Review on towards explaining activity-based costing failure: accounting and control in a decentralized organization
This paper studies the reasons why many of the firms with activity-based costing (ABC) systems are experiencing difficulties. It also examines the causes of resistance to ABC, considering at different interests of organizational stakeholders, and how the control and information systems affect ABC implementation, and suggests that some sources of resistance to ABC may be unlikely to be done with through using the strategies based on implementation.
In recent years, there is increasing evidence that many firms with ABC seem to fail although some of them succeed. However, few studies have focused on the problems of ABC, and consequently little is known about what gives rise to these difficulties. It has been argued that some of the so-called failures of ABC systems may not actually be failures, but merely reflections of a limited appreciation of the uses to which accounting and control systems are put in practice. However, as a number of ABC projects which truly fail, the study aims to increase the understanding resistance to ABC.
Although the factor studies have been used to address ABC success and/or failure by some previous research, this approach has a main problem that there is hardly any limit to the number of possible factors affecting the implementing outcome. Although it may be possible to establish the relative importance of various factors at various implementation phases, such factors models fail to address both the competing and complementing ways of obtaining information and controlling activities in organizations, and the existence of many stakeholders in the ABC implementation process. The case analysis conducted in this study aimed at explanation rather than exploration which attempts to explain the reasons for an observed 'ABC failure' in its specific case setting. It is hoped that the explanations generated from this and other case studies will help ABC failure as a phenomenon to become understandable.
The paper focuses on two short and simplified case studies: one is an ABC success story although not a usual one and the other is a story of ABC failure. In the first case, the group management found the ABC data useful, not because of any decision-making capability it delivered, but because it confirmed their understanding of appropriate strategic direction to cope with the inherent uncertainty of the informal cost estimates in formulating new business strategy for the sub-unit. While in the second case, the factory management initiated a production control system to be built together with a centrally initiated ABC system. However, the production control part of the project was abandoned due to lack of project personnel time for two parallel projects and the diminished need for a production control system in a situation of excess capacity. Tracing to it source, due to resistance to a new cost accounting system. As the expected benefits of the project to the factory management were related to production control, the new ABC system did not meet their needs and expectations so that the unit management did not use the system. Therefore, the case appears a failure.
It has been argued that according to the traditional idea of informational system failure which is no actions and no maintenance, the case appears an example of ABC failure. However, this is opposite to the group management conception described in the first case. Therefore the authors thought there was a need to discuss traditional conceptions of system success and failure in depth.
The data of this research was collected through few informal interviews, both at the group and local level, direct observations which continued with follow-up visits, memos, reports and company history (Nygren, 1981) to assure the validity of the study.
This case study suggests two ways of explaining why many ABC projects seem to fail. First, based on Simons' (1990) concept of interactive management controls, this study showed how senior management at Sisu used ABC to direct the organization's attention to strategic uncertainties. As no surprises emerged, no actions were required. It is proposed that even without actions and decisions, ABC information can be conceived as valuable, not because of any decision-making capability it delivered, but because it confirmed their understanding of appropriate strategic direction. This leads us to suggest that some ‘ABC failures’ may not have been failures at all. Instead, these supposed failures may result from the limited decision-making perspective adopted to assess ABC projects in firms. Consequently, discussion on ABC success and failure should acknowledge uses of accounting other than the currently dominant decision-making perspective. Second, this study focused on resistance to a new cost accounting system as a source of ABC failure. The authors focused on contextual issues behind the resistance as it seems that the explanation for the non-use and abandonment of ABC in this case was to be found neither in the content of the new system, nor in the process of implementation since they did not play a major role in explaining the ABC failure.
This case study also attempted to illustrate the diverse origins of resistance. The axle factory management had economic reasons to resist the new system because it did not help them to run the day-to-day operations of the factory, and they were able to derive basically the same information from other sources. Furthermore, the diagnostic control system already in use provided incentives that ABC systems should be abandoned. The axle factory management also seemed to have political concerns. The new system might have changed the way transfer pricing was conducted in the company, possibly leading to a shift of power from the axle factory to the buying sub-units. Consequently, the ABC system would also cause possible loss of autonomy to an accounting initiative. Finally, the dominant culture at the axle factory was argued to be that of the engineers, with accounting playing only a minor role in the unit management. Therefore, the new ABC system was not in consonance with the local culture. Routines and firm-level institutions, and organization culture, were suggested to be worthy of consideration in explaining resistance to ABC, and ABC failure.
The authors recognize that they cannot provide an exhaustive explanation for ABC failure, or resistance to ABC by the theories and frameworks they used which, although of great assistance, also restricted their ability to interpret what they observe. Therefore, in order to reduce this problem by not focusing on a single frame of reference, but instead relying on multiple frames discussed earlier in the accounting literature.
Personally I think this research paper is extremely useful and interesting in giving an insight into the possible reasons why some firms with ABC systems seem to fail and the origins of resistance to ABC since few studies have focused on these problems. The discussion of the results of their studies in the research sites with regard to three sources of resistance which is economic rationale, political motives as well as organizational culture ensures that this research paper is more credible and comprehensive to make readers understand easily.
A negative point of their case study which the authors acknowledge is that when they considered the arguments of the reason for the resistant and abandonment of a new accounting system by Markus and Pfeffer (1983), they didn't think over a condition as a number of ABC projects have complemented existing systems rather than replaced them. Therefore, there is a need to pay particular attention to the consonance of the new costing system to the existing formal and informal accounting and control systems and a better understanding of resistance to ABC implementation.