Activity-Based Costing in the Food Industry

der Economische Wetenschappen en

Research Memoranda

An international comparison of American and Dutch

food producing companies

Tom L.C.M. Croot

Research Memorandum 1997-46

August

Universiteit

amsterdam

pg_0002

Costing in the Food Industry

An international comparison of American and Dutch

food producing companies

Tom L.C.M. Groot

August 15, 1997

Vrije Universiteit Amsterdam

Faculty of Economics and Econometrics

De Boelelaan 1105, room

108 1 HV Amsterdam

The Netherlands

Phone: + 3 1 20 4446040

Fax: 1 20 4446005

E-mail:

pg_0003

ABSTRACT

This study focuses on the experiences of ABC-users and non-ABC users within

the food and beverage industry in the Netherlands and in the US. Unlike other

surveys we

to study a specific sector, expecting to find more similarities

between companies in terms of market and technological aspects. Both aspects give

reason to expect that product costing is increasingly important. The food and

beverage market is strongly competitive: large retail organizations stimulate price

competition and frequent on time delivery, while consumers demand a larger array

of differentiated products. Production technology provides food producers the

means to offer a wider array of products and packing alternatives. This in turn

leads to more complex production and distribution systems. Complexity of

production and logistic systems, combined with a large number of differentiated

products are considered suitable situations for the application of Activity-Based

Costing.

A US survey of 96 food producing companies and a Dutch survey of 117 food

producing companies provide information on the use of ABC in the food sector,

on the organizational and production related characteristics of ABC using food

companies and on experiences with designing and implementing ABC systems.

Given the specifics of the food sector, we try to draw some conclusions on the

reasons behind successful or unsuccessful adoption of ABC. The availability of

similar statistics from US and Dutch food companies also provides the opportunity

to see if national circumstances have their influence on the acceptance of ABC,

the process of ABC implementation and the use of ABC information.

pg_0004

INTRODUCTION

Despite widespread interest in ABC, it has become evident that its adoption has

proceeded at a fairly slow rate in the US, Australia as well as in European

countries. A brief overview of recent surveys into the use of ABC shows adoption

rates of between 0 and 20 % (see table while the more recent

present

slightly higher adoption rates. All surveys cited include a broad range of different

company sectors, making it sometimes difficult to interpret the findings. For

instance, information concerning the relationship between firm characteristics and

ABC adoption may be obfuscated by sector related market and technological

circumstances. Furthermore, these sector specific factors make it difficult to

interpret correctly detailed information about the purposes for which ABC is being

used, the benefits derived from using activity-based cost information, and experi-

ences with designing and using ABC systems. Most of this information should be

interpreted while taking specific circumstances in different sectors into account.

As has been shown by Clarke and Mia

adoption rates as well as reasons

for adoption or rejection of ABC may differ significantly between industry groups.

This leads to the impression that providing survey information across industry

groups may hamper a full understanding of the experiences companies undergo

while considering, implementing and using ABC systems.

** Insert Table 1 about here **

An alternative approach to study the adoption of Activity-Based Costing is by

comparing case studies of successful and unsuccessful ABC implementations. Most

of these studies lead to a more in-depth understanding of the ‘factors leading to

successful use of ABC in specific circumstances, but they do not permit to draw

more generalizable conclusions. Nevertheless, recent publications on ABC case

pg_0005

studies lead to the general idea that successful implementation and use of ABC is

influenced by multiple factors. These can be summarized in four basic conditions

which to be simultaneously met to a satisfactory degree. Any newly

implemented ABC system should be

technically sound, managerially useful,

behaviorally acceptable

and

economically feasible.

Technical soundness relates to

the reliability of ABC-data, resulting from adequate definition of cost drivers, cost

pools and activities, as well as from measurement of these items (Player Keys,

1995b). Cobb, Innes and Mitchell (1993) reported that many organizations had

trouble designing adequate ABC-systems as well as getting reliable data since most

overhead activities crossed departmental boundaries and individual areas of

responsibilities. Managerial usefulness means the degree in which

information is helpful in designing and executing the organization’s strategy.

