ACTIVITY BASED COSTING- DIFFUSION AND ADOPTION

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1 ACTIVITY BASED COSTING- DIFFUSION AND ADOPTION Jörgen Dahlgren, Ek Dr, Magnus Holmström, Ek Dr., Henrik Nehler, Ekon lic, The authors, Linköping University, School of Management Do not quote without permission

2 2 Abstract Few new ideas in management accounting have achieved the same attention in terms of books, reports, conferences and implementation efforts, as has Activity Based Accounting (ABC). A lot of survey studies have been carried out describing the diffusion of ABC in different countries, for example Krumwiede (1998a) in USA, Gosselin in Canada (1997), Innes & Mitchell in Great Britain (1995), Sherrer in Germany (1996), Lukka & Grönlund in Finland (1996) and Björnenak in Norway (1997). The surveys give a general picture of the extent to which ABC has been considered and adopted at certain points in time. No such study has so far been made in Sweden. This paper reports on a survey conducted during autumn The sample contains 400 Swedish manufacturing firms with more than 50 employees with a response rate of 37%. The aim of the paper is to describe and explain the diffusion and the adoption of ABC in Swedish manufacturing industry and, wherever possible, compare the results with surveys from other countries. From a diffusion perspective, the survey shows that the majority of Swedish manufacturing firms (53%) never even discussed adopting ABC. In the end, however, 16% of the Swedish firms have implemented and are currently using ABC. Out of these, only 17% have chosen a complete implementation. In the adoption perspective 27 variables were tested, all generated from the ABC literature. The factor analysis reduced the 27 variables to 9 factors, which are size, competition, differentiation, system quality, automation, strategic importance of costing, budgetary control, product diversification and finally Relevance Lost variables. The results from the study show that only three of the factors were statistically significant and could explain why Swedish firms have adopted and are using ABC. Notably none of the classic ABC factors, e.g. product diversification (Cooper, 1988ab), was significant.

3 3 ACTIVITY BASED COSTING- DIFFUSION AND ADOPTION The adoption of ABC During the end of the 80s Activity Based Costing was introduced as a new costing model. This has led to an intensive discussion within academia and an extensive supply of articles, books and conferences. The research on the application of the model has been widespread and the model is presumably the innovation that has had the most influence within management accounting for a long time. Björnenak and Mitchell (2000) have analysed the diffusion of ABC in the 15 most influential American and British Journals and concluded that 355 articles on ABC were published during the 90s. A large number of surveys with the purpose of describing the diffusion and adoption of ABC have been carried out (see Table 1 on the following page). These studies show an increased awareness of ABC but the rate of implementation has been slow and does not seem to have match the attention that the ABC model has achieved. The studies have also shown large differences between countries and even between different surveys in the same country. To a certain extent this can be explained by the fact that studies have been carried out at different points of time and with varying definitions of ABC. No empirical survey on adoption of ABC has previously been made in Sweden prior to this one. Ask & Ax (1992) include questions on ABC in their study on costing practices in Sweden and conclude that 22% of the manufacturing companies intend to try ABC. The adoption rate is, however, generally low in the Scandinavian countries. To a certain extent this has probably to do with the fact that product-costing models in Scandinavia have been heavily influenced by the German tradition. Björnenak (1995) has counted references in Norwegian books on product costing and found an extensive German dominance up to the 50s (Alnestig & Segerstedt, 1997). The German influence is also noticeable in Swedish product costing where the inclusion of e g cost of capital and depreciation based on replacement cost is standard since the development of Uniform principles during the 30s (c.f. Samuelsson 1990). Both in Sweden and Norway the Anglo-Saxon, particularly the American, influence has increased during the last part of the 20 th century. Still, according to a survey in 1970, 90% of the companies used depreciation based on current cost. This figure decreased slightly to 82% in 1982 (Samuelsson op cit). In Ask & Ax (1997) the figure for large companies was 96%, while 64% of the companies at that time included cost of capital in their computation of product cost. The general picture given by the surveys in table 1 is that the use of ABC has increased during the 90s but that this increase has been comparatively slow. Chenhall & Langfield- Smith (1998) maintain that there has been a strong increase in the awareness of ABC, but that the implementation rate has been low. A further conclusion is that ABC is more widely spread in the Anglo-Saxon world (c.f. Clarke et al 1999).

