Possible of implementation of Activity-Based Costing systems (ABC)

200 Pages·2015·2.24 MB·English

Adoption factors for the implementation of
Activity Based Costing systems: A case study
of the Libyan cement industry

Gebril Elagili

Ph.D. Thesis 2015
Adoption factors for the implementation of
Activity Based Costing systems: A case study
of the Libyan cement industry

Gebril Elagili

School of the Built Environment
University of Salford, Salford, UK

Submitted in Partial Fulfilment of the Requirements of the
Degree of Doctor of Philosophy, 2015

I
DEDICATION

This thesis is dedicated with love to spirit of my parents for
their priceless heritage of education, integrity and love.

Gebril

II
ACKNOWLEDGEMENTS

Indeed all praise and thanks is due to Allah, the Lord of all that exists, who has
enabled me to complete this endeavour.

I am very grateful to my supervisor, Professor Les Ruddock, for believing in this
project since my first approach. His comments, encouragement and enduring
interest were vital.

I would like to thank my personal tutor Professor Vian Ahmed for her help and
support during my study in the School.

I am very grateful to the respondents who took time to reply and who participated
in the interviews, especially the interviewees from the two case study
organisations, the Libyan Cement Company and the Ahlia Cement Company, as
their diligent participation made this research possible.

I would like to dedicate this thesis to my family and wish to express my deep sense
of gratitude to them. This effort would not have been possible without the
extraordinary love and support given to me by my entire family and, in particular,
I would like to express a profound appreciation for the love, encouragement and
support of my wife.

III
DECLARATION

I declare that this thesis is based on an original investigation and full
acknowledgment is given to all the sources used. This study has not been
previously submitted for a degree or a similar award at any institution. To the best
of the researcher’s knowledge and belief, this work contains no material
previously published or written by another person where due reference is not
made in the work itself.

Some parts of this thesis have been published in the Salford Postgraduate Annual
Research Conference (SPARC) which was a direct product from this thesis:
Elagili, G. & Ruddock, L., (2011), Adopting Activity-Based Costing Systems in
the Libyan Cement Industry, in: SPARC Conference, University of Salford,
Salford, UK.

