anagement Accounting Quarterly is a refereed online journal that contains in-depth articles by and for academics and practitioners of accounting and financial management.
Some of the subjects we cover are cost/management accounting techniques, ABC/ABM, RCA, GPK, statistical process controls, target costing, theory of constraints, methods of calculating stock options, techniques to improve accounting and finance education, new theories in finance and accounting, and much more.
Subscriptions
A subscription to Management Accounting Quarterly–which includes access to all back issues–is included in member dues. Subscriptions are available to nonmembers for $60.
Nov 1, 2011
management accounting
Data that (1) has been verified to be accurate and timely, (2) is specific and organized for a purpose, (3) is presented within a context that gives it meaning and relevance, and (4) that can lead to an increase in understanding and decrease in uncertainty.
The value of information lies solely in its ability to affect a behavior, decision, or outcome. A piece of information is considered valueless if, after receiving it, things remain unchanged. For a technical definition of information see information theory.
The value of information lies solely in its ability to affect a behavior, decision, or outcome. A piece of information is considered valueless if, after receiving it, things remain unchanged. For a technical definition of information see information theory.
Transfer pricing
Transfer pricing refers to the setting, analysis, documentation, and adjustment of charges made between related parties for goods, services, or use of property (including intangible property). Transfer prices among components of an enterprise may be used to reflect allocation of resources among such components, or for other purposes. OECD Transfer Pricing Guidelines state, “Transfer prices are significant for both taxpayers and tax administrations because they determine in large part the income and expenses, and therefore taxable profits, of associated enterprises in different tax jurisdictions.”
Over 60 governments have adopted transfer pricing rules.[1] Transfer pricing rules in most countries are based on what is referred to as the “arm’s length principle” – that is to establish transfer prices based on analysis of pricing in comparable transactions between two or more unrelated parties dealing at arm’s length. The OECD has published guidelines based on the arm's length principle, which are followed, in whole or in part, by many of its member countries in adopting rules. The United States and Canadian rules are similar in many respects to the OECD guidelines, with certain points of material difference. A few countries, such as Brazil and Kazakhstan, follow rules that are materially different overall.
The rules of nearly all countries permit related parties to set prices in any manner, but permit the tax authorities to adjust those prices where the prices charged are outside an arm's length range. Rules are generally provided for determining what constitutes such arm's length prices, and how any analysis should proceed. Prices actually charged are compared to prices or measures of profitability for unrelated transactions and parties. The rules generally require that market level, functions, risks, and terms of sale of unrelated party transactions or activities be reasonably comparable to such items with respect to the related party transactions or profitability being tested.
Most systems allow use of multiple methods, where appropriate and supported by reliable data, to test related party prices. Among the commonly used methods are comparable uncontrolled prices, cost plus, resale price or markup, and profitability based methods. Many systems differentiate methods of testing goods from those for services or use of property due to inherent differences in business aspects of such broad types of transactions. Some systems provide mechanisms for sharing or allocation of costs of acquiring assets (including intangible assets) among related parties in a manner designed to reduce tax controversy.
Most tax treaties and many tax systems provide mechanisms for resolving disputes among taxpayers and governments in a manner designed to reduce the potential for double taxation. Many systems also permit advance agreement between taxpayers and one or more governments regarding mechanisms for setting related party prices.
Many systems impose penalties where the tax authority has adjusted related party prices. Some tax systems provide that taxpayers may avoid such penalties by preparing documentation in advance regarding prices charged between the taxpayer and related parties. Some systems require that such documentation be prepared in advance in all cases.
Over 60 governments have adopted transfer pricing rules.[1] Transfer pricing rules in most countries are based on what is referred to as the “arm’s length principle” – that is to establish transfer prices based on analysis of pricing in comparable transactions between two or more unrelated parties dealing at arm’s length. The OECD has published guidelines based on the arm's length principle, which are followed, in whole or in part, by many of its member countries in adopting rules. The United States and Canadian rules are similar in many respects to the OECD guidelines, with certain points of material difference. A few countries, such as Brazil and Kazakhstan, follow rules that are materially different overall.
The rules of nearly all countries permit related parties to set prices in any manner, but permit the tax authorities to adjust those prices where the prices charged are outside an arm's length range. Rules are generally provided for determining what constitutes such arm's length prices, and how any analysis should proceed. Prices actually charged are compared to prices or measures of profitability for unrelated transactions and parties. The rules generally require that market level, functions, risks, and terms of sale of unrelated party transactions or activities be reasonably comparable to such items with respect to the related party transactions or profitability being tested.
Most systems allow use of multiple methods, where appropriate and supported by reliable data, to test related party prices. Among the commonly used methods are comparable uncontrolled prices, cost plus, resale price or markup, and profitability based methods. Many systems differentiate methods of testing goods from those for services or use of property due to inherent differences in business aspects of such broad types of transactions. Some systems provide mechanisms for sharing or allocation of costs of acquiring assets (including intangible assets) among related parties in a manner designed to reduce tax controversy.
Most tax treaties and many tax systems provide mechanisms for resolving disputes among taxpayers and governments in a manner designed to reduce the potential for double taxation. Many systems also permit advance agreement between taxpayers and one or more governments regarding mechanisms for setting related party prices.
Many systems impose penalties where the tax authority has adjusted related party prices. Some tax systems provide that taxpayers may avoid such penalties by preparing documentation in advance regarding prices charged between the taxpayer and related parties. Some systems require that such documentation be prepared in advance in all cases.
Throughput accounting
Throughput Accounting (TA) is a principle-based and comprehensive management accounting approach that provides managers with decision support information for enterprise profitability improvement. TA is relatively new in management accounting. It is an approach that identifies factors that limit an organization from reaching its goal, and then focuses on simple measures that drive behavior in key areas towards reaching organizational goals. TA was proposed by the late Eliyahu M. Goldratt[1] (deceased 11 June 2011) as an alternative to traditional cost accounting. As such, Throughput Accounting[2] is neither cost accounting nor costing because it is cash focused and does not allocate all costs (variable and fixed expenses, including overheads) to products and services sold or provided by an enterprise. Considering the laws of variation, only costs that vary totally with units of output (see definition of T below for TVC) e.g. raw materials, are allocated to products and services which are deducted from sales to determine Throughput. Throughput Accounting is a management accounting technique used as the performance measures in the Theory of Constraints (TOC).[3] It is the business intelligence used for maximizing profits, however, unlike cost accounting that primarily focuses on 'cutting costs' and reducing expenses to make a profit, Throughput Accounting primarily focuses on generating more throughput. Conceptually, Throughput Accounting seeks to increase the velocity or speed at which throughput (see definition of T below) is generated by products and services with respect to an organization's constraint, whether the constraint is internal or external to the organization. Throughput Accounting is the only management accounting methodology that considers constraints as factors limiting the performance of organizations.
Management accounting is an organization's internal set of techniques and methods used to maximize shareholder wealth. Throughput Accounting is thus part of the management accountants' toolkit, ensuring efficiency where it matters as well as the overall effectiveness of the whole organization. It is an internal reporting tool. Outside or external parties to a business depend on accounting reports prepared by financial (public) accountants who apply Generally Accepted Accounting Principles(GAAP) issued by the Financial Accounting Standards Board (FASB) and enforced by the U.S. Securities and Exchange Commission (SEC) and other local and international regulatory agencies and bodies.
Throughput Accounting improves profit performance with better management decisions by using measurements that more closely reflect the effect of decisions on three critical monetary variables (throughput, investment (AKA inventory), and operating expense — defined below).
Management accounting is an organization's internal set of techniques and methods used to maximize shareholder wealth. Throughput Accounting is thus part of the management accountants' toolkit, ensuring efficiency where it matters as well as the overall effectiveness of the whole organization. It is an internal reporting tool. Outside or external parties to a business depend on accounting reports prepared by financial (public) accountants who apply Generally Accepted Accounting Principles(GAAP) issued by the Financial Accounting Standards Board (FASB) and enforced by the U.S. Securities and Exchange Commission (SEC) and other local and international regulatory agencies and bodies.
Throughput Accounting improves profit performance with better management decisions by using measurements that more closely reflect the effect of decisions on three critical monetary variables (throughput, investment (AKA inventory), and operating expense — defined below).
Resource consumption accounting
Resource Consumption Accounting (RCA) is formally defined as a dynamic, fully integrated, principle-based, and comprehensive management accounting approach that provides managers with decision support information for enterprise optimization. RCA is a relatively new, flexible, comprehensive management accounting approach based largely on the German management accounting approach Grenzplankostenrechnung (GPK) and also allows for the use of activity-based drivers.
Background
Initially, RCA had emerged as a management accounting approach beginning around 2000, and was subsequently developed at CAM-I (The Consortium of Advanced Management, International) in a Cost Management Section RCA interest group[1] commencing in December 2001. Over the next seven years RCA was refined and validated through practical case studies, industry journal publications, and other research papers.
In 2008, a group of interested academics and practitioners established the RCA Institute to introduce Resource Consumption Accounting to the marketplace and raise the standard of management accounting knowledge by encouraging disciplined practices.
By July 2009, Professional Accountants in Business (PAIB) Committee of International Federation of Accountants (IFAC), recognized Resource Consumption Accounting in the International Good Practice Guidance (IGPG) publication called Evaluating and Improving Costing in Organizations and its companion document,
Costing Continuum // Levels of Maturity Copyright 2008 Gary Cokins All rights reserved. Used with permission of the author,courtesy of International Federation of Accountants-Professional Accountants in Business, International Good Practice Guidance p.23
Evaluating the Costing Journey: A Costing Levels Continuum Maturity Model. The guide focuses on universal costing principles and with the Costing Levels Maturity Model[2] acknowledges RCA attains a higher level of accuracy and visibility compared to activity based costing for managerial accounting information when the incremental benefits of RCA's better information exceed the incremental administrative effort and cost to collect, calculate and report its information. As stated in the IGPG, “A sophisticated approach at the upper levels of the continuum of costing techniques provides the ability to derive costs directly from operational resource data, or to isolate and measure unused capacity costs. For example, in the resource consumption accounting approach, resources and their costs are considered as foundational to robust cost modeling and managerial decision support, because an organization’s costs and revenues are all a function of the resources and the individual capacities that produce them.”[3]
Resource Consumption Accounting was also recognized in a Sustainability Framework Report issued by the International Federation of Accountants (IFAC), for having the capability of helping organizations “improve their understanding of environmental (and social) costs through their costing systems and models”.[4]
This Sustainability Framework highlights RCA under the sub-heading Improving Information Flows to Support Decision and informs readers that proper cost allocation can be built ‘directly into the cost accounting system’, thereby enhancing an organization's performance for “identifying, defining and classifying costs in a useful way”.[4]
[edit] Concepts of Resource Consumption Accounting
RCA concepts that distinguish it from other management accounting approaches include the following:
Germany’s GPK method of quantity-based operational modeling using fixed and proportional costs established at the resource level in a company (i.e., cost center/resource pools or value streams");[5]
Gordon Shillinglaw’s concept of attributable cost;[6]
Flexible use of activity-based drivers (only where needed) based on specific, and restrictive rules;
Value chain integration[7] of management accounting into operational systems;
Use of fundamental operations transactions as the primary source for financial and quantitative data (rather than the general ledger);
Replacing the principle of variability with the principle of responsiveness for operational modeling;[8]
Support for a multi-level, contribution margin-based profit & loss statement that supports managerial decision making without the cost distortions and complexity of inappropriate (not based on the principle of causality) allocations of cost.