4 4 Author; Date Country Population ABC adoption Comments Lukka & Granlund (1996/1992) 1 Finland Manufacturing industry 0% 5% of the companies were implementing Virtanen et al (1996/1995) Finland Manufacturing industry 14% The last survey in a series of three Björnenak (1997/N.A.) Norway Manufacturing industry 40% Includes companies that plan to adopt ABC Cobb, Innes & Mitchell UK Manufacturing industry; 6% (1993/1990) Financial Services Drury & Tayles UK Manufacturing industry 4% (1994/1991) Innes & Mitchell UK The largest % (1995/1994) companies Innes & Mitchell UK The largest % A follow-up to the (2000/1999) companies previous Clarke et al (1999/1995) Ireland Manufacturing industry 12% Sherrer Germany Manufacturing industry 3% (1996/N.A.) Groot (1999/1997) Holland Food industry 12% Cost Management Group of IMA (1996) Krumwiede (1998) USA Members of IMA 34% 49% adopters. 70% implemented or decided to implement ABC Shim & Stagliano USA Manufacturing industry 27% (1997/1993) Armitage & Nicholson Canada Manufacturing industry 23% (1993/N.A.) Gosselin (1997/N.A.) Canada Manufacturing industry 30% Corrigan (1996) (Booth & Giacobbe, 1995) Australia Manufacturing industry 12% Table 1: Adoption rates for ABC in different surveys Explaining the use of ABC An important research purpose is to explain why some companies adopt ABC (and why others don t). The variables presented below have been advanced as reasons for why a company should (or should not) use ABC. Some of these variables have been introduced only as part of a general argument for ABC in textbooks or articles, whereas others have actually been tested for statistical significance. The figures in parenthesis refer to Table 2 where the variables tested in this study are listed. Textbook arguments A basic idea behind ABC is that traditional cost systems are inefficient. These systems have a high cost of errors i.e. costs associated with bad strategic decisions caused by unreliable and distorted cost information (Cooper 1988b). Cooper argues that ABC will lead to better 1 The first date represent the date of publication, the second date year of survey

5 5 decisions (e.g. better product-mix) and companies that adopt ABC will consequently show a higher rate of return (4). At the basis of this is the claim that an ABC-system gives a more accurate (11) and fair (12) estimate of product cost. In a strategic perspective ABC facilitates the identification of the costs and revenues associated with each client (10). One hypothesis is that medium-sized clients are the most profitable. These clients still pay a good price while at the same time they do not require excessive resources for selling or service. Large companies tend to demand price-cuts and small companies require large efforts for sale and service (Donath 1999). From this follows that companies with a homogeneous group of clients can be expected to use ABC to a lesser extent than companies with a heterogeneous group of clients (25). Groot (1999) assumes that the more products (4) a company has the more differentiation between them. Since the variation between products calls for a corresponding variation in costing, the proponents for ABC have suggested that companies with differentiated products are in greater need of an ABC-system. A similar argument can be made for the number of clients (6). Estrin et al (1994) discusses the applicability of the ABC model using two dimensions. The first is related to the traditional ABC arguments of the need for a company s costing system to be adapted to the variability in its operations. This dimension is describes in terms of five general variables that would motivate the adoption of an ABC-system: Product diversification (5) Process diversification (22) Diversification of support functions (22) Cost allocation (e.g. number of cost centres) (9) Increase in indirect costs (15) The second dimension has to do with management s propensity to use improved information for decision-making. The variables used here are: Pricing freedom (18) and degree of competition (17) The strategic value of cost information (13) The decision value of cost information (14) The frequency of cost analyses (26) The importance of variance analysis (27) Percentage indirect costs (7) The arguments of ABC proponents have to a great extent focussed indirect costs. Cooper (1987) claimed for instance that direct labour represented less than 10% of total cost in American companies. This meant that direct labour (or other direct volume based factors like machine hours or material cost) should no longer be useful as allocation base for indirect costs. Companies with a low percentage direct labour (8) should therefore switch to ABC. A large percentage of salaried employees (2), the cost of which is usually treated as indirect, was also given as a reason to use ABC instead of traditional costing models. Another of the arguments in the Relevance Lost debate (Kaplan 1984,1987; Cooper 1987) was that traditional accounting systems were obsolete since they pooled many types of indirect costs into one cost centre. Total indirect cost in a cost centre is then allocated to

6 6 products in relation to their share of direct labour. This leads to a distortion and the larger percentage indirect costs, the larger the distortion. Following the Relevance Lost arguments it follows that companies with a large percentage of indirect costs should use ABC (7). Cooper further maintains that companies which have few and large cost centres and which only use direct labour to allocate the costs from these cost centres to products should benefit from changing to ABC. Companies with few cost centres should then be more likely to use ABC (9). According to Miller & Vollman (1985) the percentage of indirect costs in American companies has increased substantially during the last century. Increased automation leads to an increase which is not only relative but also in absolute terms. Johnson & Kaplan (1987) regard this development as a change in production systems leading to a change in the context for costing and consequently need for a revision of costing models. Both increasing indirect costs (15), decreasing portion of direct labour cost (16) and increasing automation (21) can therefore be seen as an indicators of the need for ABC. In his classical articles (1988a, 1988b) Cooper argues that ABC should be used in companies whose products are highly differentiated in terms of volume, size, complexity, material and set-up times. Only the first three variables (22, 23, 24) have been emphasized in the discussion and they are therefore the only ones included in this study. Empirically tested variables Based on survey of 301 American companies, Krumwiede (1998a) tried to identify variables that could explain why companies adopt or do not adopt the ABC model. The following factors were tested: Potential for cost distortion Percentage of overhead costs to total production costs Decision usefulness of cost information Lack of system initiatives Size of the organisation The potential for cost distortion describes whether e.g. only one allocation base is used or if a company has a high degree of volume or complexity differentiation. The potential is measured as a weighted index for complexity and volume (22, 23). The study showed that adopters of ABC had a higher potential for cost distortions than non-adopters. Another measure of the potential for cost distortions is the percentage of overhead costs. Krumwiede s study showed that also in this case the adopters of ABC had higher percentage overhead costs compared to non-adopters. Even if ABC would produce better estimates of cost, the model is not likely to be implemented if there is no felt need for better information. In the study, companies were asked to rate degree of competition (17), use of cost-plus pricing (18) and cost reduction efforts. Users of ABC indicated a greater usefulness from ABC information (13,14) The influence of company size (3) was also tested. The conclusion was that ABC adopters had a higher turnover than non-adopters. The reason for this could be that the ABC model

