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a. An explanation of the selected management accounting topic.
b. An explanation of the purpose of the two studies and what research question(s) they set out to explore about the topic.
c. A discussion about the similarities and differences in the findings of the two studies.
d. Provide four (4) specific outcomes or lessons learned from the two studies’ research findings that will be useful for management accountants in Australian companies to learn from, and justify your answer [i.e. provide 2 outcomes from each study].

Explanation of the Purpose of the Studies pertaining to Activity Based Costing

Activity Based Costing is an accounting method which analyses and allocates the costs to the activities of overheads which is followed by the allotment of costs to the products. It identifies the relationship between the costs, activities of overheads and the manufactured product. With the help of this relationship, it allocates the indirect costs to the products less subjectively as compared to the traditional methods.

It is mostly applied to the manufacturing industry as it enhances the reliability of the data pertaining to cost thereby assisting the companies to produce nearly to the true costs and classifying them in a better way. It is generally applied in the target costing, product costing, product line profitability analysis, service pricing and customer profitability analysis. It is popularly adopted by the manufacturing organizations  because it helps in incorporating better focus and strategy provided the costs are grasped in a better way.

This report illustrates the case study of real-life organizations in which the activity-based costing method is applied along with explaining the research questions in this behalf. It would also explain the purpose of the study as illustrated in the two journals. The similarities and differences as explained in the journals along with the lessons learned which would serve as a guide for the management accountants in Australia are also be stated in this report.

As per Phan, Baird and Su, the purpose of this study is to investigate the effects of the application of the ABC method of costing on the performance of firms. For this purpose, 106 Chinese manufacturing companies have been selected for studying the impact of the  ABC technique on their performance. For this purpose, the multiple regression technique and structural equation modeling have been applied.

According to the opinion of Schulze, Securing and Ewering, the second study illustrates the impact of cost in the low-income group countries. It also illustrates the impact of adopting the Activity Based Costing Method on the financial performance of the industrial shareholding companies. In order to fulfill their purpose, 13 public shareholding industrial companies have been selected which were operating from the period of 2000-2014.

In this regard, the average of four years prior and post application of the ABC methodology has been adopted for all the variables and their significance is tested with the help of a paired sample of t-test statistics.

Based on the two studies, the research questions as stated in the study pertain to the following:

  1. If there is a significant effect between the application features of ABC and the performance of the firms?
  2. Examining whether the application of ABC plays a moderating role in investigating the effect of the application of ABC on the performance of the firms?
  3. What are the changes in the financial performance of the public shareholding industrial companies in the context of pre and post application of ABC system?

Research Question

The first study concentrates on its research intention to verify the impact of the application of ABC on the performance of the firm. For this, the performance of the firm and its indicators is the dependent variable whereas the independent variable is the application success of ABC. The stages of application of ABC are the moderating variable.

The theoretical structure of this study is based on the contingency theory. It states that the firm’s performance is conditional and is dependent upon the extent variables and this could be enhanced upon the establishment of the managerial control systems. They would impact the performance of the firms.  It illustrates that if the structure of the company is designed in a manner which is matched with the contingency variables like culture, strategy and technology, then the firm would attain high performance, rapid growth and additional resources.

The organization is expanding itself, so the contingency variables would increase accordingly. It will result in its unsuitability in the present structure resulting in a lower performance of the firm. Subsequently, it will adopt a dynamic fit for itself. The features of the dynamic fit are being adaptive and susceptible to the transitions of the variables of the organization.

According to Schulze, Securing and Ewering, the second study, the concept of the ABC method were introduced by Cooper and Kaplan in the year 1987. It is a method which is used for allocating the overheads to the items in a more accurate manner. This study aims at finding the improvement in the financial performance which is related to the application of the ABC method. It also aims to research the conditions subject to which this improvement is accomplished.

It examines the relation between cost system functionality, the financial performance of 277 hospitals and the belief of the managers about the relevance and utility of the cost data. The purpose is to bets capture the opinion of the accountants associated with ABC. It analyses four dimensions viz. strategic cost allocation, overall performance and enhanced efficiency and effectiveness.

It insists on the fact that the developed scale can have a significant impact for capturing the perception regarding ABC in terms of strategic methods of cost allocation and enhanced effectiveness which can have a significant impact on the performance of the firm. For this purpose, the data was obtained through a survey mail of the financial managers who made available the information regarding the financial performance of the company.