Background
Initially, RCA had emerged as a management accounting approach beginning around 2000, and was subsequently developed at CAM-I (The Consortium of Advanced Management, International) in a Cost Management Section RCA interest group[1] commencing in December 2001. Over the next seven years RCA was refined and validated through practical case studies, industry journal publications, and other research papers.
In 2008, a group of interested academics and practitioners established the RCA Institute to introduce Resource Consumption Accounting to the marketplace and raise the standard of management accounting knowledge by encouraging disciplined practices.
By July 2009, Professional Accountants in Business (PAIB) Committee of International Federation of Accountants (IFAC), recognized Resource Consumption Accounting in the International Good Practice Guidance (IGPG) publication called Evaluating and Improving Costing in Organizations and its companion document,
Costing Continuum // Levels of Maturity Copyright 2008 Gary Cokins All rights reserved. Used with permission of the author,courtesy of International Federation of Accountants-Professional Accountants in Business, International Good Practice Guidance p.23
Evaluating the Costing Journey: A Costing Levels Continuum Maturity Model. The guide focuses on universal costing principles and with the Costing Levels Maturity Model[2] acknowledges RCA attains a higher level of accuracy and visibility compared to activity based costing for managerial accounting information when the incremental benefits of RCA's better information exceed the incremental administrative effort and cost to collect, calculate and report its information. As stated in the IGPG, “A sophisticated approach at the upper levels of the continuum of costing techniques provides the ability to derive costs directly from operational resource data, or to isolate and measure unused capacity costs. For example, in the resource consumption accounting approach, resources and their costs are considered as foundational to robust cost modeling and managerial decision support, because an organization’s costs and revenues are all a function of the resources and the individual capacities that produce them.”[3]
Resource Consumption Accounting was also recognized in a Sustainability Framework Report issued by the International Federation of Accountants (IFAC), for having the capability of helping organizations “improve their understanding of environmental (and social) costs through their costing systems and models”.[4]
This Sustainability Framework highlights RCA under the sub-heading Improving Information Flows to Support Decision and informs readers that proper cost allocation can be built ‘directly into the cost accounting system’, thereby enhancing an organization's performance for “identifying, defining and classifying costs in a useful way”.[4]
[edit] Concepts of Resource Consumption Accounting
RCA concepts that distinguish it from other management accounting approaches include the following:
Germany’s GPK method of quantity-based operational modeling using fixed and proportional costs established at the resource level in a company (i.e., cost center/resource pools or value streams");[5]
Gordon Shillinglaw’s concept of attributable cost;[6]
Flexible use of activity-based drivers (only where needed) based on specific, and restrictive rules;
Value chain integration[7] of management accounting into operational systems;
Use of fundamental operations transactions as the primary source for financial and quantitative data (rather than the general ledger);
Replacing the principle of variability with the principle of responsiveness for operational modeling;[8]
Support for a multi-level, contribution margin-based profit & loss statement that supports managerial decision making without the cost distortions and complexity of inappropriate (not based on the principle of causality) allocations of cost.
Lean accounting
The purpose of Lean Accounting is to support the lean enterprise as a business strategy. It seeks to move from traditional accounting methods to a system that measures and motivates excellent business practices in the lean enterprise.
Introduction
What we now call lean manufacturing was developed by Toyota and other Japanese companies. Toyota executives claim that the famed Toyota Production System was inspired by what they learned during visits to the Ford Motor Company in the 1920s and developed by Toyota leaders such as Taiichi Ohno and consultant Shigeo Shingo after World War II. As pioneer American and European companies embraced lean manufacturing methods in the late 1980s, they discovered that lean thinking must be applied to every aspect of the company including the financial and management accounting processes.[1] (See also, William Deming.)
There are two main thrusts for Lean Accounting. The first is the application of lean methods to the company's accounting, control, and measurement processes. This is no different than applying lean methods to any other processes. The objective is to eliminate waste, free up capacity, speed up the process, eliminate errors and defects, and make the process clear and understandable.
The second (and more important) thrust of Lean Accounting is to fundamentally change the accounting, control, and measurement processes so they motivate lean change and improvement, provide information that is suitable for control and decision-making, provide an understanding of customer value, correctly assess the financial impact of lean improvement, and are themselves simple, visual, and low-waste. Lean Accounting does not require the traditional management accounting methods like standard costing, activity-based costing, variance reporting, cost-plus pricing, complex transactional control systems, and untimely and confusing financial reports. These are replaced by
lean-focused performance measurements
simple summary direct costing of the value streams
decision-making and reporting using a box score
financial reports that are timely and presented in "plain language" that everyone can understand
radical simplification and elimination of transactional control systems by eliminating the need for them
driving lean changes from a deep understanding of the value created for the customers
eliminating traditional budgeting through monthly sales, operations, and financial planning processes (SOFP)
value-based pricing
correct understanding of the financial impact of lean change
As an organization becomes more mature with lean thinking and methods, they recognize that the combined methods of Lean Accounting in fact creates a Lean Management System (LMS) designed to provide the planning, the operational and financial reporting, and the motivation for change required to prosper the company's on-going lean transformation.[2]
Up until 2006, the methods of Lean Accounting were not clearly defined because they had been developed by different people in different companies. A meeting was held at the 2005 Lean Accounting Summit (Lean Accounting Summit) conference including a number of leaders in the field, and a decision was made to develop a document called "The Principles, Practices, and Tools of Lean Accounting" (PPT) (Lean Accounting PPT). While the methods of lean accounting are continually evolving, the PPT lays out the primary methods of Lean Accounting and shows how they fit together into a Lean Management System. The PPT emphasizes not only the tools and methods of Lean Accounting, but also the need for focusing on customer value and the empowerment (or respect) for people. The PPT was published in Target, the Journal of the Association of Manufacturing Excellence (AME) in 2006. (Lean Accounting PPT article)
[edit] The Vision for Lean Accounting
Provide accurate, timely, and understandable information to motivate the lean transformation throughout the organization, and for decision-making leading to increased customer value, growth, profitability, and cash flow.
Use lean tools to eliminate waste from the accounting processes while maintaining thorough financial control.
Fully comply with generally accepted accounting principles (GAAP), external reporting regulations, and internal reporting requirements.
Support the lean culture by motivating investment in people, providing information that is relevant and actionable, and empowering continuous improvement at every level of the organization.
[edit] Why is lean accounting needed?
There are positive and negative reasons for using Lean Accounting. The positive reasons include the issues addressed in the "Vision for Lean Accounting" shown above. Lean Accounting provides accurate, timely and understandable information that can be used by managers, sales people, operations leaders, accountants, lean improvement teams and others. The information gives clear insight into the company's performance; both operational and financial. The Lean Accounting reporting motivates people in the organization to move lean improvement forward. It is often stated that "what you measure is what will be improved." Lean accounting measures the right things for a company that wants to drive forward with lean transformation.
Lean Accounting is also itself lean. The information, reports, and measurements can be provided quickly and easily. It does not require the complex systems and wasteful transactions that are usually used by manufacturing companies. The simplicity of Lean Accounting frees up the time of the financial people and the operational people so that they can become more actively involved in moving the company forward towards its strategic goals. The role of the financial professional moves from bookkeeper and reporter, towards strategic partnering with the company leaders.
At a deeper level Lean Accounting matches the cultural goals of a lean organization. The simple and timely information empowers people at all levels of the organization. The financial and performance measurement information is organized around value streams and thereby honors the lean principle of value stream management. The emphasis on customer value is also derived from the principles of lean thinking. The way a company accounts and measures its business is deeply rooted in the culture of the organization. Lean Accounting has an important role to play in developing a lean culture within an organization.
Introduction
What we now call lean manufacturing was developed by Toyota and other Japanese companies. Toyota executives claim that the famed Toyota Production System was inspired by what they learned during visits to the Ford Motor Company in the 1920s and developed by Toyota leaders such as Taiichi Ohno and consultant Shigeo Shingo after World War II. As pioneer American and European companies embraced lean manufacturing methods in the late 1980s, they discovered that lean thinking must be applied to every aspect of the company including the financial and management accounting processes.[1] (See also, William Deming.)
There are two main thrusts for Lean Accounting. The first is the application of lean methods to the company's accounting, control, and measurement processes. This is no different than applying lean methods to any other processes. The objective is to eliminate waste, free up capacity, speed up the process, eliminate errors and defects, and make the process clear and understandable.
The second (and more important) thrust of Lean Accounting is to fundamentally change the accounting, control, and measurement processes so they motivate lean change and improvement, provide information that is suitable for control and decision-making, provide an understanding of customer value, correctly assess the financial impact of lean improvement, and are themselves simple, visual, and low-waste. Lean Accounting does not require the traditional management accounting methods like standard costing, activity-based costing, variance reporting, cost-plus pricing, complex transactional control systems, and untimely and confusing financial reports. These are replaced by
lean-focused performance measurements
simple summary direct costing of the value streams
decision-making and reporting using a box score
financial reports that are timely and presented in "plain language" that everyone can understand
radical simplification and elimination of transactional control systems by eliminating the need for them
driving lean changes from a deep understanding of the value created for the customers
eliminating traditional budgeting through monthly sales, operations, and financial planning processes (SOFP)
value-based pricing
correct understanding of the financial impact of lean change
As an organization becomes more mature with lean thinking and methods, they recognize that the combined methods of Lean Accounting in fact creates a Lean Management System (LMS) designed to provide the planning, the operational and financial reporting, and the motivation for change required to prosper the company's on-going lean transformation.[2]
Up until 2006, the methods of Lean Accounting were not clearly defined because they had been developed by different people in different companies. A meeting was held at the 2005 Lean Accounting Summit (Lean Accounting Summit) conference including a number of leaders in the field, and a decision was made to develop a document called "The Principles, Practices, and Tools of Lean Accounting" (PPT) (Lean Accounting PPT). While the methods of lean accounting are continually evolving, the PPT lays out the primary methods of Lean Accounting and shows how they fit together into a Lean Management System. The PPT emphasizes not only the tools and methods of Lean Accounting, but also the need for focusing on customer value and the empowerment (or respect) for people. The PPT was published in Target, the Journal of the Association of Manufacturing Excellence (AME) in 2006. (Lean Accounting PPT article)
[edit] The Vision for Lean Accounting
Provide accurate, timely, and understandable information to motivate the lean transformation throughout the organization, and for decision-making leading to increased customer value, growth, profitability, and cash flow.
Use lean tools to eliminate waste from the accounting processes while maintaining thorough financial control.
Fully comply with generally accepted accounting principles (GAAP), external reporting regulations, and internal reporting requirements.
Support the lean culture by motivating investment in people, providing information that is relevant and actionable, and empowering continuous improvement at every level of the organization.
[edit] Why is lean accounting needed?