7 7 demands large resources for its implementation something which only large companies can provide. In a study of the diffusion process for ABC, Björnenak (1997) tested the significance of cost structure (percentage indirect costs), product diversification, existing cost system and degree of competition. Cost structure (7) was found to be weakly significant on the 0,1%-level, meaning that ABC users had a higher percentage indirect cost. Product diversification was measured both in terms of number of variations in products (5) and customer adaptation (in this study called standardization; 19). None of the variables turned out to be statistically significant. In terms customer adaptation, non-users of ABC even showed a greater adaptation to customers than users. These results go somewhat against mainstream ABC thinking. Björnenak s interpretation is that companies with semi-standardized products use ABC. Existing cost system was measured in terms of the number of cost centers (9) and number of allocation bases. Neither variable showed a significant difference between users and nonusers of ABC. Degree of competition (17) has been advanced by the advocates of ABC as an important variable for explaining the need to adopt ABC (c.f. Cooper 1988b). Companies that find themselves in a market with fierce competition have no room for distorted cost estimates and should therefore, ceteris paribus, adopt ABC. Björnenak measured number of competitors and percentage of export sales, but neither was significant. Groot (1999) tested the following hypotheses: a) Companies that use ABC are larger than companies that don t use ABC (1) b) Companies that use ABC have a higher percentage indirect costs (7) c) Companies that use ABC have a greater number of products than companies that don t use ABC (4) Only the first hypothesis was accepted. Drury & Tayles (1994) achieved similar results and also Clarke et al (1999) found that company size, which they measured in terms of turnover, was a significant variable explaining the adoption of ABC. They further found that multinational companies used ABC to greater extent than indigenous companies. Percentage indirect costs did, however, not turn out to be statistically significant in explaining ABC adoption. Shim (1998) hypothesized that there should be a positive correlation between degree of automation and ABC adoption (20) since automation would lead to higher indirect costs, which ABC advocates suggested would in turn necessitate ABC. In a survey with 140 companies this hypothesis was tested but did not prove to be significant. The large majority of the variables in Table 2 (below) have been generated from the literature and surveys on ABC. They are the variables which are tested for significance in this study.

8 8 Variables Researcher 1. Number of employed Cobb et al; Björnenak; Groot; Drury & Tayles 2. Number of salaried employees Kaplan 3. Turnover Krumwiede; Clarke et al 4. Profitability Cooper 5. Number of products Cobb et al; Björnenak; Groot; Drury & Tayles; Clarke et al 6. Number of clients (own variable) 7. Percentage indirect costs Kaplan; Miller & Vollman; Estrin et al; Björnenak; Cobb et al; Groot; Drury & Tayles; Clarke et al 8. Percentage direct labour Kaplan; Miller & Vollman 9. Number of cost centres Cooper; Estrin et al; Björnenak 10. Profitability per product Cooper; Kaplan 11. Profitability per client Cooper; Kaplan 12. Reliable costing system Cooper; Kaplan 13. The strategic value of cost information Estrin et al; Krumwiede 14. The decision value of cost information Estrin et al; Krumwiede 15. Increase in indirect costs Kaplan; Estrin et al 16. Decrease in direct labour costs Kaplan 17. Degree of competition Cooper; Estrin et al; Krumwiede; Björnenak; Drury & Tayles 18. Pricing freedom Estrin et al; Krumwiede 19. Degree of standardization Björnenak 20. Degree of automation Miller & Vollman; Cooper; Shim 21. Increasing degree of automation Cooper, Johnson & Kaplan 22. Differentiation in complexity Cooper; Estrin et al; Krumwiede; Björnenak 23. Differentiation in volume Cooper; Krumwiede; Björnenak 24. Differentiation in size Cooper; Björnenak 25. Client homogeneity Gering; Donath 26. The frequency of cost analysis Estrin et al 27. Importance of variance analysis Estrin et al Table 2: Variables explaining the adoption of ABC and tested in this study In his study of the diffusion of ABC in Norway, Björnenak (1997) concluded that the demand perspective did not fully explain the diffusion process. And that taking the supply side into account seems to be promising. The analysis of the data on the variables in Table 2 gives us a possibility do discuss whether ABC in Sweden has been adopted because it corresponds to a perceived need for a new and more accurate costing model or whether it is result of heavy marketing by consultants and others. The adoption concept One of the main objectives in the surveys on ABC has been to describe the adoption of ABC and try to explain the whys and why-nots behind adoption. It is, however, not clear what ABC actually is and what adoptions means. When is a costing system ABC and when is it not? If a company changes some of its allocation bases and use activities for allocating indirect costs, is it then an ABC system? How do you categorize a partial implementation of ABC? Part of the difference in percentages between different studies on adoption can presumably be explained by the fact that different things are measured.

