Beruflich Dokumente
Kultur Dokumente
doi: 10.1006/mare.2001.0175
Available online at http://www.idealibrary.com on
1. Introduction
Activity-based costing1 (ABC) has been promoted and adopted as a basis for
making strategic decisions and for improving profit performance for over a decade
*Assistant Professor of Accounting, School of Business, University of Texas at Brownsville, Brownsville,
TX 78520, U.S.A. Tel: (956) 983-7300. E-mail: dcagwin@utb1.utb.edu.
Ralph L. McQueen Associate Professor of Accounting, Sam M. Walton College of Business, University of
Arkansas, Fayetteville, AR 72701, U.S.A. Tel: (501) 575-6117. E-mail: rbouwman@walton.uark.edu
Received 28 December 1999; accepted 4 October 2001.
1 The terms activity-based costing (ABC) and activity-based management (ABM) are sometimes used
interchangeably. Strictly speaking, ABC refers only to determining the costs of activities and the outputs
that those activities produce. Some researchers and practitioners prefer to use the term activity-based
management (ABM) when describing how the activity information is used to support operating decisions.
10445005/02/$ - see front matter
(Bjornenak and Mitchell, 1999). In addition, ABC information is now also widely used
to assess continuous improvement and to monitor process performance. Although
ABC has found rapid and wide acceptance, there is significant diversity of opinions
regarding the efficacy of ABC (McGowan and Klammer, 1997). Several reservations
have been expressed concerning its usefulness, relevance, and practicality (Innes
et al., 2000). Despite managers insistence that management accounting systems pass
the costbenefit test (Foster and Young, 1997), there still is no significant body of
empirical evidence to validate the alleged benefits of ABC (Shim and Stagliano,
1997; McGowan and Klammer, 1997). Empirical research is needed to document
the (financial) consequences of ABC implementation (Kennedy and Bull, 2000;
McGowan, 1998).
Furthermore, previous research has suggested that the benefits of ABC are
more readily realized under enabling conditions such as sophisticated information
technology, highly competitive environment, complex firm processes, relatively
high importance of costs, and relatively low unused capacity and intra-company
transactions. Variables representing these conditions are appropriately incorporated
into a model testing the efficacy of ABC.
The purpose of this study is to measure the improvement in financial performance
that is associated with ABC use and the conditions under which such improvement
is achieved. The research instrument is a cross-sectional mail survey of 1058 internal
auditors, claimed to be knowledgeable and unbiased in the assessment of cost
systems (Tanju and Helmi, 1991; Ray and Gupta, 1992). Confirmatory factor analysis
and structural equation modelling using LISREL8 (Joreskog and Sorbom, 1993) are
used to test a model hypothesizing the conditions under which there is a positive
association between time-impacted use of ABC and change in financial performance.
Control is provided for the moderating effects of concurrent use of other strategic
management initiatives (e.g. TQM, JIT) and enabling conditions identified by prior
research. In addition, the study tests the association between improvement in
financial performance and previously used measures of ABC efficacy, as suggested
by Foster and Swenson (1997).
This study enhances previous research on ABC in three ways. One, it employs
internal auditors who constitute an objective and knowledgeable source of ABC
performance. Prior research has used respondents with a personal stake in ABC,
such as controllers or ABC project managers (e.g. Shields, 1995; Swenson, 1995;
Krumwiede, 1996, 1998). Second, this study tests a specific measure of improvement
in financial performance, as opposed to unobservable general constructs such as
perceptions of success, satisfaction, or financial benefit. Finally, it tests a structural
model synthesized from prior theoretical research, describing the conditions under
which ABC should be successful.
Results show that positive synergies are obtained from concurrent use of ABC with
other initiatives. In addition, positive associations between ABC and improvement
in ROI are reported when ABC is implemented in complex and diverse firms, in
environments where costs are relatively important, and when there are limited
numbers of intra-company transactions to constrain benefits. There is also some
indication that other enabling conditions (information technology sophistication,
As in Innes et al. (2000), this study defines ABC broadly to include both activity-based costing and activitybased management.
3. Development of hypotheses
Direct association of ABC with change in financial performance
The arguments in support of ABC are generally based on the comparative advantage
that firms can obtain from the superior information generated through ABC.
Although ABC has strong theoretical underpinnings, Kaplan (1993) and other
researchers caution practitioners that not every ABC system will produce these
benefits. In addition, many researchers (e.g. Bjornenak, 1997; Gosselin, 1997b; Malmi,
1997, 1999; Bromwich and Hong, 1999) and practitioners (e.g. Smith, 2000) question
the inherent value of an ABC system. The issue of whether increasing use of ABC
is directly associated with improvement in financial performance, without regard
to firm- and industry-specific environmental conditions, has not been empirically
tested. This leads to the following hypothesis (in alternative form).
H1: There is a positive association between the extent of use of ABC and relative
improvement in financial performance (compared with other firms in the
industry).
Financial performance is measured relative to other firms in the industry while
levels of the variables of interest and other independent variables are tested. The
evaluation of this hypothesis provides a baseline for this research. Confirmation
would be expected only if ABC provided a comparative advantage, on average,
for every firm, regardless of its circumstances. On the other hand, if, as expected,
realization of the benefits of ABC requires the presence of specific firm conditions,
then this hypothesis will not be confirmed and the focus will shift to hypothesis two,
which identifies specific enabling conditions.
Enabling conditions
In an event study, Gordon and Silvester (1999) could not find a significant stock
market reaction to the installation of an ABC system. They note that it is possible that
ABC may have differential impacts across firms depending on certain firm-specific
factors. They conclude that there is strong reason to believe that the benefits of ABC
are contingent upon various behavioural and organizational factors.
