A COMPARATIVE EVALUATION OF FINANCIAL AND ACTIVITY-BASED

COST ACCOUNTING SYSTEMS IN A PRIVATE UNIVERSITY

by

DERRELL H. MOORE, B.B.A., M.B.A.

A DISSERTATION

IN

HIGHER EDUCATION

Submitted to the Graduate Faculty

of Texas Tech University in
Partial Fulfillment of
the Requirements for
the Degree of
DOCTOR OF EDUCATION

Approved

December, 1998
 'K
/'I- fM'^'^iU
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13
f ^'f^ ACKNOWLEDGMENTS

I wish to express my grateful appreciation to my committee

chairman, Dr. Albert B. Smith, for his continuing direction and

encouragement during my doctoral program and dissertation work. I would

also like to thank the other committee members, Drs. Suzanne Logan and

Lane K. Anderson for their encouragement and helpful suggestions.

Others who have contributed substantially to this project are: (1)

ICMS, Inc., 2261 Brookhollow Plaza, Suite 104, Arhngton, Texas, 76006,

provided CMS-PC™ 4.0 software and manual used in this study; (2) Mr.

Harold Preston, Senior Vice President for Finance and Management,

Hardin-Simmons University, who provided permission to use Hardin-

Simmons University as the subject of this study and for providing access to

records, personnel, and other information; (3) Mr. Watson Moore, Controller,

Hardin-Simmons University, who provided financial and other data

required to compare the financial and activity-based costing systems; and

(4) Dr. Bob E. Waldrup, Assistant Professor of Accounting, Hardin-Simmons

University, who provided consultation in the experimental design and in the

interpretation of statistical findings.

Finally, I want to express my appreciation to my wife, Janice, who

provided indispensable assistance in editing this document.

ii
 TABLE OF CONTENTS

ACKNOWLEDGMENTS ii

ABSTRACT viii

LIST OF TABLES x

LIST OF FIGURES xi

CHAPTER

I. INTRODUCTION TO THE STUDY 1

Introductory Comments 1

Hardin-Simmons University 4

Introduction of Activity-Based Costing 4

Statement of the Problem and Purposes 6

Research Question and Hypotheses 10

Research Question 10

Hypotheses 10

Need for the Study 13

Delimitations 17

Delimitation Number One 17

Delimitation Number Two 18

Delimitation Number Three 19

Delimitation Number Four 19

HI
 Delimitation Number Five 20

Limitations 20

Limitation Number One 20

Limitation Number Two 21

Limitation Number Three 21

Assumptions 22

Assumption Number One 22

Assumption Number Two 22

Definition of Terms 23

Summary 29

II. REVIEW OF THE LITERATURE AND RESEARCH 32

History of the Development of Traditional

and Activity-Based Costing/Management

(ABC/M) Systems 32

Traditional System 32

ABC/M System 36

Research in ABC/M 92

III. METHODOLOGY 104

General Design 104

Graphical Depiction of the Split-Plot Factorial Design 106

Description and Purposes of the Study 107

Instrumentation 109
iv
 Pilot Study 114

Sample Population 117

ABC/M System Design 117

Collection of Data 120

Analysis of Data 121

Research Question 121

Hypotheses 122

Computational Model 125

Summary 127

IV. FINDINGS 129

Summary 129

Findings Related to the Three Null Hypotheses Tested 129

Finding: Null Hypothesis Number 1 129

Finding: Null Hypothesis Number 2 132

Finding: Null Hypothesis Number 3 135

Interpretations of Significant Interactions Between

Levels of Treatments A and B 138

Computational Procedures and Data 144

Findings Related to Procedures For Estimating

Strength of Association, Effect Size, and Power 146

Findings: Strength of Association 146

Findings: Effect Size 148

V
 Findings: Power 149

Summary 151

V. MAJOR FINDINGS, CONCLUSIONS, AND

RECOMMENDATIONS 152

Introduction 152

Major Findings 154

Finding: Hypothesis Number 1 Related to

Treatment A (Type of Accounting System) 154

Findings: Hypothesis Number 2 Related to

Treatment B (Decision Purpose) 156

Findings: Hypothesis Number 3 Related to

the Interactions of Treatments A and B and
Blocks 159

Recommendations 160

Policy 160

Practice 163

Research 165

Conclusions 166

REFERENCES 168

APPENDICES

A. F I N A N C L ^ ACCOUNTING SYSTEM
COST FLOW DIAGRAM 182

B. ABC/M SYSTEM COST FLOW DIAGRAM 186

VI
C. ORGANIZATION CHART FOR
HARDIN-SIMMONS UNiVERSITY 190

D. EXECUTIVES, MIDDLE MANAGERS, AND STAFF

FOR HARDIN-SIMMONS UNIVERSITY 192

E. GLOSSARY 198

F. EVALUATION INSTRUMENT AND ADMINISTRATION

PROCEDURES 209

G. COST ACCOUNTING PILOT PROJECT 220

H. EXPERIMENT DATA, COMPUTATIONAL SYMBOLS,

AND COMPUTATIONAL FORMULAS 239

Vll
 ABSTRACT

Private higher education institution accounting systems provide

information to comply with external reporting standards of the Financial

Accounting Standards Board. The "official" system is described in a

National Association of College and University Business Officers (NACUBO)

publication. Although the system provides highly useful information for

external reporting purposes, it does not appear to provide highly useful

information for internal management decisions.

This study was designed to test if a complementary Activity-Based

Costing/Management (ABC/M) system would provide more useful

information for internal management decisions than the financial

accounting system. A secondary purpose was to define possibilities for

future research t h a t would relate ABC/M to other higher education

institutions of this type and to other public and private institutions of

higher learning.

A single case study was conducted at Hardin-Simmons University.

An ABC/M system was designed utilizing commercial software. The

internal management information produced by each accounting system was

evaluated by staff and administrators with financial management

Vlll
responsibilities as to usefulness for budgeting, financial management, and

strategic decision purposes.

ANOVA procedures for a split-plot factorial design were employed

with appropriate assumptions tests. Statistically significant differences

were found for each of the two independent variables and for the

interactions of the two independent variables.

The data supported a conclusion that information provided by the

ABC/M system was more useful than the NACUBO system for the decision

purposes tested. The data also supported a conclusion that information

from both accounting systems was more useful for budgeting than for

financial management, which in turn was more useful than for strategic

decisions dependent on accurate cost object costs.

The practical significance of these findings is that administrators of

institutions similar to the subject institution may find the ABC/M

information more useful than information provided by their financial

accounting system for the purposes tested. Also, administrators may make

more informed decisions and may have a better understanding of the

consequences of such decisions.

Recommendations about the policy and practice aspects of

implementation of ABC/M systems in institutions similar to the subject are

presented. Suggestions for additional research are also mentioned.

IX
 LIST OF TABLES

3.1. Split-Plot Factorial Design-Treatment Level Combinations 106

3.2. Time Frame for the Experimental Study 121

4.1. Table of Findings for SpUt-Plot Factorial Design Using ANOVA . . . 130

4.2. Table of Findings for SpUt-Plot Factorial Design Using ANOVA . . . 133

4.3. Table of Findings for Split-Plot Factorial Design Using ANOVA 137

4.4. Description of the Six Combinations of Treatment Levels

of Treatments A and B 139

4.5. Findings Related to Interactions of Combinations of

Independent Variable Treatment Levels Using
ANOVA With Tests For Simple Main Effects 140

4.6. Findings Related to Interactions of Combinations of

Independent Variable Treatment Levels Using
ANOVA With Tests For Simple Main Effects 142

4.7. Summary Table of Evaluator Responses By Block

(Executive, Middle Manager, or Staff), Treatment A
(Financial Accounting and ABC/M), and by Treatment B
(Budgeting, Financial Management, and Strategic
Decisions Dependent On Accurate Cost Object Costs) 145

H.l. Detailed Table of Evaluator Responses By Block

(Executive, Middle Manager, or Staff), Treatment A
(Financial Accounting and ABC/M), and by Treatment B
(Budgeting, Financial Management, and Strategic
Decisions Dependent On Accurate Cost Object Costs 241

H.2. Descriptive Statistics Based On Detailed Table of

Evaluator Responses to Survey Instrument Statements 245
 LIST OF FIGURES

4.1. Response Values by Accounting System Type 132

4.2. Response Values by Decision Purpose 135

A.l. Financial Accounting System Cost Flow Diagram 185

B.l. ABC/M Cost Flow Diagram 189

C.l. Organization Chart for Hardin-Simmons University 191

F.l. Sample of Financial Accounting System Information 218

F.2. Sample of ABC/M System Information 219

G.l. Partial Organization Chart, Christian College, Business Division. . 222

G.2. Cost flows-Traditional System 223

G.3. Partial Organization Chart, Christian College, Business Division. . 227

G.4. Cost Flows-ABC System 228

XI
 CHAPTER I

INTRODUCTION TO THE STUDY

Introductorv Comments

Accounting for colleges and universities has followed the predictable

track of action and reaction to a point of consensus. Accounting systems for

colleges and universities have been designed to provide the data needed to

effect compliance with the generally accepted principles of accounting t h a t

were developed in a joint effort by the National Association of College and

University Business Officers (NACUBO), the American Institute of Certified

Public Accountants (AICPA), the Financial Accounting Standards Board

(FASB), and the Governmental Accounting Standards Board (GASB)

(Freeman & Shoulders, 1993). The FASB-GASB jurisdiction agreement of

1984 granted the FASB responsibility for generally accepted accounting

principles (GAAP) applicable to private not-for-profit colleges and

universities. The FASB issues three major types of pronouncements which

constitute the most authoritative literature regarding generally accepted

accounting principles. They are: (1) Statements of Financial Accounting

Standards (SFAS), (2) Interpretations, and (3) Statements of Financial

Accounting Concepts (Williams, Stanga, & Holder, 1995).

 The preferred presentations of financial statements for private, not

for-profit institutions are not known with certainty since implementation

guidance has not been finalized by the FASB on the two most recent

statements of financial accounting standards (SFAS) on this subject,

numbers 116 and 117 (Freeman & Shoulders, 1996). SFAS 117 requires

financial statements to report the institution's financial resources that have

not been restricted externally for specific purposes and are expendable for

any legal and reasonable purpose as '^Unrestricted Current Funds." All

financial resources that have been externally restricted to specific operating

purposes must be reported as "Restricted Current Funds" (temporarily or

permanently restricted) (Freeman & Shoulders, 1996). The accounting

system must provide information that will enable the institution to comply

with these requirements. Financial analyses and other data intended for

internal management purposes are not required to be in compliance with

GAAP (FASB standards) on which the financial statements are based and,

indeed, may take any form deemed useful to the intended users. The only

limiting criterion applicable to internally generated information is that the

benefit of the information must justify the cost of providing it. During the

immediate past fifteen years, colleges and universities have increasingly

recognized the need to develop a system to compare operating results for

various programs of the subject university, with peer institutions, and with
the education industry, and also to see which institution is performing its

activities most efficiently and effectively. Control of costs, both monetary

and non-monetary, has become an important aspect of managing

institutions of higher learning (Freeman & Shoulders, 1993).

The basic budget control system in every institution including higher

education institutions is the financial accounting system. Its primary

purpose is to help the institution fulfill its fiduciary responsibility of keeping

track of funds received from third parties (the fund accounting system). The

system also serves as a financial control system, which is organized by

budget units that typically follow the organization of vice presidential areas

with academic and administrative departments and restricted grants and

contracts separately identified. Institutions are captives of their financial

accounting systems. The financial accounting system is influenced greatly

by the fund accounting system and budget organization structure. The

financial accounting systems for private higher education institutions in

general do not provide information that supports decisions regarding the

effective and efficient allocation of resources. Thus, they do not highlight

productivity variances or provide the grist for thoughtful analysis and

decisions regarding changes that should be made (Turk, 1993).

 Hardin-Simmons Universitv

Hardin-Simmons University (HSU), the subject of this experimental

research, employs an accounting system that shall hereinafter be referred to

as the financial accounting system, a system similar in many respects to

those found in the subject's peer group institutions. This accounting system

has been designated as the official system and is recommended for private

higher education institutions by NACUBO. KPMG Peat Marwick, an

international certified public accounting firm, designed the system and

provided documentation and instructions for implementation and operation

of the system in a publication titled, Financial Accounting and Reporting

Manual for Higher Education (McDonald, 1990). The model chart of

accounts presented in this system provides an eight digit coding structure

that organizes the accounts first by organizational unit and sub-units and

then by object of expenditure. A graphical design of the cost flows of the

financial accounting system employed at Hardin-Simmons is provided as

Appendix A.

Introduction of Activity-Based Costing

In 1988, an alternative approach was proposed to the traditional

accounting and reporting systems in use by many types of organizations

that provided financial and nonfinancial data for management decision

making. Drs. Robin Cooper and Robert S. Kaplan suggested that Activity-

Based Costing (ABC) would provide more accurate information than

traditional systems about production, support activities, and product costs

so t h a t management could focus its attention on the products and processes

with the most leverage for improving efficiency and effectiveness. It would

help managers make better decisions about product design, pricing,

marketing, and mix and would encourage continual operating improvements

(Cooper & Kaplan, 1988a). At the time of the writing of this article, Robin

Cooper was an associate professor of business administration at the

Harvard Business School and a fellow of the Institute of Chartered

Accountants in England and Wales. Robert S. Kaplan was the Arthur

Lowes Dickinson Professor of Accounting at the Harvard Business School

and professor of industrial administration at Carnegie Mellon University.

ABC takes its name from the basic premise of the approach. It is

about activities. More specifically it is about managing activities to gain

and sustain a competitive advantage. An activity is a combination of people,

technology costs, supplies, travel, occupancy costs, methods, and

environment t h a t produce a given service (output). Activities describe what

an organization does, the way time is spent, and the outputs of the process.

Some examples of activities common to higher education applications are:

1. Answering inquiries for admission.

 2. Teaching classes.

3. Advising students.

Ultimately an organization can manage only what it does-its

activities. The management of activities begins with an understanding that

resources are necessarily assigned to activities and are consumed by

activities (activity cost). Ab appropriate activity measure, such as the

volume of output, must be determined, and how well the activity is

performed (performance measures) must be known. This information is

derived from the ABC system (Brimson & Antes, 1994).

Experience has now demonstrated that this emerging accounting

technology is also applicable to organizations in a number of settings in

addition to manufacturing and merchandising which may include insurance

agencies and underwriters, banks, government agencies, hospitals, colleges

and universities, and a variety of other service organizations (Brimson &

Antes, 1994). A graphical design of the cost flows of the ABC system

designed for the subject institution is provided as Appendix B.

Statement of Problem and Purposes

Cost accounting literature produced in recent years contains many

references to the deficiencies of traditional accounting systems. These

deficiencies focus on the usefulness of the data for management decisions

including budgeting, financial management, and financial reporting.

The following conclusions reported in recent doctoral dissertations

describe well the problem that prompted consideration of this topic for this

dissertation: (1) One major criticism of existing cost accounting systems is

t h a t they do not provide useful information for managing modern

manufacturing operations (Basuki, 1996). (2) While basic cost accounting

methods in common use have remained practically unchanged for 30 years,

health care providers have seen radical change take place in their industry.

(3) Use of the old accounting methods may distort costs and provide

inadequate managerial information for modern decision making (Baker,

1997). Although these researchers relate the deficiencies primarily to

commercial enterprises, all organization t5rpes may be subject to the same

accounting limitations.

Frederick J. Turk, a partner at KPMG Peat Marwick in New York

City, specifically applied these deficiencies to institutions of higher

education. He indicated that the most significant problem faced by most

higher education institutions is that they do not know much about their

costs. When these leaders, governing boards and other constituencies find

themselves with this deficiency, they have difficulty understanding why

costs continue to rise so rapidly and what they can do to change cost

behavior of their institutions (Turk, 1993).

ABC may be used in common parlance to indicate a degree of

simplicity; but as an acronym for Activity-Based Costing, it introduces some

revolutionary and fundamental changes in management accounting system

design. What originally appeared to be simply a new method of tracing

costs to products has led to the development of an entirely new management

accounting and control system referred to as Activity-Based Costing and

Management (ABC/M) (Glad & Becker, 1995).

Numerous examples of successful implementation of ABC/M in

various types of organizations exist in the literature (Player & Keys, 1995);

however, a careful search of the literature failed to produce a single specific

case of the implementation of an ABC/M system in a college or university.

The major problem identified for this study was to test this new system in a

private university setting. This was done by comparing the relative

usefulness of data provided by the financial accounting system used by this

university with the usefulness of the data provided by a complementary

ABC/M system. This complementary ABC/M system was designed by the

researcher for the subject institution and the system incorporated typical

ABC/M design components.

 The primary purpose for conducting this study was to determine if

the ABC/M system, as a complementary (add-on) system to the financial

accounting system in use, produced more useful information t h a n the sole

use of the financial accounting system. Usefulness was defined as the best

combination of relevance and reliability and was judged by persons within

the university who have responsibility for: (1) budgeting, (2) financial

management (control), and (3) strategic decisions that are dependent on

accurate cost object costs.

ABC and the management system based on it have fundamentally

changed the approach to and methodology for accumulating costs in

commercial organizations with over 3,500 conversions to ABC already in

place (Player & Keys, 1995). This study sought to determine whether the

significant benefits experienced in commercial organizations by emplo5dng

ABC/M were also applicable to a private university.

An additional purpose was that this study may produce possibilities

for future research t h a t would relate ABC/M to other higher education

institutions of this tjrpe and to other public and private institutions of

higher learning (research universities, doctoral granting universities,

comprehensive colleges and universities, liberal-arts colleges, two-year

colleges, institutes, and professional schools).

 Research Question and Hvpotheses

Research Question

Does the use of the complementary ABC/M system provide more

useful information t h a n the sole use of a traditional financial accounting

system for: (1) budgeting decisions, (2) financial management (control)

decisions, and (3) strategic decisions dependent on accurate cost object cost

as judged by executives, middle managers, and staff of a private university?

Hypotheses

Hypotheses are presented to test variances between the arithmetic

means of the evaluator response values relating to the usefulness of the

information for the two treatment levels of the independent variable

relating to accounting system used (financial accounting system and ABC/M

system), variances for the three treatment levels of the independent

variable relating to decision purpose of the information (budgeting, financial

management, and strategic decisions dependent on accurate cost object

costs) and the variances resulting from the interactions of the two

independent variables. The dependent variable was defined as the

usefulness of the information provided by the accounting systems for the

three expressed decision purposes as perceived by the members of the three

professional categories of evaluators. The subject participants were

10
randomly assigned to subgroups (blocks) according to their professional

classification (executives, middle managers, and staff). Hypotheses testing

statistical variances between and within those blocks are presented in the

following section.

Null and Alternative Hvpotheses

The first hypothesis was designed to test the variances between the

two treatment levels of the independent variable. Treatment A (accounting

system).

Null hypothesis 1. Ho: /ua^ = ixa^-

Stated in words, there is no statistically significant difference

between the arithmetic means of the data scores for the two levels (a^

financial accounting system, and aj, ABC/M system) of the independent

variable. Treatment A. The alternate hypothesis was: Ha: ^a^ * ^a^.

Stated in words, there is a statistically significant difference in the

arithmetic means of the data scores for the two treatment levels of the

independent variable. Treatment A.

The second hypothesis was designed to test the variances between the

three treatment levels of the independent variable. Treatment B (decision

purpose).

Null hypothesis 2. Ho: yih^ - /uh^ = /^bg.

11
 Stated in words, there are no statistically significant differences

between the arithmetic means of the data scores of the three treatment

levels (bp budgeting, bg, financial management, and h^, strategic decisions

dependent accurate cost object costs) of the independent variable,

Treatment B. The alternate hypothesis was: Ha: /^bj * ^bz ^ /^h^. Stated in

words, there are statistically significant differences in the arithmetic means

of the data scores of the three levels of the independent variable, Treatment

B.

The third hypothesis was designed to test the variances of the

interactions of the combinations of the two independent variables.

Treatments A and B, and the interactions of the blocks (professional

classification of the evaluator).

Null hypothesis 3. Ho: /ia^bi = /^a^bg = Ma^bg = fu.a2h^ = iJ^a^^ ~ ^^2^.3-

Stated in words, there are no statistically significant differences

between arithmetic means of the data scores of the combinations of the two

independent variables. Treatments A and B. The designations ajb^ aib2

and a^bg relate to the combinations of the financial accounting system (aj)

and the three decision purposes of the information (b^ budgeting, b2,

financial management, and bg, strategic decisions dependent on accurate

cost object costs). The designations ajb^ agbj, and agbg relate to the

combinations of the activity-based costing system and the three decisions

12
purposes of the information (b^ budgeting, bj, financial management, and

bg, strategic decisions dependent on accurate cost object costs). The

alternate hypothesis was: Ma^b, ^ /^ajbg ^ A^a^bg * ^a^^ * ^^^2 * /^^jbg.

Stated in words, there are statistically significant differences between

arithmetic means of the data scores of the various combinations of the two

independent variables. Treatments A and B, and the blocks.

Need for the Study

The level of inadequacy of information produced for management

decisions by the traditional financial accounting systems that are used by

virtually every organization type and the reasons for the allegations were

first described 1987. The seminal publication in which Johnson and Kaplan

presented their arguments is titled. Relevance Lost: The Rise and Fall of

Management Accounting.

Today's management accounting information produced by the

traditional costing system, driven by the procedures and cycle
of the organization's financial reporting system, is too late, too
aggregated, and too distorted to be relevant for managers'
planning and control decisions. With increased emphasis on
meeting quarterly or annual financial targets, internal
accounting systems focus narrowly on producing monthly
budget comparisons. Despite the considerable resources
devoted to computing a monthly or quarterly financial results
amount, the amount does not measure the actual increase or
decrease in economic value that has occurred during the period.
(Johnson & Kaplan, 1987, p.l)

13
 To pursue the explanation of these failings further, three important

consequences are presented. First, management accounting reports are of

little help to operating managers as they attempt to reduce costs and

improve productivity. Frequently, the reports decrease productivity because

they require operating managers to spend time attempting to understand

and explain reported variances that have little to do with the economic and

technological reality of their operations. By not providing timely and

detailed information on process efficiencies, the management accounting

system not only fails to provide relevant information to managers but it also

distracts their attention from factors that are critical for process efficiencies

(Johnson & Kaplan, 1987).

Second, the management accounting system also fails to provide

accurate costs of services (products) provided. Costs are distributed to

services (cost objects) by simplistic and arbitrary measures that do not

represent the demands made by each cost object on the firm's resources.

These measures systematically bias and distort costs of individual cost

objects. When such distorted information represents the only available data

on "service costs," the danger exists for misguided decisions on service

pricing, service outsourcing, service mix, and responses to competitive

service. Many higher education institutions seem to be falling victim to the

danger of misguided decisions (Johnson & Kaplan, 1987).

14
 Finally, managers' horizons are reduced to consideration of the short-

term cycle of the monthly financial results statement only. The financial

accounting system treats many cash outlays as expenses of the period in

which they are made even though these outlays will benefit future periods.

Discretionary cash outlays for new services, improved processes, preventive

maintenance, long-term marketing positioning, employee training and

morale, and for developing new systems can produce substantial cash

inflows for the future. Managers under pressure to meet short-term

financial goals can, on occasion, achieve these goals by reducing their

expenditures on such discretionary investments. Thus, short-term financial

goal pressures can lead to a decrease in long-term investment. Yet monthly

accounting statements, using the practices mandated for external reporting,

can signal increased financial performance even when the long-term

economic health of the institution has been compromised (Johnson &

Kaplan, 1987).

Today's management accounting systems provide a misleading target

for managerial attention and fail to provide the relevant set of measures

t h a t appropriately reflect the technology, the services, the processes and the

competitive environment in which institutions operate. For many

organizations, financial measures have become the only measure of success.

Financial managers, relying exclusively on periodic financial statements for

15
their view of the organization, become isolated from the real value-creating

operations of the organization and fail to recognize when the accounting

numbers are no longer providing relevant or appropriate measures of the

organization's operations (Johnson & Kaplan, 1987).

Fortunately, the increased demands for excellent management

accounting systems occur at a time when the costs for collecting, processing,

analyzing, and reporting information has been decreasing by orders of

magnitude. The enormous expansion in computing capabilities has given

the designers of management accounting systems of today opportunities

t h a t could not have been dreamed about by their predecessors. Extensive

systems are now feasible to measure and attribute accurately the resource

demands made by each service offering (Johnson & Kaplan, 1987).

The time has come for self examination by higher education

institutions to determine if they are using their resources most effectively.

Competition is affecting higher education just as it affects other

organizations in our society. Ineffective use of resources drives up costs

which in t u r n causes tuition and fees to rise and requires ill-advised cuts in

academic programs and support activities. The long-term result is

institutional decay and loss of reputation in the competitive marketplace

(Turk, 1993).

16
 Activity-based management of scarce resources helps ensure
that all activities are operating at peak effectiveness and
efficiency to achieve enterprise excellence. Both, this approach
to management and ABC, should be integral parts of the
accounting system for colleges and universities as they face the
twenty-first century. (Turk, 1993, p. 34)

This study provided empirical research that supported the quotation above

of Frederick J. Turk, a Certified Public Accountant and partner of a

prestigious international public accounting firm, KPMG Peat Marwick in

New York.

Delimitations

Delimitation Number One

The researcher limited this research experiment to a single case

study partially because the single case study is considered an appropriate

research strategy for exploratory, descriptive, and explanatory (causal)

inquiries. The case study strategy is indicated when control over behavioral

events does not require researcher control and when the focus of the study is

on contemporary events (Yin, 1994). Both of these elements were present in

this study. "Some of the best and most famous case studies have been both

descriptive and explanatory" (Yin, 1994, p. 3). A computer search of the

Dissertation Abstracts International compact disc file at the Texas Tech

University Library revealed that during the period 1861 to 1997, 21,566

17
dissertations were written using the case study design of which 548 were

related to finance and 245 were related to accounting. The date period 1993

through 1997 included 7,337 case study dissertations of which 175 were

related to finance and 72 were related to accounting. A single-case study

was appropriate for this dissertation also because comparison of alternative

accounting processes within this specific context provided new insight

and new knowledge that may be applicable to the more than 900 other

similar institutions in the United States.

Delimitation Number Two

The researcher limited this study to Hardin-Simmons University (see

Appendix C for the organization chart) because the physical presence of the

researcher on this campus facilitated the significant amount of interaction

between the researcher and certain University personnel that was required

due to the depth and complexity of the ABC/M design. Public institutions

and large, more complex private institutions were excluded as possible

subjects because public institutions have less local discretion in the adoption

of alternate accounting procedures; and large complex private institutions

would have unnecessarily complicated the design, installation, and

operation of the test ABC/M system.

18
 Delimitation Number Three

Only the fiscal year which ended May 31, 1998, was included in the

study because that period fell within the time line planned for this

dissertation. The budget process for the fiscal year to end on May 31, 1999,

was accomphshed before the end of the fiscal year that ended on May 31,

1998.

Delimitation Number Four

This study was limited to consideration of the determination of the

comparative advantages of ABC/M over the financial accounting system in

regard to only three decision purpose areas (budgeting decisions, financial

management [control] decisions, and strategic decisions dependent on

accurate cost object costs). Consideration of comparative advantages in

other areas such as financing, auditing, and financial accounting reporting

could have diffused the focus into areas of financial management in which

expert financial or accounting judgment of the institution participants

would have been required. If expert financial or accounting judgment had

been required, the number of participants would have been severely limited.

19
 Delimitation Number Five

Only the expenditure transactions of current funds classified as

unrestricted, temporarily restricted, and permanently restricted were

included in this study. The transactions included constituted a very large

majority of the transactions recorded in the accounting system of the subject

institution. Revenue transactions were excluded because they are not an

element of cost. In addition, only the unrestricted current funds were

budgeted and subject to distributive financial management. To ensure

compliance with applicable restrictions, the Hardin-Simmons University

Controller monitored current funds that were temporarily restricted or

permanently restricted.

Limitations

Limitation Number One

With a college administration of 88 persons (executives, middle

managers, and staff as presented in Appendix D), nearly everyone in this

population was needed to participate in the evaluation process in order for

the subgroups (blocks) to have an adequate number of subjects to ensure

statistical validity that would have been threatened by smaller sample

sizes. If a large number of potential participants had been unwilling to

cooperate in responding to the statements on the instrument used for data

20
collection in this research, generalizability of the experiment could have

been threatened.

Limitation Number Two

The data collection instrument was not externally validated for its

expressed purpose in this research or in other studies. The researcher

formulated the instrument statements to address the purposes expressed in

the research question. Partial validation was accomplished by use of the

instrument in a pilot study using accounting students conducted prior to the

actual experiment. Also, the experimental design that was used at least

partially controlled for the lack of demonstrated validity. True experimental

designs, however, do control for nearly all sources of internal and external

invalidity because sample subjects are randomly selected and assigned

(Gay, 1992).