IV
Table of Contents

DEDICATION ........................................................................................................ II
ACKNOWLEDGEMENTS .................................................................................. III
DECLARATION .................................................................................................. IV
Table of Contents .................................................................................................... V
List of Tables......................................................................................................... XI
List of Figures ...................................................................................................... XII
Abbreviations ....................................................................................................... xiii
Abstract ............................................................................................................... xiv
CHAPTER ONE ..................................................................................................... 1
INTRODUCTION TO THE RESEARCH ............................................................. 1
1.0 Introduction ................................................................................................... 1
1.1 The Background and Research Problem ....................................................... 1
1.2 The Importance of the Study ......................................................................... 4
1.2.1 The Importance of the Concept ............................................................. 4
1.2.2 The Importance of the Cement Industry in Libya ................................. 6
1.2.3 The Dearth of Empirical Studies ........................................................... 6
1.3 Research Outline ........................................................................................... 7
1.3.1 Research Aim ........................................................................................ 7
1.3.2 Research Objectives .............................................................................. 7
1.3.3 Research Questions ................................................................................. 7
1.4 Research Methodology.................................................................................. 8
1.5 Ethical Approval ......................................................................................... 10
1.6 The Expected Contribution to Knowledge .................................................. 10
1.7 Content of the Thesis .................................................................................. 10
1.8 The Research Journey ................................................................................. 11
1.9 Chapter Summary........................................................................................ 14
CHAPTER TWO .................................................................................................. 15
REVIEW OF ACTIVITY BASED COSTING ..................................................... 15
2.0 Introduction ................................................................................................. 15
2.1 Manufacturing and Accounting Response .................................................. 15
2.2 Changes in the Manufacturing Environment .............................................. 17
V
2.3 Importance and Benefits of Advanced Manufacturing Technologies (AMT)
........................................................................................................................... 18
2.3.1 Numerical Control Machines ................................................................ 19
2.3.2 Computer Aided Design/Computer Aided Manufacturing………….19
2.3.3 Flexible Manufacturing Systems (FMS) ............................................... 19
2.3.4 Computer Integrated Manufacturing (CIM).......................................... 20
2.4 Change in Market Conditions and Customer Expectations ........................ 20
2.5 Accounting’s Response to Technological Change ...................................... 21
2.5.1 Motivators ............................................................................................. 22
2.5.2 Catalysts ................................................................................................ 22
2.5.3 Facilitators ............................................................................................. 22
2.6 Effects of Technological Change on Cost Accounting Systems ................. 24
2.7 Traditional Cost Accounting (TCA) Systems ............................................. 25
2.7.1 Background of TCA .............................................................................. 25
2.7.2 Definition of TCA and its Nature.......................................................... 26
2.7.3 Overhead Allocation ............................................................................. 28
2.7.4 TCA System Deficiencies ..................................................................... 29
2.8 Activity Based Costing System (ABC) ....................................................... 32
2.8.1 Background of ABC .............................................................................. 32
2.8.2 Definition of the ABC System .............................................................. 33
2.8.3 General Review of the ABC System ..................................................... 34
2.8.4 Design of the ABC System ................................................................... 35
2.8.4.1 Purposes of the ABC System .............................................................. 37
2.8.4.2 The Team Chosen ............................................................................... 37
2.8.4.3 Managerial Concerns......................................................................... 38
2.8.4.4 Explanation of Activities .................................................................... 38
2.8.4.5 Definition of Principal Cost Drivers .................................................. 38
2.8.4.6 Activity Cost Pools ............................................................................. 38
2.8.4.7 Determining Secondary Cost Drivers ................................................ 39
2.8.4.8 Define Cost Objects............................................................................ 39
2.8.4.9 Comparing Product Cost with Traditional Cost ................................ 39
2.8.4.10 Developing a Framework for the Implementation of ABC .............. 39
2.8.5 Importance of the ABC System ............................................................ 39
VI
2.8.6 Implementation of the ABC System ..................................................... 40
2.8.6.1 Establishing a Team ........................................................................... 40
2.8.6.2 Determining Design Choices ............................................................. 41
2.8.6.3 Training .............................................................................................. 41
2.8.6.4 Collecting Information ....................................................................... 42
2.8.6.5 Constructing an ABC Model .............................................................. 42
2.8.6.6 Post-Implementation Evaluation ........................................................ 42
2.8.7 Difference between Traditional Cost Accounting and Activity Based
Costing ................................................................................................ 42
2.8.8 Motivations for Adopting ABC ............................................................ 45
2.8.9 Support for, and Usage of, ABC ........................................................... 46
2.8.10 The Adoption Factors of ABC System ............................................... 46
2.8.10.1. Size of the Organization .................................................................. 50
2.8.10.2 Innovation ........................................................................................ 50
2.8.10.3 Top Management Support ................................................................ 51
2.8.10.4 Internal Champion Support ............................................................. 51
2.8.10.5 Overhead Costs and Cost Structure ................................................. 52
2.8.10.6 Usefulness and Importance of Cost Information ............................. 52
