The Association Between Activity-Based Costing and Manufacturing Performance

Journal of Accounting Research Vol. 40 No. 3 June 2002 Printed in U.S.A.

The Association Between Activity-Based Costing and Manufacturing Performance
C H R I S T O P H E R D . I T T N E R ,∗ W I L L I A M N . L A N E N ,† A N D D A V I D F . L A R C K E R∗ Received 20 May 1999; accepted 23 October 2001

ABSTRACT

This study examines the association between activity-based costing and manufacturing performance. Results using a cross-sectional sample of manufacturing plants indicates that extensive ABC use is associated with higher quality levels and greater improvements in cycle time and quality, and is indirectly associated with manufacturing cost reductions through quality and cycle time improvements. However, on average, extensive ABC use has no significant association with return on assets. Instead, we find weak evidence that the association between ABC and accounting profitability is contingent on the plant’s operational characteristics.

1. Introduction
This paper examines the association between extensive use of activitybased costing and plant-level operational and financial performance. For more than a decade, activity-based costing (hereafter ABC) has received
∗ The Wharton School, University of Pennsylvania; †University of Michigan Business School. We would like to thank PricewaterhouseCoopers LLP for providing access to the data used in this study, and Kristen Urban and Harold Kahn for their help with this research project. The comments of Abbie Smith and two anonymous reviewers are appreciated. The financial support of Ernst & Young LLP is also gratefully acknowledged.

711
Copyright
C

, University of Chicago on behalf of the Institute of Professional Accounting, 2002

712

C . D . ITTNER , W . N . LANEN , AND D . F . LARCKER

widespread attention in the management accounting literature. Advocates argue that ABC provides the sophisticated cost data needed to make appropriate product mix, pricing, process improvement, and other key

