Effects of activity-based costing on financial performance in small and medium-sized enterprises

Abstract

Small and medium sized enterprises (SMEs) are a major determinant in the success of most economies. Their performance usually has a significant effect on the GDP and considering their position as a considerable employer of private sector workers in most developed countries, is their success in the ever-tightening competition in the domestic and global markets vital to any economy.

Activity based costing (ABC) has been around for a long time, first being introduced by Kaplan and Johnson in 1987. It is widely used across corporations and other organizations to allocate costs to different activities to pinpoint inefficiencies in production and thus to create competitive advantages through improved productivity.

A lot of research has been conducted into the use of ABC by large organizations. There seems to, however, have been much less interest in the use of ABC in SMEs. The objective of this thesis is to review the existing literature and research on the topic and form a comprehensive overview of the effects of adopting ABC in SMEs’ profitability and answer the question: Is the adoption of ABC beneficial to financial performance in SMEs.