The Impact Of Activity-Based Costing On Organizational Performance And Why Activity-Based Costing Is Lagging Behind In Malaysia

Advantages of Activity-Based Costing

Organisations have seen a lot of changes in the operating environment of a business concern for more than half a century. Nowadays manufacturing concerns produce varieties  of di products with globalization  impacting most organisations . With the modernization of the manufacturing concerns, a new form of costing called activity based costing is steadily replacing traditional costing methods (Dale and Plunkett 2017). Traditional costing methods do not provide management with  requisite data that is required. Activity based costing however can bridge this gap and sustain  the decision making of management.

Activity based costing is a management tool that allocates the overhead expenses to individual undertakings and then apportions them to objects. Alternatively, it is costing method by which indirect costs can be allocated multiple products or departments that create these costs in the  production process (Mahal and Hossain 2015). Thus it focuses on categorizing activities while processing a job. These distinct activities are clubbed  in a  similar group with identical  processes into a cost pool that relays to a single activity cost driver (Susilawati, et al . 2015). The cost pools are scrutinized and given a predetermined overhead rate  which will  be allocated to individual jobs and products.It is a more accurate portrayal of conveying indirect costs than traditional costing methods (Plank 2018). It helps in allocating overhead costs to jobs and the product  on the basis of number of activities that  is essential to produce the product instead of  assessing how much activity one job uses(Dale and Plunkett 2017). ABC thus offers a faster and more reliable  decision making system  than traditional costing system.

In ths article, the main view is to regulate the impact of activity based costing on  performance of organizations using an exigency viewpoint. The contingency theory stipulates that no particular  accounting control process is applicable wholly to all  organizations(Sanford 2009). Not all organizations have the same operating environment. Each organization has a comparatively different working environment to that of  others. The working environment should be assessed  with  the help of the strategic planning proce. Contingency  theory dictates that manangement must adapt to the concerned strategy as well as the  structure of the organisation, encompassing the systemof accounting control to the present situation to advance the performance of organizations (Dale and Plunkett 2017). The systems of cost control integrate and back the complete premeditated goals of a corporation. The most significant goal is to develop the overall performance(Sanford 2009). Activity based costing is a method that significantly accelerates  in improving the performance of an organization. Therefore this study investigated activity based costing and regulate how it can influence the performance of organizations

Impact of Activity-Based Costing on Organizational Performance

The purpose of the second article is to link activity based costing with traditional costing. Activity based costing is a more exact version of costing as that of  traditional based costing. It is a more thorough technique of costing and considers manufacturing expenses as well, such as administrative and managerial costs.. There is a definite extent of approximation in  allocation of cost in traditional costing.  The  systems of cost do not  specify why or where the cost was incurred(Rasiah 2011). Activity based costing is more specific as it allocates costs based on specific activities. Activity based costing provides valuable perceptions into the origin of costs and also the likely consequence of diverse decisions. Traditional costing covers no such insight as to how it will impact decision making(Rasiah 2011). Another purpose that the article fulfills it aims to attempt to understand why activity based costing is still lagging beyond in Malaysia. It attempts to find out the relevant causes that does not allow activity based costing to be employed effectively.

The contingency theory was  implemented as the theoretic basis for the study. The contingency theory illustrates  that there should be planning and management of  establishments in such a way that there is a harmony with the surroundings of the environment(Otley  2016). The structure of the environment should be designed  in such a way that it should fit the external environment .

A basic contingency model was used to reveal the organization structure and its connection with that of management. Also, the competitive strategy of an organization will specify what the management accounting practices and organization structure would be so that the organization can achieve the best possible  performance (Christian 2018).

The research questions on the two articles can be summed up as follows:

• Does Activity Based Costing improve organizational performance?
• Why is  activity based costing lagging behind traditional costing in Malaysia?
• Why is activity costing more effective than traditional costing?