2.8.10.7 Product Diversity, Manufacturing Flexibility and Complexity........ 53
2.8.10.8 Intensity of the Competition ............................................................. 54
2.9 Chapter Summary........................................................................................ 55
CHAPTER THREE ............................................................................................... 56
THE LIBYAN CONTEXT ................................................................................... 56
3.0 Introduction ................................................................................................. 56
3.1 Libya’s Geography and Population ............................................................. 56
3.2 Historical and Political Background ........................................................... 56
3.3 Economic Background ................................................................................ 59
3.4 The Social and Cultural Structure in Libya................................................. 60
3.5 Overview of the Libyan Cement Industry ................................................... 61
3.6 Raw Materials ............................................................................................. 62
3.7 Cement Companies in Libya ....................................................................... 62
3.7.1 The Libyan Cement Company (LCC) ................................................... 62
3.7.2 The Ahlia Cement Company (ACC) ..................................................... 63
VII
3.8 The Future of the Cement Industry in Libya ............................................... 64
3.9 Chapter Summary........................................................................................ 64
CHAPTER FOUR ................................................................................................. 65
RESEARCH METHODOLOGY .......................................................................... 65
4.0 Introduction ................................................................................................. 65
4.1 Defining Research ....................................................................................... 65
4.2 Type of Research......................................................................................... 66
4.3 The Research Methodology Model ............................................................. 66
4.4 Research Philosophy ................................................................................... 67
4.5 Research Approach ..................................................................................... 68
4.6 Research Strategy ........................................................................................ 70
4.7 Single Case Study or Multiple Case Studies ............................................... 72
4.8 Research Method ......................................................................................... 72
4.9 Data Collection............................................................................................ 74
4.9.1 Interviews .............................................................................................. 75
4.9.2 Number of Interviews ........................................................................... 76
4.9.3 Documentation ...................................................................................... 78
4.9.4 Direct observation ................................................................................. 78
4.10 The Field Study ......................................................................................... 79
4.10.1 Setting Interview Questions ................................................................ 79
4.10.2 Pilot Case Study .................................................................................. 79
4.10.3 Translation into Arabic Language ....................................................... 80
4.10.4 Conducting the Actual Case Study ..................................................... 80
4.10.5 Ethical Approval ................................................................................. 82
4.11 Generalisation ........................................................................................... 82
4.12 Evaluating the Credibility of the research findings .................................. 83
4.13 Data Analysis ............................................................................................ 84
4.14 Chapter Summary...................................................................................... 86
CHAPTER FIVE ................................................................................................... 87
RESEARCH FINDINGS AND DISCUSSION .................................................... 87
5.0 Introduction ................................................................................................. 87
5.1 Characteristics of the Interviewees ............................................................. 87
5.2 Background to Case Study LCC ................................................................. 88
VIII
5.3 Background to Case Study ACC ................................................................. 88
5.4 The Research Findings ................................................................................ 89
5.4.1 Size of Organisation .............................................................................. 89
5.4.2 Innovation ............................................................................................. 90
5.4.3 Top Management Support ..................................................................... 96
5.4.4 Internal Champion Support ................................................................. 100
5.4.5 Level of Overhead Cost and Cost Structure ........................................ 103
5.4.6 Usefulness and Importance of Cost Information ................................ 107
5.4.7 Product Diversity, Manufacturing Flexibility, and Complexity ......... 111
5.4.8 Intensity of Competition ..................................................................... 115
5.5 The General Discussion and Validation of the Empirical Findings .......... 119
5.5.1 Organizational Factors ........................................................................ 123
5.5.1.1 Size of Organisation ......................................................................... 123
5.5.1.2 Innovation ........................................................................................ 123
5.5.1.3 Top Management Support ................................................................ 123
5.5.1.4 Internal Champion Support ............................................................. 124
5.5.2 Technological Factors ......................................................................... 124
5.5.2.1 Overhead Cost and Cost Structure .................................................. 124
5.5.2.2 Usefulness and Importance of Cost Information ............................. 125
5.5.2.3 Product Diversity, Manufacturing Flexibility and Complexity ....... 125
5.5.3 Environmental factors ......................................................................... 125
5.5.3.1 Intensity of Competition ................................................................... 125
5.5.3.2 Compatibility between the state laws and organisational policy..... 126
5.6 Chapter Summary...................................................................................... 130
CHAPTER SIX ................................................................................................... 131
CONCLUSION AND RECOMMENDATIONS ................................................ 131
6.0 Introduction ............................................................................................... 131
6.1 The Success of the Research Method........................................................ 131
6.2 Meeting the Aim and Objectives and Answering the Research Questions132
6.3 The Main Research Outcomes .................................................................. 134
6.4 Originality ................................................................................................. 136
6.5 Further Contributions to Knowledge ........................................................ 137
6.6 Limitations of the Research ...................................................................... 138
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