Activity-Based Costing (ABC), Activity-Based Management (ABM), and Balanced Scorecards (BSC) are established management methods. They are basic components of performance management systems. ABC and ABM provide business and cost intelligence on key business elements, including resources, activities, products, services, and customers. They allow managers to make decisions that improve cost and profit performance. The BSC translates the strategic objectives 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 BSC are often considered to be independent methods, each with their own purpose. However, they are complementary and offer greater value when linked together. The benefits of linking 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 the results of activities that 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 up to 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.
BSC users benefit from the analytical capabilities available in ABC. For example, a transportation department manager may find that the actual cost of maintaining one mile of highway exceeds the target on the scorecard. ABC allows the administrator to access detailed information about the activities and resources associated with road maintenance. A detailed “drill down” and analysis of this information at ABC can reveal the root cause of the problem and allow corrective action to be taken. Decision support is particularly effective if ABC data can be accessed from the BSC.
The successful linkage of ABC and BSC requires a different type of ABC model. The BSC is based on monthly or quarterly updated ABC data, so the ABC model needs to be updated monthly or quarterly and the data fed into the BSC dashboards.
This ABC business reporting system is quite different from the typical single desktop models of early applications. ABC’s unique data sources, such as employee time reports, are automated to reduce the cost and improve the timeliness of data capture. Data sources from legacy systems or ERP systems are automated using extract, transform, and load (ETL) tools.
The role of ABC as an analytical decision support tool changes the design of the ABC model and reporting system. The ABC model must be forward looking to support planning efforts as well as a source of accurate historical performance data. A good reporting system, as a modern web-based tool, allows managers to access, analyze and display ABC information on their desktop. This reporting capability should allow a manager to trace the investigation from the target performance measure on the scorecard to the underlying details in the ABC model.
In short, linking ABC and BSC enhances the value of two proven management methods. The BSC scorecard benefits from access to performance measures for business process and customer dimensions. The BSC also benefits from ABC’s analytical capabilities to support performance analyses. ABC transitions from a costing tool to an analytical method that provides up-to-date business intelligence to support performance improvement initiatives.
Why link ABC and the Balanced Scorecard? ABC and BSC are proven management methods. They work well alone, but they work better together. Here’s why: The Balanced Scorecard benefits from ABC performance measures for the business process and customer dimensions; Managers use ABC as a diagnostic tool to discover the root causes of scorecard performance issues; and ABC becomes a business analytics system for performance management