Although ABC initially has been introduced as a system for reconsidering selling

prices and product assortment (Cooper, 1988; Cooper Kaplan, in most

cases ABC is primarily used for managing overhead costs (Cobb, Innes

Mitchell, 1993; Groot, 1993; Innes Mitchell, 1995; Selto, 1995). At this stage,

ABC information does not only seem helpful in controlling overhead activities and

related costs, but also in redesigning business processes (Harr, 1990;

in reconsidering value and non-value adding activities (Selto, 1995) and

in reevaluating the value chain (Mecimore Bell, 1995). Clearness about these

objectives before ABC implementation is started seems to be a key success factor

(Thome Gurd, 1995). Managerial usefulness of ABC-information is also

influenced by the organizational arrangements in which ABC-information have to

be used. Waeytens and Bruggeman (1994) found a case of unsuccessful

implementation in which the organization structure consisted of cost centres

denying the heads of departments the necessary means for controlling their

overhead costs. ABC-introduction should be behaviorally acceptable, meaning that

its introduction should not lead to dysfunctional behavior of participants (Henning

Lindahl, 1995). If the ABC-system is used for the reduction of non-value adding

activities, some studies show that people are not willing to participate (Shanahan,

1995) or are inclined to report more activities as value adding or to downplay the

pg_0006

time devoted to non-value adding activities (Robinson, 1989; Player Keys,

Selto, 1995). On the other hand, ABC-implementation opens the possibility

for accountants to have more intensive interactions with colleagues from other

areas, like manufacturing, product design and marketing (Sweeting Davies,

1995; Player Keys, 1995b). In cases of successful implementation, ABC-systems

provide cost information in a format more relevant for decision makers, enhancing

communication between accountants and non-accountants which eventually may

lead to a positive attitude by decision makers towards ABC (Norris, 1994). The

final litmus test of the acceptability of ABC is its economic feasibility. Many

studies show that developing and implementing ABC systems is an expensive

undertaking. The benefits of improved decision making using ABC-information

should therefore at least offset the costs of development, implementation and

operation of the ABC system (Staubus, 1990; Horngren, 1989).

Both the survey and the case study approach have their strengths and weaknesses

in studying ABC implementation. Survey results are more generalizable but are

difficult to interpret at some points. Case studies give more detailed information,

leading to a better in-depth understanding of the reasons for failure or success of

ABC implementation, but the results are less generalizable. In this study we

followed a research strategy, trying to combine the strengths of each of the

research approaches by studying only one economic sector. It is expected that

technological and market circumstances are more comparable among companies

included in our study, making comparisons in the adoption of ABC and in

experiences with the use of ABC between firms more meaningful. The survey we

used has been complemented with case material and interviews with respondents

in order to improve our understanding of the survey results.

THE FOOD AND BEVERAGE INDUSTRY

It was decided to study the Food and Beverage Industry because of two different

pg_0007

reasons. First, we hypothesised that the need for ABC information would be high

in food and beverage companies. Clarke and Mia (1993) found that the ABC

adoption rate in the Australian food industry (which was 33 was the highest

of all industry groups studied. Sector specific information (Ernst Young, 1995a

and 1995b) support this impression in three ways: market circumstances,

characteristics of food companies and properties of production systems indicate

a high need for ABC information and ample possibilities to provide it. We will

discuss each of these circumstances briefly.

In Europe, the food industry is the second largest sector with sales amounting to

101,412 million ECU (Eurostat, 1995). The biggest EC industrial sector is

transportation, although is generally believed that the food market will be the

biggest EC industry in a few years from now (De Vries Mulder, 1995). The

EC food market, because of EC trade liberalisation measures, becomes more and

more internationalized, leading to increased competition among food producers.

During the last years, most investments by food companies were aimed at enhanc-

ing production efficiency, increasing product quality, introducing new products

and entering new markets (De Vries Mulder, 1995).

In The Netherlands the most dominant strategies in the food sector are focused

on product differentiation, flexibilisation in delivery and low cost production

(Spronk Van Wulfen, 1995). These strategies presumably increase the need to

calculate ‘accurate’ product costs and selling prices. Notable is for instance the

fierce (price) competition between brand names and private labels. The penalties

for applying too high or too low product prices based on inaccurate product cost

information can be severe in a highly competitive environment (Cooper, 1988).

