The Impact of Activity-Based Costing Techniques on Firm Performance

Given the debate in both the professional and scholarly literature on the effectiveness of management accounting systems in the contemporary business environment, there is a need to understand more about the impact of activity-based costing (ABC). In this paper, we show that the choice of a management accounting system, such as ABC, may have a significant impact on firm value. Specifically, for a sample of U.K. firms, we show that firms adopting activity-based costing techniques outperform matched non-ABC firms by approximately 27 percent over the three years beginning on January 1 of the year in which the ABC techniques are first implemented. This result is robust to different matching criteria and for both accounting and market-based measures of performance. Further analysis suggests that ABC adds to firm value through better cost controls and asset utilization, coupled with greater use of financial leverage.