Management And Accounting Web


Summary by Eileen Z. Taylor
Ph.D. Program in Accounting
University of South Florida, Spring 2004

ABC Main Page | Strategy Related Main Page | Structure Main Page


Although the ABC innovation is theoretically superior to traditional cost methods, it has not been widely implemented within manufacturing firms. This study explores the “ABC paradox” via a diffusion of innovation perspective. ABC is treated as an innovation, and organizational strategy and structure are examined as possible factors associated with ABC implementation.

Activity Management

This section puts forth the explanation of ABC as a multi-level innovation. Activity management (AM) is the term used for describing the over-reaching concept of ABC. There are three levels of AM. Activity analysis (AA) is the lowest level of adoption. It “consists of identifying the activities procedures carried out to convert material, labor, and other resources into outputs” p.106 (Brimson, 1991). After adopting and implementing AA, the next stage is Activity cost analysis (ACA), in which cost drivers are identified and the structure of the costs is mapped out. Finally, some firms take AM to the highest level, ABC. This stage links product and service costs to activities. In this stage, cost pools are created and applied to better inform decision-makers.

Business Strategy

Gosselin uses the Miles and Snow typology for classifying businesses by strategy. The defining characteristic is the rate at which the organization changes its products and markets. Prospectors exhibit the fastest rate of change. Defenders are the exact opposite of prospectors; they “compete aggressively on price, quality, and customer service”(p.108). Analyzers fall somewhere between prospectors and defenders. Reactors do not have a defined strategy.

Given that ABC is considered an innovation; and past studies have demonstrated that prospectors are better able to incorporate change into their organizations, the following hypothesis is proposed:

H1: A prospector strategy is positively associated with the adoption of an AM level.

Organizational Structure

Gosselin posits that certain organizational structures will facilitate the diffusion of innovation better than will others. Two theories are examined: dual-core model and ambidextrous model.

The dual-core model looks at AM as possessing two characteristics, technical and administrative, depending on the level of implementation. First, “AA and ACA are classified as technical innovations because their focus is mainly on processes and activities.” (p.109). Past research has shown that organic organizations are more adapted to implementing innovative techniques. On the other hand, ABC is classified as more administrative because it calls for administrative rules and policies. A mechanistic structure is better suited to administrative innovations. This provides the argument for hypothesis 2.

H2: Among organizations that adopt an AM approach, a mechanistic structure is positively associated with organizations that adopt ABC. (Emphasis by summarizer)

The ambidextrous model considers the stage of the innovation process. It specifically looks at differences between the initiation and implementation stages. Initiation of innovations said to be easier in organic organizations; while implementation of innovations is said to be better in mechanistic organizations. The basis for the following hypothesis can be explained as: once a mechanistic organization gets through the early stages of initiation (AA and ACA), they will be better able to implement ABC, in part, because it is an administrative innovation, and the rules and formalized structures of a mechanistic organization support implementation.

H3: Among organizations that adopt ABC, a mechanistic structure is positively associated with organizations that implement ABC. (Emphasis by summarizer)


An eight-page survey questionnaire was created and mailed out to Canadian manufacturing firms. Certain firms were excluded: these included highly diversified firms, and small organizations. The response rate of mailed surveys is generally low; in this case, it was 39%. This was deemed sufficient.

Three categorical variables were created to test each of the three hypotheses.

Measurement of strategy and structure was approached using a multiple measure. Strategy was initially measured through a self-categorization by respondents. This measure was validated by the researcher, who examined the annual reports of each SBU. The correlation was .83.

Based on prior literature, structure was measured through three variables: centralization, vertical differentiation, and formalization. Mechanistic organizations are expected be more centralized, more vertically differentiated, and more formalized. Organic organizations are lower on all three categories. (Findings are limited by these measurements, which may not accurately discriminate between the two structures).


The hypotheses are tested preliminarily through a Chi-Square analysis, and then using a logistic regression approach. H1 is supported: prospectors were found to more frequently adopt AM than analyzers and defenders. H2 was also supported; however, only for one of the three variables, vertical differentiation. It was determined that firms with higher levels of vertical differentiation (mechanistic firms), were more likely to adopt ABC. Finally, H3, which proposes a link between implementation of ABC and strategy/structure, was supported for centralization and formalization, but not for vertical differentiation.

In summary, adoption is associated with more vertical integration; whereas implementation is associated with more centralized and formal firm structures. The authors propose that once a firm decides to adopt ABC, a higher degree of centralization and formalization make it harder for management to stop the implementation of the system. Additionally, once committed to putting the system in place, mechanistic firms provide the needed support for full implementation.

This article examined both strategy and structure, and their effect on adoption and implementation of AM innovations. It was found that adoption of AM was related to a prospector strategy. Further, mechanistic firms were more likely to adopt the highest level of AM, ABC; and they were also more likely to implement ABC. Further analysis of the structure measures and their relationship to the adoption and implementation of ABC is in order.


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Martin, J. R. Not dated. Chapter 7: Activity Based Product Costing. Management Accounting: Concepts, Techniques & Controversial Issues. Management And Accounting Web. http://maaw.info/Chapter7.htm