There are positive and negative reasons for using Lean Accounting. The positive reasons include the issues addressed in the "Vision for Lean Accounting" shown above. Lean Accounting provides accurate, timely and understandable information that can be used by managers, sales people, operations leaders, accountants, lean improvement teams and others. The information gives clear insight into the company's performance; both operational and financial. The Lean Accounting reporting motivates people in the organization to move lean improvement forward. It is often stated that "what you measure is what will be improved." Lean accounting measures the right things for a company that wants to drive forward with lean transformation.
Lean Accounting is also itself lean. The information, reports, and measurements can be provided quickly and easily. It does not require the complex systems and wasteful transactions that are usually used by manufacturing companies. The simplicity of Lean Accounting frees up the time of the financial people and the operational people so that they can become more actively involved in moving the company forward towards its strategic goals. The role of the financial professional moves from bookkeeper and reporter, towards strategic partnering with the company leaders.
At a deeper level Lean Accounting matches the cultural goals of a lean organization. The simple and timely information empowers people at all levels of the organization. The financial and performance measurement information is organized around value streams and thereby honors the lean principle of value stream management. The emphasis on customer value is also derived from the principles of lean thinking. The way a company accounts and measures its business is deeply rooted in the culture of the organization. Lean Accounting has an important role to play in developing a lean culture within an organization.
Grenzplankostenrechnung
Grenzplankostenrechnung (GPK) is a German costing methodology, developed in the late 1940s and 1950s, designed to provide a consistent and accurate application of how managerial costs are calculated and assigned to a product or service. The term Grenzplankostenrechnung, often referred to as GPK, has best been translated as either Marginal Planned Cost Accounting[1] or Flexible Analytic Cost Planning and Accounting.[2]
The GPK methodology has become the standard for cost accounting in Germany [2] as a "result of the modern, strong controlling culture in German corporations".[3] German firms that use GPK methodology include Deutsche Telekom, DaimlerChrysler AG (now operating as Daimler AG), Porsche AG, Deutsche Bank, and Deutsche Post (German Post Office). These companies have integrated their costing information systems based on ERP (Enterprise Resource Planning) software (e.g., SAP) and they tend to reside in industries with highly complex processes.[4] However, GPK is not exclusive to highly complex organizations; GPK is also applied to less complex businesses and will reap the same informational insights.
GPK's objective is to provide meaningful insight and analysis of accounting information that benefits internal users, such as controllers, project managers, plant managers, versus other traditional costing systems that primarily focus on analyzing the firm's profitability from an external reporting perspective complying with financial standards (i.e., IFRS/FASB), and/or regulatory bodies' demands such as the Securities and Exchange Commission (SEC) or the Internal Revenue Services (IRS) taxation agency. Thus, the GPK marginal system unites and addresses the needs of both financial and managerial accounting functionality and costing requirements.
Resource Consumption Accounting (RCA) is based, among others, on key principles of German managerial accounting that are found in GPK.
The GPK methodology has become the standard for cost accounting in Germany [2] as a "result of the modern, strong controlling culture in German corporations".[3] German firms that use GPK methodology include Deutsche Telekom, DaimlerChrysler AG (now operating as Daimler AG), Porsche AG, Deutsche Bank, and Deutsche Post (German Post Office). These companies have integrated their costing information systems based on ERP (Enterprise Resource Planning) software (e.g., SAP) and they tend to reside in industries with highly complex processes.[4] However, GPK is not exclusive to highly complex organizations; GPK is also applied to less complex businesses and will reap the same informational insights.
GPK's objective is to provide meaningful insight and analysis of accounting information that benefits internal users, such as controllers, project managers, plant managers, versus other traditional costing systems that primarily focus on analyzing the firm's profitability from an external reporting perspective complying with financial standards (i.e., IFRS/FASB), and/or regulatory bodies' demands such as the Securities and Exchange Commission (SEC) or the Internal Revenue Services (IRS) taxation agency. Thus, the GPK marginal system unites and addresses the needs of both financial and managerial accounting functionality and costing requirements.
Resource Consumption Accounting (RCA) is based, among others, on key principles of German managerial accounting that are found in GPK.
Activity-based costing
Activity-based costing (ABC) is a special costing model that identifies activities in an organization and assigns the cost of each activity with resources to all products and services according to the actual consumption by each. This model assigns more indirect costs (overhead) into direct costs compared to conventional costing models.
Aims of model
With ABC, an organization can soundly estimate the cost elements of entire products and services. That may prepare decisions on
either identify and eliminate those products and services that are unprofitable and lower the prices of those that are overpriced (product and service portfolio aim)
or identify and eliminate production or service processes that are ineffective and allocate processing concepts that lead to the very same product at a better yield (process re-engineering aim).
In a business organization, the ABC methodology assigns an organization's resource costs through activities to the products and services provided to its customers. ABC is generally used as a tool for understanding product and customer cost and profitability based on the production or performing processes. As such, ABC has predominantly been used to support strategic decisions such as pricing, outsourcing, identification and measurement of process improvement initiatives.
[edit] Prevalence
Following initial enthusiasm, ABC lost ground in the 1990s, to alternative metrics, such as Kaplan's balanced scorecard and economic value added. An independent 2008 report concluded that manually driven ABC was an inefficient use of resources: it was expensive and difficult to implement for small gains, and a poor value, and that alternative methods should be used.[1] Other reports show the broad band covered with the ABC methodology.[2]
ABC has stagnated over the last five to seven years,
— Kaplan, 1998
However, application of an activity based recording may be applied without change in methodology to an extension as an incremental activity based accounting, not replacing any synoptic and retrospective modeling process with costing, but to transform concurrent process accounting into a most authentic approach.
[edit] Historical development
Traditionally cost accountants had arbitrarily added a broad percentage of analysis into the indirect cost.[3] In addition, activities include actions that are performed both by people and machine. However, as the percentages of indirect or overhead costs rose, this technique became increasingly inaccurate, because indirect costs were not caused equally by all products. For example, one product might take more time in one expensive machine than another product—but since the amount of direct labor and materials might be the same, additional cost for use of the machine is not being recognized when the same broad 'on-cost' percentage is added to all products. Consequently, when multiple products share common costs, there is a danger of one product subsidizing another.
ABC is based on George Staubus' Activity Costing and Input-Output Accounting.[4] The concepts of ABC were developed in the manufacturing sector of the United States during the 1970s and 1980s. During this time, the Consortium for Advanced Management-International, now known simply as CAM-I, provided a formative role for studying and formalizing the principles that have become more formally known as Activity-Based Costing.[5]
Robin Cooper and Robert S. Kaplan, proponents of the Balanced Scorecard, brought notice to these concepts in a number of articles published in Harvard Business Review beginning in 1988. Cooper and Kaplan described ABC as an approach to solve the problems of traditional cost management systems. These traditional costing systems are often unable to determine accurately the actual costs of production and of the costs of related services. Consequently managers were making decisions based on inaccurate data especially where there are multiple products.
Instead of using broad arbitrary percentages to allocate costs, ABC seeks to identify cause and effect relationships to objectively assign costs. Once costs of the activities have been identified, the cost of each activity is attributed to each product to the extent that the product uses the activity. In this way ABC often identifies areas of high overhead costs per unit and so directs attention to finding ways to reduce the costs or to charge more for costly products.
Activity-based costing was first clearly defined in 1987 by Robert S. Kaplan and W. Bruns as a chapter in their book Accounting and Management: A Field Study Perspective.[6] They initially focused on manufacturing industry where increasing technology and productivity improvements have reduced the relative proportion of the direct costs of labor and materials, but have increased relative proportion of indirect costs. For example, increased automation has reduced labor, which is a direct cost, but has increased depreciation, which is an indirect cost.
Like manufacturing industries, financial institutions have diverse products and customers, which can cause cross-product, cross-customer subsidies. Since personnel expenses represent the largest single component of non-interest expense in financial institutions, these costs must also be attributed more accurately to products and customers. Activity-based costing, even though originally developed for manufacturing, may even be a more useful tool for doing this.[7][8]
Activity-based costing was later explained in 1999 by Peter F. Drucker in the book Management Challenges of the 21st Century.[9] He states that traditional cost accounting focuses on what it costs to do something, for example, to cut a screw thread; activity-based costing also records the cost of not doing, such as the cost of waiting for a needed part. Activity-based costing records the costs that traditional cost accounting does not do.
The overhead costs assigned to each activity comprise an activity cost pool.
[edit] Alternatives
Time-driven activity-based costing (TDABC) works to improve the issues with implementing and maintaining ABC. No longer based on the "activities" of ABC, the method uses "equivalencies" in "resource groups" that are driven by one single cost driver - the time required to carry out the task.[10] This time is also different from ABC; in TDABC, time is approximated instead of finding the actual time it takes to complete a task for cost assigning.[11] Although TDABC is simpler to put into place and more accurate, it is difficult to measure time.[12]
Lean accounting methods have been developed in recent years to provide relevant and thorough accounting, control, and measurement systems without the complex and costly methods of manually driven ABC. However, lean accounting is a snapshot concept for capturing just partial derivatives or differentials of selected cost functions. Lean accounting takes an opposite direction from ABC by working to eliminate peculiar cost allocations rather than apply complex methods of resource allocation.
Lean accounting is primarily used within lean manufacturing. The approach has proven useful in many service industry areas including healthcare, construction, financial services, governments, and other industries.
Application of Theory of constraints (TOC) is analysed in a study[13] showing interesting aspects of productive coexistence of TOC and ABC application. Identifying cost drivers in ABC is described as somewhat equivalent to identifying bottlenecks in TOC. However, the more thorough insight into cost composition for the inspected processes justifies the study result: ABC may deliver a better structured analysis in respect to complex processes, and this is no surprise regarding the necessarily spent effort for detailed ABC reporting.
[edit] Methodology
Methodology of ABC focuses on cost allocation in operational management. ABC helps to segregate
Fixed cost
Variable cost
Overhead cost
The split of cost helps to identify cost drivers, if achieved. Direct labor and materials are relatively easy to trace directly to products, but it is more difficult to directly allocate indirect costs to products. Where products use common resources differently, some sort of weighting is needed in the cost allocation process. The cost driver is a factor that creates or drives the cost of the activity. For example, the cost of the activity of bank tellers can be ascribed to each product by measuring how long each product's transactions (cost driver) takes at the counter and then by measuring the number of each type of transaction. For the activity of running machinery, the driver is likely to be machine operating hours. That is, machine operating hours drive labour, maintenance, and power cost when the machines are running.
[edit] Application in routine business
ABC has proven its applicability beyond academic discussion. ABC is applicable throughout company financing, costing and accounting:
ABC is a modeling process applicable for full scope as well as for partial views.
ABC helps to identify inefficient products, departments and activities.
ABC helps to allocate more resources on profitable products, departments and activities.
ABC helps to control the costs at any per-product-level level and on a departmental level.
ABC helps to find unnecessary costs that may be eliminated.
ABC helps fixing the price of a product or service with any desired analytical resolution.
