simplified management accounting system to help chief executive officers
make crucial management decisions. Traditional financial statements that
are prepared according to accounting protocols are flawed because of
incorrect calculations and the inappropriate assignment of overhead costs.
Managers are unable to tell what the actual costs are to produce various
products. Traditional accounting systems are biased in favor of growth and
incremental activities, when the way to increase profitability may lie in
downsizing or simplifying products. Companies currently add products
based on their incremental costs and incremental profits, when the changes
are actually much more t h a n incremental. For most management decision
purposes, all costs should be considered variable and a management
accounting system should track new ventures on a project-by-project basis
(Pearlstein, 1988).
In early 1989, Cooper suggested that industry cost systems need to be
redesigned if the following are true:
1. Functional managers want to drop seemingly profitable lines.
2. Profit margins are hard to explain.
3. Hard-to-make products show big profits.
4. Departments have their own cost systems.
5. The accounting department spends a lot of time on special projects.
43
6. The company has a high-margin niche all to itself
7. Customers do not mind price increases.
8. Competitors' prices are unrealistically low.
9. The results of bids are difficult to explain.
10. Vendor bids are lower than expected.
11. Reported costs change due to new financial accounting regulations.
Managers should make a comprehensive evaluation of their cost systems
every few years to determine if the above are true (Cooper, 1989).
By J u n e 1989, others were beginning to support the concept of
ABC/M as a needed measure to overcome the product cost distortion that
occurs in traditional systems when firms use a single volume related base to
allocate overhead costs to products. ABC/M is advisable if the existing cost
system is weak and the product diversity is low (Romano, 1989).
Activity-based accounting encourages management accountants to
analyze activities and determine their value to the customer. This type of
accounting can be used to assign corporate level costs to the business units
and provide operating business units with a great deal of autonomy. The
implementation of activity-based accounting begins with an analysis of each
function performed by staff members to determine if the customer needs
those services. For each activity that a department performs, resources
must be assigned, the cost must be determined, and the most significant
44
cost driver must be selected. Companies committed to total quahty
management will institute an ongoing process of continuous improvement
(Steimer, 1990).
An Australian author pointed out that the basic premise of ABC/M is
that it is the activities and processes performed within the organization that
add cost and value to the products and services produced. ABC/M collects
costs by activity and then allocates them using cost drivers, that is, the
factors t h a t cause costs to be incurred. The key difference between
conventional product costing and ABC/M is that ABC/M allocates costs to
those products t h a t actually cause the activity to take place. It can also be
used to calculate customer profitability (Dale, 1991).
A case for a new costing paradigm should include a statement that
being a low cost producer is now expected as the norm, and the basis of
competition has clearly shifted toward time based manufacturing.
Unfortunately, cost and management accounting systems have not kept
pace with this revolution. Cost accounting systems that produce data
needed to review the past and serve external reporting purposes are proving
to be ineffective tools for predicting the bottom line impact of a company's
actions. Much of the problem lies in the way companies analyze
manufacturing costs. The overwhelming emphasis on product costs alone by
users of cost accounting data often causes them to overlook the true factors
45
t h a t contribute to high manufacturing costs. Costs are seen in terms of
fixed and variable and costing methods assume that all variable costs are
proportional to some measure of volume, such as direct labor. A new
paradigm for cost management is needed. ABC/M, which focuses attention
on the cost of performing significant activities within a company, promises
to provide the basis of this paradigm (Flentov & Shuman, 1991a).
On a more positive track, by midyear, 1991, articles began to appear
dealing with the way ABC/M works and what these authors considered to be
the inherent advantages to the ABC/M approach. Flentov and Shuman
(1991b) concluded that the traditional approach to cost accounting was no
longer adequate and that ABC/M was the logical replacement system. The
ABC/M paradigm is based on the principle that it is not the products that a
company produces that generate costs but rather the activities that are
performed in planning, procuring, and producing products. Activity cost
pools directly show companies where they spend their money and where the
greatest potential for cost reduction may be found. Under ABC/M, an
effective method of cost cutting is to group activity costs into value-added
and non- value-added costs. A company can best avoid implementation
pitfalls by starting with a pilot program.
ABC/M proponents assert that the causes of profitability and cost in
most businesses are too complex to know or control by reference to financial
46
information recorded in traditional accounting records or reports.
Companies must manage financial results and track costs with information
about activities. ABC/M information does not necessarily help companies
achieve continuous improvement of globally competitive operations. In
contrast, cross functional activity cost analysis provides both strategic
product costs and relevant operational control targets in a form that does
not necessarily jeopardize a company's efforts to become a world class
competitor (Johnson, 1991).
ABC/M is rapidly becoming an accepted and practical tool for
management accountants to implement and maintain. Two critical elements
necessary for the success of an ABC/M system are: (1) involving people who
have a strong understanding of the operations of the business organized into
a project implementation team, and (2) making use of a practical and
structured technique of analysis (Sharman, 1991).
Walker (1992) suggested a further division of ABC (ABCII) when he
proposed attribute-based costing. This approach would provide for detailed
cost benefit analysis of customer needs aimed at improving effectiveness.
The focus of ABCII is on planning rather t h a n on analysis of past costs,
which have little impact. The aims for ABCII are to analyze costs and
benefits for products and services in detail by breaking customer needs into
47
the specific product attributes. Under ABCII cost analysis, activities should
be classified as infrastructure, discretionary, and operating.
In another article, the use of ABC/M in managing resources was
emphasized. Managers can use the ABC/M resource usage cost information
to: (1) monitor and predict the changes in demands for activities as a
function of changes in output volume and mix, (2) process changes and
improvements, (3) introduce new technology, and (4) change product and
process design. Managers may be encouraged to modify their use of
resources, in the short run, based on information about unused capacity
(Cooper & Kaplan, 1992).
The findings of an empirical study suggested that manufacturing
firms demanded the new accounting systems (ABC/M) to improve product
costing estimates and to measure more accurate product line profitability.
These findings supported the claims of "lost relevancy" of the conventional
accounting systems and reinforced the needs for accounting system changes
(Shim, 1993).
Wizdo (1993) suggested that ABC/M may be used to identify, analyze,
and manage costs and suggested the use of software as an important tool in
the utilization of ABC/M. ABC/M can meet the challenge of the changing
cost mix by determining two costs for each product, the expected cost and
the actual cost. Many successful companies are emplojdng ABC/M by using
48
software that can integrate these business functions, thus providing online
information in real time so managers can analyze current situations and
perform "what-if' analyses.
Porter (1993) expressed the hope that ABC/M may one day end a long
standing feud that exists between purchasing professionals and
accountants. For purchasing agents, the ABC/M mind set represents a
possible escape from traditional performance measurements. It represents
a method for attaching numbers to often intuitive sourcing strategies and
could galvanize the purchasing professional's metamorphosis from purchase
order processor to supply strategist. ABC/M may help accountants escape
the accusation that traditional cost accounting systems beget bad numbers,
bad numbers beget bad business decisions, and bad business decisions beget
failure. By thinking in terms of activities and by attaching a cost to each
activity, ABC/M yields a more accurate picture of product cost and product
profitability.
The persuasive arguments made by both scholars and practitioners
that were presented during the years when the concept of ABC/M was being
developed, slowly began to convert some financial traditionalists over to the
position of giving ABC/M a trial, often as a pilot study. Therefore, this
researcher has given the next period in the historical development of ABC/M
the title of the "Implementation/Trial Phase."
49
The literature does not indicate any attempt by academicians or
practitioners to apply as a comprehensive system the concepts of ABC/M to
institutions of higher learning within this period. A number of articles
appear during the next phase which discuss the implementation of ABC/M
to various organization types including service industries. Literature about
the implementation of ABC/M in higher education institutions was
noticeably absent; however, the consideration of the problem areas
associated with use of the traditional accounting system and the
contribution that ABC/M could make began to be reported.
Implementation/Trial Phase
of ABC/M, 1991-1995
Actual implementation of ABC/M occurred, often on a pilot study
basis, by a variety of commercial enterprises that represented a variety of
industries, by governmental agencies, and by nonprofit organizations such
as hospitals and other health care providers. Implementation in an actual
higher education institution was not found. In the initial stages, the
literature provided suggestions for applicability to entire industries.
Smith (1989) researched some private institutions with full-time
equivalent enrollments of about 2,000 students for the purpose of
determining the extent to which indirect cost allocation methodologies were
50
utilized. He found that as full-time equivalent enrollment increased, more
institutions implemented indirect cost allocation methodologies.
Literature applying ABC/M to higher education institutions is
severely limited. Only empirical studies dealing with universal problem
areas of higher education administration could be located. Chamberlain
(1990) surveyed groups of higher education financial report users concerning
the usefulness and accessibility of selected outcomes information. In
general, the groups perceived the information to be useful but not always
available. They felt that inclusion of nonfinancial data would enhance their
use of college and university reporting.
The concepts of ABC/M can be applied to service organizations in
which labor is paramount. In contrast to traditional product costing
techniques, ABC/M attempts to identify the reason for the existence of
overhead items. Overhead is allocated to the cost object based on the
volume of its cost driver. ABC/M could allow the organization to
concentrate on the individual cost drivers and address overhead by
eliminating or reducing the true cost of the overhead (Chaffman & Talbott,
1991).
Some specific examples of industry ABC/M implementation are
provided by the literature. Perhaps the earliest example of ABC/M in
history is Perkin-Elmer Corporation of Norwalk, Connecticut. In 1984,
51
financial executives at Perkin-Elmer decided their cost accounting system
needed an overhaul. The world's leading maker of analytical instruments,
Perkin-Elmer was on the cutting edge of technology, but the company's cost
d a t a were masking inefficiencies. The financial group set out to revamp the
cost accounting system. Without reahzing it, Perkin-Elmer had taken the
first steps toward ABC/M. Starting with the basic premise that activities
(not products) generate manufacturing costs, the company formed crossfunctional teams to identify cost drivers which are responsible for the
various ways in which activities create a demand for resources. Since
implementation, parts lists have been reduced leading to greatly reduced
inventories and materials handling requirements. Working with fewer
suppliers cut the company's procurement costs. Perkin-Elmer has
subsequently completely implemented their ABC/M system (Haavind, 1991).
In the governmental area, perhaps the agency that was first to see
the advantages of ABC/M was the Department of Defense (DOD), along
with the companies that serve as major contractors for the DOD. ABC/M is
helping bring a new era of contractor and government cooperation. Cost
competition among contractors is intensifying as a result of changes in the
DOD procurement policies and current global politics. Hughes Aircraft has
evolved its systems carefully over a period of five years, thereby allowing
local auditors to grow and learn with the company as equal partners. In
52
essence, this transition recognizes that activities rather than products are
the absorbers of cost. The company's goal is to obtain accurate product cost
information. The full implementation of ABC/M in a DOD contracting
environment will require accounting changes (Haedicke & Foil, 1991).
A $100 million per year plumbing fixture manufacturer had a
vertically integrated 720,000 square foot factory in which the company
manufactured an enormous number of product permutations. These factors
resulted in a large overhead structure that was responsible for almost 60%
of the cost of goods sold. When the company became unprofitable, it decided
to conduct a manufacturing study to reduce costs and improve profitability.
The firm could not be competitive in all of the diverse manufacturing
processes it performed. Its current labor and depreciation based cost
allocation system would not support accurate make or buy decision making.
The firm's manufacturing operations had to be recosted. The ABC/M system
that was developed accumulated overhead costs into two pools, elements
driven by volume and elements driven by transactions. The company
succeeded in implementing both product line reductions and manufacturing
configuration changes (O'Guin, 1990).
Cal Electronic Circuits, Inc., a manufacturer of printed circuit boards,
implemented an ABC/M system after careful planning and analysis. The
implementation process involved five major steps. Having the accountants
53
involved from the beginning of the process ensured consistency in the
planning and implementation of the ABC/M system. The soundness of the
cost driver standards of Cal Electronic Circuits is reviewed periodically and
variance analysis is used to isolate areas that require attention of external
and internal auditors (Lee, 1990).
Gary Cokins, a manufacturing consultant for Electronic Data
Services, Inc., provided us with another example of the large semiconductor
division of the $3 billion in sales Harris Corporation that had an operating
loss of $103 million on sales of only $741 million in 1991. The managers
could not tell which product lines were responsible for the big losses because
the division was using an outmoded cost accounting system. In December,
1991, Harris Semiconductor joined the ranks of Hewlett-Packard, General
Electric, Hughes Aircraft, and scores of others using a revolutionary new
costing method (ABC/M). The benefit of ABC/M to Harris Corporation was
primarily in the area of cost behavior, production efficiency, and cost
accuracy, the areas they targeted the system to address (Montgomery,
1992).
The Best Baking Company has implemented an engineered costs
system. This method establishes a formal or engineered analysis of
resources necessary to build a product (a standard cost ABC-type system)
and then applies costs to the quantity of each resource. An engineered cost
54
system can eliminate the burden of superfluous exercises, allowing financial
professionals to redirect their effort to more relevant activities and to make
a more direct contribution to the financial success of their companies
(Mager, 1993).
The most comprehensive compilation of case studies found involving
ABC/M came from the experience of the consulting arm of Arthur Andersen,
an international accounting firm. These case studies provide us with
significant insights into the difficulties and rewards encountered in
implementing ABC/M in large national or international corporations (Player
& Keys, 1995).
Since competition has forced public electric utilities to make the
transition from cost-plus to "sink or swim," increasing numbers of them are
examining fundamentals of their business operations. They are finding that
traditional accounting methods, specifically cost accounting, serve only to
meet the financial reporting needs of regulators and not the needs of utility
managers who must run the business. An ABC/M system, however, enables
managers to look at resources in a different light. Activity management
encourages accountants and management to concentrate on how resources
are used. Activity management specialists aim at process improvement,
enhanced productivity, and streamlining. In many ways, the use of ABC/M
facilitates today's intense focus on re-engineering by providing a measurable
55
context for the evaluation of utihty business processes as candidates for
transformation (Briody, 1994).
Rao (1995) emphasizes the importance of specialized computer
software in implementing ABC/M. Important features that should be
present in the software selected include customer support, training
programs, and educational materials.
The graphic arts industry offers a good example of why traditional
costing methods no longer are effective. Traditional costing systems can do
more t h a n just throw off estimates and pricing. The misleading figures they
generate often cause printing and graphic arts firms to go after the wrong
business or even to lose money on unprofitable jobs they think are
profitable. The drawbacks of traditional costing methods have led to the
development of ABC/M, a new costing concept. ABC/M provides information
t h a t helps printing shops to better cost, market, and compete because it
relates to specific tasks. ABC/M amounts to measurement that can be
quantified that associates the cost of an activity with the consumption of the
cost (Wiersema, 1996).
Since no known comprehensively applied installation of ABC/M
exists in a higher education institution, instances of implementation
presented in this section and the suggestions for evaluation, modification,
and enhancement presented in the following section relate to other service.
56
manufacturing, and merchandising organizations. The suggested
improvements, if apphcable to the situations presented, could logically be
appropriate for ABC/M systems to be designed for higher education
institutions.
Evaluation/Modification/Enhancement
Phase of ABC/M. 1992-1995
The National Health Service in the United Kingdom, during the
1980s, was evaluating ABC along with the statistical approach to cost
accounting. While not reaching a conclusion as to the relative superiority of
one over the other, they determined that the statistical approach appeared
to have required fewer resources to implement (Holford, 1987).
Ostrenga (1990) closely aligns ABC/M with Total Cost Management
(TCM) in an article. Based on the experience of Ernst and Young (CPAs) in
applying the different principles of TCM for large and small companies from
discrete to process manufacturing, the central theme that emerges is that
activities are the focal point of TCM. The only effective way to reduce costs
is to manage resource consuming activities through their driver
relationship.
Perhaps the best description of the positive results of ABC/M t h a t
have become apparent came from an interview of Cooper and Kaplan in
57
1991 by Alfred King. Without expanding on the specific advantages. Cooper
and Kaplan enumerated several that include the following:
1. An ABC/M system provides managers with a better understanding
of the way profits are generated at both the product and the customer level.
2. Very positive results have come from the use of ABC/M cost
analysis used in conjunction with process improvement.
3. ABC/M results validate the savings from successful cost reduction
programs.
4. ABC/M promotes improved design for manufacturing programs.
5. ABC/M provides data that may result in the elimination of some of
their low volume customers from whom they cannot get price increases.
6. ABC/M triggers actions, but by itself does not cause savings to
occur.
7. Some benefits of ABC/M cannot be quantified. For example, some
managers have reported that the ABC/M cost information provided a much
better language for everybody to use in his/her everyday discussions.
8. ABC/M has had a profound but invisible effect on the profitability
of the firm.
9. ABC/M allows managers to see both how much of available
resources they are using and the economics of excess capacity.
10. People in service organizations should not hesitate to look at
58
ABC/M as a technique and a tool for continuous improvement. In the really
successful implementation, the ABC/M system is owned by everybody. It
h a s become a business system, not an accounting or financial system (King,
1991).
The first phase of a continuous improvement cycle involves training.
encouraging employees, and integrating the cost-management process
within the existing management structure. Activity analysis presents
managers with the opportunity to reduce costs by eliminating the
inefficiencies and freeing up resources associated with wasteful or nonvalue-added activities. Process analysis focuses on eliminating waste within
an organization by continuously improving the way work is performed. In
the next phase, opportunities to reduce non-value-added activities or to
optimize value-added activities are identified. With the implementation of a
continuous improvement cycle, responsibility centers may have to be
redefined. Each cost center can then be evaluated on the basis of newly
developed, activity-driven performance measures (Convey, 1991).
Greenwood (1991) extended the value of ABC/M costing which
supports strategic decision making with respect to product and customer
decisions by designing a conceptual model for directly evaluating process
cost information in support of continuous process improvement initiatives.
A unique feature of the model is that it considers the nonlinear or step
59
function capacity profiles in determining the actual impact on resource
spending of alternative process configurations.
Aims designated for any ABC/M system include at least two goals.
The first is to improve the value received by customers. The cost of poor
quality may be revealed by building in the ability to analyze activity centers
for non-value-added tasks. The second is to improve profits by providing
better value. Indeed, improving quality is the sure way to reduce cost.
Improving quality involves doing it right the first time and by working on
reducing cost drivers that cause errors. Paradoxically, reducing cost the
ABC/M way almost always improves quality (Turney, 1992).
Schiff (1992) suggested that companies that are concerned with cost
containment, the marketing concept, zero defects, or reducing cycle time
should consider employing advanced cost management techniques such as
ABC/M. He cautioned, however, that the answers to certain questions of
company-wide involvement should be obtained before embarking on any
implementation project.
Best (1992) developed a framework for examining proposed
uniformity in the ABC/M information systems in the computer
manufacturing operations of Hewlett-Packard which may be more generally
applied. The conclusion was that when multiple information systems are
utilized by higher levels of management, the imposition of a level of
60
uniformity on the ABC/M systems might create operational decision
tradeoffs t h a t must be evaluated prior to implementation.
Internal auditing can contribute to the success of ABC/M through
several types of improvement. Perhaps the most valuable contribution
internal auditors can make is to provide feedback to upper management and
operating managers in a positive manner by highlighting the value-added
n a t u r e of their activities (Ray & Gupta, 1992).
ABC/M derived business costs are not being integrated with general
corporate accounting systems to support general ledgers with inventory
valuation and variance reporting. ABC/M derived cost data should be
recorded in the general ledger at the activity level, negating the need for two
cost accumulation systems. A single ABC/M cost accumulation and
reporting system can produce costs that are more accurate than their
counterparts derived by traditional systems, and can be used by more
managers for more business decisions (Thilmony, 1992). Christensen and
Demski (1995) isolated non-volume cost drivers as one of the major
strengths of ABC/M.
The application of activity-based approaches to cost management
continues to evolve away from just product costing. A further development
was described where the cost object was the business process t h a t served as
an aid to process improvement. Treatment of the business process as the
61
cost object resulted in an activity map. The result of activity mapping was
the consideration of alternative ways to redesign the process for continuous
improvement (Morrow & Hazell, 1992).
Managers of companies that espouse total quality management
(TQM) have not yet come to terms with the new ways of thinking and new
ways of doing business frequently described as a paradigm shift. One
example of a paradigm shift is the use of ABC/M, which gives companies
better product cost information by distributing indirect costs to products
more reliably t h a n traditional cost accounting systems once did (Johnson,
1993).
Dr. Charles Horngren, the Edmund W. Littlefield Professor of
Accounting, Emeritus, at Stanford University, is one of the most widely
recognized authorities in management (cost) accounting. He expressed his
belief that although both techniques will evolve further, ABC/M together
with TQM and continuous improvement will be around for some time
(Jeffries & Hankes, 1994).
ABC/M has the potential to provide improved insight into the
relationship between a firm's costs and products and, thus, a more
meaningful assignment of costs to products. Despite this, however, ABC/M
h a s not yet made the transition from being a cost management tool to being
the foundation for financial accounting and external reporting. Better
62
approximations of long run variable costs are provided by ABC/M, but it is
not clear t h a t ABC/M costs are fully compatible with existing accounting
standards. The persistence of dual systems perhaps illustrates the
suggestion by Kaplan that one cost system is not enough. These issues
suggest t h a t if costs derived under an ABC/M system are to be used in
financial statements, they may need to be restated in a form more suitable
to the requirements of external reporting (Hartnett, Lowry, & Luther,
1994).
Some have come forward to question whether ABC/M lives up to its
billing. Keegan and Filer (1994) contend that ABC/M is a technique, not a
system, but concede that when used effectively ABC/M is an effective tool of
management, supplying insights to guide product strategy. One limitation
of ABC/M is t h a t the nonintegrated nature of an ABC/M analysis limits its
usefulness. They feel that integration into the formal system of reporting
will be required for ABC/M to achieve universal acceptance.
A company must be led from within and be driven by continual top
management support to improve. The drive to strive for better and better
performance must be in the culture of the organization if it is to succeed.
The role of ABC/M in continuous improvement initiatives is both to
prioritize and quantify improvement opportunities and, when the
improvement has been achieved, to measure the results in financial terms.
63
^
In this way, the organization benefits from being able to leverage hmited
resources and derive positive reinforcement of improvement activities.
ABC/M can create additional leverage in a continuous improvement
environment (Collins, 1994).
Since organizations tend to grow, the behavior of costs tends to be
deduced from conditions of rising total costs. For instance, a cost driver is
defined as that which causes another rise in a step cost. The point is that
the relationships deduced on the upswing may not be the same on the
downswing. Indeed, the old adage is that costs tend to be variable on the
way up but fixed on the way down (Schwan, 1994).
