Impact of Strategic Initiatives in Management Accounting on Corporate Financial Performance: Evidence from Amman Stock Exchange

Impact of Strategic Initiatives in Management
Accounting on Corporate Financial Performance:
Evidence from Amman Stock Exchange
Husam Aldeen Al-Khadash
Mete Feridun
This article aims at investigating the link between the practice of Activ-
ity Based Costing (abc), Just-in-Time (jit), and Total Quality Man-
agement (tqm) as strategic initiatives and the improvement in corpo-
rate financial performance of 56 industrial shareholding companies in
Jordan. Ordinary Least Squares Regression analysis is used to test the
association between the awareness level of the importance of using the
initiatives and the level of adopting these initiatives. It is also used to
identify the improvement in roa as a mean of financial performance
which is associated with the initiatives. Analysis shows that 26.8% of
the companies under consideration use at least one of the strategic ini-
tiatives. In addition, the awareness level of the importance of using the
strategic initiatives is found to be significantly high among the financial
managers, but such awareness is not reflected in the implementation of
these initiatives. Furthermore, strong evidence emerges that the use of
strategic initiatives leads to improvement in financial performance of
the companies under consideration.
Key Words: abc, jit, tqm, strategic initiatives, improvement
in financial performance
jel Classification: e32, e50
Introduction
Productivity and quality are the watchwords in today’s business com-
petition. Companies are not only measuring productivity and insist-
ing on improvements but also insisting that quality means bringing to
market products that satisfy customers, improve sales, and boost prof-
its. With greater competition in the manufacturing environment defined
by cost, quality and time issues, there exists a prevalent conviction that
conventional accounting-based measures of organizational performance
Dr Husam Aldeen Al-Khadash is an Associate Professor at the
Accounting Department of the Hashemite University, Jordan.
Mete Feridun, msc, is a Lecturer at the Faculty of Economics and
Administrative Sciences, Cyprus International University.
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300 Husam Aldeen Al-Khadash and Mete Feridun
are outdated (Nixon 1998). Hence, there are moves to adopt newer tech-
niques due to greater needs to be more responsive to investor and cus-
tomer needs. It is argued that the traditional approaches of managerial
accounting have limited evidence of technical development in response
to the major changes in manufacturing technology in the past 15 years.
Management accounting was the captive of financial reporting. It had
limited value by its focus on the factory floor. Consequently there was
a need for developing a management accounting project oriented to-
wards the strategic accounting rather than the management control pro-
cess. Some of the strategic initiatives techniques are Activity Based Cost-
ing System (abc), Just-in-Time (jit), and Total Quality Management
(tqm). Pricing decisions are usually based on an accurate calculation of
the costs of service and units produced. This is in turn calls for creating
an effective costing system. The most appropriate system in this regard
is an Activity-Based Costing System (abc). In fact, the Activity-Based
Costing System is an alternative system that can replace the conventional
systems used for allocating common costs. However, the growing inter-
est and tendency to use this system is attributed to various advantages
achieved through the system. Perhaps, most prominent of these advan-
tages involve improving performance measures, providing more accu-
rate and appropriate measures for pricing decision-making, rationaliz-
ing production costs, and choosing the optimal production combina-
tion. Another production system, Just-In-Time (jit), adopts a precise
system for inventory control along with an efficient information system
for full coordination between productivity on the one hand, and sup-
pliers on the other hand. In addition, coordination is also sought for
transporting supplies according to proper specifications, quantities and
in a timely manner and within the framework of a stable business en-
vironment. This system reduces costs of production, preparations, re-
operation, transport, disposes of surplus production and waiting time,
and continually improves performance especially within the context of
the prevailing severe competition. Total Quality Management (tqm), on
the other hand, represents a natural expansion of the intensive efforts
which are intended to upgrade and improve firm performance through
quality control of products. The present study aims at filling the gap in
our literature concerning the case of using strategic management ini-
tiatives such as abc, jit and tqm, and to investigate its impact on the
financial performance. Few attempts have been found in terms of de-
veloping countries, and that includes Jordan. Under this reality, many
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Impact of Strategic Initiatives in Management Accounting
301
researchers concluded that most of strategic management practices sur-
veys and literature have focused upon developed countries. Therefore,
the principal objective of this study is to provide evidence about the ex-
tent of using abc, jit and tqm, and to investigate its impact on the
financial performance. Specifically, the objectives of this study are as fol-
lows:
1. Providing an up-to-date description of the level of using abc, jit
and tqm in the Industrial Jordanian Shareholding Companies.