9 9 In terms of degree of adoption, we (Dahlgren et al 1999) distinguish between: Temporary use (activity-based costing is used in a limit time period) Parallel use (ABC is used parallel with the traditional costing system) Partial use (Activities are used for allocating part of indirect costs) Complete use (ABC is integrated into the accounting system) Complete use is expected to be very rare. The categories resemble somewhat those of Pohlen (1996) who distinguished between Diagnostic Models, Reengineering Models and Integrated Cost Management Systems. Diagnostic models are design to give an instant picture of the consumption of activities and costs for products, clients or distribution channels. This analysis can take place separate from the normal cost accounting system. The ABC analysis is fairly simple and demands little time. It is identical or similar to Temporary use. Reengineering models are based on a complete activity analysis where activities for the entire company are identified in a bottom-up approach. Efforts are made to identify non-value-added activities. This approach is relatively resource consuming but knowledge on activities and costs provides management with information that can generate ideas for change and evaluate such ideas. Finally, Integrated Cost Management Systems represent the most developed form of an ABC system. In this case ABC is integrated with other systems and can therefore both import and export data to these systems. According to Pohlen integrated systems are very rare and the research group had only identified two cases. It shares the characteristics with Complete use above. In a study of 778 companies in manufacturing Krumwiede (1998b) tested 10 steps of ABC adoption. The steps go from Not having considered adoption to the tenth step where ABC is fully integrated. Only 5 % of the companies where considered to be in this last category which agrees with Dahlgren et al and Pohlen. 26% of the companies can be said to have parallel system. Apart from different types of adoption, the purpose of ABC can also be expected to vary. Cobb et al (1993) claim that the most important purpose is not accurate product cost but instead cost control. This is confirmed by Innes & Mitchell (1995a) who found that 79% use ABC for this purpose. Swensson (1995) interviewed 25 companies to find out what ABC is used for. Most frequent response category was process improvement. As much as 92% stated that this was the main purpose which confirms Cobb et al. The next most frequent use was pricing (72%) Many of the companies considered, however, that evaluation of performance would be the final objective. The outcome of a study of 187 companies by Drury & Tayles (2000) contradicts to a certain extent the previously described results. The study shows as much as 84% of the companies use ABC primarily to generate information used for product choice or analysis of product profitability. Only 55% used it for cost control.

10 10 The reason for the differences between, on one hand, Drury & Tayles and, on the other hand, Cobb et al, Innes & Michell, Swenson could be that the Drury & Tayles study includes companies from several industries. In our study we have included questions that permit us to treat ABC adoption as a differentiated concept. We have further tried to establish what the primary objectives are for the use of ABC. Methodology The purpose of this study is threefold a) to describe the ABC adoption rate in Swedish manufacturing industry b) to analyse the relevance of reasons advanced for adopting ABC c) to compare the results of this Swedish survey with studies from other countries The Population The population in this study is the Swedish manufacturing industry. This industry was chosen because it is probably the industry that has the most developed costing systems, it is the industry that often is mentioned in the ABC-literature and it is often associated with classical ABC-costing problems such as diversity in volume, size and complexity (Cooper, 1988b, 1989). Furthermore, most other surveys about ABC have had the companies of the manufacturing industry in different countries as population. The data in this study has been collected from the company register at the SCB (The Central Bureau of Statistics). All the nine sub-segments of the manufacturing industry have been included. The study targets firms with more than 50 employees. This delimitation has two causes. First, there is probably a relation between company size, measured as the number of the employees, and the number of produced products. If a firm has few employees and produces a few products, it will probably have less of a costing problem. In such companies ABC have probably never been on the agenda. Second, one purpose of the study is to create comparable statistics and relate the results from this study with previous ABC surveys. Many of these studies have 50 employees as delimitation (e.g. Ask & Ax and Lukka & Grönlund). The population of Swedish manufacturing industry with more than 50 employees consists of 1002 firms (SCB, 1999). The Sample This is a random sample study. The random sampling was made by the SCB. The sample was calculated with a confidence interval of 95% and a chosen margin of errors of 4%. To meet

