Research Review on Activity-Based Costing System (ABC): ABC’s Development, Applications, Challenges,

and Benefits

Dr. Merlita M. Durana

ORCID ID 0000-0002-5007-4214
First Asia Institute of Technology and Humanities mmdurana@firstasia.edu.ph
Associate Professor, First Asia Institute of Technology and Humanities, No. 2 Pres. Laurel Highway,
Darasa, Tanauan City 4232, Batangas, Philippines

ABSTRACT

Management accounting continues to be useful for business, and one of its tools is Activity-
Based Costing (ABC). This paper is a thematic research review on the ABC System, its development,
applications, challenges, and benefits. Several researchers claim that ABC is efficient in product pricing,
cost-cutting strategy, and customer and profitability analysis. Meanwhile, Time-Driven ABC was
introduced with the advantages of firm-wide application and lower costs. Several academicians argue
that TDABC can be useful in the simulation of the optimal resource allocation, benchmarking, Balanced
Scorecard and Total Quality Management. For both American and British companies, researchers
attributed a highly significant correlation between overall ABC success and the purpose ‘Activity
Performance Measurement and Improvement.’ According to practitioners, ABC adoption has an
important consequence, i.e. it reinstated the relevance of management accounting. However, based on
adoption rates in the U.K. and the U.S.A., few companies adopt ABC. Challenges faced by companies in
the implementation are the possible reasons. Researchers cited the huge costs and technical complexity
as the system’s predominant challenges. This paper synthesized the researchers’ conclusions into two
unifying hypotheses on factors correlated to ABC adoption and success.

KEYWORDS

Activity-Based Costing, Time-Driven ABC, Management Accounting, ABC adoption, and success

i. INTRODUCTION

Since the 1990s, practitioners and academics alike have asserted that companies embracing
international standards of excellence need management accounting systems which strengthen the
strategic decision-making process (Innes et al., 2000; Asif, 2010). Recognized as one of the best
practices complementing sophisticated manufacturing techniques, Activity-based Costing (ABC), a
world-class management system, was endorsed by practitioners and academics (Neely & Platts, 2005).

Many scholars studied ABC and its features since it was popular in the 1990s. This study was
conducted to shed light on ABC adoption, its features, success factors, purposes, and challenges.

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 Several researchers such as Cooper and Kaplan; Kaplan and Anderson, Reyhanoglu, and Wegmann
conducted empirical studies for a more thorough comprehension of the ABC system – its advantages,
the challenges, and the factors which have an impact on its implementation.

Towards the end of the 1990s, interest in ABC waned (Innes et al., 2000). Among the reasons
given was the complexity of the system. In 2005, researchers are still mystified by the low adoption rate
of ABC.

Gosselin quoted academics and practitioners citing ABC as one of the most significant, new
models in management accounting during the twentieth century together with variance analysis, return
on investment, and the balanced scorecard. He argued that contrary to top management anticipation of
a quick development and installation of the ABC system, accountants, managers, and organizations
require an adequate period for the design and adoption. He conducted a research review on the
adoption and implementation of ABC, factors affecting its application, its consequences, and the enigma
of the non-adoption by firms.

Guzman et al. (2013) organized an exhaustive literature review of Time-Driven Activity-Based

Costing (TDABC). The research review tackled criticisms and opportunities for TDABC. It also
summarized the literature on the challenges and criticisms about Time-Driven ABC, and opportunities
for ABC implementation.

Gregory Wegmann (2011)wrote that the ABC method is the most popular and modern
management accounting method for the two decades 80s and 90s. In France, both ABC and the
strategic approach, Activity-Based Management, are quite well known. Wegmann reviewed the
empirical study by Sue et al (2007; in Wegmann, 2011) on ABC application by Chinese companies. He
compared the development of the ABC system in France and China and concluded that there is a higher
level of ABC adoption in France than in China.

Shields (1995) investigated the problems and the degree of success or failure experienced by
many adopters of ABC. He also analyzed how the behavioral and organizational variables account for the
significant differences in the level of ABC success and the resulting financial benefits.

Sohal and Chung (1998) were concerned that the management accounting systems and
database have not kept abreast with the requirements of complex manufacturing organizations. They
conducted two case studies to identify the factors that can bring ABC success.

Neely and Platts (2005) conducted a literature review on performance measurement system
design. They included ABC in the performance measures relating to cost and presented the benefits
gained from ABC. They cited that ABC is related to business process redesign which similar to ABC,
analyzes data flow in the organizational processes. They mentioned the study of Bromwich and Bhimani
(1989; in Neely & Platts, 2005) which investigated the criticisms against management accounting
systems. Murphy and Braund (1990; in Neely & Platts, 2005) affirmed the contention of Bromwich and
Bhimani (1989; in Neely & Platts, 2005) that the criticisms do not justify revision of management
accounting in the U.K. Neely and Platts (2005) cited Cooper (1987a, b; 1988a, b; 1989 a, b; in Neely &

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Platts, 2005) who introduced ABC in response to the criticisms against management accounting. Jeans
and Morrow (1989; in Neely & Platts, 2005) supported the usefulness of ABC as a remedy to the
common problems of management accounting.

Taticchi, Tonelli, and Cagnazzo (2010) updated Neely and Platts (2005) literature review on
performance measurement and management. They cited ABC and the Activity Based Management
system (ABM) authored by Cooper and Kaplan (1988; in Taticchi, Tonelli, and Cagnazzo, 2010), among
the models developed for large companies, which can be used to design a performance measurement
and management system for small and medium enterprises.

2. THEORETICAL FRAMEWORK

The approach in this literature review is to summarize and explain the existing knowledge of the
Activity-Based Costing system. This study may be categorized as preparatory to a thesis because it
identifies gaps in the literature. These gaps are leads to future research.

3. RESEARCH METHOD

The researcher gathered and evaluated information from previous researches. She identified
the questions which the articles sought to answer. She noted the methodologies and the participants of
the researches. She analyzed the findings and conclusions. She pinpointed the areas where the
previous researchers agree on or disagree about. Limitation of this research review is the scarcity of
related studies in the Philippines and Asia. However, the researcher included studies of experts on the
topic.