Previous research (e.g. Pattison and Arendt, 1994; Estrin et al., 1994; Cooper and
Kaplan, 1991) has identified specific environmental conditions (e.g. complexity and
competition) that affect the potential benefits from the use of ABC. The theory
supports the proposition that under appropriate enabling conditions the improved
costing information provided by ABC leads to improved decision-making, and
therefore should be associated with improved performance. This leads to the
following hypothesis (in alternative form).
H2: The association between the extent of use of ABC and relative improvement in
financial performance is impacted by specific enabling factors.
The specific enabling factors identified in this study (and the predicted
direction of impact) are as follows.
Importance of costs (positive).
7 F16a-g
9 F17a-l
Applications
(APPLIC)
ns
Dependent
Constructs
Independent Constructs
Functions
Using ABC
(FUNCTION)
Survey Questions
Observable Y
Key
Construct confirmed with factor analysis
Additive index
ABCUse
(ABC)
Observed variable
2 F3, F4
F3,F6,F7
Performance
Evaluation
(EVAL)
Type
(TYPE) 16
Time
(TIME) H1
D1-D6
Direct Effect
Other
Initiatives
(INIT)
8 I12a-j
Information
Technology
(INFO)
ROI 3Yr
C6
E1-E7
A1-A5
I10a, b
ComplexityDiversity
(COMPLEX)
Enabling
Conditions
(ENABLERS)
Change in
Financial
Performance
ROI 5Yr
C7
(ROI)
Importance of
Costs
(IMPORT)
-?
IntraCompany
Transactions
-?
Unused Capacity
(CAPAC) I11
Competition
(Comp) A6
Size
(SIZE) 18
Using the change in ROI (1ROI) allows control for the level of ROI prior to the
test period. 1ROI is also industry median adjusted to control for differences between
industries. Table 1 summarizes the definitions of this and subsequent variables.
Self-reported versus archival measures of performance. This study, like most research
attempting to link strategic initiatives to financial performance, relies on a selfreported measure of performance. Govindarajan (1988), Govindarajan and Fisher
(1990), and Chenhall and Langfield-Smith (1998) all asked respondents to assess their
businesss performance relative to competitors over the last three years. However, as
noted by Young (1996), self-reported performance is not necessarily a valid proxy for
actual performance.2 Management accounting research has been silent on this issue
(Young, 1996).
In order to evaluate the accuracy of self-reported measures, a subset of the
responses in this study was compared with actual financial statement information
retrieved from Compustat. Fifty-four respondents reported company-wide information for firms that were included in the Compustat database. For those companies
with complete information (ranging from 47 to 52 for an individual test), actual
change in ROI, industry adjusted by subtracting the median performance of the
subjects primary three-digit SIC code, was compared with the applicable five-point
Likert scale survey response. As shown in Table 2, the survey responses exhibit a
high degree of reliability. Spearman correlation coefficients range from 0.71 for 5 year
ROI change to 0.78 for 3 year ROI change. When the continuous measures obtained
from Compustat are converted to ranks and assigned values of one to five with the
same frequencies as the survey responses, correlations are 0.76 for 5 year ROI change
and 0.86 for 3 year ROI change. The majority of responses are identical (66.3 per
cent), and 99 per cent of responses are within one value (e.g. report 4 on the survey
and compute 5 from Compustat data).3
Independent variables
ABC use (ABC). Unless a system is used extensively, it seems unlikely that
it can be significantly associated with financial benefit. One would expect the
benefits received from an innovation to depend on the extent to which it becomes
incorporated into organizational subsystems. Shields (1995) found that ABC success
is significantly correlated with several categories of use: performance measurement,
activity analysis, product costing, and reengineering. He also found significant
correlation of success with the percentage of costs processed through ABC.
There is widespread agreement that incentive structures play a critical role in
the success of ABC (Drake et al., 1999). Employees pay more attention to those
measures of performance that affect their personal welfare. Banker and Datar (1987)
2 On the other hand, using archival data sources is not problem free either. For example, there are
significant discrepancies in financial data between the Compustat and Value Line databases (Kern and
Morris, 1994), and in SIC codes between CRSP and Compustat, limiting the ability to compute accurate
industry mean-adjusted variables (Ong and Jensen, 1994).
3 Variances can occur for reasons other than lack of knowledge by the internal auditor. For example,
choosing 4 (agree) versus 5 (strongly agree) requires a value judgement that can vary between subjects.
Also, subjects could be reporting their belief in true unobservable financial performance rather than
reported financial performance. Finally, the lack of complete congruence may have more to do with the
respondents confidence in his/her answer than the strength of the financial performance.
Table 1
Definition of variables
Abbreviation
Name
Definition
1ROI
Change in return in
investment
FUNCTION
APPLIC
EVAL
Integration in
evaluation systems
TIME
ABC
Time since
implementation
ABC use
INIT
INFO
Information technology
COMPLEX
Complexity and
diversity of business
IMPORT
Importance of costs
INTRA
Intra-company
transactions
CAPAC
Unused capacity
COMP
Level of competition
Table 1
Continued
Abbreviation
Name
Definition
SIZE
TYPE
Type of company
SUCCESS
Success of ABC
implementation
SATISFACTION
BENEFIT
Financial benefit
obtained from ABC
Table 2
Correlations of self-reported dependent measures with actual reported (Compustat) performance measures adjusted
for industry performance (three-digit SIC)
Likert dependent measure with
Measure
ROI change3 years
ROI change5 years
n
51
47
n
ROI change3 years
ROI change5 years
51
47
98
Continuous measure
Pearson
Spearman
0.77
0.62
0.78
0.71
Ranked measure
Pearson Spearman
0.86
0.75
0.86
0.76
72.5
59.6
66.3
14
18
32
27.5
38.3
32.7
0
1
1
0.0
2.1
1.0
Subject firms actual reported performance is adjusted by the median performance of firms in the subject
firms primary three-digit SIC code. The number of industry firms ranges from four (SICs 376 and 799) to
226 (SIC 131). Compustat firms are ranked 15 by ROI change with ranks assigned in the same
frequencies as the Likert scale dependent variable obtained from the survey.
