Advanced Management Accounting Techniques: The Balanced Scorecard and Activity-Based Costing/Management

Advanced Management Accounting Techniques: The Balanced Scorecard and Activity-Based Costing/Management

In the past decades, there is a significant increase in potent entrants and rival threats in the market. That is the main reason which leads to increase the awareness of outward looking of decision-makers. These controllers must create a strategy comprising identifying, measuring and communicating economic information for their business that has to attach importance to what competitors are achieving or achieved. In addition, that involves the research and development through budgeting, production, marketing, distribution and after-sales support.
Obviously, the more competitive the market would be the more profitable strategy the drivers will devise, and the higher the quality services these drivers implement the more likely they will succeed. Firms are always forced in considering the evaluation methods on operation performance. There is no doubt that powerful strategy requires ‘useful’ innovations. In the past two decades, there are several ‘new’ management accounting techniques introduced. They has been able to support modern technologies and management processes as well as searching for a competitive advantage to meet the challenge of global competition. The most remarkable are the balanced scorecard, activity-based costing/management, strategic investment appraisal and strategic management accounting. Yet, what are they motives? How do they growth? Are they functional? Are they perfect or still need to be improved? What are they strengths/weakness?...and so on. The growth of these strategic concerns has extended the management accounting domain. This is not only attributed to the growing sensitivity of businesses to heightened environmental threats and opportunities, but also the imperative to anticipate change and respond promptly. In this essay, we will verbosely discuss the two most well known techniques: activity-based costing/management and the balanced scorecard.
Briefly introducing, Activity-based costing/management (ABC/M) and the Balanced Scorecard (BSC) are established management techniques. They are raw materials of performance management systems. ABC/M provides cost and other business intelligence about key business elements including resources, activities, products, services and customers whist the BSC translates strategic goals into a set of performance measures according to the specific perspectives of performance.

Activity-Based Costing/Management (ABC/M)
Just thirty years ago, Cooper and Kaplan found that some large manufacturing firms in the US had become dissatisfied with their traditional management accounting approach. The main reason is that there had been a significant rise in the percentage of indirect/overhead costs since many of these costs are caused by, or driven by, non-production volume which is related to product characteristics such as size and complexity. In other words, too much overhead cost is allocated to some products, while too little overhead cost is allocated to other products. Moreover, at that time, labour resources were replaced, while business organisations were changing their nature, new ways of dealing with customers, and new investment in more sophisticated operating systems. However, all the factors related to these processes also caused an increase in overhead costs, so there was a swing from variable to fixed overhead costs with such a traditional cost system. As a consequence, the traditional management accounting approach became inaccurate and organisations were seeking a faithful costing system.
Activity-based costing (ABC), introduced by Cooper and Kaplan in 1988 as an approach to solve the problems of these traditional cost management systems, clearly define the correlation between cost drivers and objectives, and consequently legitimatize the cost sharing problems. It can solve these costs distortion problems by separating overhead costs into different cost categories referred to as cost pools. The basic process of this ‘new’ approach is that firstly, it identifies the way in which products drive the activity of the business and define suitable cost pools for collecting the costs which relates to each activity (activities which drive the costs such as, obtaining new costumers contracts), secondly, determine a ‘cost driver rate’ for each activity cost pool (e.g. cost per new costumer contract), and thirdly allocate cost to products according to the product’s demand for the activity which drive cost. This ‘new’ system benefits firms by providing accurate and associated cost information. Even tough it comprises an allocation of overheads, is nevertheless useful for decision-making purposes. Furthermore, these overhead costs are allocated to the products in such a way that reflects the factor which drive the cost, so that we can manage the product cost by controlling these factors.
On the other hand, non-manufacturing costs such as, marketing, distribution and customer service costs may differ substantially from product to product and from customer to customer, ABC can trace these costs to products and customers using additional cost pools and activity measures. For instance, financial institutions also have diverse products and customers which can cause these distortion problems. Since personnel expenses represent the largest expenditure in financial institutions, these costs must also be attributed more accurately. From these evidences, I can assume that activity-based costing is not only a valuable management tool for manufacturing firms, but also magnetic for service-based organisations for instance, banking, insurance, health care, transportation industries, etc. ABC, even though originally developed for manufacturing sectors, it has been widely applied in a wide variety of fields industry until today. It has thus evolved from a simple cost accounting system approach into a management approach labelled ‘activity-based management’ (ABM).
“Jones and Dugdale (2002) argued that activity-based costing transformed itself from an (‘accurate’) costing technique into a management tool – ABC/M – that can help managers understand costs in organisations, and thus improve decisions-making.” Personally, I think that the successful of ABC/M system is not merely the innovation of the accounting system process, and also the whole business management structure that provides assessed information of financial performance, cost targets as well as the cost interpretation which enable management accountants takes a key role in understanding the operation of the business (strategic and operational level) and minimising costs. Which customers are the most profitable? Which products are the least profitable? Which are our best and worst sales or distribution channels? How much of our activity is wasted? Which activities can be reduced or eliminated without loss of service? ABC/M can provide answers to all these questions in such a way that managers can understand supporting by a methodology that is fair and justifiable.
However, there are several case studies of ABC/M implementation have reported difficulties and failures. It has been criticised as the only refinement of traditional management accounting rather than an original approach. The system is unable to compute accurately full product costs due to technical pitfalls and limitations and also, it is costly to implement and operate and often generates resistance and conflict. Thus, more research is required to demonstrate whether ABC represents an effective alternative to traditional management accounting system.