By this time, the concept of ABC/M had been articulated in articles
and in other writings. This new costing system had survived the trials of
implementation in a large number of commercial organizations;
demonstrated its practicality; and in many cases, proven its superiority as a
cost accounting system for manufacturing and service organizations. The
next period provided evidence that ABC/M systems were being adopted in
growing numbers.
64
Adoption/Rejection Phase of ABC/M.
1994-Present
The National Health Service of the United Kingdom (UK) has
continued to study the development of a management accounting system
within a major UK hospital. As a result of this pilot study, the district
extended the scope of the system with the view to meeting national
demands for information. Management accounting systems in the Health
Service are geared to budgeting and budgetary control. Two of the areas
t h a t were explored in management information systems include Mediscreen,
a commercially available database package and Mycin, a medical diagnosis
program. Patient based costing systems received attention because of the
weakness of functional budgeting in determining responsibility for
controlling costs (Holford & McAulay, 1987).
In the United States (US), there are now hundreds of installed
ABC/M systems in a market that is much more mature than the market of
the United Kingdom. The experience of ABC/M in these companies
represents a valuable test bed for UK organizations that may be considering
ABC/M systems. What is already apparent, however, is that barriers to
ABC/M's use are fast being removed, perhaps even for colleges and
universities (Anonymous, 1991).
65
p
While ABC/M is rapidly gaining acceptance as a management
accounting technique and as a strategic decision making tool, controllers
will need to develop multiple cost models tailored to the different decisions
managers face. An output-based cost estimation model is suggested
(Bartley & Jensen, 1991).
ABC/M systems provide valuable economic information to companies,
especially companies active in process improvement and customer
satisfaction programs. However, ABC/M information is certainly not the
only data managers need to survive and prosper in a competitive
environment. To be successful, companies are learning how to integrate
ABC/M information with other information on revenues, customer
preferences, process quality, and cycle times (Kaplan, 1992).
An in-depth field study explored management control and accounting
systems in the transportation industry. Major findings were the
pervasiveness of the influence of marketing activities over management
control and accounting system features, and the strong belief of the persons
interviewed t h a t this influence was a major contributor to the success of the
competitive strategy. The results indicated a pattern of extensive use of
ABC/M accounting information to support marketing activities such as
planning and pricing. Traditional use of accounting output measurements
for control was limited to cost control in operations (Cunningham, 1992).
66
Collaborations among managers, practitioners, consultants, and
academics have produced the conceptual development of approaches to
improve the practice of management accounting. An important aspect of
ABC/M h a s been the benefit that accountants obtain from the process of
increased dialogue with other functional staff that is necessary in the
process of ABC/M design and implementation. Even though ABC/M has
produced invaluable progress, the need for improved methods of
performance measurement and a better understanding and costing of
business processes still remains on the management agenda (Davies &
Sweeting, 1993).
Having an array of unit cost measures from which to choose often
confuses managers. However, all of these measures are important because
they present different perspectives on costs. In addition, many unit cost
measures have unique applications associated with them. The most obvious
application is product life cycle pricing. In performance measurement,
ABC/M clearly is the superior system because it ties in with general ledger
expense. Therefore, it has credibility with product managers. Capacity
planning is another application supported well by ABC/M. In budgeting,
the intuitive nature of ABC/M is especially helpful. The authors
differentiated strategic ABC/M information as the current best estimate of
67
the future costs. Simple ABC/M involves the historic costing of products and
processes (Yang & Wu, 1993).
The IBM experience with ABC has provided us with a remarkable
success story about the accuracy of product costing, but it also demonstrated
the potential ABC/M has to cause labor problems. The most threatened
proved to be middle managers. This is a somewhat puzzling development
because it has been assumed that one reason the Japanese are not
enthusiastic about ABC/M is that it ultimately threatens the power and
freedom of the top managers in the hierarchy by giving the people below
more power to question the executives (MacErlean, 1993).
The literature in this section to this point has presented how ABC/M
has been accepted in two service industries for customer satisfaction
improvement and for marketing enhancement. Other purposes for which it
had found acceptance include: (1) strategic decision making, (2) staff
collaboration, (3) performance measurements, and (4) decisions dependent
on accurate product costs. Despite the caution that integration with
existing financial accounting systems must be achieved, the barriers to the
adoption of ABC/M were quickly disappearing. Many of those areas where
ABC/M systems have found acceptance are logically similar to higher
education institutions for application of ABC/M systems.
68
Many of Johnson and Kaplan's 1987 assertions concerning the
deficiencies in information produced by traditional accounting systems have
held, for the large part. Practitioner designed accounting systems gave
preference to the dominate need for accurate, consistent external reporting
(financial statements), and accounting academia supported that emphasis.
This almost total emphasis on financial accounting inhibited the
development and spread of cost accounting knowledge. However, there were
always individuals who never lost sight of the various roles of cost
accounting and the necessity for a cost system to produce different costs for
different purposes for managerial decision making. Fundamental to a good
cost system were departmentalization of the organization and a
commitment to continuous cost research. Future research must include an
examination of the records of individual firms and explorations of specific
industries to include colleges and universities (Vollmers, 1994).
Baker (1994) reported that ABC/M is popular now and will continue
to be popular for quite some time because it does not interrupt the financial
accounting model. It may be operated as a complementary, supplementary
system to the traditional financial accounting system.
When the somewhat problematic implementation process of ABC/M is
successful, ABC/M may be able to help teach management how to
proactively manage organizations of all types, including public and private
69
colleges and universities. Management will have an additional tool to
improve internal processes and establish pricing strategies and performance
measurements. ABC/M is the competitive advantage needed to make
quicker, more effective management decisions in the increasingly
competitive marketplace in which colleges and universities operate (Arney
& Sorice, 1994).
Acceptance of ABC/M has not always been unequivocal. One author
felt that managers should exercise caution when it comes to adoption of
activity-based approaches. Performance improvement opportunities do
certainly exist, but these do not materialize automatically. Any activitybased approach may be associated with quite large costs for measurement.
Therefore, it is important to define clearly the purpose of the approach and
to let the obtaining of activity information match this purpose. Far too
many activity-based projects have been initiated with vague insights about
what such an approach means (Borjesson, 1994).
An empirical research study found that ABC/M-assisted companies:
(1) made better bid selections, (2) used overtime or subcontracting more
effectively, and (3) minimized under/over allocation of overhead costs. Also,
ABC/M made it possible to achieve more accurate project costs t h a n with the
traditional method. Additionally, it was found that modeling an activitybased costing system was highly desirable. Activities should be defined as
70
processes to make it easier to use ABC/M for process analysis. ABC/M more
accurately reflected project costing than poohng all overhead into one
nonhomogeneous cost pool (Mansuy, 1996).
Two approaches have been taken in the design of software that allow
managers to produce the ABC/M information they need. They are cost
decomposition and process modeling. In developing ABC/M using a process
model, the first step is to determine the key activities to be examined and
the cost objectives that drive those activities (WilHamson, 1996).
Once the domain of US corporations, activity-based accounting is now
gaining popularity throughout Latin America and Europe. The one holdout
seems to be J a p a n . In theory, ABC/M works like x-ray spectacles for the
corporate set; the user looks at the world through activity-colored glasses
and the inner workings of a company magically appear (Goff, 1996).
Australian manufacturing firms have been slow to adopt the world's
best practice cost management techniques. This is somewhat surprising in
light of the amount of popular attention ABC/M has received in Australia.
Among the firms t h a t had adopted the management system, there was
almost unanimous agreement that objectives were achieved. This is fairly
u n u s u a l for any administrative system innovation. The main problems
identified in ABC/M implementation were the large amount of work
involved, other priorities, lack of staff time, the design of the more complex
71
m
ABC/M system, and the tracing of cost drivers to products. However, a large
number of firms that have previously rejected ABC/M have indicated a
willingness to consider introducing it a later date, and a number of those
which are still considering it had indicated they were likely to introduce it
within the next twelve months (Anonymous, 1997).
A sound, normative argument has been presented for the adoption of
ABC/M as an effective managerial support tool that is essential given
current international competition. The linkages among cost variables and
their interactions with decision making take on a new clarity with ABC/M
that was not apparent with the traditional cost accounting techniques. As
US-based organizations continue to expand into international markets, the
ever increasing complexity of their environment has necessitated the need
for accurate association between activities and costs that lead to more
accurate and relevant information. Historically, managerial techniques
developed in this country have been adopted, perfected, and used
successfully by international competition (DeZoort, Rosetti, & DeZoort,
1997).
Several examples of total or conditional acceptance of ABC/M for a
variety of accounting and management purposes has been presented in this
section. In the next major section, the future of ABC/M for business and for
higher education will be explored. The thoughts and sometimes predictions
72
of various authoritative authors are presented in three subsections
beginning with: (1) some possibilities for additional uses of ABC/M in new
applications, (2) theories for variations in the basic design of ABC/M, and (3)
various approaches to ABC/M that have been tried or have been suggested
for trial. Seventeen discrete possibihties for uses of ABC/M are presented
for commercial enterprises that could logically be considered equally
apphcable to higher education institutions. Three possibilities are
presented t h a t appear to have no applicability to colleges or universities.
Two additional possibilities refer only to college and university settings.
Possibilities/Theories/Approaches
for ABC/M Implementation
Possibilities Considered Equally
Applicable to All Organizations,
Including Higher Education
Institutions.
The experience of major corporations and other organizations that
have used ABC/M successfully shows that ABC/M techniques are gaining
credibility in the manufacturing sector and more recently in the service,
government, and nonprofit sectors. Some examples of the possibilities for
application of ABC/M in all of these sectors are presented in this section to
demonstrate flexibility inherent to this new system.
73
The development of ABC/M may be attributed to certain very
practical factors including the needs of financial reporting and the
competitiveness of all markets. ABC/M is concerned with all overhead costs
and it recognizes the complexity of the business through the use of multiple
cost drivers. ABC/M provides meaningful product cost and profitability
analysis information (Jeans & Morrow, 1989).
One of the less anticipated applications of ABC/M is its use in capital
asset investment analysis. This application reveals a number of distinct
advantages over more traditional capital asset analysis and justification
methods. The most significant advantage is the ability to reduce the
uncertainty surrounding major capital investment decisions. This is
accomplished by identifying a comprehensive base of activities on which the
impact of the investment decision can be measured in the short term and
over the life of the investment. It is this holistic view of the activity base
that enables the decision maker to:
1. Identify high impact investment activities. This assessment
includes an exhaustive evaluation of both non-financial and financial
benefits to a company.
2. Evaluate expected impacts by function and organization and
identify the cost necessary to achieve that result.
74
3. Formulate plans and perform iterative risk assessments to identify
the most robust alternative.
4. Integrate the selected alternative into a cost management
framework, using the same activity base, to ensure that projected benefits
are achieved (Brimson, 1989).
Cost leadership and cost effectiveness are critical elements of
business competitiveness. ABC/M permits management accountants to act
as internal management consultants, giving them the responsibility to look
inward. Properly used, ABC/M could aid the Western world in its endeavor
to overtake the Japanese in vital areas of business (Sharman, 1990).
In additional to the more common use of ABC/M to provide accurate
product cost, it has been suggested that ABC/M can be used successfully in
both resource allocation decisions and in cost control by variance analysis.
However, the use of ABC/M for resource allocation could mean less than free
cooperation from managers during the analysis; and the calculation of shortterm variances must be handled with sensitivity (Dugdale, 1990).
A major cause of the higher cost of many manufactured products is
the major cost of marketing functions, including physical distribution
activities. ABC/M principles can be applied in an attempt to trace
marketing costs to product lines and territories in order to measure
profitability- An example illustrated that marketing costs, particularly the
75
costs of physical distribution, are a major factor in worldwide competition
and should not be ignored in discussions of performance measurements and
integrated cost systems such as ABC/M (Lewis, 1991).
Efficiency is a measure of the relationship between resources
consumed and outputs or outcomes achieved. Cost per unit of output or
outcome is one such measure, giving management an idea of resource use.
Since most program costs are fixed, the cost per unit of output will decline
as more clients are served. Measurements of efficiency for non-profits must
also be compared to some criterion, an achievable target predetermined by
management. If ABC/M is used, non-profits will significantly improve
measurement of a program's full cost and efficiency (Tishlias, 1992).
ABC/M has a weak point. It may correct deficiencies in comparing
resources consumed to ultimate products, but it mixes fixed and variable
costs. A refinement, which entails keeping fixed and variable costs separate
throughout a firm's cost accounting structure, can make an ABC/M system
more useful for line managers. Separating these costs allows managers to
apply the proper techniques to reduce waste by managing those aspects of
production capacity and process design (fixed) and of production methods
and practices (variable) t h a t are within their scope of decision. This
refinement in ABC can help a company minimize off line (ad hoc)
investigations and analyses (Woods, 1992).
76
It has been suggested that ABC/M be applied to hospital cost
accounting, especially in determining the standard full cost per service unit
provided by the hospital. By combining ABC/M with standard costing,
health care administrators may be able to better plan and control the costs
of health services that are provided while ensuring sound fiscal
management. Health care organizations that are facing shrinking revenue
sources and growing expenses may find that ABC/M can be a valuable tool
in controlling costs and making strategic decisions (Chan, 1993).
In another health industry application, ABC/M enabled a private
rehabilitation hospital to satisfy the insurance industry's changing approach
to reimbursement. The hospital, determined to find an easy, reliable and
fair method to ascertain the amount, mix and resulting cost of nursing
services consumed by individual patients, initiated an analysis project. A
team developed a simple but reliable data gathering instrument to capture
variable and unpredictable events and build a database. With the help of a
consultant and by utilizing ABC/M principles, the team produced a nursing
resource consumption model for the hospital. The new data, which showed
99% accuracy in validity tests, allowed the hospital to unbundle a previously
fixed cost allocation for nursing (Carr, 1993).
In another service company, British Telecom (BT), the fundamental
principle (cost causation) underlying its costing method states t h a t costs
11
m
should be apportioned on the basis of what caused them to be incurred.
BT's cost apportionments use a variety of nonfinancial data taken from all
p a r t s of the business. Many of the calculations are the same as they would
be under ABC/M, with the use of product complexity and product range as
apportionment factors. The unusual aspect of this example is that ABC/M
principles were employed at BT long before the term ABC/M was even
coined (Bussey, 1993).
As companies seek to cut costs in every nook and cranny of their
logistics operations, they are finding they need to measure hidden costs.
The solution is ABC/M. ABC/M calculates the costs of an organization's
activities based on the time and resources devoted to them. It then uses a
computer model of the company's economic activity to allocate those costs to
cost objects (customers and products) (Gooley, 1995).
ABC/M costing methodology and additional predictive methods were
employed to determine if ABC/M was effective as a tool for addressing
Information Resource Management (IRM) concerns within the workers
compensation insurance industry. The study found ABC/M was able to
provide results t h a t were later confirmed by IRM analysis (Arnett, 1994).
Application of ABC/M to the steel industry resulted from the need of
Southwestern Ohio Steel to improve the operations of its cutting line. The
line was approaching capacity and other approaches to increasing
78
«v
throughput on the line were needed. An ABC/M system to analyze and
justify manufacturing cycle time improvements was developed for the
company. On non-constrained operations, the relative size of ABC/M costs
and the extent of idle capacity provide useful clues for determining where
overall capacity reduction efforts would bring the greatest cost savings over
a long time period (Campbell, 1995).
As apparel manufacturers design and implement new services to
satisfy retailer expectations, their processes usually become more complex
and costs usually increase. Conventional costing methods do not properly
identify differences in the cost to serve. ABC/M, on the other hand, can be
used to analyze all of a company's costs in contrast to the manufacturing
cost orientation of conventional costing methods. The cost to serve
customers can be best calculated using ABC/M methods. A finished ABC/M
model will provide activity level costs which can be used as a basis for
decision making (Schnoebelen & Skillern, 1996).
ABC/M's application to credit union management has been described
initially as burdensome and unnecessary. However, when the industry
reahzed that only 40% of the cost data on which management decisions were
being made was accurate, ABC/M was revisited with renewed interest.
Implementing an ABC/M system was a challenging undertaking, one that
required a cultural change within the credit union. The largest obstacle to
79
r
overcome may be opposition from employees. Despite the challenges,
ABC/M can provide rapid, far-reaching improvement in an organization.
Accurate data provides management with hard and fast information on
inefficiencies, unproductive products or services, and waste that can be
reduced or ehminated to help control and manage the credit union's costs.
The value these benefits bring to an organization makes the challenge well
worth the effort (Cindrich, 1996).
ABC/M systems report accurate and timely cost information in a
business environment where competition is high and the company has a
diverse product mix. In addition, the information supplied by ABC/M can be
used for continuous improvement of the business. A cost accounting system
in a Finnish fish processing firm is quite a new phenomenon. ABC/M has
proved to be a very appropriate system in fish processing. In addition to
product costing, ABC/M is an indispensable tool for both activity analysis
and quality improvement purposes (Setala & Gunasekaran, 1996).
As rising costs impact managed care, a successful manufacturing
costing method is being applied to help managers make decisions on
contract bidding, cost containment, and organizational structure. In the
healthcare environment of the 1990s, accurate costing has become much
more important. ABC/M reflects one of the most significant advances in cost
accounting and is now being used in numerous health organizations.
80
including about 20% of US and Canadian hospitals. Application of ABC/M
in an independent, nonprofit, full service renal dialysis chnic has provided
the data needed to convert this clinic from a financial loser to a profitable
department (West & West, 1997).
Possibilities for ABC/M Not Applicable
to Higher Education Institutions.
Traditional cost accounting systems do not make the benefits of an
Advanced Manufacturing System (AMS) visible, nor do they provide signals
for management to plan for future investments. With the more accurate
and relevant measurement of manufacturing cost provided by ABC/M, the
economic behavior of an AMS system can be more reliably predicted without
losing the overall system perspective (Kim, 1994).
Traditional accounting systems have failed to match revenues and
expenses properly in a just-in-time (JIT) purchasing environment. JIT
manufacturing typically reduces merchandise inventory to insignificant
levels and groups machines according to product lines rather t h a n
operational functions. The definition of product costs is changing in the new
manufacturing environment. The ABC/M approach identifies the causeand-effect relationship as the basis for cost allocation. Once the costs of
activities are identified, the activities are traced to the products t h a t
81
consumed the activities. Costs are subsequently assigned to the products
based on their share of the activities generated. Thus, the company is in a
better competitive position because it can determine more accurately the
cost of its products (Gagne & Discenza, 1992).
The combination of two new technologies, bar coding and ABC/M, has
resulted in increased credibility of a manufacturer's cost data and is far less
burdensome t h a n manual record keeping. Bar coding technology can play a
key role in ABC/M systems by supplying data that are accurate, timely and
complete. However, many h u m a n factors are critical to installing such
systems and are often ignored during a system's design and implementation
(Tyson, 1991).
Possibilities Applicable Exclusively to
Higher Education Institutions
Instruction regarding the ABC/M model needs to be part of every
course in the cost/managerial accounting curriculum and in higher
education finance courses. Because ABC/M systems have multiple
objectives and impact on many other managerial functions, ABC/M concepts
should be presented early in the coverage of every cost/managerial course
offering. Then ABC/M should be tied into discussions of subsequent related
topics through occasional examples and assignments (Benke, 1992).
82
Dr. Lane K. Anderson, Ernst and Young Professor of Accounting at
Texas Tech University, provided this researcher with an interesting article
applying ABC/M in a hypothetical university setting, the only article of this
type t h a t was found. The authors contended that while applying ABC/M to
service organizations should not differ fundamentally from the application
of ABC/M in manufacturing firms, some creativity may be needed to make
the system work. They went on to describe three uses for ABC/M in a
university setting. First was the allocation of direct educational
expenditures among the academic units served. Second was that ABC/M
may be applied to university support units for cost management and
resource allocation purposes. Third, contribution margin financial
statements based on ABC/M can provide accurate data to determine net
excess of revenues over expenditures per credit hour taken by matriculated
students in the academic unit. The authors suggested that other purposes
also could be defined (Acton & Cotton, 1997).
As stated in Acton & Cotton (1997), application of ABC/M to colleges
and universities should not differ materially from application in
manufacturing organizations. The flexibility of the ABC/M system may
facilitate such diverse applications. Since ABC/M was introduced in the late
1980s, many theoretical ideas have been advanced dealing with various
aspects of ABC/M, primarily its implementation and benefits. The articles
83
presented in the next section were selected to illustrate the range and
variety of theoretical thought associated with ABC/M.
Theories That Influence the Design.
Implementation and Benefits of
the ABC/M Svstem
One article suggested that ABC/M information enables product costs
to be compared with each other based on their interaction with the cost
drivers. This is a task difficult, if not impossible, with traditional costing
methods (Gilhgan, 1990).
ABC/M analysis should be extended from product lines to channels
and locations or from brands to customers and regions. This flexibility
would enhance the ability to manage critical functions, which could have a
positive effect on profitability (Reimann, 1990).
One theory states that ABC/M does provide more relevant
information t h a n traditional product costing. However, it probably does not
provide more decision relevant information than a contribution (variable
cost) approach (Piper & Walley, 1990).
In another article, the authors discussed the applicability of ABC/M
to both variable costing and full absorption costing systems. It was stated
t h a t perhaps ABC/M should be modified to obtain variable activity-based
costs for most decision making purposes and full absorption activity-based
84
costs for reports to identify total resources consumed (Sharp & Christensen,
1991).
In an effort to support Opportunity-Based Accounting, another author
described ABC/M as a flawed concept as an accounting system. The
conclusion reached was that ABC/M offers nothing new to what accountants
had under traditional costing and, like any tool, it is only useful if used
carefully and well (Kingcott, 1991).
The underlying assumptions inherent in ABC/M should be evaluated
before ABC/M costs can be considered superior to traditional costs. The
theories presented regarding two of the many assumptions discussed in this
article are: (1) that costs in each cost pool are driven by homogeneous
activities, and (2) that costs in each cost pool are strictly proportional to the
activity. Those theories have not been demonstrated to be valid (Roth &
Borthick, 1991).
The author of another article presented the theory that homogeneous
data regression and other analyses should be used to identify the underlying
cost drivers. Also, for less homogeneous data, sampling may be used to
establish the underlying causes for differences from cost expectations.
Another theory presented is that whenever ABC/M is appropriate for
product cost determination, the same drivers should be equally relevant for
cost control applications (Malcom, 1991).
85
A company's strategic philosophy should strongly influence the design
of the ABC/M system cost pools and drivers. This theory is in marked
contrast to the usual criteria used for the cost pool and cost driver design
which involves homogeneity of the costs and the relation of the cost driver to
the costs. In addition, the need for process cost information should be
fundamental to the design of the system (Webster, 1991).
One article theorized that the real power behind the ABC/M approach
is in its ability to pinpoint and quantify cost reduction opportunities.