The intense competition has also changed some

food companies. A process of concentration of food producers is leading to the

emergence of large food processing, transporting and vending companies (De Vries

Mulder, 1995). It is expected that large companies have more funds available

pg_0008

to invest in improving cost accounting systems than smaller companies. Some

studies of ABC application suggest that the size of overhead costs is primarily

related to production volumes (Foster Gupta, giving reason to expect

large companies to have more overhead costs than smaller companies.

The common competitive strategy adopted by most food companies has influenced

production characteristics as well. Most food producers decided to provide a large

array of differentiated products to their customers. It is expected that a high

diversity of products leads to a high portion of non-volume related overhead costs

(Cooper Kaplan, 1988; Banker Johnston, 1991). New developments, such

as Efficient Consumer Response (ECR), seek to improve on-time and frequent

delivery of exact quantities of high-quality products (Ernst Young,

Van

Wulfen, 1996). These improvements can be attained by intensive coordination

between food producing, transporting and vending companies, for instance in

called Cross-docking systems (Kuipers, 1995). Enhanced coordination may

eventually lead to more vertical integration in the food supply chain (Jack

Haedicke, Vice President Kraft Foods, 1995). Coordinating activities of this kind

incur transactions related overhead costs which tend to be unrelated to quantities

produced (Miller Vollman, 1985; Hayes and Clark, 1985).

The second reason to study the food and beverage sector lies in the possibility to

compare our results of the Dutch food and beverage sector with results obtained

in a similar study of the US food and beverage industry. This would provide us

the opportunity to study two comparable sectors in different countries.

Comparisons between these two countries may shed some light on the presumed

differences in the appreciation of ABC. Some European writers do not appreciate

ABC as a cost accounting renovation, since most of the ABC logic has already

been proclaimed before, like by the German academic F. Schmidt (1930) and the

Dutch academics J.L. Meij (1960) and H.J. van der Schroeff (1974). The cost

accounting technique applied to capture volume-related as well as non-volume

related cost drivers in most Dutch companies is called the Cost Distribution Sheet

(the ‘kostenverdeelstuat’). Differences in adoption of ABC by US and by Dutch

pg_0009

food companies could indicate a difference in opinion about the added value of

ABC in comparison with the existing cost systems.

HYPOTHESES

This discussion leads to the following questions to be addressed by the present

study :

1. Given the alleged high portion of non-volume related overhead costs in food

companies and the need to provide reliable product costs, it is to be expected

that a large percentage of the firms in the food sector apply

Costing.

2. Considering the differences in appreciation of ABC as a

accounting, the acceptance rate in the Dutch food sector will

lower than in the US food industry.

Activity-Based

renewal of cost

be considerably

3. Food companies using ABC differ from food companies not using ABC in two

dimensions: in

organizational characteristics

and in

production related

characteristics.

The relevant organizational characteristics are the following:

a. ABC using companies are bigger than firms not using ABC, since they have

more resources available to invest in improvements of cost accounting

systems;

b. ABC using companies have significantly higher overhead costs (in absolute

as well as in relative terms) than firms not using ABC.

The relevant production related characteristics are:

c. ABC using companies produce a larger number of different products than

non ABC-using companies;

d. ABC using firms use for the manufacturing of their products more product

lines and packing lines than firms not using ABC.

4. Experiences with designing and implementing ABC systems in Dutch food

companies are similar to those in US food companies. If this can be confirmed,

than it is a further indication that ABC implementation has its common

pg_0010

problems and pitfalls, irrespective of the national circumstances in which ABC

system are implemented.

The remaining of this paper is structured as follows. In the next paragraph, the

two survey studies will be introduced and discussed briefly. The following

paragraph presents the results related to the first two hypothesis. Each paragraph

thereafter discusses the results of each of the remaining three hypotheses. The

concluding paragraph summarizes and discusses the main results of this study.

SURVEY STUDIES OF THE US AND THE DUTCH FOOD INDUSTRY

In October 1994 Ernst Young conducted a survey among 564 food

manufacturers, retailers, distributors and brokers in the US. In this survey, 96

usable responses (17 were obtained from companies generating average

revenues of three billion dollar and employing on average 9,179 workers (Ernst

Young, 1995).