She pursued the following objectives: 1) to describe ABC, TDABC and ABC adoption status, 2) to
scrutinize the benefits and outcomes of ABC implementation, 3) to examine the purposes for which ABC
was utilized, 4) to summarize the challenges encountered under the ABC system, 5) look into the factors
for a successful ABC implementation, and 6) to pinpoint research opportunities on ABC. Also, she
formed a hypothesis which encapsulates the findings and conclusions of past researchers.

4. DATA ANALYSIS AND DISCUSSION

Based on reviewed literature, the author presented the following data to address the objectives
of this study.

Table 1: Studies which covered ABC and their specific topics

Cited reference Topic

Innes et al., 2000 ABC Adoption status of the most significant companies in the
U.K.,1994 and 1999
User commitment to ABC
Use of ABC for applications other than product costing
Factors for the perceived effectiveness of ABC
implementation based on a research review
Correlation between other purposes of ABC and its success

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 Views of non-adopters of ABC
Challenges encountered under the ABC system
Gosselin, 2007 ABC adoption by American firms in 1991 and 1993 and by the
U.K. companies in 1991
The difficulty experienced by survey respondents with the
nature of ABC
Contextual factors affecting the adoption of ABC
Impact of contextual factors on attaining the stage in the ABC
implementation
Consequences of ABC
Guzman et al., 2013 Challenges and criticisms about Time-Driven ABC
Shields, 1995 Influence of behavioral, organizational, and technical variables
on ABC success and the company’s financial benefit
Wegmann, 2011 Comparison of ABC implementation by French and Chinese
companies
Sohal and Chung, 1998 ABC adoption status in Australia
Factors for successful ABC implementation
Neely and Platts, 2005 Remedies to problems in management accounting, offered by
the ABC system
Asif, 2010 Compilation of management accounting tools, among which is
ABC
Wegmann, 2008 Applications which address the pitfalls of ABC
Reyhanoglu, 2004 Differences of ABC from the traditional costing systems
Kaplan and Anderson, 2003 Description of Time-Driven ABC and its successful
implementation by several companies
Cooper and Kaplan, 1991 ABC as a useful guide to management to attain higher profits
Brewer, Garrison, and Noreen, 2016 Articles on ABC adoption
Manalo, 2004 ABC implementation in the Philippines
Elhamma, 2012 ABC adoption in Morocco
Kocakulah et. al., 2017 Three tracks for ABC adoption in SMEs
Major 2014 ABC implementation in the EU telecommunications sector
Watanapa et al., 2016 ABC application for oil and container trains services in
Thailand
Ussahawanitchakit, P., 2017 The relationship between ABC, organizational development,
business competitiveness, and corporate success in the
canned and processed food sector in Thailand
Hashim, J.H., 2015 ABC diffusion in public and private Institutions of Higher
Education in Malaysia
Taticchi, Tonnelli, and Cagnazzo, 2010 Performance measurement and management: use of ABC

The first objective is the description of ABC.

R. Cooper and R. S. Kaplan (1991), studied the profit priorities from activity-based costing system.
They proposed that managers can get the most benefit from ABC if they allocate expenses judiciously to
the products. ABC promotes the profitability of the firm by focusing on activities that contribute
significantly to net income. The cost managers must not charge all expenses directly to the product units,

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instead assign them to the related activities – based on an allocated cost of resources spent, regardless of
the number of units manufactured or sold.

Managers engage in the quest for profits, and so, they must obtain a clear understanding of the
expenses at each activity level. They can clarify details of costs with the use of ABC. They can get the
complete picture regarding activities for the design, production, and delivery of the products. They
must evaluate how to allocate resources to each event to identify which products yield the highest
contribution margin. Also, they must adopt a strategy to diminish operating expenses.

The ABC Hierarchy shows how ABC distributes the expenses of indirect and support resources to
the different activities in a company. An example of such distribution is to – a) facility sustaining
operations, b) product-sustaining activities, c) batch-level activities, and, d) unit-level activities. For
example, expenses related to facility supporting activities are identified using the cost drivers: plant
management expenses, building and grounds expenses, and heating and lighting expenses.

ABC supports several advanced manufacturing and design philosophies like kaizen, “focused
factory," product engineer's design-for-manufacturability efforts and advanced information and
manufacturing technologies.

Remedies that can improve profitability taking off from ABC findings are product repricing,
reduction of resource consumption, and cutting down on spending or redeploying the excess resources
to other uses.

Reyhanoglu (2004) described the advantages offered by ABC. ABC derives more accurate product
costs which management can utilize for effective decisions on product mix and pricing. The company
can identify the profitability of the products after a proper cost allocation. It also entails a deeper
comprehension of the cost drivers. It assists the management in deciding on capital investments,
especially on new technologies. The company may switch to a flexible budget. The product designers
can evaluate alternative courses of action to cut down on costs. The primary output of the ABC system
can help management analyze profitability by looking at customers, distribution channels, brands, and
regions. Management can strive to achieve reduced costs resulting from the ABC system. It can also
project the cash flows. The ABC system is quite useful in analyzing the activities of the purchasing
department to derive accurate cost figures.

At this point, Time-Driven ABC is described.

To remedy the problem regarding the allocation of resources to activities in the ABC system,
Kaplan and Anderson (2004, 2007; in Wegmann, 2008)) designed the Time-driven ABC now called the
TDABC. Time-driven ABC is a variation of the traditional ABC model that is easier to implement because
it only has two factors: the unit cost of providing the activity (functional capacity) and the time utilized
to conduct a transaction or event (Kaplan and Anderson, 2003). Under the TDABC, managers express
cost drivers in a standard number of working hours. Analysts will review the standard working hours
when conditions in production differ. New product introductions, expansion into new markets, and
increases in product and customer demand are examples of changes in production conditions. TDABC

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simplified the ABC method for three reasons. It lessened the number of activities, and the managers
analyzed costs at the department or process level. It minimized the instances of collecting data from the
processes due to the use of a standard. It translated all the cost drivers into one equivalent-time driver.

After describing the mechanics and features of ABC and TDABC, this paper sought the status of
the ABC adoption in some parts of the globe at different periods.

Innes et al. (2000) reviewed the findings and conclusions of surveys administered to U.K.
companies in 1994 and 1999. Through the use of comparable data, the authors assessed the progress of
ABC implementation. They investigated the number of ABC adopters and the trend of ABC usage as to
purpose. They analyzed the variables which are considered as contributors to ABC success. They also
obtained the opinions of respondents who were not using ABC during the two periods.

