Activity Based Costing or commonly known as ABC Costing is one of the most efficient process to determine the cost of production of the business organizations. The main objective of this article is to enquire the improvements in the financial performance of the businesses with the adoption of the ABC costing (Cagwin and Bouwman 2002). As per this article, there are certain conditions under which the organizations can avail the advantages of ABC costing (Cagwin and Bouwman 2002). The study shows that there is a deep relationship between the ABC costing and the Return on Investment of the companies that can be jointly held responsible for the improved financial performance of the organizations. Two objectives work behind the adoption of ABC costing by the companies. First, to assists the organizations in the process of strategic decision-making process; and second, to assist the organizations in improving the profit performance. However, several opinions are there regarding the efficiency of ABC costing. Several accountants all over the world raise questions about the usefulness of ABC costing. For this purpose, there is a need for empirical research to discuss both the usefulness and constraints of ABC costing implementation in the businesses. As per this article, in the complex business situations, the companies can get the most of the advantages of ABC costing like intense competitions, sophisticated information technology, complex businesses processes of the firms and others (Cagwin and Bouwman 2002). The variables of this research has effectively taken into consideration all these above mentioned factor at the time of measuring the efficiency of ABC costing in firm’s performances (Cagwin and Bouwman 2002).
For this research, a cross sectional mail survey has been conducted with 1058 internal auditors assuming that they would provide knowledgeable and unbiased opinion about the cost system of the companies (Cagwin and Bouwman 2002). Three hypotheses have been formed for this research. A particular model has been taken into consideration to prove the efficiency of ABC costing. The model is as follows:
ΔROI = f (ABC, enabling variables, control variables)
In the above equation, ΔROI denotes the change in return on investments in the prior three or five years. As per the findings of the research, there are some positive synergistic effects of the adoption of ABC costing that provides better performance of the organizations (Cagwin and Bouwman 2002). However, there are some areas that need further research like what are the most optimal combinations of initiatives for deriving the advantages of ABC costing and others. Furthermore, the findings of this research have spotted a positive relationship between the ABC costing and ROI improvements in the most complex business situations. Another important finding of this research is the effects of the other enabling conditions like the sophistication of information technology, competitive business environment, less capacity and others. It has been seen that all these aspects affects the process of ABC costing in the organizations. The previously used measured to determine the success of ABC costing is major predictors of the financial performance of the firms. This research process has also stated that there are ample opportunities for future research programs to analyze and evaluate the efficiency of ABC costing in increasing the performance of the firms (Cagwin and Bouwman 2002).
Cagwin, D. and Bouwman, M.J., 2002. The association between activity-based costing and improvement in financial performance. Management accounting research, 13(1), pp.1-39.
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