A discussion about the similarities and differences in the findings of the two studies

The data was retrieved from the shareholding companies at the end of 2009. The method of regression analysis is applied for testing the association amongst the awareness of using the ABC and the level for adopting it. It is also implemented for analyzing the improvement in ROA as a mean of the financial performance linked with the initiatives of ABC.

It also examines the impact of the use of ABC on the performance of small firms. It has been examined if the past financial performance of the firm has driven the adoption of ABC and explored the use of ABC to a certain extent.A survey was used in the paper which indicated that the small firms having adequate financial resources were facilitated with enhanced growth and profitability through the use of ABC analysis.

The similarities amongst both the studies are that they focus on the impact of the application of ABC on the performance of the company using the theatrical aspects of ABC namely the contingency variable. It is a modern technique which focuses on the activities and designated resources which are required to manufacture various goods and services. It is in contradiction to the traditional volume based cost accounting approaches.

The first study has adopted the primary and secondary cost allocation methods. The primary cost allocation allocates the cost of the resources to the identified activities which are based upon the activity drivers and expensed resources. The secondary cost allocation assigns the activity costs which are based upon the cause-effect cost drivers. They assign the accumulated costs to the cost objects i.e. consumers, services and products. The cost drivers can be based upon the qualitative and quantitative criteria.

Both the studies agree to the fact that ABC provides more appropriate data about the activities of the firms. They are also aligned with the fact that it facilitates the management in the decision making and enhancement of the performance of the firm.  The performance of the firm is the accomplishment of its target in the aspects of market share, a quality which it delivers, cost, productivity, service etc.

Both the studies agree to the point that ABC is a crucial cost management technique and its application would lead to a superior performance.  ABC has provided value to the consumers, created higher financial returns for the firms and enhanced the overall revenue for the firms. It does not result in situations where the consumers pay a lower price for the products.

Specific Outcomes for Management Accountants

The similarities amongst both the studies are that they concluded that the system of ABC is a useful method for accomplishing the appropriate fair evaluations of the performance of the firms. It also facilitates the researchers by providing appropriate information regarding the consumers, the time allocated for each of the activities and the number of resources used for each of them.

As per the ABC system, each activity was clearly recognized and the cost of resources which is consumed by each activity is analyzed in a precise manner. The cost allocations are conducted on the basis of applicable cause-effect relationships and zero value based activities are evaluated separately. Therefore  both the studies agree that it is possible that the application of ABC would impact the performance of the firm through the supply of more applicable, accurate and complete data associated with each activity.

The differences in both the studies can be illustrated as that in the first study the dependent variable was the application of ABC while the independent variable was the margin before interest and tax ratio, gross profit margin, net profit margin ratio, return on assets and equity and return on investment ratio. The result revealed that amongst the 78 performance variables only 37 ratios i.e. 47% improved while the remaining 41 i.e. 53% degraded after the implementation of the ABC system.

It also showed that the effect on the implementation of ABC on 548 middle-sized firms. The statistics revealed that the financial results of the companies which have adopted ABC were inferior to those which had not adopted it. It also categorized the implementation procedure of ABC into six stages viz. initiation, adoption, adaption, acceptance, routinization and infusion.

Initiation happens when the firm feels that it is time to change the current system as it is either outdated or inappropriate for the successful operation of the company. The adoption stage occurs when the top management arrives at the decision to invest in ABC. It is at the acceptance stage that the firm will be arriving at a conclusion that the advantages of implementing ABC are more than the costs and it allocates some of the financial resources for adopting ABC.

Routinization happens after acceptance in which the firm has stated adopting ABC beyond its accounting and finance departments. Lastly, infusion appears when ABC has been assimilated into the other systems and it becomes a powerful procedure for the decision making.

On the other hand, the second study illustrates that the process of ABC requires the following steps. It comprises of evaluation of the activities followed by gathering the cost data. The tracing of costs to activities is executed which is followed by the establishment of output metrics. Lastly, the cost analysis is done.

It also argues that the system of ABC requires a change in the organizational structure and its willingness to learn along with the adequacy of resources.  The researches in this study have observed that the primary reasons for failure is lack of communication at any level , lack of managerial commitment and poor planning or improper processes.

