The relation between cost system The relation between cost system functionality and contingent factors: functionality and contingent factors:

an empirical study of Greek hotelsan empirical study of Greek hotels

Dr Odysseas PavlatosAthens University of Economics an Business

Department of Accounting and Finance

Presentation Outline

1. Research objective2. Literature review3. Research hypotheses4. Research methodology5. Survey results6. Conclusions, limitations and future research

Introduction

Contingency theory and management accounting systems (Emmanuel et al, 1990)

Cost system design and contingent factors (Chenhall, 2003) Accounting literature identifies at least five critical attributes of the

cost system design: the level of detail provided the ability to disaggregate costs according to behavior the frequency with which information is reported the accuracy of cost data the extent to which variances are calculated (Pizzini, 2006)

More functional cost systems, managerial decision making and performance (Cooper and Kaplan, 1991; Johnson, 1992)

Research objective

That paper is a response to recent calls by Chenhall (2007; 2003) and Gerdin (2005) for additional research “….to increase our understanding of contingent factors explaining cost system design and management control systems…..”

This study investigates associations between cost system functionality and contingent factors

The Hospitality Industry Research in cost system design has traditionally focused on cost

systems of large manufacturing companies (Sharma, 2002)

Accounting researchers interested in service production have conducted their research in non profit, public sector organizations (Olson et al., 1998; Brignall et al., 1991;)

Evidence about cost accounting and its use in tourism enterprises and especially in hotels is rather limited (Pellinen, 2003)

There is an active interest in cost and management accounting practices and cost systems of hotels (Harris and Mongiello, 2006; Potter and Schmidgall, 1999)

The Greek tourism sector is is one of Greece's three biggest industries, a continuous growth market and represents 18% of the country’s GDP

Literature review (1)

Considerations of interest to designers and researchers of cost systems have been: the extent to which the systems provide information (Mia and

Chenhall, 1994) the degree of use (e.g. Guilding, 1999; Anderson and Young, 1999) the usefulness of the information (Chenhall and Morris, 1986;

Shields, 1995) the beneficial nature of the cost systems (Chenhall and Langfield-

Smith, 1998) the importance in making operational decisions (Bouwens and

Abernethy, 2000) whether they are helpful to the organization (Guilding, 1999) the satisfaction with the systems (Bruns and Waterhouse, 1975)

Literature review (2)

Gerdin (2005) and Tillema (2005) identified several contingency factorsinfluencing the sophistication of management accounting systems

Abdel-Kader and Luther (2008) and Al-Omiri and Drury (2007) investigated the impact of a range of potentially contingent variableson management accounting sophistication and cost system sophistication

Pizzini (2006) examined the association between cost-system functionality, managers’ beliefs about the relevance and usefulness of cost data, and actual financial performance in hospitals

Mia and Pattier (2001) investigated the use of management accounting systems by general managers and department managers in luxury hotels

Literature review (3)Conclusions

Most of the studies linked contextual variables with the adoption, the use and the usefulness of cost systems (Chenhall 2003)

Empirical evidence on the contingent factors of cost-system design is focused upon a single aspect of cost-system design (activity-based costing); and here, results are modest (e.g. Al-Omiri and Drury, 2007, Pizzini, 2006)

Chenhall (2003; 2007) reports that there is a need for more research into service organizations, including hospitality and tourism sector, about cost system design and contextual variables, as these entities become increasingly important within most economies

It is hardly surprising that our knowledge of MCS design in specific service industries and contexts is limited (Auser and Langfield-Smith 2005)

Research hypotheses (1)

H1: There is a positive association between the extent of use of cost data and the cost system functionality

H2: There is a positive association between the low cost strategy and the cost system functionality

H3: There is a positive association between the level of competition and the cost system functionality

H4: There is a positive association between the company’s size and the cost system functionality

Research hypotheses (2)

H5: There is a positive association between the number of services and products and the cost system functionality

H6: There is a positive association between the membership of multinational chain and the cost system functionality

H7: There is a positive association between the extent of the use of innovative management accounting techniques and the cost system functionality

Research Methodology

Sample characteristics and data collection The sample surveyed included the leading Greek hotel

enterprises (ICAP’s Directory 2002)

The research was realized in two phases

A pilot test took place (interviews)

The participation form was sent to 196 hotel companies The response rate was 51% (100 hotels) The questionnaires were answered at 96% by executives in the

top hierarchy of the financial departments

Research MethodologyVariables measurementExtent of the use of cost data (USE)

0.90

Cronbach alpha

85.79.34 0.736 Business process re-engineering

0.834Benchmarking

0.892Acceptance– rejection sales packages from tour- operators

0.812Service design

0.905Cost reduction

0.834Output

0.798Budgeting

0.864Performance evaluation

0.832Service mix

0.875Customer profitability analysis

0.868Service pricing

Percent of variance ΕigenvalueFactor loadingsItems

Research MethodologyVariables measurementLow cost strategy (COST)

0.84

Cronbach alpha

70.14.20.834 The hotel develops cost control programs of its activities

0.794The increase of the productivity-efficiency is vitally connected with these motives

0.812The hotel’s policy is to provide motives to the departments which manage to lower their costs

0.785The hotel provides services in low cost so as to have a competitive advantage

0.820The hotel follows a policy oriented to the cost decrease in order to increase its revenues

