Вы находитесь на странице: 1из 17


2.1 Activity Based Costing (ABC) Adoption 2
2.2 Factors Influencing ABC 3
2.3 Problems of ABC Implementation 4
2.4 Advantages of ABC 5
2.5 Limitations of ABC 6
2.6 Steps in Implementing ABC 7
3 Scenario: ABC Implementation in TM 8
3.1 Company Background 8
3.2 ABC Implementation in TM 9
3.3 Problems Faced During Implementation 11
3.4 Benefits Gained 12
4 Discussion and Conclusion 12
4.1 Understanding ABC 13
4.2 Advantages and Disadvantages of ABC 13
4.3 Conclusion 14

In the traditional accounting approach, everything from marketing expenses to utility
bills and without differentiating divisions according to the type of production is
considered as overhead in determining the cost. The longstanding issues is that
some activities represent more overheads than others. This is unacceptable because
two activities that absorb the same direct costs can use very different amounts of
overhead. A mass-produced car, for instance, can use the same amount of labour
and materials as a customised car. But the customised car uses far more of the
company engineers' time (an overhead) than does the mass-produced one. This
disparity would not be reflected in traditional costing systems. Thus a company that
makes more and more customised products (and bases pricing on traditional
costing) can soon find itself making large losses. As new technologies make it easier
for firms to customise products, the importance of allocating indirect costs accurately
Activity Based Costing (ABC) is an option to the traditional accounting in which a
business's overheads (indirect costs) are allocated in proportion to an activity's direct
costs. This accounting method identifies the activities that a company performs, and
then assigns indirect costs to products less arbitrarily than traditional methods.
Indirect costs, such as management and office staff salaries are sometimes difficult
to assign to a particular product produced. For this reason, ABC has found its niche
particularly in the manufacturing sector.
ABC became popular in the early 1980s largely because of growing dissatisfaction
with traditional ways of allocating costs. Robert Kaplan, a Harvard Business School
professor sometimes recognized with being its founding father of ABC accounting
method. Together with Robin Cooper, the duo described ABC as an approach to
solve the problems of traditional cost management systems. Activity-based costing
was first clearly defined in 1987 by Robert S. Kaplan and W. Bruns as a chapter in
their book Accounting and Management: A Field Study Perspective. Later in 1999
Peter F. Drucker explained in the book Management Challenges of the 21st Century
that traditional cost accounting focuses on what it costs to do something, for

example, to cut a screw thread whereas ABC as such but also records the cost of
not doing, such as the cost of waiting for a needed part. In short, ABC records the
costs that traditional cost accounting does not do.
The ABC implementation in Telekom Malaysia (TM) was initiated by the finance
division of the company in 1996. The key motive for the introduction of ABC was
because of price competition for their products. During that time, TM was losing its
market share. The only way to increase market share is to reduce the price of
services offered and by doing that, it required further cost reduction. For this reason
TM needs to identify different cost drivers so that it can identify which areas the
company can save cost compared to other telecommunication company. As the
traditional accounting system could not identify appropriate cost of each service, the
ABC accounting method have been used to tackle the problem.
2.1 Activity Based Costing (ABC) Adoption
Business is not as usual. Globalisation has changed the landscape of modern
business. The rapid development of technology offered a new and challenging
environment in doing business. Companies especially for those in the commercial
market need to constantly adopting the suitable approaches or methods in doing
business to keep them relevant and competitive thus ensuring their business is
everlasting. As commercial market aim for highest profitable return, the top
management must be willing to invest and adapt proven techniques and method that
can help in achieving their goals. One of these method is ABC (Kalicanin &
Knezevic, 2013).
ABC was introduced since 1980s and starting to gain its popularity in 1990s. It has
attracted a great attention from scholars and practitioners due to its given benefit.
ABS was claimed to help in process improvement as well as in decision making that
benefit them. It is also widely used in developed countries especially among
Westerners for many purposes, such as product-range decisions, customer