11 11 these requirements the sample had to consist of at least 381 firms. The questionnaire was sent to 400 Swedish manufacturing firms with more than 50 employees (about 40% of the total population). The Questionnaire The questionnaire consists of 16 pages with 84 questions divided into firm background plus four different perspectives. The perspectives are made up of questions on diffusion and adoption perspectives, system design and finally implementation. The design and implementation perspectives will be reported in a coming paper (se also Nehler, 2001). The questionnaire can be seen as very long, but this was a result of a deliberate intent to minimize the number of questions with open answers. The interviewee only had to put one or more marks next to the questions. The length of the questionnaire is also a result of the broadness of this study (four perspectives). To assure a construction of a valid questionnaire a pre-study was conducted during the summer of The study was a case study of an ABB firm. This firm was ranked as the most advanced ABC user within the ABB group 2. The financial manager and the controller of two different firms tested the questionnaire. One senior consultant in the ABC field and a number of academics at Linköping University also evaluated it. The Data Collection The questionnaire was sent to 400 Swedish manufacturing firms with more than 50 employees. It was addressed to the financial manager of the firm. The questionnaire was mailed in the beginning of November A reminder was mailed in the beginning of December. In the beginning of January 2000 we had received 144 answers (36%). Nine of the respondents answered that they had not had the time to answer the questions. Four of the respondents had a number of employees that clearly was below 50, and these where excluded from the sample. Consequently we received 131 usable answers, of a new sample of 396 firms, and our response rate was therefore (33%). The analysis of non-respondent A study of the non-respondents was conducted to see if there was any response bias. A new random sample of 15 firms of the non-respondents was drawn. The firms in this sample were contacted by phone and they were interviewed either over the phone or they promised to mail the questionnaire within a week. 2 The judgement was made by the Head Office for the ABB Group. ABB also has ABC as the recommended costing method of the group.

12 12 A chi-square-test was conducted to see if there was any response bias between the firms that answered the questionnaire and the firms that did not. The analysis showed that there was no evidence of response bias with respect to firm size, sub-segment of industry or ABC usage. Since there was no response bias the firms that answered the questionnaire in the nonrespondent study could also be included into the response rate. The final response rate in this study is therefore 37%. Results Diffusion of ABC The table below shows the diffusion of ABC in Swedish manufacturing industry. The 145 useable answers have been categorized into type of adoption. Diffusion of ABC Not disscused ABC Decided not to use ABC Discuss to adopt ABC Decided to implement ABC ABC have been implemented and then abandoned ABC is implemented Total Frequency Percent 77 53,1 7 4, ,3 7 4,8 3 2, , ,0 Table 3: The diffusion of ABC in Swedish manufacturing industry. The table shows that most companies have not discussed ABC (53%), 5% of the firms have decided not to use ABC and 2% of the companies have implemented ABC and then abandoned the costing method. 60% of the firms in Swedish manufacturing industry have consequently not adopted ABC even in its weakest form. The table also shows that 19% of the firms are considering to implement ABC, 5% of the firms have decided to implement ABC and finally 16% of the companies in Swedish manufacturing industry have implemented ABC. It is interesting to notice that 53% of the firms have not discussed ABC in Swedish manufacturing industry. This ratio is comparable with the figures for the rest of Europe (a little bit higher), but a lot higher than in the USA. Further it is very few companies in Swedish manufacturing industry that have implemented ABC and then abandoned the method (only 2%). That indicates that it seems possible to adjust ABC to Swedish costing conditions as well. That assumption is also confirmed by the fact that it is fewer firms in Sweden (5%) than in the rest of Europe that have decide not to use ABC (Norway 15%, England 13% and Ireland 13%). The Swedish ratio is more in line with the ratio for the USA (6%). One explanation can be that the ratio of firms that have not discussed ABC is higher in Sweden

13 13 than in rest of Europe. Some of the firms in this category would probably not have decided to implement ABC if they had evaluated it. The ratio of Swedish firms that are discussing an adoption of ABC (19%) is almost the same as for the rest of Europe. Both in Great Britain and in the USA the ratios are higher and these results are consistent with a hypothesis that ABC is better suited for Anglo-Saxon costing conditions. 16% of the Swedish firms have implemented ABC and 5% that have decided to implement it. Together this will give a total of 21% that have adopted ABC. The ratio for firms that have implemented ABC (16%) is almost the same in Sweden as for the other Nordic countries (Norway 15% and Finland 15%). The ratio in the Nordic countries is a bit higher than for the European mainland, but a bit lower than for Great Britain (20%). In the USA ABC seems to be more popular than in Europe since over 30% of the American firms are reported to have adopted ABC (Krumwide, 1998a). Degree of Usage Firms that have adopted ABC may have implemented the method to different degrees. The classification in the following table reflects different degrees of ABC usage. The degrees are temporary use, parallel use, partial use and fully implemented ABC. The results in the table are based on the 23 firms that were classified as adopters of ABC. Degree of usage Total Temporary use Parallel use Partial use Complete use Total of firms that have implemented ABC Not supposed to answer Frequency Percent 2 8,7 4 17, ,5 4 17, , Table 4: The degree of ABC usage in Swedish manufacturing industry. Only 9% of the firms use ABC temporarily for an evaluation of product or customer profitability. It is probably the investment costs for design and implementation that have convinced the firms to have a continuous system. Most firms in Swedish manufacturing industry (56%) use a partial ABC system. The result indicates that the firms have succeeded to integrate ABC with existing systems to a certain degree. The result also indicates that the firms do not use ABC for allocation of all costs.