Process costing could be the real breakthrough associated with ABC/M
(Anonymous, 1992).
Delegates to the fifth ABC/M forum in Dublin, Ireland, debated
theories related to the effect on decision making that the frequency of
reporting may have. Some delegates felt that if activities were measured
monthly or more frequently, distortions would occur as volumes went up
and down. On the other hand, if a much longer timescale were used, there
was a danger of variations being merged or flattened out. No conclusion
was reported (Anonymous, 1993).
Much of the literature supported the theory that an ABC/M
implementation must be a team effort. One article, however, challenges this
theory by asserting t h a t initiating an ABC/M implementation is the
responsibility of the management accountant (Sharman, 1993).
86
A theory supporting process re-engineering as the key to lower prices
and a better image without increasing costs in the mortgage industry was
presented. ABC/M played a part in this idea in that it could be useful in
deciding which particular changes should be made to achieve lower prices
and a better image by assessing the activities that go into creating products
and services (Isaac, 1993).
It has been theorized that the relevant cost approach to management
decision making, as conventionally applied to short-term decisions, is valid
only so long as such decisions are unique. ABC/M can provide a useful
complement to the relevant cost approach (Kennedy, 1995).
One method for evaluating the suitability of control oriented
transactions is to compare the costs of controlling the quality of the good or
service produced to the cost of its material and labor inputs. The theory
presented in an article is that ABC/M has strategic importance to the
adoption of the methodology for accomplishing the control function (Stiles &
Mick, 1997).
Many of the theories presented in the above articles are presented by
the authors as suggestions for investigation. Some or all of them may be
valid for either commercial or higher education organization applications.
Considerable research is needed before the influence of them on ABC/M can
be established with a high degree of certainty. In the section t h a t follows,
87
practical operational procedures are suggested as approaches to broaden,
enhance, or simplify the implementation of basic ABC/M methods.
Approaches For Improvement to
ABC/M Methodologv
The ABC/M approach allocates costs to cost objects on the basis of
how the cost objects actually consume the activities. Other approaches and
modifications of the above approach have been proposed as improvements to
the basic ABC/M methodology.
With the Information Age, costs have shifted from the plant floor into
so-called overhead. The net result is that the traditional accounting
assumptions are inappropriate. Barnes (1992) strongly supports the use of
an appropriate computer system to handle the calculations involved in
ABC/M.
When studying an organizational structure in consideration of
implementing any costing system, including an ABC/M system, a detailed
analysis is required. For organizational departments, such as academic
departments, the choice of which technique to use in the analysis should be
guided by considerations of economy, accuracy, and credibility (Krueger &
Davidson, 1987).
88
The ABC/M approach opens up opportunities to set and monitor
budgets more effectively by taking into account the level of activity and the
nature of the cost variabihty of that activity. Further, such an approach can
provide a framework for understanding the linkage to the decisions that
cause cost activities to occur and those that determine the amount of
resource needed. In time, it is likely that the ABC/M approach to budgeting
and reporting will replace, rather than supplement, traditional cost
reporting when it comes to preparing the budget (Morrow & Connolly,
1991).
ABC/M can satisfy the ultimate goal of providing accounting
information from a completely integrated cost system that can easily
provide information for external financial reporting, product costing
decisions and operational control. This approach to using ABC/M systems
can accomplish this integration goal and can help managers and internal
auditors assess whether the company is performing the right activities and
performing them correctly (Tanju & Helmi, 1991).
One guiding idea of ABC/M is to regard all costs as variable and
susceptible to reduction or elimination. Another is that routine allocations
to determine product or process costs are to be replaced by a special studies
approach with attention directed to the activities in which costs are
89
occurring and the particular circumstances for which product or process
costs are being calculated (Aiyathurai, Cooper, & Sinha, 1991).
ABC/M needs to be approached as a major project requiring support
of the entire organization before implementation is begun. Three
cooperation resistance hurdles must be overcome in order to communicate
effectively the need for ABC/M. First, the perceived inadequacy of cost
accounting as a disciphne must be dispelled. Second, the lack of faith that a
new system will do any better than the old system must be addressed.
Third, the tremendous implementation costs of a new system must be
justified (Brausch, 1992).
ABC/M is designed to satisfy the additional demands of TQM.
However, maintaining cost data at the activity level involves, at least in
order of magnitude, more data than does cost center accounting. Thus,
ABC/M systems typically utilize a specially designed, computerized
approach (Gessford, 1993).
ABC/M approaches are likely to achieve the most substantive benefits
when there is a high degree of organizational complexity. The increased
complexity of the ABC/M approach may be more difficult for simpler
organizations to justify in terms of cost (Morrow & Ashworth, 1994).
Also, life cycle costing techniques are the foundation for allocating
environmental expenditures to products. The approach t h a t combines
90
ABC/M and life cycle costing can provide management with accurate
product cost information and, therefore, a reahstic understanding of
profitability (Kreuze & Newell, 1994).
Companies thinking of a just-in-time (JIT) inventory approach to
solve quality control problems and reduce work-in-process inventories may
need only a new cost management system like socio-technical systems
analysis (STSA). This system utihzes ABC/M for operational control,
outsourcing opportunities and target costing (Thomas & Mackey, 1994).
A new, less comprehensive approach to ABC/M has been developed
called Departmental Activity-Based Management (DABM). DABM reduces
the difficulty of changing to an ABC/M system by building upon a company's
current cost accounting system (Keys & Lefevre, 1995).
A different approach from the basically American ABC/M is the
French approach. The French unified costing system is volume based.
However, the costing system is supplemented in plants and factories by a
system of operational performance measures that are structured in a
"tableau de bord." The process for change is the key issue (Mevellec, 1995).
A variation of ABC/M, which views cost drivers at a far higher
activity level, facilitates management's gaining a richer and more robust
understanding of cost dynamics and eliminates the discord between
strategic and operational goals. This variation of the activity-based
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approach was developed to accomplish the reconciliation of strategic and
operational goals (Wong, 1996).
The approach that uses ABC/M to evaluate customer profitability has
been well documented. Customer satisfaction is a key issue as decisions
supported by the customer profitabihty analysis will relate to how a
business chooses to interact with customers in the future and how the
business chooses to produce the services necessary to support those
customers (Pearce, 1997).
Research in ABC/M
General ABC/M Research
ABC/M has been a subject of intense research interest. Several
doctoral dissertations have been written on various aspects of ABC/M and
its application to specific industries or organization types. A modest
number of journal articles have appeared to examine specific characteristics
of the ABC/M system. Many more articles have appeared in the popular
press in support of the idea of ABC/M. No empirical study could be located
that examines the applicability of ABC/M to an actual higher education
institution.
ABC/M is a promising tool that addresses some of the perceived
deficiencies of traditional cost accounting. The guidehnes that recommend
92
when to switch from traditional costing to ABC/M are general and anecdotal
in nature. Simulation models were used in a doctoral dissertation
experiment to identify the conditions under which ABC/M provides superior
strategic decisions as compared to traditional costing. Needy (1993)
examined three critical factors: (1) the type of manufacturing, (2) the
dynamics of the environment and (3) the product/network complexity.
Results indicate t h a t in a stable environment ABC/M outperforms
traditional costing for all manufacturing types. As stability declines,
ABC/M becomes less attractive and the performance differs depending upon
the manufacturing type and the product/network complexity. A traditional
costing system under-costs low labor products. As labor increases, the
under/over-costing varies depending upon the manufacturing type and the
volume (Needy, 1993).
ABC/M systems can be relatively inexpensive to implement.
Typically, they cost less, sometimes much less, than $100,000 and require
three people working full time for between four and six months (Cooper,
1991).
A survey of Chartered Institute of Management Accountants
members was conducted to explore their views and organizational policies
on ABC/M. The survey results reinforce the view t h a t ABC/M is a procedure
of widespread interest to practicing management accountants. Although it
93
is a relatively new phenomenon, almost half of the respondents in this study
were employed by organizations that had considered implementing ABC/M.
Most of the respondents were still involved in the assessment process;
however, a clear majority rejected it. Although the initial rejection rate
appears surprisingly high, it must be noted that 15 of the 17 organizations
rejecting ABC/M did so without any first hand, practical experience with it.
There also seems to be considerable uncertainty and some confusion about
ABC/M (Innes & Mitchell, 1991).
To determine the costs, amount of time, and benefits associated with
the implementation of ABC/M systems, managers from ten UK companies
t h a t completed an ABC/M implementation were interviewed. Six of the ten
reported no significant increases in operating costs of the system resulted
from the implementation of ABC/M. The time to implement required from
20 weeks to 52 weeks. All respondents stated that, as a result of ABC/M
implementation, more accurate product cost information had come to light;
70% admitted to improved management information (Bailey, 1991).
Since 1990, the American Accounting Association, the Governmental
Accounting Standards Board, and the National Association of College and
University Business Officers have each focused on performance
measurement and/or the identification of key financial and nonfinancial
indicators in college and university financial reports. A study was
94
developed as a rigorous attempt at the identification of key financial and
nonfinancial indicators of not only institutional performance, but also
institutional condition (Brown, 1992). Performance measurement is an
integral component of an ABC/M system.
The results of the study by Brown (1992) which was referred to above
were partitioned according to the type of judge (CEO or trustee) and type of
institution (private or public). In this way, a better understanding was
gained of CEOs' perspectives of the information needs of external users,
trustees' informational interests and possible differences in reporting needs
of private and public institutions (Brown, 1992).
Experimental data runs found very close conformance of the ABC/M
systems to a master costing system, increasing distortion and mix errors for
a marginal cost system, and a full absorption cost system, in that order.
The risk of experiencing a mix error with these systems was also estimated
by means of an incidence of error measurement. Estimated costs of system
setup and operation were derived for the systems under analysis. These
estimates revealed a relatively low cost for the full absorption cost system, a
moderate cost of the marginal system, and a relatively high fixed cost of the
ABC/M system (McLanahan, 1992).
In another investigation, three firms participated in an in depth
analysis of the association between their actual ABC/M adoption and the
95
firm's monthly accounting performance. Utihzing a time series analysis, a
transfer function for the ABC/M intervention was specified and the
statistical significance of the intervention was assessed. Of the three firms
visited, only one firm could be definitely classified as meeting the criteria of
a conventional ABC/M implementation. In this firm, the ABC/M
intervention yielded a positive and statistically significant difference in the
data gathered (Silvester, 1992).
A study by Ricketts (1992) used a laboratory experiment performed
interactively by MBA students on personal computers to examine the
students' preferences for fine versus coarse information systems. In this
paper, Ricketts (1992) argues that calls for multiple-based cost systems are
calls for finer information systems. Prior empirical research in this area has
contained mixed results regarding preferences of information evaluators for
finer or coarser t h a n optimal information systems. Ricketts' study extends
prior research by placing the experiment in a concrete cost/managerial
setting that removes much of the complexity of selecting information
systems. He examines whether the length of commitment associated with
the information system could account for differences in the choices made by
subjects. All subjects showed a preference for coarser systems. However,
the subjects in the multi-period group generally did better t h a n their
counterparts when measured against conventional benchmarks. The
96
differences between the two groups, however, were small and not
statistically significant. Subjects diverged further from the optimal choice
when the conventionally correct selection was the finer information system.
There was some indication that other ancillary variables might prove useful
for explaining subjects' selections of information systems (Ricketts, 1992).
A survey of defense and non-defense contractors was undertaken to
determine perceptions regarding the adequacy of contractor's cost
accounting systems. The survey results in this study indicated that defense
contractors' cost accounting systems were structured more toward achieving
financial and compliance reporting purposes than assisting in pricing,
product quality, innovation, performance measurement, or product
decisions. These findings show that present cost accounting systems and
practices may not adequately satisfy the fundamental need for valid,
reliable, and persuasive product line profitability cost data (Elmore &
Rezaee, 1992).
A study was based on empirical data collected from a manufacturing
site of a United Kingdom pharmaceutical firm after the decision to adopt
ABC/M was made. The author's analysis suggested that not only did the
perceived role of the accounting function within the enterprise change
following the adoption of the new costing technique, but t h a t the authority
97
and organizational power base of different line managers also shifted
(Bhimani & Pigott, 1992).
Another researcher examined management satisfaction with ABC/M
information. Interviewees reported a significant improvement in their cost
management systems following the implementation of ABC/M.
Organization characteristics, however, were not found to be good predictors
of satisfaction with ABC/M (Swenson, 1993).
Marsh (1993) sought to investigate the impact of ABC/M product cost
data on managerial decisions. Data were gathered by Marsh (1993) using a
mailed case scenario and questionnaire. The case scenario presented
competitor information, historical information, and product costs data about
a fictitious manufacturing firm that manufactured two products. The three
groups of subjects, who differed by the types and amounts of product cost
data received, answered questions on selling prices and special order
acceptance.
Explanations for the current lack of governmental management
accounting have emphasized the differences between the public and private
sectors due to government's nature and lack of profit motivation. Therefore,
an experiment was undertaken by Geiger (1993) in which a single, public
sector organization introduced a cost accounting system. The results of the
this research led to the experimenter rejecting the hypothesis t h a t
98
management accounting will not induce change in a public sector
organization. In this research it seems that management accounting
information prompted considerable change in management decision making
(Geiger, 1993).
Results in another empirical study suggested that: (1) use of ABC/M
was associated with higher returns on investment (ROIs), (2) that this
result was affected by the generic strategy the business unit pursues, and
(3) that the benefits of ABC/M usage increased with time. Specifically,
business units following a strategy of differentiation had significantly higher
ROIs if they used ABC/M. Those following a cost leadership strategy
showed no significant difference between use and non-use of ABC/M.
ABC/M was found to also interact with product structure. An increase in
the number of product lines was associated with lower ROIs, but the use of
ABC/M mitigated this effect. However, Frey (1994) found that the use of
ABC/M interacts negatively with the number of products produced and the
diversity of production volume, and was associated with lower ROIs as those
variables increased.
99
Research Applied to ABC/M in
Higher Education
The results of another survey described the use of ABC/M in UK
universities in 1994. Twenty percent of the respondents had made use of
this costing method, and were overwhelmingly positive about its benefits, in
particular its value in improving cost awareness in the organization.
Perhaps the most interesting result of this survey was that most
institutions viewed ABC/M as a tool for rational allocation of central costs to
academic departments, whereas the rationale for ABC/M outside
universities is in terms of merchandise inventory costing (Mitchell, 1996).
Cropper and Drury (1996) presented the results of research that
aimed to obtain a broad overview of the nature and scope of management
accounting in universities. Areas discussed included profitability analysis,
budgetary controls, performance reporting, and capital investment
appraisal. Against the backdrop of a rapidly changing higher education
sector and ever-increasing pressure to exact maximum benefit from scarce
resources, the management accountant in higher education must develop
new approaches in the provision of financial information. Senior academics
and managers have expressed concern over the amount of time diverted in
developing new allocation and control mechanisms and the inevitable
conflicts that have arisen where funding issues were concerned. The case
100
must be made that there is no inherent conflict between good accounting
practice and good educational provision. It is for the management
accountant to continue to ensure the financial health of higher education
institutions as they strive to meet the challenges presented in an everchanging environment.
Summarv
The development of the traditional accounting system designed to
meet the unique financial requirements of private, nonprofit higher
education institutions may be characterized as slow, deliberate, and
evolutionary. Based solidly on fund accounting, the changes have been
incremental and have preserved the integrated features of the system.
The single most notable event in this process was the publication of
NACUBO's Financial Accounting and Reporting Manual for Higher
Education. Guidance on nearly every possible situation, process, and
procedure is provided in this manual. Designed by KPMG Peat Marwick, it
h a s become the "official" system for private, higher education institutions,
and h a s been widely adopted.
The official system is the source for all of the information provided for
financial accounting (external reporting) and also for managerial accounting
(internal analysis) purposes. The chart of accounts follows the hierarchical
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form of the organization chart. The information produced within the system
focuses on who incurred the expenditures (the organization) and the nature
of the expenditure (the object of expenditure).
The primary purpose of private, nonprofit higher education
institutions is to provide an educational opportunity for the present and
future generations of society. Notably absent is the basic performance
evaluation measure of business organizations (net income) which does not
apply to these institutions. Instead, primary interests are compliance with
budgetary limitations, efficiency and effectiveness, use of resources in
accordance with any internal or external restrictions, and maintenance of
the organization's capital assets. The traditional accounting system
addresses those interests.
In 1988, however, a new concept in cost accounting emerged which
may provide more useful information for those purposes. Introduced by two
Harvard University professors. Dr. Robin Cooper and Dr. Robert Kaplan,
Activity-Based Costing (ABC) and the management system based on it h a s
received widespread attention.
The history of ABC/M, in contrast to the traditional accounting
system, must be characterized as revolutionary and dynamic.
Enhancements to the basic premise that activities cause costs to be incurred
102
and t h a t the cost objects consume the activities and the costs attached
thereto have come quickly.
ABC/M involves fundamental changes in the traditional cost
accounting processes and procedures while preserving the basis in fund
accounting. ABC/M not only addresses the who and what but also the why
questions of costs. Significantly, ABC/M can be used as a complementary
system to the traditional accounting system, thereby preserving the basic
hierarchical design.
Since the conceptual statement in 1988, ABC/M has progressed
quickly through the conceptual/awareness phase, implementation/trial
phase and the evaluation/modification/enhancement phase to the present
adoption/rejection phase. Numerous suggestions for application of the
ABC/M approach can be found in the unusually extensive literature
available. Empirical research is also extensive, but little can be found
dealing with application of ABC/M to higher education institutions. This
project will attempt to partially fill that gap in the literature.
103
CHAPTER III
METHODOLOGY
General Design
Experimental research was conducted in the Spring and Summer of
1998 with Hardin-Simmons University, Abilene, Texas, as the subject
institution. An Activity-Based Costing/Management (ABC/M) system was
designed as a complementary system to the financial accounting system
currently employed. Highly developed, speciahzed ABC/M software
provided by Mr. Tom Pryor of ICMS, Inc. (2261 Brookhollow Plaza, Suite
104, Arlington, Texas, 76006) was used to perform the calculations for
tracing and allocating costs to various cost accounts, processes, activities,
and cost objects, and to produce the reports of the complementary ABC/M
system.
Nine executives, 16 middle managers, and 19 staff members who
have responsibility for budgeting, financial management, and strategic
decisions dependent on accurate cost object costs at Hardin-Simmons were
asked to evaluate the current financial accounting system at the university
(control group). Another group, comprised of an equal number of people
within each of the above named professional classifications (who have
similar responsibilities), were asked to evaluate the new ABC/M system
104
(experimental group). Evaluation was accomphshed by both groups by
means of a survey instrument that contained five evaluative statements on
each of the three decision making areas of interest in this study, i.e., (1)
budgeting, (2) financial management, and (3) strategic decisions dependent
on accurate cost object costs.
A graphical depiction and description of the experimental design of
this study, a split-plot factorial design, is presented in Table 3.1, Split-Plot
Factorial Design-Treatment Level Combinations, p. 106. The experimental
design used in this study had two levels of the independent variable.
Treatment A (accounting system), and three levels of the independent
variable. Treatment B (decision purpose). The two levels of the independent
variable. Treatment A were: (1) a^, financial accounting system, and (2) a2,
ABC/M system. The three levels of the independent variable, Treatment B
were: (1) b ^ budgeting decisions, b2, financial management decisions, and
(3) bg, strategic decisions dependent on accurate cost object costs. Three
blocks of evaluators were randomly assigned to each level of Treatment A.
The evaluators in any block were involved with only one level of Treatment
A, but were involved with all three levels of Treatment B. Thus, the
evaluators were assigned to either level a^ or aj of Treatment A, but were
engaged in evaluating all three levels of Treatment B.
105
k
Graphical Depiction of the Split-Plot
Factorial Design
Table 3.1. Split-Plot Factorial Design-Treatment Level Combinations
Treatment A
Treatment B
Treatment B
Treatment B
Treatment
Treatment
Treatment
Treatment
Level a^ a n d ag
Level bj
Level bj
Level bg
Combination
Combination
Combination
a^bj
ajbs
ajbg
aibi
aibz
a^bg
ai
aib,
aibz
ajbg
FinancialAccounting
aibi
aA
aibg
ajbi
a2b2
azbg
az
agbi
a2b2
agbg
ABC/M
azbi
^•^2
ajbg
BlockSi2.3
Blocks456
The independent variable. Treatment A, included the financial
accounting system (a^) and the ABC/M system (a2). The other independent
variable. Treatment B, included budgeting decisions (b^), financial
management decisions (bg), and strategic decisions dependent on accurate
106
vd
cost object costs (bg). Block^, Block2, and Blockg represented executives,
middle managers, and staff respectively who evaluated the financial
accounting system information. Blockg, Blockg, and Blockg represented
corresponding groups who evaluated the ABC/M system information. All of
the individuals assigned to each block had budgeting and financial
management responsibility at Hardin-Simmons University, the subject
institution of this research.
The following section describes the experimental design in greater
detail and presents the purposes for which this research was conducted. In
subsequent sections, the research instrument, pilot study, sample
population, ABC/M system design, data collection procedures, and an
analysis of the data are presented.
Description and Purposes
of the Study
This experimental design is described in the literature as a split-plot
factorial design with two independent variables, Treatments A and B. The
independent variable. Treatment A (accounting system), had two treatment
levels (ap financial accounting system, and a2, ABC/M system). The
independent variable. Treatment B (decision purpose), had three treatment
levels(bi, budgeting decisions, bj, financial management decisions, and bg.
107
strategic decisions dependent on accurate cost object costs. Eighty-eight
subjects were randomly assigned to blocks in each of the two treatment
levels of the independent variable. Treatment A, by use of a random
numbers table provided by Dr. Roger E. Kirk, Professor of Psychology and
Director of the Institute of Statistics at Baylor University (Kirk, 1995). The
three blocks comprising treatment level a^ were comprised of nine
executives (Blockg), 16 middle managers (Blockg), and 19 staff members
(Blockg). The remaining three blocks (Blocks4 jg) which comprised treatment
level a2 included equal numbers of each professional category of evaluators
as treatment level a^. The dependent variable was "usefulness of the
information" as perceived by the members of the three blocks of professional
categories in each two treatment levels of Treatment A to which they were
assigned.
The primary purpose of this study was to determine if the use of a
complementary ABC/M system provided more useful information t h a n the
sole use of a traditional financial accounting system for: (1) budgeting
decisions, (2) financial management (control) decisions and (3) strategic
decisions dependent on accurate cost object cost as judged by executives
(Blocksj 4), middle managers (Blocks2 5), and staff (Blocksg g) of a private
university. An additional purpose was that this study may produce
possibihties for future research that would relate ABC/M to other higher
108
education institutions of this type and to other public and private
institutions of higher learning (research universities, doctoral granting
universities, comprehensive colleges and universities, liberal-arts colleges,
two-year colleges, institutes and professional schools).