Limitation Number Three

Actual accounting transactions were used in the evaluation of both

accounting system types. However, proprietary or highly sensitive data

were replaced by representative data by agreement with the Senior Vice

President of Finance and Management. No significant differences in

accounting results were experienced as a result of such substitutions.

21
 Assumptions

Assumption Number One

Assumption one relates to the first limitation presented. The staff

and administration of the subject institution have a history of cooperating in

all material respects to reasonable requests for necessary information. The

Senior Vice President for Finance and Management and the Controller were

correct in their expectation that this cooperation would extend to this

project.

Assumption Number Two

The second assumption relates to the second limitation, that of the

untested validity of the instrument. It was assumed that the validation of

the instrument could be accomplished by use in a pilot study. Knowledge-

able students were asked to respond to the same questions in related to a

hypothetical situation similar to that of the case study. The 20 knowledge-

able students were accounting and finance majors enrolled in a cost

accounting class at HSU. This test was conducted in March, 1998, which

preceded the actual single case study experiment. As anticipated, the

responses were very definitive concerning the preference of the ABC/M

process over the financial accounting approach. This preference result

serves to support the validity of the questions for the purposes stated.

22
 Definition of Terms

Definitions of the terms presented in this section are contextual. For

the most part, they relate to accounting or management situations and are

intended to assist the reader in understanding the vocabulary commonly

employed in those contexts. Terms defined in this section constitute key

terms used in this study. Definitions of statistical terms used in this study

are meanings normally attributed to them when used in studies in

behavioral science, and are not defined in this section. Additional terms

used in this report with definitions are included in Appendix E, Glossary. A

reader may either wish to review the Glossary terms prior to continuing or

may refer to the Glossary for definitions of terms to be introduced as the

reader continues through the remaining pages of this dissertation.

ACCOUNTING SYSTEM. A system used to identify, analyze,

measure, record, summarize, and communicate relevant economic

information to interested parties (Ainsworth et al., 1997).

ACTIVITY. An event, task, or unit of work with a specified purpose

(Horngren, Foster & Datar, 1997).

ACTIVITY MANAGEMENT. Planning, improvement, and control of

an organization's activities to meet internal, customer, and other external

requirements (Brimson & Antes, 1994).

23
 ACTIVITY MAP. Flowchart or diagram showing the hierarchy of

relationships between activities within an organization.

ACTrVITY-BASED COSTING. Approach to costing that focuses on

activities as the fundamental cost objects. It uses the cost of these activities

as the basis for assigning costs to other cost objects such as products,

services, or customers (Horngren, Foster & Datar, 1997).

AUDITOR. Certified Public Accountant, government agent or an

organization employee who performs financial statement audits, comphance

audits, or operational audits (Arens & Loebbecke, 1994).

BUDGET. The quantitative expression of a plan of action and an aid

to the coordination and implementation of the plan (Horngren, Foster &

Datar, 1997).

BUSINESS UNIT. Subdivision such as a department or subsidiary

(Wilhams, Stanga & Holder, 1995).

CERTIFIED PUBLIC ACCOUNTING FIRM. An organization made

up of persons with the professional designation reserved for persons who

have satisfied certain education and experience requirements and have

passed a rigorous uniform examination that the American Institute of

Certified Public Accountants prepares and grades.

COST. Resource sacrificed or forgone to achieve a specific objective

(Horngren, Foster & Datar, 1997).

24
 COST ACCOUNTING. System that measures and reports financial

and other information related to the organization's acquisition or

consumption of resources. It provides information for both management

accounting and financial accounting (Horngren, Foster & Datar, 1997).

COST ALLOCATION SYSTEM. System for assigning indirect costs

to the chosen cost object (Horngren, Foster & Datar, 1997).

COST OBJECT COSTS. Costs of anything for which a separate

measurement of costs is desired (Horngren, Foster & Datar, 1997).

COSTING SYSTEM. In this context, the system suggested by

NACUBO and adopted by many private colleges and universities.

CROSS-FUNCTION ANALYSIS. An analysis of an organization that

cuts across the functional lines. Examples of functions in a commercial

organization may include sales, manufacturing, finance, and research

(Brimson & Antes, 1994).

DEPARTMENTAL ACTIVITY-BASED MANAGEMENT (DABM).

Application of the principles of ABC/M at the departmental level of the

hierarchy of an organization.

EFFECTIVENESS. The degree to which a predetermined objective

or target is met (Horngren, Foster & Datar, 1997).

EFFICIENCY. The relative amount of inputs used to achieve a given

level of output (Horngren, Foster & Datar, 1997).

25
 EXPENSE. Cash outflow or other use of assets or incurrence of

liabilities during a period as a result of delivering or producing goods,

rendering services, or carrying out other activities that constitute the

organization's operations (Wilhams, Stanga & Holder, 1995).

FINANCIAL ACCOUNTING. System that focuses on external

reporting that is guided by generally accepted accounting principles

(Horngren, Foster & Datar, 1997).

FINANCIAL ACCOUNTING SYSTEM. In this context, the system

designed and developed by NACUBO for use by private colleges and

universities.

FINANCIAL MANAGEMENT. Employment of budgeting,

accounting, reporting, and auditing techniques to predict and control the

activities of an organization (Freeman & Shoulders, 1996)

FUND ACCOUNTING. Accounting approach defined as a fiscal and

accounting system with self-balancing accounts that record cash and other

financial resources, together with all related liabilities and residual equities

or balances, and changes therein, which are segregated for the purpose of

carrying on specific activities or attaining certain objectives in accordance

with special regulations, restrictions, or limitations (Freeman & Shoulders,

1996).

26
 GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. Principles

of accounting that have substantial authoritative support. They represent a

consensus at any time as to which economic resources and obligations

should be recorded as assets and habihties, which changes in them should

be recorded, when those changes should be recorded, how the recorded

transactions should be measured, what information should be disclosed, how

the information should be disclosed, and which financial statements should

be prepared (Wilhams, Stanga & Holder, 1995).

HIGHER EDUCATION INSTITUTIONS. Institutions offering more

advanced academic courses of instruction to qualified applicants beyond the

high school level (Clark, 1987).

INTERNAL AUDITOR. Person whose responsibility it is to ensure

that the organization's assets are safeguarded, its accounting information is

reliable, it operates efficiently, and it adheres to management's policies

(Arens & Loebbecke, 1994).

INSTRUMENT. Questionnaire or survey designed to provide

responses from experiment subjects for the purpose of effect measurement

(Gay, 1992).

27
 MANAGEMENT ACCOUNTING. System that measures and reports

financial information as well as other types of information that assist

managers in fulfilhng the goals of the organization (Horngren, Foster &

Datar, 1997).

MANAGEMENT CONTROL SYSTEM. Means of gathering and

using information to aid and coordinate the process of making planning and

control decisions throughout the organization and to guide employee

behavior (Horngren, Foster & Datar, 1997).

MANAGEMENT DECISION. Manager response to a situation

requiring resolution. A specific answer to an operational or strategic

question. (Brimson & Antes, 1994)

PERMANENTLY RESTRICTED FUNDS. Current funds that are

expendable but restricted by donors, grantors, or other outside agencies to

be expended for specific operating purposes only (Freeman & Shoulders,

1996).

PHILOSOPHY. A theory underlying or regarding a sphere of activity

or thought (Webster's, 1963).

PLANNING. Process of choosing goals and predicting results under

various ways of achieving those goals and then deciding how to attain the

desired goals (Horngren, Foster & Datar, 1997).

28
 RESTRICTED FUNDS. Current funds that are expendable but are

either permanently or temporarily restricted externally to expenditure for

specific operating purposes (Freeman & Shoulders, 1996).

SINGLE CASE STUDY. Project that is analogous to a single

experiment in which only one case represents a critical test of the research

question (Yin, 1994).

TEMPORARILY RESTRICTED FUNDS. Resources that are

expendable but restricted for a specific period of time or until the

satisfaction of certain requirements by donors, grantors, or other outside

agencies to expenditure for specific operating purposes (Freeman &

Shoulders, 1996).

UNRESTRICTED FUNDS. Financial resources of the institution

t h a t have not been restricted externally and are expendable for any legal

and reasonable purpose agreed upon by the governing board in carrying out

the purposes of the institution (Freeman & Shoulders, 1996).

Summarv

In this chapter, the researcher has introduced the study for which

this proposal has been prepared. Significant detail has been provided to

familiarize the reader with the background of the subject; major

participants; problem and purposes; research question and statistical

29
hypotheses; need for the study; delimitations and limitations; assumptions;

and finally, a list of terms for which definitions have been provided.

The need for the consideration of ABC/M for application in higher

education is based largely on the demonstrated need for consideration by

commercial enterprises. This study and other empirical research further

clarifies the contribution ABC/M can make to higher education institutions

in the near and long term.

A considerable amount of authoritative literature on ABC/M has been

produced since the suggestion in 1988 that perhaps ABC/M data should

replace traditional costing data for internal management decisions. This

researcher reviewed 2,312 articles that have been written during the last

ten years, including popular press articles, journal articles, and research

articles. The next chapter will present the primary arguments, findings,

and conclusions from some of these sources in an attempt to trace the brief

history, to trace the variety of possible applications and benefits, and to

determine the effect of empirical research on the various aspects of this new

cost accounting system. Chapter III presents a more detailed explanation of

the methodology used along with a more complete explanation of the various

items of the prescribed agenda adopted for this study.

Upon completion of the experiment and the collection and statistical

analysis of the data. Chapters IV and V were prepared. These chapters

30
contain the findings of this research, interpretation of these findings,

conclusions supported by the findings, and recommendations prompted by

the conclusions.

31
 CHAPTER II

REVIEW OF THE LITERATURE

AND RESEARCH

This chapter traces the development of the history of the both the

financial accounting and activity-based cost accounting systems as

presented in the extensive literature available. First the development of the

traditional financial accounting system is presented, then the ABC/M

system with comments on how the two systems are fundamentally different.

Historv of the Development of

Traditional and Activitv-Based
Costing/Management (ABC/M)
Svstems

Traditional System

Governmental and nonprofit (university) accounting and reporting

principles and standards have evolved separately from those for business

enterprises. Furthermore, unique principles and standards have evolved

separately for each of the several major types of organizations which are

subject to governmental and nonprofit accounting rules (Freeman,

Shoulders & Lynn, 1988). The governmental and nonprofit area of

accounting provides authoritative guidance for state and local governments.

32
nonprofit and governmental universities, hospitals, voluntary health and

welfare organizations, and other nonprofit organizations. Accounting and

reporting standards for most of the organizations listed above are now

within the jurisdiction of the Governmental Accounting Standards Board

(GASB); however, authority for establishing accounting and reporting

standards for private colleges and universities remains with the Financial

Accounting Standards Board (FASB). The present financial accounting

system h a s evolved from a rudimentary set of rather informal general

practices t h a t first appeared in publications as early as 1905. The sections

t h a t follow will trace the history beginning with the first attempt at

standardization in 1935.

Authoritative Sources of
Universitv Accounting Standards

Regional associations of college and university business officers

published the first writings constituting an attempt at standardization of

governmental and nonprofit accounting policies and procedures in 1935.

This was followed by a series of interpretive and advisory studies by the

American Council on Education (ACE) during the 1935-1942 period. A two-

volume work. College and Universitv Business Administration, published by

ACE in 1952 and 1955 respectively, was the first authoritative publication

33
covering all areas of higher education business administration. A one-

volume 1968 revised edition of College and Universitv Business

Administration (CUBA) found widespread acceptance in practice and in

academia (Freeman & Shoulders, 1997).

The Committee on College and University Accounting and Auditing of

the American Institute of Certified Public Accountants (AICPA) prepared

and industry audit guide in 1973 with the title. Audits of Colleges and

Universities. In the audit guide, CUBA was endorsed as the primary

authoritative source of generally accepted accounting principles; however,

the audit guide presented differing conclusions concerning several

important concepts suggested or supported in the CUBA guide. In an

a t t e m p t to achieve consensus on numerous matters related to higher

education accounting and reporting, the National Association of College and

University Business Officers (NACUBO) issued the third edition of CUBA

which dealt with financial accounting and reporting. In response, the

AICPA amended its audit guide to complete the reconciliation of differences

between the 1974 edition of CUBA and the audit guide (Freeman &

Shoulders, 1997).

In 1979, the FASB assumed responsibility for all accounting and

reporting standards for all colleges and universities. The standards

presented in the AICPA audit guide were designated as "preferable"

34
pending issuance of comprehensive, authoritative guidance by the FASB.

NACUBO replaced CUBA with its Financial Accounting and Reporting

Manual for Higher Education. The manual describes a comprehensive

system t h a t comphes with the audit guide rules. This loose-leaf manual has

become the "official" system for private institutions and has been widely

adopted (Freeman & Shoulders, 1997). The system suggested in this

manual is the source for nearly all of the information provided for financial

accounting (external reporting) and for managerial accounting (internal

analysis) purposes.

Financial Accounting
Standards Board

In 1984, the FASB-GASB jurisdiction agreement granted the GASB

authority of establishing standards for governmental colleges and

universities, but the FASB retained authority for private institutions. Since

1984, the accounting and reporting standards for the governmental and

private institutions have begun to differ. Recognition of Depreciation bv

Not-for-Profit Organizations (FASB Statement No. 93) requires private

institutions to report depreciation. GASB guidance to the governmental

institutions instructs those institutions not to change their accounting

practices to comply with t h a t statement. In addition, the FASB issued

35
Statements of Financial Accounting Standards (SFAS) No. 116 and No. 117

in 1993 which apply only to private institutions. The AICPA incorporated

the requirements of those SFASs in its 1996 audit and accounting guide for

private institutions. The audit guide is used extensively by independent

CPAs in audits of private colleges and universities.

For the present, the FASB approach to accounting and reporting for

higher education institutions will be followed. The subject institution for

this study complied with the requirements of SFASs 116 and 117 for the

fiscal year which ended May 31, 1995.

ABC/M System

Presented in this chapter is a somewhat overlapping, chronologically

imprecise history of the introduction and development of ABC/M. It starts

with the early beginnings (about 1988 to about 1992) during which time

business and the related professions became aware of the basic concepts

embodied in this new costing system. Those experiences are presented in

the section titled, "Conceptual/Awareness Phase of ABC/M, 1988-1992."

Some experimentation with systems similar to the ABC/M system occurred

as early as 1984; however, most of the experimental installations of ABC/M

systems were done during the period from about 1991 to about 1995. Those

installations are discussed in the section titled "Implementation/Trial Phase

36
of ABC/M, 1991-1995." Since from about 1992 to about 1996, as the

installations matured, both benefits and problem areas surfaced. Numerous

articles were written to describe the advantages and disadvantages of the

systems installed with suggestions for further enhancement and refinement

of those systems. Those comments have been included in the section titled,

"Evaluation/Modification/Enhancement Phase of ABC/M, 1992-1995." The

final phase presented is the section titled, "Adoption/Rejection Phase of

ABC/M, 1994-Present," which began in about 1992 and continues to the

present. The dates assigned to each section overlap and cannot be defined

as specific by a study of the available literature. The literature indicates

t h a t ABC/M systems that have been installed have, for the most part, been

continued. The reader should be aware that the researcher discovered no

report in the literature of an actual installation of an ABC/M system in a

higher education institution. Mr. Tom Pryor of ICMS, Inc., a consulting

company specializing in ABC/M systems, reports that the number of casual

inquiries about ABC/M from higher education institution officers has

increased in recent months.

Historically, accounting practitioners and organizations responsible

for authoritative accounting literature have systematically studied issues

with the objective of improving financial accounting reporting. More

accurate and usable accounting reports produce better financial decisions by

37
higher education administrators (Nagarajan, 1985). The economic impact of

financial accounting results, that are dependent on logical and accurate

accounting procedures, has played an increasingly important role in the

determination of Generally Accepted Accounting Principles (GAAP) since

the 1970s (Williams, Stanga & Holder, 1995).

These accounting procedures also provide information critical to

internal operational decisions. The success of management accounting

depends on whether managers' decisions are improved by the accounting

information provided to them (Horngren, Foster & Datar, 1997).

In the early 1980s, accounting and management experts began

suggesting that traditional management accounting information did not

provide accurate, relevant, and necessary data for managerial operational

and financial decision making. Two Harvard University distinguished

professors, Drs. Robin Cooper and Robert Kaplan, authored a number of

articles pointing out the failure of traditional costing methods to produce

accurate product (service) costs and supporting the consideration of ABC/M

as a replacement or complementary extension of existing systems.

38
Conceptual/Awareness Phase
of ABC/M. 1988-1992

The articles presented in this section deal with some of the basic

deficiencies of the traditional accounting systems that ABC/M purportedly

addresses. Reasons were given to justify the redesign of the traditional

system and other articles presented what the authors considered to be

inherent advantages of ABC/M over the traditional system.

Johnson and Kaplan explored the business environments of the

nineteenth and early twentieth centuries that influenced cost system design

during these periods. Advancement in cost measurement appears to have

ceased during the 1920s, while business environments have continued to

change. The emergence of vertically and horizontally integrated companies

and their impact on early cost systems were also examined. The last portion

of the book addressed the "lost relevance" of these old systems to new

business environments (Johnson & Kaplan, 1987).

In an industry context, knowledge of production costs on the part of

managers is of vital importance in regard to marketed products since

distorted product cost information can cause the firm to follow an

inappropriate and unprofitable schedule. However, despite the importance,

disagreement still exists about whether product costs should be measured

by the full absorption or by the variable cost method. Managers in some

39
firms t h a t were the subjects of a study expressed serious concerns about the

accuracy of their product costing systems. The systems studied used a two-

stage cost allocation system, yet seemed to have problems in the failure of

marginal costing and fixed cost allocations. Other significant areas in the

cost systems include transaction costing and long term variable cost. A

comprehensive product cost system should provide a better basis for

managerial decisions on pricing, introducing, discontinuing, and re-

engineering product lines (Cooper & Kaplan, 1988b).

Managers in companies selling multiple products are making

important decisions about pricing, product mix, and process technology

based on distorted cost information. What is worse, alternative information

rarely exists to alert these managers that product costs may be badly

flawed. Most companies detect the problem only after their competitiveness

and profitability have deteriorated. Distorted cost information is the result

of sensible accounting choices made decades ago when most companies

manufactured a narrow range of products. Back then, the costs of direct

labor and materials, the most important production factors, could be traced

easily to individual products. Distortions from allocating factory and

corporate overhead by burden rates on direct labor were minor. The

expense of collecting and processing data made it hard to justify more

40
sophisticated allocation of these and other indirect costs (Cooper & Kaplan,

1988a).

Today, product lines and marketing channels have proliferated.

Direct labor now represents a small fraction of corporate costs, while

expenses covering factory support operations (marketing, distribution,

engineering, and other overhead functions) have exploded. But most

companies still allocate these rising overhead and support costs by their

diminishing direct labor base or report them as current period expenses,

such as marketing and distribution costs. These simplistic approaches are

no longer justifiable, especially given the plummeting costs of information

technology. They can also be dangerous. Intensified global competition and

radically new production technologies have made accurate product cost

information crucial to competitive success (Cooper & Kaplan, 1988a).

An ABC/M system can paint a picture of product costs radically

different from data generated by traditional systems. These differences

arise because of the system's more sophisticated approach of attributing

factory overhead, corporate overhead, and other organizational resources

first to activities and then to the products that create demand for these

indirect resources (Cooper & Kaplan, 1988a).

Once executives are armed with more reliable cost information, they

can ponder a range of strategic options. Dropping unprofitable products is

41
one, so is raising prices. Strategic options relating to high volume products

become possible. Information generated by an ABC/M system can also

encourage companies to redesign products to use more common parts.

Likewise, ABC/M can change how managers evaluate new process

technologies. With all of these advantages, ABC/M is not designed only to

provide more accurate information about production and support activities

and product costs, but also to provide information that management can use

to focus its attention on the products and processes with the most leverage

for increasing profits. Rather, it helps managers make better decisions

about product design, pricing, marketing, and product mix, and encourages

continual operating improvements (Cooper & Kaplan, 1988a).

When Maskell (1988) interviewed Kaplan, Kaplan expressed concern

that managers use financial accounting figures designed for external

reporting to make important decisions for which that data are unsuitable.

Kaplan believes that the main problem is the incorrect use of available data.

Another important issue involves the problem of product costing. If current

systems are unreliable, the accounting manager needs to design an entirely

new method of capturing and calculating product costs. Additional study is

needed to answer the objection that ABC/M produces so many activity-based

cost factors that it becomes too complicated to be of practical value.

42
 In another interview, Kaplan discussed the need for a separate,

simplified management accounting system to help chief executive officers

make crucial management decisions. Traditional financial statements that

are prepared according to accounting protocols are flawed because of

incorrect calculations and the inappropriate assignment of overhead costs.

Managers are unable to tell what the actual costs are to produce various

products. Traditional accounting systems are biased in favor of growth and

incremental activities, when the way to increase profitability may lie in

downsizing or simplifying products. Companies currently add products

based on their incremental costs and incremental profits, when the changes

are actually much more t h a n incremental. For most management decision

purposes, all costs should be considered variable and a management

accounting system should track new ventures on a project-by-project basis

(Pearlstein, 1988).

In early 1989, Cooper suggested that industry cost systems need to be

redesigned if the following are true:

1. Functional managers want to drop seemingly profitable lines.

2. Profit margins are hard to explain.

3. Hard-to-make products show big profits.

4. Departments have their own cost systems.

5. The accounting department spends a lot of time on special projects.

43
 6. The company has a high-margin niche all to itself

7. Customers do not mind price increases.

8. Competitors' prices are unrealistically low.

9. The results of bids are difficult to explain.

10. Vendor bids are lower than expected.

11. Reported costs change due to new financial accounting regulations.

Managers should make a comprehensive evaluation of their cost systems

every few years to determine if the above are true (Cooper, 1989).

By J u n e 1989, others were beginning to support the concept of

ABC/M as a needed measure to overcome the product cost distortion that

occurs in traditional systems when firms use a single volume related base to

allocate overhead costs to products. ABC/M is advisable if the existing cost

system is weak and the product diversity is low (Romano, 1989).

Activity-based accounting encourages management accountants to

analyze activities and determine their value to the customer. This type of

accounting can be used to assign corporate level costs to the business units

and provide operating business units with a great deal of autonomy. The

implementation of activity-based accounting begins with an analysis of each

function performed by staff members to determine if the customer needs

those services. For each activity that a department performs, resources

must be assigned, the cost must be determined, and the most significant

44
cost driver must be selected. Companies committed to total quahty

management will institute an ongoing process of continuous improvement

(Steimer, 1990).

An Australian author pointed out that the basic premise of ABC/M is

that it is the activities and processes performed within the organization that

add cost and value to the products and services produced. ABC/M collects

costs by activity and then allocates them using cost drivers, that is, the

factors t h a t cause costs to be incurred. The key difference between

conventional product costing and ABC/M is that ABC/M allocates costs to

those products t h a t actually cause the activity to take place. It can also be

used to calculate customer profitability (Dale, 1991).

A case for a new costing paradigm should include a statement that

being a low cost producer is now expected as the norm, and the basis of

competition has clearly shifted toward time based manufacturing.

Unfortunately, cost and management accounting systems have not kept

pace with this revolution. Cost accounting systems that produce data

needed to review the past and serve external reporting purposes are proving

to be ineffective tools for predicting the bottom line impact of a company's

actions. Much of the problem lies in the way companies analyze

manufacturing costs. The overwhelming emphasis on product costs alone by

users of cost accounting data often causes them to overlook the true factors

45
t h a t contribute to high manufacturing costs. Costs are seen in terms of

fixed and variable and costing methods assume that all variable costs are

proportional to some measure of volume, such as direct labor. A new

paradigm for cost management is needed. ABC/M, which focuses attention

on the cost of performing significant activities within a company, promises

to provide the basis of this paradigm (Flentov & Shuman, 1991a).

On a more positive track, by midyear, 1991, articles began to appear

dealing with the way ABC/M works and what these authors considered to be

the inherent advantages to the ABC/M approach. Flentov and Shuman

(1991b) concluded that the traditional approach to cost accounting was no

longer adequate and that ABC/M was the logical replacement system. The

ABC/M paradigm is based on the principle that it is not the products that a

company produces that generate costs but rather the activities that are

performed in planning, procuring, and producing products. Activity cost

pools directly show companies where they spend their money and where the

greatest potential for cost reduction may be found. Under ABC/M, an

effective method of cost cutting is to group activity costs into value-added

and non- value-added costs. A company can best avoid implementation

pitfalls by starting with a pilot program.

ABC/M proponents assert that the causes of profitability and cost in

most businesses are too complex to know or control by reference to financial

46
information recorded in traditional accounting records or reports.

Companies must manage financial results and track costs with information

about activities. ABC/M information does not necessarily help companies

achieve continuous improvement of globally competitive operations. In

contrast, cross functional activity cost analysis provides both strategic

product costs and relevant operational control targets in a form that does

not necessarily jeopardize a company's efforts to become a world class

competitor (Johnson, 1991).

ABC/M is rapidly becoming an accepted and practical tool for

management accountants to implement and maintain. Two critical elements

necessary for the success of an ABC/M system are: (1) involving people who

have a strong understanding of the operations of the business organized into

a project implementation team, and (2) making use of a practical and

structured technique of analysis (Sharman, 1991).

Walker (1992) suggested a further division of ABC (ABCII) when he

proposed attribute-based costing. This approach would provide for detailed

cost benefit analysis of customer needs aimed at improving effectiveness.

The focus of ABCII is on planning rather t h a n on analysis of past costs,

which have little impact. The aims for ABCII are to analyze costs and

benefits for products and services in detail by breaking customer needs into

47
the specific product attributes. Under ABCII cost analysis, activities should

be classified as infrastructure, discretionary, and operating.

In another article, the use of ABC/M in managing resources was

emphasized. Managers can use the ABC/M resource usage cost information

to: (1) monitor and predict the changes in demands for activities as a

function of changes in output volume and mix, (2) process changes and

improvements, (3) introduce new technology, and (4) change product and

process design. Managers may be encouraged to modify their use of

resources, in the short run, based on information about unused capacity

(Cooper & Kaplan, 1992).

The findings of an empirical study suggested that manufacturing

firms demanded the new accounting systems (ABC/M) to improve product

costing estimates and to measure more accurate product line profitability.

These findings supported the claims of "lost relevancy" of the conventional

accounting systems and reinforced the needs for accounting system changes

(Shim, 1993).

Wizdo (1993) suggested that ABC/M may be used to identify, analyze,

and manage costs and suggested the use of software as an important tool in

the utilization of ABC/M. ABC/M can meet the challenge of the changing

cost mix by determining two costs for each product, the expected cost and

the actual cost. Many successful companies are emplojdng ABC/M by using

48
software that can integrate these business functions, thus providing online

information in real time so managers can analyze current situations and

perform "what-if' analyses.

Porter (1993) expressed the hope that ABC/M may one day end a long

standing feud that exists between purchasing professionals and

accountants. For purchasing agents, the ABC/M mind set represents a

possible escape from traditional performance measurements. It represents

a method for attaching numbers to often intuitive sourcing strategies and

could galvanize the purchasing professional's metamorphosis from purchase

order processor to supply strategist. ABC/M may help accountants escape

the accusation that traditional cost accounting systems beget bad numbers,

bad numbers beget bad business decisions, and bad business decisions beget

failure. By thinking in terms of activities and by attaching a cost to each

activity, ABC/M yields a more accurate picture of product cost and product

profitability.

The persuasive arguments made by both scholars and practitioners

that were presented during the years when the concept of ABC/M was being

developed, slowly began to convert some financial traditionalists over to the

position of giving ABC/M a trial, often as a pilot study. Therefore, this

researcher has given the next period in the historical development of ABC/M

the title of the "Implementation/Trial Phase."

49
 The literature does not indicate any attempt by academicians or

practitioners to apply as a comprehensive system the concepts of ABC/M to

institutions of higher learning within this period. A number of articles

appear during the next phase which discuss the implementation of ABC/M

to various organization types including service industries. Literature about

the implementation of ABC/M in higher education institutions was

noticeably absent; however, the consideration of the problem areas

associated with use of the traditional accounting system and the

contribution that ABC/M could make began to be reported.

Implementation/Trial Phase
of ABC/M, 1991-1995

Actual implementation of ABC/M occurred, often on a pilot study

basis, by a variety of commercial enterprises that represented a variety of

industries, by governmental agencies, and by nonprofit organizations such

as hospitals and other health care providers. Implementation in an actual

higher education institution was not found. In the initial stages, the

literature provided suggestions for applicability to entire industries.

