Thesis Presented for the Degree of

288 Pages·2013·14.38 MB·English

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The copyright of this thesis vests in the author. No
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quotation from it or information derived from it is to be

published without full acknowledgeement of the source.
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The thesis is to be used for private study or non-
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commercial research purposes only.

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Published by the Universit y of Cape Town (UCT) in terms
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of the non-exclusive license granted to UCT by the author.
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UNIVERSITY Of CAPE TOWN
THE APPLICATION OF ACTIVITY BASED COST AND
MANAGEMENT TO SUPPORT COMPETITIVE STRATEGY
IN THE BANKING SECTOR: A SOUTH AFRICANn CASE STUDY
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TONY MENDES DDMINGD

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MBA, Dxford Brookyes, UK; Post·Grad·Dip, CIS, RSA
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Thesis Presented for the Degree of
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DDCTDR OF PHILOSOPHY
In the Department of ACCOUNTING
Facuity of COMMERCE
UNIVERSITY OF CAPE TOWN
November, 2007
ACKNOWLEDGEMENTS
I am indebted to Dr Richard Chivaka, my supervisor, Professor of Cost and Management
Accounting in the Department of Accounting, Deputy Dean of Research and Post-Graduate
Affairs in the Commerce Faculty at the University of Cape Town, for his uncommon
combination of exceptional leadership, drive, determination and support during the course of
this study. Under no circumstances it would be possible without his contributions.
To Prof M Tayles (Hull University Business School, UK), Prof M Tsamenyi (University of
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Burmingham, UK), Dr Neil Barnes, Ms Carolyn Butler (University of Cape Town), Dr Suellen
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Shay (University of Cape Town), I express my gratitude for theior constructive criticisms; their
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expertises have proven to be invaluable. Special apprecia tions go to Mr Luigi Bianco, Mr HP
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Van Dyk, Mr Cornel Wentzel, Mr Alfred Visagie, Mr Hendus Venter, Mr Paul Abrahams, Mr
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Alester Peerse, for their support and various discCussions and interviews held in the course of

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I would also like to extend my spescial thanks to Mr Burger van der Merwe (Managing Director,
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Woolworths SC SA), Mr Willem Immel man (Group Head SC, Woolworths SA), Mr Stephen
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Abrahams (Group Henad, Finance, Woolworths SA), Mr Ian Bower (Group Head, SC,
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Woolworths SA), Mr Bill Bodington (Managing Director, Wbho), Mr Joseph Shamir (Managing
Director, Prodeco in Colombia), Mr Sello Kekana (Sapo), Mr Neville Gxumisa (Eskom), Mr
Paul Francis (Barloworld), Mr Sebastian Musendo (SAB) and Mr Kgobe Seate (Eskom), I was
energized by their consistent and valuable encouragement.
Finally to my wife Jenifer (Management Accountant), I express my deepest gratitude for the
long debated sessions on the various management accounting topics, resulting in substantial
improvements throughout. I also extend my gratitude for her tolerance of my absence during
these studies.
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DECLARATION
I hereby declare that this thesis is the product of my own work, both in concept
and execution. It has not been submitted in the past, or is being, or is to be
submitted, in whole, or part thereof, for a degree at this University or at any
other institution.
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Signature ................................................ Date .......................................
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DEDICATION
This thesis is dedicated to my children Nadine and Alexander, who have had to
bear with me during this period. I am totally indebted for their patience and
continuous understanding for my unavailability during the course of this study.
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ABSTRACT
The rapid growth in technological changes, advances in information technology, globalization
and deregulation of markets have had significant effects on businesses throughout the world.
These advancements have altered the manner in which organisations succeed in business.
The common trends found in today's business environment include decreased direct labour,
higher operating overhead costs, reduced inventories, speed to market, shorter product life
cycle, faster and high frequency of new product development, improved sales, innovative
supply chains, and so on. These developments have created the need and capacity to have
better awareness and understanding of the costs associated with running organisations,
(Cooper and Kaplan, 1998). Volume-based allocation methods traditnionally used to assign
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overhead expenditures to products and services mainly on the basis of direct labour. However,
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this has resulted in distorted product cost information in situations where products and
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services are diversified in size, complexity or material r equirement. Johnson and Kaplan
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(1987) challenged the role of management accounting in today's competitive environment to
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develop new and more flexible approaches to achievae effective cost accounting, management
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control, and performance measurement systems. Hence, among other management