2. Investigating the associations between companies’ financial perfor-
mance and the level of using abc, jit and tqm.
Literature Review
Several studies such as Hendricks and Singhal (1999) have provided ev-
idence that strategic initiatives are associated with improved financial
performance. Some proponents of abc argue that its methods are nec-
essary to trace overhead costs to objects, and thus properly account for
batch and product-level costs (Cooper, 1990), manufacturing complexity
(Jones 1991), specialty produce costs (Srinidhi 1992) and diverse business
environments (Cooper & Kaplan, 1988). Although abc systems are most
of ten associated with manufacturing companies, they can be applied in
all types of organizations (Tanju and Helmi 1991). Many authors recom-
mend using abc to support process improvement (Turney 1991) while
several reservations have been expressed regarding the efficacy of abc
(Innes, Mitchell, and Sinclair 2000). jit is simple in theory but hard
to achieve in practice. This is because a problem anywhere in the sys-
tem can stop all production. Hence, supplies must provide defect-free
materials when they are required and equipments must be maintained
so that machine failures are eliminated. One example: Coca-Cola enter-
prises and fast-food operators in usa have adapted jit strategy and that
leads to reducing the costs and to speeding the flow of finished products
to customers (Atkinson et al. 2001). Total Quality Management (tqm)
has been one of the most popular business models of the last fifteen years,
widely embraced by many organizations (Hendricks and Singhal 1999).
tqm is a concept based on continuous improvement in the performance
of all processes in an organization in the quality of the products and ser-
vices that are the outputs of those processes. Several quality experts have
suggested that a commitment to total quality will result in improved per-
formance in profitability measures (Hendricks and Singhal 1999).
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302 Husam Aldeen Al-Khadash and Mete Feridun
Many previous studies (Roberts and Sylvester 1996; Dixon 1996) sug-
gested that organizations adopted the management initiatives such as
abc, jit and tqm to obtain benefits that directly or indirectly impact
financial performance measures. From the theoretical perspective many
evidences regarding the benefits of abc have been provided (Barnes
1991; Brimson 1991). Empirically researches on abc have generally con-
sisted of modeling the factors that lead to successful abc system. Suc-
cess has been defined as ‘use for decision making’ (Innes and Mitchell
1995; Krumwiede 1998), satisfaction with the costing system, perceived
financial benefits or non financial benefits (Krumwiede 1998; McGowan,
1998). Also some researches such as Cagwin and Bouwman (2000) pro-
vided evidence that abc improves financial performance. A local study
done by (Khasharmeh 2002) about the practice of abc in Jordanian
manufacturing companies in 2002 revealed that only 10% of Jordanian
manufacturing companies use the abc system. It also revealed that 75%
of the respondents agree and 25% strongly agree that the use of abc im-
proves the company’s performance in general. Huson and Nanda (1995)
find that jit adopters have enhanced earnings per share after control-
ling for average industry unit costs, margins, turnover and employees per
sales dollar. Kaynak (1996) finds that financial and market performances
are enhanced for firms using both tqm and jit purchasing. Easton and
Jarrell (1998) find evidence that a very broadly defined tqm is associ-
ated with the variance between actual financial performances. Kinney
and Wempe (1998), on the other hand, report that jit positively affects
roi in the 1–4 year period following jit adoption. Finally Hendricks and
Singhal (1999) find a link between change in roa and implementation of
tqm for a sample of quality award winners.