Smith (1989) researched some private institutions with full-time

equivalent enrollments of about 2,000 students for the purpose of

determining the extent to which indirect cost allocation methodologies were

50
utilized. He found that as full-time equivalent enrollment increased, more

institutions implemented indirect cost allocation methodologies.

Literature applying ABC/M to higher education institutions is

severely limited. Only empirical studies dealing with universal problem

areas of higher education administration could be located. Chamberlain

(1990) surveyed groups of higher education financial report users concerning

the usefulness and accessibility of selected outcomes information. In

general, the groups perceived the information to be useful but not always

available. They felt that inclusion of nonfinancial data would enhance their

use of college and university reporting.

The concepts of ABC/M can be applied to service organizations in

which labor is paramount. In contrast to traditional product costing

techniques, ABC/M attempts to identify the reason for the existence of

overhead items. Overhead is allocated to the cost object based on the

volume of its cost driver. ABC/M could allow the organization to

concentrate on the individual cost drivers and address overhead by

eliminating or reducing the true cost of the overhead (Chaffman & Talbott,

1991).

Some specific examples of industry ABC/M implementation are

provided by the literature. Perhaps the earliest example of ABC/M in

history is Perkin-Elmer Corporation of Norwalk, Connecticut. In 1984,

51
financial executives at Perkin-Elmer decided their cost accounting system

needed an overhaul. The world's leading maker of analytical instruments,

Perkin-Elmer was on the cutting edge of technology, but the company's cost

d a t a were masking inefficiencies. The financial group set out to revamp the

cost accounting system. Without reahzing it, Perkin-Elmer had taken the

first steps toward ABC/M. Starting with the basic premise that activities

(not products) generate manufacturing costs, the company formed cross-

functional teams to identify cost drivers which are responsible for the

various ways in which activities create a demand for resources. Since

implementation, parts lists have been reduced leading to greatly reduced

inventories and materials handling requirements. Working with fewer

suppliers cut the company's procurement costs. Perkin-Elmer has

subsequently completely implemented their ABC/M system (Haavind, 1991).

In the governmental area, perhaps the agency that was first to see

the advantages of ABC/M was the Department of Defense (DOD), along

with the companies that serve as major contractors for the DOD. ABC/M is

helping bring a new era of contractor and government cooperation. Cost

competition among contractors is intensifying as a result of changes in the

DOD procurement policies and current global politics. Hughes Aircraft has

evolved its systems carefully over a period of five years, thereby allowing

local auditors to grow and learn with the company as equal partners. In

52
essence, this transition recognizes that activities rather than products are

the absorbers of cost. The company's goal is to obtain accurate product cost

information. The full implementation of ABC/M in a DOD contracting

environment will require accounting changes (Haedicke & Foil, 1991).

A $100 million per year plumbing fixture manufacturer had a

vertically integrated 720,000 square foot factory in which the company

manufactured an enormous number of product permutations. These factors

resulted in a large overhead structure that was responsible for almost 60%

of the cost of goods sold. When the company became unprofitable, it decided

to conduct a manufacturing study to reduce costs and improve profitability.

The firm could not be competitive in all of the diverse manufacturing

processes it performed. Its current labor and depreciation based cost

allocation system would not support accurate make or buy decision making.

The firm's manufacturing operations had to be recosted. The ABC/M system

that was developed accumulated overhead costs into two pools, elements

driven by volume and elements driven by transactions. The company

succeeded in implementing both product line reductions and manufacturing

configuration changes (O'Guin, 1990).

Cal Electronic Circuits, Inc., a manufacturer of printed circuit boards,

implemented an ABC/M system after careful planning and analysis. The

implementation process involved five major steps. Having the accountants

53
involved from the beginning of the process ensured consistency in the

planning and implementation of the ABC/M system. The soundness of the

cost driver standards of Cal Electronic Circuits is reviewed periodically and

variance analysis is used to isolate areas that require attention of external

and internal auditors (Lee, 1990).

Gary Cokins, a manufacturing consultant for Electronic Data

Services, Inc., provided us with another example of the large semiconductor

division of the $3 billion in sales Harris Corporation that had an operating

loss of $103 million on sales of only $741 million in 1991. The managers

could not tell which product lines were responsible for the big losses because

the division was using an outmoded cost accounting system. In December,

1991, Harris Semiconductor joined the ranks of Hewlett-Packard, General

Electric, Hughes Aircraft, and scores of others using a revolutionary new

costing method (ABC/M). The benefit of ABC/M to Harris Corporation was

primarily in the area of cost behavior, production efficiency, and cost

accuracy, the areas they targeted the system to address (Montgomery,

1992).

The Best Baking Company has implemented an engineered costs

system. This method establishes a formal or engineered analysis of

resources necessary to build a product (a standard cost ABC-type system)

and then applies costs to the quantity of each resource. An engineered cost

54
system can eliminate the burden of superfluous exercises, allowing financial

professionals to redirect their effort to more relevant activities and to make

a more direct contribution to the financial success of their companies

(Mager, 1993).

The most comprehensive compilation of case studies found involving

ABC/M came from the experience of the consulting arm of Arthur Andersen,

an international accounting firm. These case studies provide us with

significant insights into the difficulties and rewards encountered in

implementing ABC/M in large national or international corporations (Player

& Keys, 1995).

Since competition has forced public electric utilities to make the

transition from cost-plus to "sink or swim," increasing numbers of them are

examining fundamentals of their business operations. They are finding that

traditional accounting methods, specifically cost accounting, serve only to

meet the financial reporting needs of regulators and not the needs of utility

managers who must run the business. An ABC/M system, however, enables

managers to look at resources in a different light. Activity management

encourages accountants and management to concentrate on how resources

are used. Activity management specialists aim at process improvement,

enhanced productivity, and streamlining. In many ways, the use of ABC/M

facilitates today's intense focus on re-engineering by providing a measurable

55
context for the evaluation of utihty business processes as candidates for

transformation (Briody, 1994).

Rao (1995) emphasizes the importance of specialized computer

software in implementing ABC/M. Important features that should be

present in the software selected include customer support, training

programs, and educational materials.

The graphic arts industry offers a good example of why traditional

costing methods no longer are effective. Traditional costing systems can do

more t h a n just throw off estimates and pricing. The misleading figures they

generate often cause printing and graphic arts firms to go after the wrong

business or even to lose money on unprofitable jobs they think are

profitable. The drawbacks of traditional costing methods have led to the

development of ABC/M, a new costing concept. ABC/M provides information

t h a t helps printing shops to better cost, market, and compete because it

relates to specific tasks. ABC/M amounts to measurement that can be

quantified that associates the cost of an activity with the consumption of the

cost (Wiersema, 1996).

Since no known comprehensively applied installation of ABC/M

exists in a higher education institution, instances of implementation

presented in this section and the suggestions for evaluation, modification,

and enhancement presented in the following section relate to other service.

56
manufacturing, and merchandising organizations. The suggested

improvements, if apphcable to the situations presented, could logically be

appropriate for ABC/M systems to be designed for higher education

institutions.

Evaluation/Modification/Enhancement
Phase of ABC/M. 1992-1995

The National Health Service in the United Kingdom, during the

1980s, was evaluating ABC along with the statistical approach to cost

accounting. While not reaching a conclusion as to the relative superiority of

one over the other, they determined that the statistical approach appeared

to have required fewer resources to implement (Holford, 1987).

Ostrenga (1990) closely aligns ABC/M with Total Cost Management

(TCM) in an article. Based on the experience of Ernst and Young (CPAs) in

applying the different principles of TCM for large and small companies from

discrete to process manufacturing, the central theme that emerges is that

activities are the focal point of TCM. The only effective way to reduce costs

is to manage resource consuming activities through their driver

relationship.

Perhaps the best description of the positive results of ABC/M t h a t

have become apparent came from an interview of Cooper and Kaplan in

57
1991 by Alfred King. Without expanding on the specific advantages. Cooper

and Kaplan enumerated several that include the following:

1. An ABC/M system provides managers with a better understanding

of the way profits are generated at both the product and the customer level.

2. Very positive results have come from the use of ABC/M cost

analysis used in conjunction with process improvement.

3. ABC/M results validate the savings from successful cost reduction

programs.

4. ABC/M promotes improved design for manufacturing programs.

5. ABC/M provides data that may result in the elimination of some of

their low volume customers from whom they cannot get price increases.

6. ABC/M triggers actions, but by itself does not cause savings to

occur.

7. Some benefits of ABC/M cannot be quantified. For example, some

managers have reported that the ABC/M cost information provided a much

better language for everybody to use in his/her everyday discussions.

8. ABC/M has had a profound but invisible effect on the profitability

of the firm.

9. ABC/M allows managers to see both how much of available

resources they are using and the economics of excess capacity.

10. People in service organizations should not hesitate to look at

58
ABC/M as a technique and a tool for continuous improvement. In the really

successful implementation, the ABC/M system is owned by everybody. It

h a s become a business system, not an accounting or financial system (King,

1991).

The first phase of a continuous improvement cycle involves training.

encouraging employees, and integrating the cost-management process

within the existing management structure. Activity analysis presents

managers with the opportunity to reduce costs by eliminating the

inefficiencies and freeing up resources associated with wasteful or non-

value-added activities. Process analysis focuses on eliminating waste within

an organization by continuously improving the way work is performed. In

the next phase, opportunities to reduce non-value-added activities or to

optimize value-added activities are identified. With the implementation of a

continuous improvement cycle, responsibility centers may have to be

redefined. Each cost center can then be evaluated on the basis of newly

developed, activity-driven performance measures (Convey, 1991).

Greenwood (1991) extended the value of ABC/M costing which

supports strategic decision making with respect to product and customer

decisions by designing a conceptual model for directly evaluating process

cost information in support of continuous process improvement initiatives.

A unique feature of the model is that it considers the nonlinear or step

59
function capacity profiles in determining the actual impact on resource

spending of alternative process configurations.

Aims designated for any ABC/M system include at least two goals.

The first is to improve the value received by customers. The cost of poor

quality may be revealed by building in the ability to analyze activity centers

for non-value-added tasks. The second is to improve profits by providing

better value. Indeed, improving quality is the sure way to reduce cost.

Improving quality involves doing it right the first time and by working on

reducing cost drivers that cause errors. Paradoxically, reducing cost the

ABC/M way almost always improves quality (Turney, 1992).

Schiff (1992) suggested that companies that are concerned with cost

containment, the marketing concept, zero defects, or reducing cycle time

should consider employing advanced cost management techniques such as

ABC/M. He cautioned, however, that the answers to certain questions of

company-wide involvement should be obtained before embarking on any

implementation project.

Best (1992) developed a framework for examining proposed

uniformity in the ABC/M information systems in the computer

manufacturing operations of Hewlett-Packard which may be more generally

applied. The conclusion was that when multiple information systems are

utilized by higher levels of management, the imposition of a level of

60
uniformity on the ABC/M systems might create operational decision

tradeoffs t h a t must be evaluated prior to implementation.

Internal auditing can contribute to the success of ABC/M through

several types of improvement. Perhaps the most valuable contribution

internal auditors can make is to provide feedback to upper management and

operating managers in a positive manner by highlighting the value-added

n a t u r e of their activities (Ray & Gupta, 1992).

ABC/M derived business costs are not being integrated with general

corporate accounting systems to support general ledgers with inventory

valuation and variance reporting. ABC/M derived cost data should be

recorded in the general ledger at the activity level, negating the need for two

cost accumulation systems. A single ABC/M cost accumulation and

reporting system can produce costs that are more accurate than their

counterparts derived by traditional systems, and can be used by more

managers for more business decisions (Thilmony, 1992). Christensen and

Demski (1995) isolated non-volume cost drivers as one of the major

strengths of ABC/M.

The application of activity-based approaches to cost management

continues to evolve away from just product costing. A further development

was described where the cost object was the business process t h a t served as

an aid to process improvement. Treatment of the business process as the

61
cost object resulted in an activity map. The result of activity mapping was

the consideration of alternative ways to redesign the process for continuous

improvement (Morrow & Hazell, 1992).

Managers of companies that espouse total quality management

(TQM) have not yet come to terms with the new ways of thinking and new

ways of doing business frequently described as a paradigm shift. One

example of a paradigm shift is the use of ABC/M, which gives companies

better product cost information by distributing indirect costs to products

more reliably t h a n traditional cost accounting systems once did (Johnson,

1993).

Dr. Charles Horngren, the Edmund W. Littlefield Professor of

Accounting, Emeritus, at Stanford University, is one of the most widely

recognized authorities in management (cost) accounting. He expressed his

belief that although both techniques will evolve further, ABC/M together

with TQM and continuous improvement will be around for some time

(Jeffries & Hankes, 1994).

ABC/M has the potential to provide improved insight into the

relationship between a firm's costs and products and, thus, a more

meaningful assignment of costs to products. Despite this, however, ABC/M

h a s not yet made the transition from being a cost management tool to being

the foundation for financial accounting and external reporting. Better

62
approximations of long run variable costs are provided by ABC/M, but it is

not clear t h a t ABC/M costs are fully compatible with existing accounting

standards. The persistence of dual systems perhaps illustrates the

suggestion by Kaplan that one cost system is not enough. These issues

suggest t h a t if costs derived under an ABC/M system are to be used in

financial statements, they may need to be restated in a form more suitable

to the requirements of external reporting (Hartnett, Lowry, & Luther,

1994).

Some have come forward to question whether ABC/M lives up to its

billing. Keegan and Filer (1994) contend that ABC/M is a technique, not a

system, but concede that when used effectively ABC/M is an effective tool of

management, supplying insights to guide product strategy. One limitation

of ABC/M is t h a t the nonintegrated nature of an ABC/M analysis limits its

usefulness. They feel that integration into the formal system of reporting

will be required for ABC/M to achieve universal acceptance.

A company must be led from within and be driven by continual top

management support to improve. The drive to strive for better and better

performance must be in the culture of the organization if it is to succeed.

^
The role of ABC/M in continuous improvement initiatives is both to

prioritize and quantify improvement opportunities and, when the

improvement has been achieved, to measure the results in financial terms.

63
In this way, the organization benefits from being able to leverage hmited

resources and derive positive reinforcement of improvement activities.

ABC/M can create additional leverage in a continuous improvement

environment (Collins, 1994).

Since organizations tend to grow, the behavior of costs tends to be

deduced from conditions of rising total costs. For instance, a cost driver is

defined as that which causes another rise in a step cost. The point is that

the relationships deduced on the upswing may not be the same on the

downswing. Indeed, the old adage is that costs tend to be variable on the

way up but fixed on the way down (Schwan, 1994).

By this time, the concept of ABC/M had been articulated in articles

and in other writings. This new costing system had survived the trials of

implementation in a large number of commercial organizations;

demonstrated its practicality; and in many cases, proven its superiority as a

cost accounting system for manufacturing and service organizations. The

next period provided evidence that ABC/M systems were being adopted in

growing numbers.

64
Adoption/Rejection Phase of ABC/M.
1994-Present

The National Health Service of the United Kingdom (UK) has

continued to study the development of a management accounting system

within a major UK hospital. As a result of this pilot study, the district

extended the scope of the system with the view to meeting national

demands for information. Management accounting systems in the Health

Service are geared to budgeting and budgetary control. Two of the areas

t h a t were explored in management information systems include Mediscreen,

a commercially available database package and Mycin, a medical diagnosis

program. Patient based costing systems received attention because of the

weakness of functional budgeting in determining responsibility for

controlling costs (Holford & McAulay, 1987).

In the United States (US), there are now hundreds of installed

ABC/M systems in a market that is much more mature than the market of

the United Kingdom. The experience of ABC/M in these companies

represents a valuable test bed for UK organizations that may be considering

ABC/M systems. What is already apparent, however, is that barriers to

ABC/M's use are fast being removed, perhaps even for colleges and
p
universities (Anonymous, 1991).

65
 While ABC/M is rapidly gaining acceptance as a management

accounting technique and as a strategic decision making tool, controllers

will need to develop multiple cost models tailored to the different decisions

managers face. An output-based cost estimation model is suggested

(Bartley & Jensen, 1991).

ABC/M systems provide valuable economic information to companies,

especially companies active in process improvement and customer

satisfaction programs. However, ABC/M information is certainly not the

only data managers need to survive and prosper in a competitive

environment. To be successful, companies are learning how to integrate

ABC/M information with other information on revenues, customer

preferences, process quality, and cycle times (Kaplan, 1992).

An in-depth field study explored management control and accounting

systems in the transportation industry. Major findings were the

pervasiveness of the influence of marketing activities over management

control and accounting system features, and the strong belief of the persons

interviewed t h a t this influence was a major contributor to the success of the

competitive strategy. The results indicated a pattern of extensive use of

ABC/M accounting information to support marketing activities such as

planning and pricing. Traditional use of accounting output measurements

for control was limited to cost control in operations (Cunningham, 1992).

66
 Collaborations among managers, practitioners, consultants, and

academics have produced the conceptual development of approaches to

improve the practice of management accounting. An important aspect of

ABC/M h a s been the benefit that accountants obtain from the process of

increased dialogue with other functional staff that is necessary in the

process of ABC/M design and implementation. Even though ABC/M has

produced invaluable progress, the need for improved methods of

performance measurement and a better understanding and costing of

business processes still remains on the management agenda (Davies &

Sweeting, 1993).

Having an array of unit cost measures from which to choose often

confuses managers. However, all of these measures are important because

they present different perspectives on costs. In addition, many unit cost

measures have unique applications associated with them. The most obvious

application is product life cycle pricing. In performance measurement,

ABC/M clearly is the superior system because it ties in with general ledger

expense. Therefore, it has credibility with product managers. Capacity

planning is another application supported well by ABC/M. In budgeting,

the intuitive nature of ABC/M is especially helpful. The authors

differentiated strategic ABC/M information as the current best estimate of

67
the future costs. Simple ABC/M involves the historic costing of products and

processes (Yang & Wu, 1993).

The IBM experience with ABC has provided us with a remarkable

success story about the accuracy of product costing, but it also demonstrated

the potential ABC/M has to cause labor problems. The most threatened

proved to be middle managers. This is a somewhat puzzling development

because it has been assumed that one reason the Japanese are not

enthusiastic about ABC/M is that it ultimately threatens the power and

freedom of the top managers in the hierarchy by giving the people below

more power to question the executives (MacErlean, 1993).

The literature in this section to this point has presented how ABC/M

has been accepted in two service industries for customer satisfaction

improvement and for marketing enhancement. Other purposes for which it

had found acceptance include: (1) strategic decision making, (2) staff

collaboration, (3) performance measurements, and (4) decisions dependent

on accurate product costs. Despite the caution that integration with

existing financial accounting systems must be achieved, the barriers to the

adoption of ABC/M were quickly disappearing. Many of those areas where

ABC/M systems have found acceptance are logically similar to higher

education institutions for application of ABC/M systems.

68
 Many of Johnson and Kaplan's 1987 assertions concerning the

deficiencies in information produced by traditional accounting systems have

held, for the large part. Practitioner designed accounting systems gave

preference to the dominate need for accurate, consistent external reporting

(financial statements), and accounting academia supported that emphasis.

This almost total emphasis on financial accounting inhibited the

development and spread of cost accounting knowledge. However, there were

always individuals who never lost sight of the various roles of cost

accounting and the necessity for a cost system to produce different costs for

different purposes for managerial decision making. Fundamental to a good

cost system were departmentalization of the organization and a

commitment to continuous cost research. Future research must include an

examination of the records of individual firms and explorations of specific

industries to include colleges and universities (Vollmers, 1994).

Baker (1994) reported that ABC/M is popular now and will continue

to be popular for quite some time because it does not interrupt the financial

accounting model. It may be operated as a complementary, supplementary

system to the traditional financial accounting system.

When the somewhat problematic implementation process of ABC/M is

successful, ABC/M may be able to help teach management how to

proactively manage organizations of all types, including public and private

69
colleges and universities. Management will have an additional tool to

improve internal processes and establish pricing strategies and performance

measurements. ABC/M is the competitive advantage needed to make

quicker, more effective management decisions in the increasingly

competitive marketplace in which colleges and universities operate (Arney

& Sorice, 1994).

Acceptance of ABC/M has not always been unequivocal. One author

felt that managers should exercise caution when it comes to adoption of

activity-based approaches. Performance improvement opportunities do

certainly exist, but these do not materialize automatically. Any activity-

based approach may be associated with quite large costs for measurement.

Therefore, it is important to define clearly the purpose of the approach and

to let the obtaining of activity information match this purpose. Far too

many activity-based projects have been initiated with vague insights about

what such an approach means (Borjesson, 1994).

An empirical research study found that ABC/M-assisted companies:

(1) made better bid selections, (2) used overtime or subcontracting more

effectively, and (3) minimized under/over allocation of overhead costs. Also,

ABC/M made it possible to achieve more accurate project costs t h a n with the

traditional method. Additionally, it was found that modeling an activity-

based costing system was highly desirable. Activities should be defined as

70
processes to make it easier to use ABC/M for process analysis. ABC/M more

accurately reflected project costing than poohng all overhead into one

nonhomogeneous cost pool (Mansuy, 1996).

Two approaches have been taken in the design of software that allow

managers to produce the ABC/M information they need. They are cost

decomposition and process modeling. In developing ABC/M using a process

model, the first step is to determine the key activities to be examined and

the cost objectives that drive those activities (WilHamson, 1996).

Once the domain of US corporations, activity-based accounting is now

gaining popularity throughout Latin America and Europe. The one holdout

seems to be J a p a n . In theory, ABC/M works like x-ray spectacles for the

corporate set; the user looks at the world through activity-colored glasses

and the inner workings of a company magically appear (Goff, 1996).

Australian manufacturing firms have been slow to adopt the world's

best practice cost management techniques. This is somewhat surprising in

light of the amount of popular attention ABC/M has received in Australia.

Among the firms t h a t had adopted the management system, there was

almost unanimous agreement that objectives were achieved. This is fairly

u n u s u a l for any administrative system innovation. The main problems m

identified in ABC/M implementation were the large amount of work

involved, other priorities, lack of staff time, the design of the more complex

71
ABC/M system, and the tracing of cost drivers to products. However, a large

number of firms that have previously rejected ABC/M have indicated a

willingness to consider introducing it a later date, and a number of those

which are still considering it had indicated they were likely to introduce it

within the next twelve months (Anonymous, 1997).

A sound, normative argument has been presented for the adoption of

ABC/M as an effective managerial support tool that is essential given

current international competition. The linkages among cost variables and

their interactions with decision making take on a new clarity with ABC/M

that was not apparent with the traditional cost accounting techniques. As

US-based organizations continue to expand into international markets, the

ever increasing complexity of their environment has necessitated the need

for accurate association between activities and costs that lead to more

accurate and relevant information. Historically, managerial techniques

developed in this country have been adopted, perfected, and used

successfully by international competition (DeZoort, Rosetti, & DeZoort,

1997).

Several examples of total or conditional acceptance of ABC/M for a

variety of accounting and management purposes has been presented in this

section. In the next major section, the future of ABC/M for business and for

higher education will be explored. The thoughts and sometimes predictions

72
of various authoritative authors are presented in three subsections

beginning with: (1) some possibilities for additional uses of ABC/M in new

applications, (2) theories for variations in the basic design of ABC/M, and (3)

various approaches to ABC/M that have been tried or have been suggested

for trial. Seventeen discrete possibihties for uses of ABC/M are presented

for commercial enterprises that could logically be considered equally

apphcable to higher education institutions. Three possibilities are

presented t h a t appear to have no applicability to colleges or universities.

Two additional possibilities refer only to college and university settings.

Possibilities/Theories/Approaches
for ABC/M Implementation

Possibilities Considered Equally

Applicable to All Organizations,
Including Higher Education
Institutions.

The experience of major corporations and other organizations that

have used ABC/M successfully shows that ABC/M techniques are gaining

credibility in the manufacturing sector and more recently in the service,

government, and nonprofit sectors. Some examples of the possibilities for

application of ABC/M in all of these sectors are presented in this section to

demonstrate flexibility inherent to this new system.

73
 The development of ABC/M may be attributed to certain very

practical factors including the needs of financial reporting and the

competitiveness of all markets. ABC/M is concerned with all overhead costs

and it recognizes the complexity of the business through the use of multiple

cost drivers. ABC/M provides meaningful product cost and profitability

analysis information (Jeans & Morrow, 1989).

One of the less anticipated applications of ABC/M is its use in capital

asset investment analysis. This application reveals a number of distinct

advantages over more traditional capital asset analysis and justification

methods. The most significant advantage is the ability to reduce the

uncertainty surrounding major capital investment decisions. This is

accomplished by identifying a comprehensive base of activities on which the

impact of the investment decision can be measured in the short term and

over the life of the investment. It is this holistic view of the activity base

that enables the decision maker to:

1. Identify high impact investment activities. This assessment

includes an exhaustive evaluation of both non-financial and financial

benefits to a company.

2. Evaluate expected impacts by function and organization and

identify the cost necessary to achieve that result.

74
 3. Formulate plans and perform iterative risk assessments to identify

the most robust alternative.

4. Integrate the selected alternative into a cost management

framework, using the same activity base, to ensure that projected benefits

are achieved (Brimson, 1989).

Cost leadership and cost effectiveness are critical elements of

business competitiveness. ABC/M permits management accountants to act

as internal management consultants, giving them the responsibility to look

inward. Properly used, ABC/M could aid the Western world in its endeavor

to overtake the Japanese in vital areas of business (Sharman, 1990).

In additional to the more common use of ABC/M to provide accurate

product cost, it has been suggested that ABC/M can be used successfully in

both resource allocation decisions and in cost control by variance analysis.

However, the use of ABC/M for resource allocation could mean less than free

cooperation from managers during the analysis; and the calculation of short-

term variances must be handled with sensitivity (Dugdale, 1990).

A major cause of the higher cost of many manufactured products is

the major cost of marketing functions, including physical distribution

activities. ABC/M principles can be applied in an attempt to trace

marketing costs to product lines and territories in order to measure

profitability- An example illustrated that marketing costs, particularly the

75
costs of physical distribution, are a major factor in worldwide competition

and should not be ignored in discussions of performance measurements and

integrated cost systems such as ABC/M (Lewis, 1991).

Efficiency is a measure of the relationship between resources

consumed and outputs or outcomes achieved. Cost per unit of output or

outcome is one such measure, giving management an idea of resource use.

Since most program costs are fixed, the cost per unit of output will decline

as more clients are served. Measurements of efficiency for non-profits must

also be compared to some criterion, an achievable target predetermined by

management. If ABC/M is used, non-profits will significantly improve

measurement of a program's full cost and efficiency (Tishlias, 1992).

ABC/M has a weak point. It may correct deficiencies in comparing

resources consumed to ultimate products, but it mixes fixed and variable

costs. A refinement, which entails keeping fixed and variable costs separate

throughout a firm's cost accounting structure, can make an ABC/M system

more useful for line managers. Separating these costs allows managers to

apply the proper techniques to reduce waste by managing those aspects of

production capacity and process design (fixed) and of production methods

and practices (variable) t h a t are within their scope of decision. This

refinement in ABC can help a company minimize off line (ad hoc)

investigations and analyses (Woods, 1992).

76
 It has been suggested that ABC/M be applied to hospital cost

accounting, especially in determining the standard full cost per service unit

provided by the hospital. By combining ABC/M with standard costing,

health care administrators may be able to better plan and control the costs

of health services that are provided while ensuring sound fiscal

management. Health care organizations that are facing shrinking revenue

sources and growing expenses may find that ABC/M can be a valuable tool

in controlling costs and making strategic decisions (Chan, 1993).

In another health industry application, ABC/M enabled a private

rehabilitation hospital to satisfy the insurance industry's changing approach

to reimbursement. The hospital, determined to find an easy, reliable and

fair method to ascertain the amount, mix and resulting cost of nursing

services consumed by individual patients, initiated an analysis project. A

team developed a simple but reliable data gathering instrument to capture

variable and unpredictable events and build a database. With the help of a

consultant and by utilizing ABC/M principles, the team produced a nursing

resource consumption model for the hospital. The new data, which showed

99% accuracy in validity tests, allowed the hospital to unbundle a previously

fixed cost allocation for nursing (Carr, 1993).

m
In another service company, British Telecom (BT), the fundamental

principle (cost causation) underlying its costing method states t h a t costs

11
should be apportioned on the basis of what caused them to be incurred.

BT's cost apportionments use a variety of nonfinancial data taken from all

p a r t s of the business. Many of the calculations are the same as they would

be under ABC/M, with the use of product complexity and product range as

apportionment factors. The unusual aspect of this example is that ABC/M

principles were employed at BT long before the term ABC/M was even

coined (Bussey, 1993).

As companies seek to cut costs in every nook and cranny of their

logistics operations, they are finding they need to measure hidden costs.

