World Review of Science, Technology and Sustainable Development, Vol. 2, No. 1, 2005
Adoption of advanced manufacturing technology (AMT) and management accounting practices: the case of manufacturing firms in Malaysia Che Ruhana Isa* Department of Management Accounting & Taxation, Faculty of Business and Accountancy, Lembah Pantai, University of Malaya, Kuala Lumpur 50603, Malaysia E-mail:
[email protected] *Corresponding author
Soon-Yau Foong Graduate School of Management, University Putra Malaysia, 43400 UPM, Serdang, Selangor, Malaysia E-mail:
[email protected] Abstract: This paper examines advanced manufacturing technology (AMT) adoption in manufacturing firms and its relationship with management accounting practices. Advancements in technology and trade liberalisation have significantly intensified competition in the domestic and the international markets. One of the strategies for manufacturing firms to become agile and responsive to market changes is to adopt AMT, which often results in drastic changes in the production cost structure. Hence, it is conjectured that AMT adoption would lead to adoption of new costing methods, such as activity-based costing (ABC) and a higher emphasis on non-financial performance measurement indicators (PMIs). Results from this study offer mixed support for the predictions on the hypothesised relationship between AMT adoption and certain management accounting practices. Keywords: management accounting practices; advanced manufacturing technology (AMT); performance measurement indicators. Reference to this paper should be made as follows: Isa, C.R. and Foong, S-Y. (2005) ‘Adoption of advanced manufacturing technology (AMT) and management accounting practices: the case of manufacturing firms in Malaysia’, World Review of Science, Technology and Sustainable Development, Vol. 2, No. 1, pp.35–48. Biographical notes: Che Ruhana Isa is a Senior Lecturer in accounting at the University of Malaya, Malaysia. She received her PhD in accounting from the Graduate School of Management, Universiti Putra Malaysia. She has published and presented several papers in academic journals and international conferences in the area of management accounting change. Her current research interests focus on management accounting change, new management accounting practices and behavioural influences on accounting.
Copyright © 2005 Inderscience Enterprises Ltd.
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C.R. Isa and S-Y. Foong Soon-Yau Foong is an Associate Professor at the Graduate School of Management in University Putra Malaysia. She is a qualified Chartered Accountant and received her PhD in Information Systems from the University of New South Wales, Australia. She has published research papers in both academic and professional journals. Her current research interests include the design of management accounting and control systems, knowledge management and intellectual capital reporting and measurement.
1
Introduction
Trade liberalisation and advancements in manufacturing and information technologies have significantly intensified competition, both in the domestic and the international markets (Laitinen, 2001; Lukka and Sheilds, 1999; Prahalad, 1998). In response to the escalation in market competition, manufacturing firms are constantly reviewing and revising their manufacturing strategies to stay competitive (Mia and Clarke, 1999; Yakou and Dorweiler, 1995). Among the strategies typically adopted by these firms to achieve this goal is adoption of advanced manufacturing technology (AMT). The changes in the manufacturing strategies and processes often necessitate appropriate changes in their management accounting practices to take into account of the changing production cost structure. For decades, scholars and practitioners have shown a considerable amount of interest in issues related to appropriate management accounting practices for manufacturing firms in the advanced manufacturing environment. Numerous debates have been held questioning the capability of the traditional management accounting practices in providing adequate, relevant, timely and accurate information to management for planning, control and decision-making purposes in the new manufacturing environment (Bjørnenak and Olson, 1999; Cooper, 1996; Cooper and Kaplan, 1988; Drury and Tayles, 1995; Johnson and Kaplan, 1987; Kaplan, 1984). The remainder of this paper is organised in the following manner. Section 2 provides development of the theoretical framework that depicts the relationships under investigation. Section 3 presents the sample description and measures. The descriptive statistics and results of the empirical findings follow in Section 4. Finally, discussion and conclusions are presented in Section 5.