14 14 It is quite surprisingly that only 17% of the firms are using a parallel system. It has been suggested in the ABC-literature that it is complicated and costly to integrate ABC with the existing information system. Therefore the parallel system approach has been recommended. One explanation to the low use of parallel system alternative in Sweden can be that consultants have played a relative small role in the diffusion process. Consultants usually implement a parallel system. In 30% of the firms consultants were the primary information source about ABC, only in 4% of the firms did they play a major role in convincing the firms to use ABC and finally only 24% of the firms used consultants to design the ABC system. The ABC-literature claims that it is difficult to integrate an ABC system with the existing accounting system 3 The limited use of fully integrated systems is supported by the he results in this study. Only 17% of the ABC adopters have a complete implemented/integrated ABC system. The result that fully implemented ABC is unusual will be even more obvious if the result is related to all the respondents of the survey. Only 4 out of 145 firms have a complete use of an ABC system, that is 3%. ABC and Management Accounting ABC has been developed to cover more areas in management accounting than product costing, for example accounting, budgeting and management. The table below shows the extent that ABC has diffused into other areas within management accounting. IN WHICH MANAGEMENT ACCOUNTING AREAS IS ABC USED? N % Costing/Activity-Based Costing Management/Activity-Based Management, analysis of activities and evaluation of the efficiency and 7 30 effectiveness of the activity Accounting/Activity-Based Accounting, the ABC information is the base for the accounting system 5 22 Budgeting/Activity-Based Budgeting, ABC information is used for budgeting and evaluation of the 3 13 activities input and output Other area of usage 0 0 Table 5: The diffusion of ABC into other management accounting areas in Swedish manufacturing industry. The result shows that ABC is mainly used for costing purposes (se application section below). 91% use the method for costing which seems quite reasonable since this was the original purpose of the method. In second place ABC is used for management of activities. The result shows, however, a lower adoption of ABM than Anglo-Saxon studies for example Cobb et al (1993) and Swenson (1995). The fact that only 22% use ABA probably proves that ABC is difficult to integrate with the existing accounting system. Budgeting is the least frequent use. Only 13% of the firms use ABB for this purpose. ABB is also rarely discussed in the ABC-literature (cf Brimson & Antos 1999). 3 It will e.g. give rise to with the valuation of inventory.

15 15 Usage for ABC information In Table 6 (below) the different usages for ABC information have been listed in order of frequency. APPLICATIONS BASED ON ABC INFORMATION N % Profit and profitability analysis Market pricing Price quotations Cost control Transfer pricing Outsourcing decisions Cost management Stock valuation 9 39 Order costing 8 35 Budgeting 7 30 Sale strategies 7 30 Decision for product development 7 30 Activity analysis 7 30 Process development 4 17 Costing new investments 3 13 Choice of product mix 2 9 Choice of manufacturing quantities 2 9 Capacity management in production 1 4 Costing replacement investments 1 4 Other areas of application 1 4 Table 6: Usage of ABC information in Swedish manufacturing industry. The most common usage for ABC-information is profit and profitability analysis. 70% of the firms use ABC for this purpose. This result is to be expected since this type of analysis was the purpose which ABC originally was designed for. The result for Swedish manufacturing industry differs, however, from recent Anglo-Saxon studies. For example, in Swenson s (1995) American study, process management was the most common usage for ABCinformation. In the present study the ABM usages are placed relatively low in the table above, for example activity analysis (30%) and process development (17%). It seems that there is a difference in the use of ABC between Swedish and American firms. The Swedish firms use the method more conservatively. The most frequent usages after profitability analysis can then be divided into two groups, pricing decisions and decisions for cost control. The usages market pricing (52%), price quotations (52%) and transfer pricing (48%) can all be termed pricing decisions. The usages cost control (52%), cost management (48%) and outsourcing (48%) are all decision areas within cost control. Adoption of ABC In this study 27 hypotheses were tested and almost all variables are generated from the ABCliterature and ABC surveys. Most variables are based on the demand perspective due to the fact that most variables in the literature are generated within this perspective. Table 7 below shows the results of the tested variables. The hypotheses were tested with t-test and the level for significance was 0,05.