10
11
to suggest that achieving the systems objectives depends critically on organizational and technical factors (Anderson and Young, 1999). Malmi (1997) states that
implementation failures are related more to exogenous contextual factors than to the
process of implementationthat even good implementation processes fall on barren
ground. For example, Karmarkar et al. (1990) argued that complexity, importance
of costs and competition require more elaborate costing systems. Chenhall and
Langfield-Smith (1998) recognize the potential moderating effects of environmental
and organizational variables and call for further research that considers the role of
additional relevant firm-specific variables.
The following variables are incorporated into the model testing the efficacy of ABC
(see Table 1 for variable specifications).
Information technology (INFO). Cooper (1988) suggests that ABC becomes more
beneficial as the cost of data collection and processing is reduced, which requires
higher levels of information technology. An information system providing
detailed historical data and easy access to users may provide much of the driver
information needed by ABC. Reeve (1996) suggests that an integrated ABC
system pre-supposes a relatively high level of INFO sophistication with extensive
and flexible information stratification and real-time activity driver information.
SAP, PeopleSoft and Oracle have recently acquired ABC software companies or
partnered to develop ABC modules (Shaw, 1998).
Complexity and diversity (COMPLEX). A companys complexity increases as
the breadth of its product line expands, as each product uses more unique
components, and as more process options are available to manufacture the
product (or provide the service) (Swenson, 1998). Complexity factors are the
biggest single driver of cost (Gonzalves and Eiler, 1996). Product diversity and
production process complexity have been shown to be important determinants of
the need for reexamining cost allocation procedures (Gosselin, 1997a). Previous
studies have confirmed that ABC data are most likely to differ from traditional
cost data in settings with high coordination and control costs, such as those with
diverse products, processes, customer demands, or vendors (Foster and Gupta,
1990; Cooper and Kaplan, 1991; Pattison and Arendt, 1994; Estrin et al., 1994;
Anderson, 1995b; Banker et al., 1995).
Importance of costs (IMPORT). Even if ABC could substantially reduce product cost
distortions, it is not likely to be helpful unless a firm can actually utilize better cost
information in its decision-making process. Besides competitive environment,
other factors affecting the decision usefulness of cost information include the
firms use of cost data in pricing decisions, cost reduction efforts, need for special
cost studies, strategic focus, and average profit margin (Estrin et al., 1994).
Intra-company transactions (INTRA). When companies have a large number of
intra-company transactions, the financial performance of individual business
units may be misleading because of transfer pricing methodology, and constraints
on decision-making regarding source of supply and customer selection (Swenson,
1995).5 Therefore, intra-company transactions are a potentially confounding
variable to this study.
5 Some companies with many intra-company transactions may use ABC costs to set prices, the positive
value of ABC for these companies offsetting the negative effect of having large numbers of intra-company
transactions.
12
nsH5
C1
Dependent
Constructs
Independent Constructs
13
Survey Questions
Observable Y
Key
Construct confirmed with factor analysis
Additive index
ABC
Success
Observed variable
2 F3, F4
H4
Type
(TYPE) 16
Direct Effect
Other
Initiatives
(INIT)
8 I12a-j
D1-D6
Information
Technology
(INFO)
ROI 3Yr
C6
E1-E7
A1-A5
I10a, b
ComplexityDiversity
(COMPLEX)
Enabling
Conditions
(ENABLERS)
Change in
Financial
Performance
ROI 5Yr
C7
(ROI)
Importance of
Costs
(IMPORT)
--
IntraCompany
Transactions
-?
Unused Capacity
(CAPAC) I11
Competition
(Comp) A6
Size
(SIZE) 18
ABC Success
The variables of interest in testing Hypothesis 3, which associates previously
reported measures of ABC success with improvement in ROI, are those developed
by Shields (1995); Swenson (1995), and Krumwiede (1996, 1998). Figure 2 shows
the changes that need to be made to the ABC model described thus far. The
section that modelled ABC use is replaced by single item measures of SUCCESS,
SATISFACTION, and financial BENEFIT, respectively (Table 1).
14
the individuals involved. Preparers reported more favourable attitudes toward ABC
than users, with project leaders or champions being most favourable.
The current study mitigates this limitation by utilizing internal auditors as subjects.
The Statements of Responsibilities in Internal Auditing (IIA, 1990), and Section 100 of the
Standards of Practice for Internal Auditors (IIA, 1998) require that internal auditors be
independent of the activities they audit. Independence permits internal auditors to
render impartial and unbiased judgments (Standards, Section 100.01). In addition to
their independence and objectivity, internal auditors are appropriate subjects because
they are knowledgeable, possess varied talents and expertise, and have access to
relevant information (Tatikonda and Tatikonda, 1993; Stoner and Werner, 1995).
Population and sampling procedures
The firms studied are for profit firms that employ internal auditors who are
members of the Institute of Internal Auditors (IIA). The sample is drawn from
the population of those practicing members of ten geographically diverse US
chapters of the IIA7 where information was available to the researchers. Auditors
employed in the banking industry were excluded because they often have highly
specialized responsibilities, limiting their exposure to new business initiatives.