profitability analyses, cost reduction, cost modelling, budgeting inventory, valuation,
and performance measurement (Majid & Sulaiman, 2008).
For such given benefit, it is expected that these method will be widely adopt by most
firms and companies around the world. However, previous studies shown contradict
result. Surprisingly, the adoption rate is low for both in developed and developing
countries. Majid and Sulaiman (2008) quoted for example, in developed countries,
the ABC adoption rate in USA (healthcare industry) remain unchanged for 10 years;
16 percent in 1994 and 14 percent in 2004. This situation of low adoption rate
appears the same in Australia (manufacturing company) and Singapore. The same
trend can be seen in developing countries like Malaysia, China and India. There are
numerous reason given: lack of awareness, lack of expertise, lack of management
support, high cost of implementation and also no reason to change.
2.2 Factors Influencing ABC
There are various factors influencing the success of implementing ABC method in
the organization. Many researchers have found various factors from their research
that must be given attention by companies in order to ensure the success of
implementation. Many researchers agreed that top management support and
involvement together with adequate of resources are the main contributor to the
success factors. Liu and Pan (2007) classified all these success factors into four
categories: (1) technical factors involved with practical knowledge of applying the
conceptual design of an ABC system within an organisational context, selection of
activities that relates to products, linkage between ABC and organisational strategic
objectives, and an understanding of the capability of existing computer systems to
support ABC systems, (2) organisational factors such as top management support,
resource adequacy, implementation training, and structure of organisation and
culture, (3) behavioural factors such as participative manner in the process of
development and implementation of ABC systems and awareness of individual
users behaviour and (4) other contextual factors such as competition, task, quality
and relevance of cost information to managerial decisions, size of organisation,
compensation and reward, general need for change, and culture.

At the same time, the grounded theory by Abrahamson (1991) is used to categorise
the reasons of companies adopting and implementing ABC. The reasons can be
classified into three different perspectives: (1) the efficient-choice perspective; (2)
the forced selection perspective; and (3) the fad or fashion perspective.
The efficient choice of perspective is one of the main factors recognised as
contributor to the implementation of ABC mainly during the initial stage. Malmi (1999)
found that the efficient choice of perspective was the factor that influences ABC
implementation in 114 companies in Finland. Whereas, the fashion perspective
comes in later stage of implementing. While forced selection perspective appear in
the case of involvement and direction from top management. Companies and firms
will adopt ABC when they are forced by their top management. This situation happen
in CM, a subsidiary of an American company in Malaysia that have to apply ABC
techniques because of their parent company in USA used these method (Majid &
Sulaiman, 2008).
2.3 Problems of ABC Implementation
Introduction and implementation of a new method in an organization is not an easy
job. Commonly, people will react negatively to the changes even though the method
is proven for its benefit. Therefore, the process of implementing this new method (in
this case ABC method) could be a very challenging task. One of the major problem
recognised is related to the cost of implementing it especially during the initial phase.
At this point, the high set up cost will incurred. This cost will taking into account the
infrastructure provision, amount of time and energy spent by management in
identifying cost drivers and also numbers of additional accounting staff to run the
project. As a result, a lot of managers viewing the implementation of the ABC
method has taken their time that supposedly used to execute their official job (Majid
& Sulaiman, 2008).
Apart from the cost involved, companies or firm should study their employees
acceptance level. Employees acceptance is important as they are the engine to
ensure the success of the implementation. Previous study undertaken by Soin et al.

(2002) revealed those employees are afraid about the impact of ABC on their jobs.
They were suspicious of managements decision to implement ABC as they
misinterpret it as companies approach to downsize. Therefore, it makes the
management effort to gather information especially in identifying the cost drivers
become more complicated.
Other than that, software used to run the system can become another factor that
affect the success of ABC implementation. In the study by Liu and Pan (2007)
highlighted that the software problem encountered by users nearly foiled the
process. This is due to the failure by the programmer of software company to
understand the technical aspect of ABC. However, the problem was successfully
resolved with a good cooperation from user and programmer. They work closely
together where user tries to provide an understanding about the concept of ABC
model to the programmer. Once the programmer really understands the concept,
they managed to develop the ABC conceptual model into a computerised system.
2.4 Advantages of ABC
Activity based costing (ABC) has been identified as an alternative to overcome the
limitations of traditional costing systems. Previous studies have reported that ABC is
a costing method that can works as a strategic management tool to the organization
as it provides more useful appropriate decisions in the future (Griful, 2001; Malmi,
1997). Swenson (1995) points out that by allocate activity costs to products and
services by applying cost drivers, the analysis is expected to provide more accurate
costing information on costs and utilization of resources which can be used to make
sound planning, controlling and evaluation of business process.
ABC looked into the costs of complexity, variety and change related to the product or
service provided and to the customized customer requirements. ABC helps in
understanding true cost in providing specific service and performs detailed analysis
on product and customer profitability as well as identifies activities and processes
which needed improvements. It eventually help the organization recognizes the way
in which customers directly influenced the cost structure of the business.