16 16 The categories in table 7, decided to implement ABC and ABC is implemented, are added as adopters of ABC. The other four categories in the table are for the t-tests considered nonadopters of ABC. Firms that have implemented and firms that have decided to implement ABC have probably similar characteristics. Table 7 describes the significant and non-significant variables in this study. SIGNIFICANT VARIABLES SIG. VALUE NONE SIGNIFICANT VARIABLES SIG. VALUE Number of employed 0,00006 Number of salaried employees 0,217 Turnover 0, Profitability 0,270 Number of clients 0,045 Number of products 0,324 Number of cost centres 0, Percentage indirect costs 0,913 Reliable costing system 0,004 Percentage direct labour 0,502 The strategic value of cost 0,026 Profitability per product 0,586 information The decision value of cost 0,031 Degree of competition 0,993 information Decrease in direct labour costs 0,042 Pricing freedom 0,727 Increasing degree of automation 0,031 Degree of standardization 0,221 Importance of variance analysis 0,008 Degree of automation 0,310 Differentiation in complexity 0,363 WEAK SIGNIFICANCE SIG. VALUE Differentiation in volume 0,402 Profitability per client 0,055 Differentiation in size 0,753 Increase in indirect costs 0,067 Client homogeneity 0,619 The frequency of cost analysis 0,075 Table 7: A summary of the 27 tested hypotheses, divided in significant and none-significant variables. For the three hypotheses that show weak significance, further tests were conducted. The category discussing to implement ABC was added to the group adopters of ABC. This was done to analyse the effect on the t-test. It was also done to see in which direction the tests would go for the three weak significant variables. VARIABLE SIG. VALUE SIGNIFICANCE? Profitability per client 0,08 Weak Increase in indirect costs 0,959 No The frequency of cost analysis 0,043 Yes Table 8: An analysis of the three weakly significant variables. Firms that are discussing to implement ABC have been added to the group adopters of ABC. The results in the table strengthen the results from the 27 tested hypotheses. Firms that rank costing as important (high frequency of cost analysis) tend to use ABC, while the classic assumption that percentage of indirect costs would affect the use of ABC does not appear to be significant. For the variable profitability per client the test gives no further information. It is a variable that remains indistinct. Factor Analysis To improve the analysis of the 27 tested variable, a factor analysis was carried out. There are two main purposes with a factor analysis. These are data reduction and interpretation.

17 17 The first purpose implies that the factor analysis sums up the information in the original 27 variables into a number of fewer factors 4 that express what is common in the original variables. The second purpose is to identify and interpret the new factors. The goal of the factor analysis is to connect the tested variables into a fewer number of homogeneous groups, with a logical ant interpretable connection. This connection will be the name of the new factor. The result of the factor analysis shows that the 27 variables can be reduced into nine factors. These factors explain 71% of the variance in the statistical data material. This result indicates that the new factors to a great extent explain why firms use ABC. The next step is to give the new factors a name. The name is based on the variables that are included in the new factor (for example turnover and number of employed can be described as size). 5 The table below shows the name of the nine new factors. FACTOR NAME Size System quality Strategic importance of costing Automation Product diversification Relevance Lost variables Competition Differentiation Budgetary control Table 9: The nine new factors. The nine factors were tested with t-test, and the level for significance was 0,05. In Table 8 the result from the test is presented. Only three of the nine factors were statistically significant and could be used to explain why Swedish firms have adopted ABC. These are size, strategic importance of costing and budgetary control. Remarkably enough, none of the classic Relevance Lost and ABC factors were significant, e.g. product diversification (Cooper, 1988ab), percentage indirect costs and automation. These factors have been marketed by consultants and taught at the universities to be the factors that explain why firms have adopted ABC. SIGNIFICANT FACTORS SIG. VALUE NONE SIGNIFICANT FACTORS SIG. VALUE Size 0,001 System quality 0,560 Strategic importance of costing 0,016 Automation 0,708 Budgetary control 0,015 Product diversification 0,782 Relevance Lost variables 0,936 Competition 0,679 Differentiation 0,101 Table 10: A summary of the nine newly generated factors, divided in significant and none-significant factors. 4 A factor is mathematical a linear combination of variables that describes the essence of the data material. 5 See appendix 1 for a description of which variables that are included in each factor respectively.

18 18 Discussion and conclusions Diffusion ABC usage in Swedish manufacturing industry can be summarized as follows: 16% of the firms have implemented ABC A partial system is the most common degree of usage Only 3% of the firms use a fully integrated ABC system The result from this study shows that 60% of the Swedish firms can be categorized as nonadopters of ABC (not discussed ABC, decided not to use ABC and ABC have been implemented and then abandoned). The percentage of firms that are not interested in implementing ABC is comparable to the corresponding ratio in the rest of Europe, while the percentage in Sweden is a lot higher than in the USA. 40% of the Swedish firms are adopters or potential adopters of ABC (discussing ABC, decided to use ABC and ABC have been implemented). It is almost the same percentage of firms in Sweden that discuss to implement or have decided to implement ABC, as in the rest of Europe. The results differ from the diffusion in Great Britain and USA, where there are more potential adopters. This is also the situation for firms that have implemented ABC. There are most adopters in the USA, followed by Great Britain and finally a quite limited diffusion in the rest of Europe. The results above show that the diffusion of ABC has been more modest in the continental European countries including Scandinavia, compared to the Anglo-Saxon countries. The difference in costing tradition might explain why ABC has resulted in such different acceptance rates in the two areas. The continental firms have not seen ABC as a new costing method (they already have good experience of two-stage costing, differentiated allocation bases and a lot of cost centres), while American firms have seen ABC as something revolutionary. Partial use is most common alternative in Swedish manufacturing industry. This implies that the firms allocate a part of the total costs with ABC, and other costs with traditional costing methods. The result also implies that the ABC system is integrated to some extent with other information systems. This result is interesting since it differs from other studies. It differs both from empirical survey studies (Innes & Mitchell, 1995b) and theoretical recommendations (Cooper, 1990). These studies have shown that parallel usage is the most common or recommended. The reason for this was the complexity in integrating ABC with other information systems and that a parallel system is less expensive (consultants, accountants, time and internal personnel). Differences in costing history can again be a possible reason. Swedish firms that are used to two-stage costing, differentiated allocation bases and a lot of cost centres, may have had it easier to integrate and implement an ABC system Only 17% of the firms (of the firms that have adopted ABC) have a fully integrated ABC system, corresponding to only 3% of the firms in Swedish manufacturing industry. As a whole one must conclude that ABC has had a rather limited diffusion in Sweden.

