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Management Accounting Research, 2002, 13, 1–39 doi: 10.1006/mare.2001.0175 Available online at http://www.idealibrary.com on

The association between activity-based costing and improvement in financial performance
Douglass Cagwin* and Marinus J. Bouwman†

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. c 2002 Elsevier Science Ltd. All rights reserved. Key words: activity-based costing; new business initiatives; ABC success; structural equation models.

1. Introduction Activity-based costing1 (ABC) has been promoted and adopted as a basis for making strategic decisions and for improving profit performance for over a decade
*Assistant Professor of Accounting, School of Business, University of Texas at Brownsville, Brownsville, TX 78520, U.S.A. Tel: (956) 983-7300. E-mail: dcagwin@utb1.utb.edu. †Ralph L. McQueen Associate Professor of Accounting, Sam M. Walton College of Business, University of Arkansas, Fayetteville, AR 72701, U.S.A. Tel: (501)

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