The Balanced Scorecard (BSC)
After one-year multi company’s study “Measuring Performance in the Organization of the Future”, which was represented by a dozen companies of different sectors (manufacturing and service, heavy industry and high-tech), Kaplan and Norton (1992) introduced the Balance Scorecard (BSC) as a way of linking performance measures. The Balance Scorecard (BSC) was developed to translate strategy into objectives and measures, organised into financial and non-financial (customer, internal business process, learning and growth) perspectives. This technique is designed to steadily implement corporate strategies by reflecting the extent to which goals are achieved in measuring performance and deciding compensation. There is no specific form for the BSC, however, firms need to set their objectives and define performance measures which reveal those objectives will be achieved.
Implementing Balanced Scorecards typically includes four processes: firstly, translating the vision into operational goals, secondly, communicating the vision and link it to individual performance, thirdly, business planning and index setting and finally, feedback and learning, and adjusting the strategy accordingly.
Generally, the Balanced Scorecard is divided into two formats, the Strategy Map and the Scorecard. The Strategy Map interrogates what kind value of service should be provided to costumers and how working methods and organisational abilities should be improved (strategic goals). The Scorecard demonstrates the performance index represented by the achievements status and the specific goal level of each performance index. The BSC concept can be sketched quite complex or perhaps quite simple. Let us go to a simple example, the Balanced Scorecard for the library services at the University of Hull. Its BSC is arranged four standard perspectives: “how well is the library meeting the needs of our users?” (costumer perspective); “how well are the library's finances managed to achieve our mission?” (financial perspective); “how do the library's internal processes function to deliver library collections and services efficiently?” (internal process); “how do we develop our people and systems to ensure that goals are met in the future?” (learning and growth perspective). For each of these perspectives is set different measures and targets. Each measure has been set two targets. If they achieve target one, then they are performing well and reached to its goal. Achieving target two indicates that they are making progress, but they still have some way to go. Even though, several targets have not been achieved in the short-term, that does not mean they failed or has been using this method in a wrong way. As we know, responses to management decisions are not something that we can acquire in the short-term. All these targets were designed by seniors or approved by executives to improve a specific quality of service in the short-term/long-term. Different targets have different levels of difficulty, low level targets may be achieved in the short-term whereas high level targets may be achieved in the long-term. In addition, human never satisfied, qualified managers always require high quality service, thus, ‘fresh’ targets are always introduced. The aim of the BSC is to response all these factors and targets.
In the recent years, BSC has been attracted a great deal of attention in many countries. But, why do organisations require such a technique? The reasons are that managers would not be able to control if they can not measure. With BSC, they can clearly subscribe and determine prospects, strategy and activities. They can accurately distribute duties to different level of staff in order to achieve a specific objective, can manage efficiency and communicate accurately. They also can activate managing function as well as develop commercial knowledge. For instance, in terms of financial and non-financial perspectives, generally, firms are able to measure their investment returns, the satisfaction of costumers, employee performance and the quality of products. All these factors can help organisations to improve or maintain their quality of service.
All the BSC writing by Kaplan and Norton express that through the implementation of the BSC, organisations will gain superior performance. With the BSC, organisations controllers can measure how their business units create value for current and future customers, how they must build and enhance internal capabilities, and the investment in people, systems, and procedures necessary to improve future performance.
What is more, the BSC enables financial and non-financial measures to be part of the information system for employees at all levels of the organisation. Front-line employees can understand the financial consequences from their decisions and actions, while senior executives can understand the drivers of long-term financial success.
Yet, BSC may not motivate appropriate action by managers according to its reports, on the grounds that the complexities of organisational performance are not probably to be correctly represented by such a simple technique and the relationships that it responses may cause opposite effects. Anyway, it is quite complex to make definite conclusions about its use in practice as well as to determine whether the BSC has become a long-term addition to the established portfolio of management techniques, or whether it makes a significant economic contribution for its users.

