The impact of firm The impact of firm characteristics on ABC systems: characteristics on ABC systems:

an empirical study of Greek an empirical study of Greek hotelshotels

Dr Odysseas PavlatosAthens University of Economics an

BusinessDepartment of Accounting and Finance

Presentation Outline

1. Research objective2. Literature review3. Research hypotheses4. Research methodology5. Survey results6. Conclusions, limitations and future

research

Introduction

Contingency theory and management accounting systems (Emmanuel et al, 1990)

Activity Based Costing (ABC) is one of the most important innovations in the field of cost and management accounting (Bjornenak and Mitchell, 1999; Bjornenak, 1997)

Chenhall (2003) reports that there is a need for more research into service organizations about cost system design and contextual variables, as these entities become increasingly important within most economies

Evidence about cost accounting and its use in tourism enterprises and especially in hotels is rather limited (Pellinen, 2003)

There is an active interest in hospitality management and particularly in cost and management accounting practices of hotels and tourism enterprises (Pavlatos and Paggios, 2009b; Harris and Brown, 1998)

Research objective

That paper is a response to recent calls by Chenhall (2007; 2003) and Gerdin (2005) for additional research “….to increase our understanding of contingent factors explaining cost system design and management control systems…..”

This paper examines the extent to which different factors influence the choice of ABC systems in hotels

The Hospitality Industry Research in cost system design has traditionally focused on cost

systems of large manufacturing companies (Sharma, 2002)

Accounting researchers interested in service production have conducted their research in non profit, public sector organizations (Olson et al., 1998; Brignall et al., 1991;)

Evidence about cost accounting and its use in tourism enterprises and especially in hotels is rather limited (Pellinen, 2003)

There is an active interest in cost and management accounting practices and cost systems of hotels (Harris and Mongiello, 2006; Potter and Schmidgall, 1999)

The Greek tourism sector is is one of Greece's three biggest industries, a continuous growth market and represents 18% of the country’s GDP

Literature review (1)

Since the mid-1990s researchers have started to examine the contextual factors that influence the adoption and the implementation of ABC (see Gosselin 1997a for a review)

Various survey-based studies use selection and interaction approaches (e.g Bjornenak, 1997; Gosselin, 1997b; Krumwiede, 1998; Malmi, 1999; Clarke et al., 1999; Hoque, 2000; Cagwin and Bouwman, 2002; Abernethy et al., 2001)

According to Gosselin (1997b) and Krumwiede (1998) the ABC studies based on a selection approach to fit have used bivariate statistics to examine whether the difference between adopters and non-adopters were statistically significant

Al –Omiri and Drury (2007) report that there is a need for tests to be undertaken using higher powered multiple regression statistical tests that express the unique contribution of each variable by systematically controlling for the impact of other variables in the model

Literature review (2) Kaplan and Cooper (1998) suggest that service companies are

ideal candidates for ABC even more than manufacturing companies

Berts and Kock (1995) propose that ABC is suitable for market–oriented sectors such as the hospitality industry

Within the hospitality context ABC has been studied in connection with customer profitability analysis (CPA) (Dunn and Brooks 1990; Noone and Griffin, 1999; Karadag and Wod Kim, 2006; and Harris and Krakhmal, 2008)

The use of ABC in the hotel industry is limited with an informal survey by Graham (quoted in Tai, 2000) identifying no hotels in Europe to have adopted this approach

However, Pavlatos and Paggios (2009b) found that Activity Based Costing diffusion in hospitality industry in Greece is considered very satisfactory

Literature review (3)Conclusions

This research was based on the framework and the methodology of Al–Omiri and Drury (2007) and was expanded on the following:

We have examined the influence of Strategic Management Accounting (SMA) techniques on the adoption of ABC systems

Our research was restricted to including only service organizations

“It is hardly surprising that our knowledge of cost design in specific service industries and contexts is limited ”

(Auser and Langfield-Smith 2005)

We have tested this model only to a particular service industry, the hotel industry. The operational homogeneity of hotels enables powerful tests of the research questions and hypothesis to be performed

Research hypotheses (1)

H1: There is a positive association between the importance of cost data and the adoption of ABC systems

H2: There is a positive association with the proportion of indirect costs within a hotel’s cost structure and the adoption of ABC systems

H3: There is a positive association between the level of competition and the adoption of ABC systems

H4: There is a positive association between the company’s size and the adoption of ABC systems

Research hypotheses (2)

H5: There is a positive association between the extent of the use of strategic management accounting techniques and the adoption of ABC systems

H6: There is a positive association between the number of

services variants by hotels and the adoption of ABC systems

Research Methodology

Sample characteristics and data collection The sample surveyed included the leading Greek

hotel enterprises (ICAP’s Directory 2006)

The research was realized in two phases

A pilot test took place (interviews)

The participation form was sent to 146 hotel companies

The response rate was 58% (85 hotels) The questionnaires were answered at 96% by executives

in the top hierarchy of the financial departments

Research MethodologyVariables measurement

Importance of cost data (IMPO) Items Factor

loadingsΕigenvalue Percent of

variance Cronbach alpha

Product cost must be accurate to compete in your market

0.872

Cost data are important because of your cost reduction efforts

0.768

Cost data are an important factor in pricing decisions

0.813

The firm performs many special cost studies

0.683

Capital expenditures are based on “strategic reasons” instead of cost issues

0.790 5.133 64.16 0.87

Research MethodologyVariables measurement

Level of competition (COMP)Level of competition was measured by Swenson (1995) using a single item five-point Likert scale