accounting tools, activity-based costing was fproposed as a candidate to meet this challenge.
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Mergers and acquisitions have promtised significant savings, but apparent resource duplication
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is only one source of cost reduction and scaled economies have not materialised to the extent
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promised, (Max, 2005). Institutions continue to seek deep understanding of cost information as
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they strive to meet stakeiholder expectations. Drucker (1995) noted that organisations are paid
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to create wealth, andU not to simply focus on cost control. To do that requires information that
enables executives to make informed judgments. Today's executives are responding to an
unprecedented need for improved, sustained performance to meet growing stakeholder
expectations, (Max, 2005). Sophisticated companies and their stakeholders realise that
improved performance cannot come from cost cutting alone; rather comprehensive
performance management approaches and a systematic management of information are
emerging as the keys to profitable future. As such, the demand for actionable, accurate and
transparent costs and profitability information has increased.
This research investigated the effect of activity-based cost management (ABC/M) on
organisational strategies, specifically in the context of cost effective supply of products and
services within the banking environments. Banking is a time-based business environment and
its mission is to provide the most value at a lowest cost in the least elapsed time, (Sweeney
and Mays, 1997). To achieve this, efficiency and effectiveness are of paramount importance.
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Doing things right controls the pattern of resource consumption; doing the right things
generates profitability. The prime inhibitors of banking efficiency and effectiveness include
cross-subsidization among customers and cross-functional internal processes. Financial
institutions are implementing the latest major improvement to management reporting. This
change will significantly upgrade the quality and quantity of information available to support the
professional management accounting. They are moving from top-down to bottom-up design for
expenditure distributions and ABC/M is at the heart of it, (Nolan, 2005). This change is
expected to provide actionable insights into product, customer and channel profitability,
staffing and resource management, productivity and process re-engineering.
A case study method was used to investigate and gain in-depth insights into the application of
ABC/M in supporting the business strategies of a South African financial institution with three
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strategiC business units. Interviews were used to collect information on the approaches used in
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ABC/M that the organisation had adopted and implemented too support corporate strategy.
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The extent and role of ABC/M in corporate strategy was evaluated by drawing on four

components, in particular; (i) the strategic change impeeratives of the organisation, (ii) the
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nature and capabilities of the information systems, (iii) the strategic cost management
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processes, and (iv) the application of ABC/M toC support corporate strategy. The use of a
single-case study method to collect empirical e vidence was most appropriate for this enquiry in
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order to investigate the contemporary phenomenon in the real-life context due to the fact that