The solution is ABC/M. ABC/M calculates the costs of an organization's

activities based on the time and resources devoted to them. It then uses a

computer model of the company's economic activity to allocate those costs to

cost objects (customers and products) (Gooley, 1995).

ABC/M costing methodology and additional predictive methods were

employed to determine if ABC/M was effective as a tool for addressing

Information Resource Management (IRM) concerns within the workers

compensation insurance industry. The study found ABC/M was able to

provide results t h a t were later confirmed by IRM analysis (Arnett, 1994).

Application of ABC/M to the steel industry resulted from the need of

Southwestern Ohio Steel to improve the operations of its cutting line. The

line was approaching capacity and other approaches to increasing

78

«v
throughput on the line were needed. An ABC/M system to analyze and

justify manufacturing cycle time improvements was developed for the

company. On non-constrained operations, the relative size of ABC/M costs

and the extent of idle capacity provide useful clues for determining where

overall capacity reduction efforts would bring the greatest cost savings over

a long time period (Campbell, 1995).

As apparel manufacturers design and implement new services to

satisfy retailer expectations, their processes usually become more complex

and costs usually increase. Conventional costing methods do not properly

identify differences in the cost to serve. ABC/M, on the other hand, can be

used to analyze all of a company's costs in contrast to the manufacturing

cost orientation of conventional costing methods. The cost to serve

customers can be best calculated using ABC/M methods. A finished ABC/M

model will provide activity level costs which can be used as a basis for

decision making (Schnoebelen & Skillern, 1996).

ABC/M's application to credit union management has been described

initially as burdensome and unnecessary. However, when the industry

r
reahzed that only 40% of the cost data on which management decisions were

being made was accurate, ABC/M was revisited with renewed interest.

Implementing an ABC/M system was a challenging undertaking, one that

required a cultural change within the credit union. The largest obstacle to

79
overcome may be opposition from employees. Despite the challenges,

ABC/M can provide rapid, far-reaching improvement in an organization.

Accurate data provides management with hard and fast information on

inefficiencies, unproductive products or services, and waste that can be

reduced or ehminated to help control and manage the credit union's costs.

The value these benefits bring to an organization makes the challenge well

worth the effort (Cindrich, 1996).

ABC/M systems report accurate and timely cost information in a

business environment where competition is high and the company has a

diverse product mix. In addition, the information supplied by ABC/M can be

used for continuous improvement of the business. A cost accounting system

in a Finnish fish processing firm is quite a new phenomenon. ABC/M has

proved to be a very appropriate system in fish processing. In addition to

product costing, ABC/M is an indispensable tool for both activity analysis

and quality improvement purposes (Setala & Gunasekaran, 1996).

As rising costs impact managed care, a successful manufacturing

costing method is being applied to help managers make decisions on

contract bidding, cost containment, and organizational structure. In the

healthcare environment of the 1990s, accurate costing has become much

more important. ABC/M reflects one of the most significant advances in cost

accounting and is now being used in numerous health organizations.

80
including about 20% of US and Canadian hospitals. Application of ABC/M

in an independent, nonprofit, full service renal dialysis chnic has provided

the data needed to convert this clinic from a financial loser to a profitable

department (West & West, 1997).

Possibilities for ABC/M Not Applicable

to Higher Education Institutions.

Traditional cost accounting systems do not make the benefits of an

Advanced Manufacturing System (AMS) visible, nor do they provide signals

for management to plan for future investments. With the more accurate

and relevant measurement of manufacturing cost provided by ABC/M, the

economic behavior of an AMS system can be more reliably predicted without

losing the overall system perspective (Kim, 1994).

Traditional accounting systems have failed to match revenues and

expenses properly in a just-in-time (JIT) purchasing environment. JIT

manufacturing typically reduces merchandise inventory to insignificant

levels and groups machines according to product lines rather t h a n

operational functions. The definition of product costs is changing in the new

manufacturing environment. The ABC/M approach identifies the cause-

and-effect relationship as the basis for cost allocation. Once the costs of

activities are identified, the activities are traced to the products t h a t

81
consumed the activities. Costs are subsequently assigned to the products

based on their share of the activities generated. Thus, the company is in a

better competitive position because it can determine more accurately the

cost of its products (Gagne & Discenza, 1992).

The combination of two new technologies, bar coding and ABC/M, has

resulted in increased credibility of a manufacturer's cost data and is far less

burdensome t h a n manual record keeping. Bar coding technology can play a

key role in ABC/M systems by supplying data that are accurate, timely and

complete. However, many h u m a n factors are critical to installing such

systems and are often ignored during a system's design and implementation

(Tyson, 1991).

Possibilities Applicable Exclusively to

Higher Education Institutions

Instruction regarding the ABC/M model needs to be part of every

course in the cost/managerial accounting curriculum and in higher

education finance courses. Because ABC/M systems have multiple

objectives and impact on many other managerial functions, ABC/M concepts

should be presented early in the coverage of every cost/managerial course

offering. Then ABC/M should be tied into discussions of subsequent related

topics through occasional examples and assignments (Benke, 1992).

82
 Dr. Lane K. Anderson, Ernst and Young Professor of Accounting at

Texas Tech University, provided this researcher with an interesting article

applying ABC/M in a hypothetical university setting, the only article of this

type t h a t was found. The authors contended that while applying ABC/M to

service organizations should not differ fundamentally from the application

of ABC/M in manufacturing firms, some creativity may be needed to make

the system work. They went on to describe three uses for ABC/M in a

university setting. First was the allocation of direct educational

expenditures among the academic units served. Second was that ABC/M

may be applied to university support units for cost management and

resource allocation purposes. Third, contribution margin financial

statements based on ABC/M can provide accurate data to determine net

excess of revenues over expenditures per credit hour taken by matriculated

students in the academic unit. The authors suggested that other purposes

also could be defined (Acton & Cotton, 1997).

As stated in Acton & Cotton (1997), application of ABC/M to colleges

and universities should not differ materially from application in

manufacturing organizations. The flexibility of the ABC/M system may

facilitate such diverse applications. Since ABC/M was introduced in the late

1980s, many theoretical ideas have been advanced dealing with various

aspects of ABC/M, primarily its implementation and benefits. The articles

83
presented in the next section were selected to illustrate the range and

variety of theoretical thought associated with ABC/M.

Theories That Influence the Design.

Implementation and Benefits of
the ABC/M Svstem

One article suggested that ABC/M information enables product costs

to be compared with each other based on their interaction with the cost

drivers. This is a task difficult, if not impossible, with traditional costing

methods (Gilhgan, 1990).

ABC/M analysis should be extended from product lines to channels

and locations or from brands to customers and regions. This flexibility

would enhance the ability to manage critical functions, which could have a

positive effect on profitability (Reimann, 1990).

One theory states that ABC/M does provide more relevant

information t h a n traditional product costing. However, it probably does not

provide more decision relevant information than a contribution (variable

cost) approach (Piper & Walley, 1990).

In another article, the authors discussed the applicability of ABC/M

to both variable costing and full absorption costing systems. It was stated

t h a t perhaps ABC/M should be modified to obtain variable activity-based

costs for most decision making purposes and full absorption activity-based

84
costs for reports to identify total resources consumed (Sharp & Christensen,

1991).

In an effort to support Opportunity-Based Accounting, another author

described ABC/M as a flawed concept as an accounting system. The

conclusion reached was that ABC/M offers nothing new to what accountants

had under traditional costing and, like any tool, it is only useful if used

carefully and well (Kingcott, 1991).

The underlying assumptions inherent in ABC/M should be evaluated

before ABC/M costs can be considered superior to traditional costs. The

theories presented regarding two of the many assumptions discussed in this

article are: (1) that costs in each cost pool are driven by homogeneous

activities, and (2) that costs in each cost pool are strictly proportional to the

activity. Those theories have not been demonstrated to be valid (Roth &

Borthick, 1991).

The author of another article presented the theory that homogeneous

data regression and other analyses should be used to identify the underlying

cost drivers. Also, for less homogeneous data, sampling may be used to

establish the underlying causes for differences from cost expectations.

Another theory presented is that whenever ABC/M is appropriate for

product cost determination, the same drivers should be equally relevant for

cost control applications (Malcom, 1991).

85
 A company's strategic philosophy should strongly influence the design

of the ABC/M system cost pools and drivers. This theory is in marked

contrast to the usual criteria used for the cost pool and cost driver design

which involves homogeneity of the costs and the relation of the cost driver to

the costs. In addition, the need for process cost information should be

fundamental to the design of the system (Webster, 1991).

One article theorized that the real power behind the ABC/M approach

is in its ability to pinpoint and quantify cost reduction opportunities.

Process costing could be the real breakthrough associated with ABC/M

(Anonymous, 1992).

Delegates to the fifth ABC/M forum in Dublin, Ireland, debated

theories related to the effect on decision making that the frequency of

reporting may have. Some delegates felt that if activities were measured

monthly or more frequently, distortions would occur as volumes went up

and down. On the other hand, if a much longer timescale were used, there

was a danger of variations being merged or flattened out. No conclusion

was reported (Anonymous, 1993).

Much of the literature supported the theory that an ABC/M

implementation must be a team effort. One article, however, challenges this

theory by asserting t h a t initiating an ABC/M implementation is the

responsibility of the management accountant (Sharman, 1993).

86
 A theory supporting process re-engineering as the key to lower prices

and a better image without increasing costs in the mortgage industry was

presented. ABC/M played a part in this idea in that it could be useful in

deciding which particular changes should be made to achieve lower prices

and a better image by assessing the activities that go into creating products

and services (Isaac, 1993).

It has been theorized that the relevant cost approach to management

decision making, as conventionally applied to short-term decisions, is valid

only so long as such decisions are unique. ABC/M can provide a useful

complement to the relevant cost approach (Kennedy, 1995).

One method for evaluating the suitability of control oriented

transactions is to compare the costs of controlling the quality of the good or

service produced to the cost of its material and labor inputs. The theory

presented in an article is that ABC/M has strategic importance to the

adoption of the methodology for accomplishing the control function (Stiles &

Mick, 1997).

Many of the theories presented in the above articles are presented by

the authors as suggestions for investigation. Some or all of them may be

valid for either commercial or higher education organization applications.

Considerable research is needed before the influence of them on ABC/M can

be established with a high degree of certainty. In the section t h a t follows,

87
practical operational procedures are suggested as approaches to broaden,

enhance, or simplify the implementation of basic ABC/M methods.

Approaches For Improvement to

ABC/M Methodologv

The ABC/M approach allocates costs to cost objects on the basis of

how the cost objects actually consume the activities. Other approaches and

modifications of the above approach have been proposed as improvements to

the basic ABC/M methodology.

With the Information Age, costs have shifted from the plant floor into

so-called overhead. The net result is that the traditional accounting

assumptions are inappropriate. Barnes (1992) strongly supports the use of

an appropriate computer system to handle the calculations involved in

ABC/M.

When studying an organizational structure in consideration of

implementing any costing system, including an ABC/M system, a detailed

analysis is required. For organizational departments, such as academic

departments, the choice of which technique to use in the analysis should be

guided by considerations of economy, accuracy, and credibility (Krueger &

Davidson, 1987).

88
 The ABC/M approach opens up opportunities to set and monitor

budgets more effectively by taking into account the level of activity and the

nature of the cost variabihty of that activity. Further, such an approach can

provide a framework for understanding the linkage to the decisions that

cause cost activities to occur and those that determine the amount of

resource needed. In time, it is likely that the ABC/M approach to budgeting

and reporting will replace, rather than supplement, traditional cost

reporting when it comes to preparing the budget (Morrow & Connolly,

1991).

ABC/M can satisfy the ultimate goal of providing accounting

information from a completely integrated cost system that can easily

provide information for external financial reporting, product costing

decisions and operational control. This approach to using ABC/M systems

can accomplish this integration goal and can help managers and internal

auditors assess whether the company is performing the right activities and

performing them correctly (Tanju & Helmi, 1991).

One guiding idea of ABC/M is to regard all costs as variable and

susceptible to reduction or elimination. Another is that routine allocations

to determine product or process costs are to be replaced by a special studies

approach with attention directed to the activities in which costs are

89
occurring and the particular circumstances for which product or process

costs are being calculated (Aiyathurai, Cooper, & Sinha, 1991).

ABC/M needs to be approached as a major project requiring support

of the entire organization before implementation is begun. Three

cooperation resistance hurdles must be overcome in order to communicate

effectively the need for ABC/M. First, the perceived inadequacy of cost

accounting as a disciphne must be dispelled. Second, the lack of faith that a

new system will do any better than the old system must be addressed.

Third, the tremendous implementation costs of a new system must be

justified (Brausch, 1992).

ABC/M is designed to satisfy the additional demands of TQM.

However, maintaining cost data at the activity level involves, at least in

order of magnitude, more data than does cost center accounting. Thus,

ABC/M systems typically utilize a specially designed, computerized

approach (Gessford, 1993).

ABC/M approaches are likely to achieve the most substantive benefits

when there is a high degree of organizational complexity. The increased

complexity of the ABC/M approach may be more difficult for simpler

organizations to justify in terms of cost (Morrow & Ashworth, 1994).

Also, life cycle costing techniques are the foundation for allocating

environmental expenditures to products. The approach t h a t combines

90
ABC/M and life cycle costing can provide management with accurate

product cost information and, therefore, a reahstic understanding of

profitability (Kreuze & Newell, 1994).

Companies thinking of a just-in-time (JIT) inventory approach to

solve quality control problems and reduce work-in-process inventories may

need only a new cost management system like socio-technical systems

analysis (STSA). This system utihzes ABC/M for operational control,

outsourcing opportunities and target costing (Thomas & Mackey, 1994).

A new, less comprehensive approach to ABC/M has been developed

called Departmental Activity-Based Management (DABM). DABM reduces

the difficulty of changing to an ABC/M system by building upon a company's

current cost accounting system (Keys & Lefevre, 1995).

A different approach from the basically American ABC/M is the

French approach. The French unified costing system is volume based.

However, the costing system is supplemented in plants and factories by a

system of operational performance measures that are structured in a

"tableau de bord." The process for change is the key issue (Mevellec, 1995).

A variation of ABC/M, which views cost drivers at a far higher

activity level, facilitates management's gaining a richer and more robust

understanding of cost dynamics and eliminates the discord between

strategic and operational goals. This variation of the activity-based

91
approach was developed to accomplish the reconciliation of strategic and

operational goals (Wong, 1996).

The approach that uses ABC/M to evaluate customer profitability has

been well documented. Customer satisfaction is a key issue as decisions

supported by the customer profitabihty analysis will relate to how a

business chooses to interact with customers in the future and how the

business chooses to produce the services necessary to support those

customers (Pearce, 1997).

Research in ABC/M

General ABC/M Research

ABC/M has been a subject of intense research interest. Several

doctoral dissertations have been written on various aspects of ABC/M and

its application to specific industries or organization types. A modest

number of journal articles have appeared to examine specific characteristics

of the ABC/M system. Many more articles have appeared in the popular

press in support of the idea of ABC/M. No empirical study could be located

that examines the applicability of ABC/M to an actual higher education

institution.

ABC/M is a promising tool that addresses some of the perceived

deficiencies of traditional cost accounting. The guidehnes that recommend

92
when to switch from traditional costing to ABC/M are general and anecdotal

in nature. Simulation models were used in a doctoral dissertation

experiment to identify the conditions under which ABC/M provides superior

strategic decisions as compared to traditional costing. Needy (1993)

examined three critical factors: (1) the type of manufacturing, (2) the

dynamics of the environment and (3) the product/network complexity.

Results indicate t h a t in a stable environment ABC/M outperforms

traditional costing for all manufacturing types. As stability declines,

ABC/M becomes less attractive and the performance differs depending upon

the manufacturing type and the product/network complexity. A traditional

costing system under-costs low labor products. As labor increases, the

under/over-costing varies depending upon the manufacturing type and the

volume (Needy, 1993).

ABC/M systems can be relatively inexpensive to implement.

Typically, they cost less, sometimes much less, than $100,000 and require

three people working full time for between four and six months (Cooper,

1991).

A survey of Chartered Institute of Management Accountants

members was conducted to explore their views and organizational policies

on ABC/M. The survey results reinforce the view t h a t ABC/M is a procedure

of widespread interest to practicing management accountants. Although it

93
is a relatively new phenomenon, almost half of the respondents in this study

were employed by organizations that had considered implementing ABC/M.

Most of the respondents were still involved in the assessment process;

however, a clear majority rejected it. Although the initial rejection rate

appears surprisingly high, it must be noted that 15 of the 17 organizations

rejecting ABC/M did so without any first hand, practical experience with it.

There also seems to be considerable uncertainty and some confusion about

ABC/M (Innes & Mitchell, 1991).

To determine the costs, amount of time, and benefits associated with

the implementation of ABC/M systems, managers from ten UK companies

t h a t completed an ABC/M implementation were interviewed. Six of the ten

reported no significant increases in operating costs of the system resulted

from the implementation of ABC/M. The time to implement required from

20 weeks to 52 weeks. All respondents stated that, as a result of ABC/M

implementation, more accurate product cost information had come to light;

70% admitted to improved management information (Bailey, 1991).

Since 1990, the American Accounting Association, the Governmental

Accounting Standards Board, and the National Association of College and

University Business Officers have each focused on performance

measurement and/or the identification of key financial and nonfinancial

indicators in college and university financial reports. A study was

94
developed as a rigorous attempt at the identification of key financial and

nonfinancial indicators of not only institutional performance, but also

institutional condition (Brown, 1992). Performance measurement is an

integral component of an ABC/M system.

The results of the study by Brown (1992) which was referred to above

were partitioned according to the type of judge (CEO or trustee) and type of

institution (private or public). In this way, a better understanding was

gained of CEOs' perspectives of the information needs of external users,

trustees' informational interests and possible differences in reporting needs

of private and public institutions (Brown, 1992).

Experimental data runs found very close conformance of the ABC/M

systems to a master costing system, increasing distortion and mix errors for

a marginal cost system, and a full absorption cost system, in that order.

The risk of experiencing a mix error with these systems was also estimated

by means of an incidence of error measurement. Estimated costs of system

setup and operation were derived for the systems under analysis. These

estimates revealed a relatively low cost for the full absorption cost system, a

moderate cost of the marginal system, and a relatively high fixed cost of the

ABC/M system (McLanahan, 1992).

In another investigation, three firms participated in an in depth

analysis of the association between their actual ABC/M adoption and the

95
firm's monthly accounting performance. Utihzing a time series analysis, a

transfer function for the ABC/M intervention was specified and the

statistical significance of the intervention was assessed. Of the three firms

visited, only one firm could be definitely classified as meeting the criteria of

a conventional ABC/M implementation. In this firm, the ABC/M

intervention yielded a positive and statistically significant difference in the

data gathered (Silvester, 1992).

A study by Ricketts (1992) used a laboratory experiment performed

interactively by MBA students on personal computers to examine the

students' preferences for fine versus coarse information systems. In this

paper, Ricketts (1992) argues that calls for multiple-based cost systems are

calls for finer information systems. Prior empirical research in this area has

contained mixed results regarding preferences of information evaluators for

finer or coarser t h a n optimal information systems. Ricketts' study extends

prior research by placing the experiment in a concrete cost/managerial

setting that removes much of the complexity of selecting information

systems. He examines whether the length of commitment associated with

the information system could account for differences in the choices made by

subjects. All subjects showed a preference for coarser systems. However,

the subjects in the multi-period group generally did better t h a n their

counterparts when measured against conventional benchmarks. The

96
differences between the two groups, however, were small and not

statistically significant. Subjects diverged further from the optimal choice

when the conventionally correct selection was the finer information system.

There was some indication that other ancillary variables might prove useful

for explaining subjects' selections of information systems (Ricketts, 1992).

A survey of defense and non-defense contractors was undertaken to

determine perceptions regarding the adequacy of contractor's cost

accounting systems. The survey results in this study indicated that defense

contractors' cost accounting systems were structured more toward achieving

financial and compliance reporting purposes than assisting in pricing,

product quality, innovation, performance measurement, or product

decisions. These findings show that present cost accounting systems and

practices may not adequately satisfy the fundamental need for valid,

reliable, and persuasive product line profitability cost data (Elmore &

Rezaee, 1992).

A study was based on empirical data collected from a manufacturing

site of a United Kingdom pharmaceutical firm after the decision to adopt

ABC/M was made. The author's analysis suggested that not only did the

perceived role of the accounting function within the enterprise change

following the adoption of the new costing technique, but t h a t the authority

97
and organizational power base of different line managers also shifted

(Bhimani & Pigott, 1992).

Another researcher examined management satisfaction with ABC/M

information. Interviewees reported a significant improvement in their cost

management systems following the implementation of ABC/M.

Organization characteristics, however, were not found to be good predictors

of satisfaction with ABC/M (Swenson, 1993).

Marsh (1993) sought to investigate the impact of ABC/M product cost

data on managerial decisions. Data were gathered by Marsh (1993) using a

mailed case scenario and questionnaire. The case scenario presented

competitor information, historical information, and product costs data about

a fictitious manufacturing firm that manufactured two products. The three

groups of subjects, who differed by the types and amounts of product cost

data received, answered questions on selling prices and special order

acceptance.

Explanations for the current lack of governmental management

accounting have emphasized the differences between the public and private

sectors due to government's nature and lack of profit motivation. Therefore,

an experiment was undertaken by Geiger (1993) in which a single, public

sector organization introduced a cost accounting system. The results of the

this research led to the experimenter rejecting the hypothesis t h a t

98
management accounting will not induce change in a public sector

organization. In this research it seems that management accounting

information prompted considerable change in management decision making

(Geiger, 1993).

Results in another empirical study suggested that: (1) use of ABC/M

was associated with higher returns on investment (ROIs), (2) that this

result was affected by the generic strategy the business unit pursues, and

(3) that the benefits of ABC/M usage increased with time. Specifically,

business units following a strategy of differentiation had significantly higher

ROIs if they used ABC/M. Those following a cost leadership strategy

showed no significant difference between use and non-use of ABC/M.

ABC/M was found to also interact with product structure. An increase in

the number of product lines was associated with lower ROIs, but the use of

ABC/M mitigated this effect. However, Frey (1994) found that the use of

ABC/M interacts negatively with the number of products produced and the

diversity of production volume, and was associated with lower ROIs as those

variables increased.

99
Research Applied to ABC/M in
Higher Education

The results of another survey described the use of ABC/M in UK

universities in 1994. Twenty percent of the respondents had made use of

this costing method, and were overwhelmingly positive about its benefits, in

particular its value in improving cost awareness in the organization.

Perhaps the most interesting result of this survey was that most

institutions viewed ABC/M as a tool for rational allocation of central costs to

academic departments, whereas the rationale for ABC/M outside

universities is in terms of merchandise inventory costing (Mitchell, 1996).

Cropper and Drury (1996) presented the results of research that

aimed to obtain a broad overview of the nature and scope of management

accounting in universities. Areas discussed included profitability analysis,

budgetary controls, performance reporting, and capital investment

appraisal. Against the backdrop of a rapidly changing higher education

sector and ever-increasing pressure to exact maximum benefit from scarce

resources, the management accountant in higher education must develop

new approaches in the provision of financial information. Senior academics

and managers have expressed concern over the amount of time diverted in

developing new allocation and control mechanisms and the inevitable

conflicts that have arisen where funding issues were concerned. The case

100
must be made that there is no inherent conflict between good accounting

practice and good educational provision. It is for the management

accountant to continue to ensure the financial health of higher education

institutions as they strive to meet the challenges presented in an ever-

changing environment.

Summarv

The development of the traditional accounting system designed to

meet the unique financial requirements of private, nonprofit higher

education institutions may be characterized as slow, deliberate, and

evolutionary. Based solidly on fund accounting, the changes have been

incremental and have preserved the integrated features of the system.

The single most notable event in this process was the publication of

NACUBO's Financial Accounting and Reporting Manual for Higher

Education. Guidance on nearly every possible situation, process, and

procedure is provided in this manual. Designed by KPMG Peat Marwick, it

h a s become the "official" system for private, higher education institutions,

and h a s been widely adopted.

The official system is the source for all of the information provided for

financial accounting (external reporting) and also for managerial accounting

(internal analysis) purposes. The chart of accounts follows the hierarchical

101
form of the organization chart. The information produced within the system

focuses on who incurred the expenditures (the organization) and the nature

of the expenditure (the object of expenditure).

The primary purpose of private, nonprofit higher education

institutions is to provide an educational opportunity for the present and

future generations of society. Notably absent is the basic performance

evaluation measure of business organizations (net income) which does not

apply to these institutions. Instead, primary interests are compliance with

budgetary limitations, efficiency and effectiveness, use of resources in

accordance with any internal or external restrictions, and maintenance of

the organization's capital assets. The traditional accounting system

addresses those interests.

In 1988, however, a new concept in cost accounting emerged which

may provide more useful information for those purposes. Introduced by two

Harvard University professors. Dr. Robin Cooper and Dr. Robert Kaplan,

Activity-Based Costing (ABC) and the management system based on it h a s

received widespread attention.

The history of ABC/M, in contrast to the traditional accounting

system, must be characterized as revolutionary and dynamic.

Enhancements to the basic premise that activities cause costs to be incurred

102
and t h a t the cost objects consume the activities and the costs attached

thereto have come quickly.

ABC/M involves fundamental changes in the traditional cost

accounting processes and procedures while preserving the basis in fund

accounting. ABC/M not only addresses the who and what but also the why

questions of costs. Significantly, ABC/M can be used as a complementary

system to the traditional accounting system, thereby preserving the basic

hierarchical design.

Since the conceptual statement in 1988, ABC/M has progressed

quickly through the conceptual/awareness phase, implementation/trial

phase and the evaluation/modification/enhancement phase to the present

adoption/rejection phase. Numerous suggestions for application of the

ABC/M approach can be found in the unusually extensive literature

available. Empirical research is also extensive, but little can be found

dealing with application of ABC/M to higher education institutions. This

project will attempt to partially fill that gap in the literature.

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 CHAPTER III

METHODOLOGY

General Design

Experimental research was conducted in the Spring and Summer of

1998 with Hardin-Simmons University, Abilene, Texas, as the subject

institution. An Activity-Based Costing/Management (ABC/M) system was

designed as a complementary system to the financial accounting system

currently employed. Highly developed, speciahzed ABC/M software

provided by Mr. Tom Pryor of ICMS, Inc. (2261 Brookhollow Plaza, Suite

104, Arlington, Texas, 76006) was used to perform the calculations for

tracing and allocating costs to various cost accounts, processes, activities,

and cost objects, and to produce the reports of the complementary ABC/M

system.

Nine executives, 16 middle managers, and 19 staff members who

have responsibility for budgeting, financial management, and strategic

decisions dependent on accurate cost object costs at Hardin-Simmons were

asked to evaluate the current financial accounting system at the university

(control group). Another group, comprised of an equal number of people

within each of the above named professional classifications (who have

similar responsibilities), were asked to evaluate the new ABC/M system

104
(experimental group). Evaluation was accomphshed by both groups by

means of a survey instrument that contained five evaluative statements on

each of the three decision making areas of interest in this study, i.e., (1)

budgeting, (2) financial management, and (3) strategic decisions dependent

on accurate cost object costs.

A graphical depiction and description of the experimental design of

this study, a split-plot factorial design, is presented in Table 3.1, Split-Plot

Factorial Design-Treatment Level Combinations, p. 106. The experimental

design used in this study had two levels of the independent variable.

Treatment A (accounting system), and three levels of the independent

variable. Treatment B (decision purpose). The two levels of the independent

variable. Treatment A were: (1) a^, financial accounting system, and (2) a2,

ABC/M system. The three levels of the independent variable, Treatment B

were: (1) b ^ budgeting decisions, b2, financial management decisions, and

(3) bg, strategic decisions dependent on accurate cost object costs. Three

blocks of evaluators were randomly assigned to each level of Treatment A.

The evaluators in any block were involved with only one level of Treatment

A, but were involved with all three levels of Treatment B. Thus, the

evaluators were assigned to either level a^ or aj of Treatment A, but were

engaged in evaluating all three levels of Treatment B.

105

k
 Graphical Depiction of the Split-Plot
Factorial Design

Table 3.1. Split-Plot Factorial Design-Treatment Level Combinations

Treatment A Treatment B Treatment B Treatment B

Treatment Treatment Treatment Treatment

Level a^ a n d ag Level bj Level bj Level bg

Combination Combination Combination

a^bj ajbs ajbg

aibi aibz a^bg

ai aib, aibz ajbg

FinancialAccounting aibi aA aibg

BlockSi2.3

ajbi a2b2 azbg

az agbi a2b2 agbg

ABC/M azbi ^•^2 ajbg

Blocks456

The independent variable. Treatment A, included the financial

accounting system (a^) and the ABC/M system (a2). The other independent

variable. Treatment B, included budgeting decisions (b^), financial

management decisions (bg), and strategic decisions dependent on accurate

106

vd
cost object costs (bg). Block^, Block2, and Blockg represented executives,

middle managers, and staff respectively who evaluated the financial

accounting system information. Blockg, Blockg, and Blockg represented

corresponding groups who evaluated the ABC/M system information. All of

the individuals assigned to each block had budgeting and financial

management responsibility at Hardin-Simmons University, the subject

institution of this research.

