The association between activity-based costing and improvement in financial performance

Abstract

This study investigates the improvement in financial performance that is associated with the use of activity-based costing (ABC), and the conditions under which such improvement is achieved. Internal auditors furnish information regarding company financial performance, extent of ABC usage, and enabling conditions that have been identified in the literature as affecting ABC efficacy. Confirmatory factor analysis and structural equation modelling are used to investigate the relationship between ABC and financial performance.Results show that there indeed is a positive association between ABC and improvement in ROI when ABC is used concurrently with other strategic initiatives, 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. In addition, measures of success of ABC used in prior research appear to be predictors of improvement in financial performance.