In The Netherlands, a similar survey’ was administered among 480 Dutch food

manufacturers and retailers employing more than 30 workers. In this study 117

usable responses were obtained (24.4 %), including all food sectors in The

Netherlands. The Dutch food companies employed on average 520 workers, with

a minimum of 32 and a maximum of 20,878 employees. As can be appreciated,

the average size of the Dutch sample companies is much smaller than the average

size of the US sample companies. This difference may have an impact on the

survey results.

Additionally to the survey, the research team visited 13 companies to gain more

1: The Dutch survey is partly comparable with the US study. The main difference is that

the Dutch study contains more questions related to the characteristics of the food

companies and their production systems. Also more questions were included related

to experiences of the food companies with implementing and operating ABC systems.

pg_0011

in-depth understanding of ABC in food companies. During each visit an interview

was conducted with the controller and with employees directly related to the

design, implementation and operation of ABC systems. At the time the survey

results became available, a meeting was held during which the results have been

discussed with over one hundred managers of Dutch food producing companies.

We will now turn to each of the research questions and present the corresponding

data.

USE OF ACTIVITY-BASED COSTING

As can be appreciated from tables 1 and 2, the percentage ABC users in the Dutch

and in the US sample is not significantly higher than the industry averages found

in other studies. US and Dutch Food producers do not seem to face very different

circumstances compared to other sectors, or they do not feel extra need to invest

in ABC systems to improve profitability.

No significant difference could be found between the percentage Dutch ABC-users

and the percentage US ABC-users in the food industry.

** Insert Table 2 about here **

However, significant differences exist in the category food companies which decided

not

to use ABC. Among the Dutch food companies, 63 % reported not to use ABC in the

future, while this percentage is only 24 % in the US sample. Some companies interviewed

responded as follows:

. . The cost allocation system we currently use is based on the Cost Distribution Sheet

and follows the guidelines

the Cost Center Method. We think it is generally the same

Costing, although we use a different name

for

it. It is therefore not

necessary to implement ABC, although we

feel

that we should constantly reevaluate the

pg_0012

usefulness and accuracy of our existing cost allocation system.

(Controller of a large milk

producing company)

These results support the impression that ABC is perceived differently by Dutch food

producers in comparison with their US colleagues. A possible explanation for this

difference may be found in the alternative cost allocation methods already in use in Dutch

food companies.

Table 3 gives an overview from the use of ABC in the different sectors of the Dutch food

industry. No statistically significant differences between sectors could be found. Marked

differences exist in three sectors. The bread and biscuits sector demonstrates a very high

percentage of firms decided not to apply ABC, while in the drinks and tobacco sectors

a strikingly high percentage of firms decided to use ABC or to plan an ABC pilot. Given

the low numbers of firms it seems hazardous to give too much meaning to these results.

** Insert Table 3 about here **

CHARACTERISTICS OF USERS AND NON-USERS OF ABC

It was hypothesized that differences in acceptance of ABC may be attributed to two

organizational characteristics and two product related characteristics. The organizational

characteristics relate to the size of the company and the share of overhead costs.

Organizational characteristics

It was hypothesized that the bigger the company, the more resources will be available to

develop, implement and operate ABC systems. Table 4 lists the sample companies

according to size in terms of full-time employed workers. The differences between the

categories ‘ABC-users’ and ‘Non-ABC users’ are significant (Chi-square, p 0.05): more

than half of the non-ABC users are small companies of between 50 and 100 employees,

while half of the ABC using companies employ more than 250 workers. These results

pg_0013

confirm the hypothesis that on average more larger companies apply ABC than smaller

companies do, if size is expressed in full-time workers employed.

** Insert Table 4 about here **

If size is expressed in net income, the differences between ABC-using and non-ABC-using

companies are not significant any more (see table 5). A possible explanation is that the

factor ‘number of employees’ combines two dimensions which seem to work in the same

direction. This factor gives an indication of size and at the same time of labor intensity

of the production. the food industry, highly automated production systems are mostly

used, causing the force to take up more indirect tasks. If, in spite of the high

degree of automatization. food producers still employ high numbers of workers, a

relatively large percentage of these employees will be dedicated to overhead activities.

