The implementation of activity-based costing in South Africa
Susan Wessels
Member: Specialised Funds Management Division: Wipcapital (Pty) Ltd
This document provides a summary of the research results of a study
carried out in November 1997 on the implementation of activity-based
costing (ABC) among listed companies in South Africa. The author
submitted part of this work for her Masters of Commerce in Accounting
thesis titled: “The implementation of Activity-based Costing in South
Africa”.
Background
Since the initial writings of Robin Cooper and Robert Kaplan on activitybased costing in 1988, the topic has been a source of much debate.
Currently, many companies are considering the implementation of ABC,
but are unsure of the practical implications and whether ABC will be
successful in their organization. Literature on ABC has placed much
emphasis on the problems that may be experienced with the
implementation of an ABC system and this has led to perceptions that ABC
is difficult to implement.
Organisational profile
A literature review suggests that certain organizational profile factors may
play a role in the adoption of an activity-based costing system. Five
prevalent organizational profile factors have been identified and examined,
namely: overhead cost significance, number of products, use of
technology, competition and size of the company.
Overhead cost significance
Traditional volume based costing systems can accurately allocate direct
costs to products, but not indirect costs, since the consumption of these
costs is often unrelated to physical volume. It is therefore suggested that
companies with a high overhead cost significance should benefit from the
implementation of an activity-based costing system. In this study it was
found that there is no significant difference in the cost structure of users
and non-users of ABC. Labour and materials jointly constitute the largest
portion of total costs for both groups. This could possibly be due to the fact
that ABC is used for purposes other than cost allocation.
Number of products
In organizations producing diverse product mixes, traditional costing
systems will lead to distorted costs, since the different products use indirect
resources in different amounts, and these are not necessarily volume
related. The literature review therefore indicated that the number of
products could be a distinguishing factor between users of ABC and nonusers of ABC. In this study it was found, however, that the number of
products that a company has, does not influence the decision to implement
ABC. This could once again be due to the fact that ABC is used for
purposes other than cost allocation.
Use of technology
Changes in the manufacturing environment have led to increased
mechanization and automation. Traditional costing systems that use labour
based methods of allocation are not able to accurately allocate the indirect
costs in an environment where there is very little direct labour. Companies
that rely heavily on technology are therefore thought to be more likely to
implement ABC. The empirical study found that companies that use ABC
do indeed rely moderately to heavily on technology. However, since it was
also found that companies that do not use ABC have the same level of
reliance on technology, this cannot be used as a distinguishing factor
between the two.
Competition in market
Fierce competition increases the need for accurate costing and could
therefore lead to the adoption of an activity-based costing system. It was
however found that companies that have implemented ABC do not
necessarily face higher competition than companies that have not
implemented it. This could again indicate that ABC is used for other
purposes than pure costing.
Size of company
Studies performed by, among others, Innes & Mitchell (1995: 142) and
Bjørnenak (1997: 14) have found that size is a statistically significant
source of differentiation between adopters and non-adopters of ABC. They
have not been able to explain this, but Bjørnenak suggests that it may be
because larger organizations have a larger communication network and
the necessary infrastructure for adopting ABC. In this study it was also
found that companies that are using ABC tend to be larger than companies
that do not.
Conclusion
Listed companies in South Africa currently using ABC are moderately to
heavily reliant on technology and tend to be large in size. However, it
cannot be said that all companies that have these two characteristics use
ABC, since companies that do not use ABC display similar characteristics.
When surveying other characteristics suggested as indicators of
companies that use ABC, no distinguishing factors between companies in
South Africa that use ABC and those that do not were found. It is possible
that these factors were present in the early adopters of ABC, but as more
information on the technique became available, it was realized that a wide
range of companies can actually benefit from the technique. The
companies currently using ABC may have very different characteristics and
may use ABC for a wide variety of reasons, apart from pure costing. It
seems to indicate that almost any company can benefit from the use of
ABC, regardless of their organizational profile.
