the impact of abc (activity based costing) on manufacturing firm performance in vietnam

Le Van Lien Abstract In this study, Based on the data from a large sample amount of Vietnam manufacturing plants and some research models, I want to demonstrate the impact of Activity-

DECLARATION

I hereby declare that the graduation project is based on my original work except for quotations and citations which have been duly acknowledged I also declare that it has not been previously or concurrently submitted for any other course/degree at HELP University College or other institutions The word count is about 10,500 words

NGUYEN THI HA

Date: 30/6/2010

ACKNOWLEDGEMENTS

Firstly, I want to send my thankfulness to my advisor Dr Le Van Lien for his continuous support in my thesis The advices of Dr Lien helped me so much in the accurate thesis structure, also the method to simplify the result He taught me as how to offer the right questions and express my ideas I also want to send my thankfulness to

Ms Sumathi who guided me how to use the statistic method, step by step to do this research enthusiastically

Secondly, I want to thank to the sources such as a large amount of manufacturing firms that provide a lots of necessary information from responding mail to me The data

is really significant for my result finding, integrated with some statistic methods, from that I could offer my conclusion effectively

Thirdly, I also want to thank to the internet sources such as prior researches that really helped me in how to find the result, hypothesis setting, questionnaires making I also want to thank to the sources, other researchers that provide the conceptual theories that contributed to my literature review chapter

In finally, I want to send my thankfulness to my friends, my family who has supported, encouraged and motivated me in doing this thesis

THE IMPACT OF ABC (ACTIVITY BASED COSTING)

ON MANUFACTURING FIRM PERFORMANCE IN VIETNAM

BY NGUYEN THI HA June 2010

Supervisor: Dr Le Van Lien

Abstract

In this study, Based on the data from a large sample amount of Vietnam manufacturing plants and some research models, I want to demonstrate the impact of Activity-based costing (ABC) on manufacturing performance, especially is the plant performance regarded as operational performance rather than financial performance, is directly by the World-class manufacturing (WCM) practices adoption From the result of sample research, I can conclude that ABC has no significant or very little direct effect on performance of plant that is represented by the improvement of manufacturing cost, cycle time and the quality of product However, WCM present as a mediator that helps

to explore the impact of ABC on plant performance clearly By using results and methods of many other researchers, I evaluate the relationship between ABC implementation, WCM adoption and plant performance From this evaluation, I can see that ABC can’t improve performance of plant by itself, and one of the ways to see overall impact of ABC is the implementation of WCM

Chapter I INTRODUCTION

Chapter II LITERATURE REVIEW

2.3 The fundamental of World-Class Manufacturing (WCM) practices 17 2.4 The relationship and the impact of ABC implementation & WCM practices

4.1.1 Percentage method 41

4.1.2.1 Impact of Activity-based Costing on World-class Manufacturing 46 4.1.2.2 Impact of World-class Manufacturing on Plant Performance 47 4.1.2.3 Impact of ABC on Plant Performance: A Mediation Mechanism 50