The major limitations of this research are that it only concentrates about the impact of implementing the ABC method on the financial performance in the industrial sector. It totally ignores the other corporate sectors of the economy and its effects on the probable difference in the accounting methods which are adopted by the industrial sector companies.

The findings of the first study illustrate that the increase in Return on Assets (ROA) is positively associated with ABC. The improvement in Return on Assets (ROA) means that the organization is using its assets in a more efficient manner in order to earn more profit. It further reveals that Return on Investment (ROI) is positively associated with ABC when it is used simultaneously with the four conditions viz. when it is implemented in complex and diverse firms, other strategic initiatives, when it is used in the company where the cost is relatively crucial and lastly when there are limited number of transactions occurring within the company.

Thirdly, the learning outcomes of the study also indicate that ABC system can depict greater cost detail, report the data associated with cost in a more efficient manner along with further classifying the costs as per the behavior of the company.  Lastly, ABC costing integrates the techniques to analyze the indirect costs i.e. overheads into the cost objects such as services, products and consumers.

The findings of the second study revealed that the performance of the firm upon the application of ABC depends upon the variables such as total quality control, tight cost control and asset utilization. Secondly, the lessons learned from the outcomes are the application of ABC and its consequences on the firm are based upon all the aspects of financial and non-financial attributes.

Thirdly, the findings also reveal that information which is provided through the implementation of ABC can directly assist the managers in the identification of the challenging problems such as reworks and activities which add zero value to the company. Lastly, it identifies the way resources are consumed by activities which help the production of the anticipated objects of cost. It also helps in allocating the costs of the resources in the ratio of the consumption so  that the cost of activities can be determined.

So, ABC can help the management accountants as it provides a more accurate method for assessing the cost of the product or service thereby leading to appropriate decisions of pricing. It assists them by increasing their knowledge about the cost drivers and overheads. It makes the non-value adding and expensive activities more visible to them and allows them to eliminate or diminish them.

It enables the efficient challenge of operating costs to search for better ways for allocation and elimination of overheads and improves the analysis of the management accountants regarding the profitability analysis of consumers and products. It also promotes the performance management techniques like the scorecards and continuous improvements.They can play an important role in designing of ABC system in their organization.

They can assess the crucial points of their analysis and explain the reasons behind the deficiencies of the current cost systems. Based on their unique abilities, they can judge the level of combinations which are required for ABC costing systems. They can use their qualification to allocate the cost to activities and objects.

The accountants must understand the fact that ABC calculates the historical costs for providing insights, focus and knowledge. The concept of ABC is based on absorption costing but it does not violate the rules of causality as is done with the traditional allocations of the cost of indirect expenses. Its decision impact the future.

In order to validate the anticipated financial impact of a decision, they should implement managerial economics which involves managerial cost analysis. It categorizes the behavior of expenses with regards to transitions in the mix and volumes as variable, step fixed, semi-variable  or fixed.

It would help in distinguishing the variation between the provided and used capacity. It shall also help in considering the presence of available and unused capacity. With the help of ABC, the marginal cost analysis and capital justification techniques implement the various versions of past costs which can be levied depending upon which of the expenses are excluded or included. It would also depend upon the type of decision made and planning horizon.

Thus ABC provides the management accountants with the information which is needed to make the value-based decision. Management Accountants need to comprehend that the current system of costing is producing inappropriate and misleading information on analyzing the costs of the companies in Australia.

ABC mode of costing takes into account the time period like a month, year or quarter. The consumers or products pass through various life cycles. ABC evaluates high costs of products during the early stages when it requires stabilizing production. So, the product may seem to be unprofitable today but it might be profitable in the future with the decrease in the costs.

 It is also essential for the management accountants as they have to implement the change management processes before the implementation of the ABC system. This process should be applied to ensure that there is assistance for the system at all the hierarchies of the company. It comprises of having a top level manager to gain expertise in the initiative along with the acceptance of the lower level managers.


Hence to conclude, it can be said that the guiding principle for ABC is to work in a backward manner. The management accountants must have a strong reason for the reformations of the existing cost system. They must know a type of decision through which ABC system will improve. ABC can be implemented by using the real-time data of revenues and expenses. If the goal is to gain a buy-in for ABC then the budgeted or anticipated revenue must be used. In this regard, the cost drivers and volumes must be analyzed.

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