Auditors employed by governmental and non-profit organizations were excluded
as well since those organizations do not measure improved financial performance
as improvement in profitability (ROI). Sample size is further limited to five
randomly drawn subjects per organization. A mail survey was used to collect the
information.
To permit generalization to the broader population of firms, the sampling design
included entities with a broad range of applications in ABC ranging from no
implementation to extensive applications. As stated by Chenhall (1997), the sampling
ensured that the study included a proportion of firms that employed varying levels of
use of other strategic business initiatives and varying levels of enabling conditions.
This increased the comprehensiveness of the study, and permitted the identification
of the effects on performance of the amplifying effect of enabling variables across a
range of ABC observations.
In order to investigate the effect of firm characteristics on implementation project
outcomes a large sample of firms is needed (Anderson and Young, 1999). Accordingly, the questionnaire was distributed to 1058 internal auditing professionals.
This sample was reduced by 68 that were returned unopened because of incorrect
address or change of employment with no forwarding address (see Table 3). In
addition, 28 uncompleted or partially completed surveys were returned because the
subjects were not knowledgeable about their companys systems, company policies
against response to surveys, or other reasons, leaving an adjusted sample size of
962. 210 completed responses were received. In six instances, there were multiple
responses from the same business unit. Differences were minor, and responses were
combined into a single observation by averaging scores. Of the remaining 204 usable
responses, 137 are from the first and 67 from the second mailings, yielding a response
7 The IIA serves as the internal auditing professions authority on significant issues affecting internal
auditors, and is the only organization dedicated solely to the advancement of the internal auditor and
the profession on a worldwide basis. The IIA is the worlds leader in research and educational issues for
internal auditors and is the standard-setting body for the profession. It has approximately 70 000 members
in 230 local chapters, national institutes, and audit clubs in more than 120 countries (IIA, 2001).
15
Table 3
Summary of sample
Questionnaires mailed
1058
Less: undeliverable
68
990
12
6
1
7
2
28
962
141
69
210
Response rate
Less: responses from same business unit averaged into
single response
Useable responses
Responses reporting
No use of ABC
Implementation stage of ABC
Use of ABC for decision-making
21.8%
6
204
21.2%
139
18
47
204
Generally because the position is extremely specialized such as railroad rate auditor.
rate of 21.2 per cent. Sixty-five responses (31.8 per cent) indicate some use of ABC.
The remaining 139 respondents serve as a non-using control group. The number of
responses is adequate for purposes of statistical analysis.8
8 For effective analysis, the sample covariance matrix must be reasonably stable and approximate the
pattern of covariances in the population. In general, ceteris paribus, the larger the sample size the
more likely this will be the case. Guadagnoli and Velicer (1998) reviewed the literature on sample size
considerations in factor analysis and principal components analysis and conducted an extensive Monte
Carlo study on sample size effects. Consistent with other Monte Carlo studies, they found no support for
often used rules of thumb based on respondents-to-variables criteria (e.g. 5 : 1). As quoted from Jaccard
and Wan (1996),
The most important factors influencing the stability of the sample covariance matrix were the absolute
sample size and the magnitudes of the path coefficients from the latent constructs to the observed
indicators (referred to as saturation). When such standardized path coefficients were low (i.e. near 0.40),
sample size was quite important. At moderate to high saturation levels (e.g. standardized path coefficients
of 0.60 to 0.80), once a certain sample size was achieved, further improvements in stability were small with
increasing N . When saturation was high (standardized path coefficients of 0.80), sample sizes as low as 50
performed well, even when the number of variables in the covariance matrix was large.
Jaccard and Wan then recommend a sample size of 75100 in conditions of high saturation, and 150 for
moderate saturation levels. The saturation levels obtained in this study are high for 76 per cent of the
multi-item variables used to test H1 and H2 and moderate to high or high for 80 per cent of those used
to test H3. These levels are adequate to expect a stable covariance matrix.
As a check, a sensitivity test is performed whereby the 19 ABC manifest variables are reduced to six,
reducing the number of manifest variables to 25 and increasing the sample size/variable ratio to 8 : 1 from
5 : 1. Results are not impacted.
16
There is no test to ensure that the study is free of non-response bias. Two separate
procedures were performed to help assess the possibility of bias. As in (Gosselin,
1997a) and Krumwiede (1998), a reason for non-response section was included at
the bottom of the transmittal letter. In addition, the median responses of the first
mailing were compared with those of the second mailing. Wilcoxon 2-sample signed
rank tests (Hollander and Wolfe, 1973) and Pearson chi-square tests of proportions
(Feinberg, 1983) on both the raw data and the additive indexes revealed significant
differences ( p < 0.05) on five of the 75 variables tested, or 6.7 per cent. This is slightly
more than would be expected by chance. Second mailing respondents tended to
report at a somewhat higher level of aggregation (e.g. company versus division;
median 4.82 versus 4.29 p < 0.0385), have less tendency to be manufacturers
(0.42 versus 0.57 p < 0.044), be less likely to use CIM (0.10 versus 0.22 p < 0.047),
and be less satisfied with their business unit cost (3.20 versus 2.91 p < 0.041) and
performance measurement (3.18 versus 2.87 p < 0.033) systems. It is not suprising
that the test revealed some differences. For example, a possible explanation for slower
responses by internal auditors with company-wide responsibilities is that they tend
to travel more often, and are thus likely to have delayed responses.
Survey instrument
Data were extracted from a 96-item survey instrument. As in Kaynak (1996), Shields
(1995), Swenson (1995), Grandzol and Gershon (1997), McGowan and Klammer
(1997) and Krumwiede (1996, 1998) the instrument was constructed so that analysis
could be conducted at the appropriate level of knowledge of the individual
respondents (plant, division, region, subsidiary, country, or entire company).9 This
reduced measurement error associated with differing levels of ABC use in different
segments of firms. As described in the variable descriptions, most of the survey items
were adapted from previous research.10 The survey instrument is included in the
appendix.