This makes it more necessary for the company to establish ‘accurate’ product costs.

** Insert Table 5 about here **

As can also be appreciated from table 5, overhead costs expressed in absolute as well as

relative terms, do not seem to make much difference between ABC-users and non-ABC-

users. It looks as if only the combination of size and overhead costs, expressed by number

employed, give sufficient explanatory power to the difference between firms

using and firms rejecting Activity-Based Costing.

Production related characteristics

It is generally believed that more product differentiation leads to higher indirect costs,

which in turn makes it more worthwhile to apply ABC. The results of our survey do not

support this hypothesis: the differences between ABC-users and non-ABC users are not

significant when the number of different products is taken into consideration (see table

pg_0014

Perhaps the number of different products is a too crude approximation of the demand for

overhead activities and should we take a closer look at in which way food products are

produced. It is conceivable that a highly automated production line is capable of producing

a large number of different products without incurring much overhead. In this situation,

overhead activities are then more confined to maintenance of the production line, than to

the number of different products. More overhead costs would then not be related to the

number of products but to the number of product lines and packing lines operated,

** Insert Table 6 about here **

Table 7 shows the differences in number of production lines and packing lines between

ABC-using food companies and non-ABC-using companies. The difference in number of

production lines is as expected and statistically significant: ABC-using firms operate on

average more production lines than firms not using ABC. This does however not count

for the number of packing lines, presumably because there are not as much overhead

activities related to packing as to producing food products.

** insert Table 7 about here **

REASONS FOR USING ABC

In their early writings, Cooper and Kaplan suggested that ABC-information would enable

companies to make better selling price, product mix and client mix decisions. The present

results show that companies value these properties, but other benefits from ABC informa-

tion are valued higher, like reduction of overhead costs, planning and budgeting of

departments and improvement of production processes. It seems as if ABC is higher

valued as a tool for improving management control of production units and departments

pg_0015

then as an aid to strategic decision making.

The US survey generated similar results. Among the highest ranking uses of

information we find ‘profitability review’, ‘process improvement’, ‘performance measure-

ment’ and ‘planning and budgeting’. Only 24 % reports the use of ABC information for

‘reevaluation of product mix in order to increase profitability’.

** Insert Table 8 about here **

REASONS FOR NOT USING ABC

The food companies not applying ABC systems give different reasons for their decision.

The reasons Dutch food producers give are summarized in table 9. Unfamiliarity with

ABC is the reason most mentioned, followed by two reasons suggesting that improving

cost allocation practices is not a priority issue at this moment. These three reasons are

not included in the US survey. On the remaining reasons, US firms, appear to have a

different opinion: they seem to value the costs of collecting the appropriate data more

important for not accepting ABC as a useful method than that they doubt the value of the

ABC information. Dutch food producers seem to value these arguments reversely: they

cast more doubt on the added value of ABC information than on the cost of collecting the

relevant information. This striking difference could be explained by the use of ABC-alike

cost information from the

Cost Distribution Sheet.

This sheet already uses similar data

as is required for ABC calculations and therefore the ‘cost of collection’ argument is not

perceived as important any more.

** Insert Table 9 about here **

pg_0016

EXPERIENCES WITH ABC

In the Dutch sample, 86 % of the ABC using companies reported that introducing ABC

has been a worthwhile experience. This experience was not without any difficulty.

however. Most problems were encountered in collecting information, assigning costs to

activities, and the identification of activities and cost drivers. The most difficult part of

the implementation of ABC was the problem to convert ABC-information into action. As

Cooper et.al.

already noted, no organization ever made more money merely

because it had a more accurate understanding of its economics. Only when understanding

is translated into action is the potential for profit improvement unleashed. The difficulty

of translating ABC-information into profit generating actions is reported to be the top

problematic area in the Dutch food industry.

The least problematic areas were those related to gaining support from top management,

business unit management and workers to cooperate in the implementation of an ABC

system. This seems obvious since only the responses of food companies who actually

implemented ABC are considered here.

