strategies in teaching
Activity-Based Costing and the Balanced Scorecard
By Dr. Peter Turney
Activity-based costing (ABC), activity-based management (ABM) and the balanced scorecard (BSC) are established management methods. They are building blocks of performance management systems. ABC and ABM provide cost and other business intelligence about key business elements including resources, activities, products, services and customers. They enable managers to make decisions that improve cost and profit performance. The BSC translates strategic goals into a set of performance measures balanced according to the important dimensions of performance. It helps communicate and execute the strategic plan by defining success in quantitative terms at each level of the organization.
ABC and the BSC are often viewed as independent methods each with its own purpose. However, they are complementary and offer greater value when linked together. The benefits of linkage include additional performance measures-measures for which ABC is the only reliable source-and more comprehensive decision support.
The BSC benefits from the inclusion of ABC performance measures. These include the cost of activities and activity outputs which are used in the internal business process dimension of the BSC of public and private organizations. This activity information covers support services as well as primary business processes. For private organizations, ABC profit measures by customer, market segment, market area and distribution channel are used in the customer dimension of the BSC.
ABC can provide as much as 20-30% of the performance measures in the BSC. For example, the South Dakota Department of Transportation's activity-based costing model provided 22% of the measures in the BSC.
The users of the BSC benefit from the analytic capabilities available in ABC. For example, a manager of a transportation department may find that the actual cost of maintaining a mile of highway exceeds the target in the scorecard.
By Dr. Peter Turney
Activity-based costing (ABC), activity-based management (ABM) and the balanced scorecard (BSC) are established management methods. They are building blocks of performance management systems. ABC and ABM provide cost and other business intelligence about key business elements including resources, activities, products, services and customers. They enable managers to make decisions that improve cost and profit performance. The BSC translates strategic goals into a set of performance measures balanced according to the important dimensions of performance. It helps communicate and execute the strategic plan by defining success in quantitative terms at each level of the organization.
ABC and the BSC are often viewed as independent methods each with its own purpose. However, they are complementary and offer greater value when linked together. The benefits of linkage include additional performance measures-measures for which ABC is the only reliable source-and more comprehensive decision support.
The BSC benefits from the inclusion of ABC performance measures. These include the cost of activities and activity outputs which are used in the internal business process dimension of the BSC of public and private organizations. This activity information covers support services as well as primary business processes. For private organizations, ABC profit measures by customer, market segment, market area and distribution channel are used in the customer dimension of the BSC.
ABC can provide as much as 20-30% of the performance measures in the BSC. For example, the South Dakota Department of Transportation's activity-based costing model provided 22% of the measures in the BSC.
The users of the BSC benefit from the analytic capabilities available in ABC. For example, a manager of a transportation department may find that the actual cost of maintaining a mile of highway exceeds the target in the scorecard.