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. ABC allows the manager to access detailed information about the activities and resources associated with maintaining highways. A detailed “drill down” and analysis of this information in ABC may 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 within the BSC.

Successfully linking ABC and the BSC requires a different type of ABC model. The BSC relies on up-to-date ABC data on a monthly or quarterly basis, so the ABC model must be up-dated monthly or quarterly and data fed to the scorecards in the BSC.

This ABC enterprise reporting system is quite different from the one-off desk-top models typical of early applications. Data sources unique to ABC-such as employee time reporting–are automated to reduce the cost and enhance the timeliness of data capture. Data feeds from legacy systems or enterprise resource planning systems are automated using extract, transform and load (ETL) tools.

ABC’s role as an analytic 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-such 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 follow the trail of investigation from the targeted performance measure in the scorecard to the underlying details in the ABC model.

In summary, linking ABC and the BSC enhances the value of two proven management methods. The BSC scorecard benefits from access to performance measures for the business process and customer dimensions. The BSC also benefits from the analytic capability of ABC to support performance analyses. ABC transitions from costing tool to analytic method supplying up-to-date business intelligence to support performance improvement initiatives.

Why link ABC and the balanced scorecard? ABC and the BSC are proven management methods. They work well on their own, but they work better together. This is why: The balanced scorecard benefits from ABC performance measures for the business process and customer dimensions; Managers use ABC as a diagnostic tool to uncover the root causes of scorecard performance problems; and ABC becomes an enterprise analytic system for performance management

Source by Dr. Peter Turney