References: ANDERSON, S. W. “A Framework for Assessing Cost Management System Changes: The Case of Activity-Based Costing at General Motors, 1986–1993.” Journal of Management Accounting Research (Fall 1995): 1–51. ———, AND S. M. YOUNG. “The Impact of Contextual and Procedural Factors on the Evaluation of Activity Based Costing Systems.” Accounting, Organizations and Society (October 1999): 525–59. ARMITAGE, H., AND G. RUSSELL. “Activity-Based Management Information: TQM’s Missing Link.” Cost & Management (March 1993): 7–12. BANKER, R. D., AND G. POTTER. “Economic Implications of Single Cost Driver Systems.” Journal of Management Accounting Research (Fall 1993): 15–31. BJORNENAK, T. “Diffusion and Accounting: The Case of ABC in Norway.” Management Accounting Research (March 1997): 3–17. BORTHICK, A. F., AND H. P. ROTH. “Accounting for Time: Reengineering Business Processes to Improve Responsiveness.” In Readings in Management Accounting, edited by S. M. Young. Englewood Cliffs, NJ: Prentice Hall, 1995. BROMWICH, M., AND C. HONG. “Activity-Based Costing Systems and Incremental Costs.” Management Accounting Research (March 1999): 39–60. CAROLFI, I. A. “ABM Can Improve Quality and Control Costs.” Cost & Management (May 1996): 12–16. CHENHALL, R. H., AND K. LANGFIELD-SMITH. “The Relationship Between Strategic Priorities, Management Techniques and Management Accounting: An Empirical Investigation Using a Systems Approach.” Accounting, Organizations and Society (April 1998): 243–64. CHRISTENSEN, J., AND J. S. DEMSKI. “Product Costing in the Presence of Endogenous Subcost Functions.” Review of Accounting Studies (1997): 65–87. 726 C . D . ITTNER , W . N . LANEN , AND D . F . LARCKER COOPER, R. “The Rise of Activity-Based Costing—Part One: What is an Activity-Based Cost System?” Journal of Cost Management (Summer 1988): 45–53. ———-. “The Rise of Activity-Based Costing—Part Three: How Many Cost Drivers Do You Need and How Do You Select Them?” Journal of Cost Management (Winter 1989a): 34–46. ———-. “The Rise of Activity-Based Costing—Part Four: What Do Activity-Based Cost Systems Look Like?” Journal of Cost Management (Spring 1989b): 38–49. ———-. “The Role of Activity-Based Systems in Supporting the Transition to the Lean Enterprise.” Advances in Management Accounting (1994): 1–23. ———, AND R. S. KAPLAN. The Design of Cost Management Systems. Englewood Cliffs, NJ: Prentice Hall, 1991. ———; R. S. KAPLAN; L. MAISEL; E. MORRISSEY; AND R. OEHM. Moving From Analysis to Action: Implementing Activity-Based Management. Montvale, NJ: Institute of Management Accountants, 1992. DATAR , S. M., AND M. GUPTA. “Aggregation, Specification and Measurement Errors in Product Costing.” The Accounting Review (October 1994): 567–91. DUNK , A. S. “Management Accounting Lag.” Abacus (September 1989): 149–55. FOSTER , B., AND T. WARD. “Theory of Perpetual Management Accounting Innovation Lag in Hierarchical Organizations.” Accounting, Organizations and Society (May–July 1994): 401–11. FOSTER , G., AND D. W. SWENSON. “Measuring the Success of Activity-Based Cost Management and Its Determinants.” Journal of Management Accounting Research (Fall 1997): 109–41. GOSSELIN, M. “The Effect of Strategy and Organizational Structure on the Adoption and Implementation of Activity-Based Costing.” Accounting, Organizations and Society (February 1997): 105–22. ITTNER, C. D. “An Examination of the Indirect Productivity Gains From Quality Improvement.” Production and Operations Management (Summer 1994): 149–70. ———. “Activity-Based Costing Concepts for Quality Improvement.” European Management Journal (October 1999): 492–500. ———, AND D. F. LARCKER. “Assessing Empirical Research in Managerial Accounting: A ValueBased Management Perspective.” Journal of Accounting and Economics (December 2001): 349– 410. KAPLAN, R. S. “In Defense of Activity-Based Cost Management.” Management Accounting (November 1992): 58–63. KRUMWIEDE, K. R. “The Implementation Stages of Activity-Based Costing and the Impact of Contextual and Organizational Factors.” Journal of Management Accounting Research (Fall 1998): 239–77. MACDUFFIE, J. P. “Human Resource Bundles and Manufacturing Performance: Organizational Logic and Flexible Production Systems in the World Auto Industry.” Industrial & Labor Relations Review ( January 1995): 197–221. MILGROM, P., AND J. ROBERTS. Economics. Organization & Management, Englewood Cliffs, NJ: Prentice Hall, 1992. ———, AND ———. “Complementarities and Fit: Strategy, Structure, and Organizational Change in Manufacturing.” Journal of Accounting and Economics (March–May 1995): 179–208. NELSON, R. R., AND S. G. WINTER. An Evolutionary Theory of Economic Change. Cambridge, MA: Belknap Press of Harvard University Press, 1982. NOREEN, E. “Conditions Under Which Activity-Based Cost Systems Provide Relevant Costs.” Journal of Management Accounting Research (Fall 1991): 159–68. OSTRENGA, M. R.; T. R. OZAN; R. D. MCILHATTAN; AND M. D. HARWOOD. The Ernst & Young Guide to Total Cost Management. New York, NY: John Wiley & Sons, 1992. REEVE, J. R. “Cost Management in Continuous Process Environments.” In Handbook of Cost Management, edited by Barry J. Brinker. Boston, MA: Warren, Gorham & Lamont, 1995. SHIELDS, M. D., AND S. M. YOUNG. “A Behavioral Model for Implementing Cost Management Systems.” Journal of Cost Management (Winter 1989): 17–27. U.S. Department of Commerce. 1997 Statistical Abstract of the United States, 117th edition, Washington, D.C.: U.S. Department of Commerce, 1997.