traditional cost systems focus their attention

Chapter 5

LIST OF ABBREVIATIONS Abbreviation Full Name

ABC Activities Based Costing

WCM World-class Manufacturing Practices

TQM Total Quality Management

JIT Just-in-time Manufacturing

AMP Advanced Manufacturing Practices

CHAPTER I: INTRODUCTION

1.1 Introduction

1.2 Need for Research

1.3 Elements of the Research

1.4 Scope of Research

1.5 Assumptions

1.6 Plan of Presentation

1.1 Introduction

Along with the development of market economy, accounting information requires precise, more detailed and updated Previously, manufacturing companies only use traditional cost allocation methods as VBC (Volume Based Costing) but until now, this allocation method is gradually being replaced by activity based costing method ABC (Activities Based Costing) The reason is that in according to the VBC method, the distribution of overall production costs in manufacturing costs - cost factories are usually allocated to each product based on a fixed allocation criteria (usually direct labor hours) The allocation of all common expenses according to such fixed criteria is unsuitable because general expenses include many items that have different nature in the production process makes the actual cost of the product reflected not accurately lead to the false business decisions making But according to the ABC method, common expenses are allocated based on cost’s factors so we can see that ABC method can provides accurate cost information and a more sensible approach than the traditional cost accounting In according to Cooper and Kaplan, accurate cost data is provided by ABC adoption that is useful in the strategic decisions making of business process performance This accurate cost data also useful in product mix, sourcing, pricing, process improvement, and evaluation processes (Cooper and Kaplan, 1992; Swenson, 1995)

This paper examines the impact of ABC on plant level operational Using the Vietnam manufacturing plants sample, we find that ABC use is indirectly impact on manufacturing performance through the advanced manufacturing practice implementation Based on the paper the Association between Activity-Based Costing

and Manufacturing Performance in the Journal of Accounting Research Vol 40 No 3 June 2002 Printed in U.S.A is written by Christopher D Ittner, William N Lanen and David F that said: Plants with higher quality levels and better cycle time improvements will be associated more with extensive use of ABC, although there is not association of ABC with the reduction of manufacturing cost but the association can be directly occurred by the improvement of quality and cycle time In addition, in the financial performance, there is no association between ABC use and return on assets Furthermore, the finding showed that there is a little evidence that the operational characteristics of plant are important factors that will be contingent with the association

of ABC use and accounting profitability That reading also showed that from the ROA results, we can see the association between ABC use and net financial benefits is varies with the characteristics of plant’s operational Especially, ABC may be more beneficial for performance if it adopts and implements advanced manufacturing practices (Shields and Young [1989], Kaplan [1992], Cooper [1994]) Base on that point, perceptual measures of ABC success is used by prior studies such as find whether the relationship between the adoption of advanced manufacturing practices and the success of ABC implementation is positive (see Anderson and Young [1999] for a review)

Because ABC has a little direct impact on plant manufacturing performance, base on prior research’s analysis methods, I do a research in a cross-sectional sample of Vietnam manufacturing firms to survey the indirect impact of ABC on manufacturing performance through the adopt of WCM practices

1.2 Need for research

Today, the competitive world of business is so high, with using ABC method in manufacturing performance, many firms have provided accurate information that is to determine the optimal product mix so that management can make better decisions and the result is to have company’s effectiveness However, in fact, in Vietnam, not all firms success with this method The reason why is that businesses do not want to renew method and try to get the traditional cost accounting, or do not want to change because they have no understanding of this new method, but the main reason is that the lack of advanced manufacturing practice This research’s purpose is to provide the better information to managers that can help them to understand the overall the positive indirect impact of ABC on manufacturing plant performance through the WCM practices implementation

1.3 Elements of the research

1.3.1 Research question

What is the overall direct and indirect impact of ABC on manufacturing firm performance? And can WCM mediate the impact of ABC on plant performance by the performance improvement?

1.3.2 Research objective

Prior studies have almost concentrates on the direct impact of ABC and almost them, they has only little care about how to increase other organizational capabilities by indirect impact of ABC implementation Prior researcher showed the ABC implementation’s benefits (Foster and Swenson, 1997; Ittner and Larcker, 2001), in

evaluating the successful outcomes and the plant performance measures, one of them have explored the research Moreover, ABC success’s definition has often been regarded as “benefits of financial”, “ABC satisfaction”, or “decision making by the use

of ABC.” From these definition and the sources of methodology, I bring out the measure approach that is needed evaluate the impact of ABC Beside of firm-level financial metrics focus, It is also significant to concentrate on the measurement of process-level performance, since before firm’s aggregate performance reflect ABC implementation, the potential impact may be appropriated

In this thesis, I mainly concentrate in the point that will show the ABC’s impact on plant performance through the enabler of organizational capacity Particularly, in this research, the positive relationship between implementation of ABC and WCM practices and the impact of them on plant-level operational performance will be investigated