Innes et al., (2000) concluded that ABC adoption by companies did not manifest a growth from
1994 to 1999. Data on the implementers showed a dip from 21% in 1994 to 17.5% in 1999. Those who
were currently assessing ABC adoption also declined from 29.6% in 1994 to 20.3% in 1994.

The number of companies which rejected ABC after its evaluation posted a minimal increase:
15.3% in 99 vs. 13.3% in 94. More companies did not consider using ABC: 46.9% in 99 vs. 36.1% in 94.

The proportion of ABC implementation and the trend of ABC use registered a minor but
statistically significant difference between 1994 and 1999. ABC implementation continued to be
significantly higher in larger companies and those belonging to the finance industry. In contrast, the
percentage of ABC adopters and those considering it have declined. Also, the proportion of those who
rejected ABC climbed a little bit. The number of companies which did not consider ABC posted
statistically significant growth. These data implied no increase in the acceptance of ABC and it remained
at the actual usage rate from 1994 to 1999.

Specific information gathered from ABC users gave a different proof on their implementation.
Not all 17.5% (n=31) of the users in 1999 is reasonably extensive and committed users of ABC. More
than half of them (n=14) applied ABC in a few purposes in the organization while others (n=7) utilized it
in pilot projects. Excluding these partial users, will leave only 7.9% (n=14) as extensive users of ABC.
Thus, the 1999 figure (7.9%) will be below the 1994 data (9.7%). Also, some of these adapters (1999: n =
3; 1994: n = 4) used ABC side by side with the traditional costing system. These findings suggest a
provisionary adoption of ABC, which may imply that users did not have a strong positive experience with
it.

Gosselin (2007) also reviewed the researches on the degree of adoption and implementation of
ABC. The ensuing discussion is taken from his review.

The National Association of Accountants (1991) surveyed 2,500 American firms. The response
rate was 23% (575 firms) of which 11% (64 firms) had implemented ABC. The Institute of Management
Accountants (1993) surveyed the implementation of ABC by 1,500 American firms. The response rate
was 27% (405 firms) of which 36% (146 firms) implemented ABC. Innes and Mitchell (1991; in Gosselin,

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2007) surveyed 720 firms (manufacturing and financial services sectors) in the United Kingdom. The
response rate was 26% (188 firms) of which 6% (12 firms) implemented ABC. The authors concluded
that notwithstanding the vast interest of the academe and management accountants in ABC, a lot of
industries and organizations still did not adopt ABC. Gosselin (1997; in Gosselin, 2007) counseled that
researchers and implementers must be careful in analyzing survey results because there is a wide array
of ABC definitions. He doubted that the respondents in the study indeed had a thorough knowledge of
the ABC system.

Even the study which Gosselin (1997; in Gosselin, 2007) conducted on the planned innovation and
actual implementation, indicated that respondents were puzzled about the nature of ABC. Baird et al.
(2004; in Gosselin, 2007) supported Gosselin’s opinion. An aggravating circumstance is that respondents
who have not been exposed to the ABC system might not have participated in the study. Therefore, the
respondents might have overestimated the ABC adoption rates.

Numerous researchers (2002-2005) commented that surveys in management accounting do not

yield generalizations on how and why companies adopt ABC. They believe that said surveys cannot
determine the extent that ABC is used in companies.

Gosselin & Mevellec, (2004; in Gosselin, 2007), concluded that there are different types of ABC
applications and cost management systems. In that light, respondents may be confused in answering
the questionnaires on ABC implementation. Therefore, the definition of ABC must be explained first to
the potential respondents. Surveys revealed that only a few firms implemented ABC.

Sohal and Chung (1998) conducted case studies on ABC in manufacturing. As a backgrounder, he
cited Corrigan (1996) and Wood (1996) who reported the survey completed by the Australian Society of
CPAs about ABC. Out of 213 firms, only 12% were ABC implementers, though 88% were aware of ABC.
Of the non-adopters, 45% never considered ABC, 29% were still assessing it, 14% had considered and
rejected it.

A more recent survey on companies regarding the cost system being used was done by Stratton,
Desroches, Lawson, and Hatch (2009; in Brewer, Garrison, and Noreen, 2016). They surveyed 348
managers. To assign production costs to the products, only 18.3% of the respondents adopted ABC
while a majority or 42% utilized standard costing. At least 13% of the respondents implemented ABC
within the departments across the value chain. The departments were research and development,
product and process design, sales and marketing, distribution, customer service, and shared services.
Numerous companies did not assign the costs of the non-production departments to the products. This
study showed a low adoption rate for the ABC system.

ABC research in the Philippines revealed 59% of the companies used ABC parallel to a costing
system. The other 41% implemented ABC fully. The Philippine companies started by piloting ABC with a
unit and analyzing costs vs. benefits before adopting ABC firm-wide. Observed obstacles to ABC
implementation were specifications required by stakeholders (clients, customers, suppliers) and
employee resistance. The author recommended adequate training to achieve employee acceptance and
understanding (Manalo, 2004).

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 Elhamma (2012) conducted an empirical research on 62 firms in Morocco. Adoption rate
averaged at 12.9%, of which 21.87% represented large firms and 3.33% were SMEs. Industrial firms
accounted for 14.58%.

Based on the preceding discussions, this paper concluded that a lot of organizations and
industries did not adopt ABC despite the vast interest and highly positive comments of organizations.

Kocakulah et. al., (2017) designed three tracks for ABC implementation in SMEs. Under the
outcomes-focused research track, the effects of SME characteristics, and challenges posed by ABC to its
outcome are examined. The process-focused research track looks into the effects of the same
independent variables on its implementation process. The impact of the preceding result on ABC
implementation outcomes is measured under the third track – the process/outcomes-based research.

Based on the preceding discussions, this paper concluded that a lot of firms from different
sectors did not adopt ABC despite the vast interest and highly positive comments of organizations.

Although they perceived a low adoption rate, researchers also noted the consequences, benefits
or negative outcomes of the traditional ABC system and the TDABC.

Gosselin (2007) studied the impact or outcome of ABC implementation. At the onset of ABC in
the 1980s, service, not-for-profit, and public sector organizations also utilized cost accounting methods
which they applied to customers, projects, activities, and internal functions. These developments paved
the way for the cost management system.