Strategic ABC tools also focus on the value-added activities, which proper use of
these tools can help alter product demand and service and operation efficiency, by
eliminating non-value-added or low-value-added activities. Non value-added or low
value-added activities are those activities that bear no or little impact to customers in
their absence. Hence, understanding the expectation of targeted customers will
result more accurate product and service costing. Non-value-added and low-value-
added activities and costs are the cost behaviour that captured the interest of the
To the public sector, ABC is an option to improve the ineffectiveness of traditional
system and also to build up their accountability level as the generated information
can help the organization to explain, justify and take responsibility for every action
taken (Messner, 2009).
2.5 Limitations of ABC
Activity-based costing is a system to solve the limitation of traditional costing system
but did not represent to be the perfect one. Besides its advantages, lot of time, effort
and cost on collecting, checking and entered the data into the system are also
associated with Activity-Based Costing (Druker, 1999). Difficulty in collecting
accurate data due to cross department activities is among limitations in ABC and
since managers are familiar with traditional costing system before, the managers
face resistance in handling too many details that involved in ABC.
In practice, most managers insist on fully allocating all costs to products, customers
and other costing objects in ABC resulted to overstated costs and understated
margins together with mistakes in critical decision. Therefore, relevant ABC cost data
must be identified before being used in in making significant decision. On the other
hand, incomplete data will affect the analysis result and lead to bad and
unacceptable decision making.
Reports generated by ABC systems do not conform to generally accepted
accounting principles. Consequently, organizations that use ABC need to have two
costing systems for internal use and preparing external reports which incurred more

cost to the organization. It may also cause confusion on which system to be believed
and relied on. The technical complexity and higher cost in implementing and
maintaining ABC system could be some of the reason businesses had no intention of
adopting ABC in their organizations.
2.6 Steps in Implementing ABC
ABC was introduced when traditional costing systems were criticized for lack of
relevance, accuracy and timeliness. Under ABC, costs are no longer allocated by
functions instead costs are assigned to the products and services based on the
demand of product and services places on various activities. The ABC
implementation process is broke down into 5 steps involves:
(1) Identifying activities, activity cost pools and activity measures
First major step in implementing ABC system is to identify the activities that will form
the foundation for the system. A common procedure to this is by interviewing people
who work in overhead departments which results a long list of activities. This long list
of activities can be combined into a single activity based on similarity to avoid higher
cost in implementing ABC. Activities should be group together at the appropriate
level such as batch-level, product-level and unit-level. It is best to combine activities
that are highly correlated with each other within the level.
(2) Assigning overhead costs to activity cost pools
Overhead costs are assigned based on the results of a considerable care interviews
with employees who have first-hand knowledge of the activities. Besides that, the
departmental manager are typically interviewed in determining the distribution of
non-personnel cost across the activity cost pools.
(3) Calculate activity rates
Activity rates for cost pools are calculated to assign overhead costs to products and

(4) Assign overhead costs to cost objects
This step is also called secondstage allocation where activity rates are used to
apply overhead costs to products and customers.
(5) Prepare management reports
Most common management reports prepared with ABC data are product and
customer profitability reports. These reports help in channelling resources to most
profitable growth opportunities while highlighting products and customers that drain
profit. Product and customer margin is easily computed using ABC system.
Figure 1: Steps in Implementing ABC

3.1 Company Background
Telekom Malaysia (TM) is a leading company in telecommunication services in
Malaysia. It was formed in 1986 as a result of privatization efforts of the Malaysian
government. Until now, it has an authorised capital reaching nearly RM 3.6 billion
and issued and paid up capital reaching RM 2.5 billion. TM is a public listed
company, with more than 24,000 employees throughout Malaysia and has won many
awards at the national and international level. Below is the organization chart of TM:

TM is driven by stakeholder value creation in a highly competitive environment. It
focuses on delivering an enhanced customer experience via continuous customer
service quality improvements and innovations, whilst focusing on increased
operational efficiency and productivity.
3.2 ABC Implementation in TM
Activity Base Costing (ABC) in TM has started in 1996 and was introduced by the
nance division of TM to be implemented within the company. Although the ABC
system has been implemented since 1996, it has not been implemented 100% by
the company. ABC have been implemented in the company starting with the network
or engineering department, followed by the marketing department and eventually,
the support group department. Currently the ABC system is fully implemented in the
network division while ABC implementation is still in progress in the international
area of the same division. However the implementation of ABC in the human
resource department and marketing department are still in progress.
The main factor that encourages TM to implement ABC was competition. TM had to
lower their product cost to make sure they can compete with other innovative and
competitive product in the market. In addition, there was critical issue with the
overtime costs. The costs were high although they having workers that were under-
utilized. In order to understand this issue, TM needed to understand the work
activities/process of its workers. To understand and help them to identify which