1.4 Scope of research

In this research, I will develop framework which indicates the WCM capacity enablement will be mediated factor to show the ABC adoption impact on plant performance is positive Since ABC is adopted at the business process level, I concentrate mainly on the measure of operational process performance and the manufacturing plant is treated as a unit of analysis In addition, prior studies showed the

of ABC’s impact traditionally so the revision and validation of those prior studies are needed by using many types of model and approaches In difference with Ittner et al (2002) my result is that, on plant performance, ABC has a statistically indirect impact

that is showed by the mediation, advanced manufacturing capabilities is represented as WCM

1.5 Assumptions

I suppose that ABC implementation by itself is unable to provide the direct valuable impactions, but will be enable to create the convenient condition for the advanced manufacturing practices implementation and other capabilities, as the result, this capacities may contribute into plant performance improvements Previous studies that have tried to explored the direct impact of ABC but almost, they have to conclude that the organization needs the improvement

1.6 Plan of presentation

My research is organized in five chapters In chapter II, the literature will be reviewed

on the fundamental of ABC, the conceptualization of ABC, advanced manufacturing practices, their relationship and their impact in according to the prior research Then, in chapter III, I present methodology that shows the description of my research data, hypothesis, variables’ measurement and limitations Next, in chapter IV, I analyze results of the statistical estimation, and a discussion Finally, in chapter V, I summarize

my findings and the study implications for future research

CHAPTER II: LITERATURE REVIEW

2.1 A General Look at ABC

2.2 The ABC criticism

2.3 The fundamental of World-Class Manufacturing (WCM) practices

2.4 The relationship and the impact of ABC implementation & WCM practices on plant performance

2.1 A general look at ABC

ABC is method that replaced traditional costing method Previous period, everybody still

think that customers purchase a large volume of products, the loyal customers will bring

the high profitability The customer profitability researches disclosed that those above

judges are not really correct ABC method determines all activities expenses, then

delivery those expenses in according to products and services base on activity amount or

occurred transactions in the providing process of products or services Hence, ABC

method can help managers to have the optimal investment value of shareholders and

increase the effectiveness of company’s activities

The costing methods based on counting on indirect expenses The benefits of ABC

method can be mentioned as: Determine customers, products, delivery channel that

create the most profit and least profit Determine factors that make increase or decrease

financial activity’s efficiency Forecast exactly the original causes of the financial

activity’s bad effectiveness Keep track of activity expenses and operational processes

Equip for managers reporting data of the valuable expenses for operational

improvement Support management and adjust marketing combination Increase the

ability of customer negotiating Locate products better

With ABC method, the service expenses can be determined definitely After minus the

product expenses and services expenses for each customer, the customer profitability

will be calculated The ABC method calculates customer expenses and help to locate

correlative products or services In addition, ABC application can help staff to grasp all

related expenses, help them to analyze the expenses and specify the plus value and no

plus value activities, from that, improve effectively activities This is a complete process continuously starting from the cost analysis, to reduce the activities that do not create added value and thus achieve the overall performance effectiveness Moreover, ABC also helps companies create better products that meet the needs of the market with a cost competitive Analysis of profitability by product and customer profitability, this approach has contributed positively to the decision making process of grant management; company can improve efficiency and reduce operating costs without sacrifice to bring value to customers Many companies also use the ABC method in the implementation of the card balance (balanced scorecard) ABC method helps companies model the impact of cost cutting and cost control savings Overall, ABC is a dynamic method to promote continual improvement With ABC, any company can create competitive advantage on costs and continuously create value for shareholders and customers

In addition, also talk about the benefits of ABC, prior studies found and affirmed that: ABC is defined as a separately task that can help to ensure the product or service delivering, cost drivers using and assign the cost of activity to products or services that relate to these activities (Cooper, 1988; Ittner et al 2002) Base on direct labor, machine hours, traditional costing system use them to allocate expenses that combined with the indirect activity to product and services However, ABC distinguishes the indirect expenses and resources supporting by activities, and to assign the expense, the drivers of those activities are important factor (Cooper and Kaplan, 1991) Hence, a more structured approach of ABC adoption result provide to plant mangers for expenses evaluating that is associated with particular activities used in product supporting