A reports summarises reasons for implementing ABC as mere unspecific and mainly for case study purposes[14] (in alphabetical order):
Better Management
Budgeting, performance measurement
Calculating costs more accurately
Ensuring product /customer profitability
Evaluating and justifying investments in new technologies
Improving product quality via better product and process design
Increasing competitiveness or coping with more competition
Management
Managing costs
Providing behavioural incentives by creating cost consciousness among employees
Responding to an increase in overheads
Responding to increased pressure from regulators
Supporting other management innovations such as TQM and JIT systems
Beyond such selective application of the concept, ABC may be extended to accounting, hence proliferating a full scope of cost generation in departments or along product manufacturing. Such extension, however, requires a degree of automatic data capture that prevents from cost increase in administering costs.
[edit] Limitations
Applicability of ABC is bound to cost of required data capture. That drives the prevalence to slow processes in services and administrations, where staff time consumed per task defines a dominant portion of cost. Hence, the reported application for production tasks do not appear as a favorized scenario.
[edit] Tracing Costs
Even in ABC, some overhead costs are difficult to assign to products and customers, such as the chief executive's salary. These costs are termed 'business sustaining' and are not assigned to products and customers because there is no meaningful method. This lump of unallocated overhead costs must nevertheless be met by contributions from each of the products, but it is not as large as the overhead costs before ABC is employed.
Although some may argue that costs untraceable to activities should be "arbitrarily allocated" to products, it is important to realize that the only purpose of ABC is to provide information to management. Therefore, there is no reason to assign any cost in an arbitrary manner.
[edit] Reducing cost of ABC modeling
ABC is considered a relatively costly accounting methodology.[15] As long as cost elements would have to be taken and notified just manually, the activity-based costing approach would remain arduous and the obtained completeness would be poor.
An escape from costly procedures may be found with transition from coarse scale cost modeling to fine scaled data capture for concurrent accounting.[16] The implementing of respective means shall redirect from the managerial level of the planning for entities of an activity type to the simply automated data capture technically detectable entities of paired events: Each two events of starting and ending an activity determine the duration of the very same activity.
The clock time of events plus identification of the persons involved and assets used may be notified easily with technical means. In contrast to locating technologies the identity and time capture always performs with desired precision and hig reliability. Application of classical logic supports for pairing the respective event times supported by captured identities. All modes of context and contributing assets and resources may be allocated and quantified for detailed costing in conjunction with such event detection. Hence agglomerating of collected data is suited to contribute to the costing model for activity based costing in all desirable detail. Modern identification technologies (e.g. RFID) provide the necessary instruments.
[edit] Transition to automated ABC accounting
The prerequisite for lesser cost in performing ABC is automating the data capture with an accounting extension that leads to the desired ABC model. Known approaches for event based accounting simply show the method for automation. Any transition of a current process from one stage to the next may be detected as a relevant event. Paired events easily form the respective activity.
The state of the art approach with authentication and authorization in IETF standard RADIUS gives an easy solution for accounting all workposition based activities. That simply defines the extension of the Authentication and Authorization (AA) concept to a more advanced AA and Accounting (AAA) concept. Respective approaches for AAA get defined and staffed in the context of mobile services, when using smart phones as e.a. intelligent agents or smart agents for automated capture of accounting data .
[edit] Public sector usage of ABC
When ABC is reportedly used in the public administration sector, the reported studies do not provide evidence about the success of methodology beyond justification of budgeting practise and existing service management and strategies.
Usage in the US Marine Corps started in 1999.[17][18][19][20] Its use by the UK Police has been mandated since the 2003-04 UK tax year as part of England and Wales’ National Policing Plan, specifically the Policing Performance Assessment Framework.
Aims of model
With ABC, an organization can soundly estimate the cost elements of entire products and services. That may prepare decisions on
either identify and eliminate those products and services that are unprofitable and lower the prices of those that are overpriced (product and service portfolio aim)
or identify and eliminate production or service processes that are ineffective and allocate processing concepts that lead to the very same product at a better yield (process re-engineering aim).
In a business organization, the ABC methodology assigns an organization's resource costs through activities to the products and services provided to its customers. ABC is generally used as a tool for understanding product and customer cost and profitability based on the production or performing processes. As such, ABC has predominantly been used to support strategic decisions such as pricing, outsourcing, identification and measurement of process improvement initiatives.
[edit] Prevalence
Following initial enthusiasm, ABC lost ground in the 1990s, to alternative metrics, such as Kaplan's balanced scorecard and economic value added. An independent 2008 report concluded that manually driven ABC was an inefficient use of resources: it was expensive and difficult to implement for small gains, and a poor value, and that alternative methods should be used.[1] Other reports show the broad band covered with the ABC methodology.[2]
ABC has stagnated over the last five to seven years,
— Kaplan, 1998
However, application of an activity based recording may be applied without change in methodology to an extension as an incremental activity based accounting, not replacing any synoptic and retrospective modeling process with costing, but to transform concurrent process accounting into a most authentic approach.
[edit] Historical development
Traditionally cost accountants had arbitrarily added a broad percentage of analysis into the indirect cost.[3] In addition, activities include actions that are performed both by people and machine. However, as the percentages of indirect or overhead costs rose, this technique became increasingly inaccurate, because indirect costs were not caused equally by all products. For example, one product might take more time in one expensive machine than another product—but since the amount of direct labor and materials might be the same, additional cost for use of the machine is not being recognized when the same broad 'on-cost' percentage is added to all products. Consequently, when multiple products share common costs, there is a danger of one product subsidizing another.
ABC is based on George Staubus' Activity Costing and Input-Output Accounting.[4] The concepts of ABC were developed in the manufacturing sector of the United States during the 1970s and 1980s. During this time, the Consortium for Advanced Management-International, now known simply as CAM-I, provided a formative role for studying and formalizing the principles that have become more formally known as Activity-Based Costing.[5]
Robin Cooper and Robert S. Kaplan, proponents of the Balanced Scorecard, brought notice to these concepts in a number of articles published in Harvard Business Review beginning in 1988. Cooper and Kaplan described ABC as an approach to solve the problems of traditional cost management systems. These traditional costing systems are often unable to determine accurately the actual costs of production and of the costs of related services. Consequently managers were making decisions based on inaccurate data especially where there are multiple products.
Instead of using broad arbitrary percentages to allocate costs, ABC seeks to identify cause and effect relationships to objectively assign costs. Once costs of the activities have been identified, the cost of each activity is attributed to each product to the extent that the product uses the activity. In this way ABC often identifies areas of high overhead costs per unit and so directs attention to finding ways to reduce the costs or to charge more for costly products.
Activity-based costing was first clearly defined in 1987 by Robert S. Kaplan and W. Bruns as a chapter in their book Accounting and Management: A Field Study Perspective.[6] They initially focused on manufacturing industry where increasing technology and productivity improvements have reduced the relative proportion of the direct costs of labor and materials, but have increased relative proportion of indirect costs. For example, increased automation has reduced labor, which is a direct cost, but has increased depreciation, which is an indirect cost.
Like manufacturing industries, financial institutions have diverse products and customers, which can cause cross-product, cross-customer subsidies. Since personnel expenses represent the largest single component of non-interest expense in financial institutions, these costs must also be attributed more accurately to products and customers. Activity-based costing, even though originally developed for manufacturing, may even be a more useful tool for doing this.[7][8]
Activity-based costing was later explained in 1999 by Peter F. Drucker in the book Management Challenges of the 21st Century.[9] He states that traditional cost accounting focuses on what it costs to do something, for example, to cut a screw thread; activity-based costing also records the cost of not doing, such as the cost of waiting for a needed part. Activity-based costing records the costs that traditional cost accounting does not do.
The overhead costs assigned to each activity comprise an activity cost pool.
[edit] Alternatives
Time-driven activity-based costing (TDABC) works to improve the issues with implementing and maintaining ABC. No longer based on the "activities" of ABC, the method uses "equivalencies" in "resource groups" that are driven by one single cost driver - the time required to carry out the task.[10] This time is also different from ABC; in TDABC, time is approximated instead of finding the actual time it takes to complete a task for cost assigning.[11] Although TDABC is simpler to put into place and more accurate, it is difficult to measure time.[12]
Lean accounting methods have been developed in recent years to provide relevant and thorough accounting, control, and measurement systems without the complex and costly methods of manually driven ABC. However, lean accounting is a snapshot concept for capturing just partial derivatives or differentials of selected cost functions. Lean accounting takes an opposite direction from ABC by working to eliminate peculiar cost allocations rather than apply complex methods of resource allocation.
Lean accounting is primarily used within lean manufacturing. The approach has proven useful in many service industry areas including healthcare, construction, financial services, governments, and other industries.
Application of Theory of constraints (TOC) is analysed in a study[13] showing interesting aspects of productive coexistence of TOC and ABC application. Identifying cost drivers in ABC is described as somewhat equivalent to identifying bottlenecks in TOC. However, the more thorough insight into cost composition for the inspected processes justifies the study result: ABC may deliver a better structured analysis in respect to complex processes, and this is no surprise regarding the necessarily spent effort for detailed ABC reporting.
[edit] Methodology
Methodology of ABC focuses on cost allocation in operational management. ABC helps to segregate
Fixed cost
Variable cost
Overhead cost
The split of cost helps to identify cost drivers, if achieved. Direct labor and materials are relatively easy to trace directly to products, but it is more difficult to directly allocate indirect costs to products. Where products use common resources differently, some sort of weighting is needed in the cost allocation process. The cost driver is a factor that creates or drives the cost of the activity. For example, the cost of the activity of bank tellers can be ascribed to each product by measuring how long each product's transactions (cost driver) takes at the counter and then by measuring the number of each type of transaction. For the activity of running machinery, the driver is likely to be machine operating hours. That is, machine operating hours drive labour, maintenance, and power cost when the machines are running.
[edit] Application in routine business
ABC has proven its applicability beyond academic discussion. ABC is applicable throughout company financing, costing and accounting:
ABC is a modeling process applicable for full scope as well as for partial views.
ABC helps to identify inefficient products, departments and activities.
ABC helps to allocate more resources on profitable products, departments and activities.
ABC helps to control the costs at any per-product-level level and on a departmental level.
ABC helps to find unnecessary costs that may be eliminated.
ABC helps fixing the price of a product or service with any desired analytical resolution.
A reports summarises reasons for implementing ABC as mere unspecific and mainly for case study purposes[14] (in alphabetical order):
Better Management
Budgeting, performance measurement
Calculating costs more accurately
Ensuring product /customer profitability
Evaluating and justifying investments in new technologies
Improving product quality via better product and process design
Increasing competitiveness or coping with more competition
Management
Managing costs
Providing behavioural incentives by creating cost consciousness among employees
Responding to an increase in overheads
Responding to increased pressure from regulators
Supporting other management innovations such as TQM and JIT systems
Beyond such selective application of the concept, ABC may be extended to accounting, hence proliferating a full scope of cost generation in departments or along product manufacturing. Such extension, however, requires a degree of automatic data capture that prevents from cost increase in administering costs.
[edit] Limitations
Applicability of ABC is bound to cost of required data capture. That drives the prevalence to slow processes in services and administrations, where staff time consumed per task defines a dominant portion of cost. Hence, the reported application for production tasks do not appear as a favorized scenario.
[edit] Tracing Costs
Even in ABC, some overhead costs are difficult to assign to products and customers, such as the chief executive's salary. These costs are termed 'business sustaining' and are not assigned to products and customers because there is no meaningful method. This lump of unallocated overhead costs must nevertheless be met by contributions from each of the products, but it is not as large as the overhead costs before ABC is employed.