The following section describes the experimental design in greater

detail and presents the purposes for which this research was conducted. In

subsequent sections, the research instrument, pilot study, sample

population, ABC/M system design, data collection procedures, and an

analysis of the data are presented.

Description and Purposes

of the Study

This experimental design is described in the literature as a split-plot

factorial design with two independent variables, Treatments A and B. The

independent variable. Treatment A (accounting system), had two treatment

levels (ap financial accounting system, and a2, ABC/M system). The

independent variable. Treatment B (decision purpose), had three treatment

levels(bi, budgeting decisions, bj, financial management decisions, and bg.

107
strategic decisions dependent on accurate cost object costs. Eighty-eight

subjects were randomly assigned to blocks in each of the two treatment

levels of the independent variable. Treatment A, by use of a random

numbers table provided by Dr. Roger E. Kirk, Professor of Psychology and

Director of the Institute of Statistics at Baylor University (Kirk, 1995). The

three blocks comprising treatment level a^ were comprised of nine

executives (Blockg), 16 middle managers (Blockg), and 19 staff members

(Blockg). The remaining three blocks (Blocks4 jg) which comprised treatment

level a2 included equal numbers of each professional category of evaluators

as treatment level a^. The dependent variable was "usefulness of the

information" as perceived by the members of the three blocks of professional

categories in each two treatment levels of Treatment A to which they were

assigned.

The primary purpose of this study was to determine if the use of a

complementary ABC/M system provided more useful information t h a n the

sole use of a traditional financial accounting system for: (1) budgeting

decisions, (2) financial management (control) decisions and (3) strategic

decisions dependent on accurate cost object cost as judged by executives

(Blocksj 4), middle managers (Blocks2 5), and staff (Blocksg g) of a private

university. An additional purpose was that this study may produce

possibihties for future research that would relate ABC/M to other higher

108
education institutions of this type and to other public and private

institutions of higher learning (research universities, doctoral granting

universities, comprehensive colleges and universities, liberal-arts colleges,

two-year colleges, institutes and professional schools).

Instrumentation

Fifteen different evaluation statements were categorized in sets of

five in the order of the three types of decisions as expressed in the research

question. The statements were designed to address some (but not

necessarily all) of the specific tasks routinely encountered by administrators

in the performance of their responsibilities involving budgeting decisions,

financial management (control) decisions, and strategic decisions dependent

on accurate cost object costs. The statements were designed to address the

issues considered representative of the type that frequently arise in each of

those decision areas at the subject institution. The evaluation statements

were developed by the researcher specifically for this study. The survey

instrument is presented as part of Appendix F.

The statements relating to budgeting were designed to address

specific issues frequently encountered by administrators during the

budgeting process. Budgeting for most programs involves considering

existing programs that are expected to continue without significant change

109
into the fiscal year for which the budget is being prepared. Some of those

programs that will continue require significant changes that constitute a

program redesign. New programs must be considered because of the

dynamic situation in which many departments operate. Budgets of a fixed

dollar amount are typically used by higher education institutions, however,

variable budgets, the dollar amount of which may be altered automatically

and routinely depending on resource availability, are commonly used by

other types of organizations such as business corporations. Variable

budgets have the same possibilities for applicability in all organization

types. Regardless of the type used (fixed or variable), the budget is the

means by which plans for the fiscal year under consideration are quantified.

Financial and non-financial performance measures are often developed as

key indicators of whether operations can be performed within the available

resources. These measures are developed as part of the budget to assist

managers in the control of their programs.

Statements relating to financial management were designed to

address issues frequently encountered by administrators in controlling their

programs. Program control involves analysis of budget variances, the

differences between the actual expenditures and budgeted expenditures.

The system should provide enough information to permit the manager to

isolate specific budget problem areas that require remedial action. In some

110
programs, over-expenditure, or perhaps under-expenditure, may be

unavoidable thus requiring revision to the program design. Achievement of

financial and non-financial performance standards are considered key issues

in the successful control of programs. Non-value-added tasks are those that

do not contribute to the effectiveness or efficiency of the program. Frequent,

routine reviews of programs for the purpose of eliminating non-value-added

tasks may result in achieving important continual improvement goals.

Statements relating to strategic decisions dependent on accurate cost

object costs were designed to address issues frequently encountered by

administrators who make decisions of a broader nature that will affect the

programs in effect. Breakeven analysis is a useful technique in defining the

level of operations which would be required in order for the respective

programs to operate within available resources. The terms "profitable" and

"unprofitable" in the context of a private university relate to operations that

can or cannot be accomplished within the resources provided for them. The

statements assume that administrators may decide that it is desirable to

expand the "profitable" programs or cost objects, and that "unprofitable"

programs or cost objects may require revision in order to eliminate or

mitigate the detrimental effects of the "unprofitability." In some cases, in

the short run, elimination of "unprofitable" programs may not be desirable.

Ill
In those cases, actions may be taken to minimize the detrimental effects to

those programs.

An interview with each evaluator was conducted by the researcher in

July, 1998 to ensure that the he/she understood the information (financial

accounting or ABC/M) on which they were to base their judgments. All of

the executives, middle managers, and staff who were to evaluate the

financial accounting information responded to the researcher's inquiry that

they considered themselves sufficiently familiar with the financial

accounting information provided to make appropriate responses to the

statements. In all cases, they were given an explanation of: (1) the concepts,

(2) focuses or purposes of the system, (3) FASB authoritative

pronouncements, (4) data provided, and (5) the expected uses for which the

data was prepared. The executives, middle managers, and staff who were to

evaluate the ABC/M information had httle or no familiarity with the ABC/M

system. During the interview, they were given an explanation of the basic

accounting and design issues so they would have at least a fundamental

understanding of the ABC/M system. The outline of the instructions given

to the evaluators and the information provided by each accounting system

are presented in Appendix F.

A Likert scale was developed for the survey instrument on which the

evaluator was to respond to a series of statements by indicating whether he

112
or she: (1) strongly agrees, (2) agrees, (3) is neutral, (4) disagrees, or (5)

strongly disagrees with each statement. Each evaluator indicated his/her

choice of the responses available by circling the number of the response that

most nearly corresponded to the evaluator's judgement for that statement.

The point value of the responses was indicated by a value within the range

from five (strongly agrees) to one (strongly disagrees). The data score for

each decision area was determined by summing the point values for each

group of statements (Gay, 1992). All of the statements were presented as

positive statements relating to the high degree of usefulness of the

information for certain tasks associated with each decision purpose. All

evaluators assigned to all blocks responded to identical statements

regardless of which accounting system information they were provided.

The Likert scale sequence of numbers was intentionally alternated for

each statement on the survey instrument with half of them beginning with

" 1 " and half of them beginning with "5" to assist the evaluator in choosing

the specific response that most nearly matches his/her judgement.

Sometimes evaluators are prone to circle scale numbers in a pattern which

may not express their true responses to the specific statements presented.

Alternating the sequence was an attempt to avoid any arbitrary pattern.

The survey instrument, the outline of the instructions given to the

evaluators, and examples of the information provided by each accounting

113
system on which the evaluators based their evaluations are presented in

Appendix F.

Because the survey instrument used in the data collection phase of

this study was developed specifically for this study, the instrument was not

externally validated for its expressed purpose by use in previous similar

studies. Validation was accomplished to the satisfaction of the researcher

by use of a pilot study conducted prior to the actual experiment, and by

application of the Kuder-Richardson formula 20 which was designed to

estimate the internal consistency reliability of data gathered using an

instrument t h a t had not been validated. The results of applying this

formula 5delded a value of .83. This result indicated that the reliability was

well above average formula value of .75. A minimum acceptable value was

set by the authors for the formula at .70. An additional level of confidence

in the instrument was based on the ability of the experimental design and

the random selection and assignment of subjects which control for nearly all

sources of internal and external invahdity (Kirk, 1995). A description of the

pilot study that was conducted is presented in the following section.

Pilot Study

A pilot study was conducted with knowledgeable students serving as

the sample group subjects for the pilot study. Nineteen students who were

114
enrolled in ACCT 3313 A, Cost Accounting, were asked to study a budget

prepared using financial accounting and also a budget using activity-based

costing, and to evaluate the usefulness of the information for the budgeting

purpose. The pilot study was conducted on March 13, 1998, utilizing

information developed by the researcher for the test. The 19 students

evaluated the usefulness of the information relating to the budgeting

decision area only. Their evaluation was based on information provided for

each accounting system, and incorporated the identical statements that

were evaluated by the actual case study participants. The information for

the pilot study consisted of hypothetical financial accounting and ABC/M

information for a fictitious higher education institution. The pilot study

evaluator response values for each accounting system were tested

statistically to determine if statistically significant differences in the

arithmetic means of the evaluator response values for the two accounting

systems existed.

A completely randomized design with two treatment levels of the

independent variable. Treatment A (a^ Financial Accounting, and a2,

ABC/M) and only one level of the independent variable. Treatment B

(Budgeting) was selected for the pilot study analysis. Statistics were

calculated to analyze the total sum of squares (SSTO), the sum of squares

between groups (SSBG), and sum the squares within groups (SSWG). It

115
was a fixed effects model. The analysis of variance (ANOVA) procedure that

utilizes the F statistic was conducted, with the appropriate statistical

measures and tests applied.

The results of the pilot study showed very large statistical

significance between the arithmetic means of the two levels of Treatment A

(accounting system) with the ABC/M values much higher than the financial

accounting values. The strength of association value of .46, the effect size

value of 24.86, and the power value of greater than .99 at the alpha .05 level

supported the conclusion that the researcher had a very high confidence

level t h a t the ABC/M information was more useful than the financial

accounting information for the budgeting decision area in the pilot study.

The very large degree of significance and the high values found on testing

the assumptions of strength of association, effect size, and power supports

the validity of the statements for the budgeting decision area.

The results of the pilot study were helpful in determining t h a t the

sample sizes for the case study blocks were probably adequate to provide

adequate values for strength of association, effect size, and power for the

actual experiment. Also, minor problems relating to the interpretation of

the specific meaning of certain words in the statements to be evaluated

arose during the pilot study. As a result, the meaning of all words in all of

the statements were explained during the pre-evaluation interview with the

116
evaluators by the researcher during the actual experiment. The pilot study

required one week to complete. The pilot study information and survey

instruments, and instructions, are presented in Appendix G.

Sample Population

The sample population involved eighty-eight of the persons in

administration or on the support staff of Hardin-Simmons University (HSU)

who have budget and financial management responsibility for a program.

These eighty-eight persons were stratified into three professional

classifications which were labeled: (1) executives (18 in number), (2) middle

managers (32 in number), and (3) staff (38 in number). The three

classifications were chosen by consideration of the size or complexity of the

program. Some persons managed very small programs involving a single

cost account. Others were responsible for large and pervasive programs

with many cost accounts, and still others were responsible for moderate size

programs with a few cost accounts. A listing of the personnel at HSU who

constituted the sample population is provided in Appendix D. The data

scores utilized for statistical analysis were secured from the persons whose

names appear on the referenced list.

: ''^^j^^

117
 ABC/M System Design

The CMS-PC^' 4.0 software utilized for the design of the ABC/M

system used in this study featured a modular format, an Activity Dictionary

template, pre-formatted reports, and a report writer helpful for creating a

useful ABC/M system. The features of this software were utihzed as they

were needed during the system design process.

The first step in building this ABC/M model was to create a data set.

A data set represents cost account amounts for a particular time period.

Data sets may be created for different time periods (monthly, quarterly,

semiannual, or annual), different locations (campuses), or to differentiate

between actual costs and budgeted costs. Extensive help was available

within the Project Manager module.

The next step was to define all departments (cost centers) and

activities related to each department at HSU by use of an Activity Analysis

module. An output measure was required for each activity defined.

Attributes for each activity were assigned (primary/secondary and value-

added/non-value-added). Each activity was assigned to an organizational

process (Executive, Academic, Advancement, Student Development and

Finance and Management). An implementation tool provided in the

software called the Activity Dictionary template was useful as a system

model aid in defining departments and activities.

118
 Costs were then traced to the activities. The cost amounts in the data

set were traced to the appropriate activities by use of the cost tracing

function within the Activity Accounting module. Costs may be traced by

time percentages, lump sum, or by overall percentages. Output measure

quantities were defined for each activity after which cost per output

measure was automatically calculated by the software program. Certain

reports could have been printed at this time to verify the accuracy of the

considerable amount of data that had been entered up to this point in the

system design process.

ABC/M is based on the principle that activities consume costs and

cost objects consume the outputs of the activities. The purpose of the

Product (cost object) Costing module was to define all of the cost objects that

would be desirable for the ABC/M model. Within this module, activity

output measure quantities were traced to the cost objects defined for the

various activities. An interim optional step permitted the tracing of cost

object costs to other cost objects. The remaining predefined reports could

have been printed at this point.

The researcher supplemented the CMS-PC 4.0 reports for all cost

objects defined with reports developed in spreadsheet software in order to

present data simultaneously for several different cost object costs each of

119
which utilized all of the costs of each activity. The format for these reports

varied from the CMS-PC 4.0 predefined report formats.

The budgeting module utilized activity output quantities and activity

cost per output produced by the accounting module. The product of these

values represented the resources required for each activity. All of the

predefined reports could have been printed with budget data except the

product costing reports.

Use of the CMS-PC™ 4.0 software expedited the design of the ABC/M

system for the subject university. The software proved to be intuitive and

easy to use. When questions arose, the ICMS Technical Support personnel

were very helpful.

An excellent concise summary of the design of a system of this type is:

An activity-based system includes resources and costs that are

traced to activity pools with resource drivers. The activity
pools are traced to cost objects with activity drivers. Cost
drivers and performance measures can be determined for each
activity if an activity-based control system is in place.
(Anderson & Clancy, 1998, pp. 11-12)

Collection of Data

The collection of data began after several prehminary tasks h a d been

completed. These tasks are hsted on the next page with the actual time-

frame indicated for each element.

120
Table 3.2. Time Frame for the Experimental Study

Design/Preparation Time Period

Dissertation Proposal Document September, 1997-January,

1998

Three P a r t Evaluation Instrument January, 1998

ABC/M System for HSU September, 1997-June, 1998

Conducted Experiment

Conducted the Pilot Study March, 1998

Gathered Data from Evaluators July, 1998

Performed Data Analysis August, 1998

Completed Dissertation October, 1998

Analysis of Data

Research Question

Does the use of the complementary ABC/M system provide more

useful information t h a n the sole use of a traditional financial accounting

system for: (1) budgeting decisions, (2) financial management (control)

121
decisions, and (3) strategic decisions dependent on accurate cost object cost

as judged by executives, middle managers, and staff of a private university?

An answer to this question was developed from the statistical testing of the

hypotheses stated for this experiment.

Hypotheses

"The first step in evaluating a scientific hypothesis is to express the

hypothesis in the form of a statistical hypothesis" (Kirk, 1995, p. 48). The

statistical hypotheses presented in the following sections are statements

about certain parameters of the data collected. Three null and alternate

hypotheses are presented, although only the tenability of the null

hypotheses was actually tested. If any null hypothesis is rejected, only the

alternate hypothesis would remain tenable. According to statistical

convention, the alternative hypotheses are formulated as opposites of the

null hypotheses so that they correspond to the researcher's pretest scientific

hunch. The process of choosing between the null and alternative hypotheses

is called hypothesis testing (Kirk, 1995).

Null and Alternative Hypotheses

The first hypothesis was designed to test the variances that existed

between the two treatment levels of the independent variable, Treatment A

122
(accounting system).

Null hypothesis 1. Ho: /j,a^ = /Lta^.

Stated in words, there is no statistically significant difference

between the arithmetic means of the evaluator response values for the two

levels (ap financial accounting system, and ag, ABC/M system) of the

independent variable. Treatment A. The alternate hypothesis was: Ha: jj,a^

* Ij,a2. Stated in words, there is a statistically significant difference in the

arithmetic means of the evaluator response values for the two treatment

levels of the independent variable. Treatment A.

The second hypothesis was designed to test the variances that existed

between the three treatment levels of the independent variable, Treatment

B (decision purpose).

Null hypothesis 2. Ho: yub^ = /^b2 = /^bg.

Stated in words, there are no statistically significant differences

between the arithmetic means of the evaluator response values of the three

treatment levels (b^ budgeting, b2, financial management, and bg, strategic

decisions dependent accurate cost object costs) of the independent variable.

Treatment B. The alternate hypothesis was: Ha: iA>^ * ijh^ * ^bg. Stated in

words, there are statistically significant differences in the arithmetic means

of the evaluator response values of the three levels of the independent

variable. Treatment B.

123
 The third hypothesis was designed to test the variances that exi.sted

due to the interactions of the combinations of the two independent variables.

Treatments A and B, and the interactions of the blocks (professional

classification of the evaluator).

Null hypothesis 3. Ho: /^aibi = /^a^bj = ^aibg = Majb^ = /^agbs = /ua2bg.

Stated in words, there are no statistically significant differences

between arithmetic means of the evaluator response values associated with

the combinations of the two independent variables. Treatments A and B,

and the blocks. The designations a^bi, aib2 and a^bg relate to the

combinations of the financial accounting system (ai) and the three decision

purposes of the information (b^, budgeting, bg, financial management, and

bg, strategic decisions dependent on accurate cost object costs). The

designations a2bi, a2b2, and a2bg relate to the combinations of the activity-

based costing system and the three decisions purposes of the information

(bj, budgeting, bg, financial management, and bg, strategic decisions

dependent on accurate cost object costs). The alternate hypothesis was:

fxa^h^ * A^a^bg ^ A^a^bg ^ /uagb^ * J^8i2^2 * A^agbg. Stated in words, there are

statistically significant differences between arithmetic means of the

evaluator response values associated with the combinations of the two

independent variables. Treatments A and B, and the blocks.

124
 Computational Model

Descriptive statistical data were prepared from the evaluator

response values collected from the persons in the six blocks who evaluated

the information provided by the financial accounting and ABC/M systems.

The statistical technique known as ANOVA, which utihzes the F statistic for

between treatments and within treatments sources, was conducted to

evaluate the three statistical null hypotheses presented. The level of

significance adopted was a = .05. The results of the computation are

displayed in the ANOVA table (Table 4.1. Table of Findings for Spht-Plot

Factorial Design Using ANOVA, p. 130) for the experimental design used.

The population from which the two samples were randomly selected

included all of the executives, middle managers and staff who had

responsibilities for: (1) budgeting, (2) financial management (control) and (3)

strategic decisions dependent on accurate cost object costs at Hardin-

Simmons University. There was a total of 88 persons at Hardin-Simmons

in those groups. A random number table provided by Kirk was used to

randomly select the sample subjects for each block (Kirk, 1995).

The evaluator response values were obtained by the use of an

instrument composed of three sets of five statements each, one set for each

decision purpose. The subjects of each sample group were asked to score the

system they were evaluating using a response from one to five on a Likert

125
scale relating to the usefulness of the information. The score for each

subject was the sum of the scores assigned by the subject/respondent to the

five statements dealing with each of the three areas of interest presented on

the instrument, i.e., (1) budgeting decisions, (2) financial management

decisions, and (3) strategic decisions dependent on accurate cost object costs.

The data were physically analyzed in an effort to detect: (1) possible

data recording errors, (2) assumptions that appeared untenable, and (3) any

unexpected promising lines for further investigation. The fixed effects

model, which included all of the treatment levels of the two independent

variables, was used. Tests were conducted on the data to test the

assumptions as to: (1) strength of association and effect size, (2) power,

(3) the determination of sample size, and (4) to detect the presence of trends.

Computational symbols, procedures, and formulas designed for this

particular experimental design provided the data presented in the ANOVA

table (Table 4.1. Table of Findings for Spht-Plot Factorial Design Using

ANOVA, p. 130) on which conclusions about the hypotheses were based. The

partial omega square measure was used to estimate the strength of

association, effect size, power, and sample size. No other tests were

considered necessary to be conducted due to the very large statistical

significance found.

126
 Summary

This dissertation required the design of an ABC/M system the

information from which was to be evaluated in contrast to the information

provided by the financial accounting system currently in use. The

experiment involved one independent variable relating to the type of

accounting system used, and one independent variable relating to the

decision types. The effect of each and the interaction of both of these

independent variables on the dependent variable (usefulness of the

information) was tested. The purpose of the experiment was to determine

whether the ABC/M system information was more useful for the three

decision purposes t h a n the information provided by the financial accounting

system currently in use at the subject institution.

Three null statistical hypotheses were tested that related to the two

independent variables and their effect on the dependent variable. A survey

instrument was utilized to collect data from six blocks of persons who had

responsibility for budgeting, financial management, and strategic decisions

for their program at the subject university. The survey instrument was

developed specifically for this study, and had not been validated by use in

other studies. It was validated to the satisfaction of the researcher by two

different research techniques, by the experimental design, and by random

selection of evaluators.

127
 In the next chapter, summarized data tables are presented, the

statistical techniques that were used are presented, and significant findings

for each of the three hypotheses tested are discussed. Graphical depictions

of the findings are presented along with the narrative explanation of the

findings when it was practical to do so.

128
 CHAPTER TV

FINDINGS

Summarv

This chapter contains the statistical analysis of the data collected

from evaluations performed by the eighty-eight members of the

management group at the subject institution, and the findings that resulted.

This chapter presents: (1) findings related to the three null hypotheses,

(2) interpretations of significant interactions between independent variable

levels, (3) computational procedures and data, and (4) findings of procedures

to estimate the strength of association, effect size, and power.

Findings Related to the Three

Null Hypotheses Tested

Finding: Null Hypothesis Number 1

In order to provide an answer to the compound research question

presented in Chapter I, p. 10, and again in Chapter III, p. 121, three null

hypotheses were formulated. Hypotheses number 1 (jxa^ = fxa.^ was

designed to test whether the evaluator responses to the statements

presented in the survey instrument that were based on the financial

accounting system information were significantly different from the

129
evaluator responses to the statements in the survey instrument that were

based on the ABC/M system information. The ANOVA procedure for the

split-plot factorial design used in this study produced three findings, one of

which was t h a t there was a significant difference between the arithmetic

means of the evaluator response values for the two types of accounting

systems evaluated (see Table 4.1).

Table 4.1. Table of Findings for Spht-Plot Factorial Design Using ANOVA

Source SS df MS

1. Between blocks 9,437.34 np -1 = 87 108.48

2. A (Fin & ABC) 5,918.56 p-l = l 5,918.56 2/3 144.64*

3. B l o c k s W.A 3,518.78 p(n - 1) = 86 40.92

4. Within Blocks 687.33 npiq - 1) = 176 3.91

5. B (Purposes) 51.37 q- 1 = 2 25.69 5/7 8.53**

6. AB 118.51 (p - 1)(^ - 1)= 2 59.26 6/7 19.69***

7. B X B l o c k s w A 517.45 pin-l){q - l)= 172 3.01

8. Total 10,124.67 npq -1 = 263

*Fo5 1, 86 = <3.92
**Fo5 2, 172 = <3.04
***Fo5 2, 172 = <3.04
alpha = .05
n = 44

130
 The bold print section of Table 4.1, Table of Findings for the Split-

Plot Factorial Design Using ANOVA, p. 130, including the related notes

reveals t h a t for the Treatment A (accounting system) source, the sum of

squares value of 5,918.56 with one degree of freedom produced a mean

square value also of 5,918.56. The F value reported resulted from dividing

the mean square value for Treatment A by the mean square value for the

blocks within Treatment A (5,918.56/40.92 = 144.64). This number, when

compared to the critical F value of less than 3.92 for Treatment A (unshaded

bold print) determined by reference to a table showing the upper percentage

points of the F distribution (Kirk, 1995), indicated very high statistical

significance existed for Treatment A; therefore, the null hypothesis number

1 (jua^ = ij,a^ was rejected. Stated in words, there was a significant

difference in the arithmetic means of the evaluator response values to

information provided by the two accounting systems for the three decision

purposes tested. The ABC/M information was more useful than the

information provided by the financial accounting system currently in use.

This was a very important finding that provides an answer to an important

p a r t of the research question. The response values tested by the null

hypothesis number 1 are presented in graphical form in Figure 4.1,

Response Values by Accounting System Type, on the next page.

131
 Response Values by Accounting System

vjuu •

Qnn - 4
.- 1 '
yuu
Rnn - • 1

ouu i

700

600

500 -
Ann
Budgeting Financial Management Cost Object Costs
Decision Purpose

Financial Accounting Activity-Based Costing

Figure 4.1. Response Values by Accounting System Type

Finding: Null Hypothesis Number 2

Null hypothesis number 2{p)o^ = ^^^ /^bg) was formulated to test

whether there were significant differences between the evaluator response

values for the three levels of Treatment B (budgeting decisions, financial

management decisions, and strategic decisions dependent on accurate cost

object costs) irrespective of which accounting system information was

evaluated. The analysis of the data produced an interesting but unexpected

finding. The findings resulting from testing the second null hypothesis are

presented in the bold print section of Table 4.2, Table of Findings for Splits

132
Plot Factorial Design Using ANOVA, and the related notes presented with

different items in bold print.

Table 4.2. Table of Findings for Spht-Plot Factorial Design Using ANOVA

Source SS df MS

1. Between blocks 9,437.34 n p - l = 87 108.48

2. A (Fin & ABC) 5,918.56 p-l = l 5,918.56 2/3 144.64'

3. Blocks W.A 3,518.78 p{n - 1) = 86 40.92

4. Within Blocks 687.33 np(q - 1) = 176 3.91

5. B ( P u r p o s e s ) 51.37 q-l =2 25.69 5/7 8.53**

6. AB 118.51 (p - l)(q - l)= 2 59.26 6/7 19.69 • * * *

7. B X B l o c k s w A 517.45 p ( n - l ) ( g - 1)= 172 3.01

8. Total 10,124.67 npq -1 = 263

*Fo5 1, 86 = <3.92
**Fo5 2, 172 = <3.04
***Fo5 2, 172 = <3.04
alpha = .05
n = 44

For the Treatment B (decision purposes) source , the sum of squares

value of 51.37 with 2 degrees of freedom produced a mean square value of

25.69. The F value reported resulted from dividing the mean square value

for Treatment B by the mean square value for B X Blocks w A (25.69/3.01 =

8.53). This value, when compared to the critical F value of less t h a n 3.04

133
for Treatment B (bold print in notes) determined by reference to a table

showing the upper percentage points of the F distribution (Kirk, 1995),

indicated a significant difference in the arithmetic means of the evaluator

responses to information regarding the three decision purposes presented;

therefore, the null hypothesis number 2 (pih^ = /ib2 = /^bg) was rejected.

Stated in words, there were significant differences in the arithmetic means

of the evaluator responses to information presented for the three decision

purposes tested. Means of the evaluator response values relating to

budgeting decisions were significantly higher than means of the evaluator

response values relating to financial management (control) decisions. The

means of the evaluator response values to financial management (control)

decisions were significantly higher than the means of the evaluator response

values to strategic decisions dependent on accurate cost object costs.

Statistical significance between the means of the evaluator response values

for the three decision purposes was somewhat surprising since all three

decisions purposes would seem to the researcher to be equally important,

and to represent functions mutually complementary and typically performed

by all managers with financial management responsibility. No test of the

relative importance of the decision purpose was proposed or conducted. The

response values tested by the null hypothesis number 2 in graphical form

(Figure 4.2, Response Values by Decision Purpose) are presented below.

134
 Response Values by Decision Purpose

1000 t

i
900
' /A
800
700 ji y
// / \
•• y /
i y /
600 / y /
4
^ / /
500 • t /

400
Financial Accounting Activity-Based Costing
Accounting System

Budgeting -"f— Financial Managemen*-»— Cost Object Costs

Figure 4.2. Response Values by Decision Purpose

Finding: Null Hypothesis Number 3

Hypothesis number 3 (/^a^bj^yua^bg = ^xa^^^^ixa^^ = A^agbg =/>ia2b3)

was designed to test whether the effect of all levels of each independent

variable was the same for all levels of the other independent variable in this

study which had two independent variables. The bold print items of Table

4.3, Table of Findings for the Spht-Plot Factorial Design Using ANOVA, and

the related notes presented on page 137 with different items in bold print

revealed that for the interactions of the two independent variables and the

blocks source, the sum of squares value of 118.51 with 2 degrees of freedom

135
produced a mean square value of 59.26. The F value reported resulted from

dividing the mean square value for both independent variables (Treatments

A and B) by the mean square value for the blocks within Treatment B X

Blocks w A (59.26/3.01 = 19.69). This value when compared to the critical F

value of less t h a n 3.04 for interaction of Treatments A and B (bold print in

the figure notes) determined by reference to a table showing the upper

percentage points of the F distribution (Kirk, 1995), indicated statistical

significance existed as a result of the interactions of the two independent

variables; therefore, the null hypothesis number 3 (jxaihi=/j.a^h2 = /ia,b3 =

/<ia2bi = Ma2b2 ^yuagbg) was rejected. Stated in words, there was a significant

difference in the effect of each independent variable on each level of the

other independent variable.