The research methodolgy used for both articles  is descriptive in nature. A sample survey of various companies is conducted in this  above analysis and a descriptive study is used to describe the behavior of sample population that is being employed in this study. Both of these articles is  assessed in respect of  a number of variables that is conducted in the above analysis. 

The first article measures how impact based costing measures performance. This study uses multiple financial measures to evaluate the performance of an organization.The study’s focus was to control the influence of activity based cost regarding the performance of organizations. The methodology used was descriptive  in nature. The article a much more thorough background study of ABC including its history, principles and implementation.The research questions whether activity Based Costing improve organizational performance or not.

Why Activity-Based Costing is Lagging Behind in Malaysia

The second article measures the reasons as to why activity based costing is still lagging behind the traditional costing in Malaysia.This study uses a range of reasons as to why organisations in Malaysia are reluctant to implement Activity based costing. The methodology used was descriptive  in nature. The article a much more thorough background study of ABC including its origins and how it first came to be on the forefront as a managerial decision making tool. The research questions as to why activity based costing is still lagging behind traditional costing in Malaysia.

particulars	Article 1	Article 2
Title	The impact of activity based costing on organizational performance	Why activity based costing is still lagging behind the traditional costing in Malaysia,
Year	2009	2011
author	Robert sanford	Devinaga Rasiah
Study background	Made a much more thorough background study of ABC including its history, principles and implementation	Delved into the origins of activity based costing
Research question	Does Activity Based Costing improve organizational performance	Why is  activity based costing lagging behind traditional costing in Malaysia
Methodology	Descriptive	Descriptive
Research outcome	Inconclusive as to whether activity based cosying improves organizational performance or not	People in Malaysia are reluctant to switch over to ABC because of huge initial costs.

Organizations nowadays operate in a complex environment. The management of these establishments desires to be reliable(Sanford 2009). Precise information needs to be present to make sound business decisions. Activity based costing is the most suitable system to provide  the management with the necessary funds to reorganize activities and  classify problems of a fundamental nature . This is also the most suitable decision making tool to improve long term effeciencies(Sanford 2009).

The organizational performance employed in this article can be definite in diverse ways .The article makes the observation that organizational performance is a function of seven  financial measures, including asset turnover, debt to equity management , earnings per share , market price , operating performance ratio, market price and return on investment(Sanford 2009).

The rudimentary function of  ABC is to providing management with detailed data so that management could do better decision making in terms of eliminating waste and reducing costs(Mahal and Hossain 2015). ABC assumes that its modifications would lead to improvement in performance. The decision makers of ABC  is of the belief that ABC only  valuable when the costing data provided by ABC is employed to lessen costs and develop performance (Plank 2018).

The  examination of the fit of contingency was analysd between strategic choice, organizational design and performance of organizations . The fitness landscape theory was used to test the level of fitness among  the strategy that is chosen and the contextual variables(Otley  2016). The porter’s model was used as the basis for this. The model uses three contextual variables: a) the  centralization degree  b) the control type c) the  management accounting systems type (Sanford 2009). The contingent fit predicts that organizations with a cost leadership strategy would perform better when they are centralized(Schaltegger  and Burritt 2017).it also predicts that organizations with a differentiation strategy will perform better when they are decentralized (Noreen, Brewer and Garrison  2014).

Research Methodology

General Motors is one of the largest automobile manufacturers in the world. It used a variety of activities classifying activity based costing as air conditioning, liquid hearing, manual sealing etc.It used variety of cost drivers like sealing line, paint booth and post paint operations. Although Activity based costing systems provided the organizations with a significant strategy to improve firm performance, yet this did not have the desired impact on the organization(Gm.com 2018). It could not improve firm performance to the extent that management had in mind.General motors ,  being focused on cost leadership strategy would perform better when it has centralized operations.