From the prior research, they affirmed that the impact of ABC has produced a lot of evidences Firstly, ABC is argued as to help economics capturing of production process that is more accurately than traditional costing system, and accurate costing data also has provide more (Cooper and Kaplan, 1991; Ittner, 1999) Secondly, prior research also said that the implementation of ABC brings out more benefits for organization’s operation (Anderson and Young, 1999; Cooper and Kaplan, 1991) In addition to, researchers also showed that the benefits achieved of ABC implementation are from the improvement of production processes, causal cost driver, the better product development’s information, sourcing, product mix and other strategic decisions (Anderson, 1995; Shields, 1995)

As refer to the benefits of ABC implementation, literature showed three potential types

of benefit that help to improve operational performance: cost lowering, quality improvement, and manufacturing cycle time reducing (e.g., Anderson and Young [1999]; Ostrenga et al [1992]) In addition to, in refer to the cost associated with the value-added and non value-added activities, ABC advocates (e.g., Cooper and Kaplan [1991, chapter 5]; Ostrenga et al [1992]; Carolfi [1996]) showed that detailed information on the drivers of activity costs is provided by activity-based costing systems This information help managers in costs reducing by designing products and processes that consume fewer activity resources that can also increase the efficiency of existing activities, the non valued added activities id eliminated to customers, and from that, the coordination of customers and suppliers is improved

In relation to the similar conclusion about the benefit of ABC in cost reducing to non value added activities, Carolfi also said that since ABC provide better business processes visibility and the cost drivers, it might help managers to reduce and eliminate cost of activities that related to non value added and from that, the efficiencies of existing process are improved (Carolfi, 1996) Moreover, from the information visibility improvement, it may also support the quality-related initiatives deployment by realize the activities that combined with poor product quality, and their cost drivers (Ittner,

1999, Cooper et al 1992) Hence, prior researchers suggest that in the activities process improvement such as total quality management (TQM) programs, ABC adoption will have the valuable association (Ittner and Larcker, 1997a, 1997b; Anderson, Hesford, and Young, 2002)

2.1.1 The conceptualization of ABC

ABC is a two-stage procedure: Activity -> Activities’ costs -> Products or services This process is disclosed more clearly in figure 2.1

Figure 2.1: the estimation of ABC

Firstly, research activities create costs in each cost center; make a list of different activities Then, in each cost center, it will be allocated to each activity that is directly related to activities are allocated Secondly, in each type of activity, we should determine standards that measure the change of expenses using degree These standards are considered as the cost allocation base for each type of product, service

or subject costs The standards are used to allocate are: a direct hours number of workers, wages of direct workers, the number of orders, number of units transported

Thirdly, the similar distribution standard activities have to gather into a “sub-center” Depending on the product’s technical nature, services or objects continue to bear the costs that break down into small groups to calculate cost

Thus, we can say that the ABC method can make an indirect cost as a direct cost with an object creates definite costs The selection of activities and cost allocation standard reasonably help managers have more reliable reports of products’ cost and services’ cost with higher reliability than traditional methods compare to tradition based costing method

In short, the ABC method improved operating systems by determining the cost of a business This cost determining method change the basis to allocate the cost centre for products Or we can say that instead of expenses allocation according to direct labor, they are allocated according to the cause of the factors used for the product or work requirements In addition, this determination method change many types of general production costs in that these costs are considered indirect in nature but has been associated with particular activities and thus are directly calculated to each product However, the ABC method is complicated and takes more effort than traditional methods But, with the scientific development of information technology today has reduced much time and effort for the application of this method Thus, the method of accounting based on operating costs would be indispensable to the application of corporate governance

2.1.2 The importance of ABC

In according to Sullivan, the lists of the new manufacturing environment’s characteristics is shown in table 2.1,

