The Association Between Activity-Based Costing and Manufacturing Performance

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Journal of Accounting Research Vol. 40 No. 3 June 2002 Printed in U.S.A.

The Association Between Activity-Based Costing and Manufacturing Performance C H R I S T O P H E R D . I T T N E R ,∗ W I L L I A M N . L A N E N ,† A N D D A V I D F . L A R C K E R∗ Received 20 May 1999; accepted 23 October 2001

ABSTRACT

This study examines the association between activity-based costing and manufacturing performance. Results using a cross-sectional sample of manufacturing plants indicates that extensive ABC use is associated with higher quality levels and greater improvements in cycle time and quality, and is indirectly associated with manufacturing cost reductions through quality and cycle time improvements. However, on average, extensive ABC use has no significant association with return on assets. Instead, we find weak evidence that the association between ABC and accounting profitability is contingent on the plant’s operational characteristics.

1. Introduction
This paper examines the association between extensive use of activitybased costing and plant-level operational and financial performance. For more than a decade, activity-based costing (hereafter ABC) has received ∗ The Wharton School, University of Pennsylvania; †University of Michigan Business School. We would like to thank PricewaterhouseCoopers LLP for providing access to the data used in this study, and Kristen Urban and Harold Kahn for their help with this research project. The comments of Abbie Smith and two anonymous reviewers are appreciated. The financial support of Ernst & Young LLP is also gratefully acknowledged.

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, University of Chicago on behalf of the Institute of Professional Accounting, 2002

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C . D . ITTNER , W . N . LANEN , AND D . F . LARCKER

widespread attention in the management accounting literature. Advocates argue that ABC provides the sophisticated cost data needed to make appropriate product mix, pricing, process improvement, and other key decisions (e.g., Cooper and Kaplan, [1991, chapter 5]). These claims have prompted a growing number of firms to implement ABC systems. Yet little evidence exists that organizations using ABC systems have higher performance than their competitors, despite the professional enthusiasm and academic discussions surrounding ABC. Prior research examining ABC success relies almost exclusively on perceptual outcome measures. Foster and Swenson’s [1997] review groups the diverse set of success measures in these studies into four categories: (1) use of ABC information, (2) decisions and actions taken with ABC information, (3) management evaluations of overall ABC success, and (4) perceived financial improvements from ABC implementation. In general, these studies find modest use of ABC information and moderate perceived benefits from ABC implementation. However, this work has a number of limitations. First, few of the studies attempt to demonstrate that the perceptual measures are substantively correlated with operational and financial performance measures. Second, most use relatively small samples. More important, none of the studies compares the performance of ABC adopters and nonadopters. Using a large sample of manufacturing plants, we find modest evidence that ABC use is positively associated with manufacturing performance. On average, extensive ABC use is associated with higher quality levels, greater decreases in cycle time, and larger increases in first pass quality. Path analysis also indicates that ABC use has a positive indirect association with manufacturing cost reductions through improvements in quality and cycle time. However, on average, extensive ABC use has no significant association with return on assets. Instead, we find some evidence that the relation between ABC and profits varies with the extent to which the decision to use ABC “matches” the plant’s operational characteristics. The remainder of the paper consists of four sections. Section 2 provides an overview of the...
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