** Insert Table 10 about here **

As table 11 demonstrates, ABC is mostly used to calculate product costs, followed at a

large distance by product categories, customers and distribution channels. Calculation of

product costs is mostly related to downstream activities and not as much with upstream

activities (like suppliers or supplier categories). There are no big differences between the

choice of cost objects made by US or by Dutch food companies. In both countries, ABC

planners seem to give a slightly higher priority to calculate customer costs.

In the Dutch sample, 86 % of the firms using ABC complement ABC information with

cost information from the existing allocation systems, like the cost center method.

The most important purpose for which ABC information is used‘ lies in improving

production efficiency and identifying cost reduction opportunities. Less important are

deciding upon selling price, product mix and client mix issues. This picture is the same

pg_0017

for US as well as for Dutch food companies. Most of the Dutch food companies report

that the use of ABC information has improved or greatly improved the results in the

decision areas mentioned.

** Insert Table 11 about here **

Some writers claim that the introduction of ABC is not an isolated activity, but that it

should work in conjunction with other organizational and administrative measures in order

to take appropriate effect (Turney, 1991). Cooper et.al. (1992) state that “Management

must institute a conscious process of organizational change and implementation if the

organization is to receive benefits from the improved insights resulting from an ABC

analysis.” They mention specific possibilities to manage activities and processes from a

cross-functional, integrated view of the firm. At the same time, given the

of the

ABC-approach in the companies studied, it was too early for Cooper et.al. to detect which

concrete organizational measures the companies would take in the course of ABC imple-

mentation.

In the Dutch food sector, most ABC-using companies took measures to change the

financial performance measures (mostly not affecting compensation schemes) and the

bookkeeping systems. Contrary to the expectations of Cooper only few companies

changed their organization structure (see table 12 for an overview).

** Insert Table 12 about here **

Almost all companies state that the ABC system provides more accurate information than

the ‘old (existing) cost system’. Mostly, the production of more accurate information

requires additional effort, increasing the possibility of delays in the provision of

information to decision makers. For only 58 % of the sample firms, ABC outperforms

existing cost systems in providing more timely cost information. More than half of the

pg_0018

companies update cost information only yearly, while almost 80 % updates the cost drivers

yearly (see table 13). It looks as if the complexity of ABC systems seems to hinder

frequent updating of ABC information. This may lead to an important disadvantage for

food companies, since they operate in dynamic competitive environments requiring

frequent updating of information in order to be able to react adequately to changing

circumstances.

** Insert Table 13 about here **

By 70 % of the Dutch food companies using ABC information, this information has also

been used to value inventories for financial reporting purposes.

SUMMARY AND CONCLUSIONS

At the start of this project, it was expected that the use of ABC would be more widespread

within the US and Dutch food sectors than the industry-wide averages reported in other

ABC survey studies. This proved not to be the case: the adoption percentages of 18

(US) and 12 % (Netherlands) are within the range reported by other studies. Also the

difference between US and Dutch food companies is not significant. However, the

percentages of companies having decided not to use ABC are surprisingly different

between US and Dutch food producers. Where 24 % of US food firms decide not to

implement ABC, this percentage is 63 % among Dutch food companies. A first possible

explanation for this large difference could lie in the widespread use in The Netherlands

of the Cost Center Method, applying the Cost Distribution Sheet, which is able to provide

similar cost information as ABC systems do. This ad hoc explanation is supported by

another finding in this study. The Dutch food managers who decided not to use ABC

information report more frequently the expectation that ABC would not be able to provide

valuable information (in addition to the existing cost systems) than their US colleagues.

US food managers mostly reject ABC because of the expected difficulty in collecting the

information and of the predicted costs of designing and implementing systems. A

pg_0019

second possible explanation we found is the unfamiliarity with ABC among Dutch

ABC users.

The main differences between companies in the Dutch sample using ABC and not using

ABC can be attributed to two dimensions: one organizational characteristic and one

production related characteristic. The dominant organizational characteristic proves to be

the size of the company, expressed in terms of number of employees. Net income and

overhead costs (in absolute or relative terms) do not make a difference between ABC-users

and non-users. This could be explained by the nature of the factor ‘number of employees’,

which seems to combine two dimensions working in the same direction. A large number

of employees characterizes large companies which also employs labour-intensive produc-

tion systems. Since most of the production technology in the food sector is highly mechan-

ized and automated, a large part of the employed is supposed to carry out overhead

activities.