The basic concepts of ABC (Kaplan, 1988; in Gosselin, 2007) such as cost objects, activities and
cost drivers ushered in a new accounting logic. The new accounting logic has several characteristics.
ABC hastened the rise of new cost objects such as services, customers, customized services, product
lines, internal services, and projects. ABC classifies costs based on activity; hence, it required an
explanation of why costs were incurred. After implementing ABC for several years, management
accountants surmised that cost drivers and cost driver rates were crucial for cost management. Thus,
managers and accountants, compelled by the need to derive the cost drivers and cost driver rates re-
investigated processes and activities. Although it involved changes in the methods of cost classification,
cost behavior, activity definition, and cost driver management, ABC is genuinely a part of the traditional
costing rationale.

ABC reinstated the relevance of management accounting (Bromwich & Bhimani, 1989, 1994; in
Gosselin, 2007). It revived management accounting, together with new accounting approaches - target
costing and life-cycle costing. The authors claim that restoring the relevance of management accounting
is the most significant consequence of ABC.

ABC requires accountants and managers to adopt a holistic view of the activities in an
organization (Argyris & Kaplan, 1994; in Gosselin, 2007). Contrary to top management anticipation for a
quick development and installation of ABC, accountants, managers, and organizations indeed require an
adequate period to design, install, and implement ABC.

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 Another consequence of ABC is the managers’ appreciation of accountants and their work
(Friedman & Lyn, 1997; in Gosselin, 2007).

In the area of Information Technology, ABC data facilitated setting-up of systems for controlling
costs and better deployment of resources. These systems may be boosted up by the wise use of
borrowings from financial institutions or other sources. This argument favors the efficient choice
hypothesis (Malmi, 1999; in Gosselin, 2007).

Kennedy and Affleck-Graves (2001; in Gosselin, 2007) found out that firms which adopted ABC
surpassed the firm value of those companies which did not.

Cagwin and Bouwmann et al. (2002; in Gosselin, 2007) reported that coupling ABC with other
strategies like JIT and TQM raised the level of financial performance compared to companies not using
ABC. They also implied that empowering circumstances like information technology sophistication, the
absence of excess capacity, and competitive environment make ABC more effective. They argued that
companies can anticipate a boost in financial performance based on metrics of success, contentment
with ABC, and financial advantage that ABC provides (Krumwiede, 1998; Shields, 1995; Swanson, 1995;
in Gosselin, 2007).

Ittner et al. (2002; in Gosselin, 2007) discovered a positive but moderate link between strong
adoption of ABC and manufacturing performance. In contrast, they concluded that there is no
significant correlation between ABC and return on investment, a measure of financial performance.

The findings cited above support Gosselin’s (2007) conclusion that ABC had a substantial effect on
cost accounting and management accounting. Some researchers and practitioners even claimed that
ABC adoption is advantageous to the financial performance of firms. But, limited empirical research
proved their assertion.

Individual case studies like that of Major (2004) and Watanapa et al., (2016), confirmed ABC‘s
capability to provide detailed and accurate cost accounting information. Major (2014) studied the case
of ‘International Telecom’s adoption of ABC. The firm implemented ABC not only to produce detailed
information regarding the quality and costs of its services and products. It also addressed its
responsibility to give comprehensive and organized cost data, anytime. ABC allowed the firm to justify
its pricing policies, to the government agencies and the public. Likewise, managers obtained detailed
and accurate cost accounting information, which helped them win against their competitors. Major
concluded that ABC implementation accomplished the desired modernization for the firm, bolstered by
the liberalization of the EU telecommunications sector.

Watanapa et al., (2016) focused on deriving the costs for service procedures of Laem Chabang
under the two categories: container train service and oil train service. Results revealed a higher cost for
oil train due to the lower number of its clients. Hence, the authors recommended that more oil trains
must be fielded with future expansion. Labor productivity must be optimized to reduce labor hours and
corresponding cost.

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 Aside from the consequences of ABC in the preceding discussion, researchers and practitioners
noted several pitfalls of the system.

Gregory Wegmann (2008) conducted a study on the developments and applications of the ABC
method. Several scholars and practitioners affirmed that ABC had drawbacks (Anderson & Young, 1999;
Datar & Gupta, 1994; Foster & Swenson, 1997; and Malmi, 1997; cited in Wegmann, 2008).

According to implementers, ABC is challenging to actualize and adjust, and, demands much
time. Numerous failures were reported, mostly in service industries. Due to the complex processes of
the ABC system, there were incidents when bases for decisions and strategies are unclear.

In certain instances, the ABC system entails a lavish degree of details which cannot result in a
useful and significant analysis. Managers explain the ABC allocation process in two steps. The first step
is the allocation of resources to activities. The problem in the first step arises in complex organizations
which require numerous resources drivers and distributions: The second step concerns per operation,
the cost allocation to cost objects which can be products, customers or Stock Keeping Units. The first
step cannot be controlled easily, unlike the second step which practitioners can manage with ease.
Hence, the first step is a problem in the ABC method.

The listed pitfalls led to new applications improving the ABC system. New cost systems focused
on the Customer-driven ABC, Market-driven ABC, Benchmarking-driven ABC (analysis of competitors),
Environmental-driven ABC and Inter-organizational Cost Management (the study of suppliers and
partners) to diversify the cost objects.

Ahmed Asif (2010) compiled the fifty-two tools of management accounting (2010), among which
is Activity-Based Costing. He cited that ABC is commonly used to complement an existing cost system
which managers utilize for external financial reports. Meanwhile, the ABC system is used for
formulating strategies and for managing operations.

Certain benefits were realized by practitioners of ABC.

Kuchta and Troska (2007; in Wegmann, 2008) affirmed a benefit that the Customer-driven ABC
can give, i.e. it can pinpoint the products and customers with the highest income yield. It can also
identify the processes which are customer-oriented. It can analyze whether activities add customer
value or not. It can spot the areas where the company should improve customer relations.

Scott McCartney (2008; in Brewer, Garrison, and Noreen, 2016) showed an application of ABC.
He explained how airlines determined the service fees it will collect from passengers for their baggage
during the flight. Airline analysts itemized the tasks involved in transporting the luggage as placing tags
on bags, arranging bags according to type, class, flight number, hauling the bags into the carts, bringing
the carriers near the plane, and stacking them into the cargo area of the aircraft. The airlines now earn
a substantial amount from fees for checked luggage.