2
Literature review
2.1 Theoretical framework Market competition has become more global based as a result of trade liberalisation under World Trade Organisation (WTO) through multilateral trading system. Advances in information and communications technology (ICT) have changed the manner in which data and information are being collected, measured, analysed and disseminated within and between organisations (Atkinson et al., 1997). In order to cope with the turbulence and uncertainty in the marketplace, it has been argued that organisations need to equip themselves with appropriate responses to the threats and opportunities and ensure that they design and use appropriate control systems for this purpose (Burchell et al., 1980; Khandwalla, 1973; Khandwalla, 1977).
Adoption of advanced manufacturing technology
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Management accounting and control systems (MACS) play a vital role in monitoring the strategic progress of a firm through a feedback information system. The growing concern among accounting professionals and academics on the adequacy of the traditional MACS in meeting the current information needs of the firms, has led to a number of ‘new or claimed to be new’ management accounting practices, such as new product costing techniques, strategic cost analysis, quality management and others (Libby and Warehouse, 1996). These new costing approaches allow more accurate tracing of costs to products and thus should result in improved decisions. The traditional volume-based approach of allocation of production overhead costs to products and services is criticised as over-simplistic and does not reflect the complexity of products (Kaplan, 1984). However, empirical research has shown that the traditional management accounting practices are still widely used in firms, possibly due to the lack of knowledge of the other alternatives and the high financial costs of changing the existing costing systems (Chenhall and Langfield-Smith, 1998; Drury and Tayles, 1995; Johnson and Kaplan, 1987). Companies surveyed in the UK and the USA (for example Drury et al., 1993; Cohen and Paquette, 1991) used standard costing systems with an adoption rate of more than 80%. In more recent studies carried in Australia (Chenhall and Langfield-Smith, 1998) and in New Zealand (Guilding et al., 1998), the researchers documented similar findings. In both countries, standard costing systems were still widely used with adoption rates of over 70%. Using a sample of Malaysian manufacturing firms, this study seeks to explore the relationship between the level of AMT adoption and the types of costing and performance measurement practices in these firms.
2.2 Advanced manufacturing technology New manufacturing strategy often involves the adoption of new technologies and changes in the organisational structures and practices, such as just-in-time (JIT) and total quality management (TQM) that may result in radical changes in the way business is conducted (Young and Selto, 1991). The AMT adoption encompasses the adoption of advanced technologies and the integration of various computer applications in the production planning and processes. The AMT applications include applications such as computer integrated manufacturing (CIM), computer-aided design (CAD), computer-aided engineering (CAE), flexible manufacturing systems (FMS), material requirements planning (MRP I), manufacturing resource planning (MRP II) and enterprise resource planning (ERP). The CIM system automates manufacturing through integrating the manufacturing processes by using ICT to allow information flows between people and equipment. Activities including product design, development, engineering, manufacturing, inventory control, marketing, sales, field support and service can be fully integrated and automated. The CIM can significantly improve quality, reliability and manufacturing flexibility (Kaplan, 1986; Schroder and Sohal, 1999). Kaplan (1986) argues that the manufacturing flexibility attribute allowed for in CIM enables such IT investment a longer useful life than traditional manufacturing process investments. Furthermore, investments in AMT offer other benefits, tangible and intangible, such as reduced inventory levels, savings in floor space, lower throughput and lead times and acceleration of the learning phase.
