AMP or advanced manufacturing technology or world-class manufacturing has no consistent definition in the literature. Definitions point to a synthesis of management techniques in a contemporary manufacturing environment covering three broad areas: people, process and quality. AMP have become the sign of simplified manufacturing methods, high quality, low cost, on-time production and new organisational structures. ‘It is argued that world-class manufacturing is a set of fundamental managerial beliefs that transcend its constituent techniques’ (Jazayeri & Hopper 1999, p. 264). Lind (2001) describes world-class manufacturing as broad management philosophies that focus primarily on production. There are four specific attributes that accompany AMP implementation: a new approach to quality, JIT manufacturing techniques, changes in management of the work force and more flexible approaches to meeting customer needs (Maskell 1991).
The need for a better definition of AMP has influenced the empirical studies of ABC. Ittner, Lanen and Larcker (2002) found that extensive ABC use is associated with higher quality levels and greater improvement in cycle time and quality and is associated indirectly with manufacturing cost reduction through quality and cycle time improvements. However, authors found that extensive ABC use has not been significantly associated with return on assets. Further, there is weak evidence that the association between ABC and profitability is contingent on the plant operational characteristics such as manufacturing production methods, product mix and volume, new product introductions and AMP. The previous study considered these four variables as determinants of ABC adoption or success. AMP was measured broadly by including responses to human resource practices, customer and supplier initiatives, manufacturing practices such as JIT, TQM and cellular manufacturing and information technologies such as advanced MRP II and ERP.
Cagwin and Bouwman (2002) found a positive association between ABC and improvement in ROI when ABC is used concurrently with other strategic initiatives (for example, AMP), when implemented in complex and diverse firms, when used in environments where costs are relatively important, and when there are limited numbers of intra-company transactions. The study viewed AMP as an enabler that reacts positively with ABC.
Contrary to the previous studies, Banker, Bardhan and Chen (2008) found that ABC has no significant direct impact on plant performance. The study criticised the previous studies regarding the role of AMP. The authors found that world- class manufacturing practices (WCM) completely mediate the positive impact of ABC on plant performance (see Figure 2.11).
WCM was defined as ‘a broad range of manufacturing capabilities, which allow plant managers to adapt to the volatility and uncertainty associated with changes in customer demand and business cycles in agile manufacturing environments’ (Banker, Bardhan & Chen 2008, p. 4).These practices include JIT, continuous process improvement, TQM, competitive benchmarking and self-directed teams. However, the authors excluded customer and supplier relationships and information technology from the content of WCM.
Plant Performance
Plant-level Control Variables
Figure 2.11: The Model of Banker et al. (2008)
It is well established that higher levels of information technology facilitate the implementation of ABC. It provides ABC with cost driver information. Therefore, many companies have integrated ABC systems into other business initiatives. A survey by the Institute of Management Accountants (IMA) indicates that 43 per cent of ABC implementers had integrated their ABC projects into their existing TQM programs (Roberts & Silvester 1996).
ABC and AMP share the same objective of continuous process improvement. ABC systems support AMP by measuring and evaluating the performance (for
Activity-based Costing (ABC) World-class Manufacturing (WCM) Quality ∆ Time ∆ Cost ∆
Size Plant age Discrete
example, activity costs) and identifying opportunities for improvements (for example, alternative designs). In contrast, AMP includes techniques that are controlled by ABC such as process reengineering, quality improvement, automation and team-based work. ABC and AMP are not individual innovations; rather, they are complementary systems that work together to improve performance. Askarany, Smith and Yazdifar (2007b) found that technological changes in manufacturing practices lead to increased diffusion of ABC. Also, Waweru and Uliana (2008) found that change in management accounting systems is significantly associated with higher number of technological changes. One way to improve the link between ABC and business-unit performance is to consider information technology, among other factors, as a determinant of ABC use and to create a new factor, namely, ABC-based actions, that mediates the link between ABC use and business-unit performance. Accordingly, this study investigates whether ABC use leads to actions on the shop floor and, if so, whether these actions improve performance.
One important issue here is the integration of ABC with other information systems in the organisation. A parallel system has some advantages in the preliminary stages of the project. It helps managers to explore the results of the project quickly. It also avoids making major changes in the current system for considerations of cost, compatibility and internal control (Shields & McEwen 1996). However, a stand-alone system lacks credibility and confidence because it is not the official system that managers report with or measure against. It is used by limited users for limited applications. The majority of people are risk adverse and always prefer the least risky option, in this case, using the standard system. For these reasons, firms should invest in integrated ABC systems (O'Guin 1991).
An integrated ABC system has two dimensions: first, ABC sharing one database with other information systems in the organisation. Thus, ABC can easily derive data from different sources including human resources; inventory; financial accounting; production and sales. In addition, ABC can update the data in real time. This enhances the integrity of the data and eliminates errors or inconsistencies. Second, ABC systems should be accessible from any information system terminal in the organisation. This allows non-accounting managers to use
timely and relevant data in making the related decisions. To obtain the capability of integration, firms need to invest in ERP systems. ‘ERP systems integrate all the information systems of an organisation into one enterprise-wide system’ (Hansen , Mowen & Shank 2006, p. 26). ERP vendors (for example, SAP) have integrated ABC into their systems.
ABC-based actions are decision actions taken based on ABC information. Decision actions, for example, include change in processes, change in products/customers mix and change in the work structure. It is well established in the literature that ABC information would be beneficial if it were used in supporting managerial decisions. Continuing use of conventional systems in decision making renders ABC irrelevant and no change is expected in the organisation. Malmi (1997) argues that ABC implementation would be successful without subsequent actions. He claims that organisations may implement ABC as a control system. The real question is as follows: does this represent sufficient benefit to implement such a complex system? In fact, using ABC information in managerial decisions is assumed to some degree to lead to actions. For example, ABC information may lead to a decision of reducing the price for some products. Krumwiede (1998) found that decision usefulness of cost information is significantly associated with extensive use of ABC. Foster and Swenson (1997) have used decision actions taken with ABC among other ABC success measures to study the association between ABCM success determinants and this measure and they found decision actions are significantly correlated with ABCM information use. This study considers ABC-based actions as important in explaining improvement in organisational performance; it also considers that ABC-based actions are indicators of ABC success. Therefore, the next hypotheses to be tested are:
H3a: ABC-based actions are positively associated with the extent of ABC applications.
H3b: ABC-based actions are positively associated with the extent of ABC functions.