The US and Dutch samples show that the main reason for applying ABC is

not

based on

the need to decide more accurately in selling price, product mix or client mix issues. This

was originally stated as the decision areas where ABC could be most helpful (Cooper,

1988). In stead, ABC information is mostly used to make profit reviews, to improve

production processes and to measure performance. These areas are very much oriented

towards cost management issues than to more strategic issues.

Finally, the experiences of Dutch food producers are very similar to those obtained by

their US colleagues. Both encountered the same problems while implementing ABC

systems and both selected the same cost objects while applying the ABC methodology.

These results indicate that ABC design and implementation has its common problems and

pitfalls, irrespective of the national circumstances in which ABC systems are implemented.

Besides some clear answers to our hypothesis, the survey data also convey some results

which are difficult to interpret. We are not able to give a satisfactory explanation for the

finding that more Dutch food producing companies decided

not

to use ABC compared with

their American colleagues. Some more in-depth studies of ABC and non-ABC users are

needed to identify the exact reasons for non-adaption. Special attention should be given

pg_0020

to the role of the Dutch cost allocation methods in Dutch food producing companies which

decided not to implement ABC.

Another striking result which we could not explain satisfactorily is the finding that the

use of ABC is significantly related to the number of production lines and not to the

number of packing lines. We expect this to be a result of the way production processes

are structured. It still could also be the result of the type of decisions requiring

analysis; may be the costs differences of package alternatives are not material, or they

may already been included in the costs of production.

To conclude, Dutch ABC-users seem to perceive as the most problematic area the

conversion of ABC-information into action. We do not have much detailed knowledge

about this area, and yet it seems of great importance for the managers involved. Detailed

study into follow-up questions related to the managerial use of Activity-Based Costing

information is therefore urgently needed.

Our research strategy consisted of narrowly focusing on one specific economic sector,

using surveys, some case studies and a general meeting for discussing the survey results.

This strategy gave some interesting results. Nevertheless, we must also conclude that for

getting satisfactory answers on the three remaining issues the use of a series of case studies

may provide more appropriate answers.

pg_0021

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pg_0022

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pg_0024

Recent surveys concerning the use of

Costing

Country

Sweden

United Kingdom

Kingdom

Year usmg

ABC

1992 I 0.0

Currently

tmg ABC

6.0

22.5

9.0

18.0

or no

tion of ABC to

United Kingdom 1995 19.5

27.1

53.4

Innes Mitchell

I I

Ireland

1992 14.0

34.1

51.9

Clarke

Australia

1993 13.6 29.5

56.0

Clarke

pg_0025

Table 2: Use of Activity-Based Costing in the Dutch Food Industry in 1995 and the US

Food Industry in 1994 (sources: Ernst Young, 1995; Van 1995)

Currently using ABC

12.0

17.7

Conducting a pilot study

3.4

Planning a pilot study

21.4

43.8

Decided not to use ABC

63.2

23.9

Total

117

100.0

pg_0026

Table 3: Number and percentage of Dutch food

currently ABC, planning to implement an ABC system

(the ‘planning a study’ and ‘conducting a pilot study’ combined) and decided not to use ABC.

Sectors

ABC users

ABC

planners

Non-ABC

Total

meat products

bread

cacao. chocolate sweets

cattle-fodder

vegetables

far

drinks

tobacco

fish

snacks

goods

18.8%

31.3%

11.1%

27.8%

0.0%

4 22.2%

11.8%

4 23.5%

12.5%

0.0%

I 16.7%

0.0%

I 50.0%

22.2%

5 55.6%

66.7%

0 0.0%

50.0%

0 0.0%

0.0%

0 0.0%

20.0%

I 20.0%

0.0%

2 22.2%

50.0% . 16

61.1%

77.8%

64.7%

75.0%

83.3%

50.0%

22.2%

33.3%

50.0%

100.0%

77.8%

100.0%

Total

12.0%

29 24.8%

74 63.2%

pg_0027

Table 4: Dutch food companies using ABC, planning the implementation of ABC and not using ABC,