activity can reduce the operational cost, the finance manager has decided to use in
1996. Besides this, the change in the business structure of TM had triggered the
management to adopt ABC. Before it was implemented, the management has
identified that the current costing system was not reliable and may not have been
appropriate for the new business structure. Lastly, the urge to try a new tool, that is
claimed to be more relevant to dynamic business environment, also motivated the
company to implement ABC.
At the first stage, the management has formed a committee which consist staff from
the costing department, personnel from the network or engineering departments and
other related personnel. The committee was chaired by an experienced manager
who specialized in strategic cost management. A steering committee which was
participated by the top-level management was also established. The responsibility of
the steering committee was to ensure that the working committee was on the right
track. At the same time, TM hired external consultants to give the necessary training
to the employees before implementing the ABC software that will be use by TM such
as Oros ABC and Net Prophet Expert.
As for the second stage, it involved identifying the relevant cost pools. For this, the
working committee has developed a web-based input via the intranet for TM workers
from all over the country to key in their activities. At first, there were 500 cost pools
identied. After further discussions with related personnel, the number was reduced
to 50. To make sure they receive the full commitment of employees to the system
developed, the working committee invited staff from related departments to work
closely with them. Those employees have to sit with the committee for at least two
days in a week to help identify the right activities and cost drivers. The steering
committee provided further support by introducing the concept of management buy-
in. This means, the staff will only involve to perform their normal tasks three days a
week while the remaining two days are spent with the working committee. Indirectly,
this procedure helps to reduce staff workload and at the same time avoiding
problems of workers resistance to the implementation of ABC.
In the implementation stage, after two months of training for the software that will be
used, TM managed the implementation on its own. The working committee then

improvised the system and created its own ABC schedule analysis to meet the daily
operating needs. Finally, TM used ABC for product pricing, product output decisions,
cost management and reduction, cost budgeting, new product design, customer
protability analysis, performance measurement, cost modelling and process
improvement. ABC is also used for product output decisions. Additionally, ABC is
used as a performance evaluation tool which they will identify the actual costs
derived from ABC and compared it with previous years gures, with competitors
costs (when available), and with the target costs set.
3.3 Problems Faced During Implementation
At the early stage, did not agree with the idea of implementing ABC within TM. They
assume that ABC is the same as other costing techniques that have been used in
TM. The main concern of the top management perhaps is they were afraid that ABC
would be just a corporate trend and would thus lose its popularity eventually. As a
result, they are reluctant to spend the companys resources on putting ABC into
practice. Additionally, management has an assumption that they had other more
critical problems to solve then introducing a new system. To convince them, the
nance division, headed by the costing manager, conducted a pilot test on one of its
networks. The success of that pilot test activated interest among top management.
The lower level employees were similarly sceptical of the new system, primarily
because they did not know what ABC was all about. However, when the benets
from ABC implementation started to be fruitful, the system was fully accepted by the
Another problem encountered in adopting ABC, particularly in the
telecommunications industry, is the rapid change in technology. By the time the
working committee nished studying and understanding the process ow and
activities of existing products, there were new products or services being introduced
by TM. As a result, new process ows especially for the new product would then be
irrelevant. This problem is being addressed by the use of appropriate software.
Further, given the experience of identifying the process ows of past products, the
time taken to chart the process ows of new products may be reduced.

3.4 Benefits Gained
The benets derived from ABC implementation were not immediate. It takes four (4)
years for TM to identify the actual benefits that gain by implementing ABC. ABC has
enabled the company to identify non-value added activities and tasks that were done
inefciently. This helps managers to make more precise decision to solve any
issues. Additionally, the company was able to reduce wastage and rework time.
Another pertinent issue was the high overtime costs paid by TM. With the
implementation of ABC, an activity map or process ow was developed. This
facilitated managers in identifying the high costs for particular activities.
Through the ABC activity map, managers identify that high overtime costs were due
to workers starting work only after 4.00 pm which then helps reduce in product cost.
The marketing division was also able to identify protable customers from
unprotable ones. For example, after the ABC analysis, TM discovered that it was
much more efcient and cheaper to provide services to customers living in
apartments as compared to customers living on landed properties. The
implementation of ABC at TM provided benets for both engineers and the
accountants. The engineers were able to appreciate the costs of the services
rendered while the accountants now understood the network and engineering
process activities of the company.
Costing systems helps companies determine the cost of a product related to the
revenue it generates. Two common costing systems used in business are traditional
costing and ABC. Traditional costing assigns manufacturing overhead based on the
volume of a cost driver, such as the amount of direct labor hours needed to produce
an item. A cost driver is a factor that causes cost to incur, such as machine hours,
direct labor hours and direct material hours. ABC allocates the costs of
manufacturing a product according to the activities needed to produce the item.
Managers should understand the advantages and disadvantages of both systems to
meet the needs of their business.