Table 2.1: The changes in manufacturing environment (Sullivan, William G., 1992)

High volume, long production runs,

long product life cycles

Low volume, short product runs, short product life cycles

Small number of product variations in a

Domestic market

Large number of product variations in

an international market Large direct labor component; high cost

of processing information

Relatively high technology costs; relatively low information processing costs Small indirect/overhead costs in

relation to direct labor

Large indirect/overhead costs in relation to direct labor

In competitive world, manufacturing companies change more and more, and more information required, highly flexible, and have to respond to the customer expectations immediately (Sullivan, William G., 1992) Traditional cost accounting is rapidly disappearing because of the change of manufacturing environment The development of traditional accounting systems is suitable when direct labor has high percentage of total product costs

The technologies of manufacturing are changing, such as the just-in-time philosophy, robotics, and flexible manufacturing systems that decreased the favor of the component

of direct labor of production and make the increase in overhead costs Nowadays, in the recent manufacturing environment, 10% of the costs are accounted for direct labor, 55% are accounted for material for and overhead is 35% (See Figure 2.2 and 2.3)

Figure 2.2: The proportion of material, direct labor and overhead costs in today’s world

Figure 2.3: The proportion of material, direct labor and overhead costs where traditional cost systems focus their attention

As a result, product cost will be distorted if we use traditional based costing method, the reason is the allocation of overhead costs to the products based on each product’s direct labor hours used (Harsh, Mary Frances., 1993, Liggett, H R., J Trevino, and

Materials, 55%

Direct Labor, 10%

Overhead, 35%

Materials Direct Labor Overhead

Materials, 10%

Direct Labor, 75%

Overhead, 15%

Materials Direct Labor Overhead

J P Lavelle , 1992) Several situations that Cooper report can lead to occurrence of distortion, they include: the diversity of production volume, complexity, material and setup (Cooper, Robin ,1988)

The cost distortion can be solve by the using of ABC method that provides information to identify the overhead’s component precisely such as better grounded product design, development, production, and distribution decisions The resource costs that ABC help to assign to products is more accurately and the it also the main tool that serve for companies’ decision support (Harsh, Mary Frances., 1993, Johnson, H T and Robert S Kaplan., 1987) In according to Ioannou and Sullivan who also affirm that the ABC can make better decision making in manufacturing firm

by offer the best obtained information (Ioannou, George and William G Sullivan., 1999)

2.2 The ABC criticism

In contrast to the ABC adoption benefits, Datar and Gupta (1994) claimed that the rise

of number of cost pools and the cost bases specification improvement may lead to the increase of errors in product cost measurement Banker and Potter (1993) and Christensen and Demski (1997) said that the ability of cost estimation of ABC belong to some other factors that include the market competitiveness, the information technology infrastructure quality Noreen (1991) also suggests that ABC implementation can only provide benefit under specific conditions Since, the mix result of ABC benefits has produced by empirical studies that have analyzed the ABC’s impact on firm performance (Itnner and Larcker, 2001; Gordon and Silvester, 1999) In addition to,

there were many studies that only believe in the success of ABC implementation and do not show the difference between ABC adopters and non-adopters operational or financial levels achieved (Shields, 1995; McGowan and Klammer, 1997; Foster and Swenson, 1997) Other studies have showed that many ABC implementations are not success and have abandon, (McGowan and Klammer, 1997) Reeve also said that, since ABC system has many cost drivers (product changeover activities) that has no important

in operation, the processors have rejected to adopt ABC, Krumwiede [1998]