6. Results
Descriptive statistics
As described in Table 3, 204 completed questionnaires were returned. Fifty per cent
of the respondents reported for their entire company, 17.2 per cent reported for their
division, with the remainder spread among plant, group, subsidiary, and country
business units. 46.6 per cent reported that their business unit revenues exceed $1
billion, while, as is not suprising for firms employing internal auditors, only 8.3 per
cent reported for business units with revenues under $50 million. Manufacturing
firms constituted 52 per cent of the responses.
9 Multiple tests were run whereby performance and ABC use were regressed against level of business unit.
In no cases was a business unit significant at conventional levels.
10 Procedures prescribed by Dillman (1999) for maximizing response rates were followed. Specific steps
taken included (1) sending a second mailing, (2) promising confidentiality of responses, (3) including
deadline dates for reply, (4) including personalized cover letters, (5) including a postage-paid, selfaddressed envelope for reply, and (6) promising to send a summary of results on request.
17
As reported in Table 4, all but 45 (22.1 per cent) of the respondents indicated that
their business unit was significantly using at least one business initiative. The median
firm used two practices (range from zero to six) with JIT and TQM the most often
referenced at 46 per cent. Manufacturers had more mean use (2.56 versus 1.32) than
non-manufacturers and companies over $1 billion in revenues had higher use than
smaller companies (2.2 versus 1.5). Discounting the purely manufacturing initiatives
CIM and FMS, the difference in use between manufacturers and non-manufacturers
reduced to 2.06 initiatives versus 1.32 initiatives.
Forty-seven respondents, 23 per cent, reported that they were significant users
of ABC. Another 18 respondents indicated that they were implementing ABC, but
that the system was not yet in significant use. This rate is somewhat lower than
prior research (Shim and Stagliano, 1997; Geishecker, 1996), which reported that 27
to 44 per cent of respondents were using ABC.11 Manufacturers reported higher
use than non-manufacturers (31.1 per cent versus 14.3 per cent). Significant ABC
users generally also used other initiatives (mean of 2.2 other initiatives). Only seven
of 47 ABC firms were using ABC in isolation.
As reported in Table 5, significant users tended to use ABC in several applications,
with, as expected, cost reduction and product costing representing the highest uses
(4.37 and 4.13 out of 5, respectively). The majority, 34, had been using ABC for
over two years. 72 per cent felt that the implementation had been successful, 66 per
cent felt that ABC had been worth implementing, and 64 per cent felt that benefits
exceeded costs. The correlation of SUCCESS with BENEFIT is 0.60, statistically
significant and consistent with that found by Shields (1995) of 0.53.
The correlation matrix portraying the univariate relationships between new
business initiatives is presented as Table 6. For the full sample, 39 per cent of the
relationships are significant at the = 0.05 level, and all significant relationships
are positive except that of business process reengineering (BPR) and the theory
of constraints (TOC). JIT exhibits the strongest relationship with other initiatives,
with significant correlations between it and all other initiatives except TOC. ABC
is significantly correlated with JIT at the = 0.05 level, and BPR at = 0.10.
Somewhat suprisingly, the relationships are qualitatively similar for the partition
including manufacturing firms only.
Content validity and reliability
Confirmatory factor analysis is used to test the unidimensionality of each of the
six multi-item constructs FUNCTION, APPLIC, EVAL, INFO, COMPLEX, and
IMPORT.12 One indicator of fit is the chi-square statistic ( 2 ). A good fitting model
may be indicated when the ratio of 2 to the degrees of freedom is less than two
(Tabachnick and Fidell, 1996). However, this statistic is sensitive to sample size
and violations of assumptions of multivariate normality (Bentler, 1983; Joreskog
and Sorbom, 1989), which can lead to rejections of the model even when the fit is
reasonable. Therefore, it is useful to supplement the 2 with other indicators of fit.
11 Prior research has generally used samples from populations that consisted of manufacturers exclusively.
This is a likely explanation for the lower use of ABC found in this study.
12 To use confirmatory factor analysis for verifying unidimensionality, a measurement model is specified
for each construct. Individual items constituting the construct are examined to see how closely they
represent the same construct.
0
45
14
31
22.1
13.2
31.6
47
94
95
37
79
23
16
9
(n = 106)
33
65
66
37
42
16
16
6
3
47
30
17
23.0
28.3
17.3
31.1
61.3
62.3
34.9
39.6
15.1
15.1
5.7
5
6
6
0
2.9
5.7
0.0
(n = 98)
14.3
29.6
29.6
0.0
37.8
7.1
0.0
3.1
6
4
4
0
2.0
3.8
0.0
40.4
58.5
56.8
54.1
49.4
43.5
68.8
66.7
Percentage of
users with $1
billion
4
23
21
2
11.3
19.8
2.0
14
29
29
0
37
7
0
3
Manufacturers
Non-manufacturers
Number
Per cent Number
Per cent
All initiatives
Manufacturers Non-manufacturers
2.56
1.32
3
1
1
45
19
26
22.1
17.9
26.5
23.0
46.1
46.6
18.1
38.7
11.3
7.8
4.4
Number Percentage of
using
total
46.6% of responses were from business units over $1 billion. Omitting CIM and FMS.