Considering only the financial accounting system (a J information

response values, the information for budgeting was significantly more useful

t h a n for financial management (control) decisions (bg). Additionally, the

information for financial management (control) decisions (bg) was

significantly more useful t h a n for strategic decisions dependent on accurate

cost object costs (bg). Contrarily, the ABC/M system (ag) provided more

useful information for strategic decisions dependent of accurate cost object

costs t h a n for financial management (control) decisions (b2). Additionally,

the ABC/M system (a2) provided more highly useful information for financial

136
management decisions (b2) than for budgeting decisions (bg). The evaluator

response values which were tested by the null hypothesis number 3 can also

be seen in graphical form in Figure 4.2, Response Values by Decision

Purpose, p. 135.

Table 4.3. Table of Findings for Split-Plot Factorial Design Using ANOVA

Source SS df MS

1. Between blocks 9,437.34 np -1 = 87 108.48

2. A (Fin & ABC) 5,918.56 p-l=l 5,918.56 2/3 144.64*

3. Blocks W.A 3,518.78 p{n - i) = 86 40.92

4. Within Blocks 687.33 np{q - 1) = 176 3.91

5. B (Purposes) 51.37 g- 1 = 2 25.69 5/7 8.53**

6. AB 118.51 p-l)(g-l)=2 59.26 6/7 19.69***

7. B X B l o c k s w A 517.45 p ( n - l ) ( g - 1)= 172 3.01

8. Total 10,124.67 npq -1 = 263

*Fo5 1, 86 = <3.92
**Fo5 2, 172 = <3.04
***Fo5 2, 172 = <3.04
alpha = .05
n = 44

137
 Interpretations of Significant
Interactions Between Levels

of Treatments A and B

If the interaction between levels of the independent variables in an

experiment is statistically significant, as was the case in this experiment,

additional insight can be gained into the interaction of the levels of the

independent variables with each other by further analysis of variance

between treatment level combinations. ANOVA procedures for simple main-

effects sums of squares were conducted to compare the evaluator response

scores for each combination of treatment levels of the independent variables.

The null hypothesis number 3 (jj.a^h^ = ^a^h2 = //aibg^/^ajb^ = /ua2b2 =

//a2b3) relating to the interactions could also be tested using computational

procedures for simple main-effects sum of squares. A description of each

combination of treatment levels for each independent variable is presented

in Table 4.4, Description of the Six Combinations of Treatment Levels of

Treatments A and B, p. 139 to aid the reader in understanding the

narrative analysis that follows.

138
Table 4.4. Description of the Six Combinations of Treatment Levels of
T r e a t m e n t s A and B

Combination Accounting Svstem Decisions Purpose Evaluated

a,bi Financial Accounting Budgeting

aibg Financial Accounting Financial Management

a^bg Financial Accounting Strategic Decisions

ABC/M Budgeting

^^2 ABC/M Financial Management

azba ABC/M Strategic Decisions

Of the fifteen possible combinations of levels of independent variables

t h a t could be compared, comparisons of combinations ajb^ to a2bi, aib2 to

a2b2, anda^bg to a2b3 were of special interest due to the desire to determine

whether the ABC/M system information was more useful t h a n the financial

accounting system information overall. The comparisons of combinations

involving the decision purpose levels within the two levels of Treatment A

(a^bi to aib2, a^b^ to a^bg, a^bg to aib3 a^^ to a2b2, a^^ to a2b3, and a2b2 to

a2b3) were also of interest in order to see if the same significant differences

existed between the three decision purpose levels for both levels of

T r e a t m e n t A (accounting system). Table 4.5, Findings Related To

Interactions of Combinations of Independent Variable Treatment Levels

139
Using ANOVA For Simple Main Effects, is presented below with certain

items of interest to be discussed presented in bold print. These items will be

discussed in the analysis that follows the table.

Table 4.5. Findings Related To Interactions of Combinations of Independent

Variable Treatment Levels Using ANOVA With Tests For Simple Main
Effects

Source SS df MS

1. A 5,918.56 p-l =l 5,918.56 1/9 378.42*

2. B 51.37 g-l = 2 25.69 2/9 1.64

3. AB 118.51 (p-l)iq-l) =2 59.26 3/9 3.79**

4. A at bj 1,400.01 p-l = l 1,400.01 4/9 89.51***

5. A at b. 1,863.92 p-l = l 1,863.92 5/9 119.18***

6. A a t b , 2,773.14 p-l = l 2,773.14 6/9 177.31***

7. B a t a ^ 162.59 q- 1 = 2 81.30 7/9 5.20 * • * * • *

8. B at a. 7.29 q- 1 = 2 3.65 8/9 .23

9. W i t h i n Cell 4,036.23 pq(n - 1) = 258 15.64

10. Total 10,124.67 npq - 1 = 263

*Fo5 1, 258 = 3.84

**Fo5 2, 258 = 3.00
***Foi 1. 258 = 6.63
****Foi 1. 258 = 4.61
alpha = .05

140
 All combinations involving comparisons of the differences m the

arithmetic means of the two levels (a^ and a^) of Treatment A (accounting

system) overall were found to have very high statistical significance. The

sum of squares values for Treatment A of 5,918.56 with one degree of

freedom yields a mean squares value of 5,918.56 which in turn indicates an

F value of 378.42. That value, when compared to the critical value of F

(3.84), indicated the high degree of difference between the two levels of

T r e a t m e n t A (accounting system). Stated in words, the evaluator response

values were much higher for the ABC/M system than for the financial

accounting system currently in use. This finding supports the

determination that ABC/M information is much more useful for the

decisions purposes tested than the financial accounting information for the

three purposes tested.

Interactions involving comparisons of the three levels of Treatment B

(decisions purposes) overall were found to be statistically insignificant with

an F value of 1.64; however, the interactions of the two treatment levels (A

and B) were significant. The sum of squares of 118.51 for the source AB

with two degrees of freedom yielded a mean squares value of 59.26 and a

significant F value of 3.79 when compared to the critical F value of 3.00.

The very high significance found for Treatment A had an influential effect

on the findings related to the interactions of both variables. Table 4.6,

141
Findings Related to Interactions of Combinations of Independent Variable

Treatment Levels using ANOVA With Tests For Simple Main Effects, is

repeated on this page with other findings in bold print for discussion in the

paragraphs that follow the table.

Table 4.6. Findings Related To Interactions of Combinations of Independent

Variable Treatment Levels Using ANOVA With Tests for Simple Main
Effects

Source SS df MS F

1. A 5,918.56 p-l = l 5,918.56 1/9 378.42*

2. B 51.37 q- 1 = 2 25.69 2/9 1.64

3. AB 118.51 (p- l){q - 1) = 2 59.26 3/9 3.79**

4. A at bi 1,400.01 p-l = l 1,400.01 4/9 89.51***

5. A at bg 1,863.92 p-l = l 1,863.92 5/9 119.18*** t

6. A at bj 2,773.14 p-l = l 2,773.14 6/9 177.31***

7. B at ai 162.59 q-l =2 81.30 7/9 5.20****

8. B at ag 7.29 q-\-2 3.65 8/9 .23

9. W i t h i n Cell 4,036.23 pq{n - 1) = 258 15.64

10. Total 10,124.67 npq - 1 = 263

*F 1 258 = 3.84
* * XT' 9
^ .05 ^^
258 = 3.00
ieis-kp \^ 258 = 6.63
•k-k'kicp 1^ 258 = 4.61

alpha = .05

142
 For combinations of the two independent variables, significant

differences were found between arithmetic means of the evaluator response

values for the three decisions purposes when compared irrespective of the

accounting system information evaluated. That is, when both levels of

Treatment A (accounting system) were combined, there were significant

differences in the arithmetic means of the evaluator response values for the

three decisions areas tested. It should be noted, that when combinations of

treatment levels that were within the financial accounting system level of

Treatment A (accounting systems) were compared, significant differences

were found between the arithmetic means of the evaluator response values

for the three decision purposes tested. When combinations that were within

the ABC/M level of Treatment A (accounting system) were compared, no

significance was found. That is, the evaluators of the financial accounting

system found the information more useful for budgeting purposes than for

financial management purposes, and more useful for financial management

purposes than for strategic decisions dependent on accurate cost object

costs. Contrarily, evaluators of the ABC/M system information found the

information almost equally useful for the all three of the decisions purposes

tested. Note that overall the evaluators of the ABC/M system information

found the information more useful for the three decision purposes tested

143
than the evaluators of the financial accounting system information found for

the same decision purposes.

Computational Procedures and Data

Computational procedures appropriate for analysis of variance using

ANOVA techniques and using the F statistic were performed in order to

determine the statistical significance between evaluator response values for

both independent variables (Treatment A and Treatment B) and for the

interactions between the levels of the two independent variables. The

computational symbols and formulas for the experimental design used in

this experiment (split-plot factorial design with two independent variables)

were taken from Kirk's textbook on experimental design (Kirk, 1995).

Calculations were done without the use of statistical software.

Complete data tables are presented in Appendix H. Summary tables

of the data are presented in this section for the convenience of the reader.

All findings are based on either the complete data table entries presented in

Appendix H or on the summary totals of the data presented in the summary

tables in this section.

144
Table 4.7. Summary Table of Evaluator Responses By Block (Executive,
Middle Manager, or Staff), Treatment A (Financial Accounting and ABC/M),
and by Treatment B (Budgeting, Financial Management, and Strategic
Decisions Dependent On Accurate Cost Object Costs)

Independent
Variable Treatment B
Treatment A bi b2 b3 Totals
Blocks Totals 134 110 92 336
Financial Accounting

ai Block2 Totals 176 149 130 455

Financial Accounting

Block3 Totals
FinancialAccounting 227 229 196 652

Blocks
ABC/M 175 178 192 545

a2 Blockg Totals
ABC/M 331 333 337 1001

Blockg Totals
ABC/M 382 382 383 1147

BlockSi2,3 537 488 418 1443

Blocks45g 888 893 912 2693
Blocks 12.3.4,5,6 1425 1381 1330 4136

a^ - Financial Accounting System

a2 -ABC/M System
bj - Budgeting Decisions
b2 - Financial Management Decisions
bg - Strategic Decisions Dependent On Accurate Cost Object Costs
Blockg and Blockg = Executives
Blockg and Blockj = Middle Managers
Block, and Blocks = Staff

145
 Findings Related to Procedures
for Estimating Strength of
Association. Effect Size, and Power

"Statistical significance is concerned with whether an observed

treatment effect is due to chance. Practical significance is concerned with

whether an observed effect is large enough to be useful in the real world

(Kirk, 1995, p. 177). It is possible that in some experiments, relatively

trivial independent variable effects can achieve statistical significance if a

sufficient number of subjects is included in an experiment. Large sample

sizes may produce significant findings that may not have any practical

importance. The purpose of these tests was to determine if the strength of

association, effect size, and power associated with the data in this

experiment support practical significance as well as the statistical

significance of the findings. A scale for each test has been devised by

statisticians so that the findings for each test for this actual experiment

could be interpreted as to whether the values calculated should be classified

as low, medium, or high. A minimum acceptable value was also defined for

the test of power.

Findings: Strength of Association

The most popular measures of strength of association are partial

omega squareds (w^) for fixed effects. The following guidelines are

146
suggested for interpreting calculated strength of association values for a

specific experiment:

0) = .010 is a small association,

o) = .059 is a medium association,

d)^ = .138 or larger is a large association (Kirk, 1995).

Partial omega squareds for each combination of two independent

variables (Treatments A and B) and for the interaction of the two

independent variables (AB) were calculated. The strength of association

value for treatment A was found to be very large with a calculated value of

.352. The strength of association value for treatment B was found to be

medium with a calculated value of .054, and the strength of association

value for the interaction of the treatment levels was found to be toward the

high end of the medium range with a calculated value of. 124. Not only

were all three of these quantitative associations statistically significant, as

indicated in Table 4.1, Table of Findings for Split-Plot Factorial Design

Using ANOVA presented on p. 130, again in Table 4.2 on p. 133, and again

in Table 4.3, on p. 137, but also the strength of association for all three

significant findings was moderate to very strong. These findings give

additional support to the determination that the incidences of statistical

significance found for Treatment A, for Treatment B, and for the

147
interactions of the two independent variables are valid for real world

decisions.

Findings: Effect Size

A second approach to assessing the practical significance of research

results is based on differences among arithmetic means. This useful

statistical measure was popularized by Cohen in 1988 and was called effect

size. The calculated value for a specific experiment is denoted by d (Kirk,

1995). In this experiment, the researcher developed an experiment for

measuring the usefulness of information. It was difficult, if not impossible,

to specify in advance the minimum difference in the arithmetic means of the

evaluator responses of the two treatment levels of Treatment A and the

three treatment levels of Treatment B and the interactions of the two

t r e a t m e n t s t h a t would be worth detecting from a practical standpoint.

When the measurements of the differences in the arithmetic means of the

evaluator responses are arbitrary and not intuitively obvious, as they were

in this experiment, the use of effect size to convey the magnitude of the

difference found can be helpful in interpreting the practical significance of

the differences found. Cohen determined that ds of .2 were considered

small, .5 was considered medium, and .8 or larger was considered large.

The calculated effect size value for Treatment A was found to be .73, which

148
is considered fairly large. The calculated effect size value for Treatment B

and the interaction of treatments A and B were .22 and .37, respectively,

which are fairly small. The large effect size for the independent variable.

T r e a t m e n t A (accounting system) supports the practical significance of the

finding t h a t ABC/M system information is more highly useful than

information provided by the financial accounting system currently in use by

the subject university for the decision purposes tested. The fairly small

effect size for the independent variable. Treatment B (decision purpose) and

for the interaction of the two independent variables implies a somewhat

diminished support for the practical significance of the statistically

significant finding t h a t the information provided by both accounting

systems was more highly useful for budgeting decisions than for financial

management decisions, and that information for financial management

decisions was more useful t h a n for strategic decisions dependent on

accurate cost object costs.

Findings: Power

The measure called power is a measure of the probability of rejecting

a false hypothesis. A power of .80 is considered by many researchers to be

the minimum acceptable power (Kirk, 1995). The power calculated for the

independent variable Treatment A (accounting system) was .99, which is

149
very large. The power calculated for the independent variable, Treatment B

(decision purpose) was .96, also quite large. The power for the interaction of

the independent variables. Treatments A and B, was an acceptable .80.

These findings gave a high degree of confidence that all of the false

hypotheses were correctly rejected. The probabihty of rejecting a true null

hypotheses was .05.

Stated in words, the confidence level of correctly rejecting any null

hypotheses relating to the two levels of Treatment A (financial accounting

and ABC/M), the three levels of Treatment B (budgeting decisions, financial

management decisions, and decisions dependent on accurate cost object

costs) and the interactions of the levels of Treatments A and B, was very

high. The confidence level of correctly accepting any true null hypotheses

was 95%. Decisions concerning usefulness of information when comparing

existing financial accounting systems with Activity-Based

Costing/Management systems in private universities can be made with

considerable confidence.

Presentation of presumptive arguments, including critical questions

designed to avoid weak arguments, was considered. Although less

conclusive t h a n the statistical evidence, the arguments would have added

legitimate support to the conclusions reached by use of the statistical

methods presented above (Walton, 1996). In the opinion of the researcher.

150
these presumptive arguments were unnecessary due to the strength of the

findings using the statistical analysis described above.

Summarv

The statistical analysis presented in Chapter IV support the finding

t h a t the ABC/M system provides more useful information for: (1) budgeting

decisions, (2) financial management decisions, and (3) strategic decisions

dependent on accurate cost object costs than the financial accounting system

currently in use by the subject institution. The statistical findings

presented also support the conclusions and recommendations presented and

discussed in the following chapter. A statistical null hypothesis was

developed for all three elements of the research question which were all

addressed by the design of the experiment. All three null hypotheses were

rejected at the .05 level. Findings related to the three null hypotheses

needed to answer the research question were presented and discussed.

Computational procedures were explained in brief, and tables of

summarized data were presented in order to aid the reader in

understanding the findings more completely. A group of findings related to

distinguishing the important differences between statistical and practical

significance completed the presentations of this chapter.

151
 CHAPTER V

MAJOR FINDINGS, CONCLUSIONS,

AND RECOMMENDATIONS

Introduction

Cost accounting literature produced in recent years contains many

references to the deficiencies of traditional accounting systems relating to

the usefulness of the data for management decisions which commonly

include budgeting, financial management, and strategic decisions dependent

on accurate cost object costs. Activity-based costing, a new approach to cost

accounting, was proposed as a solution to these deficiencies. Many private

universities use the "official" NACUBO financial accounting system for the

external reporting purpose for which it was designed, and for the internal

management decision purpose for which it has been adapted. Information

provided by ABC/M systems has been demonstrated to be superior to

information provided by traditional financial accounting systems for the

management accounting function in commercial organizations. It follows

logically that ABC/M may provide some of the same benefits for higher

education institutions that it has been demonstrated that it does for

commercial organizations.

152
 This research was expected to support an affirmative answer to the

research question of whether a complementary ABC/M system provides

more useful information than the sole use of the financial accounting system

for: (1) budget decisions, (2) financial management (control) decisions and

(3) strategic decisions dependent on accurate cost object costs as judged by

executives, middle managers, and staff of a private university. A split-plot

factorial experimental design was employed for this experiment using

ANOVA procedures to measure statistical significance of the arithmetic

means of evaluator responses to fifteen statements in a survey instrument

that could be classified: (1) as to the accounting system that was the source

for the information evaluated (Treatment A), (2) as to the three decision

purposes tested (Treatment B), and (3) as to the interactions of the levels of

the two treatments. Eighty-eight persons with budgeting and financial

management responsibility at Hardin-Simmons University, the subject of

this research, used a fifteen statement survey instrument to evaluate the

usefulness of the information provided by either the financial accounting

system currently in use or by an ABC/M system designed for the subject

university by the researcher using professional software.

Three statistical null hypotheses were formulated to provide possible

support for the conclusions presented in this chapter. They were:

153
 Null hypothesis number 1-There is no statistically significant

difference between the arithmetic means of the evaluator response values

for the two treatment levels of the independent variable. Treatment A

(accounting system). This null hypothesis was rejected in view of the

significance found by statistical analysis.

Null hypothesis number 2-There are no statistically significant

differences between the arithmetic means of the evaluator response values

for the three levels of the independent variable, Treatment B (decision

purpose). This null hypothesis was rejected in view of the significance found

by statistical analysis.

Null hypothesis number 3-There were no statistically significant

differences in the evaluator response values for either independent variable

that were associated with the interactions of the levels of the independent

variables, Treatments A and B, and the blocks. This hull hypothesis was

rejected in view of the significance found by statistical analysis.

Major Findings

Finding: Hypothesis Number 1

Related To Treatment A (Type of
AccountingSystem)

Perhaps the result of greatest interest in this experiment was that

the data supported a finding that in the judgement of the executives, middle

154
managers and staff of the subject university, the ABC/M system designed

for the subject university provided more useful information than was

provided by the financial accounting system currently in use at the subject

institution for the three decision purposes tested including: (1) budgeting

decisions, (2) financial management (control) decisions, and (3) strategic

decisions dependent on accurate cost object costs. This extremely important

finding provided empirical evidence that could support a decision by

administrators of private higher education institutions to consider ABC/M

systems on the basis of usefulness of the information provided for the three

decision purposes tested. The practical significance of this major finding

was t h a t administrators may have a high degree of confidence that the

ABC/M system information is more highly useful than information provided

by the financial accounting system typically used by institutions similar to

the subject institution.

The ABC/M system designed by the researcher for the subject

university was compatible with the CMS-PC™ for Windows™ software

used in ABC/M system implementation by all organization t5rpes. A

workbook was provided by the supplier of the software as a system

implementation aid. The workbook specifies five principles of excellence

inherent in the ABC/M system that are incorporated in the software:

1. Continually manage activities, not resources.

155
 2. Continually synchronize activities within organization processes.

3. Continually eliminate wasteful activities (tasks).

4. Continually improve activity cost, time, and quahty.

5. Continually empower employees to improve activities.

The information provided to the executives, middle managers, and staff who

evaluated the ABC/M system was produced by the CMS-PC™ 4.0 for

Windows software provided by ICMS, Inc.

Findings: Hypothesis Number 2

Related to Treatment B
(Decision Purpose)

Of interest also was the finding that the information provided for

budgeting decisions was significantly more useful than for financial

management decisions and more useful for financial management decisions

than for decisions dependent on accurate cost object costs. These decision

purposes are of interest because they are considered by the researcher to be

decisions commonly encountered by administrators, and therefore are

representative of decisions made routinely by administrators of higher

education institutions. Other suggested decision areas that could have been

studied could include financial (external) reporting decisions, financing

decisions, auditing decisions, and financial accounting theory decisions.

156
 Three situations at the subject institution may have contributed to

these findings. First, considerable emphasis had been placed on the careful

budgeting of scarce resources for the fiscal years beginning in 1991 and after

by the subject university due to budget deficits in prior fiscal years. As a

consequence, strict budget guidance was provided to all levels of

administration with little variation permitted. Approved changes to the

budget guidance were infrequent. Second, financial management was a

task performed only monthly for smaller programs, but in some programs

within the subject university, it was performed continually. The familiarity

with the financial management process due to the frequency of use may

have had some influence on the valuations. Third, the financial accounting

system provided very limited cost object cost data. Administrators were

routinely provided only cost object information related to the overall cost of

their program and the specific cost accounts utilized by their particular

program. The administrators were unfamiliar with cost object costs of the

type provided for the evaluators of the ABC/M system. Given this context,

the findings related to the decisions for which the information was to be

used appeared to be understandable and logical.

The ABC/M system emphasizes the production of accurate cost object

costs as a primary objective. Costs of activities were traced to several

different cost objects in the ABC/M system. For example, the costs for the

157
instruction activity were traced to six cost objects (cost per class and cost per

student per class, cost per course and cost per student per course, and cost

per professor and cost per student per professor). Staff members (non-

academic) who evaluated the ABC/M system information expressed interest

in the use of accurate cost object cost data as support for requests for budget

increases. Financial management decision information was presented in

the ABC/M system primarily at the activity level, and included depreciation,

utilities, and other prorated costs not normally included in the information

provided for the various programs by the financial accounting system.

Evaluators of the ABC/M system information generally were very interested

in this total-cost concept as opposed to the budgeted-costs-only concept of

the financial accounting system. Budget information for the ABC/M system

was provided by the researcher; therefore, evaluators were not given an

opportunity to participate in the budget preparation process. This may have

contributed to the finding that the budgeting decision purpose information

was viewed as being slightly less useful t h a n the information for the other

two decision purposes in the ABC/M system. The practical significance of

this finding was that logic would suggest that administrators may find they

will be able to make more informed decisions using information provided by

the ABC/M system. The more useful information may also lead to the

reduction of the time required for decisions to be made in each purpose area.

158
A better understanding of the consequences of each decision could also

result.

Findings: Hypothesis Number 3

Related to the Interactions of
Treatments A and B and the Blocks

Within the Financial Accounting system, the information provided for

budgeting decisions was considered more highly useful than for financial

management decisions, and more useful for financial management decisions

than for decisions dependent on accurate cost object costs. In the ABC/M

system, the order of the decision purposes for which the information was

more useful was reversed. For example, information for strategic decisions

dependent on accurate cost object costs was more useful than for financial

management decisions. Information for financial management decisions

was more useful than for budgeting decisions. It should be noted that the

differences in the arithmetic means of the evaluator response values for the

three decision purposes using information provided by the financial

accounting system were large, but the differences in the arithmetic means of

the evaluator response values for the three decision purposes using

information provided by the ABC/M system were quite small. The greater

uniformity of values within the ABC/M system for each decision purpose

compared to the financial accounting system was an indicator of a higher

159
level of overall satisfaction with the ABC/M system information for the

decision purposes tested. The interactions between Treatments A and B

were greatly influenced by the highly significant value found for Treatment

A. The highly significant differences between the two levels of Treatment A

interacting with the relatively modest (but still statistically significant)

differences between the three levels of Treatment B produced statistical

significance for the interactions that is considered to be only moderate.

Recommendations

Policy

In view of the very high statistical significance between the

arithmetic means of the evaluator response values found for the usefulness

of the ABC/M system information over the financial accounting system

information, and because of the findings related to the strength of

association, effect size, and power of the significant differences in the

arithmetic means of the evaluator response values found, this research

supported the conclusion that an ABC/M system provided more useful

information for the decision purposes tested than the financial accounting

system commonly in use by many private higher education institutions.

The policy effect of this conclusion is that administrators should be provided

with the most useful information available for the three decisions purposes

160
t h a t now are (or should be) an integral part of management accounting

systems for all private higher education institutions.

It is also recommended that the financial accounting systems be

retained for external reporting purposes, and that complementary ABC/M

systems be implemented to provide the internal managerial accounting

information needed for effective and efficient management decision making

in private universities. The reasons for this recommendation are twofold.

First, the financial statements of private higher education institutions are

external reporting documents, and must be prepared in accordance with

generally accepted accounting principles. The financial accounting system

used by many private higher education institutions was designed to provide

information that satisfies this very important function. The ABC/M system

was developed as a managerial accounting system designed to produce

information for internal management decision making. No known research

h a s been done to determine if ABC/M systems provide the information

needed to comply with the external reporting standards for private higher

education institutions. Proponents of ABC/M systems (found mainly in

industry) emphasize t h a t the ABC/M systems have an advantage over

financial accounting systems in determining accurate cost object costs. In

manufacturing industries, this advantage could be reflected in more

accurate merchandise inventory or manufactured product values. However,

161
in organizations like higher education institutions, determination of

accurate merchandise inventory costs is not a major accounting issue. Of

greater importance to higher education institutions is the increased

accuracy the ABC/M system may provide in determining the costs of

academic and other services offered by these institutions. ABC/M systems,

employed as complementary systems and enhanced by the functionality of

ABC/M software commercially available, could enhance the limited

provision for internal management decision information available from

existing financial accounting systems.

Second, administrators may be reluctant to replace existing financial

accounting systems without a history of a considerable number of successful

implementations of ABC/M systems in higher education institutions. No

example of a comprehensive successful or unsuccessful implementation of

an ABC/M system in a private higher education institution was found in the

literature review for this investigation. Texas Tech University has

successfully implemented ABC/M in the Extended Learning Section of the

Division of Continuing Education under the direction of Dr. Suzanne Logan,

Director. This suggests that implementation of an ABC/M system in public

higher education institutions on a comprehensive basis may also be feasible.

Fortunately higher education institutions can enjoy the advantages of a

complementary ABC/M system without the necessity of replacing existing

162
financial accounting systems. The cost of an ABC/M system for institutions

similar to the subject institution would be dependent on the particular

needs and degree of use in each institution.

To maximize the advantages of an ABC/M system and to create a

culture of excellence, policy changes to adopt the five principles of excellence

in management, i.e., (1) continually manage activities, not resources; (2)

continually synchronize activities within organization processes; (3)

continually eliminate wasteful activities (tasks); (4) continually improve

activity cost, time, and quality; and (5) continually empower employees to

improve activities would be strongly encouraged. The adoption of these

principles may require significant restructuring of the organization and

policies of the administration of many private higher education institutions.

Practice

ABC/M systems focus on continuous improvement as a primary

objective. One approach to facilitating the process of continuous

improvement is the use of teams at both the departmental and highest

administrative levels. These teams would be responsible for identifying

continuous improvement opportunities and time frames, specifying and

providing resources (budget authority), and suggesting implementation

procedures. Among the most fundamental targets for continuous

163
improvement would be the activities that are classified as central to the

mission of the organization (primary activities) and the activities that

administratively support the primary activities (secondary activities).

Examples of primary activities for private higher education institutions are

teaching, research, advising, and university service. Examples of secondary

activities for the academic area could include clerical, janitorial,

maintenance, and utilities management. The number of primary activities

in an institution should be much greater than the number of secondary

activities.