Although some may argue that costs untraceable to activities should be "arbitrarily allocated" to products, it is important to realize that the only purpose of ABC is to provide information to management. Therefore, there is no reason to assign any cost in an arbitrary manner.
[edit] Reducing cost of ABC modeling
ABC is considered a relatively costly accounting methodology.[15] As long as cost elements would have to be taken and notified just manually, the activity-based costing approach would remain arduous and the obtained completeness would be poor.
An escape from costly procedures may be found with transition from coarse scale cost modeling to fine scaled data capture for concurrent accounting.[16] The implementing of respective means shall redirect from the managerial level of the planning for entities of an activity type to the simply automated data capture technically detectable entities of paired events: Each two events of starting and ending an activity determine the duration of the very same activity.
The clock time of events plus identification of the persons involved and assets used may be notified easily with technical means. In contrast to locating technologies the identity and time capture always performs with desired precision and hig reliability. Application of classical logic supports for pairing the respective event times supported by captured identities. All modes of context and contributing assets and resources may be allocated and quantified for detailed costing in conjunction with such event detection. Hence agglomerating of collected data is suited to contribute to the costing model for activity based costing in all desirable detail. Modern identification technologies (e.g. RFID) provide the necessary instruments.
[edit] Transition to automated ABC accounting
The prerequisite for lesser cost in performing ABC is automating the data capture with an accounting extension that leads to the desired ABC model. Known approaches for event based accounting simply show the method for automation. Any transition of a current process from one stage to the next may be detected as a relevant event. Paired events easily form the respective activity.
The state of the art approach with authentication and authorization in IETF standard RADIUS gives an easy solution for accounting all workposition based activities. That simply defines the extension of the Authentication and Authorization (AA) concept to a more advanced AA and Accounting (AAA) concept. Respective approaches for AAA get defined and staffed in the context of mobile services, when using smart phones as e.a. intelligent agents or smart agents for automated capture of accounting data .
[edit] Public sector usage of ABC
When ABC is reportedly used in the public administration sector, the reported studies do not provide evidence about the success of methodology beyond justification of budgeting practise and existing service management and strategies.
Usage in the US Marine Corps started in 1999.[17][18][19][20] Its use by the UK Police has been mandated since the 2003-04 UK tax year as part of England and Wales’ National Policing Plan, specifically the Policing Performance Assessment Framework.
Balanced scorecard
The Balanced Scorecard (BSC) is a strategic performance management tool - a semi-standard structured report, supported by proven design methods and automation tools, that can be used by managers to keep track of the execution of activities by the staff within their control and to monitor the consequences arising from these actions.[1] It is perhaps the best known of several such frameworks (it is the most widely adopted performance management framework reported in the annual survey of management tools undertaken by Bain & Company, and has been widely adopted in English-speaking western countries and Scandinavia in the early 1990s). Since 2000, use of the Balanced Scorecard, its derivatives (e.g., Performance Prism), and other similar tools (e.g., Results Based Management) has also become common in the Middle East, Asia and Spanish-speaking countries.
Characteristics
The characteristic of the Balanced Scorecard and its derivatives is the presentation of a mixture of financial and non-financial measures each compared to a 'target' value within a single concise report. The report is not meant to be a replacement for traditional financial or operational reports but a succinct summary that captures the information most relevant to those reading it. It is the method by which this 'most relevant' information is determined (i.e. the design processes used to select the content) that most differentiates the various versions of the tool in circulation.
As a model of performance, the BSC is effective in that "it articulates the links between leading inputs (human and physical), processes, and lagging outcomes and focuses on the importance of managing these components to achieve the organization's strategic priorities",[2]
The first versions of Balanced Scorecard asserted that relevance should derive from the corporate strategy, and proposed design methods that focused on choosing measures and targets associated with the main activities required to implement the strategy. As the initial audience for this were the readers of the Harvard Business Review, the proposal was translated into a form that made sense to a typical reader of that journal - one relevant to a mid-sized US business. Accordingly, initial designs were encouraged to measure three categories of non-financial measure in addition to financial outputs - those of "Customer," "Internal Business Processes" and "Learning and Growth." Clearly these categories were not so relevant to non-profits or units within complex organisations (which might have high degrees of internal specialisation), and much of the early literature on Balanced Scorecard focused on suggestions of alternative 'perspectives' that might have more relevance to these groups.
Modern Balanced Scorecard thinking has evolved considerably since the initial ideas proposed in the late 1980s and early 1990s, and the modern performance management tools including Balanced Scorecard are significantly improved - being more flexible (to suit a wider range of organisational types) and more effective (as design methods have evolved to make them easier to design, and use).
[edit] History
The first Balanced Scorecard was created by Art Schneiderman (an independent consultant on the management of processes) in 1987 at Analog Devices, a mid-sized semi-conductor company.[3] Art Schneiderman participated in an unrelated research study in 1990 led by Dr. Robert S. Kaplan in conjunction with US management consultancy Nolan-Norton, and during this study described his work on Balanced Scorecard. Subsequently, Kaplan and David P. Norton included anonymous details of this use of Balanced Scorecard in their 1992 article on Balanced Scorecard.[4] Kaplan and Norton's article wasn't the only paper on the topic published in early 1992[5] but the 1992 Kaplan and Norton paper was a popular success, and was quickly followed by a second in 1993.[6] In 1996, they published the book The Balanced Scorecard.[7] These articles and the first book spread knowledge of the concept of Balanced Scorecard widely, but perhaps wrongly have led to Kaplan and Norton being seen as the creators of the Balanced Scorecard concept.
While the "Balanced Scorecard" concept and terminology was coined by Art Schneiderman, the roots of performance management as an activity run deep in management literature and practice. Management historians such as Alfred Chandler suggest the origins of performance management can be seen in the emergence of the complex organisation - most notably during the 19th Century in the USA.[8] More recent influences may include the pioneering work of General Electric on performance measurement reporting in the 1950s and the work of French process engineers (who created the tableau de bord – literally, a "dashboard" of performance measures) in the early part of the 20th century. The tool also draws strongly on the ideas of the 'resource based view of the firm'[9] proposed by Edith Penrose. However it should be noted that none of these influences is explicitly linked to original descriptions of Balanced Scorecard by Schneiderman, Maisel, or Kaplan & Norton.
Kaplan and Norton's first book, The Balanced Scorecard, remains their most popular. The book reflects the earliest incarnations of Balanced Scorecard - effectively restating the concept as described in the second Harvard Business Review article. Their second book, The Strategy Focused Organization, echoed work by others (particularly in Scandinavia[10]) on the value of visually documenting the links between measures by proposing the "Strategic Linkage Model" or strategy map. Since then Balanced Scorecard books have become more common - in early 2010 Amazon was listing several hundred titles in English which had Balanced Scorecard in the title.
[edit] Design
Design of a Balanced Scorecard ultimately is about the identification of a small number of financial and non-financial measures and attaching targets to them, so that when they are reviewed it is possible to determine whether current performance 'meets expectations'. The idea behind this is that by alerting managers to areas where performance deviates from expectations, they can be encouraged to focus their attention on these areas, and hopefully as a result trigger improved performance within the part of the organisation they lead.
The original thinking behind Balanced Scorecard was for it to be focused on information relating to the implementation of a strategy, and perhaps unsurprisingly over time there has been a blurring of the boundaries between conventional strategic planning and control activities and those required to design a Balanced Scorecard. This is illustrated well by the four steps required to design a Balanced Scorecard included in Kaplan & Norton's writing on the subject in the late 1990s, where they assert four steps as being part of the Balanced Scorecard design process:
Translating the vision into operational goals;
Communicating the vision and link it to individual performance;
Business planning; index setting
Feedback and learning, and adjusting the strategy accordingly.
These steps go far beyond the simple task of identifying a small number of financial and non-financial measures, but illustrate the requirement for whatever design process is used to fit within broader thinking about how the resulting Balanced Scorecard will integrate with the wider business management process. This is also illustrated by books and articles referring to Balanced Scorecards confusing the design process elements and the Balanced Scorecard itself. In particular, it is common for people to refer to a “strategic linkage model” or “strategy map” as being a Balanced Scorecard.
Although it helps focus managers' attention on strategic issues and the management of the implementation of strategy, it is important to remember that the Balanced Scorecard itself has no role in the formation of strategy. In fact, Balanced Scorecards can comfortably co-exist with strategic planning systems and other tools.
[edit] Original design method
The earliest Balanced Scorecards comprised simple tables broken into four sections - typically these "perspectives" were labeled "Financial", "Customer", "Internal Business Processes", and "Learning and Growth". Designing the Balanced Scorecard required selecting five or six good measures for each perspective.
Many authors have since suggested alternative headings for these perspectives, and also suggested using either additional or fewer perspectives. These suggestions were notably triggered by a recognition that different but equivalent headings would yield alternative sets of measures. The major design challenge faced with this type of Balanced Scorecard is justifying the choice of measures made. "Of all the measures you could have chosen, why did you choose these?" This common question is hard to answer using this type of design process. If users are not confident that the measures within the Balanced Scorecard are well chosen, they will have less confidence in the information it provides. Although less common, these early-style Balanced Scorecards are still designed and used today.
In short, early-style Balanced Scorecards are hard to design in a way that builds confidence that they are well designed. Because of this, many are abandoned soon after completion.
[edit] Improved design methods
In the mid 1990s, an improved design method emerged. In the new method, measures are selected based on a set of "strategic objectives" plotted on a "strategic linkage model" or "strategy map". With this modified approach, the strategic objectives are distributed across the four measurement perspectives, so as to "connect the dots" to form a visual presentation of strategy and measures.
To develop a strategy map, managers select a few strategic objectives within each of the perspectives, and then define the cause-effect chain among these objectives by drawing links between them. A Balanced Scorecard of strategic performance measures is then derived directly from the strategic objectives. This type of approach provides greater contextual justification for the measures chosen, and is generally easier for managers to work through. This style of Balanced Scorecard has been commonly used since 1996 or so: it is significantly different in approach to the methods originally proposed, and so can be thought of as representing the "2nd Generation" of design approach adopted for Balanced Scorecard since its introduction.
Several design issues still remain with this enhanced approach to Balanced Scorecard design, but it has been much more successful than the design approach it superseded.
In the late 1990s, the design approach had evolved yet again. One problem with the "2nd generation" design approach described above was that the plotting of causal links amongst twenty or so medium-term strategic goals was still a relatively abstract activity. In practice it ignored the fact that opportunities to intervene, to influence strategic goals are, and need to be anchored in the "now;" in current and real management activity. Secondly, the need to "roll forward" and test the impact of these goals necessitated the creation of an additional design instrument; the Vision or Destination Statement. This device was a statement of what "strategic success," or the "strategic end-state" looked like. It was quickly realized, that if a Destination Statement was created at the beginning of the design process then it was much easier to select strategic Activity and Outcome objectives to respond to it. Measures and targets could then be selected to track the achievement of these objectives. Design methods that incorporate a "Destination Statement" or equivalent (e.g. the Results Based Management method proposed by the UN in 2002) represent a tangibly different design approach to those that went before, and have been proposed as representing a "3rd Generation" design method for Balanced Scorecard.