Implementation problems
Various literature studies have suggested problems to be expected during
the implementation process of ABC, and this study investigated the actual
problems experienced in the implementation of ABC systems by listed
companies in South Africa. The actual problems often differ from the
perceived problems. Problems were grouped into three main categories,
namely: problems related to organizational support and coherence,
technical problems and problems with the perceived value of ABC.
Organisational support and coherence problems
The implementation of a cost management system is, according to Shields
and Young (in Shields 1995: 149), an administrative innovation. The
success of an administrative innovation is determined to a larger extent by
behavioural and organizational factors, than by economical and technical
factors. Organisational factors refer to management support for the project,
resources made available to the project and coherence with the
organisation’s goals and culture.
Top management seems to adequately support the implementation of
ABC. A problem is however, experienced with other priorities in the firm
being considered more important than the ABC project. This difficulty is
aggravated by a lack of top-management’s support, and also in instances
where ABC is not compatible with the company’s strategy. Furthermore,
respondents felt that the ABC project was too time-consuming for
operational managers.
The companies did not experience a lack of adequate resources as an
obstacle during the implementation of ABC. This could be due to the fact
that companies implementing ABC tend to be large and have access to
sufficient resources.
The ABC projects seem to be in line with organisational goals and culture.
ABC initiatives are aligned with company strategy and implementers are
adequately trained. Resistance to change in organizational culture is not a
huge obstacle and neither is the crossing of departmental boundaries.
However, some companies experienced problems with these two factors.
Inadequate training of users and managers are problems, but become less
so as the time since initial implementation of ABC lengthens.
The results indicate that organizational support and coherence is the area
in which respondents experienced the most problems.
Technical problems
Technical problems are those that are specific to the technique of activitybased costing. In studies on ABC it was found that the perception of
technical problems is one of the reasons why companies are hesitant to
implement ABC, or have decided not to implement ABC.
In this study it was found that companies in South Africa do not experience
technical problems with the implementation of ABC. This is very
encouraging and not contrary to expectations. In many instances technical
problems with ABC are perceived to be much worse than they actually are.
The only factor that proved to be problematic is a lack of internal
knowledge on ABC. However, this is significantly reduced if outside
consultants are employed. This seems to indicate that outside consultants
have specialized knowledge on ABC that can be used to the benefit of their
clients.
Value of ABC
Value is defined as the benefits that the organisation receives from using
ABC compared to the input required to create those benefits. The
perception of ABC is that the value to be obtained by implementing an ABC
system does not warrant the input required.
Most companies did not experience any of the factors influencing value as
obstacles. These factors include proper presentation, understanding and
acceptance of the ABC information by users, as well as the cost of
information. Lack of understanding and acceptance of ABC information by
users could be problematic, but this can be overcome with proper training.
Conclusion
In the literature study and overview of the work of other researchers, it was
suggested that the implementation of ABC is highly problematic. Some
researchers have however, suggested that the perceived problems may be
much worse than the actual problems. This could be because most case
studies on ABC explain in great detail, in an effort to give a true reflection
of the process, the difficulties experienced prior to eventual successful
implementation. The result is that much more emphasis is placed on the
problems with implementation than on the successes.
In this study it was found that the implementation of ABC in South Africa
has been largely free from serious problems. This could be because a
number of years have already passed since the initial introduction of ABC
as a business tool, with much having been written in the popular and
academic press during this period on the subject. Therefore implementers
have had a chance to study the technique and the implementation process
in more detail. Another possibility is that the implementation of ABC was
carried out initially on a small scale, as an experiment, before moving to a
company-wide implementation. This would reveal possible problems at the
start of the project, which could then be eliminated by the time the system
was implemented in the rest of the company. It is further possible that the
implementation of ABC in South African companies is carried out at a basic
level, and not in-depth, thereby reducing the problems experienced.
It is interesting to note that most of the problems that were experienced in
South African companies relate to organizational support and coherence
factors. It is possible that companies concentrate more on the technical
aspects to the detriment of the organizational factors. This study has
shown that companies that are intending to implement ABC, or are in the
process of implementing it, should not neglect the organizational factors,
since these play an equally important role in the endeavour to succeed.