2.3 The fundamental of World-Class Manufacturing (WCM) practices

WCM practices implementation requires a large range of manufacturing capabilities Since in the rapid manufacturing environment, the changes in customer demand and business cycles that is associated with the volatility and uncertainty that plant managers can be adapted (Flynn et al 1999; Sakakibara et al 1997; Banker et al 1995) The component of WCM practices that comprises just-in-time manufacturing (JIT), process improvement continuously, total quality management (TQM), competitive benchmarking, and worker autonomy by need of self-directed of work teams The role of advanced manufacturing practices is to provide the significant capacities in lot sizes and setup times to face to rapid changes Flexible and agile processes are the manufacturing target that can be achieved by make changeover techniques quickly lead to high volume production and with the increase in variety of products (Kaplan, 1983; Flynn et al 1999)

2.4 Relationship and impact of ABC implementation & WCM practices on plant performance

In this study, I will survey the interaction of ABC implementation and WCM practices on plant performance In the study on relationships between JIT implementation and incentive systems, Fullerton and McWatters (2002, p 711) said that WCM strategies adoption need the changes in the management of firm accounting systems With better inter-relationships understanding in the processes of manufacturing, the uncertainty of demand and complexity of product, the implementation of ABC will lead managers have the relevant process improvements which can facilitate the initiation of WCM implementation Cooper and Kaplan (1991) also conclude that the understanding of cost variability sources of plant managers and so, can manage the demand of resource and rationalize the product mix changes is the result of ABC implementation

In support ABC, Cagowin and Bouwman said that the transparency increasing and information accuracy is obtained form ABC adoption (Cagowin and Bouwman, 2002) However, Kaplan (1993) and others has some crisis about the ABC advantages They said that not all the implementation of ABC produce benefits directly The direct benefits

of ABC are only achieved if we initiate the organization (Anderson et al 2002; Henri, 2006) Since, the impact of ABC implementation on plant performance is real only by supporting the capacities of advanced manufacturing which need the flexibility to adapt

to the changes of product and the characteristics of demand To improve manufacturing performance, ABC is unable to by itself if lack the advanced manufacturing capacity There were many prior researchers who studied the ABC’s impact on the firm-level performance In my research, from the plant-level observing, I want to show the overall

impact of ABC on specific plant performance measures through the WCM implementation

CHAPTER III: RESEARCH METHODOLOGY

3.1 Research objective

The manufacturing environment is more dynamically changing make the adoption of traditional costing systems is not relevant Instead of, ABC can provide more accurate activities information and transactions information and lead to the effect on product costs with smaller lot sizes producing, high broad mix and frequent changeovers (Krumwiede, 1998) In supporting management in decision making capacities in fast-paced manufacturing processes, ABC implementation can provide the costs of resources timely, especially when production runs are shorter or there are the changes in production method (Kaplan, 1983) Hence, base on the data collection and the statistic analysis method, this research objective is to show ABC’s impact as an enabler in supporting for WCM capacities implementation and impact on plant performance indirectly

3.2 Research strategy

Strategy of this research is to include firstly the three research hypothesis that comprises the ABC’s impact on WCM practices, of WCM on plant performance and of ABC on plant performance as mediation mechanism Secondly, I will talk about the measurement

of variables that include dependent and independent variables Thirdly, research methodology that is done based on the questionnaires survey and prior research’s analysis Forthly, I will talk about data sources and sample collection that include both secondary data and primary data Finally, it’s the research limitation

3.3 Research hypothesis

The model of research describing the interaction between manufacturing capabilities, ABC, and plant performance is shown in Figure 3.1 There are two stages in the model The first stage present the facilitation of ABC adoption that helps to implement WCM practices The impact of advanced manufacturing practices (AMP) capabilities on plant performance is described by the second stage From the model, I focus on the relationship between WCM and ABC, The mediation of manufacturing capabilities that help to show ABC’s impact on plant performance

Figure 3.1: Conceptual Research Model

Note: Plant performance is represented using three separate dependent variables that are grouped together in Figure 3.1 for ease of representation Our regression models are estimated using each performance variable as a dependent variable in a separate multivariate regression