This article analysed the various advantages that  activity based costing has over traditional costing method. Activity based costing  has the distinct advantage  that allows managers to eradicate costs that are related to non value added activities . It also helps in developing  the competences of current progress activities since ABC presented a better insight into development of business and the associated cost drivers(Schaltegger  and Burritt 2017). When the visibility of information got better  it also enabled  the classification of activities that were associated with unsatisfactory  quality of product and their cost drivers.One more benefit of  this system is  the measurement of performance (Weygandt,  Kimmel and Kieso 2015). The information delivered by activity based costing on cost drivers and  their rates specified  that the lack of staff  negatively impacts  firm performance (Plank, 2018). This echoed the efficiency and correctness of the activity concerned. Activity based costing assigns costs based on  different activity drivers while traditional costing allocate costs based on drivers like direct labour and machine hours (Mossialos et al. 2016).ABC  can be applied to objects of cost excluding  the product(Noreen, Brewer and Garrison  2014). Indirectly, profitability of customers can be analysed .This  gave the  management  a market  overview of how the company have earned their revenue (Subramaniam and Watson 2016).. It is  a decision making  tool  for costing and pricing decisions. Activity based costing has helped minimize cost by providing the economies of costing.It provides a more precise valuation of  costing than traditional costing.Another advantage was cost reduction(Susilawati, et al . 2015).

Tourism Malaysia  is an agency under the Ministry of Tourism , Malaysia that has its full plans on endorsing Malaysia both  domestically and internationally. Tourism Malaysia presently has 34 overseas and 11 marketing representative offices(Tourism.gov.my 2018). Previously it followed traditional costing, but since the early 1990’s it started following activity based costing. Initially there was a difficulty in implementing activity based costing  because it was expensive to install at that time (Neto et al. 2018). It reduced costs and provided better decision making criteria than traditional costing methods. It also improved performance enhancement of the organization as well (Rohani, Azman, and Zakaria 2015).

Fitness Landscape Theory

The study used basic contingency model as the undying foundation of this article. ABC provides management with precise and consistent data for  making strategic decisions. The research of ABC has shown a little support in  performance improvement (Subramaniam and Watson 2016). The article aimed to establish that prosperous ABC organizations needed to discover an ideal fit among  environment, strategies , structures and accounting processes(Arora and Raju 2017). However results showed little support that ABC managerial accounting systems will provide higher operating performance than other managerial accounting systems (Plank, 2018).The financial measures signify how involved third parties  like that of investors and creditors assess performance of organisations (Almeida and Cunha 2017). The study sought to regulate the factors that  may influence the decision of the firm to implement activity based costing or not(Noreen, Brewer and Garrison  2014). The results that were found to be mixed from empirical research may be inducing user insights of activity based costing that keeps establishments from deserting out-of-date traditional costing systems(Susilawati, et al . 2015). The study found that an absence of commitment from management, resource lacking,  objective clarity, perceived usefulness of the systems, the trouble of  identifying cost drivers can create barriers to the application of ABC(Ali, Alain and Haque 2015).

The study examined the underlying assumptions of the contingency model in the regression analysis and conducted a hypothesis testing. A regression analysis was conducted which found that managerial accounting, size of organization, technology and strategy are predictors of market price, EPS , ROI, operating environment and asset turnover. After conducting a thorough analysis,it is still a debate as  to whether activity based costing impacts firm performance or not .

The article indicated a variety of statistical tools to determine significant predictors of each measure of organization performance as indicated by market price, EPS, ROI,asset turnover and roe. The results signified that  management accounting practices are only a significant predictor of market price, EPS and asset turnover. The findings also indicate that the strategy of the firm is not affected by the managerial accounting practices that are used. The findings also support the assumption that managerial accounting practices increase market price and EPS. The findings also stated that organizations that employ ABC have a higher asset turnover than organizatons that do not employ ABC.  Organizations that do not employ ABC have have a greater market price than organizations who follow ABC. All these findings exclusively point out that that there is no conclusive evidence as to whether ABC effectively improves firm performance or not.