In light of the theoretical framework of this study and related previous
studies, the null hypotheses are provided as follows:
h01: Jordanian shareholding companies do not use strategic initiatives
(i. e. abc, jit, tqm).
This hypothesis aims at testing the level of applying the new strategic
initiatives which are widely known in management accounting, it will
provide an up-to-date description of the level of using abc, jit and tqm
in the Industrial Jordanian Shareholding Companies.
h02: Financial managers of industrial Jordanian shareholding compa-
nies are not aware enough of the importance of using strategic initia-
tives (i. e. abc, jit, tqm).
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Impact of Strategic Initiatives in Management Accounting 303
It is generally known that using a new strategy in an appropriate way
necessitates that users should be aware enough of the benefits which
come out as a result of that use, otherwise the importance of utilizing
a new strategy will not be sustained, consequently this hypothesis aims
at testing the level of awareness of the financial managers in the Jorda-
nian shareholding companies of the importance of utilizing the strategic
initiatives in management accounting.
h03: No significant relationship exists between the awareness level of fi-
nancial managers of the importance of using abc, jit and tqm and
the level of adopting these initiatives.
This hypothesis aimed at testing if there is any relationship between
the awareness level of using the strategic initiatives and the actual adap-
tation of these initiatives, it is expected that high level of awareness might
lead to more application of the initiatives and, if that is factual, so the
level of adaptation might be predicted with level of awareness.
h04: No significant relationship exists between the level of using abc,
jit and tqm and the financial performance.
From the theoretical point of view and based on the results of some
previous studies it is expected that using strategic initiatives in man-
agement accounting will lead to provide management with a consider-
able information that might enhance the way that the management is
running, and offcourse that will affect the financial performance of the
company. Consequently this hypothesis aims at testing the relationship
between the level of using abc, jit and tqm and the financial perfor-
mance.
In order to support the result of this hypothesis the following one is
also suggested to see if any difference exists between the financial per-
formance of Industrial Jordanian Shareholding Companies which use at
least one of the initiatives and those are not.
h05: No significant difference exists between the financial performance
of Industrial Jordanian Shareholding Companies which use at least
one of the initiatives (i. e. abc, jit, tqm) and those companies which
do not use any of such initiatives.
Data and Methodology
The study population consists of all Industrial Jordanian Shareholding
Companies which are listed at Amman Stock Exchange by the end of
2003. However, the following companies will be excluded:
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304 Husam Aldeen Al-Khadash and Mete Feridun
1. Companies which are still in the foundation phase and which have
not yet commenced their business operations.
2. Companies whose shares have not been traded within Amman
Stock Exchange during 2003.
3. Companies under liquidation.
The industrial companies sector has been selected for conducting this
study because it is one of the largest sectors listed within the Amman
Stock Exchange, and which most needs to implement modern concepts
of managerial accounting (i. e. abc, jit, tqm). The total number of
companies included was 59, and phone calls were made to all these
listed industrial companies to identify those companies which applied
the strategic initiatives. In other words, this total number (59) is thought
to be ‘large’ enough from which to get meaningful and reliable results
and ‘small’ enough not to consider determining a sample. Out of the
total (3) companies did not cooperate, so at the end (56) companies were
investigated. It is found that six companies are using the abc and eight
companies are using the jit while just four companies are using the con-
cept of tqm. In total, the number of companies which use at least one of
the initiatives was 15 out of 59. The survey was sent to the 59 companies
and the financial managers were asked to answer some specific questions
and to indicate their level of agreement with a number of closed-end
statements. These statements are based on a five-point scale. The survey
was personally handed to all respondents. To improve the response rate,
all selected companies were then followed up with a phone call and later
on by a personal visit to collect the ‘filled’ copy of the survey. A striking
feature of our survey is the response rate. Due to the fact that the head-
quarters of most of the companies are located in the capital (Amman),
and a specific person has been appointed for a period of two months
to follow up the respondents and to collect all responses, it is not really
surprising that the response rate is about 95%.