Design methods for Balanced Scorecard continue to evolve and adapt to reflect the deficiencies in the currently used methods, and the particular needs of communities of interest (e.g. NGO's and Government Departments have found the 3rd Generation methods embedded in Results Based Management more useful than 1st or 2nd Generation design methods).
[edit] Popularity
In 1997, Kurtzman found that 64 percent of the companies questioned were measuring performance from a number of perspectives in a similar way to the Balanced Scorecard.
Balanced Scorecards have been implemented by government agencies, military units, business units and corporations as a whole, non-profit organisations, and schools.
Many examples of Balanced Scorecards can be found via Web searches. However, adapting one organisation's Balanced Scorecard to another is generally not advised by theorists, who believe that much of the benefit of the Balanced Scorecard comes from the design process itself. Indeed, it could be argued that many failures in the early days of Balanced Scorecard could be attributed to this problem, in that early Balanced Scorecards were often designed remotely by consultants. Managers did not trust, and so failed to engage with and use these measure suites created by people lacking knowledge of the organisation and management responsibility.
[edit] Variants, alternatives and criticisms
Since the Balanced Scorecard was popularized in the early 1990s, a large number of alternatives to the original 'four box' Balanced Scorecard promoted by Kaplan and Norton in their various articles and books have emerged. Most have very limited application, and are typically proposed either by academics as vehicles for promoting other agendas (such as green issues),[11] or consultants as an attempt at differentiation to promote sales of books and / or consultancy.[12]
Many of the variations proposed are broadly similar, and a research paper published in 2002[13] attempted to identify a pattern in these variations - noting three distinct types of variation. The variations appeared to be part of an evolution of the Balanced Scorecard concept, and so the paper refers to these distinct types as "Generations". Broadly, the original 'measures in boxes' type design (as proposed by Kaplan & Norton) constitutes the 1st Generation Balanced Scorecard design; Balanced Scorecard designs that include a 'strategy map' or 'strategic linkage model' (e.g. the Performance Prism, later Kaplan & Norton designs,[14] the Performance Driver model of Olve & Wetter[15]) constitute the 2nd Generation of Balanced Scorecard design; and designs that augment the strategy map / strategic linkage model with a separate document describing the long-term outcomes sought from the strategy (the "Destination Statement" idea) comprise the 3rd Generation Balanced Scorecard design. Examples of the 3rd Generation Balanced Scorecard design include the Third Generation Balanced Scorecard itself, and the performance management elements of the UN's Results Based Management model.
[edit] Criticism
The Balanced Scorecard has always attracted criticism from a variety of sources. Most has come from the academic community, who dislike the empirical nature of the framework: Kaplan and Norton notoriously failed to include any citation of prior art in their initial papers on the topic. Some of this criticism focuses on technical flaws in the methods and design of the original Balanced Scorecard proposed by Kaplan and Norton,[16] and has over time driven the evolution of the device through its various Generations. Other academics have simply focused on the lack of citation support.[17] But a general weakness of this type of criticism is that it typically uses the 1st Generation Balanced Scorecard as its object: many of the flaws identified are addressed in other works published since the original Kaplan & Norton works in the early 1990s.
Another criticism, usually from pundits and consultants, is that the Balanced Scorecard does not provide a bottom line score or a unified view with clear recommendations: it is simply a list of metrics.[18] These critics usually include in their criticism suggestions about how the 'unanswered' question postulated could be answered. Typically however, the unanswered question relates to things outside the scope of Balanced Scorecard itself (such as developing strategies).[19]
There are a few empirical studies linking the use of Balanced Scorecards to better decision making or improved financial performance of companies, but some work has been done in these areas. However broadcast surveys of usage have difficulties in this respect, due to the wide variations in definition of 'what a Balanced Scorecard is' noted above (making it hard to work out in a survey if you are comparing like with like). Single organization case studies suffer from the 'lack of a control' issue common to any study of organizational change - you don't know what the organization would have achieved if the change had not been made, so it is difficult to attribute changes observed over time to a single intervention (such as introducing a Balanced Scorecard). However, such studies as have been done have typically found Balanced Scorecard to be useful.[20]
Balanced Scorecard used for incentive based pay
A common use of Balanced Scorecard is to support the payments of incentives to individuals, even though it was not designed for this purpose nor is particularly suited to it[21]. Perhaps unsurprisingly, versions of generic concerns about performance appraisal are as a result a variety of complaints are levelled at the use of Balanced Scorecard for this purpose[by whom?]. Examples of the concerns raised are that use of Balanced Scorecard for appraisal / incentive use may:
result in the 'forced distribution' of people into performing groups[citation needed]
lead to a 'one size fits all' strategy to performance management.[citation needed]
encourage organisations to evaluate performance using a bell curve method. This in turn can mean that a set percentage of staff will be categorized as 'under performing'.[citation needed]
encourage 'peer ranking' resulting in assessment of performance relative to the performance of other employees, rather than fixed standards.[citation needed]
[edit] The four perspectives
The 1st Generation design method proposed by Kaplan and Norton was based on the use of three non-financial topic areas as prompts to aid the identification of non-financial measures in addition to one looking at Financial. Four "perspectives" were proposed:[22]
Financial: encourages the identification of a few relevant high-level financial measures. In particular, designers were encouraged to choose measures that helped inform the answer to the question "How do we look to shareholders?"
Customer: encourages the identification of measures that answer the question "How do customers see us?"
Internal Business Processes: encourages the identification of measures that answer the question "What must we excel at?"
Learning and Growth: encourages the identification of measures that answer the question "Can we continue to improve and create value?".
These 'prompt questions' illustrate that Kaplan and Norton were thinking about the needs of small to medium sized commercial organizations in the USA[citation needed] (the target demographic for the Harvard Business Review) when choosing these topic areas. They are not very helpful to other kinds of organizations, and much of what has been written on Balanced Scorecard since has, in one way or another, focused on the identification of alternative headings more suited to a broader range of organizations.
[edit] Measures
The Balanced Scorecard is ultimately about choosing measures and targets. The various design methods proposed are intended to help in the identification of these measures and targets, usually by a process of abstraction that narrows the search space for a measure (e.g. find a measure to inform about a particular 'objective' within the Customer perspective, rather than simply finding a measure for 'Customer'). Although lists of general and industry-specific measure definitions can be found in the case studies and methodological articles and books presented in the references section. In general measure catalogues and suggestions from books are only helpful 'after the event' - in the same way that a Dictionary can help you confirm the spelling (and usage) of a word, but only once you have decided to use it proficiently.
[edit] Software tools
It is important to recognise that the Balanced Scorecard by definition is not a complex thing - typically no more than about 20 measures spread across a mix of financial and non-financial topics, and easily reported manually (on paper, or using simple office software).
The processes of collecting, reporting, and distributing Balanced Scorecard information can be labour intensive and prone to procedural problems (for example, getting all relevant people to return the information required by the required date). The simplest mechanism to use is to delegate these activities to an individual, and many Balanced Scorecards are reported via ad-hoc methods based around email, phone calls and office software.
In more complex organisations, where there are multiple Balanced Scorecards to report and/or a need for co-ordination of results between Balanced Scorecards (for example, if one level of Balanced Scorecard reports relies on information collected and reported at a lower level) the use of individual Balanced Scorecard reporters is problematic. Where these conditions apply, organisations use Balanced Scorecard reporting software to automate the production and distribution of these reports.
A 2009 survey[23] of software usage found roughly one third of organisations used office software to report their Balanced Scorecard, one third used bespoke software developed specifically for their own use, and one third used one of the many commercial packages available.
In February 2011 over 100 Balanced Scorecard reporting applications (i.e. supporting the automation of data collection, reporting and analysis) were available.
Characteristics
The characteristic of the Balanced Scorecard and its derivatives is the presentation of a mixture of financial and non-financial measures each compared to a 'target' value within a single concise report. The report is not meant to be a replacement for traditional financial or operational reports but a succinct summary that captures the information most relevant to those reading it. It is the method by which this 'most relevant' information is determined (i.e. the design processes used to select the content) that most differentiates the various versions of the tool in circulation.
As a model of performance, the BSC is effective in that "it articulates the links between leading inputs (human and physical), processes, and lagging outcomes and focuses on the importance of managing these components to achieve the organization's strategic priorities",[2]
The first versions of Balanced Scorecard asserted that relevance should derive from the corporate strategy, and proposed design methods that focused on choosing measures and targets associated with the main activities required to implement the strategy. As the initial audience for this were the readers of the Harvard Business Review, the proposal was translated into a form that made sense to a typical reader of that journal - one relevant to a mid-sized US business. Accordingly, initial designs were encouraged to measure three categories of non-financial measure in addition to financial outputs - those of "Customer," "Internal Business Processes" and "Learning and Growth." Clearly these categories were not so relevant to non-profits or units within complex organisations (which might have high degrees of internal specialisation), and much of the early literature on Balanced Scorecard focused on suggestions of alternative 'perspectives' that might have more relevance to these groups.
Modern Balanced Scorecard thinking has evolved considerably since the initial ideas proposed in the late 1980s and early 1990s, and the modern performance management tools including Balanced Scorecard are significantly improved - being more flexible (to suit a wider range of organisational types) and more effective (as design methods have evolved to make them easier to design, and use).
[edit] History
The first Balanced Scorecard was created by Art Schneiderman (an independent consultant on the management of processes) in 1987 at Analog Devices, a mid-sized semi-conductor company.[3] Art Schneiderman participated in an unrelated research study in 1990 led by Dr. Robert S. Kaplan in conjunction with US management consultancy Nolan-Norton, and during this study described his work on Balanced Scorecard. Subsequently, Kaplan and David P. Norton included anonymous details of this use of Balanced Scorecard in their 1992 article on Balanced Scorecard.[4] Kaplan and Norton's article wasn't the only paper on the topic published in early 1992[5] but the 1992 Kaplan and Norton paper was a popular success, and was quickly followed by a second in 1993.[6] In 1996, they published the book The Balanced Scorecard.[7] These articles and the first book spread knowledge of the concept of Balanced Scorecard widely, but perhaps wrongly have led to Kaplan and Norton being seen as the creators of the Balanced Scorecard concept.
While the "Balanced Scorecard" concept and terminology was coined by Art Schneiderman, the roots of performance management as an activity run deep in management literature and practice. Management historians such as Alfred Chandler suggest the origins of performance management can be seen in the emergence of the complex organisation - most notably during the 19th Century in the USA.[8] More recent influences may include the pioneering work of General Electric on performance measurement reporting in the 1950s and the work of French process engineers (who created the tableau de bord – literally, a "dashboard" of performance measures) in the early part of the 20th century. The tool also draws strongly on the ideas of the 'resource based view of the firm'[9] proposed by Edith Penrose. However it should be noted that none of these influences is explicitly linked to original descriptions of Balanced Scorecard by Schneiderman, Maisel, or Kaplan & Norton.
Kaplan and Norton's first book, The Balanced Scorecard, remains their most popular. The book reflects the earliest incarnations of Balanced Scorecard - effectively restating the concept as described in the second Harvard Business Review article. Their second book, The Strategy Focused Organization, echoed work by others (particularly in Scandinavia[10]) on the value of visually documenting the links between measures by proposing the "Strategic Linkage Model" or strategy map. Since then Balanced Scorecard books have become more common - in early 2010 Amazon was listing several hundred titles in English which had Balanced Scorecard in the title.