Case Study: General Motors

In Malaysia, there are some organizations that have converted to  ABC by the 1980s. By that time  it had proven its usefulness in the suitable product mix and overhead management. Yet there were many corporations in Malaysia that  still commit to apply the traditional costing system which was established a long time back. There are multiple reasons why activity based costing os not that implemented in Malaysia . First of all it is expensive(Schaltegger  and Burritt 2017). Second in Malaysia, there was an increase in cost of identifying several activities. This prevented many organisations in Malaysia from using ABC costing. Thus it was found that costs of ABC surpassed the benefits . Therefore companies in Malaysia were reluctant to apply activity based costing (López, and Hiebl 2014).The costs of discovering true costs overshadowed the benefits of discovery of  true costs(Mossialos et al. 2016).. Activity based costing will  be most effectively implemented when there is  minimum detail and the cost figures are approximated. This suggests that Malaysian companies that want to swich over to  ABC needed  the selection of such a  costing  designer that  could come up with more exact tools of measurement if  there is a requirement of additional costing(Oseifuah 2018).

Both articles stressed about the fact that very few organizations still employ activity based costing methods . While the first article based its research on U.S companies, the second article based its research on Malaysian companies. The first article states that almost 80 percent of all US organizations employ traditional costing methods while the second article states that more than 70 % of local firms that do business in Malaysia still employ traditional costing (Fratocchi et al.2016).

Both articles stressed about the benefits of activity based costing  which included providing a better decision making criteria than traditional costing method., reduced costs and improved performance measurement.(López, and Hiebl 2014).  Activity based costing systems were allocated based on the activity drivers, while traditional costing systems used bases like direct labor and machine hours to allocate expenses related to products and services., hence providing better decision making criteria(Weygandt,  Kimmel and Kieso 2015).It also highlighted some of the basic difficulties that prevented companies from implementing activity based costing(Subramaniam and Watson 2016). One was the fact that it was expensive to install . Secondly the increased cost of identifying multiple activities and applying large amounts of cost drivers was a significant reason which prevented most companies from implementing activity based costing technique (Otley 2016) .Finally there was also a lack of adequate resources  that presented a  significant degree of  difficulty in implementing activity based costing(Hoque 2018).

Conclusion

Both articles found that activity based costing has its fair share of pros and cons. The findings indicate that there is little support in the fact that activity based costing systems will provide higher operating performance than other managerial accounting systems. Several factors such as knowing about the internal and external pressures that the company faces, the capacity to offer information about performance measurement etc may affect which costing system is better to use in different scenarios(Fratocchi et al.2016). Sometimes activity based costing may not be applicable because of the difference in the nature and scope of information created by each system. Although activity based costing systems has more benefits than limitations, yet both these articles cannot conclusively prove that activity based costing system is significantly better to implement in organizations than traditional costing(Chenhall and Moers 2015).

The two articles focused on two different approaches to activity based costing. The first article stressed primarily about how activity based costing improves firm performance. It considered a list of variables that include ROI. ROE , asset turnover among others that specifically discussed about how each of these variables had a role to play how activity based costing systems work. The second article on the other hand compared the pros and cons of activity based costing and how it could weigh against traditional costing systems(López, and Hiebl 2014). It compares traditional costing with activity based costing system and analyses the effectiveness of both costing models and how it can best  utilized in a given company in Malaysia.

The first article is more descriptive in nature. It uses a lot of statistical tools and descriptive statistics to take into account a list of variables that impact organizational performance that include ROI, ROA and asset turnover among others. It numerically tries to illustrate and assess how much each of these variables individually impact organizational performance. The second article on the other hand is a lot less descriptive in nature. It does not incorporate a variety of statistical tools and descriptive statistics to illustrate the point why activity based costing is still not being implemented to that extent as compared to traditional costing in Malaysia

The first article used the contingency model as a basis for theorizing as to  how organizations impact organizational performance . the contingency model used in this article helps presenting the data in a reliable manner (Chenhall and Moers 2015).The contingency theory stipulates that there is no common accounting system  that applies equally to all organizations. The second article uses no such theoretical framework to address the relevant issue addressed in this article.

