The Impact of Activity-Based Costing System Application on Enhancing Company’s Financial Performance

Abstract

This study examines the impact of application of activity based costing (ABC) on enhancing company financial performance in a sample of Sudanese manufacturing companies. The main problem of this study is “despite of the benefits of ABC system over traditional costing systems, a review of recent literature of activity (ABC) revealed that the practice of ABC system still was done in developed countries and very little has been made in developing countries, especially in Africa context. More specifically, in the Sudan, recent literature revealed that a majority of Sudanese manufacturing companies (SMCs) still using the same traditional costing systems which provide inaccurate product cost information; and ABC system is not being applied by many companies yet. This was one of the major obstacles preventing better business financial performance. So, SMCs in new competitive environment need to apply more sophisticated system such as ABC system to enhance the accuracy of cost information which provides significant opportunities for enhancing financial performance ”. Thus, the study aims to investigate the impact of applying ABC system on enhancing financial performance by examining some influential factors (cost structure, importance of cost information, product diversity, and competition) which influence the application of ABC system. In addition, the study looks to identify the difficulties and problems associated with application and non-application of ABC system. To achieve the study objectives the following hypotheses were developed: H1: SMCs do not apply ABC system. H2: There is a positive relationship between some influential factors ( cost structure, importance of cost information, product diversity and competition) and application of ABC system by SMCs H3: There is a positive relationship between application of ABC system and enhancement in financial performance H4: There are problems and difficulties associated with application and non-application of ABC system by SMCs. The study used a descriptive analytical method to analyzed Quantitative and Qualitative data. Quantitative data were collected from archive accounting data (cost sheets) for the year 2012. Quantitative data analyzed based on “Cooper’ model” to apply ABC system. Qualitative data were collected by using semi-structured interview for the study’s sample. The study revealed the following findings: (a) Activity based costing (ABC) is not being applied currently by SMCs; a majority of manufacturing companies in Sudan apply traditional cost and management accounting systems such as absorption costing, budget, and break even point analysis rather than modern systems such as Activity based costing; (b) the application of ABC system on SMCs determined product cost more accurately which enhanced financial performance through reduced cost and increased profit. In addition, ABC system identified details information about activities costs and cost drivers which provide significant opportunities for improving activities and processes; (c) the influential factors (cost structure, importance of cost information and competition) have positive impact on the adoption of ABC system among SMCs. whereas, product diversity has not a positive relationship with application of ABC system. (d) The main difficulties with ABC adoption among SMCs are: Lack of adequate resources (ABC skills & ABC knowledge); High costs (including cost of IT) of ABC implementation; Complexity nature of ABC adoption; insufficient support from top management; Increased workload of cost/ management accountants; Satisfaction with current systems; and Resistance to change by the management/ employees. The study reached to the following recommendations: (a) there is a great need for adopting and implementing ABC system to provide more accurate cost information by Sudanese manufacturing companies; (b) train employees with courses to enhance their skills and experience in dimensions of activity based costing to meet the work requirements in the new business environment; (c) and activate the role of the modern costing systems such as activity based costing more by universities and high educational institutes to raise the level of awareness.