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2.3 Implications of AMT adoption on management accounting practices Generally, the fundamental objectives of management accounting in an AMT environment remain the same as in the traditional manufacturing setting: to cost products, value inventory, measure performance and make investment decisions (Jeans and Morrow, 1989). However, while the traditional management accounting practices may be still useful under certain circumstances, the new manufacturing environment has posed new challenges to these traditional management accounting systems. The drastic changes in today’s competitive business environment and advancements in manufacturing technology have a number of implications for accounting. Clarke (1995) identifies five implications for accounting: changes in cost patterns and cost behaviour, reduced inventory and reduced emphasis on inventory accounting, declining relevance of standard costing systems, changing nature of capital investments and the increasing importance of non-financial performance indicators. These implications point towards the need for new management accounting practices to meet the challenges of the new manufacturing environment. In this intensely competitive environment, accurate information about product costs and a performance measurement system that allows effective monitoring of a firm’s strategy are critical for survival and sustained profitability. Automating the manufacturing processes requires large-scale capital investments and as a consequence, drastic changes in the firm’s production cost structure; costs are shifting from being mostly variable to mostly fixed and the amount of direct labour shrinks significantly, while costs for indirect and highly skilled labour increase significantly. The growing amount of fixed costs requires the management to have a better understanding of the cause–effect relationship between resource consumption and level of activity. Thus, the idea of using multiple overhead application rates, such as those used in an activity-based costing (ABC) system is gaining popularity (Cooper and Kaplan, 1988). The AMT adoption leads to changing manufacturing operations and information needs, and changes to the traditional MACS are required to meet those needs (Johnson and Kaplan, 1987). The MACS play an important role in providing the information needed for companies to formulate strategies to meet the rapid changes in the business environment. New management accounting practices, such as ABC and non-financial performance measurement indicators, can enhance the quality and relevance of information needed by management. When environment changes and the level of AMT adopted increase, managers are expected to make a greater and more frequent use of management accounting information for decision making. It is conjectured that a higher level of AMT adoption is associated with a more extensive use of new costing systems, such as ABC and non-financial performance measure indicators. This paper aims to examine the following research questions: •
what is the current level of AMT adoption among the manufacturing firms in Malaysia?
•
is there any significant difference in the level of AMT adoption between users and non-users of certain costing systems, performance measurement indicators and other innovative management reports?
Adoption of advanced manufacturing technology
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Method
3.1 Sample Questionnaires were mailed out to 1000 manufacturing firms randomly selected from the 2001–2002 Federation of Malaysian Manufacturers (FMM) Directory. A total of 122 responses were received, which represented a response rate of 12.2%. The respondents comprised senior level managers, including chief executive officers, general managers and management accountants. Ten responses came from those with less than one year working experience and were excluded from the analysis because they might not be familiar with their organisations’ previous operations to provide reliable information for our analysis. Two incomplete responses were also taken out from the analysis. Finally, a total of 110 responses were chosen for the final analysis. To check for response bias, two procedures, similar to those utilised by Williams and Seaman (2001), were used. First, the final sample was dichotomised according to size based on sales turnover. Response bias did not appear to be problematic since the cross-correlation for all variables in the two groups was not significantly different. Second, the final sample was divided into two groups: early and late responses. Similar to the first procedure, no significant differences were found.
3.2 Measure of AMT adoption The instrument for measuring AMT adoption was adapted from Snell and Dean (1992). It consisted of a 22-item question, sub-divided into two categories: advanced technology applications and computer integration in the production process. The respondents were asked to rate the level of application for each item on a scale of 0 (not used at all) to 5 (very widely used) and the corresponding importance of that application to the firm’s operation on a scale of 0 (not applicable/not used at all) to 5 (extremely important). A weighted measure of each AMT adoption was computed by taking the square root of the product of the rating score for the level of application and the rating score for its importance. The 22 weighted measures were then added and averaged to obtain an index of overall AMT adoption for each firm. A high score of the index indicates high level of AMT adoption.
