The Impact of Activity‐Based Costing Techniques on Firm Performance

Given the debate in both the professional and scholarly literature on the effectiveness of management accounting systems in the contemporary business environment, there is a need to understand more about the impact of activity‐based costing (ABC). In this paper, we show that the choice of a management accounting system, such as ABC, may have a significant impact on firm value. Specifically, for a sample of U.K. firms, we show that firms adopting activity‐based costing techniques outperform matched non‐ABC firms by approximately 27 percent over the three years beginning on January 1 of the year in which the ABC techniques are first implemented. This result is robust to different matching criteria and for both accounting and market‐based measures of performance. Further analysis suggests that ABC adds to firm value through better cost controls and asset utilization, coupled with greater use of financial leverage.

[1]  Lawrence A. Gordon,et al.  Stock market reactions to activity-based costing adoptions , 1999 .

[2]  Teemu Malmi,et al.  Activity-based costing diffusion across organizations: an exploratory empirical analysis of Finnish firms , 1999 .

[3]  R. Banz,et al.  The relationship between return and market value of common stocks , 1981 .

[4]  D. Spiess,et al.  Underperformance in long-run stock returns following seasoned equity offerings , 1995 .

[5]  George Foster,et al.  Manufacturing overhead cost driver analysis , 1990 .

[6]  R. Kaplan,et al.  PUTTING THE BALANCED SCORECARD TO WORK , 1993 .

[7]  Michael Bromwich,et al.  Management Accounting: Pathways to Progress , 1995 .

[8]  Michael D. Shields,et al.  The design and effects of control systems: tests of direct- and indirect-effects models , 2000 .

[9]  K. Langfield-Smith,et al.  Adoption and benefits of management accounting practices: an Australian study , 1998 .

[10]  Vijay Govindarajan,et al.  Strategic Cost Management: The New Tool for Competitive Advantage , 1993 .

[11]  Falconer Mitchell,et al.  Activity-based costing in the U.K.’s largest companies: a comparison of 1994 and 1999 survey results , 2000 .

[12]  Gautam Kaul,et al.  Long‐Term Market Overreaction or Biases in Computed Returns? , 1993 .

[13]  Brad M. Barber,et al.  Detecting Long-Run Abnormal Stock Returns: The Empirical Power and Specification of Test Statistics , 1997 .

[14]  Innes John,et al.  The Application of Activity-based Costing in the United Kingdom's Largest Financial Institutions , 1997 .

[15]  Teemu Malmi,et al.  Towards explaining activity-based costing failure: accounting and control in a decentralized organization , 1997 .

[16]  Michael W. Maher,et al.  A field study on the limitations of activity-based costing when resources are provided on a joint and indivisible basis , 1998 .

[17]  J. Ritter.  The Long-Run Performance of Initial Public Offerings , 1991 .

[18]  R. Kaplan,et al.  Cost & Effect: Using Integrated Cost Systems to Drive Profitability and Performance , 1997 .

[19]  A. N. Oppenheim,et al.  Questionnaire Design, Interviewing and Attitude Measurement , 1992 .

[20]  G. Easton,et al.  The Effects of Total Quality Management on Corporate Performance: An Empirical Investigation , 1998 .

[21]  Shannon W. Anderson,et al.  The impact of contextual and process factors on the evaluation of activity-based costing systems , 1999 .

[22]  Maurice Gosselin.  The effect of strategy and organizational structure on the adoption and implementation of activity-based costing , 1997 .

[23]  M. Levis.  The long-run performance of initial public offerings: The UK experience 1980-1988 , 1993 .

[24]  Thomas H. Johnson,et al.  Relevance Lost: The Rise and Fall of Management Accounting , 1987 .

[25]  Falconer Mitchell,et al.  A survey of activity-based costing in the U.K.'s largest companies , 1995 .

[26]  E. Fama,et al.  The Cross‐Section of Expected Stock Returns , 1992 .

[27]  E. Fama,et al.  The Adjustment of Stock Prices to New Information , 1969 .

[28]  Falconer Mitchell,et al.  Activity-Based Costing: Problems in Practice , 1993 .

[29]  P. Asquith,et al.  Equity issues and offering dilution , 1986 .

[30]  Brad M. Barber,et al.  Detecting abnormal operating performance: The empirical power and specification of test statistics , 1996 .

[31]  Jerold B. Warner,et al.  MEASURING SECURITY PRICE PERFORMANCE , 1980 .

[32]  Theo Vermaelen,et al.  Market Underreaction to Open Market Share Repurchases , 1994 .

[33]  A. Bhimani,et al.  Management accounting : evolution not revolution , 1989 .

[34]  D. Crowther.  Creating Shareholder Value , 2003 .

[35]  M. Porter.  Competitive Advantage: Creating and Sustaining Superior Performance , 1985 .

[36]  Jerold B. Warner,et al.  Using daily stock returns: The case of event studies , 1985 .

[37]  R. Ball,et al.  An empirical evaluation of accounting income numbers , 1968 .