Instrumentation
Fifteen different evaluation statements were categorized in sets of
five in the order of the three types of decisions as expressed in the research
question. The statements were designed to address some (but not
necessarily all) of the specific tasks routinely encountered by administrators
in the performance of their responsibilities involving budgeting decisions,
financial management (control) decisions, and strategic decisions dependent
on accurate cost object costs. The statements were designed to address the
issues considered representative of the type that frequently arise in each of
those decision areas at the subject institution. The evaluation statements
were developed by the researcher specifically for this study. The survey
instrument is presented as part of Appendix F.
The statements relating to budgeting were designed to address
specific issues frequently encountered by administrators during the
budgeting process. Budgeting for most programs involves considering
existing programs that are expected to continue without significant change
109
into the fiscal year for which the budget is being prepared. Some of those
programs that will continue require significant changes that constitute a
program redesign. New programs must be considered because of the
dynamic situation in which many departments operate. Budgets of a fixed
dollar amount are typically used by higher education institutions, however,
variable budgets, the dollar amount of which may be altered automatically
and routinely depending on resource availability, are commonly used by
other types of organizations such as business corporations. Variable
budgets have the same possibilities for applicability in all organization
types. Regardless of the type used (fixed or variable), the budget is the
means by which plans for the fiscal year under consideration are quantified.
Financial and non-financial performance measures are often developed as
key indicators of whether operations can be performed within the available
resources. These measures are developed as part of the budget to assist
managers in the control of their programs.
Statements relating to financial management were designed to
address issues frequently encountered by administrators in controlling their
programs. Program control involves analysis of budget variances, the
differences between the actual expenditures and budgeted expenditures.
The system should provide enough information to permit the manager to
isolate specific budget problem areas that require remedial action. In some
110
programs, over-expenditure, or perhaps under-expenditure, may be
unavoidable thus requiring revision to the program design. Achievement of
financial and non-financial performance standards are considered key issues
in the successful control of programs. Non-value-added tasks are those that
do not contribute to the effectiveness or efficiency of the program. Frequent,
routine reviews of programs for the purpose of eliminating non-value-added
tasks may result in achieving important continual improvement goals.
Statements relating to strategic decisions dependent on accurate cost
object costs were designed to address issues frequently encountered by
administrators who make decisions of a broader nature that will affect the
programs in effect. Breakeven analysis is a useful technique in defining the
level of operations which would be required in order for the respective
programs to operate within available resources. The terms "profitable" and
"unprofitable" in the context of a private university relate to operations that
can or cannot be accomplished within the resources provided for them. The
statements assume that administrators may decide that it is desirable to
expand the "profitable" programs or cost objects, and that "unprofitable"
programs or cost objects may require revision in order to eliminate or
mitigate the detrimental effects of the "unprofitability." In some cases, in
the short run, elimination of "unprofitable" programs may not be desirable.
Ill
In those cases, actions may be taken to minimize the detrimental effects to
those programs.
An interview with each evaluator was conducted by the researcher in
July, 1998 to ensure that the he/she understood the information (financial
accounting or ABC/M) on which they were to base their judgments. All of
the executives, middle managers, and staff who were to evaluate the
financial accounting information responded to the researcher's inquiry that
they considered themselves sufficiently familiar with the financial
accounting information provided to make appropriate responses to the
statements. In all cases, they were given an explanation of: (1) the concepts,
(2) focuses or purposes of the system, (3) FASB authoritative
pronouncements, (4) data provided, and (5) the expected uses for which the
data was prepared. The executives, middle managers, and staff who were to
evaluate the ABC/M information had httle or no familiarity with the ABC/M
system. During the interview, they were given an explanation of the basic
accounting and design issues so they would have at least a fundamental
understanding of the ABC/M system. The outline of the instructions given
to the evaluators and the information provided by each accounting system
are presented in Appendix F.
A Likert scale was developed for the survey instrument on which the
evaluator was to respond to a series of statements by indicating whether he
112
or she: (1) strongly agrees, (2) agrees, (3) is neutral, (4) disagrees, or (5)
strongly disagrees with each statement. Each evaluator indicated his/her
choice of the responses available by circling the number of the response that
most nearly corresponded to the evaluator's judgement for that statement.
The point value of the responses was indicated by a value within the range
from five (strongly agrees) to one (strongly disagrees). The data score for
each decision area was determined by summing the point values for each
group of statements (Gay, 1992). All of the statements were presented as
positive statements relating to the high degree of usefulness of the
information for certain tasks associated with each decision purpose. All
evaluators assigned to all blocks responded to identical statements
regardless of which accounting system information they were provided.
The Likert scale sequence of numbers was intentionally alternated for
each statement on the survey instrument with half of them beginning with
" 1 " and half of them beginning with "5" to assist the evaluator in choosing
the specific response that most nearly matches his/her judgement.
Sometimes evaluators are prone to circle scale numbers in a pattern which
may not express their true responses to the specific statements presented.
Alternating the sequence was an attempt to avoid any arbitrary pattern.
The survey instrument, the outline of the instructions given to the
evaluators, and examples of the information provided by each accounting
113
system on which the evaluators based their evaluations are presented in
Appendix F.
Because the survey instrument used in the data collection phase of
this study was developed specifically for this study, the instrument was not
externally validated for its expressed purpose by use in previous similar
studies. Validation was accomplished to the satisfaction of the researcher
by use of a pilot study conducted prior to the actual experiment, and by
application of the Kuder-Richardson formula 20 which was designed to
estimate the internal consistency reliability of data gathered using an
instrument t h a t had not been validated. The results of applying this
formula 5delded a value of .83. This result indicated that the reliability was
well above average formula value of .75. A minimum acceptable value was
set by the authors for the formula at .70. An additional level of confidence
in the instrument was based on the ability of the experimental design and
the random selection and assignment of subjects which control for nearly all
sources of internal and external invahdity (Kirk, 1995). A description of the
pilot study that was conducted is presented in the following section.
Pilot Study
A pilot study was conducted with knowledgeable students serving as
the sample group subjects for the pilot study. Nineteen students who were
114
enrolled in ACCT 3313 A, Cost Accounting, were asked to study a budget
prepared using financial accounting and also a budget using activity-based
costing, and to evaluate the usefulness of the information for the budgeting
purpose. The pilot study was conducted on March 13, 1998, utilizing
information developed by the researcher for the test. The 19 students
evaluated the usefulness of the information relating to the budgeting
decision area only. Their evaluation was based on information provided for
each accounting system, and incorporated the identical statements that
were evaluated by the actual case study participants. The information for
the pilot study consisted of hypothetical financial accounting and ABC/M
information for a fictitious higher education institution. The pilot study
evaluator response values for each accounting system were tested
statistically to determine if statistically significant differences in the
arithmetic means of the evaluator response values for the two accounting
systems existed.
A completely randomized design with two treatment levels of the
independent variable. Treatment A (a^ Financial Accounting, and a2,
ABC/M) and only one level of the independent variable. Treatment B
(Budgeting) was selected for the pilot study analysis. Statistics were
calculated to analyze the total sum of squares (SSTO), the sum of squares
between groups (SSBG), and sum the squares within groups (SSWG). It
115
was a fixed effects model. The analysis of variance (ANOVA) procedure that
utilizes the F statistic was conducted, with the appropriate statistical
measures and tests applied.
The results of the pilot study showed very large statistical
significance between the arithmetic means of the two levels of Treatment A
(accounting system) with the ABC/M values much higher than the financial
accounting values. The strength of association value of .46, the effect size
value of 24.86, and the power value of greater than .99 at the alpha .05 level
supported the conclusion that the researcher had a very high confidence
level t h a t the ABC/M information was more useful than the financial
accounting information for the budgeting decision area in the pilot study.
The very large degree of significance and the high values found on testing
the assumptions of strength of association, effect size, and power supports
the validity of the statements for the budgeting decision area.
The results of the pilot study were helpful in determining t h a t the
sample sizes for the case study blocks were probably adequate to provide
adequate values for strength of association, effect size, and power for the
actual experiment. Also, minor problems relating to the interpretation of
the specific meaning of certain words in the statements to be evaluated
arose during the pilot study. As a result, the meaning of all words in all of
the statements were explained during the pre-evaluation interview with the
116
evaluators by the researcher during the actual experiment. The pilot study
required one week to complete. The pilot study information and survey
instruments, and instructions, are presented in Appendix G.
Sample Population
The sample population involved eighty-eight of the persons in
administration or on the support staff of Hardin-Simmons University (HSU)
who have budget and financial management responsibility for a program.
These eighty-eight persons were stratified into three professional
classifications which were labeled: (1) executives (18 in number), (2) middle
managers (32 in number), and (3) staff (38 in number). The three
classifications were chosen by consideration of the size or complexity of the
program. Some persons managed very small programs involving a single
cost account. Others were responsible for large and pervasive programs
with many cost accounts, and still others were responsible for moderate size
programs with a few cost accounts. A listing of the personnel at HSU who
constituted the sample population is provided in Appendix D. The data
scores utilized for statistical analysis were secured from the persons whose
names appear on the referenced list.
: ''^^j^^
117
ABC/M System Design
The CMS-PC^' 4.0 software utilized for the design of the ABC/M
system used in this study featured a modular format, an Activity Dictionary
template, pre-formatted reports, and a report writer helpful for creating a
useful ABC/M system. The features of this software were utihzed as they
were needed during the system design process.
The first step in building this ABC/M model was to create a data set.
A data set represents cost account amounts for a particular time period.
Data sets may be created for different time periods (monthly, quarterly,
semiannual, or annual), different locations (campuses), or to differentiate
between actual costs and budgeted costs. Extensive help was available
within the Project Manager module.
The next step was to define all departments (cost centers) and
activities related to each department at HSU by use of an Activity Analysis
module. An output measure was required for each activity defined.
Attributes for each activity were assigned (primary/secondary and valueadded/non-value-added). Each activity was assigned to an organizational
process (Executive, Academic, Advancement, Student Development and
Finance and Management). An implementation tool provided in the
software called the Activity Dictionary template was useful as a system
model aid in defining departments and activities.
118
Costs were then traced to the activities. The cost amounts in the data
set were traced to the appropriate activities by use of the cost tracing
function within the Activity Accounting module. Costs may be traced by
time percentages, lump sum, or by overall percentages. Output measure
quantities were defined for each activity after which cost per output
measure was automatically calculated by the software program. Certain
reports could have been printed at this time to verify the accuracy of the
considerable amount of data that had been entered up to this point in the
system design process.
ABC/M is based on the principle that activities consume costs and
cost objects consume the outputs of the activities. The purpose of the
Product (cost object) Costing module was to define all of the cost objects that
would be desirable for the ABC/M model. Within this module, activity
output measure quantities were traced to the cost objects defined for the
various activities. An interim optional step permitted the tracing of cost
object costs to other cost objects. The remaining predefined reports could
have been printed at this point.
The researcher supplemented the CMS-PC
4.0 reports for all cost
objects defined with reports developed in spreadsheet software in order to
present data simultaneously for several different cost object costs each of
119
which utilized all of the costs of each activity. The format for these reports
varied from the CMS-PC
4.0 predefined report formats.
The budgeting module utilized activity output quantities and activity
cost per output produced by the accounting module. The product of these
values represented the resources required for each activity. All of the
predefined reports could have been printed with budget data except the
product costing reports.
Use of the CMS-PC™ 4.0 software expedited the design of the ABC/M
system for the subject university. The software proved to be intuitive and
easy to use. When questions arose, the ICMS Technical Support personnel
were very helpful.
An excellent concise summary of the design of a system of this type is:
An activity-based system includes resources and costs that are
traced to activity pools with resource drivers. The activity
pools are traced to cost objects with activity drivers. Cost
drivers and performance measures can be determined for each
activity if an activity-based control system is in place.
(Anderson & Clancy, 1998, pp. 11-12)
Collection of Data
The collection of data began after several prehminary tasks h a d been
completed. These tasks are hsted on the next page with the actual timeframe indicated for each element.
120
Table 3.2. Time Frame for the Experimental Study
Design/Preparation
Time Period
Dissertation Proposal Document
September, 1997-January,
1998
Three P a r t Evaluation Instrument
January, 1998
ABC/M System for HSU
September, 1997-June, 1998
Conducted Experiment
Conducted the Pilot Study
March, 1998
Gathered Data from Evaluators
July, 1998
Performed Data Analysis
August, 1998
Completed Dissertation
October, 1998
Analysis of Data
Research Question
Does the use of the complementary ABC/M system provide more
useful information t h a n the sole use of a traditional financial accounting
system for: (1) budgeting decisions, (2) financial management (control)
121
decisions, and (3) strategic decisions dependent on accurate cost object cost
as judged by executives, middle managers, and staff of a private university?
An answer to this question was developed from the statistical testing of the
hypotheses stated for this experiment.
Hypotheses
"The first step in evaluating a scientific hypothesis is to express the
hypothesis in the form of a statistical hypothesis" (Kirk, 1995, p. 48). The
statistical hypotheses presented in the following sections are statements
about certain parameters of the data collected. Three null and alternate
hypotheses are presented, although only the tenability of the null
hypotheses was actually tested. If any null hypothesis is rejected, only the
alternate hypothesis would remain tenable. According to statistical
convention, the alternative hypotheses are formulated as opposites of the
null hypotheses so that they correspond to the researcher's pretest scientific
hunch. The process of choosing between the null and alternative hypotheses
is called hypothesis testing (Kirk, 1995).
Null and Alternative Hypotheses
The first hypothesis was designed to test the variances that existed
between the two treatment levels of the independent variable, Treatment A
122
(accounting system).
Null hypothesis 1. Ho: /j,a^ = /Lta^.
Stated in words, there is no statistically significant difference
between the arithmetic means of the evaluator response values for the two
levels (ap financial accounting system, and ag, ABC/M system) of the
independent variable. Treatment A. The alternate hypothesis was: Ha: jj,a^
* Ij,a2. Stated in words, there is a statistically significant difference in the
arithmetic means of the evaluator response values for the two treatment
levels of the independent variable. Treatment A.
The second hypothesis was designed to test the variances that existed
between the three treatment levels of the independent variable, Treatment
B (decision purpose).
Null hypothesis 2. Ho: yub^ = /^b2 = /^bg.
Stated in words, there are no statistically significant differences
between the arithmetic means of the evaluator response values of the three
treatment levels (b^ budgeting, b2, financial management, and bg, strategic
decisions dependent accurate cost object costs) of the independent variable.
Treatment B. The alternate hypothesis was: Ha: iA>^ * ijh^ * ^bg. Stated in
words, there are statistically significant differences in the arithmetic means
of the evaluator response values of the three levels of the independent
variable. Treatment B.
123
The third hypothesis was designed to test the variances that exi.sted
due to the interactions of the combinations of the two independent variables.
Treatments A and B, and the interactions of the blocks (professional
classification of the evaluator).
Null hypothesis 3. Ho: /^aibi = /^a^bj = ^aibg = Majb^ = /^agbs = /ua2bg.
Stated in words, there are no statistically significant differences
between arithmetic means of the evaluator response values associated with
the combinations of the two independent variables. Treatments A and B,
and the blocks. The designations a^bi, aib2 and a^bg relate to the
combinations of the financial accounting system (ai) and the three decision
purposes of the information (b^, budgeting, bg, financial management, and
bg, strategic decisions dependent on accurate cost object costs). The
designations a2bi, a2b2, and a2bg relate to the combinations of the activitybased costing system and the three decisions purposes of the information
(bj, budgeting, bg, financial management, and bg, strategic decisions
dependent on accurate cost object costs). The alternate hypothesis was:
fxa^h^ * A^a^bg ^ A^a^bg ^ /uagb^ * J^8i2^2 * A^agbg. Stated in words, there are
statistically significant differences between arithmetic means of the
evaluator response values associated with the combinations of the two
independent variables. Treatments A and B, and the blocks.
124
Computational Model
Descriptive statistical data were prepared from the evaluator
response values collected from the persons in the six blocks who evaluated
the information provided by the financial accounting and ABC/M systems.
The statistical technique known as ANOVA, which utihzes the F statistic for
between treatments and within treatments sources, was conducted to
evaluate the three statistical null hypotheses presented. The level of
significance adopted was a = .05. The results of the computation are
displayed in the ANOVA table (Table 4.1. Table of Findings for Spht-Plot
Factorial Design Using ANOVA, p. 130) for the experimental design used.
The population from which the two samples were randomly selected
included all of the executives, middle managers and staff who had
responsibilities for: (1) budgeting, (2) financial management (control) and (3)
strategic decisions dependent on accurate cost object costs at HardinSimmons University. There was a total of 88 persons at Hardin-Simmons
in those groups. A random number table provided by Kirk was used to
randomly select the sample subjects for each block (Kirk, 1995).
The evaluator response values were obtained by the use of an
instrument composed of three sets of five statements each, one set for each
decision purpose. The subjects of each sample group were asked to score the
system they were evaluating using a response from one to five on a Likert
125
scale relating to the usefulness of the information. The score for each
subject was the sum of the scores assigned by the subject/respondent to the
five statements dealing with each of the three areas of interest presented on
the instrument, i.e., (1) budgeting decisions, (2) financial management
decisions, and (3) strategic decisions dependent on accurate cost object costs.
The data were physically analyzed in an effort to detect: (1) possible
data recording errors, (2) assumptions that appeared untenable, and (3) any
unexpected promising lines for further investigation. The fixed effects
model, which included all of the treatment levels of the two independent
variables, was used. Tests were conducted on the data to test the
assumptions as to: (1) strength of association and effect size, (2) power,
(3) the determination of sample size, and (4) to detect the presence of trends.
Computational symbols, procedures, and formulas designed for this
particular experimental design provided the data presented in the ANOVA
table (Table 4.1. Table of Findings for Spht-Plot Factorial Design Using
ANOVA, p. 130) on which conclusions about the hypotheses were based. The
partial omega square measure was used to estimate the strength of
association, effect size, power, and sample size. No other tests were
considered necessary to be conducted due to the very large statistical
significance found.
126
Summary
This dissertation required the design of an ABC/M system the
information from which was to be evaluated in contrast to the information
provided by the financial accounting system currently in use. The
experiment involved one independent variable relating to the type of
accounting system used, and one independent variable relating to the
decision types. The effect of each and the interaction of both of these
independent variables on the dependent variable (usefulness of the
information) was tested. The purpose of the experiment was to determine
whether the ABC/M system information was more useful for the three
decision purposes t h a n the information provided by the financial accounting
system currently in use at the subject institution.
Three null statistical hypotheses were tested that related to the two
independent variables and their effect on the dependent variable. A survey
instrument was utilized to collect data from six blocks of persons who had
responsibility for budgeting, financial management, and strategic decisions
for their program at the subject university. The survey instrument was
developed specifically for this study, and had not been validated by use in
other studies. It was validated to the satisfaction of the researcher by two
different research techniques, by the experimental design, and by random
selection of evaluators.
127
In the next chapter, summarized data tables are presented, the
statistical techniques that were used are presented, and significant findings
for each of the three hypotheses tested are discussed. Graphical depictions
of the findings are presented along with the narrative explanation of the
findings when it was practical to do so.
128
CHAPTER TV
FINDINGS
Summarv
This chapter contains the statistical analysis of the data collected
from evaluations performed by the eighty-eight members of the
management group at the subject institution, and the findings that resulted.
This chapter presents: (1) findings related to the three null hypotheses,
(2) interpretations of significant interactions between independent variable
levels, (3) computational procedures and data, and (4) findings of procedures
to estimate the strength of association, effect size, and power.
Findings Related to the Three
Null Hypotheses Tested
Finding: Null Hypothesis Number 1
In order to provide an answer to the compound research question
presented in Chapter I, p. 10, and again in Chapter III, p. 121, three null
hypotheses were formulated. Hypotheses number 1 (jxa^ = fxa.^ was
designed to test whether the evaluator responses to the statements
presented in the survey instrument that were based on the financial
accounting system information were significantly different from the
129
evaluator responses to the statements in the survey instrument that were
based on the ABC/M system information. The ANOVA procedure for the
split-plot factorial design used in this study produced three findings, one of
which was t h a t there was a significant difference between the arithmetic
means of the evaluator response values for the two types of accounting
systems evaluated (see Table 4.1).
Table 4.1. Table of Findings for Spht-Plot Factorial Design Using ANOVA
Source
1. Between blocks
SS
9,437.34
MS
df
2. A (Fin & ABC) 5,918.56
p-l = l
3. B l o c k s W.A
p(n - 1) = 86
3,518.78
687.33
4. Within Blocks
51.37
5. B (Purposes)
6. AB
118.51
7. B X B l o c k s w A
517.45
8. Total
10,124.67
108.48
np -1 = 87
5,918.56
npiq - 1) = 176
2/3
144.64*
40.92
3.91
q- 1 = 2
25.69
5/7
8.53**
(p - 1)(^ - 1)= 2
59.26
6/7
19.69***
pin-l){q
- l)= 172
npq -1 = 263
*Fo5 1, 86 = <3.92
**Fo5 2, 172 = <3.04
***Fo5 2, 172 = <3.04
alpha = .05
n = 44
130
3.01
The bold print section of Table 4.1, Table of Findings for the SplitPlot Factorial Design Using ANOVA, p. 130, including the related notes
reveals t h a t for the Treatment A (accounting system) source, the sum of
squares value of 5,918.56 with one degree of freedom produced a mean
square value also of 5,918.56. The F value reported resulted from dividing
the mean square value for Treatment A by the mean square value for the
blocks within Treatment A (5,918.56/40.92 = 144.64). This number, when
compared to the critical F value of less than 3.92 for Treatment A (unshaded
bold print) determined by reference to a table showing the upper percentage
points of the F distribution (Kirk, 1995), indicated very high statistical
significance existed for Treatment A; therefore, the null hypothesis number
1 (jua^ = ij,a^ was rejected. Stated in words, there was a significant
difference in the arithmetic means of the evaluator response values to
information provided by the two accounting systems for the three decision
purposes tested. The ABC/M information was more useful than the
information provided by the financial accounting system currently in use.
This was a very important finding that provides an answer to an important
p a r t of the research question. The response values tested by the null
hypothesis number 1 are presented in graphical form in Figure 4.1,
Response Values by Accounting System Type, on the next page.