3.3.1 Impact of Activity-based Costing on World-class Manufacturing

In relate to the implementation of WCM, Kaplan (1983, p 702) said that the integration of accounting systems with scheduling systems and the plan of plant production need to be tightly that can utilize bottleneck resources efficiently and reduce the levels of inventory over the plant In addition to, former researchers also

suggested that ABC creates more benefits for organization performance if it supports the AMP’s implementation (Shields and Young, 1989; Kaplan, 1992; Cooper, 1994) For example, Anderson and Young (1999) affirmed that ABC adoption and various advanced manufacturing practices have the positive relationship Value added and non-value added activities in manufacturing are more accurately identified and measured by the facilitation of ABC, which the cost control and resource allocation capabilities are easily developed better Since, it’s essential requirement for world-class manufacturing implementation

In according to the Miltenburg and Milgrom, There is difference in the compensation, accounting systems, performance measurement, incentive structure, and practices between traditional manufacturing and world-class manufacturing environment (Miltenburg, 1995; Milgrom and Roberts, 1995) For example, the measures of performance is required to track the cost of unit manufacturing related to direct and indirect labor ratios to volume, equipment utilization, number of orders, number of set-ups, in traditional manufacturing process On the other hand, in the process of WCM implementation, the measures of performance track the reduce in cycle time, actual cost and quality, the delivery rate of time and on-time delivery, and actual production

as a percentage of planned production (Miltenburg, 1995, p 336) In ABC effect, the identification is more accurately and measurement is enabled by the measure of costs that relating to products and customers, specific activities Since, ABC is an important factor that creates the successful of WCM implementation (Argyris and Kaplan, 1994; Krumwiede, 1998)

Some prior researchers claim that there are some several ways ABC can support WCM capacities implementation Firstly, by the accurate costs tracking and the redundant resources identification of plant managers, ABC can support TQM implementation and other quality/process improvement programs.Secondly, by identifying non-value added activities timely that ABC lead reducing process-related investments in cycle time (Kaplan, 1992) Thirdly, from the ABC implementation, the resource allocation decision making is better by concentrate in product lines and know the exact impact of the changes in the production mix and profits in production activities So, Cooper and Kaplan conclude that the advantages of ABC implementation is to provide the training process that is significant for activities analyzing, collecting and tracking costs to activities, and create the appropriate measurement of output’s capabilities that are helpful in the changing manufacturing environments (Cooper and Kaplan, 1991, 1998)

The implementation of ABC increases the use of self-directed teams and worker autonomy that will raise WCM’s capacity (Anderson and Young, 1999) Similarly, In using ABC system, it design the data practices better on the corporation of activity centers, cost pools, and cost drivers that may lead to the improvement of decision making of managers in plant performance, and so develop the WCM programs (Elnathan et al 1996; Atkinson et al 2001) Since, I suppose the success of WCM practices implementation is facilitated by ABC adoption In contrast to Ittner et al (2002), affirms that the ABC is adopted by causal variables as regarded as the advanced manufacturing practices In this research, I can affirm as the WCM

practices’ implementation is supported by ABC and from that, plant performance may

be improved Therefore,

Hypothesis H1: ABC implementation will create the convenient condition for the implementation of WCM practices

3.3.2 Impact of World-class Manufacturing on Plant Performance

There are some advantages that manufacturing firm can get from WCM practices implementation It allows plant to response promptly to the variety of customer demand From that, the inventory levels are reduced, cost is improved efficiently, and the production flexibility increasing is facilitated by the use of scheduling and planning of software Since, it improves productivity of whole plant (Banker et al 2006) In production runs, Setup times is reduced by the applying of Investment in JIT and flexible manufacturing practices, from the reducing, so control more efficiently and reduce gap rates of products(Kaplan, 1983;Hendricks & Singhal, 1997; Sakakibara

et al 1997)

The JIT implementation comprises five techniques that are: systems of pull/Kanban, reductions of lot-size, cycle-time, quick changeover techniques, and practices of bottleneck removal The researcher Sakakibarra also surveyed the impact of JIT on performance (Sakakibara et al 1997; Hendricks & Singhal, 1997) He showed that the benefits of JIT implementation are work in process and finished goods reducing, higher quality and firm productivity In addition to, Srinivasan affirm that the alignment is better to the needs of customers that reduce the lead times and make time

to market faster are also the JIT adoption advantages (Srinivasan et al 1994)

