This study investigates the improvement in financial performance that is associated
with the use of activity-based costing (ABC), and the conditions under which such
improvement is achieved. Internal auditors furnish information regarding company
financial performance, extent of ABC usage, and enabling conditions that have been
identified in the literature as affecting ABC efficacy. Confirmatory factor analysis
and structural equation modelling are used to investigate the relationship between
ABC and financial performance.
Results show that there indeed is a positive association between ABC and improvement
in ROI when ABC is used concurrently with other strategic initiatives, when implemented
in complex and diverse firms, when used in environments where costs are relatively
important, and when there are limited numbers of intra-company transactions. In addition,
measures of success of ABC used in prior research appear to be predictors of improvement
in financial performance.