131
Response Values by Accounting System
vjuu •
Qnn yuu
.-
1
'
4
Rnn -
•
ouu
1
i
i
700
600
500 Ann
Budgeting
Financial Management
Cost Object Costs
Decision Purpose
Financial Accounting
Activity-Based Costing
Figure 4.1. Response Values by Accounting System Type
Finding: Null Hypothesis Number 2
Null hypothesis number 2{p)o^ = ^^^
/^bg) was formulated to test
whether there were significant differences between the evaluator response
values for the three levels of Treatment B (budgeting decisions, financial
management decisions, and strategic decisions dependent on accurate cost
object costs) irrespective of which accounting system information was
evaluated. The analysis of the data produced an interesting but unexpected
finding. The findings resulting from testing the second null hypothesis are
presented in the bold print section of Table 4.2, Table of Findings for Splits
132
Plot Factorial Design Using ANOVA, and the related notes presented with
different items in bold print.
Table 4.2. Table of Findings for Spht-Plot Factorial Design Using ANOVA
Source
df
SS
1. Between blocks
9,437.34
n p - l = 87
2. A (Fin & ABC)
5,918.56
p-l = l
3. Blocks W.A
3,518.78
p{n - 1) = 86
4. Within Blocks
687.33
5. B ( P u r p o s e s )
51.37
MS
108.48
5,918.56
np(q - 1) = 176
q-l
3.91
=2
25.69
5/7
8.53**
59.26
6/7
19.69 • * * *
118.51
(p - l)(q - l)= 2
7. B X B l o c k s w A
517.45
p ( n - l ) ( g - 1)= 172 3.01
10,124.67
144.64'
40.92
6. AB
8. Total
2/3
npq -1 = 263
*Fo5 1, 86 = <3.92
**Fo5 2, 172 = <3.04
***Fo5 2, 172 = <3.04
alpha = .05
n = 44
For the Treatment B (decision purposes) source , the sum of squares
value of 51.37 with 2 degrees of freedom produced a mean square value of
25.69. The F value reported resulted from dividing the mean square value
for Treatment B by the mean square value for B X Blocks w A (25.69/3.01 =
8.53). This value, when compared to the critical F value of less t h a n 3.04
133
for Treatment B (bold print in notes) determined by reference to a table
showing the upper percentage points of the F distribution (Kirk, 1995),
indicated a significant difference in the arithmetic means of the evaluator
responses to information regarding the three decision purposes presented;
therefore, the null hypothesis number 2 (pih^ = /ib2 = /^bg) was rejected.
Stated in words, there were significant differences in the arithmetic means
of the evaluator responses to information presented for the three decision
purposes tested. Means of the evaluator response values relating to
budgeting decisions were significantly higher than means of the evaluator
response values relating to financial management (control) decisions. The
means of the evaluator response values to financial management (control)
decisions were significantly higher than the means of the evaluator response
values to strategic decisions dependent on accurate cost object costs.
Statistical significance between the means of the evaluator response values
for the three decision purposes was somewhat surprising since all three
decisions purposes would seem to the researcher to be equally important,
and to represent functions mutually complementary and typically performed
by all managers with financial management responsibility. No test of the
relative importance of the decision purpose was proposed or conducted. The
response values tested by the null hypothesis number 2 in graphical form
(Figure 4.2, Response Values by Decision Purpose) are presented below.
134
Response Values by Decision Purpose
1000
t
i
900
'
/A
800
ji
700
••
i
600
// /
y
y
y
\
/
/
/ y /
4
^ /
500
•
t
/
/
400
Financial Accounting Activity-Based Costing
Accounting System
Budgeting
-"f— Financial Managemen*-»— Cost Object Costs
Figure 4.2. Response Values by Decision Purpose
Finding: Null Hypothesis Number 3
Hypothesis number 3 (/^a^bj^yua^bg = ^xa^^^^ixa^^ = A^agbg =/>ia2b3)
was designed to test whether the effect of all levels of each independent
variable was the same for all levels of the other independent variable in this
study which had two independent variables. The bold print items of Table
4.3, Table of Findings for the Spht-Plot Factorial Design Using ANOVA, and
the related notes presented on page 137 with different items in bold print
revealed that for the interactions of the two independent variables and the
blocks source, the sum of squares value of 118.51 with 2 degrees of freedom
135
produced a mean square value of 59.26. The F value reported resulted from
dividing the mean square value for both independent variables (Treatments
A and B) by the mean square value for the blocks within Treatment B X
Blocks w A (59.26/3.01 = 19.69). This value when compared to the critical F
value of less t h a n 3.04 for interaction of Treatments A and B (bold print in
the figure notes) determined by reference to a table showing the upper
percentage points of the F distribution (Kirk, 1995), indicated statistical
significance existed as a result of the interactions of the two independent
variables; therefore, the null hypothesis number 3 (jxaihi=/j.a^h2 = /ia,b3 =
/<ia2bi = Ma2b2 ^yuagbg) was rejected. Stated in words, there was a significant
difference in the effect of each independent variable on each level of the
other independent variable.
Considering only the financial accounting system (a J information
response values, the information for budgeting was significantly more useful
t h a n for financial management (control) decisions (bg). Additionally, the
information for financial management (control) decisions (bg) was
significantly more useful t h a n for strategic decisions dependent on accurate
cost object costs (bg). Contrarily, the ABC/M system (ag) provided more
useful information for strategic decisions dependent of accurate cost object
costs t h a n for financial management (control) decisions (b2). Additionally,
the ABC/M system (a2) provided more highly useful information for financial
136
management decisions (b2) than for budgeting decisions (bg). The evaluator
response values which were tested by the null hypothesis number 3 can also
be seen in graphical form in Figure 4.2, Response Values by Decision
Purpose, p. 135.
Table 4.3. Table of Findings for Split-Plot Factorial Design Using ANOVA
Source
SS
df
1. Between blocks
9,437.34
np -1 = 87
2. A (Fin & ABC)
5,918.56
p-l=l
3. Blocks W.A
3,518.78
p{n - i) = 86
4. Within Blocks
687.33
np{q - 1) = 176
MS
108.48
5,918.56
3.91
51.37
6. AB
118.51
p-l)(g-l)=2
7. B X B l o c k s w A
517.45
p ( n - l ) ( g - 1)= 172 3.01
8. Total
10,124.67
npq -1 = 263
*Fo5 1, 86 = <3.92
**Fo5 2, 172 = <3.04
***Fo5 2, 172 = <3.04
alpha = .05
n = 44
137
144.64*
40.92
5. B (Purposes)
g- 1 = 2
2/3
25.69
5/7
8.53**
59.26
6/7
19.69***
Interpretations of Significant
Interactions Between Levels
of Treatments A and B
If the interaction between levels of the independent variables in an
experiment is statistically significant, as was the case in this experiment,
additional insight can be gained into the interaction of the levels of the
independent variables with each other by further analysis of variance
between treatment level combinations. ANOVA procedures for simple maineffects sums of squares were conducted to compare the evaluator response
scores for each combination of treatment levels of the independent variables.
The null hypothesis number 3 (jj.a^h^ = ^a^h2 = //aibg^/^ajb^ = /ua2b2 =
//a2b3) relating to the interactions could also be tested using computational
procedures for simple main-effects sum of squares. A description of each
combination of treatment levels for each independent variable is presented
in Table 4.4, Description of the Six Combinations of Treatment Levels of
Treatments A and B, p. 139 to aid the reader in understanding the
narrative analysis that follows.
138
Table 4.4. Description of the Six Combinations of Treatment Levels of
T r e a t m e n t s A and B
Combination
a,bi
Accounting Svstem
Financial Accounting
Decisions Purpose Evaluated
Budgeting
aibg
Financial Accounting
Financial Management
a^bg
Financial Accounting
Strategic Decisions
ABC/M
Budgeting
^^2
ABC/M
Financial Management
azba
ABC/M
Strategic Decisions
Of the fifteen possible combinations of levels of independent variables
t h a t could be compared, comparisons of combinations ajb^ to a2bi, aib2 to
a2b2, anda^bg to a2b3 were of special interest due to the desire to determine
whether the ABC/M system information was more useful t h a n the financial
accounting system information overall. The comparisons of combinations
involving the decision purpose levels within the two levels of Treatment A
(a^bi to aib2, a^b^ to a^bg, a^bg to aib3 a^^ to a2b2, a^^ to a2b3, and a2b2 to
a2b3) were also of interest in order to see if the same significant differences
existed between the three decision purpose levels for both levels of
T r e a t m e n t A (accounting system). Table 4.5, Findings Related To
Interactions of Combinations of Independent Variable Treatment Levels
139
Using ANOVA For Simple Main Effects, is presented below with certain
items of interest to be discussed presented in bold print. These items will be
discussed in the analysis that follows the table.
Table 4.5. Findings Related To Interactions of Combinations of Independent
Variable Treatment Levels Using ANOVA With Tests For Simple Main
Effects
Source
SS
df
1. A
5,918.56
p-l =l
2. B
51.37
g-l = 2
3. AB
118.51
(p-l)iq-l)
MS
5,918.56
=2
1/9
378.42*
25.69 2/9
1.64
59.26 3/9
3.79**
4. A at bj
1,400.01
p-l = l
1,400.01 4/9
89.51***
5. A at b.
1,863.92
p-l = l
1,863.92 5/9
119.18***
6. A a t b ,
2,773.14
p-l = l
2,773.14
6/9
177.31***
7. B a t a ^
162.59
q- 1 = 2
81.30
7/9
5.20
8. B at a.
7.29
q- 1 = 2
3.65
8/9
.23
pq(n - 1) = 258
15.64
9. W i t h i n Cell 4,036.23
10. Total
10,124.67
npq - 1 = 263
*Fo5 1, 258 = 3.84
**Fo5 2, 258 = 3.00
***Foi 1. 258 = 6.63
****Foi 1. 258 = 4.61
alpha = .05
140
*
•
*
*
•
*
All combinations involving comparisons of the differences m the
arithmetic means of the two levels (a^ and a^) of Treatment A (accounting
system) overall were found to have very high statistical significance. The
sum of squares values for Treatment A of 5,918.56 with one degree of
freedom yields a mean squares value of 5,918.56 which in turn indicates an
F value of 378.42. That value, when compared to the critical value of F
(3.84), indicated the high degree of difference between the two levels of
T r e a t m e n t A (accounting system). Stated in words, the evaluator response
values were much higher for the ABC/M system than for the financial
accounting system currently in use. This finding supports the
determination that ABC/M information is much more useful for the
decisions purposes tested than the financial accounting information for the
three purposes tested.
Interactions involving comparisons of the three levels of Treatment B
(decisions purposes) overall were found to be statistically insignificant with
an F value of 1.64; however, the interactions of the two treatment levels (A
and B) were significant. The sum of squares of 118.51 for the source AB
with two degrees of freedom yielded a mean squares value of 59.26 and a
significant F value of 3.79 when compared to the critical F value of 3.00.
The very high significance found for Treatment A had an influential effect
on the findings related to the interactions of both variables. Table 4.6,
141
Findings Related to Interactions of Combinations of Independent Variable
Treatment Levels using ANOVA With Tests For Simple Main Effects, is
repeated on this page with other findings in bold print for discussion in the
paragraphs that follow the table.
Table 4.6. Findings Related To Interactions of Combinations of Independent
Variable Treatment Levels Using ANOVA With Tests for Simple Main
Effects
Source
df
SS
1. A
5,918.56
p-l = l
2. B
51.37
q- 1 = 2
3. AB
F
MS
118.51 (p- l){q - 1) = 2
5,918.56 1/9
378.42*
25.69
2/9
1.64
59.26
3/9
3.79**
4. A at bi
1,400.01
p-l = l
1,400.01 4/9
89.51***
5. A at bg
1,863.92
p-l = l
1,863.92 5/9
119.18***
6. A at bj
2,773.14
p-l
= l
2,773.14
6/9
177.31***
7. B at ai
162.59
q-l
=2
81.30
7/9
8. B at ag
7.29
3.65
8/9
q-\-2
9. W i t h i n Cell 4,036.23
pq{n - 1) = 258
10,124.67
10. Total
*F 1 258 = 3.84
* * XT'
9
258 = 3.00
^ .05 ^^
ieis-kp
\^ 258 = 6.63
•k-k'kicp
1^ 258 = 4.61
alpha = .05
npq - 1 = 263
142
15.64
5.20****
.23
t
For combinations of the two independent variables, significant
differences were found between arithmetic means of the evaluator response
values for the three decisions purposes when compared irrespective of the
accounting system information evaluated. That is, when both levels of
Treatment A (accounting system) were combined, there were significant
differences in the arithmetic means of the evaluator response values for the
three decisions areas tested. It should be noted, that when combinations of
treatment levels that were within the financial accounting system level of
Treatment A (accounting systems) were compared, significant differences
were found between the arithmetic means of the evaluator response values
for the three decision purposes tested. When combinations that were within
the ABC/M level of Treatment A (accounting system) were compared, no
significance was found. That is, the evaluators of the financial accounting
system found the information more useful for budgeting purposes than for
financial management purposes, and more useful for financial management
purposes than for strategic decisions dependent on accurate cost object
costs. Contrarily, evaluators of the ABC/M system information found the
information almost equally useful for the all three of the decisions purposes
tested. Note that overall the evaluators of the ABC/M system information
found the information more useful for the three decision purposes tested
143
than the evaluators of the financial accounting system information found for
the same decision purposes.
Computational Procedures and Data
Computational procedures appropriate for analysis of variance using
ANOVA techniques and using the F statistic were performed in order to
determine the statistical significance between evaluator response values for
both independent variables (Treatment A and Treatment B) and for the
interactions between the levels of the two independent variables. The
computational symbols and formulas for the experimental design used in
this experiment (split-plot factorial design with two independent variables)
were taken from Kirk's textbook on experimental design (Kirk, 1995).
Calculations were done without the use of statistical software.
Complete data tables are presented in Appendix H. Summary tables
of the data are presented in this section for the convenience of the reader.
All findings are based on either the complete data table entries presented in
Appendix H or on the summary totals of the data presented in the summary
tables in this section.
144
Table 4.7. Summary Table of Evaluator Responses By Block (Executive,
Middle Manager, or Staff), Treatment A (Financial Accounting and ABC/M),
and by Treatment B (Budgeting, Financial Management, and Strategic
Decisions Dependent On Accurate Cost Object Costs)
Independent
Variable
Treatment A
Blocks Totals
Financial Accounting
ai
Treatment B
bi
b2
134
110
b3 Totals
92 336
176
149
130 455
Block3 Totals
FinancialAccounting
227
229
196
652
Blocks
ABC/M
175
178
192
545
Blockg Totals
ABC/M
331
333
337 1001
Blockg Totals
ABC/M
382
382
383 1147
Block2 Totals
Financial Accounting
a2
BlockSi2,3
Blocks45g
Blocks 12.3.4,5,6
537 488 418 1443
888 893 912 2693
1425 1381 1330 4136
a^ - Financial Accounting System
a2 -ABC/M System
bj - Budgeting Decisions
b2 - Financial Management Decisions
bg - Strategic Decisions Dependent On Accurate Cost Object Costs
Blockg and Blockg = Executives
Blockg and Blockj = Middle Managers
Block, and Blocks = Staff
145
Findings Related to Procedures
for Estimating Strength of
Association. Effect Size, and Power
"Statistical significance is concerned with whether an observed
treatment effect is due to chance. Practical significance is concerned with
whether an observed effect is large enough to be useful in the real world
(Kirk, 1995, p. 177). It is possible that in some experiments, relatively
trivial independent variable effects can achieve statistical significance if a
sufficient number of subjects is included in an experiment. Large sample
sizes may produce significant findings that may not have any practical
importance. The purpose of these tests was to determine if the strength of
association, effect size, and power associated with the data in this
experiment support practical significance as well as the statistical
significance of the findings. A scale for each test has been devised by
statisticians so that the findings for each test for this actual experiment
could be interpreted as to whether the values calculated should be classified
as low, medium, or high. A minimum acceptable value was also defined for
the test of power.
Findings: Strength of Association
The most popular measures of strength of association are partial
omega squareds (w^) for fixed effects. The following guidelines are
146
suggested for interpreting calculated strength of association values for a
specific experiment:
0) = .010 is a small association,
o) = .059 is a medium association,
d)^ = .138 or larger is a large association (Kirk, 1995).
Partial omega squareds for each combination of two independent
variables (Treatments A and B) and for the interaction of the two
independent variables (AB) were calculated. The strength of association
value for treatment A was found to be very large with a calculated value of
.352. The strength of association value for treatment B was found to be
medium with a calculated value of .054, and the strength of association
value for the interaction of the treatment levels was found to be toward the
high end of the medium range with a calculated value of. 124. Not only
were all three of these quantitative associations statistically significant, as
indicated in Table 4.1, Table of Findings for Split-Plot Factorial Design
Using ANOVA presented on p. 130, again in Table 4.2 on p. 133, and again
in Table 4.3, on p. 137, but also the strength of association for all three
significant findings was moderate to very strong. These findings give
additional support to the determination that the incidences of statistical
significance found for Treatment A, for Treatment B, and for the
147
interactions of the two independent variables are valid for real world
decisions.
Findings: Effect Size
A second approach to assessing the practical significance of research
results is based on differences among arithmetic means. This useful
statistical measure was popularized by Cohen in 1988 and was called effect
size. The calculated value for a specific experiment is denoted by d (Kirk,
1995). In this experiment, the researcher developed an experiment for
measuring the usefulness of information. It was difficult, if not impossible,
to specify in advance the minimum difference in the arithmetic means of the
evaluator responses of the two treatment levels of Treatment A and the
three treatment levels of Treatment B and the interactions of the two
t r e a t m e n t s t h a t would be worth detecting from a practical standpoint.
When the measurements of the differences in the arithmetic means of the
evaluator responses are arbitrary and not intuitively obvious, as they were
in this experiment, the use of effect size to convey the magnitude of the
difference found can be helpful in interpreting the practical significance of
the differences found. Cohen determined that ds of .2 were considered
small, .5 was considered medium, and .8 or larger was considered large.
The calculated effect size value for Treatment A was found to be .73, which
148
is considered fairly large. The calculated effect size value for Treatment B
and the interaction of treatments A and B were .22 and .37, respectively,
which are fairly small. The large effect size for the independent variable.
T r e a t m e n t A (accounting system) supports the practical significance of the
finding t h a t ABC/M system information is more highly useful than
information provided by the financial accounting system currently in use by
the subject university for the decision purposes tested. The fairly small
effect size for the independent variable. Treatment B (decision purpose) and
for the interaction of the two independent variables implies a somewhat
diminished support for the practical significance of the statistically
significant finding t h a t the information provided by both accounting
systems was more highly useful for budgeting decisions than for financial
management decisions, and that information for financial management
decisions was more useful t h a n for strategic decisions dependent on
accurate cost object costs.
Findings: Power
The measure called power is a measure of the probability of rejecting
a false hypothesis. A power of .80 is considered by many researchers to be
the minimum acceptable power (Kirk, 1995). The power calculated for the
independent variable Treatment A (accounting system) was .99, which is
149
very large. The power calculated for the independent variable, Treatment B
(decision purpose) was .96, also quite large. The power for the interaction of
the independent variables. Treatments A and B, was an acceptable .80.
These findings gave a high degree of confidence that all of the false
hypotheses were correctly rejected. The probabihty of rejecting a true null
hypotheses was .05.
Stated in words, the confidence level of correctly rejecting any null
hypotheses relating to the two levels of Treatment A (financial accounting
and ABC/M), the three levels of Treatment B (budgeting decisions, financial
management decisions, and decisions dependent on accurate cost object
costs) and the interactions of the levels of Treatments A and B, was very
high. The confidence level of correctly accepting any true null hypotheses
was 95%. Decisions concerning usefulness of information when comparing
existing financial accounting systems with Activity-Based
Costing/Management systems in private universities can be made with
considerable confidence.
Presentation of presumptive arguments, including critical questions
designed to avoid weak arguments, was considered. Although less
conclusive t h a n the statistical evidence, the arguments would have added
legitimate support to the conclusions reached by use of the statistical
methods presented above (Walton, 1996). In the opinion of the researcher.
150
these presumptive arguments were unnecessary due to the strength of the
findings using the statistical analysis described above.
Summarv
The statistical analysis presented in Chapter IV support the finding
t h a t the ABC/M system provides more useful information for: (1) budgeting
decisions, (2) financial management decisions, and (3) strategic decisions
dependent on accurate cost object costs than the financial accounting system
currently in use by the subject institution. The statistical findings
presented also support the conclusions and recommendations presented and
discussed in the following chapter. A statistical null hypothesis was
developed for all three elements of the research question which were all
addressed by the design of the experiment. All three null hypotheses were
rejected at the .05 level. Findings related to the three null hypotheses
needed to answer the research question were presented and discussed.
Computational procedures were explained in brief, and tables of
summarized data were presented in order to aid the reader in
understanding the findings more completely. A group of findings related to
distinguishing the important differences between statistical and practical
significance completed the presentations of this chapter.
151
CHAPTER V
MAJOR FINDINGS, CONCLUSIONS,
AND RECOMMENDATIONS
Introduction
Cost accounting literature produced in recent years contains many
references to the deficiencies of traditional accounting systems relating to
the usefulness of the data for management decisions which commonly
include budgeting, financial management, and strategic decisions dependent
on accurate cost object costs. Activity-based costing, a new approach to cost
accounting, was proposed as a solution to these deficiencies. Many private
universities use the "official" NACUBO financial accounting system for the
external reporting purpose for which it was designed, and for the internal
management decision purpose for which it has been adapted. Information
provided by ABC/M systems has been demonstrated to be superior to
information provided by traditional financial accounting systems for the
management accounting function in commercial organizations. It follows
logically that ABC/M may provide some of the same benefits for higher
education institutions that it has been demonstrated that it does for
commercial organizations.
152
This research was expected to support an affirmative answer to the
research question of whether a complementary ABC/M system provides
more useful information than the sole use of the financial accounting system
for: (1) budget decisions, (2) financial management (control) decisions and
(3) strategic decisions dependent on accurate cost object costs as judged by
executives, middle managers, and staff of a private university. A split-plot
factorial experimental design was employed for this experiment using
ANOVA procedures to measure statistical significance of the arithmetic
means of evaluator responses to fifteen statements in a survey instrument
that could be classified: (1) as to the accounting system that was the source
for the information evaluated (Treatment A), (2) as to the three decision
purposes tested (Treatment B), and (3) as to the interactions of the levels of
the two treatments. Eighty-eight persons with budgeting and financial
management responsibility at Hardin-Simmons University, the subject of
this research, used a fifteen statement survey instrument to evaluate the
usefulness of the information provided by either the financial accounting
system currently in use or by an ABC/M system designed for the subject
university by the researcher using professional software.
Three statistical null hypotheses were formulated to provide possible
support for the conclusions presented in this chapter. They were:
153
Null hypothesis number 1-There is no statistically significant
difference between the arithmetic means of the evaluator response values
for the two treatment levels of the independent variable. Treatment A
(accounting system). This null hypothesis was rejected in view of the
significance found by statistical analysis.