19 19 Adoption The results of the factor analysis showed that three factors were significant and explained why firms in Swedish manufacturing industry adopt and use ABC. These factors were: Size Strategic importance of costing Budgetary control Large firms have probably the resources and the knowledge that it takes to implement ABC in higher degree than small firms. Furthermore large firms have a more extensive network (academia and consultants), which implies a better possibility to get in contact with the method. The result of this study confirms the results in many other survey studies conducted in different countries. An interesting result is that firms that use ABC regard costing as being of higher strategic importance than do non-users. ABC is designed to generate more accurate product and customer costs. However, have many survey studies showed that implementing ABC demands a lot of resources, is complicated to integrate and finally costly to bring up to date. Swedish firms that adopt ABC seem to consider the value of ABC-information to be higher than the cost of measurement (c.f. Cooper). The result also confirms the findings in Krumwiedes (1998b) implementation study. In his study strategic importance is only one of many factors that explains different steps in an implementation model (in this case the adoption stage). Our study is the first that singles out the strategic importance of costing to be very important as an explanation to why firms use ABC. The fact that budgetary control is significantly correlated with use of ABC has probably the same explanation as for the factor strategic importance of costing. Firms that have adopted ABC use costing for control to a greater extent then firms that are non-users. The management of these firms is demanding accurate costing estimates which leads to an implementation of ABC. Can the diffusion of ABC be explained by factors on the demand side or is it a result of the supply and marketing of the technique (c.f. Björnenak, 1997). The significance of size gives an indication that the diffusion has been influenced both from the demand side (larger resources makes it possible to have controllers that can evaluate existing cost systems) and the supply side (larger firms have more contacts and are to a greater extent exposed to management fads). Strategic importance of costing and budgetary control (these firms are probably putting higher demands on an accurate costing system) imply an influence from the demand side. According to such an interpretation, Swedish firms have demanded a method for better decision-making. The data also shows that consultants (supply side) have played a relatively small role for the diffusion process of ABC in Sweden. This result differs from the Björnenak study in Norway which indicates a diffusion process influenced by the supply side. Swedish firms use ABC primarily for profit and profitability analysis, pricing decisions and cost control decisions. The result differs from Anglo-Saxon studies that indicate that ABMdecisions is the most frequent area of usage, e.g. activity analysis or process management. Consequently ABM, ABB and ABA are rare in the Swedish manufacturing industry.

20 20 In their study on traditional costing practice Ask & Ax (1997) claim that there is a discrepancy between literature and practice. The results from this study show that this is also the case for ABC. The three factors that were significant in this study are not the variables that have been advanced in the ABC-literature nor are they the ones that have been marketed at seminars, conferences or, for that matter, at the universities. The factors from the Relevance-Lost literature or the classical ABC articles were instead found to be far from significant. We have already pointed to the difference between the USA and Sweden in costing tradition and practice as one possible explanation for the difference. Swedish firms have not regarded ABC as a new costing method (they already have long experience of two-stage costing, differentiated allocation bases and a lot of cost centres). The adopters of ABC are instead firms with genuine interest in costing, and these firms feel it worthwhile to implement this costly and complicated method. American firms have seen ABC as something revolutionary. ABC has resulted in two-stage costing, differentiated allocation bases and a lot of cost centres. These changes have handled the shortcomings in the traditional costing system.

21 Appendix 1 21 Rotated Component Matrix a Number of employed Turnover Number of clients Percentage indirect costs Number of cost centres Profitability per product Profitability per client Reliable costing system The strategic value of cost information The decision value of cost information Increase in indirect costs Decrease in direct labour costs Degree of competition Pricing freedom Degree of standardization Degree of automation Increasing degree of automation Differentiation in compexity Differentiation in volume Differentiation in size Client homogeneity The frequency of cost analysis Importance of variance analysis Nuber of salaried employees Percentage direct labour Factor 1 Factor 2 Factor 3 Factor 4 Factor 5 Factor 6 Factor 7 Factor 8 Factor 9,937,927,796,897,855,855,716,824,841 Extraction Method: Principal Component Analysis. Rotation Method: Varimax with Kaiser Normalization. a. Rotation converged in 13 iterations.,821,822,570 -,473,497,734,640 -,789,530,558,402 -,471,759,795 -,494,860,456,884

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