I12
Survey
item
Business initiative
Table 4
Use of innovative business practices, n = 204
Total
204
106
98
100.0
100.0
100.0
18
D. Cagwin and M. J. Bouwman
31
4
11
1
Strongly agree
Agree
No opinion
Disagree
Strongly disagree
Value
Yes
Will be
Too early to tell
No
66.0
8.5
23.4
2.1
<1
0
0
0
0
0
0
0
0
0
9
25
8
3
2
Number
13
12
4
0
9
8
6
6
2
10
7
2
18
25
11
18
22
22
20
19
24
19.1
53.2
17.0
6.4
4.3
Per cent
7
9
13
4
45
19
19
14
13
8
10
9
6
9
>5
13
17
12
4
1
27.7
36.2
25.5
8.5
2.1
Number of years
23
34
5
2
12
7
10
8
15
11
6
Extent of use
3
65 respondents indicated some use of ABC. 47 respondents indicated use to a significant extent in decision-making.
H5
H4
H1b
Value
Implementation of ABC
H1a
Time since
Product costing
Cost reduction
Pricing decisions
Product mix decisions
Determine customer profitability
Budgeting
Off-line analytic tool
Outsourcing decisions
Performance measurement
Application
Survey
item
F17
Survey
item
Table 5
Use of ABCSignificant Users, n = 47
4.13
4.37
3.65
3.78
3.70
3.78
3.70
3.46
3.76
Mean
4
4
4
4
4
4
4
4
4
37
44
25
31
30
32
29
25
33
78.7
93.6
53.2
66.0
63.8
68.1
61.7
53.2
70.2
Number of responses
Median
4&5
Per cent
20
Table 6
Correlation matrix of new business initiatives. Manufacturers, n = 106, to the lower left of the diagonal; all firms,
n = 204, to the upper right (Spearman correlations)
ABC
JIT
CIM
BPR
VCA
FMS
TOC
TQM
Significant at 5%
Significant at 10%
Number significantly using ABC with
Per cent (47 firms)
Total
Possible
28
28
Full sample
Number %
11
39.3
14
50.0
VCA
6
12.8
Manufacturers
Number %
10
35.7
11
39.3
JIT
30
63.8
CIM
7
14.9
BPR
23
48.9
FMS
3
6.4
Mean
2.2
7
14.9
6
12.8
17
36.2
10
21.3
TOC
1
2.1
TQM
25
53.2
Number of initiatives
Number significantly using ABC with
Per cent
4
8.5
2
4.3
1
2.1
A goodness of fit index (GFI) of 0.90 or higher for the model suggests that there is no
evidence of a lack of unidimensionality (Joreskog and Sorbom, 1989), and an adjusted
goodness of fit index (AGFI) of 0.80 and a root-mean-square residual (RMR) under 0.10
are generally regarded as indications of good fit (Libby and Tan, 1994).
The 2 statistics, and GFI, AGFI, and RMR indices for the six constructs, are
reported in Table 7. After deletion of five of 37 survey items, 2 tests that the models
fit the data are not rejected ( p < 0.01). Furthermore, all GFI and AGFI values are
above 0.90 and 0.80, respectively, indicating that there is no evidence of a lack of
uni-dimensionality.
A scale exhibits discriminant validity if its constituent items estimate only one
construct (Bagozzi et al., 1991). Lack of discriminant validity usually results in
an over-estimation of correlation among constructs. To test scales for discriminant
validity a 2 difference test is used (Ahire et al., 1996). A set of confirmatory factor
analyses is run on each multi-item pair of scales, first allowing for correlation
between the two constructs and then fixing the correlation between the two scales
at one. A statistical significant difference in 2 statistics demonstrates that the two
constructs under consideration are distinct (Venkatraman, 1989).
For the six multi-item scales in the instrument, a total of 15 discriminant validity
checks were run. The three ABC scales (FUNCTION, APPLIC, and EVAL) failed
to yield statistically significant 2 differences (the 2 difference is under two).
Description
7
9
3
6
7
5
37
19
F3, 6, 7
D1D6
E1E7
A1-A5
2
2
5
0
0
0
Number of items
Original Deleted
F16a-g
F17a-i
Instrument
items
131.99/127
1.81/4
10.71/1
3.93/4
2.23/1
2.96/7
16.60/19
0.36
0.77
0.00
0.42
0.14
0.89
0.62
0.94
1.00
0.97
0.99
0.98
0.99
0.95
0.91
0.99
0.80
0.97
0.87
0.95
0.88
0.012
0.012
0.082
0.016
0.027
0.026
0.044
0.98
0.99
0.91
0.99
0.98
0.99
0.96
0.94
0.79
0.54
0.84
0.87
0.90
0.92
GFI value of 0.90 suggests that there is no lack of unidimensionality (Joreskog and Sorbom, 1989); AGFI value of 0.80 indicates a good fitting model
(Tabachnick and Fidell, 1996); RMR value of under 0.10 indicates a good fitting model (Tabachnick and Fidell, 1996); NFI value of 0.90 suggests strong
convergent validity (Tabachnick and Fidell, 1996); Alpha value of 0.50 indicates acceptable reliability (Nunnaly, 1978).
ABC
Construct
Table 7
Construct unidimensionality, convergent validity, and reliability
22
Expected
sign
+
1ROI
ABC
INIT
ENABLE
an interaction term
SIZE
The results of this regression are presented as Table 8. Use of other initiatives is
significant at the = 0.05 level, and the interactive term is significant at 0.081. There
appears to be an overall effect of enabling variables and use of initiatives combined
with ABC. It is noteworthy that this effect is not present when ABC is dropped from
the interaction term. The contrast between effects with and without inclusion of ABC
is an indicator of probable efficacy of the use of ABC under favourable enabling
conditions.