Null hypothesis number 2-There are no statistically significant
differences between the arithmetic means of the evaluator response values
for the three levels of the independent variable, Treatment B (decision
purpose). This null hypothesis was rejected in view of the significance found
by statistical analysis.
Null hypothesis number 3-There were no statistically significant
differences in the evaluator response values for either independent variable
that were associated with the interactions of the levels of the independent
variables, Treatments A and B, and the blocks. This hull hypothesis was
rejected in view of the significance found by statistical analysis.
Major Findings
Finding: Hypothesis Number 1
Related To Treatment A (Type of
AccountingSystem)
Perhaps the result of greatest interest in this experiment was that
the data supported a finding that in the judgement of the executives, middle
154
managers and staff of the subject university, the ABC/M system designed
for the subject university provided more useful information than was
provided by the financial accounting system currently in use at the subject
institution for the three decision purposes tested including: (1) budgeting
decisions, (2) financial management (control) decisions, and (3) strategic
decisions dependent on accurate cost object costs. This extremely important
finding provided empirical evidence that could support a decision by
administrators of private higher education institutions to consider ABC/M
systems on the basis of usefulness of the information provided for the three
decision purposes tested. The practical significance of this major finding
was t h a t administrators may have a high degree of confidence that the
ABC/M system information is more highly useful than information provided
by the financial accounting system typically used by institutions similar to
the subject institution.
The ABC/M system designed by the researcher for the subject
university was compatible with the CMS-PC™ for Windows™ software
used in ABC/M system implementation by all organization t5rpes. A
workbook was provided by the supplier of the software as a system
implementation aid. The workbook specifies five principles of excellence
inherent in the ABC/M system that are incorporated in the software:
1. Continually manage activities, not resources.
155
2. Continually synchronize activities within organization processes.
3. Continually eliminate wasteful activities (tasks).
4. Continually improve activity cost, time, and quahty.
5. Continually empower employees to improve activities.
The information provided to the executives, middle managers, and staff who
evaluated the ABC/M system was produced by the CMS-PC™ 4.0 for
Windows
software provided by ICMS, Inc.
Findings: Hypothesis Number 2
Related to Treatment B
(Decision Purpose)
Of interest also was the finding that the information provided for
budgeting decisions was significantly more useful than for financial
management decisions and more useful for financial management decisions
than for decisions dependent on accurate cost object costs. These decision
purposes are of interest because they are considered by the researcher to be
decisions commonly encountered by administrators, and therefore are
representative of decisions made routinely by administrators of higher
education institutions. Other suggested decision areas that could have been
studied could include financial (external) reporting decisions, financing
decisions, auditing decisions, and financial accounting theory decisions.
156
Three situations at the subject institution may have contributed to
these findings. First, considerable emphasis had been placed on the careful
budgeting of scarce resources for the fiscal years beginning in 1991 and after
by the subject university due to budget deficits in prior fiscal years. As a
consequence, strict budget guidance was provided to all levels of
administration with little variation permitted. Approved changes to the
budget guidance were infrequent. Second, financial management was a
task performed only monthly for smaller programs, but in some programs
within the subject university, it was performed continually. The familiarity
with the financial management process due to the frequency of use may
have had some influence on the valuations. Third, the financial accounting
system provided very limited cost object cost data. Administrators were
routinely provided only cost object information related to the overall cost of
their program and the specific cost accounts utilized by their particular
program. The administrators were unfamiliar with cost object costs of the
type provided for the evaluators of the ABC/M system. Given this context,
the findings related to the decisions for which the information was to be
used appeared to be understandable and logical.
The ABC/M system emphasizes the production of accurate cost object
costs as a primary objective. Costs of activities were traced to several
different cost objects in the ABC/M system. For example, the costs for the
157
instruction activity were traced to six cost objects (cost per class and cost per
student per class, cost per course and cost per student per course, and cost
per professor and cost per student per professor). Staff members (nonacademic) who evaluated the ABC/M system information expressed interest
in the use of accurate cost object cost data as support for requests for budget
increases. Financial management decision information was presented in
the ABC/M system primarily at the activity level, and included depreciation,
utilities, and other prorated costs not normally included in the information
provided for the various programs by the financial accounting system.
Evaluators of the ABC/M system information generally were very interested
in this total-cost concept as opposed to the budgeted-costs-only concept of
the financial accounting system. Budget information for the ABC/M system
was provided by the researcher; therefore, evaluators were not given an
opportunity to participate in the budget preparation process. This may have
contributed to the finding that the budgeting decision purpose information
was viewed as being slightly less useful t h a n the information for the other
two decision purposes in the ABC/M system. The practical significance of
this finding was that logic would suggest that administrators may find they
will be able to make more informed decisions using information provided by
the ABC/M system. The more useful information may also lead to the
reduction of the time required for decisions to be made in each purpose area.
158
A better understanding of the consequences of each decision could also
result.
Findings: Hypothesis Number 3
Related to the Interactions of
Treatments A and B and the Blocks
Within the Financial Accounting system, the information provided for
budgeting decisions was considered more highly useful than for financial
management decisions, and more useful for financial management decisions
than for decisions dependent on accurate cost object costs. In the ABC/M
system, the order of the decision purposes for which the information was
more useful was reversed. For example, information for strategic decisions
dependent on accurate cost object costs was more useful than for financial
management decisions. Information for financial management decisions
was more useful than for budgeting decisions. It should be noted that the
differences in the arithmetic means of the evaluator response values for the
three decision purposes using information provided by the financial
accounting system were large, but the differences in the arithmetic means of
the evaluator response values for the three decision purposes using
information provided by the ABC/M system were quite small. The greater
uniformity of values within the ABC/M system for each decision purpose
compared to the financial accounting system was an indicator of a higher
159
level of overall satisfaction with the ABC/M system information for the
decision purposes tested. The interactions between Treatments A and B
were greatly influenced by the highly significant value found for Treatment
A. The highly significant differences between the two levels of Treatment A
interacting with the relatively modest (but still statistically significant)
differences between the three levels of Treatment B produced statistical
significance for the interactions that is considered to be only moderate.
Recommendations
Policy
In view of the very high statistical significance between the
arithmetic means of the evaluator response values found for the usefulness
of the ABC/M system information over the financial accounting system
information, and because of the findings related to the strength of
association, effect size, and power of the significant differences in the
arithmetic means of the evaluator response values found, this research
supported the conclusion that an ABC/M system provided more useful
information for the decision purposes tested than the financial accounting
system commonly in use by many private higher education institutions.
The policy effect of this conclusion is that administrators should be provided
with the most useful information available for the three decisions purposes
160
t h a t now are (or should be) an integral part of management accounting
systems for all private higher education institutions.
It is also recommended that the financial accounting systems be
retained for external reporting purposes, and that complementary ABC/M
systems be implemented to provide the internal managerial accounting
information needed for effective and efficient management decision making
in private universities. The reasons for this recommendation are twofold.
First, the financial statements of private higher education institutions are
external reporting documents, and must be prepared in accordance with
generally accepted accounting principles. The financial accounting system
used by many private higher education institutions was designed to provide
information that satisfies this very important function. The ABC/M system
was developed as a managerial accounting system designed to produce
information for internal management decision making. No known research
h a s been done to determine if ABC/M systems provide the information
needed to comply with the external reporting standards for private higher
education institutions. Proponents of ABC/M systems (found mainly in
industry) emphasize t h a t the ABC/M systems have an advantage over
financial accounting systems in determining accurate cost object costs. In
manufacturing industries, this advantage could be reflected in more
accurate merchandise inventory or manufactured product values. However,
161
in organizations like higher education institutions, determination of
accurate merchandise inventory costs is not a major accounting issue. Of
greater importance to higher education institutions is the increased
accuracy the ABC/M system may provide in determining the costs of
academic and other services offered by these institutions. ABC/M systems,
employed as complementary systems and enhanced by the functionality of
ABC/M software commercially available, could enhance the limited
provision for internal management decision information available from
existing financial accounting systems.
Second, administrators may be reluctant to replace existing financial
accounting systems without a history of a considerable number of successful
implementations of ABC/M systems in higher education institutions. No
example of a comprehensive successful or unsuccessful implementation of
an ABC/M system in a private higher education institution was found in the
literature review for this investigation. Texas Tech University has
successfully implemented ABC/M in the Extended Learning Section of the
Division of Continuing Education under the direction of Dr. Suzanne Logan,
Director. This suggests that implementation of an ABC/M system in public
higher education institutions on a comprehensive basis may also be feasible.
Fortunately higher education institutions can enjoy the advantages of a
complementary ABC/M system without the necessity of replacing existing
162
financial accounting systems. The cost of an ABC/M system for institutions
similar to the subject institution would be dependent on the particular
needs and degree of use in each institution.
To maximize the advantages of an ABC/M system and to create a
culture of excellence, policy changes to adopt the five principles of excellence
in management, i.e., (1) continually manage activities, not resources; (2)
continually synchronize activities within organization processes; (3)
continually eliminate wasteful activities (tasks); (4) continually improve
activity cost, time, and quality; and (5) continually empower employees to
improve activities would be strongly encouraged. The adoption of these
principles may require significant restructuring of the organization and
policies of the administration of many private higher education institutions.
Practice
ABC/M systems focus on continuous improvement as a primary
objective. One approach to facilitating the process of continuous
improvement is the use of teams at both the departmental and highest
administrative levels. These teams would be responsible for identifying
continuous improvement opportunities and time frames, specifying and
providing resources (budget authority), and suggesting implementation
procedures. Among the most fundamental targets for continuous
163
improvement would be the activities that are classified as central to the
mission of the organization (primary activities) and the activities that
administratively support the primary activities (secondary activities).
Examples of primary activities for private higher education institutions are
teaching, research, advising, and university service. Examples of secondary
activities for the academic area could include clerical, janitorial,
maintenance, and utilities management. The number of primary activities
in an institution should be much greater than the number of secondary
activities.
Budgeting under ABC/M links work activities with the strategic cost,
time, and quality objectives of the organization. It is focused on activities
and the workload needed to achieve them. The budget focuses on the
workload, not the worker. The budget should constitute an analysis of what
the organization plans to do (activities), not so much what the organization
plans to spend. Budget resource requirements for all activities could then
be determined by multipljdng the output volume for each activity by the cost
per unit of output. For example, resources to be applied to the teaching
function for a particular class could be determined by multiplying the cost
per student for that particular class of the recent past by the number of
students expected to enroll in the class during the fiscal period for which the
budget is being prepared. Financial resource constraints could then be
164
addressed by reducing the output volumes of some or all activities rather
than by perhaps more disruptive across-the-board percentage cuts often
experienced by all university programs.
ABC/M, if implemented by a group of peer institutions, could provide
information to benchmark best practices for emulation by all members of
the peer group. With activities common to all peer institutions serving as
the basis for bench marking, successful continuous improvement practices
and procedures could be shared among the institutions. Reduction of the
time for overall improvement of the management process for all of the
members of the group could result. Certain common elements such as
activities, output measures, cost structures, and cost objects would be
required of each member wishing to share in the benchmark experiences.
Research
Additional research will be needed to answer questions relating to
whether ABC/M system information is more useful than financial
accounting systems for other decision purposes such as financing decisions,
auditing decisions, and financial accounting theory decisions in private
higher education institutions. Research also will be needed to answer the
question as to the extent to which ABC/M system information will satisfy
the financial accounting reporting requirements for these institutions.
165
The applicability of ABC/M to private higher education institutions
that are larger and more complex than the subject institution will require
additional research. Also, the applicability of ABC/M to public higher
education institutions will require still additional research. Activity-Based
Costing and the management system based on it has the potential for
becoming the catalyst for changes leading to significant improvement in
financial and nonfinancial administration of higher education institutions.
Conclusions
The research question to be answered for this study was: Does the use
of a complementary ABC/M system provide more useful information than
the sole use of the financial accounting system for (1) budgeting decisions,
(2) financial management (control) decisions and (3) strategic decisions
dependent on accurate cost object cost as judged by executives, middle
managers and staff of a private university? A positive answer to this
question would provide significant empirical evidence as to the advantages
of ABC/M systems over financial accounting systems in the provision of
management accounting information in private universities. An additional
purpose identified for this study was that a workable prototype ABC/M
system for institutions similar to the subject institution would result.
166
Inspection of the evaluator response values and the statistical
analysis of the data supported the conclusion that the ABC/M system
information was significantly more useful for the decision purposes tested
t h a n the information provided by the sole use of the financial accounting
system presently in use by the subject institution. The significant
improvement in the usefulness of the information, as evidenced by the data
analysis in this study, has the potential for significant improvement in the
management decisions required of administrators of institutions similar to
the subject institution. The conclusions expressed for this study appears to
represent significant progress in the determination of universal applicability
of ABC/M to private higher education institutions similar to the subject
institution of this study.
167
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181
APPENDIX A
FINANCIAL ACCOUNTING
SYSTEM COST FLOW DIAGRAM
182
FINANCL\L ACCOUNTING
SYSTEM COST FLOW DIAGRAM
The diagram appears on the page following this explanation.
Cost flows in the traditional costing system involve only direct costs.
The system does not permit the determination of the total direct and
indirect costs for any chosen cost object. Support costs (indirect costs) are
represented as separate line items and are not allocated to the consuming
units (Acton & Cotton, 1997).
Information about the cost of specific cost objects is difficult to
determine from information provided by the system. Thus, users of this
information find it difficult to answer questions regarding which academic
units are self-sustaining and which contribute positively to covering the
university's overhead (Acton & Cotton, 1997).
Direct costs are traced to each level of the organization chart. Since
no allocation of indirect costs is made, cost objects are defined as those
having direct costs only. The total costs of the cost objects are
systematically understated by the lack of allocation of indirect costs.
The system's main strength is t h a t it is fairly simple and intuitive.
When actual amounts expended are compared to budgeted expenditures, an
accurate assessment of remaining unexpended resources results. The
183
primary weaknesses of this system are that it is inflexible and does not yield
accurate cost object costs.
184
DIRECT COSTS
ACADEMIC
EXECUTIVE
ADVANCE.
FINANCE &
MANAGEMENT
STUDENT & VICE
[DEVELOPMENT PRESIDENTS
COLLEGES &
THEOLOGY
V
SCHOOLS
y
COST OBJECTS
Figure A.l. Financial Accounting System Cost Flow Diagram
185
APPENDIX B
ABC/M SYSTEM
COST FLOW DIAGRAM
186
ABC/M SYSTEM
COST FLOW DIAGRAM
The diagram appears on the page following this explanation.
Cost flows in an ABC/M system involve direct tracing of direct costs to
the cost object, and a series of allocations of indirect costs which ultimately
become p a r t of the cost object costs after considerable refinement. Indirect
costs are accumulated in several homogeneous cost pools. They then are
allocated through processes, and perhaps through additional hierarchical
layers, to activities. The advantage of using multiple indirect cost pools is
t h a t each pool may be allocated on a basis that most nearly represents a
correct measurement of the consumption of those costs.
Activities are used as final cost accumulation/allocation devices
because of their action orientation. The final cost objects are charged with
the directly traced costs and also with the proportion of each activity cost
t h a t is consumed by the cost object. More direct cost tracing and more
logical allocation of indirect costs result in more accurate cost object costs.
The activities also provide the framework for management (control) of
the tasks performed within the activities. These tasks may be classified as
value-added or non-value-added, and also as primary or secondary to the
purpose of the activity. Continuous improvement, the key to success in
187
managing activities, occurs when non-value-added tasks are eliminated.
AB/M involves, therefore, not only a managerial accounting cost system, but
also a management system that promotes the achievement of excellence
through continuous improvement.
188
COSTS
DIKECTLT
TRACEABLE TO
THE COST
OBJECT
ABC MULTI-STAGE COST ALLOCATION MODEL
[NDIKECT
COSTS NOT
DIKECTLT
TRACEABLE TO
THE COST
SPBJECT
HOM)0iG£K^OtfSINDIREClTCflST POOLS
Figure B.l. ABC/M System Cost Flow Diagram
189
J
APPENDIX C
ORGANIZATION CHART FOR
HARDIN-SIMMONS UNIVERSITY
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APPENDIX D
EXECUTFVES, MIDDLE
MANAGERS AND STAFF FOR
HARDIN-SIMMONS UNEVERSITY
192
EXECUTIVES, MIDDLE
MANAGERS AND STAFF FOR
HARDIN-SIMMONS UNIVERSITY
Executives
Dr. Jesse C. Fletcher, Chancellor
Dr. Lanny Hall, President
Dr. W. Craig Turner, Executive Vice President and Chief Academic Officer
Mr. Wayne Roy, Vice President for Advancement
Dr. Michael Whitehorn, Vice President for Student Development
Mr. Harold R. Preston, Senior Vice President for Finance and Management
Dr. Lawrence R. Clayton, Dean, College of Arts and Sciences
Dr. Lynn G. Gillette, Dean, School of Business
Dr. Peter J. Oilman, Dean, School of Education
Dr. Loyd F. Hawthorne, Dean, School of Music
Dr. H. K. Neely, Dean, School of Theology
Dr. J. Paul Sorrels, Dean, Graduate Studies and Special Programs
Mr. Shane Davidson, Associate Vice President of Enrollment Services
Dr. Dan McAlexander, Associate Vice President for Planning
Mr. M. Watson Moore, Controller
Mr. John M. Neese, Athletic Director
193
Mrs. Alice Specht, Director of University Libraries
Dr. Dannis D. Cooper, Director of Foreign Studies
Middle Managers
Mrs. Susan L. Allen, Head, Department of Social Work
Dr. Darrel Baergen, Head, Department of Communication
Dr. Bobby H. Bammel, Head, Department of Geological Sciences
Dr. Robert C. Barnes, Head, Department of Counseling/Human Dev.
Dr. Terry L. Bratton, Associate Vice President for Information Management
Dr. Julian C. Bridges, Head, Department of Sociology
Mrs. Laura Pogue, Head, Department of English
Dr. John C. Campbell, Head, Department of Performance Studies
Mrs. Linda Carleton, Dean of Students
Ms. Linda D. Fawcett, Head, Department of Art
Dr. Charles W. Garraway, Head, Department of Political Science
Mr. Earl T. Garrett, Director of Human Resources
Dr. Wilham R. Gould, Head, Department of Physical Therapy
Dr. Carol D. Haire, Head, Department of Speech/Pathology/Audiology
Dr. Edwin J. Hewett, Head, Director of Mathematics
Dr. James P. Ivey, Head, Department of Theatre
Dr. Bertie W. Kingore, Head, Dept. of Elementary/Secondary. Education
194
Mrs. Dorothy M. Riser, Registrar
Dr. Paul Madden, Head, Department of History
Mrs. Rhonda Manry, Associate Dean of Students, Housing Director
Dr. Randall J. Maurer, Director of Family Psychology
Dr. Larry R. McGraw, Director of Academic Services
Dr. Christopher L. McNair, Head, Department of Biology
Mrs. Laura L. Moore, Assistant to the President for University Relations
Dr. Andy J. Patterson, Head, Department of Music Theory and Composition
Dr. John Peslak, Head, Department of Chemistry and Physics
Dr. Ronald Rainwater, Head, Department of Physical Education
Mrs. Martha Ferguson, Manager, University Printing
Dr. Gary J. Stanlake, Director of Environmental Sciences Program
Dr. Teresia E. Taylor, Head, Department of Foreign Language
Dr. Doug P. Thomas, Head, Department of Psychology
Dr. Larry R. Welz, Head, Department of Music History and Literature
Staff
Dr. Randy L. Armstrong, Director of Student Publications
Dr. Virginia C. Armstrong, Director of Legal Studies
Mr. Bruce D. Ayers, Director of Church Relations
Mr. Bill Bailey, Assistant Vice President for Development
195
Mrs. Sue Ann Biggs, University Nurse
Mrs. Mary Brown, Assistant Controller
Mrs. Linda S. Butts, Coordinator of Building Maintenance
Mr. Glen Casselberry, Director of Physical Properties
Mr. Louis R. (Bobby) Cobbs, Assistant Vice President for Development
Mr. Steve Coleman, Head Baseball Coach
Mrs. Gayle W. Davis, Manager of Development Services
Mr. Don L. Dearman, Chief of Police
Mr. Lance E. Drake, Tennis Coach
Dr. Larry Brunner, Professor of English
Mr. Cory A. Foster, Head Soccer Coach (Men)
Mrs. Julie A. Goodenough. Head Basketball Coach (Women)
Mr. Marion Jeff Goodin, Golf Coach
Mrs. Sandra S. Graham, Admin. Assist, to Sr. Vice Pros, for Fin. and Mgmt.
Dr. William A. Grice, Director for Physical Education Graduate Studies
Mr. Dennis Harp, Head Basketball Coach (Men)
Mrs. Connie Carrington, Assistant Director, Career Services
Mrs. Britt Jones, Director of Alumni Relations
Mrs. Debra E. Jones, Director of White Horse Program
Mr. Jimmie Keeling, Head Football Coach
Ms. Holly Tarter, Head Vollyball Coach
196
Mr. Tim McCarry, Facihties Coordinator
Mrs. Brenda J. McClintock, Post Office Manager
Mr. Palmer McCown, Director of Religious Activities
Mr. Michael Scot Miller, Head, Department of Philosophy
Mr. Charles Richardson, Director of Media Relations
Mrs. Rena K. Richardson, Volleyball Coach
Mr. Joe Seaton, Jr., Director of Physical Properties-Construction
Dr. Warren K. Simpson, Director of Campus Recreational Sports and Clubs
Mr. David Stovall, Director of Business Services and Telecommunications
Mr. David Stuckey, Athletic Trainer
Mrs. Sandra K. Toy, Coordinator, Center for Life Long Learning
Mr. Charles Walts, Director of Computer Science Laboratories
Mr. Jason Wharton, Head Soccer Coach (Women)
197
APPENDIX E
GLOSSARY
-•p^,"
198
y
GLOSSARY
ACTIVITY MAP. Flowchart or diagram showing the hierarchy of
relationships of between activities within an organization (Morrow &
Hazell, 1992).
AMERICAN ACCOUNTING ASSOCIATION. A private organization
dominated by accounting educators, although many practicing
accountants are active members. The organization exists to foster
improvements in accounting education and research and in
accounting principles. It publishes The Accounting Review,
Accounting Horizons, and Issues in Accounting Education (Brown,
1992).
AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS. A
national professional organization of CPAs. It publishes The Journal
of Accountancv in addition to many other useful documents (Freeman
& Shoulders, 1993).
ATTRIBUTE BASED COSTING. A costing system based on cause-andeffect relationships. Predetermined characteristics serve as cost
drivers (Walker, 1992).