Kim, Han, Shin, and Choi (2010; in Brewer, Garrison, and Noreen, 2016) conducted a case study
on activity-based costing in the allocation of rebar fabrication costs to the projects – commercial, high-

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rise condo and heavy civil. When compared to the ABC system, it was evident that the traditional cost
system charged lower costs to commercial and high-rise condo but charged higher costs to heavy civil.

Suthummanon, Ratanamanee, Boonyanuwat, and Saritprit (2011; in Brewer, Garrison, and

Noreen, 2016) wrote a case study on applying ABC to a Parawood Furniture Factory with premises in a
province of Southern Thailand. It implemented the ABC system using activity measures as the basis of
allocating overhead costs to the product. Results of the ABC system showed that the traditional system
charged higher costs to four of the products (tile top table, side chair, telephone table, and plant tree
with grooves), and assigned lower costs to the computer desk.

The three applications of ABC (Brewer, Garrison, & Noreen, 2016) showed that ABC achieved a
more accurate overhead cost allocation as compared to the traditional costing system.

At this point, this study presents a brief result of Time-Driven ABC (TDABC) adoption.

Time-driven ABC does not transfer costs of unused capacity to products and customers because
one of its parameters is the actual time utilized to conduct a transaction or activity. Unit time estimates
consumed from total size is the transaction driver. When unexpected surpluses or shortages of
committed resources happen, it means there were material errors in the unit time estimates. Hence,
review and correction of the unit time estimate must be done to serve best the company pricing
strategy. However, if intended for operational control, time-based ABC must be on constant watch over
resource requirements, quality, and cycle times of activities and processes. The company must continue
whatever improvements have been achieved to progress further.

Time-driven ABC overcame the weaknesses of the traditional ABC. It can be installed swiftly and
with ease. Interface with ERP and CRM systems is possible. Maintenance and updating are not costly,
and the entity can do them fast. Expanding the model for the firm-wide application is attainable.
Distinctive attributes of customers and their requests, vendors, and activities can be integrated. The
system is transparent as to extricate process inefficiencies and to adjust the capacity whether actual is
at par, over or under the full level. It can also project future resource requirements using forecasted
order quantities and complexity.

Innovations in Time-driven ABC allowed it to produce relevant and useful data, swiftly and
economically, for management decisions.

This study also aims to examine the purposes for which ABC was utilized and their correlation to
success.

Other than product costing, respondents cited the use of ABC for applications they considered
quite important (Innes et al., 2000). ABC was used in the manufacturing, service and finance sectors.
Aside from product profitability and product costing, other uses for ABC were statutory reporting,
investment appraisal, transfer pricing, strategic development and operational staff awareness, branch
contribution, business process engineering, and engineering work management.

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 Significant progression (1994 vs. 1999) in the success rating was found in two purposes which
had the highest scores: stock valuation (3.6 to 4.6) and output decisions (3.7 to 4.2).

The 1994 and 1999 studies assessed ABC success and compared the variables underpinning it in
the U.K. Companies which adopted ABC in various applications continually gave high ratings (1994 to
1999) for its success. Also, the overall success of ABC has scored an average of 3.9 (the scale assigned
five as very successful and one as very unsuccessful) by the 1999 respondents (3.8 in 1994). This minimal
increase implied consistency in the ABC activities and processes and satisfaction among those involved
in the system. Twenty-five respondents (28 answered the question) deemed that the ABC system cost
paid off favorably to their companies.

The individual purposes of ABC were correlated to the overall ABC success. In the 1994 study,
overall success had a very significant relationship with Budgeting, Cost Modeling, Cost Reduction and
Cost Management, and Activity Performance Measurement and Improvement. Also, it had a significant
correlation with Customer Profitability, New Product or Service Design, and Stock Valuation.

In the 1999 study, overall success had a very significant correlation with New Product or Service
Design, Customer Profitability Analysis, Cost Reduction, and Cost Management, Cost Modeling, and
Activity Performance Measurement and Improvement. Besides, it also had a significant relationship
with Product or Service Pricing, and Product or Service Output Decisions. The high significance
attributed to Activity Performance Measurement and Improvement in both years was also cited in the
U.S.A. studies.

For the UK companies, the majority of the nine purposes were significant factors of ABC success
except for ‘Budgeting’ and ‘Stock Valuation.’ Budgeting which was very substantial in 1994 plummeted
to not statistically significant. Stock Valuation dropped from statistically significant to not significant.
On the contrary, both Product or Service Pricing, and Product or Service Output Decisions attained
statistical significance.

In addition to the preceding explanation of Innes et al. (2000), Guzman et al. (2013) discussed
opportunities for Time-Driven ABC application. They specified the following possibilities: simulation of
the optimal resource allocation, benchmarking of processes with those of other firms, balanced
scorecard, and TQM. Simulation of the optimal resource allocation can be done under TDABC because
the method works on real values. Scenario analysis can be employed. The resulting simulation model
can assist in budgeting plant capacity because both shortage and excess can be derived. TDABC allows
companies to compare processes with other firms due to commonality across industries (Kaplan &
Anderson, 2007 b, in Guzman et al., 2013). The time equations and costs of a company unit (like
warehouses in different locations) can be compared. Anderson (2006, in Guzman et al., 2013) believed
that TDABC enhanced but did not replace the traditional ABC. Under TDABC, causes can be identified
for pinpointed variations. Balanced Scorecard may be linked with the conventional ABC and TDABC
(Yilmaz and Ayvaz et al. (2008a, b, and 2011, respectively, in Guzman et al., 2013). They identified four
links – operational connection, customer profitability connection, financial connection, and analytic
hierarchy process. ABC may also be linked to TQM because it gives data on costs and procedures. It is

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wholly aligned with TQM because it reveals costs which can be discarded and still maintain product
quality.

From the above discussion, this study concluded that practitioners utilized both ABC and TDABC
for purposes which were correlated to ABC success.

Understanding the challenges posed by ABC may clarify why only a few firms adopt the system.