Size (SIZE) Size was measured using the log annual sales turnover (€ million)

Number of services variants (SERV) Objective data were used for measure the number of services variants. This variable was adopted from Bjørnenak (1997)

Cost structure (STRUC)Cost structure’ of the hotel was measured by indirect costs as a percentage of total costs. This measure was similar to others that appear in the literature (Brierley et al., 2001)

Research MethodologyVariables measurementExtent of the use of strategic management accounting techniques (SMA)

Items Factor loadings

Εigenvalue Percent of variance

Cronbach alpha

Benchmarking 0.854

Life cycle costing 0.718

Strategic pricing 0.698

Competitive position motoring

0.627

Competitor cost assessment

0.741

Strategic costing (strategic cost management)

0.632 3.738 53.4 0.85

Research MethodologyVariables measurementABC adoption (ABC)

The variable ‘ABC systems adoption’ was measured using a binary (dichotomous) variable by Bjørnenak (1997) and Al- Omiri and Drury (2007). Respondents identify whether firms were ABC adopters or ABC non-adopters

Data analysisDescriptive statistics for independent variables

Variable N Mean Std. Dev.Actual Minimum

Actual Maximum

Importance of cost data 85 22.95 4.15 15 32

Cost structure (% of indirect costs) 85 46.93 7.66 30 63

Level of competition 85 5.21 0.87 3 7

Sales revenue for the year 2005 (€

mil) 85 9.85 12.25 3.3 99.5

Extent of use of strategic management accounting

techniques 85 16.10 5.03 8 26

Data analysisSpearman correlation matrix for the independent variables

Variable STRUC SERV SIZE COMP IMPO SMA

STRUC 1          

SERV 0.029 1

SIZE 0.241* 0.421** 1

COMP 0.188 -0.190 -0.015 1

IMPO 0.172 0.107 0.184 -0.007 1

SMA 0.361** 0.203 0.185 0.249|* 0.451** 1

Note: * indicates Correlations is significant at the .05level (2 tailed)

**indicates Correlations is significant at the .01 level (2 tailed)

Research Findings

ABC adoption rates

Note: N= 85

N %

ABC adopters 20 23.5

ABC non- adopters 65 74.5

ABC deniers 56 86.1

ABC supporters 9 13.9

Total 85 100

Research FindingsHypothesis testing (1)

In order to test the hypothesis the following model was applied:

Y= b1 + b2 IMPO+ b3 STRUC + b4COMP + b5 SIZE+ b6 SMA+ b7 SERV+ e

where Y: the dichotomous variable of ABC adoption and

ABC non- adoption

Research FindingsHypothesis testing (2)

Collinearity statistics

B St. Er.

P Value Exp. B

Tolerence

VIF

Importance of cost data 0.393 0.514

0.444 0.482 0.582 0.718

Cost structure (% indirect costs) 0.170 0.058

0.004 1.185 0.826 0.211

Level of competition -0.658 0.524

0.209 0.518 0.886 1.129

Size (log annual sales in euro millions)

0.000 0.000

0.720 1.000 0.869 1.151

Number of services variants -0.143 0.099

0.662 0.958 0.833 1.201

Extent of the use of innovative management accounting techniques

1.893 0.787

0.016 0.639 0.495 2.022

Constant -6.656 3.673

0.070 0.001

Chi-square 0.000

Hosmer – Lemeshow goodness of fit

0.735

Cox & Snell R square 0.441

Nagelkerke R square 0.588

Per cent correctly classified 87%

Conclusions ABC adoption in hospitality industry in Greece can be considered

very satisfactory

It is rather surprising that the majority of the hotels that are non-adopters do not intent to adopt ABC in the future (ABC deniers)

The adoption of ABC systems is significantly positively associated with the cost structure

The adoption of ABC systems is significantly positively associated with the extent of the use of strategic management accounting techniques

Structural determinants, including size (sales revenues), the intensity of the competitive environment, the number of services variants and the importance of cost data were not significant variables affecting the adoption of ABC systems

Limitations

Cross-sectional studies as this can establish associations, but not causality

Another factor that may affect these results is the noisiness of the measures

Sample size was small and we could not split it for validation purposes into analysis and holdout samples

The ABC adopters group contain the minimum size of 20 observations required for logistic regression (Hair et al., 1998)

Contribution

The results provide the first empirical evidence of the relation

between ABC adoption and contingent factors in hotels

This study extends prior research in several ways: It has provided additional insights into areas relating to factors

influencing the adoption of ABC systems This research establishes the association between the

extent of use of strategic management accounting techniques with the adoption of ABC systems

It has provided additional insights into areas relating to factors influencing the adoption of ABC systems in services

The operational homogeneity of hotels enables powerful tests of the research questions and hypotheses

Future research

Incorporate other important variables from contingency theory that are likely to influence the adoption of ABC systems:

top management support quality of information technology satisfaction of the existing cost system etc.

An interesting extension of this work would be to investigate why adoption rates in the hospitality industry are comparatively lower than other industries in Greece (see Cohen et al., 2005 for a review)

Interviews with hotel managers could help understand their motivations to adopt ABC (ABC supporters) and the extent to which they are satisfied with the current accounting practices (ABC deniers)