AUDITING DECISIONS. Decisions relating to the attest function
performed by external or internal auditors (Arens & Loebbecke,
1994).
BAR CODING. A machine-readable system of labeling that provides for
controlling and accounting for items as they are moved, stored, or
produced
BATCH RELATED COSTS. The costs of resources sacrificed on activities
that are related to a group of units of products or services rather than
to each individual unit of product or service (Horngren, Foster &
Datar, 1997).
BIG SIX ACCOUNTING FIRM. International public accounting firm
recognized as one of the six largest and most prestigious firms in the
world.
199
BOTTOM LINE. The amount representing net income on the income
statement of a company
CAPACITY PLANNING. Planning the production volume or some other
cost driver (Raiborn, Barfield & Kinney, 1993).
CAPITAL ACQUISITION. Acquisition of assets with a useful life of more
than one accounting period (Wilhams, Stenga & Holder, 1995).
CASH INFLOW. Receipt of cash (Raiborn, Barfield & Kinney, 1993).
CASH OUTLAY. Disbursement of cash (Raiborn, Barfield & Kinney, 1993).
CAUSE AND EFFECT. Criterion for identifying the variable or variables
that cause cost objects to incur costs. Most credible criterion for
operational allocations (Williams, Stanga & Holder, 1995).
CHART OF ACCOUNTS. A hsting of an organization's general ledger
accounts including asset, liability, capital, income, and expense
accounts (Williams, Stanga & Holder, 1995).
COARSE INFORMATION SYSTEM. Costing system that provides less
precise costing information, but at a lesser cost than fine costing
systems (Ricketts, 1992).
CODING STRUCTURE. Numbering system logically developed and
assigned to the general ledger accounts of an organization (Freeman
& Shoulders, 1996).
COMPLIANCE REPORTING. Financial and non-financial reporting
required by governmental agencies or due to contractual
commitments (Freeman & Shoulders, 1996).
CONTINUOUS IMPROVEMENT. Process of identifying opportunities for
improvement so that decisions may be made to correct less than
optimal operations (Brimson & Antes, 1994).
CONTRIBUTION MARGIN. Revenues minus all costs of the output (a
product or service) that vary with respect to the number of output
units (Horngren, Foster & Datar, 1997).
200
COST DECOMPOSITION. Breaking down of the elements comprising the
cost of a product or service (Brimson & Antos, 1994).
COST DRIVERS. Factors that affect total costs; that is, a change in the cost
driver will cause a change in the level of the total cost of a related cost
object. Factors that cause costs to be incurred (Horngren, Foster &
Datar, 1997).
COST ELEMENT. A portion of the total cost that represents the cost of
specific parts of the product or service. Specific parts of the product
or service include materials, labor, and overhead (Brimson, 1989).
COST OBJECT. Anything for which a separate measure of costs is desired
(Horngren, Foster & Datar, 1997).
COST OF GOODS SOLD. The total cost of products that were sold during
the accounting period being reported (Williams, Stanga & Holder,
1995)
COST PLUS PRICING. System for pricing products or services that is
based on actual allowable cost plus a fixed fee (Horngren, Foster &
Datar, 1997).
COST POOL. A grouping of individual cost items (Horngren, Foster &
Datar, 1997).
COST TO SERVE. Cost associated with servicing the wants and needs of a
customer (Brimson & Antos, 1994).
CUSTOMER PROFITABILITY ANALYSIS. Examines how individual
customers, or groupings of customers, differ in their profitability
(Horngren, Foster & Datar, 1997).
DATABASE SOFTWARE. Application software designed to accommodate
large volumes of data that can be sorted, retrieved, merged, and
otherwise manipulated to provide data useful to managerial decisionmaking
201
DEPRECIATION. Allocation of capitalized costs of property, plant, and
equipment to the periods benefitting from the use of the assets on the
basis of several estimates concerning the use of the assets (Williams,
Stanga & Holder, 1995).
DIRECT COSTS. Costs that are related to a particular cost object and that
can be traced to it in an economically feasible way (Horngren, Foster
& Datar, 1997).
DISCRETIONARY INVESTMENT. Arise from periodic (usually yearly)
decisions regarding the maximum outlay to be incurred. Are not tied
to a clear cause-and-effect relationship between inputs and outputs
(Horngren, Foster & Datar, 1997).
DUAL COSTING SYSTEM. A system that determines for a selling division
the price of products or services at market or negotiated market price
and a buying division to record the transfer at a lower cost-based
amount (Raiborn, Barfield & Kinney, 1993).
ENGINEERED COST SYSTEM. Costing system that results specifically
from a clear cause-and-effect relationship between costs and outputs
(Horngren, Foster & Datar, 1997).
EXTERNAL REPORTING. Basic, general purpose financial statements
designed for and prepared for external use. The financial statements
included are the Balance Sheet, the Income Statement, the Cash
Flow Statement, and the Statement of Stockholders' Equity
(Wilhams, Stanga & Holder, 1995).
FACILITY SUSTAINING COSTS. The costs of resources sacrificed on
activities that cannot be traced to specific products or services but
support the organization as a whole (Horngren, Foster & Datar,
1997).
FACTORY OVERHEAD. All manufacturing costs considered to be part of
the cost object but that cannot be individually traced to that cost
object in an economically feasible way (Horngren, Foster & Datar,
1997).
202
FINANCIAL ACCOUNTING STANDARDS BOARD. Official private sector
body charged with estabhshing and improving generally accepted
accounting principles in the United States (Williams, Stanga &
Holder, 1995).
FINE INFORMATION SYSTEMS. Cost accounting systems that produce
more exact costing information than coarser systems, but at the cost
of more complexity (Ricketts, 1992).
FIXED COST. Cost that does not change in total despite changes in a cost
driver (Horngren, Foster & Datar, 1997).
FULL ABSORPTION COST. Inventory costing method in which all
variable manufacturing costs and all fixed manufacturing costs are
included in inventoriable costs (Horngren, Foster & Datar, 1997).
FULL-TIME EQUIVALENT. A designation apphed to a number of enrolled
semester credit hours that describe a full-time student (Clark, 1987).
FUNCTIONAL BUDGETING. Preparation of a document in which costs
that are incurred for the same basic purpose are grouped together
(Raiborn, Barfield & Kinney, 1993).
GENERAL LEDGER. A record of information about specific assets,
liabilities, equity, revenues, and expenses. The accounts are
maintained with a double-entry system of debit and credit. The
accounts provide information on balances, changes, and other historic
information useful for financial reporting (Ainsworth et al., 1997).
GOVERNMENTAL ACCOUNTING STANDARDS BOARD. A division of
the Financial Accounting Foundation, it formulates accounting
principles for state and local governmental entities (Freeman &
Shoulders, 1996).
HISTORIC COSTING. Cash-equivalent payment actually made to acquire
an asset and put the asset to its intended use (Ainsworth et al., 1997).
HOMOGENEOUS COSTS. Costs which have the same or similar causeand-effect relationship or benefits-received relationship between the
cost allocator and the costs of the cost object (Horngren, Foster &
Datar, 1997).
203
INCREMENTAL COSTS. Additional costs to obtain an additional quantity
over and above existing or planned quantities of a cost object
(Horngren, Foster & Datar, 1997).
INDIRECT COSTS. Costs that are related to the particular cost object but
cannot be traced to it in an economically feasible way (Horngren,
Foster & Datar, 1997).
INTEGRATED ACCOUNTING SYSTEM. An accounting system that
allows organizations to disclose relevant financial and non-financial
information on a timely basis without duplication (Williams, Stanga
& Holder, 1995).
INVENTORIES. Specific type of capitalized costs. Those capitalized costs
associated with the purchase of goods for resale or costs associated
with the acquisition and conversion of materials and all other
manufacturing inputs into goods for sale (Williams, Stanga & Holder,
1995).
INVESTMENT ANALYSIS. Capital budgeting (Horngren, Foster & Datar,
1997).
J U S T IN TIME (JIT). Production system in which each component on a
production line is produced immediately as needed by the next step in
the production line. Inventories received immediately prior to time
needed in the production process (Horngren, Foster & Datar, 1997).
KEY INDICATORS. Factors that directly affect customer satisfaction such
as cost, quality, time, and innovative products and services. Factors
t h a t are considered to be critical in the success of any endeavor
LEVERAGE. Use of long-term and short-term credit in place of capital
investment to provide required capital for investment or operations
(Wilhams, Stanga & Holder, 1995).
LOGISTICS. Industry t h a t provides for procurement, maintenance, and
transportation of materiel, facilities, and personnel
MAKE OR BUY DECISIONS. Decisions about whether a producer of goods
or services will produce them within the organization or purchase
them from outside vendors (Horngren, Foster & Datar, 1997).
204
NATIONAL ASSOCIATION OF COLLEGE AND UNIVERSITY BUSINESS
OFFICERS. A private organization dedicated to improving the
financial management information used by college and university
business officers, academic officers, and members of governing boards
(Freeman & Shoulders, 1996).
NEW MANUFACTURING ENVIRONMENT. An environment embracing
various strategies (Materials Requirements Planning, Just-In-Time
production, Computer Integrated Manufacturing, and Total Factor
Productivity) for improving manufacturing effectiveness and
efficiency (Horngren, Foster & Datar, 1997).
NONLINEAR COST. Cost, the graph for which, does not form a straight
line within the relevant range (Horngren, Foster & Datar, 1997).
NONPROFIT ORGANIZATIONS. As non-government organizations, these
organizations include voluntary health and welfare organizations and
colleges and universities, and all other organizations that finance
their services with user charges or membership fees charged to the
primary recipients of the services (cemetery organizations, museums,
religious organizations, etc.) (Freeman & Shoulders, 1996).
NON-VALUE-ADDED COSTS. Costs that, if ehminated, would not reduce
the value customers obtain from using the product or service
(Horngren, Foster & Datar, 1997).
OBJECT OF EXPENDITURE. An expenditure control system that reports
the amounts expended for specific goods or services (salaries and
wages, supplies, capital outlay, etc.) needed by operating units for
which budgets are prepared (Freeman & Shoulders, 1996).
OPERATIONAL GOALS. Expectations of performance for an on-going
organization that are expressed in units, dollars, and in non-financial
terms
OUTSOURCING. Process of purchasing goods and services from outside
vendors rather than producing the same goods or providing the same
services within the organization (Horngren, Foster & Datar, 1997).
205
OVERHEAD. The indirect or supporting costs of converting materials or
supplies into finished products or services. Does not include direct
materials or direct labor (Raiborn, Barfield & Kinney, 1993).
PERFORMANCE MEASURES. Financial and non-financial information
used in bench-marking performance against similar exemplary
organizations
PRODUCT COST. Sum of the costs assigned to a product or service for a
specific purpose (Horngren, Foster & Datar, 1997).
PRODUCT DFVERSITY. The number of different types or products or
services produced
PRODUCT SUSTAINING COSTS. The costs of resources sacrificed on
activities undertaken to support specific products or services
(Horngren, Foster & Datar, 1997).
PRODUCTION. The coordination and assembly of resources to produce a
product or deliver a service (Horngren, Foster & Datar, 1997).
PRODUCTIVITY. Measures the relationship between actual inputs used
and actual outputs achieved; the lower the inputs for a given set of
outputs or the higher the outputs for a given set of inputs, the higher
the level of productivity (Horngren, Foster & Datar, 1997).
QUALITY. Refers to fitness for use, the degree to which a product satisfies
the needs of a customer, and the degree to which a product conforms
to design specification and engineering requirements (Horngren,
Foster & Datar, 1997).
RE-ENGINEERING. Radical redesign of strategic value-added
organizational processes and the systems, policies, and the structures
that support them to optimize activity work flows and productivity in
an organization
REGRESSION. Statistical model that measures the average amount of
change in the dependent variable that is associated with a unit
change in one or more independent variables (Horngren, Foster &
Datar, 1997).
206
RESEARCH AND DEVELOPMENT. The generation of and
experimentation with ideas related to new products, services, or
processes (Horngren, Foster & Datar, 1997).
RETURN ON INVESTMENT. Accounting measure of income divided by an
accounting measure of investment (Horngren, Foster & Datar, 1997).
REVENUES. Inflow of assets received in exchange for products or services
provided to customers (Wilhams, Stagna & Holder, 1995).
SINGLE-CASE STUDY. Analogous to a single experiment in which only
one case represents a critical test of the research question (Yin, 1994).
STANDARD COST. Carefully predetermined cost. Standard costs can
relate to units of input or units of output (Horngren, Foster & Datar,
1997).
STRATEGIC DECISIONS. Decisions related to how an organization best
combines its own capabilities with the opportunities in the market
place to accomplish its overall objectives
SUPPORT ACTIVITIES. Activities that provide the services that maintain
other internal departments in the organization (Horngren, Foster &
Datar, 1997).
TARGET COSTING. Estimated long run cost of a product or service that
when sold at the target price enables the company to achieve the
targeted income per unit. Target cost per unit is derived by
subtracting the target operating income per unit from the target price
(Horngren, Foster & Datar, 1997).
TQM. Total Quahty Management
UNIT RELATED COSTS. Costs related to a specific unit or group of units
within the production organization (Horngren, Foster & Datar, 1997).
VALUE ADDED COST. A cost that, if ehminated, would reduce the value
customers obtain from using the products or services (Horngren,
Foster & Datar 1997).
207
VARIABLE COST. Cost that changes in total in proportion to changes in a
cost driver (Horngren, Foster & Datar, 1997).
VARIANCE ANALYSIS. Analysis of the difference between an actual result
and a budgeted amount when that budgeted amount is a financial
variable reported by the accounting system (Horngren, Foster &
Datar, 1997).
VOLUME RELATED ALLOCATION BASE. Base used to allocate overhead
costs to cost objects that focuses on the volume of units of production
rather than a base that better relates cause-and- effect between the
costs and the cost object (Brimson & Antos, 1994).
WORK IN PROCESS INVENTORY. Goods partially worked on but not yet
fully completed (Horngren, Foster & Datar, 1997).
ZERO DEFECTS. A production strategy that attempts to produce only
goods or services with no important deficiencies; perfect, salable
products (Horngren, Foster & Datar, 1997).
208
APPENDIX F
EVALUATION INSTRUMENT AND
ADMINISTRATION PROCEDURES
209
EVALUATION INSTRUMENT
FINANCIAL ACCOUNTING SYSTEM
(or)
ACTIVITY-BASED COSTING/MANAGEMENT SYSTEM
Preparer's Name
Date Prepared
Code Explanation
5 - Strongly Agree
4 - Agree
3 - Neutral
2 - Disagree
1 - Strongly Disagree
Circle the response with which you agree.
Statements Relating to
Budgeting Decisions
1. The data provided are highly useful for
decisions relating to the allocation of
resources to continuing programs.
5-
2. The data provided are highly useful
for decisions relating to the allocation of
resources to redesigned programs.
1-
3. The data provided are highly useful for
decisions relating to the allocation of
resources to new programs.
5-
-4
3
2-
4. The data provided are highly useful for
decisions relating to quantif5ring plans
by means of a fixed (or variable) budget.
1- -—2
3
4
5
5
3
2
1
The data provided are highly useful for
decisions relating to the selection of
financial and non-financial performance
measurements.
210
-4
4
3
2
1
-4
5
Evaluation Instrument (Continued)
Statements Relating to Financial Management (Control) Decisions
1. The data provided are highly useful for
decisions relating to the analysis of budget
1
variances.
2
3
4
5
2. The data provided are highly useful for
decisions relating to process design or
revision.
5
4
3
2
1
3. The data provided are highly useful for
decisions relating to the achievement of
financial performance standards.
1
2
3
4
5
4. The data provided are highly useful for
decisions relating to the achievement of
non-financial performance standards.
5-
•4
3
2
1
5. The data provided are highly useful for
decisions relating to the detection of
non-value-added tasks and procedures.
1- — 2
3
4
5
Statements Relating to Strategic Decisions
Dependent on Accurate Cost Object Costs
1. The data provided are highly useful for
break-even analysis for each cost object.
5
3
2
1
2. The data provided are highly useful for
analysis of the degree of "profitability"
attained for each selected cost object.
1- -2—-3
4
5
3. The data provided are highly useful for
strategic decisions relating to expansion
of "profitable" programs.
5-
•2
1
211
4
Evaluation Instrument (Continued)
The data provided are highly useful for
strategic decisions relating to revision or
elimination of "unprofitable" programs.
1
•2
3
4
The data provided are highly useful for
strategic decisions relating to the
minimization of the detrimental effects of
"unprofitable" programs.
5- - 4
3
2-
212
5
INSTRUCTIONS TO EVALUATORS
I. Determination of Familiarity With The Information
A. Step 1-Determine the familiarity with the information provided
by the accounting system to be evaluated by the respondent.
a. Question: How would you rate your familiarity with the
financial accounting system?
b. Question: How would you rate the usefulness of the
information you receive now for all purposes overall?
c. Question: Would the data be more useful to you for
budgeting, financial management, and strategic decision making if
you got budgeted and actual cost data on specific cost objects?
Specific cost objects applicable to the evaluator's program were
provided. All respondents indicated that they had a significantly high
level of familiarity with the financial accounting system information.
B. It was confirmed with the evaluators of the ABC/M system that
they had no or nearly no familiarity with the ABC/M system information.
213
II. Explanation of the Two Accounting Systems
A. Financial Accounting System
1. Focus or purpose of the system is to provide information for
external reporting purposes (Annual Reports). A copy of a recent
annual report was shown to the evaluator.
2. Information complies with the Financial Accounting
Standards Board pronouncements.
3. Present the information to be evaluated. Discuss details.
4. Discuss the uses to which the information is typically put.
a. External reporting (Annual Report).
b. Budget preparation.
c. Financial management review.
d. Strategic decisions based on accurate cost object data.
B. Activity-Based Costing/Management System
1. Based on the concept that institutions incur costs because
they do things. The system accumulated data on the activities that
are done and the production of those activities.
2. Focus of the system-Internal Management Decisions.
3. Budget preparation.
4. Present the information to be evaluated. Discuss details.
5. Discuss the typical uses to which the information is put.
214
a. Internal management decisions.
b. Budget preparation.
c. Financial management review.
d. Strategic decisions based on accurate cost object data.
III. Review and Interpret the Statements On the Survey Instrument.
A. Explain any technical meanings of terms used in the statements.
B. Explain any terms that are unfamiliar to the evaluator.
215
MEMORANDUM REQUESTING PARTICIPATION
To:
From: Derrell H. Moore, Associate Professor of Accounting, School of
Business, HSU
Subject: Case Study
Date: July 7, 1998
H a r d i n - S i m m o n s is the subject of a case study in a c c o u n t i n g
s y s t e m s r e l a t e d to m y doctoral dissertation topic. The study involves
the evaluation of the existing financial accounting system (as it relates to
each area of responsibility) by half of the eighty-eight persons with
budgeting and financial management responsibilities at HSU. The other
half will evaluate (as it relates to each area of responsibility) a new
complementary management accounting system that I have designed for
HSU. You are one the persons involved in the subject group and were
randomly assigned to your respective group.
P a r t i c i p a n t i n v o l v e m e n t will be limited to a r e s p o n s e to fifteen
s t a t e m e n t s expressing the participant's judgement as to the usefulness of
the data provided by the accounting system being evaluated for budgeting,
financial management, and decision making purposes.
I would like to meet with each participant to explain in greater detail the
purpose of the study, the expected results, and the participant's
involvement. I will provide the materials required for your response. For
planning purposes, the entire session should not require more t h a n fifteen
m i n u t e s of your time.
Since you are among the eight-eight persons that make up the two
evaluation groups, I respectfully request that you i n d i c a t e y o u
p r e f e r e n c e for a d a y and t i m e d u r i n g o n e of t h e t h r e e w e e k s
i n d i c a t e d b e l o w to m e e t w i t h m e in your office to make your
evaluation. Of course, you are not required to participate, but your help
would be greatly appreciated.
216
Date
July 13, 14, 15, 16, 17 (Circle one)
OR
July 20, 21, 22, 23, 24 (Circle one)
OR
July 27, 28, 29, 30, 31 (Circle one)
Time
_AM, PM (Circle one)
_AM, PM (Circle one)
_AM, PM (Circle one)
Please fold and staple this memo at the places indicated and return
it to me at your convenience.
217
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219
APPENDIX G
COST ACCOUNTING PILOT PROJECT
220
COST ACCOUNTING PILOT PROJECT
TRADITIONAL ACCOUNTING SYSTEM COMPARED TO ACTR^TYBASED COSTING SYSTEM FOR THE PURPOSES OF DECISION
MAKING RELATED TO BUDGETING
MARCH, 1988
NAME OF EVALUATOR
DATE SUBMITTED
221
COST ACCOUNTING PROJECT
TRADITIONAL ACCOUNTING SYSTEM
CHRISTIAN COLLEGE, BUSINESS DIVISION
BUDGET EVALUATION
Partial Organization Chart
President
FUNCTIONS
1
1
1
VP
Davalopmant
VP Acidamic
Affaira
VP Studant
Affaira
t
VP
Fin & Acct
Artf/Sci Div
Thaolofjr Div
f
DIVISIONS
^
KducatioB Div
B u i i s a i i Div —i
Acct
DEPARTMENTS
MktK
Mgmt
Figure G.l. Partial Organization Chart for Christian College, Business
Division
222
DIRECT COSTS
NO INDIRECT COST
ALLOCATIONS
FUNCTIONS
DIVISIONS
Figure G.2. Cost Flows-Traditional System
223
DEPARTMENTS
Projected Direct Costs:
Salaries/Benefits:
Faculty
Accounting Department
Assistant Professor A
Associate Professor A
Professor/Dept Head A
Subtotals
Computer Science Department
Adjunct Professor A
Assistant Professor B
Professor B
Subtotals
Finance Department
Assistant Professor C
Associate Professor B
Subtotals
Management Department
Assistant Professor D
Professor C
Subtotals
Marketing Department
Associate Professor C
Administration
Administrative Assistant
Student Workers
Subtotal
Grand Totals
Operating Expenses:
Office Supplies
Copier Lease/Supplies
Travel
Computer Lease
Alumni Relations
Equipment Maintenance
Total
Empl.
Bene.