Table of differences

Particulars	Article 1	Article 2
Different approach	This article stressed primarily about how activity based costing improves firm performance	This article on the other hand compared the pros and cons of activity based costing and how it could weigh against traditional costing systems
Nature of the article	Very descriptive in nature	Less descriptive in nature
Theoretical framework	Uses the contingency perspective as a theoretical framework	Uses no such theoretical framework

Table of similarities

Article 1	Article 2
This article illustrated how  very few organizations  employ activity based costing methods compared to traditonla costing methods	This article talked about the relatively low implementation of ABC in Malaysia.
This article talked about the benefit of ABC	This article also taklked about the benefits of ABC
This article was of the opinon that installing ABC had its fair share of pros and cons	This article reiterated the same fact that installing ABC had benefits and limitations.

The four specific outcomes that can be learned from this articles above  include:

Outcome 1- ABC improves organizational performance to a greater degree because it helps in reducing costs and making  a greater allocation of costs among different activities.

Implications in Australia-

This article will help australian managers in improving organizational effectiveness through activity based costing. By using this method, the organisations will be gratly benefitted because it will ghelp them to reduce costs and make a greater allocation of activities.

Outcome 2- ABC is more suited to contingency model of management because  it helps in fitting with company strategies in this regard.

Implication in Australia

A contingency model of management woyuld elp suit activity based costing in Australia as it is much more modern styleof management which fits in with the business principles oF australia

Outcome 1- Activity costing has  more benefits than limitations. The benefits of reducing costs,enhancing organisatonal performance outweighs the initial costs of implementing ABC

Implication in Australia- if more companies in Austtralia implement this method it will surely result in more benefits than limitations. The benefits,as discussd above include reduced operating costs and improving organisatonal effectiveness. The only big limitation in the intial stage is that it costs too high.

Outcome 2- Activity costing is still lagging behind traditional costing methods in Malaysia because there is no such awareness of activity based costing in Malaysia.

Implication in Australia-  More and more companies in Australi are implementing activity based costing. It is a much more evolved method of assighning costs. Big corporations see that this is tee method which can correctly assign indirect costs and hence use this method to develop cost effectiveness and finding out the correct cost of products.

Table of learning outcomes

outcomes	Article1	Article 2
Outcome 1	ABC increases organizational performance to a greater degree since it helps in diminishing costs and making  a greater allocation of costs among different activities.	Activity costing has  more benefits than limitations. The benefits of reducing costs,enhancing organisatonal performance outweighs the initial costs of implementing ABC
Outcome 2	ABC is more suited to contingency model of management because  it helps in  implementing a more  gradual fit of  company strategies	Activity costing is still lagging behind traditional costing methods in Malaysia because there is no such awareness of activity based costing in Malaysia.

Conclusion 

Through the first article the influence of ABC on organizational performance was examined  from a contingency perspective. It used a lot of statistical tools and mathematical models to assess whether ABC advances  the performance of organizatoins or not. The article expected to find that successful organizations  that employed ABC needed to find a suitable fit that aligned with the environment, strategies, structures and  the accounting process of organisations. There was no conclusive evidence as to whether ABC improves organizational performance or not. The mixed results, as per the empirical or mathematical models may have influenced user perceptions from abandoning outdated traditional costing systems. It was found that organizations that employ ABC  have a higher asset turnover than firms who do not employ ABC. However non ABC organizations have a higher market price and EPS than most companies. There was also no noteworthy difference between  low cost ABC and non ABC organizations. The findings of the study are likely to continue the debate of whether ABC can improve organizational performance.

Through the second article the article found evidence that the Malaysian companies were found to have extensive distribution and there was huge tenacity of traditional costing method. The article compares both traditional and activity based costing systems by highlighting both of their advantages and disadvantages. It came to a conclusion that both traditional costing and activity based costing are equally competing product costing methods. It came to the realization that Malaysian companies should  know what they need before they decide on what costing method they should use. Companies  need to assess the benefits and costs of individual costing methods to see which method is more suited to their  organization structure .

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