4
Results
4.1 Descriptive statistics 4.1.1 Profile of firms Table 1 displays the types of firms, which participated in this survey. The firms came from the following industries: electrical and electronics (33% or 30.0%); food, beverage and tobacco (10% or 9.1%); textile, clothing and footwear (3% or 2.7%), transport and automotive (8% or 7.3%); wood and timber products (9% or 8.2%); metallurgical (15% or 13.6%); chemical and plastic manufacturers (25% or 22.7%) and others (7% or 6.4%), comprising mainly of cement or ceramic tiles manufacturers. The proportions of locally owned and foreign owned firms were almost equal, 54 (49.1%) were locally owned firms and 56 (50.9%) were foreign owned firms. A majority of these firms (85% or 78%) had
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C.R. Isa and S-Y. Foong
been in operations for more than ten years, 18 (16.5%) for between five and ten years, and 6 (5.5%) for less than five years. In terms of number of employees, 11 (10.2%) of the firms had 100 or less employees, 54 (50%) had between 101 and 500 employees and 43 (39.8) had more than 500 employees. Fifty-nine (56.8%) of the firms had reported a total shareholders’ fund of RM50 million or less1 and 45 (43.2%) had more than RM51 million total shareholders’ fund. A total of 14 (13.5%) firms had reported a total annual sales turnover of RM25 million or less, 37 (35.5%) had a total annual sales turnover between RM26 and RM100 million and 53 (51%) had a total annual sales turnover of more than RM100 million. Table 1
Profile of sample firms
Background variable
Category
Frequency
Percentage (%)
Type of industry
Electrical and electronics
33
30.0
Food, beverage and tobacco
10
9.1
Textiles, clothing and footwear
3
2.7
Transport and automotive
8
7.3
Wood and timber products
Ownership structure Years of operation
Number of employees Shareholders’ fund
9
8.2
Metallurgical
15
13.6
Chemicals and plastic
25
22.7
Others
7
6.4
Local
54
49.1
Foreign
56
50.9
Less than five years
6
5.5
Between five and ten years
18
16.5
More than ten years
85
78.0
0–100
11
10.2
101–500
54
50.0
More than 500
43
39.8
Less than RM2.5 million Between RM2.5 and RM50 million
Annual sales turnover
6
5.8
53
51.0
More than RM50 million
45
43.2
Less than 25 million
14
13.5
Between RM26 and RM100 million
37
35.5
More than RM100 million
53
51.0
4.1.2 AMT adoption The mean scores and standard deviations for the AMT adoption are summarised in Table 2. The Cronbach (1951) alpha coefficients for the items ranged from 0.77 to 0.91, which fall within the acceptable levels of reliability (Nunnally, 1967). The mean score for overall AMT adoption index was 2.81. The most extensively used AMT application was MRP (mean = 3.47), followed by CAD (mean = 3.16). Both of these applications involve the use of computer software for inventory planning and product design. The least used
Adoption of advanced manufacturing technology
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application was DNC (mean = 2.11). The computer integrations were most extensively used in quality control and materials planning (mean = 3.52), production scheduling and maintenance (mean = 3.46) and materials handling and quality control (mean = 3.46). The least computer integrated was in component manufacturing and assembly (mean = 2.81). Table 2
Mean scores and standard deviations for AMT adoption (n = 110)
Variable
Mean
SD
Mean
SD
Robotics
2.22
1.72
Design-development/ planning
3.14
1.50
CIM
2.68
1.67
Planning/component manufacturing
3.23
1.50
CAM
2.85
1.71
Component manufacturing/assembly
2.81
1.52
CAE
2.66
1.65
Assembly/scheduling
3.12
1.46
CAD
3.16
1.63
Scheduling/maintenance
3.46
1.15
NC
2.73
1.65
Maintenance/material handling
3.22
1.25
CNC
2.72
1.67
Material handling/QC
3.46
1.15
QC/material management
3.52
1.21
3.19
1.10
Advanced technology
Computer integration
DNC
2.11
1.46
Automated material handling
2.57
1.52
CA testing and inspection
2.90
1.57
ERP
2.80
1.65
MRP II
2.88
1.62
MRP
3.47
1.43
Automated warehousing
2.27
1.49
Overall for computer
Overall for technology (0.77)a
2.62
1.14
Integration (0.91)a
a
Overall AMT (0.91)
Mean = 2.82 and Standard deviation = 1.06
a
Cronbach alpha in brackets. Scale: 0 (not applicable) to 5 (very widely used high/extremely important).