[edit] Design
Design of a Balanced Scorecard ultimately is about the identification of a small number of financial and non-financial measures and attaching targets to them, so that when they are reviewed it is possible to determine whether current performance 'meets expectations'. The idea behind this is that by alerting managers to areas where performance deviates from expectations, they can be encouraged to focus their attention on these areas, and hopefully as a result trigger improved performance within the part of the organisation they lead.
The original thinking behind Balanced Scorecard was for it to be focused on information relating to the implementation of a strategy, and perhaps unsurprisingly over time there has been a blurring of the boundaries between conventional strategic planning and control activities and those required to design a Balanced Scorecard. This is illustrated well by the four steps required to design a Balanced Scorecard included in Kaplan & Norton's writing on the subject in the late 1990s, where they assert four steps as being part of the Balanced Scorecard design process:
Translating the vision into operational goals;
Communicating the vision and link it to individual performance;
Business planning; index setting
Feedback and learning, and adjusting the strategy accordingly.
These steps go far beyond the simple task of identifying a small number of financial and non-financial measures, but illustrate the requirement for whatever design process is used to fit within broader thinking about how the resulting Balanced Scorecard will integrate with the wider business management process. This is also illustrated by books and articles referring to Balanced Scorecards confusing the design process elements and the Balanced Scorecard itself. In particular, it is common for people to refer to a “strategic linkage model” or “strategy map” as being a Balanced Scorecard.
Although it helps focus managers' attention on strategic issues and the management of the implementation of strategy, it is important to remember that the Balanced Scorecard itself has no role in the formation of strategy. In fact, Balanced Scorecards can comfortably co-exist with strategic planning systems and other tools.
[edit] Original design method
The earliest Balanced Scorecards comprised simple tables broken into four sections - typically these "perspectives" were labeled "Financial", "Customer", "Internal Business Processes", and "Learning and Growth". Designing the Balanced Scorecard required selecting five or six good measures for each perspective.
Many authors have since suggested alternative headings for these perspectives, and also suggested using either additional or fewer perspectives. These suggestions were notably triggered by a recognition that different but equivalent headings would yield alternative sets of measures. The major design challenge faced with this type of Balanced Scorecard is justifying the choice of measures made. "Of all the measures you could have chosen, why did you choose these?" This common question is hard to answer using this type of design process. If users are not confident that the measures within the Balanced Scorecard are well chosen, they will have less confidence in the information it provides. Although less common, these early-style Balanced Scorecards are still designed and used today.
In short, early-style Balanced Scorecards are hard to design in a way that builds confidence that they are well designed. Because of this, many are abandoned soon after completion.
[edit] Improved design methods
In the mid 1990s, an improved design method emerged. In the new method, measures are selected based on a set of "strategic objectives" plotted on a "strategic linkage model" or "strategy map". With this modified approach, the strategic objectives are distributed across the four measurement perspectives, so as to "connect the dots" to form a visual presentation of strategy and measures.
To develop a strategy map, managers select a few strategic objectives within each of the perspectives, and then define the cause-effect chain among these objectives by drawing links between them. A Balanced Scorecard of strategic performance measures is then derived directly from the strategic objectives. This type of approach provides greater contextual justification for the measures chosen, and is generally easier for managers to work through. This style of Balanced Scorecard has been commonly used since 1996 or so: it is significantly different in approach to the methods originally proposed, and so can be thought of as representing the "2nd Generation" of design approach adopted for Balanced Scorecard since its introduction.
Several design issues still remain with this enhanced approach to Balanced Scorecard design, but it has been much more successful than the design approach it superseded.
In the late 1990s, the design approach had evolved yet again. One problem with the "2nd generation" design approach described above was that the plotting of causal links amongst twenty or so medium-term strategic goals was still a relatively abstract activity. In practice it ignored the fact that opportunities to intervene, to influence strategic goals are, and need to be anchored in the "now;" in current and real management activity. Secondly, the need to "roll forward" and test the impact of these goals necessitated the creation of an additional design instrument; the Vision or Destination Statement. This device was a statement of what "strategic success," or the "strategic end-state" looked like. It was quickly realized, that if a Destination Statement was created at the beginning of the design process then it was much easier to select strategic Activity and Outcome objectives to respond to it. Measures and targets could then be selected to track the achievement of these objectives. Design methods that incorporate a "Destination Statement" or equivalent (e.g. the Results Based Management method proposed by the UN in 2002) represent a tangibly different design approach to those that went before, and have been proposed as representing a "3rd Generation" design method for Balanced Scorecard.
Design methods for Balanced Scorecard continue to evolve and adapt to reflect the deficiencies in the currently used methods, and the particular needs of communities of interest (e.g. NGO's and Government Departments have found the 3rd Generation methods embedded in Results Based Management more useful than 1st or 2nd Generation design methods).
[edit] Popularity
In 1997, Kurtzman found that 64 percent of the companies questioned were measuring performance from a number of perspectives in a similar way to the Balanced Scorecard.
Balanced Scorecards have been implemented by government agencies, military units, business units and corporations as a whole, non-profit organisations, and schools.
Many examples of Balanced Scorecards can be found via Web searches. However, adapting one organisation's Balanced Scorecard to another is generally not advised by theorists, who believe that much of the benefit of the Balanced Scorecard comes from the design process itself. Indeed, it could be argued that many failures in the early days of Balanced Scorecard could be attributed to this problem, in that early Balanced Scorecards were often designed remotely by consultants. Managers did not trust, and so failed to engage with and use these measure suites created by people lacking knowledge of the organisation and management responsibility.
[edit] Variants, alternatives and criticisms
Since the Balanced Scorecard was popularized in the early 1990s, a large number of alternatives to the original 'four box' Balanced Scorecard promoted by Kaplan and Norton in their various articles and books have emerged. Most have very limited application, and are typically proposed either by academics as vehicles for promoting other agendas (such as green issues),[11] or consultants as an attempt at differentiation to promote sales of books and / or consultancy.[12]
Many of the variations proposed are broadly similar, and a research paper published in 2002[13] attempted to identify a pattern in these variations - noting three distinct types of variation. The variations appeared to be part of an evolution of the Balanced Scorecard concept, and so the paper refers to these distinct types as "Generations". Broadly, the original 'measures in boxes' type design (as proposed by Kaplan & Norton) constitutes the 1st Generation Balanced Scorecard design; Balanced Scorecard designs that include a 'strategy map' or 'strategic linkage model' (e.g. the Performance Prism, later Kaplan & Norton designs,[14] the Performance Driver model of Olve & Wetter[15]) constitute the 2nd Generation of Balanced Scorecard design; and designs that augment the strategy map / strategic linkage model with a separate document describing the long-term outcomes sought from the strategy (the "Destination Statement" idea) comprise the 3rd Generation Balanced Scorecard design. Examples of the 3rd Generation Balanced Scorecard design include the Third Generation Balanced Scorecard itself, and the performance management elements of the UN's Results Based Management model.
[edit] Criticism
The Balanced Scorecard has always attracted criticism from a variety of sources. Most has come from the academic community, who dislike the empirical nature of the framework: Kaplan and Norton notoriously failed to include any citation of prior art in their initial papers on the topic. Some of this criticism focuses on technical flaws in the methods and design of the original Balanced Scorecard proposed by Kaplan and Norton,[16] and has over time driven the evolution of the device through its various Generations. Other academics have simply focused on the lack of citation support.[17] But a general weakness of this type of criticism is that it typically uses the 1st Generation Balanced Scorecard as its object: many of the flaws identified are addressed in other works published since the original Kaplan & Norton works in the early 1990s.
Another criticism, usually from pundits and consultants, is that the Balanced Scorecard does not provide a bottom line score or a unified view with clear recommendations: it is simply a list of metrics.[18] These critics usually include in their criticism suggestions about how the 'unanswered' question postulated could be answered. Typically however, the unanswered question relates to things outside the scope of Balanced Scorecard itself (such as developing strategies).[19]
There are a few empirical studies linking the use of Balanced Scorecards to better decision making or improved financial performance of companies, but some work has been done in these areas. However broadcast surveys of usage have difficulties in this respect, due to the wide variations in definition of 'what a Balanced Scorecard is' noted above (making it hard to work out in a survey if you are comparing like with like). Single organization case studies suffer from the 'lack of a control' issue common to any study of organizational change - you don't know what the organization would have achieved if the change had not been made, so it is difficult to attribute changes observed over time to a single intervention (such as introducing a Balanced Scorecard). However, such studies as have been done have typically found Balanced Scorecard to be useful.[20]
Balanced Scorecard used for incentive based pay
A common use of Balanced Scorecard is to support the payments of incentives to individuals, even though it was not designed for this purpose nor is particularly suited to it[21]. Perhaps unsurprisingly, versions of generic concerns about performance appraisal are as a result a variety of complaints are levelled at the use of Balanced Scorecard for this purpose[by whom?]. Examples of the concerns raised are that use of Balanced Scorecard for appraisal / incentive use may:
result in the 'forced distribution' of people into performing groups[citation needed]
lead to a 'one size fits all' strategy to performance management.[citation needed]
encourage organisations to evaluate performance using a bell curve method. This in turn can mean that a set percentage of staff will be categorized as 'under performing'.[citation needed]
encourage 'peer ranking' resulting in assessment of performance relative to the performance of other employees, rather than fixed standards.[citation needed]
[edit] The four perspectives
The 1st Generation design method proposed by Kaplan and Norton was based on the use of three non-financial topic areas as prompts to aid the identification of non-financial measures in addition to one looking at Financial. Four "perspectives" were proposed:[22]
Financial: encourages the identification of a few relevant high-level financial measures. In particular, designers were encouraged to choose measures that helped inform the answer to the question "How do we look to shareholders?"
Customer: encourages the identification of measures that answer the question "How do customers see us?"
Internal Business Processes: encourages the identification of measures that answer the question "What must we excel at?"
Learning and Growth: encourages the identification of measures that answer the question "Can we continue to improve and create value?".
These 'prompt questions' illustrate that Kaplan and Norton were thinking about the needs of small to medium sized commercial organizations in the USA[citation needed] (the target demographic for the Harvard Business Review) when choosing these topic areas. They are not very helpful to other kinds of organizations, and much of what has been written on Balanced Scorecard since has, in one way or another, focused on the identification of alternative headings more suited to a broader range of organizations.
[edit] Measures
The Balanced Scorecard is ultimately about choosing measures and targets. The various design methods proposed are intended to help in the identification of these measures and targets, usually by a process of abstraction that narrows the search space for a measure (e.g. find a measure to inform about a particular 'objective' within the Customer perspective, rather than simply finding a measure for 'Customer'). Although lists of general and industry-specific measure definitions can be found in the case studies and methodological articles and books presented in the references section. In general measure catalogues and suggestions from books are only helpful 'after the event' - in the same way that a Dictionary can help you confirm the spelling (and usage) of a word, but only once you have decided to use it proficiently.