data collection tool (questionnaire)
The survey instrument was developed based on the discussion presented
in the theoretical framework and the questions were developed after a
thorough review of strategic management techniques survey questions
found in prior research. Questions were reviewed, critiqued by other
quality researchers and accounting departments at several universities
and went through several rounds of revisions. Careful attention was
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Impact of Strategic Initiatives in Management Accounting 305
given to making sure that the wording of each question was clear, con-
cise and described only one concept. The survey intended to measure
the extent to which level Industrial Jordanian Shareholding Companies
are using strategic initiatives of managerial accounting (i. e. abc, jit,
tqm) along with the extent of the financial managers’ belief in the im-
portance of such use, and their awareness of such importance. The main
four parts of the questionnaire are as follows: Part One which seeks to
find out the extent of using the initiatives (i. e. abc, jit, tqm) and the
respondent’s belief in the importance of using such initiatives. Part Two
aims to measure the degree of awareness on the implementation of the
Activity-Based Costing (abc) system. Part Three is intended to measure
the degree of awareness on the implementation of the Just-In-Time (jit)
production system and finally Part Four is designed to measure the de-
gree of awareness on the implementation of concepts of Total Quality
Management (tqm). It is noteworthy that the answers to questions in
parts two, three and four have been worded by using the Likert scale for
measuring degrees of agreements. So, five answers have been given to
determine the extent of responses (i. e. extremely large, large, medium,
little and very little).
methods of data analysis
For the purpose of analyzing the data and testing the hypotheses, the cur-
rent study used the descriptive statistical analysis such as the mean and
the standard deviation, also simple regression analysis is used to test the
association between the level of awareness of the importance of using the
initiatives and the level of adopting these initiatives. Multiple regression
analysis is used to identify the improvement in roa as a mean of finan-
cial performance which was associated with the initiatives. Furthermore
one sample t-test is used to test hypothesis number 5.
the models of the study and analyzing the results
As mentioned earlier, the survey instrument intended to gather infor-
mation about the level of using the well-known strategic initiatives: abc,
jit and tqm in addition to some information about financial managers’
awareness of the importance of using these initiatives. Also annual re-
ports were used to collect information about the roa in order to test
to what extent the initiatives are related to the level of financial perfor-
mance (roa). As expected, and as has been noted by some other studies
such as Balakrishnan, Linsmeier, and Venkatachalam (1996) in their dis-
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306 Husam Aldeen Al-Khadash and Mete Feridun
table 1 Non-users vs. formal users of initiatives
Initiatives (abc, jit and tqm)
Number
Percentage
Users
15
26.8%
Non-users
41
73.2%
Total
56
100%
table 2 The Awareness Level of the Importance of Using Initiatives
abc
jit
tqm
Mean
4.475
4.393
4.467
Std.
0.48
0.63
0.51
cussion of strategic initiatives, a firm’s pre-adoption operating efficiency
will influence its roa response to the increased efficiency of initiatives
use. The strategic initiatives implementation variables measure the ex-
tent to which a firm is actually practising the strategic initiatives philos-
ophy. The variables are expressed as a percentage of total possible strate-
gic initiatives implementation, and calculated using the responses to the
management practices questions from the survey. As tabulated in table 1,
it is noted that (26.8%) of the selected companies showed a use of at least
one of the strategic initiatives i. e. abc, jit and tqm.
