Activity-Based Costing: Helping Small and Medium-Sized Firms Achieve a Competitive Edge in the Global Marketplace

Abstract

Since the 1970s, activity-based costing (ABC) has enabled companies to identify the true costs of processes and products and to make sound decisions related to the profitability and expense of the products they produce, as well as the effectiveness of their manufacturing and business processes. This paper explores the advantages of activity-based costing vs. traditional costing systems and presents arguments for the potential benefits to the world's millions of small to medium business (SMEs) from implementing ABC. Issues related to the implementation of ABC are discussed. A framework for ABC implementations in SMEs is presented that shows the variables (characteristics of SME and implementation challenges) that can impact the ABC implementation process, and/or ultimately, implementation outcomes.

Factors Influencing the Implementation of Activity-Based Costing: A Study on Malaysian SMEs

“…ABC as such has been evolving drastically over more than two decades; starting from an early experiment in costing, ABC eventually appeared as a tool for profit improvement (Hooper, Tsamenyi, Udin, & Wickramasinghe, 2009). Some of the benefits of the ABC system include better job allocation of overheard expenditure as it does not group costs that are spread out across many different activities, ABC also does a better job of separating the cost of idle capacity from the true cost of producing a product and finally, ABC provides management with a way to have continuous improvement, help to identify cost and profit enhancement opportunities subsequently, leading to better company profitability (Kocakulah, Foroughi, Stott, & Manyoky, 2017).…”

“…In most countries including Malaysia, SMEs make up the majority of the business population, hence they play an important role in generating economic growth (Ahmad, 2012;Ahmad, 2014;Nair & Yee, 2017). SMEs make up 95 percent of enterprises worldwide, accounting to 67% of employment in private sector and 52% private sector value added (Kocakulah et al, 2017). Ahmad et al (2015) stated that more than 90 % of the total manufacturing output (Gross Domestic Product and exports) in Malaysia was generated by SMEs.…”

“…In terms of ABC as a cost saving mechanisms, in India, SMEs that explored the usage of MAPs such as ABC found that the firms' cost reduction and quality improvement led to the success of ABC (Chand & Dahiya, 2010), Furthermore, the use of the ABC system has allowed SMEs to achieve cost saving and transparency in their operations especially when these companies strive to attain competitive advantage in the age of globalization (Kocakulah et al, 2017).Another important factor that may contribute to the implementation of ABC in SMEs is the user attitude. Many users have inconsistent opinions about the ABC system in SMEs, due to lack of education and awareness.…”

A Simplified Activity-Based Costing Approach for SMEs: The Case Study of an Italian Small Road Company

“…ABC was designed to facilitate accurate cost information regarding production, support activities, specific cost objects, with approaches adaptable to businesses (Kaplan and Cooper, 1992) driving operative improvements (Stevenson et al, 1996). The availability of analytical information can support SMEs in managing relationships between costs, customer value, revenues, profitability and their drivers, enhancing client satisfaction (Kocakulah, 2007). Understanding cost behaviour, SMEs managers can improve decision-making handling the complexities of a globalized context .…”

“…The Case Study of an Italian Small Road Company 202 "medium" (UE Recommendation, 361/2003), the low diffusion of advanced costing systems was explained by lower operative and structural complexity, financial and human capital constraints, scarce presence of accounting information which can result inaccurate, and by simple management control approaches (Hicks, 1999;Kocakulah et al, 2017). SMEs are based on governance systems where the owner tends to centralize power, with a lack of a clear definition of tasks and responsibilities among employees with a high degree of informality (Barretta, 1999;Sandelin, 2008).…”