Percent of variance ΕigenvalueFactor loadingsItems

Research MethodologyVariables measurement

Level of competition (COMP)Level of competition was measured by Swenson (1995) using a single item five-point Likert scale

Size (SIZE)

Size was measured using the log annual sales turnover (€ million)

Number of services variants (SERV) Objective data were used for measure the number of services variants. This variable was adopted from Bjørnenak (1997)

Membership of multinational chain (MULT)

Membership of multinational chain (MULT) was measured using a binary variable (1 = member, 0 = otherwise)

Research MethodologyVariables measurementExtent of the use of innovative management accounting techniques (INNO)

0.596 55.411.160.843Balanced scorecard

0.613Value chain analysis

0.759Activity Based Costing

Cronbach alpha

Percent of variance ΕigenvalueFactor loadings

Items

Research MethodologyVariables measurementCost system functionality (FUNC)

Binary variables used to measure “Cost system functionality” Proxy variables used to test the validity of accuracy and

frequency (adopted by Pizzini, 2006)

SemiannuallyQuarterly

mix variancesMonthly

price variancesWeeklyefficiency variancesDailyVariance Frequency

great degree of accuracy of cost data cost by tour operator /travel agent

Annually

Accuracy cost by room

controllable/ non- controllable costcost by room night

direct/indirect costcost by customer

fixed/variable cost cost by individual service

Classification Detail

Data analysisDescriptive statistics for independent variables and proxy variables

>66

4-622

2-340

132

N100

Allocation bases

Std. Dev.1.10

Mean3.1

N 100

Timely

Construct validity measures

1481.5210.48100Extent of use of innovative management

accounting techniques

1733.548.12100Number of services variants

520.973.42100Level of competition

993.211.49.2100Size (€ mil)

2553.9712.31100Low cost strategy

53139.1229.9100Extent of use of cost data

Actual Maximum

Actual Minimum

Std. Dev. MeanNVariable

Data analysisSpearman correlation matrix for the independent variables

10.461**0.1720.256*0.269**0.1880.384**COST

10.0600.1230.411**0.1380.204*USE

10.1160.096-0.173-0.023SERV

10.1450.213*0.110MULT

10.7200.183SIZE

10.192COMP

     1INNO

COSTUSESERVMULTSIZECOMPINNOVariable

Note: * indicates Correlations is significant at the .05level (2 tailed)

**indicates Correlations is significant at the .01 level (2 tailed)

Research FindingsCritical attributes of cost system functionality

24efficiency variances 24Monthly

24price variances 76Annually

24mix variances

VarianceYesFrequency

24great degree of accuracy of cost data

24cost by tour operator /travel agent

Accuracy24cost by room

24controllable/non- controllable cost

24cost by room night

24direct/indirect cost24cost by customer

24fixed/variable cost 24cost by individual service

YesClassificationYesDetail

Note: N= 100

Research FindingsHypothesis testing (1)

Regarding the cost systems’ attitudes the hotel units have been classified into 2 groups:

those that have used a more functional system (this group contains 24 hotels)

those using a less functional system (this group contains 76 hotels)

The following model was applied:

Y= b1 + b2 USE + b3COM + b4 SIZE + b5 COST + b4 MULTI + b5 SERV + b5 INNO + e

where Y: the dichotomous variable of more functional cost systems and less functional cost systems

Research FindingsHypothesis testing (2)

0.64Nagelkerke R square

0.42Cox & Snell R square

0.332Hosmer – Lemeshow goodness of fit

0.000Chi-square

00.0379.367-19.505Constant

1.2900.7751.6870.2170.4290.523Extent of the use of innovative management accounting techniques

1.2900.7753.8520.2170.4241.349Member of multinational chain

1.1150.8971.1950.0940.1060.178Number of services variants

1.5380.6502.6350.0230.4270.969Low cost strategy

1.1640.8596.2810.1531.2871.837Size

1.1830.8461.8170.1540.4190.597 Level of competition

1.300 0.769 2.2010.025 0.353 0.789 Extent of the use of cost data

VIFTolerenceExp. BP ValueSt. Er.

B

85%Per cent correctly classified

Collinearity statistics

Conclusions The level of cost-system functionality in Greek hotels

used is low The level of cost-system functionality is significant

positively associated with: the low cost strategy the extent of the use of cost data

Size, level competition, number of services variants, extent of use of innovative manag. accounting tools, membership of multinational chain were no significant variables

Limitations

Cross-sectional studies as this can establish associations, but not causality

Data were collected from hotels in Greece (generalizing the results in other countries and industries)

Sample size was small and we could not split it for validation purposes into analysis and holdout samples

The more functional cost systems group contains a little more than the minimum size of 20 observations required for logistic regression (Hair et al., 1998)

Contribution

The results provide the first empirical evidence of the relation between cost system functionality and contingent factors in the hospitality industry

Comprehensive survey data provide a relatively objective, multidimensional characterization of the functions a cost system can perform, rather than simply identifying whether an organization has adopted a single costing technique

The operational homogeneity of hotels enables powerful tests of the research hypotheses

Adds to the literature on contingency theory by measuring ‘‘fit’’ between control system and organizational context using both

‘‘selection’’ and ‘‘systems’’ approaches (Selto et.al., 1995)

Future research

Incorporate other important variables from contingency theory that are likely to influence the level of functionality of cost system: top management support quality of information technology satisfaction of the existing cost system etc.

Examine associations between cost system functionality and actual performance