according to number of workers employed

ABC users

Workers

Employed

50-100 1 3.0%

3 20.0%

2 8.3%

250-500 5 20.0%

500 2 11.1%

ABC planners

Not using ABC

Total

2 6.1%

30 90.9%

4 26.7%

8 53.3%

15 100.0%

7 29.2%

62.5%

24 100.0%

12 48.0%

25 100.0%

8 44.4%

100.0%

Total

13 11.3%

29 25.2%

115

between

are

(Cht-square, p 0.05)

pg_0028

Table 5: Organizational Characteristics of ABC using Food Companies and non-ABC

using companies

Characteristics

-tailed

ABC-users Non-ABC users t-test

Net income in 1993 (after tax

interest) in millions of guilders

Net income in 1994 (after tax

interest) in millions of guilders

Overhead, in millions of guilders

Overhead, in of total costs

5.65

17.86

p =

5.88

23.01

p =

28.1

24.4

p =

24.5

27.4

D =

pg_0029

Table 6: Dutch food companies using ABC, planning the implementation of ABC and not using ABC.

according to number of different products produced

Number

of Pro-

ducts

ABC users

ABC planners

Not using ABC

Total

3 9.7%

24 77.4%

31 100.0%

SO-150

3 13.6%

22 100.0%

150-250

3 18.8%

10 62.5%

16 100.0%

250-500 3 14.3%

7 33.3%

11 52.4%

21 100.0%

500

2 7.7%

7 26.9%

17 65.4%

26 100.0%

Total

29 25.0%

73 62.9%

116

differences between categories are statistically not

(chi-square test, p = 0.40)

pg_0030

Table 7: Production Characteristics of ABC using Food Companies and non-ABC using

food companies in The Netherlands

Firm Characteristics

ABC-users Non-ABC users l-tailed

t-test

Number of Production Lines

9.1

5.8

p =

Number of Packing Lines

8.9

18.1

D =

pg_0031

Table 8: Number of Dutch food companies indicating the use they make of ABC informa-

tion

ABC

Planning and

Use of ABC information

users

conducting

Pilot study

Reduction of overhead costs

Calculation of product profit margin

Planning and Budgeting of departments

Improvement of production processes

Performance evaluation of production units

Calculation of selling prices products

Benchmarking product costs

Composition of product mix

Composition of client mix

Other

respondents had the opportunity to more than one answer

pg_0032

Rankorder of reasons given by Dutch and American food producers for

not

using ABC

Dutch producers US producers

Reason

Rankorder

Unfamiliarity with ABC

Other high priorities

Lack of time

ABC is not expected to provide valuable information

Costs of design and implementation of ABC systems

are prohibitively high

Required data not available or too costly to collect

Internal resistance to change

Lack of necessary computer facilities

pg_0033

Table 10: By Dutch food industry managers identified most and least problematic areas in the design,

and oneration of ABC svstems

Most

areas

I Least

areas

converting information into action

convincing top management

collecting information

lack of support from top management

assigning costs to activities

scarce computer resources

the large amount of work

convincing unit management

lack of sufficient staff support

lack of business unit management support

identification of activities

identification of cost drivers

convincing workers

pg_0034

Table 11: Selection of Cost Objects by Dutch and US food companies, currently using ABC or planning

and/or conducting a pilot to implement ABC, according to priority given (1 is highest), number of responses

between narentheses

Dutch Food companies I US Food companies II

Cost objects

ABC users I ABC planners I ABC users ABC planners II

Products

I 1 (11) I (24) I 1 (13) I 2 (33)

Product categories

2 (7)

3 (32)

Customers

2 (9)

3 (4)

Distribution channels

4 (3)

Customer Groups

4 (3)

3 (7)

4 (3)

4 (21)

Suppliers

3 (4)

4 (21)

Supplier groups

pg_0035

Table 12: Number of Dutch food companies which introduced additional administrative and organizational

changes, aimed at supporting ABC analysis

Yes I No I Total II

Organization structure

Financial performance measures

Compensation schemes

Bookkeeping system

Administrative procedures

pg_0036

Table 13: Frequency of updating ABC systems as reported by Dutch food companies

Frequency

Updating cost information

(in %)

Updating cost drivers (in

monthly

quarterly

biannually

yearly

less than