Accounting, Organizations and Society 33 (2008) 1–19 www.elsevier.com/locate/aos
The role of manufacturing practices in mediating the impact of activity-based costing on plant performance Rajiv D. Banker a, Indranil R. Bardhan
a Fox School of Business, Temple University, 1810 N. 13th Street, Philadelphia, PA 19122, USA The University of Texas at Dallas, School of Management, SM 41, 2601 N. Floyd Road, Richardson, TX 75083-0688, USA c School of Business and Management, Hong Kong University of Science and Technology, Clearwater Bay, Kowloon, Hong Kong, China
Abstract We study the impact of activity-based costing (ABC) on adoption of world-class manufacturing (WCM) practices and plant performance. In contrast to earlier research that estimates the direct impact of ABC on plant performance, we develop an alternative research model to study the role of world-class manufacturing practices as a mediator of the impact of ABC. Analysis of data from a large cross-sectional sample of US manufacturing plants indicates that ABC has no signiﬁcant direct impact on plant performance, as measured by improvements in unit manufacturing costs, cycle time, and product quality. We ﬁnd, however, that WCM practices completely mediate the positive impact of ABC on plant performance, and thus advanced manufacturing capabilities represent a critical missing link in understanding the overall impact of ABC. Our results provide a diﬀerent conceptual lens to evaluate the relationship between ABC adoption and plant performance, and suggest that ABC adoption by itself does not improve plant performance. Ó 2006 Elsevier Ltd. All rights reserved.
Introduction Activity-based costing (ABC) was designed with the objective of providing managers with accurate activity-based cost information by using cost drivers to assign activity costs to products * Corresponding author. Tel.: +1 972 883 2736; fax: +1 972 883 6811. E-mail addresses: firstname.lastname@example.org (R.D. Banker), email@example.com (I.R. Bardhan), firstname.lastname@example.org (T.-Y. Chen).
and services. Proponents of ABC argue that it provides accurate cost data needed to make appropriate strategic decisions in terms of product mix, sourcing, pricing, process improvement, and evaluation of business process performance (Cooper & Kaplan, 1992; Swenson, 1995). These claims may have led many ﬁrms to adopt ABC systems. A survey of the 1000 largest ﬁrms in the United Kingdom showed that 19.5% of these companies have adopted ABC (Innes & Mitchell, 1995). Another survey released by the Cost Management
0361-3682/$ - see front matter Ó 2006 Elsevier Ltd. All rights reserved. doi:10.1016/j.aos.2006.12.001
R.D. Banker et al. / Accounting, Organizations and Society 33 (2008) 1–19
Group (1998) of the Institute of Management Accountants indicated that 39% of organizations have approved ABC adoption.1 Assessing the impact of ABC on manufacturing plant performance is recognized as an important research question. Prior research has typically focused on the direct impact of ABC while ignoring its indirect impact in supporting other organizational capabilities. While past studies have reported moderate levels of beneﬁts from ABC adoption (Foster & Swenson, 1997; Ittner & Larcker, 2001), few have extended this work to evaluate the linkages between ‘‘beliefs’’ that represent successful outcomes and the operational measures of plant performance. Furthermore, the deﬁnition of ABC success has often been vaguely deﬁned in terms of subjective beliefs regarding ‘‘ﬁnancial beneﬁt’’, ‘‘satisfaction with ABC’’, or ‘‘use of ABC system for decision making’’. In light of these methodological deﬁciencies, we argue that a more rigorous approach is needed to measure the impact of ABC. It is also important to focus on process-level performance measures, instead of ﬁrm-level ﬁnancial metrics, since the potential impact of ABC implementation may be...