4.1 Understanding ABC
Activity-based costing provides a more accurate view of product cost, but companies
typically use it as a supplemental costing system. The allocation bases used in ABC
differ from those used in traditional costing. Activity-based costing determines every
activity associated with producing an item and allocates a cost to the activity. The
cost assigned to the activity is then assigned to products that require the activity for
production. It can become quite a hassle to identify the actual activity costing since it
is far more complex and makes it more accurate than the traditional costing.

4.2 Advantages and Disadvantages of ABC

Greater costing accuracy is the primary benefit of activity-based costing. Companies
assign cost only to the products that require the activity for production. This method
eliminates allocating irrelevant costs to a product. Other advantages of activity-based
costing include an easy interpretation of cost for internal management, the ability to
enable benchmarking and a greater understanding of overhead costs. Implementing
an activity-based costing system within a company requires substantial resources.
This can prove a disadvantage for companies with limited funds. Another
disadvantage of using activity-based costing is that it is easily misinterpreted by
some users.

ABC provides a way to allocate costs more accurately when overhead costs are not
incurred at the same rate as direct labour dollars. The more activities identified the
more complex the costing system becomes. Computer systems are needed for
complex ABC systems. Some companies limit the number of activities used in the
costing system to keep the system manageable. While this approach may result in
some allocations being arbitrary, using ABC does provide a more accurate estimate
of costs for use in making management decisions.

4.3 Conclusion
Whilst ABC is not a perfect science it does offer a sense of financial pragmatism to
the wider management process. The initial premise that activity analysis can
highlight waste (non-value adding) and bureaucracy (secondary or support
activities), activity based techniques have been used for straightforward cost
reduction, process improvement and re-engineering, benchmarking, performance
measurement and a variety of related exercises including activity or priority based

The three generations of activity based costing supplement and complement each
other and one system should not be considered the replacement of either of the
other two. The first generation focuses on product costing, the second generation on
process costing or performance evaluation, and the third generation on value chain
costing to be used in strategic analysis. All three use the same activities database;
differences lie in types of linkage and the extent to which data on activities are to be

ABC forces the manager to investigate fixed costs very closely. It therefore helps
management to identify areas of inefficiency as well as recognize costs which we
could have been conceived fixed but, which are in fact, variable or semi-variable to
specific products. As for TM, The implementation of ABC at TM provided benets as
to appreciate the costs of the services rendered while understood the process
activities of the company.

Abrahamson, E. (1991). Managerial fads and fashions: the diffusion and rejection of
innovations. Academy of Management Review, Vol. 16, pp. 586-612.
Drucker, Peter F. Management Challenges of the 21st Century. New York:Harper
Business, 1999.
Griful, C. (2001). Activity-Based Costing Methodology for Third-Party Logistics
Companies. IAER, Vol. 7, No. 1, pp. 133-146.
Kalicanin, D., & Knezevic, V. (2013). Activity-based costing as an information basis
for an efficient strategic management process. Economic annals, 58(197), 95119.
Liu, L. Y. J., & Pan, F. (2007). The implementation of Activity-Based Costing in
China: An innovation action research approach. The British Accounting Review,
39(3), 249264.
Majid, J. A., & Sulaiman, M. (2008). Implementation of activity based costing in
Malaysia: A case study of two companies. Asian Review of Accounting, 16(1), 39
Malmi, T. (1999). Activity-based costing diffusion across organizations: an
exploratory empirical analysis of Finnish firms. Accounting Organizations and
Society, Vol. 8, pp. 649-72.
Messner, M. 2009. The limits of accountability. Accounting, Organizations and
Society, Vol. 918-938.
Soin, K., Seal, W. and Cullen, J. (2002). ABC and organizational change: an
institutional perspective. Management Accounting Research, Vol. 13, pp. 249-71.
Swenson, D. (1995). The benefits of activity-based cost management to the
manufacturing industry. Journal of Management Accounting Research, Vol. 7, Fall,
pp. 167-80.