4.2 Relationship between AMT adoption and management accounting practices 4.2.1 Costing methods The mean scores on the level of AMT adoption for the users and those for the non-users of various costing methods are presented in Table 3. The table indicates that the traditional costing methods, such as standard costing, were widely used. Standard costing system was used by 83 (77%) of the firms surveyed, while ABC was used by only 25 (23%) of the firms. The adoption rate of standard costing system in this study is comparable with 80% adoption rate found in companies surveyed in the UK and USA (Cohen and Paquette, 1991; Drury et al., 1993). The t-tests indicate that the AMT adoption level was higher for users of the standard (p = 0.008), process (p = 0.016), activity-based (p = 0.001) and marginal (p = 0.089) costing systems, as compared
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C.R. Isa and S-Y. Foong
to that of non-users of such costing systems. This finding indicates that firms with high level of AMT adoption tend to practice more extensively the new costing method such as ABC, as well as some of the traditional costing systems, such as standard and process costing systems. Table 3
Mean scores on AMT adoption for users and non-users of various costing methods
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By dichotomising the sample firms into low and high AMT adoption firms, using the middle point of the adoption index as the dividing point, Table 4 shows that 66.3% of standard costing users, 71.1% of marginal costing users, 55.3% of full costing users, 63.2% of the job order costing users, 75% of process costing users and 88% of ABC users were high AMT adopters. These percentages are consistent with the earlier findings that firms with high level of AMT adoption tend to be users of the various costing systems. Table 4
Frequencies of usage of costing methods between low and high AMT adopters Frequencies of usage of costing methods between low and high AMT adopters
AMT Level
Standard costing
Marginal costing
Full costing
Job order costing
Process costing
ABC
Low
28 (33.7%)
11 (28.9%)
17 (44.7%)
7 (36.8%)
9 (25.0%)
3 (12.0%)
High
55 (66.3%)
27 (71.1%)
21 (55.3%)
12 (63.2%)
27 (75.%)
22 (88.0%)
4.2.2 Performance measurement indicators (PMIs) Table 5 shows the means and standard deviations for AMT adoption for users and non-users of various PMIs. The level of AMT adoption was higher for users of all PMIs, except for two PMIs, profitability analysis and productivity measures. The t-tests indicate that the AMT adoption level was higher for users of PMIs, ‘growth in market share’ (p = 0.009), ‘cash-flow and liquidity’ (p = 0.029), ‘financial stability’ (p = 0.070) and ‘manufacturing flexibility’ (p = 0.090). For usage of non-financial performance measurement indicators, it was found that firms with higher level of AMT adoption generally use the non-financial PMIs, such as customer delivery, quality, manufacturing flexibility and innovation more extensively than firms with low level of AMT adoption, even though only a significant difference was found for the manufacturing flexibility measure. Consistent with the earlier findings, Table 6 indicates that these PMIs were used more extensively among the high AMT adopters, as compared to the usage by low AMT adopters.
4.2.3 Other innovative management reports Table 7 presents the levels of AMT adoption for users and non-users of other innovative management reports. The users of suppliers’ performance report (p = 0.001) and benchmarking report (p = 0.000) and product-line profitability report (p = 0.084) tended to have a higher level of AMT adoption than the non-users of such reports. Table 8 also shows that these innovative management reports were used more extensively among the high AMT adopters, as compared to the usage by low AMT adopters.