Budgeting under ABC/M links work activities with the strategic cost,

time, and quality objectives of the organization. It is focused on activities

and the workload needed to achieve them. The budget focuses on the

workload, not the worker. The budget should constitute an analysis of what

the organization plans to do (activities), not so much what the organization

plans to spend. Budget resource requirements for all activities could then

be determined by multipljdng the output volume for each activity by the cost

per unit of output. For example, resources to be applied to the teaching

function for a particular class could be determined by multiplying the cost

per student for that particular class of the recent past by the number of

students expected to enroll in the class during the fiscal period for which the

budget is being prepared. Financial resource constraints could then be

164
addressed by reducing the output volumes of some or all activities rather

than by perhaps more disruptive across-the-board percentage cuts often

experienced by all university programs.

ABC/M, if implemented by a group of peer institutions, could provide

information to benchmark best practices for emulation by all members of

the peer group. With activities common to all peer institutions serving as

the basis for bench marking, successful continuous improvement practices

and procedures could be shared among the institutions. Reduction of the

time for overall improvement of the management process for all of the

members of the group could result. Certain common elements such as

activities, output measures, cost structures, and cost objects would be

required of each member wishing to share in the benchmark experiences.

Research

Additional research will be needed to answer questions relating to

whether ABC/M system information is more useful than financial

accounting systems for other decision purposes such as financing decisions,

auditing decisions, and financial accounting theory decisions in private

higher education institutions. Research also will be needed to answer the

question as to the extent to which ABC/M system information will satisfy

the financial accounting reporting requirements for these institutions.

165
 The applicability of ABC/M to private higher education institutions

that are larger and more complex than the subject institution will require

additional research. Also, the applicability of ABC/M to public higher

education institutions will require still additional research. Activity-Based

Costing and the management system based on it has the potential for

becoming the catalyst for changes leading to significant improvement in

financial and nonfinancial administration of higher education institutions.

Conclusions

The research question to be answered for this study was: Does the use

of a complementary ABC/M system provide more useful information than

the sole use of the financial accounting system for (1) budgeting decisions,

(2) financial management (control) decisions and (3) strategic decisions

dependent on accurate cost object cost as judged by executives, middle

managers and staff of a private university? A positive answer to this

question would provide significant empirical evidence as to the advantages

of ABC/M systems over financial accounting systems in the provision of

management accounting information in private universities. An additional

purpose identified for this study was that a workable prototype ABC/M

system for institutions similar to the subject institution would result.

166
 Inspection of the evaluator response values and the statistical

analysis of the data supported the conclusion that the ABC/M system

information was significantly more useful for the decision purposes tested

t h a n the information provided by the sole use of the financial accounting

system presently in use by the subject institution. The significant

improvement in the usefulness of the information, as evidenced by the data

analysis in this study, has the potential for significant improvement in the

management decisions required of administrators of institutions similar to

the subject institution. The conclusions expressed for this study appears to

represent significant progress in the determination of universal applicability

of ABC/M to private higher education institutions similar to the subject

institution of this study.

167
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181
 APPENDIX A

FINANCIAL ACCOUNTING

SYSTEM COST FLOW DIAGRAM

182
 FINANCL\L ACCOUNTING

SYSTEM COST FLOW DIAGRAM

The diagram appears on the page following this explanation.

Cost flows in the traditional costing system involve only direct costs.

The system does not permit the determination of the total direct and

indirect costs for any chosen cost object. Support costs (indirect costs) are

represented as separate line items and are not allocated to the consuming

units (Acton & Cotton, 1997).

Information about the cost of specific cost objects is difficult to

determine from information provided by the system. Thus, users of this

information find it difficult to answer questions regarding which academic

units are self-sustaining and which contribute positively to covering the

university's overhead (Acton & Cotton, 1997).

Direct costs are traced to each level of the organization chart. Since

no allocation of indirect costs is made, cost objects are defined as those

having direct costs only. The total costs of the cost objects are

systematically understated by the lack of allocation of indirect costs.

The system's main strength is t h a t it is fairly simple and intuitive.

When actual amounts expended are compared to budgeted expenditures, an

accurate assessment of remaining unexpended resources results. The

183
primary weaknesses of this system are that it is inflexible and does not yield

accurate cost object costs.

184
 DIRECT COSTS

EXECUTIVE ACADEMIC ADVANCE. FINANCE & STUDENT & VICE

MANAGEMENT [DEVELOPMENT PRESIDENTS

COLLEGES &
THEOLOGY SCHOOLS
V y

COST OBJECTS

Figure A.l. Financial Accounting System Cost Flow Diagram

185
 APPENDIX B

ABC/M SYSTEM

COST FLOW DIAGRAM

186
 ABC/M SYSTEM

COST FLOW DIAGRAM

The diagram appears on the page following this explanation.

Cost flows in an ABC/M system involve direct tracing of direct costs to

the cost object, and a series of allocations of indirect costs which ultimately

become p a r t of the cost object costs after considerable refinement. Indirect

costs are accumulated in several homogeneous cost pools. They then are

allocated through processes, and perhaps through additional hierarchical

layers, to activities. The advantage of using multiple indirect cost pools is

t h a t each pool may be allocated on a basis that most nearly represents a

correct measurement of the consumption of those costs.

Activities are used as final cost accumulation/allocation devices

because of their action orientation. The final cost objects are charged with

the directly traced costs and also with the proportion of each activity cost

t h a t is consumed by the cost object. More direct cost tracing and more

logical allocation of indirect costs result in more accurate cost object costs.

The activities also provide the framework for management (control) of

the tasks performed within the activities. These tasks may be classified as

value-added or non-value-added, and also as primary or secondary to the

purpose of the activity. Continuous improvement, the key to success in

187
managing activities, occurs when non-value-added tasks are eliminated.

AB/M involves, therefore, not only a managerial accounting cost system, but

also a management system that promotes the achievement of excellence

through continuous improvement.

188
 [NDIKECT ABC MULTI-STAGE COST ALLOCATION MODEL
COSTS
DIKECTLT COSTS NOT
TRACEABLE TO DIKECTLT
THE COST TRACEABLE TO
OBJECT THE COST
SPBJECT

HOM)0iG£K^OtfSINDIREClTCflST POOLS J

Figure B.l. ABC/M System Cost Flow Diagram

189
 APPENDIX C

ORGANIZATION CHART FOR

HARDIN-SIMMONS UNIVERSITY

190
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191
 APPENDIX D

EXECUTFVES, MIDDLE

MANAGERS AND STAFF FOR

HARDIN-SIMMONS UNEVERSITY

192
 EXECUTIVES, MIDDLE

MANAGERS AND STAFF FOR

HARDIN-SIMMONS UNIVERSITY

Executives

Dr. Jesse C. Fletcher, Chancellor

Dr. Lanny Hall, President

Dr. W. Craig Turner, Executive Vice President and Chief Academic Officer

Mr. Wayne Roy, Vice President for Advancement

Dr. Michael Whitehorn, Vice President for Student Development

Mr. Harold R. Preston, Senior Vice President for Finance and Management

Dr. Lawrence R. Clayton, Dean, College of Arts and Sciences

Dr. Lynn G. Gillette, Dean, School of Business

Dr. Peter J. Oilman, Dean, School of Education

Dr. Loyd F. Hawthorne, Dean, School of Music

Dr. H. K. Neely, Dean, School of Theology

Dr. J. Paul Sorrels, Dean, Graduate Studies and Special Programs

Mr. Shane Davidson, Associate Vice President of Enrollment Services

Dr. Dan McAlexander, Associate Vice President for Planning

Mr. M. Watson Moore, Controller

Mr. John M. Neese, Athletic Director

193
Mrs. Alice Specht, Director of University Libraries

Dr. Dannis D. Cooper, Director of Foreign Studies

Middle Managers

Mrs. Susan L. Allen, Head, Department of Social Work

Dr. Darrel Baergen, Head, Department of Communication

Dr. Bobby H. Bammel, Head, Department of Geological Sciences

Dr. Robert C. Barnes, Head, Department of Counseling/Human Dev.

Dr. Terry L. Bratton, Associate Vice President for Information Management

Dr. Julian C. Bridges, Head, Department of Sociology

Mrs. Laura Pogue, Head, Department of English

Dr. John C. Campbell, Head, Department of Performance Studies

Mrs. Linda Carleton, Dean of Students

Ms. Linda D. Fawcett, Head, Department of Art

Dr. Charles W. Garraway, Head, Department of Political Science

Mr. Earl T. Garrett, Director of Human Resources

Dr. Wilham R. Gould, Head, Department of Physical Therapy

Dr. Carol D. Haire, Head, Department of Speech/Pathology/Audiology

Dr. Edwin J. Hewett, Head, Director of Mathematics

Dr. James P. Ivey, Head, Department of Theatre

Dr. Bertie W. Kingore, Head, Dept. of Elementary/Secondary. Education

194
Mrs. Dorothy M. Riser, Registrar

Dr. Paul Madden, Head, Department of History

Mrs. Rhonda Manry, Associate Dean of Students, Housing Director

Dr. Randall J. Maurer, Director of Family Psychology

Dr. Larry R. McGraw, Director of Academic Services

Dr. Christopher L. McNair, Head, Department of Biology

Mrs. Laura L. Moore, Assistant to the President for University Relations

Dr. Andy J. Patterson, Head, Department of Music Theory and Composition

Dr. John Peslak, Head, Department of Chemistry and Physics

Dr. Ronald Rainwater, Head, Department of Physical Education

Mrs. Martha Ferguson, Manager, University Printing

Dr. Gary J. Stanlake, Director of Environmental Sciences Program

Dr. Teresia E. Taylor, Head, Department of Foreign Language

Dr. Doug P. Thomas, Head, Department of Psychology

Dr. Larry R. Welz, Head, Department of Music History and Literature

Staff

Dr. Randy L. Armstrong, Director of Student Publications

Dr. Virginia C. Armstrong, Director of Legal Studies

Mr. Bruce D. Ayers, Director of Church Relations

Mr. Bill Bailey, Assistant Vice President for Development

195
Mrs. Sue Ann Biggs, University Nurse

Mrs. Mary Brown, Assistant Controller

Mrs. Linda S. Butts, Coordinator of Building Maintenance

Mr. Glen Casselberry, Director of Physical Properties

Mr. Louis R. (Bobby) Cobbs, Assistant Vice President for Development

Mr. Steve Coleman, Head Baseball Coach

Mrs. Gayle W. Davis, Manager of Development Services

Mr. Don L. Dearman, Chief of Police

Mr. Lance E. Drake, Tennis Coach

Dr. Larry Brunner, Professor of English

Mr. Cory A. Foster, Head Soccer Coach (Men)

Mrs. Julie A. Goodenough. Head Basketball Coach (Women)

Mr. Marion Jeff Goodin, Golf Coach

Mrs. Sandra S. Graham, Admin. Assist, to Sr. Vice Pros, for Fin. and Mgmt.

Dr. William A. Grice, Director for Physical Education Graduate Studies

Mr. Dennis Harp, Head Basketball Coach (Men)

Mrs. Connie Carrington, Assistant Director, Career Services

Mrs. Britt Jones, Director of Alumni Relations

Mrs. Debra E. Jones, Director of White Horse Program

Mr. Jimmie Keeling, Head Football Coach

Ms. Holly Tarter, Head Vollyball Coach

196
Mr. Tim McCarry, Facihties Coordinator

Mrs. Brenda J. McClintock, Post Office Manager

Mr. Palmer McCown, Director of Religious Activities

Mr. Michael Scot Miller, Head, Department of Philosophy

Mr. Charles Richardson, Director of Media Relations

Mrs. Rena K. Richardson, Volleyball Coach

Mr. Joe Seaton, Jr., Director of Physical Properties-Construction

Dr. Warren K. Simpson, Director of Campus Recreational Sports and Clubs

Mr. David Stovall, Director of Business Services and Telecommunications

Mr. David Stuckey, Athletic Trainer

Mrs. Sandra K. Toy, Coordinator, Center for Life Long Learning

Mr. Charles Walts, Director of Computer Science Laboratories

Mr. Jason Wharton, Head Soccer Coach (Women)

197
APPENDIX E

GLOSSARY

-•p^,"

198

y
 GLOSSARY

ACTIVITY MAP. Flowchart or diagram showing the hierarchy of

relationships of between activities within an organization (Morrow &
Hazell, 1992).

AMERICAN ACCOUNTING ASSOCIATION. A private organization

dominated by accounting educators, although many practicing
accountants are active members. The organization exists to foster
improvements in accounting education and research and in
accounting principles. It publishes The Accounting Review,
Accounting Horizons, and Issues in Accounting Education (Brown,
1992).

AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS. A

national professional organization of CPAs. It publishes The Journal
of Accountancv in addition to many other useful documents (Freeman
& Shoulders, 1993).

ATTRIBUTE BASED COSTING. A costing system based on cause-and-

effect relationships. Predetermined characteristics serve as cost
drivers (Walker, 1992).

AUDITING DECISIONS. Decisions relating to the attest function

performed by external or internal auditors (Arens & Loebbecke,
1994).

BAR CODING. A machine-readable system of labeling that provides for

controlling and accounting for items as they are moved, stored, or
produced

BATCH RELATED COSTS. The costs of resources sacrificed on activities

that are related to a group of units of products or services rather than
to each individual unit of product or service (Horngren, Foster &
Datar, 1997).

BIG SIX ACCOUNTING FIRM. International public accounting firm

recognized as one of the six largest and most prestigious firms in the
world.

199
BOTTOM LINE. The amount representing net income on the income
statement of a company

CAPACITY PLANNING. Planning the production volume or some other

cost driver (Raiborn, Barfield & Kinney, 1993).

CAPITAL ACQUISITION. Acquisition of assets with a useful life of more

than one accounting period (Wilhams, Stenga & Holder, 1995).

CASH INFLOW. Receipt of cash (Raiborn, Barfield & Kinney, 1993).

CASH OUTLAY. Disbursement of cash (Raiborn, Barfield & Kinney, 1993).

CAUSE AND EFFECT. Criterion for identifying the variable or variables

that cause cost objects to incur costs. Most credible criterion for
operational allocations (Williams, Stanga & Holder, 1995).

CHART OF ACCOUNTS. A hsting of an organization's general ledger

accounts including asset, liability, capital, income, and expense
accounts (Williams, Stanga & Holder, 1995).

COARSE INFORMATION SYSTEM. Costing system that provides less

precise costing information, but at a lesser cost than fine costing
systems (Ricketts, 1992).

CODING STRUCTURE. Numbering system logically developed and

assigned to the general ledger accounts of an organization (Freeman
& Shoulders, 1996).

COMPLIANCE REPORTING. Financial and non-financial reporting

required by governmental agencies or due to contractual
commitments (Freeman & Shoulders, 1996).

CONTINUOUS IMPROVEMENT. Process of identifying opportunities for

improvement so that decisions may be made to correct less than
optimal operations (Brimson & Antes, 1994).

CONTRIBUTION MARGIN. Revenues minus all costs of the output (a

product or service) that vary with respect to the number of output
units (Horngren, Foster & Datar, 1997).

200
COST DECOMPOSITION. Breaking down of the elements comprising the
cost of a product or service (Brimson & Antos, 1994).

COST DRIVERS. Factors that affect total costs; that is, a change in the cost
driver will cause a change in the level of the total cost of a related cost
object. Factors that cause costs to be incurred (Horngren, Foster &
Datar, 1997).

COST ELEMENT. A portion of the total cost that represents the cost of
specific parts of the product or service. Specific parts of the product
or service include materials, labor, and overhead (Brimson, 1989).

COST OBJECT. Anything for which a separate measure of costs is desired

(Horngren, Foster & Datar, 1997).

COST OF GOODS SOLD. The total cost of products that were sold during
the accounting period being reported (Williams, Stanga & Holder,
1995)

COST PLUS PRICING. System for pricing products or services that is

based on actual allowable cost plus a fixed fee (Horngren, Foster &
Datar, 1997).

COST POOL. A grouping of individual cost items (Horngren, Foster &

Datar, 1997).

COST TO SERVE. Cost associated with servicing the wants and needs of a
customer (Brimson & Antos, 1994).

CUSTOMER PROFITABILITY ANALYSIS. Examines how individual

customers, or groupings of customers, differ in their profitability
(Horngren, Foster & Datar, 1997).

DATABASE SOFTWARE. Application software designed to accommodate

large volumes of data that can be sorted, retrieved, merged, and
otherwise manipulated to provide data useful to managerial decision-
making

201
DEPRECIATION. Allocation of capitalized costs of property, plant, and
equipment to the periods benefitting from the use of the assets on the
basis of several estimates concerning the use of the assets (Williams,
Stanga & Holder, 1995).

DIRECT COSTS. Costs that are related to a particular cost object and that
can be traced to it in an economically feasible way (Horngren, Foster
& Datar, 1997).

DISCRETIONARY INVESTMENT. Arise from periodic (usually yearly)

decisions regarding the maximum outlay to be incurred. Are not tied
to a clear cause-and-effect relationship between inputs and outputs
(Horngren, Foster & Datar, 1997).

DUAL COSTING SYSTEM. A system that determines for a selling division

the price of products or services at market or negotiated market price
and a buying division to record the transfer at a lower cost-based
amount (Raiborn, Barfield & Kinney, 1993).

ENGINEERED COST SYSTEM. Costing system that results specifically

from a clear cause-and-effect relationship between costs and outputs
(Horngren, Foster & Datar, 1997).

EXTERNAL REPORTING. Basic, general purpose financial statements

designed for and prepared for external use. The financial statements
included are the Balance Sheet, the Income Statement, the Cash
Flow Statement, and the Statement of Stockholders' Equity
(Wilhams, Stanga & Holder, 1995).

FACILITY SUSTAINING COSTS. The costs of resources sacrificed on

activities that cannot be traced to specific products or services but
support the organization as a whole (Horngren, Foster & Datar,
1997).

FACTORY OVERHEAD. All manufacturing costs considered to be part of

the cost object but that cannot be individually traced to that cost
object in an economically feasible way (Horngren, Foster & Datar,
1997).

202
FINANCIAL ACCOUNTING STANDARDS BOARD. Official private sector
body charged with estabhshing and improving generally accepted
accounting principles in the United States (Williams, Stanga &
Holder, 1995).

FINE INFORMATION SYSTEMS. Cost accounting systems that produce

more exact costing information than coarser systems, but at the cost
of more complexity (Ricketts, 1992).

FIXED COST. Cost that does not change in total despite changes in a cost
driver (Horngren, Foster & Datar, 1997).

FULL ABSORPTION COST. Inventory costing method in which all

variable manufacturing costs and all fixed manufacturing costs are
included in inventoriable costs (Horngren, Foster & Datar, 1997).

FULL-TIME EQUIVALENT. A designation apphed to a number of enrolled

semester credit hours that describe a full-time student (Clark, 1987).

FUNCTIONAL BUDGETING. Preparation of a document in which costs

that are incurred for the same basic purpose are grouped together
(Raiborn, Barfield & Kinney, 1993).

GENERAL LEDGER. A record of information about specific assets,

liabilities, equity, revenues, and expenses. The accounts are
maintained with a double-entry system of debit and credit. The
accounts provide information on balances, changes, and other historic
information useful for financial reporting (Ainsworth et al., 1997).

GOVERNMENTAL ACCOUNTING STANDARDS BOARD. A division of

the Financial Accounting Foundation, it formulates accounting
principles for state and local governmental entities (Freeman &
Shoulders, 1996).

HISTORIC COSTING. Cash-equivalent payment actually made to acquire

an asset and put the asset to its intended use (Ainsworth et al., 1997).

HOMOGENEOUS COSTS. Costs which have the same or similar cause-

and-effect relationship or benefits-received relationship between the
cost allocator and the costs of the cost object (Horngren, Foster &
Datar, 1997).

203
INCREMENTAL COSTS. Additional costs to obtain an additional quantity
over and above existing or planned quantities of a cost object
(Horngren, Foster & Datar, 1997).

INDIRECT COSTS. Costs that are related to the particular cost object but
cannot be traced to it in an economically feasible way (Horngren,
Foster & Datar, 1997).

INTEGRATED ACCOUNTING SYSTEM. An accounting system that

allows organizations to disclose relevant financial and non-financial
information on a timely basis without duplication (Williams, Stanga
& Holder, 1995).

INVENTORIES. Specific type of capitalized costs. Those capitalized costs

associated with the purchase of goods for resale or costs associated
with the acquisition and conversion of materials and all other
manufacturing inputs into goods for sale (Williams, Stanga & Holder,
1995).

INVESTMENT ANALYSIS. Capital budgeting (Horngren, Foster & Datar,

1997).

J U S T IN TIME (JIT). Production system in which each component on a

production line is produced immediately as needed by the next step in
the production line. Inventories received immediately prior to time
needed in the production process (Horngren, Foster & Datar, 1997).

KEY INDICATORS. Factors that directly affect customer satisfaction such

as cost, quality, time, and innovative products and services. Factors
t h a t are considered to be critical in the success of any endeavor

LEVERAGE. Use of long-term and short-term credit in place of capital

investment to provide required capital for investment or operations
(Wilhams, Stanga & Holder, 1995).

LOGISTICS. Industry t h a t provides for procurement, maintenance, and

transportation of materiel, facilities, and personnel

MAKE OR BUY DECISIONS. Decisions about whether a producer of goods

or services will produce them within the organization or purchase
them from outside vendors (Horngren, Foster & Datar, 1997).

204
NATIONAL ASSOCIATION OF COLLEGE AND UNIVERSITY BUSINESS
OFFICERS. A private organization dedicated to improving the
financial management information used by college and university
business officers, academic officers, and members of governing boards
(Freeman & Shoulders, 1996).

NEW MANUFACTURING ENVIRONMENT. An environment embracing

various strategies (Materials Requirements Planning, Just-In-Time
production, Computer Integrated Manufacturing, and Total Factor
Productivity) for improving manufacturing effectiveness and
efficiency (Horngren, Foster & Datar, 1997).

NONLINEAR COST. Cost, the graph for which, does not form a straight
line within the relevant range (Horngren, Foster & Datar, 1997).

NONPROFIT ORGANIZATIONS. As non-government organizations, these

organizations include voluntary health and welfare organizations and
colleges and universities, and all other organizations that finance
their services with user charges or membership fees charged to the
primary recipients of the services (cemetery organizations, museums,
religious organizations, etc.) (Freeman & Shoulders, 1996).

NON-VALUE-ADDED COSTS. Costs that, if ehminated, would not reduce

the value customers obtain from using the product or service
(Horngren, Foster & Datar, 1997).

OBJECT OF EXPENDITURE. An expenditure control system that reports

the amounts expended for specific goods or services (salaries and
wages, supplies, capital outlay, etc.) needed by operating units for
which budgets are prepared (Freeman & Shoulders, 1996).

OPERATIONAL GOALS. Expectations of performance for an on-going

organization that are expressed in units, dollars, and in non-financial
terms

OUTSOURCING. Process of purchasing goods and services from outside

vendors rather than producing the same goods or providing the same
services within the organization (Horngren, Foster & Datar, 1997).

205
OVERHEAD. The indirect or supporting costs of converting materials or
supplies into finished products or services. Does not include direct
materials or direct labor (Raiborn, Barfield & Kinney, 1993).

PERFORMANCE MEASURES. Financial and non-financial information

used in bench-marking performance against similar exemplary
organizations

PRODUCT COST. Sum of the costs assigned to a product or service for a

specific purpose (Horngren, Foster & Datar, 1997).

PRODUCT DFVERSITY. The number of different types or products or

services produced

PRODUCT SUSTAINING COSTS. The costs of resources sacrificed on

activities undertaken to support specific products or services
(Horngren, Foster & Datar, 1997).

PRODUCTION. The coordination and assembly of resources to produce a

product or deliver a service (Horngren, Foster & Datar, 1997).

PRODUCTIVITY. Measures the relationship between actual inputs used

and actual outputs achieved; the lower the inputs for a given set of
outputs or the higher the outputs for a given set of inputs, the higher
the level of productivity (Horngren, Foster & Datar, 1997).

QUALITY. Refers to fitness for use, the degree to which a product satisfies
the needs of a customer, and the degree to which a product conforms
to design specification and engineering requirements (Horngren,
Foster & Datar, 1997).

RE-ENGINEERING. Radical redesign of strategic value-added

organizational processes and the systems, policies, and the structures
that support them to optimize activity work flows and productivity in
an organization

REGRESSION. Statistical model that measures the average amount of

change in the dependent variable that is associated with a unit
change in one or more independent variables (Horngren, Foster &
Datar, 1997).

206
RESEARCH AND DEVELOPMENT. The generation of and
experimentation with ideas related to new products, services, or
processes (Horngren, Foster & Datar, 1997).

RETURN ON INVESTMENT. Accounting measure of income divided by an

accounting measure of investment (Horngren, Foster & Datar, 1997).

REVENUES. Inflow of assets received in exchange for products or services

provided to customers (Wilhams, Stagna & Holder, 1995).

SINGLE-CASE STUDY. Analogous to a single experiment in which only

one case represents a critical test of the research question (Yin, 1994).

STANDARD COST. Carefully predetermined cost. Standard costs can

relate to units of input or units of output (Horngren, Foster & Datar,
1997).

STRATEGIC DECISIONS. Decisions related to how an organization best

combines its own capabilities with the opportunities in the market
place to accomplish its overall objectives

SUPPORT ACTIVITIES. Activities that provide the services that maintain

other internal departments in the organization (Horngren, Foster &
Datar, 1997).

TARGET COSTING. Estimated long run cost of a product or service that

when sold at the target price enables the company to achieve the
targeted income per unit. Target cost per unit is derived by
subtracting the target operating income per unit from the target price
(Horngren, Foster & Datar, 1997).

TQM. Total Quahty Management

UNIT RELATED COSTS. Costs related to a specific unit or group of units

within the production organization (Horngren, Foster & Datar, 1997).

VALUE ADDED COST. A cost that, if ehminated, would reduce the value
customers obtain from using the products or services (Horngren,
Foster & Datar 1997).

207
VARIABLE COST. Cost that changes in total in proportion to changes in a
cost driver (Horngren, Foster & Datar, 1997).

VARIANCE ANALYSIS. Analysis of the difference between an actual result

and a budgeted amount when that budgeted amount is a financial
variable reported by the accounting system (Horngren, Foster &
Datar, 1997).

VOLUME RELATED ALLOCATION BASE. Base used to allocate overhead

costs to cost objects that focuses on the volume of units of production
rather than a base that better relates cause-and- effect between the
costs and the cost object (Brimson & Antos, 1994).

WORK IN PROCESS INVENTORY. Goods partially worked on but not yet

fully completed (Horngren, Foster & Datar, 1997).

ZERO DEFECTS. A production strategy that attempts to produce only

goods or services with no important deficiencies; perfect, salable
products (Horngren, Foster & Datar, 1997).

208
 APPENDIX F

EVALUATION INSTRUMENT AND

ADMINISTRATION PROCEDURES

209
 EVALUATION INSTRUMENT
FINANCIAL ACCOUNTING SYSTEM
(or)
ACTIVITY-BASED COSTING/MANAGEMENT SYSTEM

Preparer's Name Date Prepared

Code Explanation

5 - Strongly Agree
4 - Agree
3 - Neutral
2 - Disagree
1 - Strongly Disagree

Circle the response with which you agree.

Statements Relating to
Budgeting Decisions

1. The data provided are highly useful for

decisions relating to the allocation of
resources to continuing programs. 5- -4 3 2 1

2. The data provided are highly useful

for decisions relating to the allocation of
resources to redesigned programs. 1- -4 5

3. The data provided are highly useful for

decisions relating to the allocation of
resources to new programs. 5- -4 3 2-

4. The data provided are highly useful for

decisions relating to quantif5ring plans
by means of a fixed (or variable) budget. 1- -—2 3 4 5

The data provided are highly useful for

decisions relating to the selection of
financial and non-financial performance
measurements. 5 4 3 2 1

210
Evaluation Instrument (Continued)

Statements Relating to Financial Management (Control) Decisions

1. The data provided are highly useful for

decisions relating to the analysis of budget
variances. 1 2 3 4 5

2. The data provided are highly useful for

decisions relating to process design or
revision. 5 4 3 2 1

3. The data provided are highly useful for

decisions relating to the achievement of
financial performance standards. 1 2 3 4 5

4. The data provided are highly useful for

decisions relating to the achievement of
non-financial performance standards. 5- •4 3 2 1

5. The data provided are highly useful for

decisions relating to the detection of
non-value-added tasks and procedures. 1- — 2 3 4 5

Statements Relating to Strategic Decisions

Dependent on Accurate Cost Object Costs

1. The data provided are highly useful for

break-even analysis for each cost object. 5 4 3 2 1

2. The data provided are highly useful for

analysis of the degree of "profitability"
attained for each selected cost object. 1- -2—-3 4 5

3. The data provided are highly useful for

strategic decisions relating to expansion
of "profitable" programs. 5- •2 1

211
Evaluation Instrument (Continued)

The data provided are highly useful for

strategic decisions relating to revision or
elimination of "unprofitable" programs. 1 •2 3 4 5

The data provided are highly useful for

strategic decisions relating to the
minimization of the detrimental effects of
"unprofitable" programs. 5- - 4 3 2-

212
 INSTRUCTIONS TO EVALUATORS

I. Determination of Familiarity With The Information

A. Step 1-Determine the familiarity with the information provided

by the accounting system to be evaluated by the respondent.

a. Question: How would you rate your familiarity with the

financial accounting system?

b. Question: How would you rate the usefulness of the

information you receive now for all purposes overall?

c. Question: Would the data be more useful to you for

budgeting, financial management, and strategic decision making if

you got budgeted and actual cost data on specific cost objects?

