Activity-Based Cost Management Practices in India: An Empirical Study

Abstract

This is a study of activity-based cost management practices being followed by the corporate India. The aim is to understand the whether corporate India practices cost management in a value-chain analytic framework.

A nationwide survey has been conducted to capture the issues in the design and applications of contemporary cost and performance management tools. The universe for the present study consisted of the bt-500 private sector companies and 75 most valuable PSUs, which is a fair representation of the corporate India. Fifty-three completed questionnaires have been received. The study is essentially of large-sized corporate firms using activity-based cost management.

The examination of responses conditional on ABC-adoption revealed that the firms who have adopted ABC were significantly more successful in capturing accurate cost information for value chain analysis and supply chain analysis vis-a-vis the firms who had not adopted ABC. The extent of ABCM adoption in the service sector had not been found significantly different from that in manufacturing sector.

To have detailed information on value added and non-value added activities followed by the need to be competitive in the industry in terms of price quality and performance is the major motivation for the introduction of the activity-based costing. The management motivations for adoption of activity-based costing is significantly higher in case of manufacturing sector firms vis-a-vis service sector firms only in case of product/service pricing decisions. The need for customer profitability analysis and budgeting led the corporate India to extend their ABC-systems from basic level to advanced level, extending it to facility level and customer level activities.

The ABCM-user respondent firms faced problems in the area of developing activity dictionary, inability of traditional costing system to capture the information needs of ABC, and lack of review of ABC implementation initiative, while introducing activity-based cost systems. The resources, both management time and funds have not been found to be limiting factor.

The introduction of activity based costing system in corporate India has brought quantum change and associated incremental cash benefits in different areas such a focus on profitable customers, change in product pricing strategy, elimination of redundant activities through the entire value chain, product mix and outsourcing decisions. It led to change in the strategic focus. The ABCM-user respondent firms are using activity-based cost management in value chain analytic framework.

Keywords: Activity-Based Costing, Activity-Based Cost Management, Practices, India

JEL Classification: M41