44 Table 5
C.R. Isa and S-Y. Foong Mean scores on AMT adoption for users and non-users of various PMIs
Adoption of advanced manufacturing technology Table 5
45
Mean scores on AMT adoption for users and non-users of various PMIs (continued)
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C.R. Isa and S-Y. Foong
Table 6
Frequencies of usage of PMIs between low and high AMT adopters Frequencies of usage of PMIs between low and high AMT adopters
AMT level
Variance analysis
Profitability analysis
Growth in mkt. share
Cash flow liquidity
Financial stability
Productivity
Low
31 (36%)
40 (40%)
15 (28.3%)
22 (32.4%)
16 (32%)
35 (39.3%)
High
55 (64%)
60 (60%)
38 (71.7%)
46 (67.6%)
34 (68%)
54 (60.7%)
Quality
Manufacturing flexibility
Innovation
22 (34.4%)
31 (37.4%)
14 (32.6%)
10 (45.5%)
42 (65.6%)
52 (62.6%)
29 (67.4%)
12 (54.5%)
Customer delivery Low High Table 7
Mean scores on AMT adoption for users and non-users of other innovative management reports Supplier’s performance
Mean score (SD) Individual sample t-test
Customer profitability
Product-line profitability
Benchmarking
User (n = 50)
Non-users (n = 60)
User (n = 41)
Non-users (n = 69)
User (n = 82)
Non-users (n = 28)
User (n = 51)
Non-users (n = 59)
3.19 (1.02)
2.50 (1.01)
2.92 (1.16)
2.75 (1.01)
2.71 (1.08)
3.11 (0.92)
3.20 (1.03)
2.48 (0.99)
t = –3.508 (p = 0.001)*
t = –0.790 (p = 0.431)
t = 1.743 (p = 0.084)**
t = –3.712 (p = 0.000)*
*p significant at 0.10. **p significant at 0.05. Table 8
Frequencies of usage of other innovative management reports between low and high AMT adopters Supplier’s performance
Customer profitability
Product-line profitability
Benchmarking
Low
12 (24%)
15 (36.6%)
32 (39%)
14 (27.5%)
High
38 (76%)
26 (64.4%)
50 (61%)
37 (72.5%)
5
Discussion and conclusions
The objective of the study is to examine whether the level of AMT adoption in manufacturing firms in Malaysia influences the types of costing and performance measurement practices. It is conjectured that adoption of AMT will lead to a more extensive usage of new costing systems, such as ABC and a greater emphasis on non-financial PMIs and other innovative management reports. Firms adopt AMT to improve efficiency and productivity and the adoption of AMT often results in changes in the manufacturing cost structures and the information needs for decision making. Thus, the management accounting reporting systems have to change to be effective in meeting the changing needs of organisations.
Adoption of advanced manufacturing technology
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The results of this study provide some empirical evidence on the influence of the level of AMT adoption on certain management accounting and reporting practices. This study provides mixed support for the contentions that high level of AMT adoption will lead to high adoption of certain management and reporting practices. Consistent with the findings of the studies conducted in other countries (e.g., Chenhall and Langfield-Smith, 1998; Drury et al., 1993; Guilding et al., 1998), this study shows that the traditional standard costing and variance analysis techniques are still widely prevalent among the manufacturing firms in Malaysia. In addition, the findings indicate that while these methods are widely used by the firms with high level AMT adoption, these firms also supplement the traditional approaches with new costing approaches, such as ABC. Similarly, both the financial and non-financial PMIs are widely used, but the firms with the higher AMT adoption tend to use them more extensively as compared to firms with the lower AMT adoption. The use of other innovative management reports, such as supplier’s performance, customer profitability, product-line profitability and benchmarking, is found to be more prevalent among firms with the higher AMT adoption. The study is subject to all the limitations associated with survey research. There are at least two limitations to the study that may limit the generalisation of this study’s findings and need to be addressed. First, this study covers only manufacturing firms. It is possible that other types of industries such as service industries may provide different results. Second, the types of AMT used in the study are not exhaustive and may have excluded certain pertinent types of technology.
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Note 1
Exchange rate: USD 1 = RM3.80.