23
Table 8
Exploratory multiple regression analysis of overall effect of enabling conditions on improvement in performance,
n = 204
Model F
Model p-value
R square
Adjusted R square
Variable
Intercept
ABC
Other INITiatives
ENABLErs
ABC INIT ENABLE
SIZE
Parameter
estimate
1.018
0.038
0.152
0.235
0.009
0.049
6.666
0.0001
0.1441
0.1225
Standardized
parameter
estimate
0.000
0.064
0.221
0.096
0.175
0.105
Standard
error
0.950
0.066
0.056
0.171
0.007
0.322
t-statistic
1.072
0.576
2.697
1.372
1.405
1.532
p-value
0.285
0.565
0.004
0.172
0.081
0.127
Bold = significant at the 0.05 level; Underlined = significant at the 0.10 level; Intercept and size tested with
two-tailed test; other variables with one-tailed tests.
Hypothesis testing
The purpose of the first two hypotheses is to test whether ABC is directly associated
with improvement in ROI (H1) and to identify the enabling conditions under which
ABC results in an improvement in ROI (H2). To perform these tests, the conceptual
model presented previously as Figure 1 is modified to that shown in Figure 3.
Figure 3 also reports the results of testing.13 Product terms are created for the
interactions between ABC and each of the enabling variables, other initiatives, and
size. Positive significance of the ABC variable would indicate a direct effect on change
in performance, regardless of environmental conditions. Positive significance of a
product term indicates that ABC is positively associated with an improvement in
performance when used in the environment described by the product term.14
The fit of the model is good: 2 (1017 df) = 911, p< 0.99, GFI = 0.96, AGFI = 0.92,
RMR = 0.075. The model explains 36% of the variance of the dependent construct.
Many of the variables have significant direct effects: INFOrmation technology,
IMPORTance of costs, SIZE, and other INITiatives have positive direct effects
at the 0.05 level. Number of INTRA-company transactions and COMPetitive
environment have negative direct effects at the 0.05 level. COMPLEXity (positive)
and unused CAPACity (negative) are not significant at conventional levels. It is
logical that INFO, SIZE, INIT and COMP are significant predictors of change in
13 Factor loadings and structural coefficients are obtained using the maximum likelihood estimation
method. Estimation involves finding the values of the coefficients that produce an estimated covariance
matrix that is as close as possible to the sample covariance structure of the manifest variables (Libby and
Tan, 1994).
14 A potential problem with this approach is that the measurement error for a given product indicator
must be a function of the measurement error of the component parts of the product terms (Jaccard and
Wan, 1996). Joreskog and Yang (1996) developed an approach to address this problem, which requires the
formation of four new matrices and the imposition of nine constraints per product term. The resulting
model requires estimation of a number of parameters that is larger than the sample size, resulting
in unstable parameters. However, the parameters and t-statistics derived are nearly identical to those
previously reported. All variables retain their signs and significance levels are stable within 0.05 and 0.10
boundaries.
24
DIRECT
INTERACTION
CONSTRUCTS
CONSTRUCTS
F16a-g
ABC
0.05
0.39
(0.348)
INIT
0.30
4.78
(0.000)
INFO
0.35
4.57
(0.000)
E1-E5
COMPLEX
0.02
0.31
(0.757)
A1-A4
IMPORT
0.20
2.05
(0.040)
I10a,b
F17a-I
F3, 6,7
I12a-j
D1-D5
Add
0.10
1.89 ABC X INIT
(0.003)
-0.16
Add
INTRA
I11
CAPAC
-0.00
-0.05
(0.960)
-0.09
-1.41 ABC X INTRA
(0.079)
Change in
Financial
Performance
-3.14
(0.002)
-0.02
-0.14 ABC X CAPAC
(0.444)
ROI-3 YR
1
C6
ROI-5 YR
1
A6
COMP
-0.21
-4.66
(0.000)
I6
SIZE
0.22
2.94
(0.003)
I8
TYPE
C7
Construct
Observed variable
1
0.01
0.08
F3,F4
-0.936
coefficient constrained to 1
Standardized coefficient
t-statistic
p-value
Direct Effect
ABC X SIZE
Add
Figure 3. LISREL models of ABC and financial performance with control for enabling conditions and
other initiatives.
25
approach capacity constraints. Opportunity costs become more important than cost
allocation.
The results of the three tests of H3 are presented in Table 9. As expected with use
of single item variables of interest, model fit is not as good as that of the previous
model. 2 generally approaches three times degrees of freedom rather than the
desired two. GFIs range in the lower 0.80s and AGFIs in the upper 0.70s, although
the RMR for all three models are under 0.08. Variable significance is consistent for
the three models. INFOrmation technology, IMPORTance of costs (except against
SATISFACTION), and other INITiatives are positive and significant at 0.05. INTRAcompany transactions and COMPetitive environment are negative and significant.
SATISFACTION ( p< 0.104), SUCCESS ( p< 0.059), and financial BENEFIT ( p< 0.174)
are positively signed and SUCCESS is marginally significant. Although no firm
statistical conclusions can be reached regarding H3, it appears that the variables are
relatively good proxies for improvement in performance associated with use of ABC.
Sensitivity analysis
As additional checks on the specifications of the models, the analysis was reestimated with (1) limited, and (2) substantial error correlation allowed between
the independent manifest variables, (3) restriction of the error correlation of the
dependent variables, (4) change in ROI over separate 3 and 5 year periods rather
than a construct derived from the combination of the two periods, (5) all correlations
between the latent constructs allowed rather than only those statistically significant
at the 0.10 level, (6) a direct effect of industry TYPE on change in ROI (even though
the ROI variable is industry adjusted), (7) a reduction in the number of manifest
ABC variables from 19 to six (H1 and H2 model only), and (8) for the preceding
exploratory regression analysis, change in ROI measured over separate 3 and 5
year periods. Although there is some change in fit statistics of the models, there is
little change in significance levels of the independent variables, with the following
exceptions.
