Balanced Scorecard or Activity-Based Costing?

Balanced scorecard or activity-based costing?

The Balanced Scorecard and the activity-based costing system (ABC system) are both types of performance measurements that give managers a more comprehensive view of the business. The Balanced Scorecard translates a company’s strategy into a balanced presentation of measures including financial measures that show the results of actions already taken and allows executives to view the company from several perspectives simultaneously (Kaplan, Atkinson & Young, 2011) (Maiga & Jacobs 2003). The ABC system focuses on increasing the accuracy of cost measures of the company’s processes which provides managers valuable information about the profitability of products/services and customers (Kaplan, Atkinson & Young, 2011).  The ABC system is often viewed as a supportive measurement for successful implementation of the balanced scorecard (Maiga & Jacobs 2003) and since the management prefers to undertake only one major change at a time I propose that they implement the ABC system. That way they can lay a good foundation for a successful implementation of the balanced scorecard in the future.

If the management wants to influence their costs, they must understand and have a clear view of what products or processes are generating profits for the company. This information equips them to make better decision on pricing, product mix and process improvements that can turn unprofitable products into profitable ones. However, in order for the costing system to beneficial it is crucial that the cost information and resource consumption is accurate otherwise it could lead to poor decision making on various operations (Kaplan, Atkinson & Young, 2011). The ABC system can be easily modified to reflect changes in the company’s operating conditions and by updating the model on the basis of events rather than on the calendar it generates a much more accurate reflection of current conditions (Robert S Kaplan, 2004).

The time-scale feature equips the management to forecast future resource demands, allowing them to budget for resource capacity. Additionally, it provides visibility to the cost of unused capacity which can save companies from making unnecessary investments in some cases. (Robert S Kaplan, 2004).

It is important for the success of the system that it is implemented with a long-term perspective and with a specific business purpose in mind and is sponsored by top management. The strategy to implement the ABC system as first performance measure, while keeping the balanced scorecard in mind, is that with the ABC system the company are more likely to see results sooner and therefore more motivated to hold on to it. When the management has had experience with the ABC system and understand their cost relationships perfectly they are more prepared to make further improvements in their performance in other areas.