$ 9,720
11,340
15,930
$ 36,990
Total
$ 45,720
53,340
70,930
$ 169,990
$
224
9,720
13,770
$ 23,714
$
36,000
42,000
78,000
$ 9,720
11,340
$ 21,060
$
$_
36,000
51,000
87,000
$ 9,720
13,770
$ 23,490
$ 45,720
64,770
$110,490
l_
42,000
$ 11,340
$ 53.340
18,000
3,200
21,200
$ 4,920
256
$ 5,176
$ 22,920
3,456
$ 26,376
$121,770
$572,770
Salary
$ 36,000
42,000
55,000
$133,000
2,800
36,000
51,000
l_ 89,800
$
$
l_
$
$
L
% 451.000
$
1
224
800
1,375
2,000
7,500
2,500
6,000
20.175
3,024
45,720
64,770
$ 113,514
45,720
53,340
$ 99,060
I n d i r e c t Costs:
Facilities Cost:
Building Cost per square foot (120,000 sq.ft. Total)
(1.36112 psf)
$
62.203
Utihties per semester
$
13.600
Maintenance/Repair ($0.45 psf per semester)
$
20.565
Square feet used by Business Division:
Computer Science Dept.
Finance
Marketing
Management
Accounting
Administration
Total
Direct costs of support functions:
President's Office
Vice Pres. Academic Affairs
Vice Pres. Development
Vice Pres. Student Affairs
Vice Pres. Fin-Acct.
Total
7,200
7,200
7,200
9,600
12,000
2,500
45.700
$
350,000
200,000
250,000
175,000
5,650,000*
$ 6.625.000
* Includes $1,500,000 principal retirement, $2,925,000 interest,
$1,000,000 in other campus-wide support costs, and $225,000 in operational
costs.
NOTE: The traditional accounting system does not permit
allocation of costs of support functions to the academic function.
Only direct costs for each function/department are budgeted. The
cost of each of the VP functions are primarily operating costs
except the VP Fin-Acct.
Direct Costs- Business Division
S 592.945
Cost Object: Direct Cost Per Di\ision
$ 592.945
Required: Review the proposed budget and supporting data for the Fall
semester, 1998, of the Business Division of Christian CoUege. Evaluate all
five statements for budgeting.
225
PILOT STUDY
CHRISTIAN COLLEGE
SURVEY INSTRUMENT - TRADITIONAL COSTING SYSTEM
Code Explanation
5 - Strongly Agree
4 - Agree
3 - Neutral
2 - Disagree
1 - Strongly Disagree
Budgeting Statements
1. The data provided are highly useful for decisions relating to the
allocation of resources to continuing programs.
5
4—-3
2
1
2. The data provided are highly useful for decisions relating to the
allocation of resources to redesigned programs.
5
4
3
2
1
3. The data provided are highly useful for decisions relating to the
allocation of resources to new programs.
5
4
3
2
1
4. The data provided are highly useful for decisions relating to
quantifying plans by means of a fixed (or variable) budget.
5
4
3
2
1
5. The data provided is highly useful for decisions relating to the
selection of financial and non-financial performance measurements.
5
4
3—-2
1
226
COST ACCOUNTING PROJECT
ACTIVITY-BASED COSTING SYSTEM
CHRISTIAN COLLEGE, BUSINESS DIVISION
BUDGET EVALUATION
Partial Organization Chart
President
FUNCTIONS
1
1
1
VP
Davalopmant
VP Acadamie
Affaira
VP Stadant
Affaira
1
VP
Fin k Acct
ATta/SciDiv
Thaolotr Div
DIVISIONS
Education Div
Buainaaa Div _,
.Pinanca
Acct
DEPARTMENTS
Uktc
Mtmt
Figure G.3. Partial Organization Chart, Christian College, Business
Division
227
COST FLOWS-ABC SYSTEM
HOMOGENEOUS COST POOLS
^College Overheadj
ipport Alloc
Instruction
Committee
Service
Advising
ACTIVITIES
COST OBJECTS
Figure G.4. Cost Flows-ABC System
228
^dm inistration
PROJECTED COST POOL DATA:
Grand Totals
Empl.
Bene.
$ 9,720
11,340
15,930
$ 36,990
Total
$ 45,720
53,340
70,930
$ 169,990
2,800
36,000
51,000
89,800
$
224
9,720
13,770
$23,714
$
3,024
45,720
64,770
$ 113,514
36,000
42.000
78,000
$ 9,720
11,340
$ 21,060
$
ee-
Salaries/Benefits:
Faculty
Accounting Department
Assistant Professor A
Associate Professor A
Professor/Dept Head A
Subtotals
Computer Science Department
Adjunct Professor A
Assistant Professor B
Professor B
Subtotals
Finance Department
Assistant Professor C
Associate Professor B
Subtotals
Management Department
Assistant Professor D
Professor C
Subtotals
Marketing Department
Associate Professor C
Administration
Administrative Assistant
Student Workers
Subtotal
36,000
51,000
87,000
$ 9,720
13,770
$ 23,490
$ 45,720
64,770
$110,490
l_
42,000
$ 11,340
$ 53.340
18,000
3,200
21,200
$ 4,920
256
$ 5,176
$ 22,920
3,456
$ 26,376
$ 451.000
$121,770
$572,770
Salary
36,000
$
42,000
55,000
$133,000
$
i.
$
1
$
$
i.
Operating Expenses:
Office Supplies
Copier Lease/Supplies
Travel
Computer Lease
Alumni Relations
Equipment Maintenance
Total
45,720
53,340
$ 99,060
$
800
1,375
2,000
7,500
2,500
6,000
$ 20.175
229
Facilities:
Depreciation Cost $1.36112 per sq. ft. for 45,700
45,700 sf
sf
i
Class
Enroll
Square Feet Utilized:
Office
Accounting (65 Majors, 57 Non-majors)
rs)
Assistant Professor A
500
2311A 32
Associate Professor A
500
Professor A
600
2311B
2312
3320
3311
3315
3303
2302
4312
4317
30
10
25
21
15
15
12
12
11
183
Totals
1,600
on-majors)
Computer Science (38 Majors, 112 Non-majors)
1303 A 30
Adjunct Professor A
500
IIXU
IIXV
Assistant Professor B
500
Professor B
600
UXW
1303B
IIXX
IIXY
IIXZ
1320
3320
3323
4322
4324
4330
30
30
30
30
30
30
30
12
12
14
9
10
_8.
305
Totals
1,600
Finance (37 Majors, 55 Non-majors)
3341A 31
Assistant Professor C
500
3341B 29
3344A 21
10
4321
3344B 15
Associate Professor B
500
9
4341
9
4343
4
4399
128
Totals
1,000
230
$ 62.203
Class R o o m s
2,000
2,000
800
800
800
800
800
800
800
800
10,400
625
200
200
225
625
200
200
225
350
350
800
800
400
400
5,600
800
800
800
800
800
800
800
600
6,200
F a c i l i t i e s (Continued):
Management (26 Majors, 37 Non-majors)
Assistant Professor D
500
3351A
3351B
3353
4350
Professor C
700
1305
4307
4351
4375
Totals
1,200
Marketing (23 Majors, 22 Non-majors)
s)
Associate Professor C
3361
500
3363
3364
4362
Totals
500
21
20
9
7
11
8
6
6
88
1,200
1,200
1,200
1,200
1,200
800
800
800
8,400
28
15
10
9
62
1,200
1,200
1,200
1,200
4,800
Administration
Administrative Assistant
500
Student Workers
1,000
Storage
2,900
Total
4,400
Grand Totals
10.300
35.400
A d d i t i o n a l Data:
189 Business Majors taking 2,646 semester hours
283 Non-majors taking 759 semester hours
Utilities $13,600 per semester. ($.29759 per sf per semester)
Maintenance/Repair $ 20,565 (450 per sf per semester)
231
College S u p p o r t Overhead Allocation (Indirect Costs):
President's Office
VP Academic Affairs
VP Development
VP Student Affairs
VP Finance and Accounting
Subtotal
Less: Principal payments
Distributable Indirect Costs
Allocation to Divisions:
Arts/Sciences
Theology
Education
Business
$
350,000
200,000
250,000
175,000
5,650,000
$6,625,000
( 2,925,000)
$3.700.000
$1,110,000
740,000
1,295,000
555,000
$3.700.000
Allocation of Business Indirect Costs to Departments:
Accounting
$ 111,000
Computer Science
152,625
Finance
83,250
Management
124,875
Marketing
83,250
Total
$ 555.000
$ 1.244.313
Total Costs (Direct and Indirect)
232
Suggested Allocation Bases - Cost Pool to Activities:
Faculty Salaries/Benefits:
Allocated on the percentage of time devoted to each activity.
Activity
Teaching Faculty
Instruction
85%
Advising
5%
Committee Service
10%
Administration
0%
100%
Department Head
30%
15%
15%
40%
100%
Staff Salaries/Benefits:
Traced 100% to Administration
Office Supplies/Alumni Relations:
Traced 100% to Administration
Copier Lease/Supplies:
Directly traced by use of a machine counter by password. 8.60 per
copy
Faculty:
Accounting
Assistant Professor A
Associate Professor A
Professor/Dept. Head
Computer Science
Adjunct Professor A
Assistant Professor B
Professor B
Finance
Assistant Professor C
Associate Professor B
Management
Assistant Professor D
Professor C
Number of Copies
300
300
800 (40% administration)
200
350
1,050
600
1,200
1,800
2,200
233
Marketing
Associate Professor C
1,200
/\aministraLion
Administrative Asst.
Student Workers
Total
2,000
4,000
16.000
1Travel:
Directly traced.
Professor/Dept. Head A
Administrative Assistant
Professor B
Total
$ 1,200
400
400
$ 2.000
Computer Lease:
Allocated on the number of computers used.
All teaching faculty, $500 each. Administration 4 @ $500 each.
Equipment Maintenance:
Directly traced to Computer Science, $6,000.
Facilities:
Depreciation - Allocated by number of square feet used.
Utilities - Allocated by number of square feet used.
Maintenance and Repair - Allocated by number of square feet used
College Support Overhead Allocation:
See Allocation of business allocation to departments above.
234
Suggested Cost Objects:
Cost per activity
Cost per instructor
Cost per class
Cost per student per class
Cost per student per instructor
Cost per department
Cost per student per department
Cost Per Cost Object
Cost per activity
Instruction
Advising
Committee Service
Administration
Total
$ 1,066,478
38,736
66,830
72,269
$ 1.244.313
All other cost objects - See worksheet on the next page.
235
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$15,316
$15,316
$15,316
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$18,846
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$18,847
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$16,922
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i-
S< n
236
Required: Review the proposed budget and supporting data for the Fall
semester, 1998, of the Business Division of Christian College. Evaluate all
five statements presented relating to budgeting.
237
PILOT STUDY
CHRISTIAN COLLEGE
SURVEY INSTRUMENT - ACTFVITY-BASED COSTING SYSTEM
Code Explanation
5 - Strongly Agree
4 - Agree
3 - Neutral
2 - Disagree
1 - Strongly Disagree
Budgeting Statements
1. The data provided are highly useful for decisions relating to the
allocation of resources to continuing programs.
5
4
3
2
1
2. The data provided are highly useful for decisions relating to the
allocation of resources to redesigned programs.
5
4
3—-2
1
3. The data provided are highly useful for decisions relating to the
allocation of resources to new programs.
5
4—-3
2
1
4. The data provided are highly useful for decisions relating to
quantifying plans by means of a fixed (or variable) budget.
5
4
3
2
1
5. The data provided are highly useful for decisions relating to the
selection of financial and non-financial performance measurements.
5
4
3
2
1
238
APPENDIX H
EXPERIMENT DATA, COMPUTATIONAL SYMBOLS, AND
COMPUTATIONAL FORMULAS
239
Data and Notation
Y-j^ denotes a score for an experiment unit in block i and treatment
combination a,6^; i = 1, . . . ,n blocks within each aj,j = 1, . . . , p levels of
treatment A (o^); k= I, . . . , q levels of treatment B (b^).!. Data tables
utilized in the statistical computations and some descriptive statistics
helpful in the interpretation of the results of the computations are presented
next.
240
Table H.l. Detailed Table of Evaluator Responses By Block (Executive,
Middle Manager, or Staff), Treatment A (Financial Accounting and ABC/M),
and by Treatment B (Budgeting, Financial Management, and Strategic
Decisions Dependent On Accurate Cost Object Costs)
Independent
Variable
Treatment A
Treatment B
Subi
bl
b.
Total
7
13
14
9
5
7
11
6
20
92
33
41
58
34
17
35
32
24
62
336
si
s2
s3
s4
s5
s6
s7
s8
s9
15
15
22
16
6
16
12
10
22
134
si
s2
s3
s4
s5
s6
s7
s8
Block2
s9
Fin Acct
slO
sll
sl2
sl3
sl4
sl5
sl6
Blockg, Totals
12
7
12
6
13
9
6
17
11
7
17
18
14
7
6
14
176
10
5
5
6
16
9
5
16
9
7
10
16
9
9
5
12
149
10
5
5
5
12
6
5
16
5
5
5
16
9
10
6
10
130
32
17
22
17
41
24
16
49
25
19
32
50
32
26
17
36
455
si
s2
s3
12
9
7
12
11
7
11
12
5
35
32
19
Blocks
Fin Acct
Blocki Totals
^1i
11
13
22
9
6
12
9
8
20
110
b3
241
Table H.l Continued.
Independent
Variable
Treatment A
Treatment B
Block Subj
b,
b,
b3
Total
s4
s5
s6
s7
Blockg
s8
Fin Acct
s9
slO
sll
sl2
sl3
sl4
sl5
sl6
sl7
sl8
sl9
Blockg Totals
18
16
11
6
14
10
16
11
11
17
6
10
11
15
17
10
227
20
16
13
7
10
12
15
13
10
11
6
10
13
16
17
10
229
15
7
13
5
14
6
17
10
7
10
5
9
11
13
16
10
196
53
39
37
18
38
28
48
34
28
38
17
29
35
44
50
30
652
si
s2
s3
s4
s5
s6
s7
s8
s9
22
23
20
24
5
17
22
19
23
175
23
22
20
23
5
21
21
21
22
178
25
23
20
25
5
21
24
24
25
192
70
68
60
72
15
59
67
64
70
545
15
22
18
22
24
21
18
23
16
20
24
19
18
24
16
21
23
25
51
69
50
63
71
65
Blocks
ABC/M
Block,^ Totals
si
s2
s3
s4
s5
s6
242
Table H.l Continued.
Independent
Variable
Treatment A
a2
Treatment B
Block Subj
b,
b2
s7
s8
s9
SlO
sll
sl2
Blocks
sl3
ABC/M
sl4
sl5
sl6
Blocks Totals
si
s2
s3
s4
s5
s6
s7
s8
Blockg
s9
ABC/M
slO
sll
sl2
sl3
sl4
sl5
sl6
sl7
sl8
sl9
Block,6 Totals
20
22
20
22
25
18
17
20
23
22
331
19
24
22
24
25
19
19
16
23
22
333
23
21
17
21
19
22
18
23
20
19
22
20
23
15
19
18
18
24
20
382
243
23
22
20
21
22
20
18
22
18
18
23
21
25
16
16
17
19
22
19
382
ba
Total!
58
19
71
25
63
21
71
25
75
25
53
16
51
15
52
16
69
23
69
25
337 1001
69
23
67
24
58
21
62
20
62
21
60
18
54
18
69
24
57
19
57
20
70
25
59
18
72
24
46
15
55
20
52
17
53
16
67
21
58
19
383 1147
Table H.l Continued.
a.
b.
537
888
Blocks^ 2;
Blocks 4.5.6
B l o c k s i,2.3.4.5,(
b2
488
893
b., Totals
418 1443
912 2693
1425 1381 1330 4136
a^ = Financial Accounting System
a2 = ABC/M System
Blockg = Executives-Financial Accounting System
Block2 = Middle Managers-Financial Accounting System
Blockg = Staff-Financial Accounting System
Block4 = Executives-ABC/M System
Blocks - Middle Managers-ABC/M System
Blocks = Staff-ABC/M System
bj = Budgeting Decisions
bg = Financial Management Decisions
bg = Strategic Decisions Dependent On Accurate Cost Object Costs
244
Table H.2. Descriptive Statistics Based On Detailed Table of Evaluator
Responses to Survey Instrument Statements
Sum of Y
Treatment A
Block
bl
ai
^2
Blocki
Blockg
Blockg
Blocks
Blocks
Blockg
Blocki2,3
Block456
134
176
227
175
331
382
537
888
Treatment B
Total
bg
ba
336
110
92
455
149 130
652
229 196
545
178 192
1001
333 337
382 383 1147
488 418 1443
893 912 2693
Mean of Y
Treatment A
Block,
Blockg
Blocko
Block.
14.89
11.00
11.95
19.44
Treatment B
Total
bg
ba
12.22 10.22 37.33
9.31 8.13 28.44
12.05 10.32 34.32
19.78 21.33 60.56
Blocks
Blockg
Blockigg
Block4,5_6
20.69
20.11
12.20
20.18
20.81 21.06 62.56
20.11 20.16 60.37
11.09 9.50 32.80
20.30 20.73 61.20
Block
bl
^1
(Sum of Y-Mean of Y)'
Treatment A
Block
^
a,
a.
Block,
Block2
Blockg
Blocks
Block.
Treatment B
Total
1
214.89 235.56 185.56
272.00 233.44 227.75
252.95 236.95 258.11
274.22 253.56 326.00
105.44 128.44 220.94
245
Table H.2 Continued.
Treatment A
Block
Treatment B
b,
^2
bo
hj
Total
101.79 115.79 148.53
739.84 705.94 671.41
481.45 497.78 695.46
1221.29 1203.72 1366.87
Blockg
Block,2,3
Block45g
Block, 2,3.4.5,6
Variance (s^)
Treatment A
Treatment B
Block
b,
Block,
ai
a2
Block2
Blockg
Blocks
Blocks
Blockg
Block,2,3
Block^s.e
rilOCli, 2 g 4 s g
bo
bg
Total
26.86
18.13
14.05
34.28
7.03
5.65
17.21
11.2
14.04
29.44
15.56
13.16
31.69
8.56
6.43
16.42
11.58
13.84
23.19
15.18
14.34
40.75
14.73
8.25
15.61
16.17
15.71
Std Deviation (s)
Treatment A
Block
b,
Block,
ai
Block2
Blockg
Block4
a2
Blocks
Blockg
Blocki2.3
Block45g
Block, 2,g,4,5g
246
Treatment ]3
b2
b 3 _ Total
5.18 5.43 4.82
4.26 3.94 3.90
3.75 3.63 3.79
5.85 5.63 6.38
2.65 2.93 3.84
2.38 2.54 2.87
4.15 4.05 3.95
3.35 3.40 4.02
3.75 3.72 3.96
Computational Svmbols
Symbols which determined values required for use in the
computational formulas are developed in this section. These formulas
provided sum of squares values for determining mean square and F values
reported in Table 4.1, p. 130, for this experiment. In a spht-plot factorial
design with two levels of treatment A and three levels of treatment B, there
were six symbols required to be defined. A description of these six symbols
follows:
[Y] = The sum of all of the data scores squared and then divided by
the product of (1) the number of data scores (n), (2) the number of
levels of treatment A and (3) the number of levels of treatment B.
[ABS] = The sum of all data scores that have been squared.
[AS] = The sum of the data scores for each subject squared and then
divided by the number of levels of treatment B.
[A] = The sum of the data scores for each level of treatment A squared
which have been divided by the product of (1) the number of data
scores {n) and (2) the number of levels of treatment B.
[B] = The sum of the data scores for each level of treatment A squared
which have then been divided by the number of data scores for both
levels of treatment A.
[AB] = The sum of the data scores for each level of treatment B
squared which have been divided by the number of data scores for
each level of treatment A {n).
241
Computational Formulas
The eight computational formulas that follow produced values for the
sum of squares total, sum of squares between blocks, sum of squares for
t r e a t m e n t A, sum of squares for the blocks within treatment A, sum of
squares within blocks, sum of squares for treatment B, sum of squares for
the interaction of treatments A and B and sum of squares for the interaction
of t r e a t m e n t B and the blocks within treatment A. The required formulas
are as follows:
Sum of squares total
SSTO = [ABS] - [Y]
Sum of squares between blocks
SSBETWEENBL = [AS] - [Y]
Sum of squares for treatment A
SSA = [A] - [Y]
Sum of squares for the blocks within treatment A
SSBL(A) = [AS] - [A]
Sum of squares within blocks
SSWITHINBL = [ABS] - [AS]
Sum of squares for treatment B
SSB = [B] - [Y]
Sum of squares for the interaction of treatments A and B
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SSAB - [AB] - [A] - [B] + [Y]
Sum of squares for the interaction of treatment B and the blocks
within treatment A.
SSB X BL(A) = [ABS] - [AB] - [AS] + [A]
Computational Procedures-Simple Main Effects
Summary
There are five computational symbols required for determining
simple main effects for a split-plot factorial design with two levels of
treatment A and three levels of treatment B. These symbols determine
values for use in the computational formulas for determining sum of squares
for treatment A, treatment B and the interaction of treatments A and B
including each level of the two treatments. The computational symbols are
developed in the next two sections and the computational formulas defined
in the third section following.
Computation of SSA at b^^
SSA at b, = The sum of the sum of the data scores for each of the two
levels of treatment A for b, squared and then divided by the number of data
scores for each level of treatment A (n) for b, minus the total of the data
scores for both levels of treatment A for b, squared and then divided by the
product of (1) the number of data scores for each level of treatment A for b,
and (2) the number of levels of treatment A for b,.
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SSA at bg = The sum of the sum of the data scores for each of the two
levels of t r e a t m e n t A for h^ squared and then divided by the number of data
scores for each level of treatment A (n) for b2 minus the total of the data
scores for both levels of treatment A for b2 squared and then divided by the
product of (1) the number of data scores for each level of treatment A for bg
and (2) the number of levels of treatment A for bg.
SSA at bg = The sum of the sum of the data scores for each of the two
levels of treatment A for bg squared and then divided by the number of data
scores for each level of treatment A (n) for bg minus the total of the data
scores for both levels of treatment A for bg squared and then divided by the
product of (1) the number of data scores for each level of treatment A for bg
and (2) the number of levels of treatment A for bg.
Computation of SSB at a^
SSB at a, = The sum of the sum of the data scores for each of the
three levels of treatment B for a, squared and then divided by the number of
d a t a scores for each level of treatment B (n) for a, minus the total of the
data scores for all three levels of treatment B for a, squared and then
divided by the product of (1) the number of data scores for each level of
t r e a t m e n t B for a, and (2) the number of levels of treatment B for a,.
SSB at ag = The sum of the sum of the data scores for each of the
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three levels of treatment B for ag squared and then divided by the number of
data scores for each level of treatment B (n) for ag minus the total of the
data scores for all three levels of treatment B for ag squared and then
divided by the product of (1) the number of data scores for each level of
treatment B for ag and (2) the number of levels of treatment B for ag.
Computational Formulas
SSA + SSAB = SSA at b, + SSA at b2 + SSA at bg
SSB + SSAB = SSB at a, + SSB at a2
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