Abstract: While several studies have been conducted regarding the impact of Activity-based costing (ABC) system on the financial performance of a firm, to a larger extent they were focused on large enterprises who are mainly established in developed economies. There have been very few studies focused on small and medium sized enterprises and specifically those in the developing/emerging economies. This project therefore sought to explore the impact of Activity-based costing on the financial performance of small and medium sized enterprises based in Lusaka, Zambia, being a developing economy. The specific objectives of the study were to investigate the relationship between Activity-based costing and financial performance in SMEs based in Lusaka, the impact of the implementation of ABC in SMEs on cost control and cost reduction, and the reasons why the majority of SMEs have not adopted the use of the ABC system.
An analysis of the responses from 20 participants in the survey revealed that only seven respondents (35%) had implemented the ABC system, while the other 13 (65%) were still using a traditional costing system. The study further revealed that all the SMEs who had adopted the ABC system had reported a positive impact on their financial performance, as well as on cost control and cost reduction. Furthermore, the study showed that there were three major reasons that the respondents indicated for not adopting the system, namely being satisfied with the traditional costing system (53.85% of the respondents), the high cost of implementing the ABC system (30.77% of the respondents), and lack of expertise to implement the ABC system (15.38% of the respondents). The contribution of this study to the body of knowledge is that the findings will contribute to the understanding of the impact that the adoption and implementation of the ABC system has on the financial performance of SMEs particularly those based in Lusaka, this being the first study on this topic. In addition, the findings of the study will contribute to the understanding of the reasons for low implementation of the ABC system among SMEs in Lusaka.