Using BSC with ABC
Activity-based costing and the Balanced Scorecard are often viewed as independent methods each with its own purpose. However, Norton expressed: “The Balanced Scorecard provides a top down model of business strategy, ABC/M provides a bottom-up view of business processes. Linking the two together opens new opportunities for strategic insight and action. As a source of strategically relevant information about customer and product profitability, ABC/M makes an invaluable contribution to enabling the Balanced Scorecard strategic management process.” Two benefits we can assume of ABC/M to the BSC: ‘profitability management’ and ‘process management'.
ABC/M and BSC can be viewed as if they are complementary. They offer greater value when linked together. The benefits of linkage include additional performance measures and more comprehensive decision support. The BSC benefits from the inclusion of ABC/M performance measures. For instance, the internal process perspective of the BSC benefits from the use of ABC/M measures of the cost of activities and their outputs, which covers support services as well as primary business processes. ABC/M measures benefits the customer perspective of BSC by providing measures of product, customer, market segment, market area and channel profitability to BSC. Without ABC/M, it may not be possible to measure the net profit of these objects. Typically, in the financial perspective of BSC, there will be key performance indicators (KPIs) around profitability. ABC/M enables organisations to know quite accurately where its profits are coming from (from which products and which customers).

In conclusion, both ABC/M and BSC are in practice well accepted as reliable tools for business operation, and it seems reasonable to assume as integral for a better service to the top management and the firm per se. They provide cost and other business intelligence about key business elements including resources, activities, products, services and customers. As we know, the main objectives of firms are minimising cost and maximising profit, ABC/M and BSC enable managers to make decisions that improve cost and profit performance. These two ‘new’ approaches give organization executives valuable decision-making criteria in a more reliable manner with better quality that spans over financial and non-financial, internal and external, objective and subjective and past and future performance aspects. Finally, ABC/M and the BSC work well on their own, but they work better together.


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Norreklit, H. (2003) ‘The balanced scorecard: what is the score? A rhetorical analysis of the balanced scorecard’, Accounting, Organizations and Society, 28, pp.591-619.

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Advanced Management Accounting Techniques:
-The Balanced Scorecard (BSC)
-Activity-Based Costing/Management (ABC/M)