Besides that, the WCM practices implementation also comprises the practices of other process improvement as total quality management (TQM) and continuous process improvement programs (Fullerton & McWatters, 2002) The improvement programs

by the use of such advanced practices includes the control of statistical process, competitive benchmarking, and the empowerment of employee(Schroeder & Flynn, 2001).From the need of the quality improvement of product, manufacturing plants and the issues of time to market, the company wants to support advanced manufacturing capacities Prior research showed that the WCM implementation that includes other advanced manufacturing practices and TQM has impact positively on the performance

of company based on firm level data analysis The impact is present as reducing the cost of product, increasing quality, and make better delivery performance on-time (Ittner & Larcker, 1995, 1997a; Banker et al 1995; Hendricks & Singhal,1997, Banker

et al 2001)

Since, I affirm that in manufacturing plants, WCM practices implementation impact positively to plant improvements performance The impacts are posited as the measurement of quality, plant cost, and time-to-market Hence, I have hypothesis such as:

Hypothesis H2: The impact of WCM practices implementation improved the plant

performance

H2a: The impact of WCM practices on improvement of plant manufacturing costs H2b: The impact of WCM practices on improvement of plant manufacturing quality

H2c: The impact of WCM practices on improvement if plant manufacturing time to market

3.3.3 Impact of ABC on plant performance: A mediation mechanism

3.3.3 Impact of ABC on plant performance: A mediation mechanism

From the proponents argument who affirm that ABC adoption facilitate the WCM practices implementation by easier determination of non-value added activities and the measurement simplifying, particularly is in the prompt changeovers process and a line of support activities In addition to, in according to Cooper and Kaplan (1988) also conclude that the high volume production create less transactions than low volume production Document analyzing and activities understanding is essential required for business process improving and so, activities are the business processes’ building blocks The adoption of ABC will make costs more accuracy, and since, it will contribute to the improvement of plant performance The performance improvement will have greater opportunity to implement the initiated processes by for example, removing non-value added activities

In identifying and eliminating non-value added activities, the WCM implementation needs the development of business process model In addition to, the process model development in activities identifying and analyzing, the operational activities’ cost tracking and activity-based cost analyzing are required by ABC implementation From this, in adopting ABC, plant managers can know the major cost drivers by the gathered information that are essential component in most TQM and competitive benchmarking initiatives The JIT capacities implementation also needs the information that is

provided by ABC results as pricing, product mix, and profitability Therefore, ABC adoption can be the leverage to make the WCM implementation successfully

The business model development of activity-based management (ABM) models development will be allowed by ABC analysis that let their organization is improved effectively (Chenhall andLangfield-Smith, 1998) Furthermore, the correlation of ABC implementation and the factors that is unable to observe such as the training of worker and management leadership that also are significant to the success of implementation

of WCM practices Since, the allocation of cost accurately and the support of management in improving the performance of plant are offered by ABC that make easier the WCM capacity implementation and from that, may allow plants to increase the capacity Almost prior researchers have explored the ABC’s direct impact on performance of plant such as Ittner (2002) From such prior literature, I realize that the direct impact of ABC in plant performance is not really enough Since, in my research,

I want to explore the ABC responsibility that is regarded as the important factor to facilitate the capacities of manufacturing, and from WCM adoption, we can know the impact of ABC on plant performance indirectly (Henri, 2006) Therefore, I have third hypothesis that is:

Hypothesis H3: The WCM practices implementation is regarded as a mediator that

show the indirect impact of ABC on plant performance

Moreover, I also want to refer to an alternative perspective that posits the interaction between WCM capacity and the implementation of ABC to the plant performance’s impact jointly As Cgowin and Bouwman argued that the combination of both ABC