When correlated errors of the manifest independent variables are estimated,
t-statistics of all variables tend to increase. If a large number of correlations are
estimated, the interaction terms and the SUCCESS and SATISFACTION variables
become significant at = 0.05. However, in the absence of an error theory to explain
these correlations, no inference can be made from these results.
Since correlated errors were expected for the dependent variables ROI3 and ROI5,
the results have been reported with correlated error terms. When the errors between
ROI3 and ROI5 are not allowed to correlate, significance levels of the independent
variables are generally weakened somewhat. Although signs remain as expected,
ABC IMPORTance of costs and ABC SIZE lose their significance ( p< 0.176 and
p< 0.142 versus p< 0.097 and p< 0.093). ABC INIT also loses some significance ( p<
0.054 versus p< 0.030). However, even with this additional restriction, the models
furnish evidence of the efficacy of ABC under specific environmental conditions.
Remaining sensitivity tests yielded little additional information. TYPE is never
significant at conventional levels and modification to the permitted correlations of
the latent construct matrix had minimal effect. For the 3 year change in ROI model,
IMPORTance of costs becomes significant at the 0.05 level when SATISFACTION is
the dependent variable (rather than the p< 0.097 for the reported model).
0.09
0.32
0.27
0.12
0.15
0.17
0.01
0.27
0.12
1.26
5.24
3.08
1.53
0.15
0.01
0.83
4.11
0.12
552
524
517
Satisfaction
Coefficient t-statistic
Chi-square
0.11
0.29
0.27
0.07
0.23
0.16
0.01
0.32
0.11
Coefficient
p-value
0.104
0.000
0.002
0.126
0.136
0.006
0.302
0.001
0.042
0.00
0.00
0.00
p-value
175
173
172
Degrees of
freedom
1.59
4.72
3.24
0.81
2.41
2.76
0.20
4.86
1.84
0.82
0.83
0.83
Success
t-statistic
GFI
0.059
0.000
0.001
0.418
0.016
0.006
0.841
0.000
0.066
p-value
0.76
0.77
0.77
AGFI
0.078
0.078
0.077
RMR
0.06
0.30
0.29
0.08
0.26
0.16
0.01
0.31
0.11
Coefficient
Bold = significant at the 0.05 level; underlined = significant at the 0.10 level; one-tailed test except for SIZE.
ABC
INIT
INFO
COMPLEX
IMPORT
INTRA
CAPAC
COMP
SIZE
Satisfaction
Success
Benefit
ABC construct
Table 9
LISREL models of ABC and success with control for enabling conditions and other initiatives, n = 204
0.94
4.76
3.39
0.95
2.34
2.72
0.23
4.69
1.87
0.174
0.000
0.001
0.166
0.001
0.007
0.826
0.000
0.061
Financial benefit
t-statistic
p-value
0.35
0.35
0.35
R2
26
D. Cagwin and M. J. Bouwman
27
28
Acknowledgements
The authors wish to thank the anonymous reviewers, Lisa Austen, Katherine Barker,
Tommy Carnes, Johnny Deng, Bill Glezen, Tanya Lee, Angela Monroe, Karen Pincus
and participants at the 2000 Annual Meeting of the American Accounting Association
and Accounting Colloquia at the University of Arkansas and the University of Texas
at Brownsville for their many helpful comments and critiques on earlier drafts of this
paper.
Appendix
29
30
Strongly
No
Strongly
disagree Disagree opinion Agree agree
1
2
3
4
5
Strongly
No
Strongly
disagree Disagree opinion Agree agree
1
1
1
2
2
3
3
4
4
5
5
17.
31
32
1
1
1
1
1
2
2
2
2
2
3
3
3
3
3
4
4
4
4
4
5
5
5
5
5
33
H. General questions:
1. How long since your business unit began:
a. the implementation of ABC? <1 yr 12 yr 23 yr 34 yr 45 yr >5 yr
b. using ABC to aid in
<1 yr 12 yr 23 yr 34 yr 45 yr >5 yr
decision-making?
c. implementation of quality
<1 yr 12 yr 23 yr 34 yr 45 yr >5 yr
program?
2. What percentage would you estimate your sales have increased or decreased
since you began using ABC?
% increase
% decrease
No change
3. What percentage would you estimate your profits have increased or decreased
since you began using ABC?
% increase
% decrease
No change
4. In your opinion, was ABC worth implementing?
Yes No Will be Too early to tell
Please comment:
Strongly
No
Disagree Disagree opinion Agree
5. Overall your ABC initiative
has been successful . . . . . . . .
Strongly
agree
Please comment:
Wholesale/retail
Transportation
Other services
Government
Utilities
Other
$520M
$501M$1 billion
$2150M
$15 billion
$51100M
$5 billion+
34
10. What percentage of the following are to another business unit of your
company?
< 10%
1025%
2550%
> 50%
a. Your sales
b. Your purchases
< 10%
1025%
2550%
> 50%
11. At what percentage of capacity does your business unit usually operate?
< 50%
5065%
6580%
8090%
> 90%
12. Check if the following is used to a significant extent in your business unit:
a. Activity-based costing (ABC)
b. Just-in-time (JIT)
c. Computer-integrated
d. Business process
manufacturing (CIM)
f. Value chain analysis
engineering
g. Flexible manufacturing
systems
i. Total quality management
(TQM)
j. Other (describe)
Please comment on any refinements that can be made to the survey (questions
needed, unnecessary, or those that should be changed):
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