Researchers agreed on and disagreed about the effectiveness of ABC. Bjornenak and Mitchell
(1999; in Innes et al., 2000) commented that Activity-based costing/ management had reached
popularity as a modern management accounting technique. Despite the tenacious endorsements by
Cooper, Cooper, and Kaplan, and Kaplan (1988, 1991, 1992, 1998, and 1992, respectively; in Innes et al.,
2000), practitioners debated about ABC’s effectiveness. Bjornenak, Gosselin, and Malmi (1997; 1997;
and 1999, in Innes et al., 2000) doubted ABC as a genuine and useful technical enhancement. Noreen
and Bromwich and Hong (1991; and 1999, respectively in Innes et al. 2000) alleged that ABC requires
compliance with strict conditions to generate relevant costs. They concluded that ABC adoption and
execution is difficult and expensive.

Views of non-adopters of ABC imply the challenges posed by the ABC system. Both 1999 and
1994 surveys obtained the opinion of those respondents who were not using ABC on survey dates (Innes
et al., 2000). These non-users were categorized into a) with conscious decision to reject ABC, b) still
considering ABC, and c) did not consider ABC.

In 1999, those who decided to reject ABC (74%) disliked the perceived administrative and
technical complexity and the continuing generation of activity data resulting in total costs which
outweigh the benefits. Other respondents doubted the technical reliability of ABC. Still, others felt no
need for ABC because they had small product line variety and low overhead costs. These criticisms are
close to the results of the 1994 study; however, the comment on unreasonably large resource
requirement climbed from 28% in 1994 to 37% in 1999.

In 1999, the group which was still considering ABC averaged at 2.01 years assessment period for
the system (1.58 years in 1994). They were attracted to the benefits of ABC such as improvement in
product cost/profitability information, better cost control information, knowledge of customer
profitability, superior decision-making information, and advances in performance measurement.
However, they do not adopt ABC due to the costly demands that ABC development would place on staff
and other resources, the prioritization of other competing initiatives, the need to address difficult
technical issues, such as the identification of cost drivers, and the need to provide accurate cost
apportionment, and behavioral problems, such as changing well-established practice and employee
suspicion about the motives for using ABC.

The perceived advantages and disadvantages of ABC in 1999 were similar to 1994.

In 1999, those who did not consider ABC perceived lack of relevance/suitability of ABC to the
respondents’ business, the existence of a cost/cost management system that operated satisfactorily, the

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absence of the necessary expertise and resources to undertake an assessment, and the lack of top
management interest/support. Only 13% of the respondents plan to assess ABC for future adoption.
The reasons and scale of respondents were similar to 1994.

The preceding discussions presented the explanations of non-adopters of ABC. Meanwhile,

Guzman et al., (2013) conducted a literature review of Time-Driven ABC (TDABC). They identified the
challenges as follows: measurement error, hard and straight data, applicable to homogenous and
repetitive activities.

Cardinals and Labro (2008, in Guzman et al., 2013) commented based on an experimental
analysis that the employees’ calculation in the TDABC’s time equation might not be as precise as
desired. The derived equation may be materially affected by his or her perception. Kaplan and
Anderson (2007b in Guzman et al., 2013) described time estimation as obtainable from direct
observation, yet, Guzman et al. (2013) believe that interviews with the respondents will clarify data. In
some cases, interviewees were alienated by the perceived restriction during the dialog. Cardinals and
Labro (2008, in Guzman et al., 2013) found that respondents gave overestimated figures when
measured in minutes rather than as percentages of the total time consumption. The overestimation
happens, because most employees do not report their idle time.

Barret (2005, in Guzman et al., 2013) reported that TDABC depends upon hard and straight data
to afford high accuracy. An example is a piece of information from an IT application that is updated
regularly. When updating is neglected, the cost data may be significantly erroneous. Barret (2005, in
Guzman et al., 2013) states that an error in records can be magnified into a huge mistake when the
activity is performed repeatedly. He also questions the correctness of the estimated costs due to the
assertion that an estimated functional capacity can be calculated as a percentage of theoretical capacity.

Sherratt (2005, in Guzman et al., 2013) commented that TDABC is solely for predetermined
routines and activities. Barret (2005, in Guzman et al., 2013) believes that TDABC may be a primary
method for a unit with a single function. The total amount of direct and indirect costs can readily be
allocated based on available resources. The challenge arises because most divisions spend on direct and
indirect resources in varying percentages. Wegmann and Nozile (2009, and 2010, respectively in
Guzman et al., 2013) report that TDABC is only applicable to standard processes. Cardinals and Labro
(2008, in Guzman et al., 2013) commented that errors might be committed for incoherent tasks such as
in research and development. Incoherent tasks are not performed on a planned order, instead, as the
activity happens.

After determining the challenges, the study deemed it helpful to know the factors for a
successful ABC implementation.

Prior research findings reviewed by Innes et al.are cited in this section. McGowan and Klammer
(1997; in Innes et al., 2000) confirmed Shields’ (1989; in Innes et al., 2000) findings that three factors:
top management support, performance evaluation links, and adequacy of training and training
resources had significant influence on the respondents’ perceived effectiveness of ABC implementation.

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Also, user participation in the application and perception of the quality of ABC output data have a
positive correlation to his or her satisfaction with ABC implementation.

Foster and Swenson (1997; in Innes et al., 2000) concluded that the factors accounting for ABC
success were: integration with performance evaluation linked to compensation, links to quality
initiatives, top management support, implementation training, and resource adequacy. Hence, there is
consistency in the findings of Shields (1989), McGowan and Klammer (1997), and Foster and Swenson
(1997) regarding the factors which are correlated with or have an influence on ABC success.

Only a few pieces of research have been conducted on ABC success in the U.K. except for
Friedman and Lyne (1999) who worked on a case study regarding the variables responsible for the long-
term success and failure of ABC. Friedman and Lyne’s conclusions are similar to those of U.S.A.
researches. They attributed ABC success to the following variables: a well-established demand for ABC
at the start of the project; firm-wide bolstering for ABC especially upper management; accountants
coordinating scrupulously with experts on ABC on its evolution and adoption; the entrenchment of ABC
in organizational structure and processes; the provision of sufficient resources, and useful interface with
costing techniques like TQM.

Similar to the prior researches, Innes et al. also tackled the factors influencing the success of
ABC implementation in their 1994 and 1999 surveys. These studies present the strong influence of top
management support on ABC success, a finding that is similar to that of U.S.A. research.