Consequently, the first null hypothesis will be rejected and we can
say that the Industrial Jordanian Shareholding Companies are using the
strategic initiatives.
the level of awareness
In order to reach a level of good practice of the strategic initiatives, there
is a need to get support from the top management. The top management
might do so if it is aware enough of the importance of using the strategic
initiatives. Top management is responsible for strategic planning, setting
goals, authorizing strategic initiatives and allocating resources to enable
implementation and support of all plans and initiatives. Top manage-
ment awareness and commitment is necessary to implement and sustain
a quality program and is an essential element for achieving successful
implementation of strategic initiatives (Ahire, Golhar, and Waller 1996;
Barker and Cagwin 2000). The results of analyzing the answers to the
questions were used to measure the top management awareness, and are
shown in table 2.
Consequently, and based on the results shown in table 2, it might be
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Impact of Strategic Initiatives in Management Accounting 307
concluded that financial managers of Industrial Jordanian Shareholding
Companies are aware enough of the importance of using the strategic
initiatives, i. e. abc, jit and tqm. The means for initiatives are all above
4, so hypothesis number two is rejected, since the maximum score was 5
which indicates strongly agree.
The Association between Adopting the abc, jit and tqm and the
Awareness Level of the Importance of Using the Initiatives:
This section comes to test if there is any association between the aware-
ness level of the importance of using abc, jit and tqm and the level
of practicing the initiatives. It might be argued that if the managers are
aware enough of the importance of using the initiatives, then the level of
practicing these initiatives is higher in comparison with a case of lower
level of awareness. Consequently, testing of hypothesis number three is
achieved through estimation of the following regression models:
ABCit = a + 1AABCit + eit,
(1)
where
ABCit represents the level of adopting the abc,
AABCit represents the awareness level of financial managers of the im-
portance of using the abc,
eit represents the unexplained error of the regression model utilized.
JITit = a + 1AJITit + eit,
(2)
where
JITit represents the level of adopting the jit,
AJITit represents the awareness level of financial managers of the im-
portance of using the jit,
eit represents the unexplained error of the regression model utilized.
TQMit = a + 1ATQMit + eit,
(3)
where
TQMit represents the level of adopting the tqm,
ATQMit represents the awareness level of financial managers of the
importance of using the tqm,
eit represents the unexplained error of the regression model utilized.
As shown in table 3 none of the suggested regression models was sig-
nificant at the level of .05. This result confirms that no relationship exists
between the awareness level of the financial managers of industrial Jor-
danian shareholding companies of the importance of using abc, jit and
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308 Husam Aldeen Al-Khadash and Mete Feridun
table 3 Use of Management Initiatives and the Awareness Level
Regression model
Adjusted R2
F
Sig.
Regression model 1 (abc)
.253
4.045
.079
Regression model 2 (jit)
–.087
.277
.613
Regression model 3 (tqm)
.042
1.391
.272
tqm and the level of adopting abc, jit and tqm respectively. Conse-
quently hypothesis three is accepted. This result gives an indicator that a
high level of awareness is not associated with a real practice of the initia-
tives, an expected explanation for such results might be that while finan-
cial managers are aware enough to the importance of using the strate-
gic initiatives of managerial accounting as shown in the previous results,
the top management – which is the decision maker – probably does not
take a real action toward adopting these initiatives. So the high awareness
level of financial managers does not mean a high awareness level of top
management.
test of association between strategic initiatives
and financial performance
Testing of hypothesis number four is achieved through estimation of the
following multiple regression:
ROAit = +1ABCit + 2JITit + 3TQMit + eit,
(4)
where
ROAit represents the change on return on assets,
ABCit represents the level of adopting the abc,
JITit represents the level of adopting the jit,
TQMit represents the level of adopting the tqm.
The result of testing model 4 shows a significant relationship between
financial performance and the level of using strategic initiatives. Conse-
quently, and based on the figures shown in table 4 and table 5, hypothe-
sis number four is rejected, so it might be argued that the level of using
abc, jit and tqm has a positive effect with the financial performance.
This confirms with the results of the previous studies which found a sig-
nificant positive association between the use of management initiatives
and improvement in financial performance.
Furthermore, a t-test is utilized in order to test hypothesis number
five which examines if any difference exists between the financial perfor-
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