the boundaries between phenomenony and context were not clearly defined, and in which
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multiple sources of evidence were uised, (Yin, 2003).
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In order to provide an explavnatory framework of the results of the study, the institutional theory
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was used. This strategny was of particular interest to gain a greater in-sight and in-depth
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understanding in the manner in which ABC/M supported change management in the process
of implementing the business strategies. The use of institutional theory as an explanatory
framework enabled the understanding of the process of adoption and implementation of
ABC/M in supporting competitive strategies. It facilitated the investigation and evaluation of
what was changed, what was left unchanged and the reasons thereof; for example, the
traditional management accounting systems remained unchanged, but instead, an additional
dimension to the management accounting systems in the form of ABC/M was introduced, in
order to provide more accurate and reliable cost information for strategic decision-making.
The results confirm that ABC/M has the capability to support corporate strategies through the
supply of more accurate information that is used to design, develop and provide cost-effective
products and services, resulting in the creation and sustainability of competitive advantages.
The empirical results demonstrated that ABC/M information supports business strategy in
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areas such as cost visibility, activity analysis, process reengineering, accurate cost
information, improved pricing on products and services, reliable management reporting for
proactive decision-making, life-cycle costing of products and service and profitability. All these
enhanced the management's capability in strategic planning, resulting in proactive decision
making.
USing a case-based approach, the results of this study have a number of implications for both
practice and theory development. First, the research demonstrates the usefulness of ABC/M in
supporting better product/service decisions. This finding supports prior research that has
demonstrated the superiority of ABC/M over traditional accounting systems. Second, it also
shows that the usefulness of ABC/M can be recognised in organisations in the developed
countries as well as emerging and developing economies. Third, the research identifies the
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importance of diverse exogenous and endogenous factors that impact on the manner in which
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ABC/M can be adopted and applied in the organisations. This foinding is significant in that it
contributes to better implementation of ABC/M systems in orgTanisations, and thus potentially

reduce the failure rate, especially given the wide-spreaed failure of such systems in most
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organisations globally. Finally, it also contributes to the calls for management accounting
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systems to be examined in their organisational andC institutional contexts.

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TABLE OF CONTENTS
Contents Page no
Thesis title
Acknowledgements ii
Declaration iii
Dedication iv
Abstract v
Table of contents viii
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CHAPTER ONE 01
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1.0 INTRODUCTION T 01

1.1 Introduction e 01
1.2 Background p 02
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1.3 Issues within the SA banking sector 03
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1 .4 Problem Statements 07

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1.4.1 Management Accounting o 07

1.4.2 Traditional Management Ayccounting Systems 07
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1.4.3 Johnson and Kaplan'si Relevance Lost 10
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1.4.4 Johnson Relevancre Regained 15
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1.5 Advanced managemenvt techniques 16
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1.5.1 Balanced Sncorecard 16
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1.5.2 Activity-based cost management 17
1.5.3 Activity-based budgeting 17
1.5.4 Total quality management 17
1.5.5 Benchmarking 18
1.5.6 Process value analysis 18
1.5.7 Target Costing 18
1.5.8 Strategic Cost Management 18
1.6 Research Purpose 19
1.7 Conclusion 20
1.8 Organisation of the research study 21
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CHAPTER TWO 22
2.0 ACTIVITY BASED COST MANAGEMENT 22
2.1 Introduction 22
2.2 The Difference between ABC, ABC/M and ABM 22
2.3 Organisational Activities 26
2.3.1 Background 26
2.3.2 Activity and cost control 27
2.4 ABM and value creation 29
2.5 The Conversion of ABC to ABM 31
2.6 The Scope of Activity-Based Management 34
2.7 Data Collection Management Systems 37
2.7.1 Information Characteristics n 38
2.7.2 Sources of Information w 39
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2.7.2.1 Financial Accounting 39
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2.7.2.2 Transaction Processing 39

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2.7.2.3 Accounting Applications 40
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2.7.2.4 Management reporting a 40
2.7.2.5 Systems Modules C 41

2.8 Activity-Based Information f 41
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2.8.1 Activity Information 43

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2.8.2 Using Activity Information 44
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2.9 The Reduction of Purpose to Asctivity 46
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2.10 ABC/M's Implementatione challenges 49
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2.10.1 Strategic business unit size 49
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2.10.2 Decision usefulness of cost information 49
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2.10.3 Strategic business unit cultures 50
2.11 Criticisms and limitations of ABC 52
2.12 Conclusion 55
CHAPTER THREE 57
3.0 COMPETITIVE STRATEGY 57
3.1 Introduction 57
3.2 Definition of strategy 57
3.3 Strategic management 58
3.3.1 Definition of strategic management 59
3.3.2 The strategic management process 60
3.3.2.1 Organisation's mission 61
3.3.2.2 Internal analysis 61
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