Specific cost objects applicable to the evaluator's program were

provided. All respondents indicated that they had a significantly high

level of familiarity with the financial accounting system information.

B. It was confirmed with the evaluators of the ABC/M system that

they had no or nearly no familiarity with the ABC/M system information.

213
II. Explanation of the Two Accounting Systems

A. Financial Accounting System

1. Focus or purpose of the system is to provide information for

external reporting purposes (Annual Reports). A copy of a recent

annual report was shown to the evaluator.

2. Information complies with the Financial Accounting

Standards Board pronouncements.

3. Present the information to be evaluated. Discuss details.

4. Discuss the uses to which the information is typically put.

a. External reporting (Annual Report).

b. Budget preparation.

c. Financial management review.

d. Strategic decisions based on accurate cost object data.

B. Activity-Based Costing/Management System

1. Based on the concept that institutions incur costs because

they do things. The system accumulated data on the activities that

are done and the production of those activities.

2. Focus of the system-Internal Management Decisions.

3. Budget preparation.

4. Present the information to be evaluated. Discuss details.

5. Discuss the typical uses to which the information is put.

214
 a. Internal management decisions.

b. Budget preparation.

c. Financial management review.

d. Strategic decisions based on accurate cost object data.

III. Review and Interpret the Statements On the Survey Instrument.

A. Explain any technical meanings of terms used in the statements.

B. Explain any terms that are unfamiliar to the evaluator.

215
 MEMORANDUM REQUESTING PARTICIPATION

To:

From: Derrell H. Moore, Associate Professor of Accounting, School of

Business, HSU

Subject: Case Study

Date: July 7, 1998

H a r d i n - S i m m o n s is the subject of a case study in a c c o u n t i n g

s y s t e m s r e l a t e d to m y doctoral dissertation topic. The study involves
the evaluation of the existing financial accounting system (as it relates to
each area of responsibility) by half of the eighty-eight persons with
budgeting and financial management responsibilities at HSU. The other
half will evaluate (as it relates to each area of responsibility) a new
complementary management accounting system that I have designed for
HSU. You are one the persons involved in the subject group and were
randomly assigned to your respective group.

P a r t i c i p a n t i n v o l v e m e n t will be limited to a r e s p o n s e to fifteen

s t a t e m e n t s expressing the participant's judgement as to the usefulness of
the data provided by the accounting system being evaluated for budgeting,
financial management, and decision making purposes.

I would like to meet with each participant to explain in greater detail the
purpose of the study, the expected results, and the participant's
involvement. I will provide the materials required for your response. For
planning purposes, the entire session should not require more t h a n fifteen
m i n u t e s of your time.

Since you are among the eight-eight persons that make up the two
evaluation groups, I respectfully request that you i n d i c a t e y o u
p r e f e r e n c e for a d a y and t i m e d u r i n g o n e of t h e t h r e e w e e k s
i n d i c a t e d b e l o w to m e e t w i t h m e in your office to make your
evaluation. Of course, you are not required to participate, but your help
would be greatly appreciated.

216
 Date Time
July 13, 14, 15, 16, 17 (Circle one) _AM, PM (Circle one)
OR
July 20, 21, 22, 23, 24 (Circle one) _AM, PM (Circle one)
OR
July 27, 28, 29, 30, 31 (Circle one) _AM, PM (Circle one)

Please fold and staple this memo at the places indicated and return
it to me at your convenience.

217

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219
 APPENDIX G

COST ACCOUNTING PILOT PROJECT

220
 COST ACCOUNTING PILOT PROJECT

TRADITIONAL ACCOUNTING SYSTEM COMPARED TO ACTR^TY-

BASED COSTING SYSTEM FOR THE PURPOSES OF DECISION
MAKING RELATED TO BUDGETING

MARCH, 1988

NAME OF EVALUATOR
DATE SUBMITTED

221
 COST ACCOUNTING PROJECT
TRADITIONAL ACCOUNTING SYSTEM
CHRISTIAN COLLEGE, BUSINESS DIVISION

BUDGET EVALUATION
Partial Organization Chart

President

FUNCTIONS

1 1 1 t
VP Acidamic VP VP Studant VP
Affaira Davalopmant Affaira Fin & Acct

Artf/Sci Div

Thaolofjr Div
DIVISIONS
f ^
KducatioB Div

B u i i s a i i Div —i

Acct DEPARTMENTS

MktK

Mgmt

Figure G.l. Partial Organization Chart for Christian College, Business

Division

222
 DIRECT COSTS
NO INDIRECT COST
ALLOCATIONS

FUNCTIONS DIVISIONS DEPARTMENTS

Figure G.2. Cost Flows-Traditional System

223
 Projected Direct Costs:

Salaries/Benefits:
Faculty Empl.
Accounting Department Salary Bene. Total
Assistant Professor A $ 36,000 $ 9,720 $ 45,720
Associate Professor A 42,000 11,340 53,340
Professor/Dept Head A 55,000 15,930 70,930
Subtotals $133,000 $ 36,990 $ 169,990
Computer Science Department
Adjunct Professor A $ 2,800 $ 224 $ 3,024
Assistant Professor B 36,000 9,720 45,720
Professor B 51,000 13,770 64,770
Subtotals l_ 89,800 $ 23,714 $ 113,514
Finance Department
Assistant Professor C $ 36,000 $ 9,720 $ 45,720
Associate Professor B 42,000 11,340 53,340
Subtotals l_ 78,000 $ 21,060 $ 99,060
Management Department
Assistant Professor D $ 36,000 $ 9,720 $ 45,720
Professor C 51,000 13,770 64,770
Subtotals $_ 87,000 $ 23,490 $110,490
Marketing Department
Associate Professor C l_ 42,000 $ 11,340 $ 53.340
Administration
Administrative Assistant $ 18,000 $ 4,920 $ 22,920
Student Workers 3,200 256 3,456
Subtotal L 21,200 $ 5,176 $ 26,376

Grand Totals % 451.000 $121,770 $572,770

Operating Expenses:
Office Supplies $ 800
Copier Lease/Supplies 1,375
Travel 2,000
Computer Lease 7,500
Alumni Relations 2,500
Equipment Maintenance 6,000
Total 1 20.175

224
 I n d i r e c t Costs:
Facilities Cost:
Building Cost per square foot (120,000 sq.ft. Total)
(1.36112 psf) $ 62.203

Square feet used by Business Division:

Computer Science Dept. 7,200
Finance 7,200
Marketing 7,200
Management 9,600
Accounting 12,000
Administration 2,500
Total 45.700

Utihties per semester $ 13.600

Maintenance/Repair ($0.45 psf per semester) $ 20.565

Direct costs of support functions:

President's Office $ 350,000
Vice Pres. Academic Affairs 200,000
Vice Pres. Development 250,000
Vice Pres. Student Affairs 175,000
Vice Pres. Fin-Acct. 5,650,000*
Total $ 6.625.000

* Includes $1,500,000 principal retirement, $2,925,000 interest,

$1,000,000 in other campus-wide support costs, and $225,000 in operational
costs.

NOTE: The traditional accounting system does not permit

allocation of costs of support functions to the academic function.
Only direct costs for each function/department are budgeted. The
cost of each of the VP functions are primarily operating costs
except the VP Fin-Acct.

Direct Costs- Business Division S 592.945

Cost Object: Direct Cost Per Di\ision $ 592.945
Required: Review the proposed budget and supporting data for the Fall
semester, 1998, of the Business Division of Christian CoUege. Evaluate all
five statements for budgeting.

225
 PILOT STUDY
CHRISTIAN COLLEGE
SURVEY INSTRUMENT - TRADITIONAL COSTING SYSTEM

Code Explanation

5 - Strongly Agree

4 - Agree

3 - Neutral
2 - Disagree

1 - Strongly Disagree

Budgeting Statements

1. The data provided are highly useful for decisions relating to the
allocation of resources to continuing programs.

5 4—-3 2 1

2. The data provided are highly useful for decisions relating to the
allocation of resources to redesigned programs.

5 4 3 2 1

3. The data provided are highly useful for decisions relating to the
allocation of resources to new programs.

5 4 3 2 1

4. The data provided are highly useful for decisions relating to

quantifying plans by means of a fixed (or variable) budget.

5 4 3 2 1

5. The data provided is highly useful for decisions relating to the

selection of financial and non-financial performance measurements.

5 4 3—-2 1

226
 COST ACCOUNTING PROJECT
ACTIVITY-BASED COSTING SYSTEM
CHRISTIAN COLLEGE, BUSINESS DIVISION

BUDGET EVALUATION
Partial Organization Chart

President

FUNCTIONS

1 1 1 1
VP VP Stadant VP
VP Acadamie
Davalopmant Affaira Fin k Acct
Affaira

ATta/SciDiv

Thaolotr Div
DIVISIONS
Education Div

Buainaaa Div _,

.Pinanca

Acct DEPARTMENTS

Uktc

Mtmt

Figure G.3. Partial Organization Chart, Christian College, Business

Division

227
 COST FLOWS-ABC SYSTEM

HOMOGENEOUS COST POOLS

^College Overheadj
ipport Alloc

Instruction Advising Committee ^dm inistration

Service

ACTIVITIES

COST OBJECTS

Figure G.4. Cost Flows-ABC System

228
 PROJECTED COST POOL DATA:
Salaries/Benefits:
Faculty Empl.
Accounting Department Salary Bene. Total
Assistant Professor A $ 36,000 $ 9,720 $ 45,720
Associate Professor A 42,000 11,340 53,340
Professor/Dept Head A 55,000 15,930 70,930
Subtotals $133,000 $ 36,990 $ 169,990
Computer Science Department
Adjunct Professor A $ 2,800 $ 224 $ 3,024
Assistant Professor B 36,000 9,720 45,720
Professor B 51,000 13,770 64,770
Subtotals i. 89,800 $23,714 $ 113,514
Finance Department
Assistant Professor C $ 36,000 $ 9,720 $ 45,720
Associate Professor B 42.000 11,340 53,340
Subtotals 1 78,000 $ 21,060 $ 99,060
Management Department
Assistant Professor D $ 36,000 $ 9,720 $ 45,720
Professor C 51,000 13,770 64,770
ee-

Subtotals 87,000 $ 23,490 $110,490

Marketing Department
Associate Professor C l_ 42,000 $ 11,340 $ 53.340
Administration
Administrative Assistant $ 18,000 $ 4,920 $ 22,920
Student Workers 3,200 256 3,456
Subtotal i. 21,200 $ 5,176 $ 26,376

Grand Totals $ 451.000 $121,770 $572,770

Operating Expenses:
Office Supplies $ 800
Copier Lease/Supplies 1,375
Travel 2,000
Computer Lease 7,500
Alumni Relations 2,500
Equipment Maintenance 6,000
Total $ 20.175

229
Facilities:
Depreciation Cost $1.36112 per sq. ft. for 45,700
45,700 sf
i
sf $ 62.203
Square Feet Utilized: Office Class Enroll Class R o o m s
Accounting (65 Majors, 57 Non-majors) rs)
Assistant Professor A 500 2311A 32 2,000
2311B 30 2,000
2312 10 800
3320 25 800
Associate Professor A 500 3311 21 800
3315 15 800
3303 15 800
2302 12 800
Professor A 600 4312 12 800
4317 11 800
Totals 1,600 183 10,400
Computer Science (38 Majors, 112 Non-majors)
on-majors)
Adjunct Professor A 500 1303 A 30 625
IIXU 30 200
IIXV 30 200
UXW 30 225
Assistant Professor B 500 1303B 30 625
IIXX 30 200
IIXY 30 200
IIXZ 30 225
1320 12 350
3320 12 350
Professor B 600 3323 14 800
4322 9 800
4324 10 400
4330 _8. 400
Totals 1,600 305 5,600
Finance (37 Majors, 55 Non-majors)
Assistant Professor C 500 3341A 31 800
3341B 29 800
3344A 21 800
4321 10 800
Associate Professor B 500 3344B 15 800
4341 9 800
4343 9 800
4399 4 600
Totals 1,000 128 6,200

230
F a c i l i t i e s (Continued):
Management (26 Majors, 37 Non-majors)
Assistant Professor D 500 3351A 21 1,200
3351B 20 1,200
3353 9 1,200
4350 7 1,200
Professor C 700 1305 11 1,200
4307 8 800
4351 6 800
4375 6 800
Totals 1,200 88 8,400

Marketing (23 Majors, 22 Non-majors)

s)
Associate Professor C 500 3361 28 1,200
3363 15 1,200
3364 10 1,200
4362 9 1,200
Totals 500 62 4,800

Administration
Administrative Assistant 500
Student Workers 1,000
Storage 2,900
Total 4,400

Grand Totals 10.300 35.400

A d d i t i o n a l Data:

189 Business Majors taking 2,646 semester hours

283 Non-majors taking 759 semester hours

Utilities $13,600 per semester. ($.29759 per sf per semester)

Maintenance/Repair $ 20,565 (450 per sf per semester)

231
College S u p p o r t Overhead Allocation (Indirect Costs):

President's Office $ 350,000

VP Academic Affairs 200,000
VP Development 250,000
VP Student Affairs 175,000
VP Finance and Accounting 5,650,000
Subtotal $6,625,000
Less: Principal payments ( 2,925,000)
Distributable Indirect Costs $3.700.000

Allocation to Divisions:
Arts/Sciences $1,110,000
Theology 740,000
Education 1,295,000
Business 555,000
$3.700.000

Allocation of Business Indirect Costs to Departments:

Accounting $ 111,000
Computer Science 152,625
Finance 83,250
Management 124,875
Marketing 83,250
Total $ 555.000

Total Costs (Direct and Indirect) $ 1.244.313

232
 Suggested Allocation Bases - Cost Pool to Activities:

Faculty Salaries/Benefits:

Allocated on the percentage of time devoted to each activity.

Activity Teaching Faculty Department Head

Instruction 85% 30%
Advising 5% 15%
Committee Service 10% 15%
Administration 0% 40%
100% 100%

Staff Salaries/Benefits:

Traced 100% to Administration

Office Supplies/Alumni Relations:

Traced 100% to Administration

Copier Lease/Supplies:

Directly traced by use of a machine counter by password. 8.60 per

copy

Faculty:
Accounting Number of Copies
Assistant Professor A 300
Associate Professor A 300
Professor/Dept. Head 800 (40% administration)
Computer Science
Adjunct Professor A 200
Assistant Professor B 350
Professor B 1,050
Finance
Assistant Professor C 600
Associate Professor B 1,200
Management
Assistant Professor D 1,800
Professor C 2,200

233
 Marketing
Associate Professor C 1,200
/\aministraLion
Administrative Asst. 2,000
Student Workers 4,000
Total 16.000

1-
Travel:

Directly traced.
Professor/Dept. Head A $ 1,200
Administrative Assistant 400
Professor B 400
Total $ 2.000

Computer Lease:

Allocated on the number of computers used.

All teaching faculty, $500 each. Administration 4 @ $500 each.

Equipment Maintenance:

Directly traced to Computer Science, $6,000.

Facilities:
Depreciation - Allocated by number of square feet used.
Utilities - Allocated by number of square feet used.
Maintenance and Repair - Allocated by number of square feet used
College Support Overhead Allocation:

See Allocation of business allocation to departments above.

234
 Suggested Cost Objects:

Cost per activity

Cost per instructor

Cost per class

Cost per student per class

Cost per student per instructor

Cost per department

Cost per student per department

Cost Per Cost Object

Cost per activity

Instruction $ 1,066,478
Advising 38,736
Committee Service 66,830
Administration 72,269
Total $ 1.244.313

All other cost objects - See worksheet on the next page.

235
 CO C4
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236
Required: Review the proposed budget and supporting data for the Fall
semester, 1998, of the Business Division of Christian College. Evaluate all
five statements presented relating to budgeting.

237
 PILOT STUDY
CHRISTIAN COLLEGE
SURVEY INSTRUMENT - ACTFVITY-BASED COSTING SYSTEM

Code Explanation

5 - Strongly Agree

4 - Agree

3 - Neutral

2 - Disagree

1 - Strongly Disagree

Budgeting Statements
1. The data provided are highly useful for decisions relating to the
allocation of resources to continuing programs.

5 4 3 2 1

2. The data provided are highly useful for decisions relating to the
allocation of resources to redesigned programs.

5 4 3—-2 1

3. The data provided are highly useful for decisions relating to the
allocation of resources to new programs.

5 4—-3 2 1

4. The data provided are highly useful for decisions relating to

quantifying plans by means of a fixed (or variable) budget.

5 4 3 2 1

5. The data provided are highly useful for decisions relating to the
selection of financial and non-financial performance measurements.

5 4 3 2 1

238
 APPENDIX H

EXPERIMENT DATA, COMPUTATIONAL SYMBOLS, AND

COMPUTATIONAL FORMULAS

239
 Data and Notation

Y-j^ denotes a score for an experiment unit in block i and treatment

combination a,6^; i = 1, . . . ,n blocks within each aj,j = 1, . . . , p levels of

treatment A (o^); k= I, . . . , q levels of treatment B (b^).!. Data tables

utilized in the statistical computations and some descriptive statistics

helpful in the interpretation of the results of the computations are presented

next.

240
Table H.l. Detailed Table of Evaluator Responses By Block (Executive,
Middle Manager, or Staff), Treatment A (Financial Accounting and ABC/M),
and by Treatment B (Budgeting, Financial Management, and Strategic
Decisions Dependent On Accurate Cost Object Costs)

Independent
Variable Treatment B
Treatment A Subi bl b. b3 Total

si 15 11 7 33
s2 15 13 13 41
s3 22 22 14 58
s4 16 9 9 34
Blocks s5 6 6 5 17
Fin Acct s6 16 12 7 35
s7 12 9 11 32
s8 10 8 6 24
s9 22 20 20 62
Blocki Totals 134 110 92 336

si 12 10 10 32
s2 7 5 5 17
s3 12 5 5 22
s4 6 6 5 17
s5 13 16 12 41
s6 9 9 6 24
s7 6 5 5 16
Block2 s8 17 16 16 49
Fin Acct s9 11 9 5 25
slO 7 7 5 19
sll 17 10 5 32
sl2 18 16 16 50
^1i sl3 14 9 9 32
sl4 7 9 10 26
sl5 6 5 6 17
sl6 14 12 10 36
Blockg, Totals 176 149 130 455

si 12 12 11 35
s2 9 11 12 32
s3 7 7 5 19

241
Table H.l Continued.

Independent
Variable Treatment B
Treatment A Block Subj b, b, b3 Total

s4 18 20 15 53
s5 16 16 7 39
s6 11 13 13 37
s7 6 7 5 18
Blockg s8 14 10 14 38
Fin Acct s9 10 12 6 28
slO 16 15 17 48
sll 11 13 10 34
sl2 11 10 7 28
sl3 17 11 10 38
sl4 6 6 5 17
sl5 10 10 9 29
sl6 11 13 11 35
sl7 15 16 13 44
sl8 17 17 16 50
sl9 10 10 10 30
Blockg Totals 227 229 196 652

si 22 23 25 70
s2 23 22 23 68
s3 20 20 20 60
s4 24 23 25 72
Blocks s5 5 5 5 15
ABC/M s6 17 21 21 59
s7 22 21 24 67
s8 19 21 24 64
s9 23 22 25 70
Block,^ Totals 175 178 192 545

si 15 18 18 51
s2 22 23 24 69
s3 18 16 16 50
s4 22 20 21 63
s5 24 24 23 71
s6 21 19 25 65

242
Table H.l Continued.

Independent
Variable Treatment B
Treatment A Block Subj b, b2 ba Total!

a2 s7 20 19 19 58
s8 22 24 25 71
s9 20 22 21 63
SlO 22 24 25 71
sll 25 25 25 75
Blocks sl2 18 19 16 53
ABC/M sl3 17 19 15 51
sl4 20 16 16 52
sl5 23 23 23 69
sl6 22 22 25 69
Blocks Totals 331 333 337 1001

si 23 23 23 69
s2 21 22 24 67
s3 17 20 21 58
s4 21 21 20 62
s5 19 22 21 62
s6 22 20 18 60
s7 18 18 18 54
Blockg s8 23 22 24 69
ABC/M s9 20 18 19 57
slO 19 18 20 57
sll 22 23 25 70
sl2 20 21 18 59
sl3 23 25 24 72
sl4 15 16 15 46
sl5 19 16 20 55
sl6 18 17 17 52
sl7 18 19 16 53
sl8 24 22 21 67
sl9 20 19 19 58
Block,6 Totals 382 382 383 1147

243
Table H.l Continued.

b. b2 b., Totals
Blocks^ 2; 537 488 418 1443
a. Blocks 4.5.6 888 893 912 2693
B l o c k s i,2.3.4.5,( 1425 1381 1330 4136

a^ = Financial Accounting System

a2 = ABC/M System

Blockg = Executives-Financial Accounting System

Block2 = Middle Managers-Financial Accounting System
Blockg = Staff-Financial Accounting System
Block4 = Executives-ABC/M System
Blocks - Middle Managers-ABC/M System
Blocks = Staff-ABC/M System

bj = Budgeting Decisions
bg = Financial Management Decisions
bg = Strategic Decisions Dependent On Accurate Cost Object Costs

244
Table H.2. Descriptive Statistics Based On Detailed Table of Evaluator
Responses to Survey Instrument Statements

Sum of Y

Treatment A Block Treatment B

bl bg ba Total
Blocki 134 110 92 336
ai Blockg 176 149 130 455
Blockg 227 229 196 652
Blocks 175 178 192 545
^2 Blocks 331 333 337 1001
Blockg 382 382 383 1147
Blocki2,3 537 488 418 1443
Block456 888 893 912 2693

Mean of Y

Treatment A Block Treatment B

bl bg ba Total
Block, 14.89 12.22 10.22 37.33
^1 Blockg 11.00 9.31 8.13 28.44
Blocko 11.95 12.05 10.32 34.32
Block. 19.44 19.78 21.33 60.56

Blocks 20.69 20.81 21.06 62.56

Blockg 20.11 20.11 20.16 60.37
Blockigg 12.20 11.09 9.50 32.80
Block4,5_6 20.18 20.30 20.73 61.20

(Sum of Y-Mean of Y)'

Treatment A Block Treatment B

^ 1
Total
Block, 214.89 235.56 185.56
a, Block2 272.00 233.44 227.75
Blockg 252.95 236.95 258.11
Blocks 274.22 253.56 326.00
a. Block. 105.44 128.44 220.94

245
Table H.2 Continued.

Treatment A Block Treatment B

b, bo hj Total
^2 Blockg 101.79 115.79 148.53
Block,2,3 739.84 705.94 671.41
Block45g 481.45 497.78 695.46
Block, 2,3.4.5,6 1221.29 1203.72 1366.87

Variance (s^)

Treatment A Block Treatment B

b, bo bg Total
Block, 26.86 29.44 23.19
ai Block2 18.13 15.56 15.18
Blockg 14.05 13.16 14.34
Blocks 34.28 31.69 40.75
a2 Blocks 7.03 8.56 14.73
Blockg 5.65 6.43 8.25
Block,2,3 17.21 16.42 15.61
Block^s.e 11.2 11.58 16.17
rilOCli, 2 g 4 s g 14.04 13.84 15.71

Std Deviation (s)

Treatment A Block Treatment ]3

b, b2 b 3 _ Total
Block, 5.18 5.43 4.82
ai Block2 4.26 3.94 3.90
Blockg 3.75 3.63 3.79
Block4 5.85 5.63 6.38
a2 Blocks 2.65 2.93 3.84
Blockg 2.38 2.54 2.87
Blocki2.3 4.15 4.05 3.95
Block45g 3.35 3.40 4.02
Block, 2,g,4,5g 3.75 3.72 3.96

246
 Computational Svmbols

Symbols which determined values required for use in the

computational formulas are developed in this section. These formulas

provided sum of squares values for determining mean square and F values

reported in Table 4.1, p. 130, for this experiment. In a spht-plot factorial

design with two levels of treatment A and three levels of treatment B, there

were six symbols required to be defined. A description of these six symbols

follows:

[Y] = The sum of all of the data scores squared and then divided by
the product of (1) the number of data scores (n), (2) the number of
levels of treatment A and (3) the number of levels of treatment B.

[ABS] = The sum of all data scores that have been squared.

[AS] = The sum of the data scores for each subject squared and then
divided by the number of levels of treatment B.

[A] = The sum of the data scores for each level of treatment A squared
which have been divided by the product of (1) the number of data
scores {n) and (2) the number of levels of treatment B.

[B] = The sum of the data scores for each level of treatment A squared
which have then been divided by the number of data scores for both
levels of treatment A.

[AB] = The sum of the data scores for each level of treatment B
squared which have been divided by the number of data scores for
each level of treatment A {n).

241
 Computational Formulas

The eight computational formulas that follow produced values for the

sum of squares total, sum of squares between blocks, sum of squares for

t r e a t m e n t A, sum of squares for the blocks within treatment A, sum of

squares within blocks, sum of squares for treatment B, sum of squares for

the interaction of treatments A and B and sum of squares for the interaction

of t r e a t m e n t B and the blocks within treatment A. The required formulas

are as follows:

Sum of squares total

SSTO = [ABS] - [Y]

Sum of squares between blocks

SSBETWEENBL = [AS] - [Y]

Sum of squares for treatment A

SSA = [A] - [Y]

Sum of squares for the blocks within treatment A

SSBL(A) = [AS] - [A]

Sum of squares within blocks

SSWITHINBL = [ABS] - [AS]

Sum of squares for treatment B

SSB = [B] - [Y]

Sum of squares for the interaction of treatments A and B

248
 SSAB - [AB] - [A] - [B] + [Y]

Sum of squares for the interaction of treatment B and the blocks

within treatment A.

SSB X BL(A) = [ABS] - [AB] - [AS] + [A]

Computational Procedures-Simple Main Effects

Summary

There are five computational symbols required for determining

simple main effects for a split-plot factorial design with two levels of

treatment A and three levels of treatment B. These symbols determine

values for use in the computational formulas for determining sum of squares

for treatment A, treatment B and the interaction of treatments A and B

including each level of the two treatments. The computational symbols are

developed in the next two sections and the computational formulas defined

in the third section following.

Computation of SSA at b^^

SSA at b, = The sum of the sum of the data scores for each of the two

levels of treatment A for b, squared and then divided by the number of data

scores for each level of treatment A (n) for b, minus the total of the data

scores for both levels of treatment A for b, squared and then divided by the

product of (1) the number of data scores for each level of treatment A for b,

and (2) the number of levels of treatment A for b,.

249
 SSA at bg = The sum of the sum of the data scores for each of the two

levels of t r e a t m e n t A for h^ squared and then divided by the number of data

scores for each level of treatment A (n) for b2 minus the total of the data

scores for both levels of treatment A for b2 squared and then divided by the

product of (1) the number of data scores for each level of treatment A for bg

and (2) the number of levels of treatment A for bg.

SSA at bg = The sum of the sum of the data scores for each of the two

levels of treatment A for bg squared and then divided by the number of data

scores for each level of treatment A (n) for bg minus the total of the data

scores for both levels of treatment A for bg squared and then divided by the

product of (1) the number of data scores for each level of treatment A for bg

and (2) the number of levels of treatment A for bg.

Computation of SSB at a^

SSB at a, = The sum of the sum of the data scores for each of the

three levels of treatment B for a, squared and then divided by the number of

d a t a scores for each level of treatment B (n) for a, minus the total of the

data scores for all three levels of treatment B for a, squared and then

divided by the product of (1) the number of data scores for each level of

t r e a t m e n t B for a, and (2) the number of levels of treatment B for a,.

SSB at ag = The sum of the sum of the data scores for each of the

250
three levels of treatment B for ag squared and then divided by the number of

data scores for each level of treatment B (n) for ag minus the total of the

data scores for all three levels of treatment B for ag squared and then

divided by the product of (1) the number of data scores for each level of

treatment B for ag and (2) the number of levels of treatment B for ag.

Computational Formulas

SSA + SSAB = SSA at b, + SSA at b2 + SSA at bg

SSB + SSAB = SSB at a, + SSB at a2

251