In 1999, the relationship between the overall success rating and the quality variables (top
management support, consultants involved, in-house accountants affected, production personnel
involved, systems personnel involved, in manufacturing sector, in finance sector, and how long ABCM
has been used) specifically the link to TQM programs was evaluated using step-wise regression. Results
showed that top management support and to a lower degree, being in the manufacturing sector proved
high significance in accounting for the differences in overall ABC success among firms. However, the
TQM link variable had a very minimal effect on overall ABC success. In 1994, top management support
had a highly significant input to the differences in overall ABC success among firms. Also, the TQM link
variable had a very minimal effect on overall ABC success. The findings in 1999 and 1994 were similar.

Thus the modest contribution of TQM link variable to overall ABC success, supports, though not
on a strictly significant level,the findings of Shields,Foster and Swenson, McGowan and Klammer, and
Friedman and Lyne(1995, 1997, 1997, and 1999, respectively, in Innes et al., 2000).

Gosselin (2007) cited in his research review, the conclusions of researchers from 1993 to 2005,
that contextual factors affect the adoption of ABC. The contextual factors include competition,
environmental uncertainty, organizational structure, product diversity, production process, size,
strategy, and a subsidiary of a multinational firm.

Anderson, Bjornenak, Innes and Mitchell, and Krumwiede (1995, 1997, 1995, and 1998,
respectively; in Gosselin, 2007) commented that entities with many rival firms are inclined to adopt ABC.

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 Anderson, Innes and Mitchell, Gosselin, Malmi and Chenhall, and Langfield-Smith (1995, 1995,
1997, 1997, and 1998, respectively; in Gosselin, 2007) concluded that there is a correlation between
environmental uncertainty and the use of ABC.

Gosselin (1997 in Gosselin, 2007) found that centralization led to the adoption of ABC among
companies utilizing the Activity Management method.

Bjornenak, Krumwiede, and Malmi (1997,1998, and1999, respectively; in Gosselin, 2007) showed
that companies with highly diversified products use ABC. Krumwiede and Ittner et al. (1998, 2002,
respectively;in Gosselin, 2007) linked the complicated production process with the installation of ABC.

Numerous researchers (Armitage & Nicholson, Bjornenak, Gosselin, Innes et al, Innes & Mitchell,
Krumwiede, Pierce & Brown; 1993,1997, 1997, 2000, 1995, 1998, and 2004, respectively; in Gosselin,
2007) revealed in their field studies and surveys that there are many large companies which utilize ABC.

According to Gosselin, Baines, and Langfield-Smith, and Bhimani et al. (1997,2003, and 2005,
respectively; in Gosselin, 2007) the strategy formulated by the firm determines the implementation of
ABC. Meanwhile, Clark et al. (1999, in Gosselin, 2007) reported the adoption of ABC by a significant
number of multinational firms’ subsidiaries.

Several researchers deepened their analysis by studying the influence of contextual and
organizational factors on the stage of ABC adoption. Anderson (1995, in Gosselin, 2007) categorized the
factors that affect the attainment of the stage of ABC implementation, as follows:

The relevant factors under the external environment category are heterogeneity of demands,
competition, and environmental uncertainty. These external environmental factors have a positive
influence on the attainment of the following stages of ABC: initiation, adaptation, and adoption.

The critical factors under the individual characteristics category are a disposition toward change,
process knowledge, and role involvement. These factors under individual characteristics category have
a positive influence on the initiation, adoption, and adaptation and a negative impact on the adaptation
stage of ABC.

The factors considered under the organizational factors category are centralization, functional
specialization, internal communications, and training. They have a positive influence on the adaptation,
initiation, the acceptance, and adoption stage of ABC. But, they have a negative impact on the
initiation, adaptation and adoption stage.

Included under the technological factors category are complexity for users, compatibility with
existing systems, relative improvements over the current system, relevance to managers’ decisions and
harmony with firm strategy. They have a positive influence on the initiation, adoption, and adaptation
stage.

Listed under the task characteristics category are uncertainty and lack of goal clarity, variety,
worker autonomy, and worker responsibility. They have a positive influence on the initiation,

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acceptance, and adaptation stage. However, they have a negative impact on the initiation and adoption
stage.

Various researchers have shown that contextual and organizational factors have either a positive
or negative influence on the implementation of ABC. Anderson, Gosselin, Krumwiede and Baird et al.
(1995,1997, 1998,and 2004, respectively; in Gosselin, 2007) suggested that researchers must discern the
different stages of the implementation process and the factors that influence the system.

To sum up, ABC adoption is influenced by contextual and organizational factors which are in turn
affected by the stage of ABC implementation.

Shields (1995) surveyed 143 firms. The initial draft of the survey was edited and enhanced by
delegates from the Consortium for Advanced Manufacturing – International, ABC software vendors, and
ABC Consultants from the Big 6 public accounting firms. The survey consists of two dependent variables
– ABC success and financial benefit. The seventeen dependent variables were 1) top management
support, 2) clear and concise objectives, 3) consensus about objectives, 4) link to competitive strategy,
5) link to quality initiatives, 6) link to JIT/Speed initiatives, 7) Training – Designing ABC, 8) Training –
Implementing ABC, 9)Training – Using ABC, 10) canned software, 11) custom software, 12) external
consultants, 13) accounting ownership, 14) non-accounting ownership, 15) stand-alone system, 16) link
to performance evaluation and compensation, and 17) adequate resources. Limitation of the survey is
that each question is addressed in a single statement.

Shields tested five predictions or hypotheses on empirical data of 143 firms. He used the
theoretical framework of Shields and Young (1989; in Shields, 1995). Shields and Young (1989; in
Shields, 1995) contend that technical resources do not dictate the success of a cost management
system. However, they suggest that they can complement the behavioral and organizational variables.
Cooper et al. (1992; in Shields, 1995) affirmed that ABC success rests on efficaciously handling the
behavioral and organizational variables of the Shields and Young, 1989 and 1994 model. Argyris and
Kaplan (1994) amplified the conclusion of Cooper et al. (1992; in Shields, 1995) through a behavioral
model of employees who react negatively to ABC adoption and the corrective measure offered. They
schemed to neutralize resistance by getting the non-accounting managers as champions of ABC.

Shields (1995) concluded on his survey of 143firms that they had varied levels of success with
ABC, the average of which is moderate. Also, 75% obtained a financial benefit while 25% did not.
Behavioral and organizational variables account for the significant difference in the level of ABC success
among firms. Technical variables do not justify the level of success. In summary, Shields concluded that
a particular set of behavioral and organizational variables could significantly influence ABC success.

Ussahawanitchakit, P. (2017) examined the relationships among ABC, organizational

development, business competitiveness and corporate success of the Thai canned and processed food
sector. Based on the results of Structural Equation Modeling, the researcher concluded that ABC has a
positive relationship with organizational development and business competitiveness. Organizational
development also has a positive correlation to business competitiveness and corporate success.
Business competitiveness has a positive influence on corporate success. Thus, ABC should be supported

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 intensely through training to upgrade competencies and capabilities. Adequate resources and assets
must be provided.

Hashim, J.H. (2015) studied whether the types of Institutions of Higher Education – public and
private, have a statistically significant influence on elements of ABC diffusion. Only the elements
‘relative advantage’ and ‘comparability’ had a significant effect on ABC diffusion for Public IHE. The
complexity of ABC accounted for the difference in the ABC diffusion between Public and Private IHE.

5. CONCLUSION, LIMITATION, IMPLICATION, AND RECOMMENDATION

Based on the above review of the literature on Activity-Based Costing, the following conclusions
are drawn:

The factors – top management support, performance evaluation links and adequacy of training
and training resources have a significant influence on ABC success. This hypothesis is supported by
McGowan and Klammer, Shields, Foster and Swenson, Friedman and Lyne (1997, 1989,1997, and 1999;
in Innes et al., 2000).

Contextual factors – competition, environmental uncertainty, organizational structure, product

diversity, production process, size, strategy, and a subsidiary of the multinational firm, have a significant
relationship with the adoption of ABC. This hypothesis is backed up by Anderson, Bjornenak, Innes and
Mitchell, and Krumwiede (1995, 1997, 1995, and 1998, respectively; in Gosselin, 2007). Gosselin, Malmi
and Chenhal, and Langfield-Smith (1997, 1997, and 1998, respectively; in Gosselin, 2007) also have the
same conclusion. Armitage and Nicholson, Innes et al., Baines and Langfield-Smith, Clark et al., and
Bhimani et al. (1993, 2000, 2003, 1999, 2005, respectively; in Gosselin, 2007) attest to the same
hypothesis.

The researcher cannot synthesize the conclusions of other reviewed studies due to the absence
of corroborating literature. In some instances, the reliability or validity of the researchers’ conclusions
was negated by the lack of statistical significance or deficiency in the study’s scope or participating
respondents.

As promoted by its proponents, ABC has advantages which several researchers and practitioners
have asserted. ABC may be described based on its advantages. It is useful in product pricing and cost-
cutting (Cooper & Kaplan, 1991; and Reyhanoglu, 2004). It is effective in the customer and product
profitability analysis (Reyhanoglu, 2004; and Kuchta and Troska, 2007; in Wegmann, 2008).

To address the weaknesses of the traditional ABC, Kaplan and Anderson (2003) introduced
TDABC. It had the advantage of being easier to implement than the traditional ABC. Maintenance and
updating are not costly while a firm-wide application is attainable. TDABC offers opportunities like a
simulation of the optimal resource allocation, benchmarking, complement with Balanced Scorecard and
TQM.

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 Due to perceived difficulties posed by ABC adoption, few companies implemented it in the
U.S.A., U.K., and Australia. A lot of industries and organizations still did not adopt ABC despite the huge
interest of the academe and management accountants (Innes et al, 2000).

Various individual purposes of ABC were significantly correlated to ABC success: Customer
Profitability Analysis, Cost Reduction and Cost Management, Cost Modeling, and Activity Performance
Measurement and Improvement. Other relevant purposes for which ABC was utilized among U.K.
companies were statutory reporting, investment appraisal, transfer pricing, strategic development and
operational staff awareness, branch contribution, business process engineering, and engineering work
management (Innes et al, 2000). This was true for the manufacturing, service, and finance sectors
(Innes et al, 2000).

For American companies, high significance was also attributed to Activity Performance
Measurement and Improvement (Shields, McGowan & Klammer, Foster & Swenson 1995, 1997, and
1997, respectively; in Innes et al, 2000).

Several companies rejected ABC due to perceived administrative and technical complexity, and
the continuing generation of activity data which pushed costs to outweigh the benefits (Innes et al,
2000).

The firms which still considered ABC lost enthusiasm for it due to the huge cost and demands on
employees (Innes et al, 2000).

Other companies which did not consider ABC cited among their reasons the perceived lack of
ABC’s relevance to their business, lack of top management support, a satisfactorily operating cost
system, and absence of the necessary expertise and resources (Innes et al, 2000).

The thematic review yielded some research gaps which form the pillar for future research
directions. Past researchers like Gosselin (2007) state that there is limited empirical research on the
impact of ABC. They contend that ABC’s effect can be investigated by checking the relationships
between contextual and organizational factors, the success of ABC implementation and performance.
Innes et al. (2000) revealed a provisionary ABC adoption by users despite highly favorable comments on
its relevance and success. Thus, future studies may focus on this gap between cases of tentative
commitment and full appreciation of ABC by users. The nature of ABC adoption (whether as a complete
application to the costing system or specific processes only) and the adoption rate by companies maybe
examined more thoroughly.

It was evident that users of ABC stipulated quite positive comments on the importance and
success in general and specific applications within their companies. Thus, investigation of the rift
between user commitment to ABC, assessment of users and an understanding of the nature and rate of
its adoption, leads to future research.

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 Despite the existence of ABC for around twenty years, there is still a lack of empirical proof on its
impact. Hence, the previous researchers deemed it necessary to investigate further the correlation
between contextual and organizational factors, the success of ABC implementation and performance.

Future researchers may focus on applying the three tracks for ABC implementation in SMEs
involving SME characteristics, challenges posed by ABC, and the ABC implementation process (Kocakulah
et. al., 2017).

From the narrative of factors and their influence on the four stages of ABC implementation,
researchers noted that there are few adverse effects. Gosselin (2007) attributed the finding to the
possible abandonment of ABC by the respondent. Hence, this is an area for future research.

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