[edit] Software tools
It is important to recognise that the Balanced Scorecard by definition is not a complex thing - typically no more than about 20 measures spread across a mix of financial and non-financial topics, and easily reported manually (on paper, or using simple office software).
The processes of collecting, reporting, and distributing Balanced Scorecard information can be labour intensive and prone to procedural problems (for example, getting all relevant people to return the information required by the required date). The simplest mechanism to use is to delegate these activities to an individual, and many Balanced Scorecards are reported via ad-hoc methods based around email, phone calls and office software.
In more complex organisations, where there are multiple Balanced Scorecards to report and/or a need for co-ordination of results between Balanced Scorecards (for example, if one level of Balanced Scorecard reports relies on information collected and reported at a lower level) the use of individual Balanced Scorecard reporters is problematic. Where these conditions apply, organisations use Balanced Scorecard reporting software to automate the production and distribution of these reports.
A 2009 survey[23] of software usage found roughly one third of organisations used office software to report their Balanced Scorecard, one third used bespoke software developed specifically for their own use, and one third used one of the many commercial packages available.
In February 2011 over 100 Balanced Scorecard reporting applications (i.e. supporting the automation of data collection, reporting and analysis) were available.
Geographic vs. Industry or Client Segment Reporting
Question
1.it is known that finanacial accounting is designed for external users in the form of finanacial statements where as managerial accounting is designed to internal users in the form of performance repor,but finanacvial statements are also known as performance repor. Does managerial accounting mean not used finanacial statements.what is the clear distinction between these two fields of accounting?
thanks.
1.it is known that finanacial accounting is designed for external users in the form of finanacial statements where as managerial accounting is designed to internal users in the form of performance repor,but finanacvial statements are also known as performance repor. Does managerial accounting mean not used finanacial statements.what is the clear distinction between these two fields of accounting?
thanks.
Price Modeling & Management
Key Elements:
Sophisticated modeling techniques
Accurately accounts for geographic or consumer segment differences in price elasticity
Incorporates key price points and competition
Financial analysis considering margins and retail pass-through of price changes
Helps determine optimal pricing across a wide range of items
Marketing Analytics price models have been used to guide decisions on billions of dollars of product, providing insights into expected volume at new prices, key price points, changing price sensitivity, shelf versus promotional price changes, portfolio pricing, and competitive price matching.
The solution we implemented for Kraft Foods is literally a textbook example of a successful automated modeling system.
"Kraft has invested in software to provide automated and standard modeling results and on the information infrastructure to rapidly feed data into this software. This investment has made possible the "mass production" of standard econometric models of price and sales promotion across hundreds of product groupings in dozens of product categories. .. One additional benefit of this process of automated modeling is a cross-sectional database of model results that can be further analyzed to produce company-wide insight into the effect of key measures such as price elasticity, trade merchandising effectiveness, etc. on brand performance." [Hanssens, Dominique M., Leonard J. Parsons, and Randall L. Schultz. Market Response Models: Econometric and Time Series Analysis. 2nd Edition. Boston: Kluwer Academic Publishers, 2001.]
Sophisticated modeling techniques
Accurately accounts for geographic or consumer segment differences in price elasticity
Incorporates key price points and competition
Financial analysis considering margins and retail pass-through of price changes
Helps determine optimal pricing across a wide range of items
Marketing Analytics price models have been used to guide decisions on billions of dollars of product, providing insights into expected volume at new prices, key price points, changing price sensitivity, shelf versus promotional price changes, portfolio pricing, and competitive price matching.
The solution we implemented for Kraft Foods is literally a textbook example of a successful automated modeling system.
"Kraft has invested in software to provide automated and standard modeling results and on the information infrastructure to rapidly feed data into this software. This investment has made possible the "mass production" of standard econometric models of price and sales promotion across hundreds of product groupings in dozens of product categories. .. One additional benefit of this process of automated modeling is a cross-sectional database of model results that can be further analyzed to produce company-wide insight into the effect of key measures such as price elasticity, trade merchandising effectiveness, etc. on brand performance." [Hanssens, Dominique M., Leonard J. Parsons, and Randall L. Schultz. Market Response Models: Econometric and Time Series Analysis. 2nd Edition. Boston: Kluwer Academic Publishers, 2001.]
Business development metrics and scorecard
Linking business development plan to Balanced Scorecards
In a globalized economy companies often find the task of business development to be far more challenging than their initial plans which may even have a textbook simplicity about them. While a traditional business development plan may be good in itself if may suffer from inadequacies resulting out of a lack of attention to evolving market details and changing taste patterns.
The business environment in 21st century has seen a seismic change with consumers getting access to an ever increasing range of choices for products and services. The internet has been an enabler of open dissemination of information and with social networking and blogging gaining ground, customers today can rapidly shift opinion about a brand and even measure its value with its competitors with ease. Even large organizations cannot hide behind their preeminent market position or economies of scale while pursuing their business development objectives. New upstarts and innovative companies are already pushing at the established order in many industries and competition for new business is at an all-time high. As consumers choices become less stable and the business race heats up, it becomes critical for businesses to evaluate the need to redefine their business development plan and tailor it with the changing times.
The Business Challenge
At times management is aware of complexities that await them in the real world but are reluctant to see the light and naively pursue policies under misplaced belief that with time the performance will improve. Different organizations use different measures to deal with the challenge of developing their business under a dynamic market conditions - some tend to remain idealistic and present their potential and existing customers with a set of facts about their products , which while being true, scores low on garnering instant attention. On the other hand some managers end up believing that hype based marketing campaign based on sheer can give dividends and end up tailoring their business development plans in the same vein. However soon they realize that such a approach can only bring temporary benefits and gain customers who have limited loyalty with brand they purchase. The goal of getting the right balance can often become a unending paradox unless proven performance measurement paradigms are not introduced.
The Solution
The complexity of the business development challenges that managers typically experience lead them to explore different performance management tools. At times managers can go ahead introduce complex concepts that do more harm than good or even start the use of costly software which may fail to address the specific issues at hand. This leads to the loss of valuable time and effort and can also lead to wrong decisions.
In a globalized economy companies often find the task of business development to be far more challenging than their initial plans which may even have a textbook simplicity about them. While a traditional business development plan may be good in itself if may suffer from inadequacies resulting out of a lack of attention to evolving market details and changing taste patterns.
The business environment in 21st century has seen a seismic change with consumers getting access to an ever increasing range of choices for products and services. The internet has been an enabler of open dissemination of information and with social networking and blogging gaining ground, customers today can rapidly shift opinion about a brand and even measure its value with its competitors with ease. Even large organizations cannot hide behind their preeminent market position or economies of scale while pursuing their business development objectives. New upstarts and innovative companies are already pushing at the established order in many industries and competition for new business is at an all-time high. As consumers choices become less stable and the business race heats up, it becomes critical for businesses to evaluate the need to redefine their business development plan and tailor it with the changing times.
The Business Challenge
At times management is aware of complexities that await them in the real world but are reluctant to see the light and naively pursue policies under misplaced belief that with time the performance will improve. Different organizations use different measures to deal with the challenge of developing their business under a dynamic market conditions - some tend to remain idealistic and present their potential and existing customers with a set of facts about their products , which while being true, scores low on garnering instant attention. On the other hand some managers end up believing that hype based marketing campaign based on sheer can give dividends and end up tailoring their business development plans in the same vein. However soon they realize that such a approach can only bring temporary benefits and gain customers who have limited loyalty with brand they purchase. The goal of getting the right balance can often become a unending paradox unless proven performance measurement paradigms are not introduced.
The Solution
The complexity of the business development challenges that managers typically experience lead them to explore different performance management tools. At times managers can go ahead introduce complex concepts that do more harm than good or even start the use of costly software which may fail to address the specific issues at hand. This leads to the loss of valuable time and effort and can also lead to wrong decisions.
Rate/Volume Analysis
The following schedule presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. It distinguishes between the changes related to outstanding balances and that due to changes in interest rates. The change in interest attributable to rate has been determined by applying the change in rate between periods to average balances outstanding in the later period. The change in interest due to volume has been determined by applying the rate from the earlier period to the change in average balances outstanding between periods. Changes attributable to both rate and volume which cannot be segregated have been allocated proportionately based on the changes due to rate and the changes due to volume.
Six Months Ended June 30,
2006 vs. 2005
Increase
(Decrease)
Due to
Volume Rate Total Increase
(Decrease)
(In thousands)
Interest-earning assets:
Loans receivable $ (1,526) $ 1,782 $ 256
Mortgage-backed securities 884 0 884
CMO's 934 174 1,108
Investment securities (142) 93 (49)
FHLB stock (13) 30 17
Interest earning deposit accounts 306 499 805
Other earning assets (98) 0 (98)
Total interest-earning assets $ 345 $ 2,578 2,923
Interest-bearing liabilities
Savings and money market $ (258) $ 2,324 2,066
Interest-bearing demand (17) 15 (2)
Time 841 751 1,592
Borrowings (136) (12) (148)
Total interest-bearing liabilities $ 430 $ 3,078 3,508
Net interest income $ (585)
The decrease in net interest income of $585,000, or 2.9%, for the current six-month period over the same period last year primarily resulted from a 2.6% increase in average total interest-earning assets to $1.4 million from $1.3 million for the comparable period in 2005. The net change in rate for average total interest-bearing liabilities was a greater increase than the change in rate for average total interest-earning assets. Average interest-bearing liabilities decreased 0.09% to $1.1 million in 2006 from $1.1 million for the same period last year. The yield on average interest-earning assets for the six-month period ended June 30, 2006 increased to 5.08% from 4.76% during the same period in 2005. The cost of average interest-bearing liabilities increased to 2.56% for the six-month period ended June 30, 2006 from 1.94% for the same six-month period in 2005. The net interest spread decreased to 2.52% for the six months ended June 30, 2006 from 2.82% from the same six month period in 2005.Because the Company's interest-bearing liabilities generally reprice or mature more quickly than its interest-earning assets, an increase in short term interest rates would initially result in a decrease in net interest income.
Six Months Ended June 30,
2006 vs. 2005
Increase
(Decrease)
Due to
Volume Rate Total Increase
(Decrease)
(In thousands)
Interest-earning assets:
Loans receivable $ (1,526) $ 1,782 $ 256
Mortgage-backed securities 884 0 884
CMO's 934 174 1,108
Investment securities (142) 93 (49)
FHLB stock (13) 30 17
Interest earning deposit accounts 306 499 805
Other earning assets (98) 0 (98)
Total interest-earning assets $ 345 $ 2,578 2,923
Interest-bearing liabilities
Savings and money market $ (258) $ 2,324 2,066
Interest-bearing demand (17) 15 (2)
Time 841 751 1,592
Borrowings (136) (12) (148)
Total interest-bearing liabilities $ 430 $ 3,078 3,508
Net interest income $ (585)
The decrease in net interest income of $585,000, or 2.9%, for the current six-month period over the same period last year primarily resulted from a 2.6% increase in average total interest-earning assets to $1.4 million from $1.3 million for the comparable period in 2005. The net change in rate for average total interest-bearing liabilities was a greater increase than the change in rate for average total interest-earning assets. Average interest-bearing liabilities decreased 0.09% to $1.1 million in 2006 from $1.1 million for the same period last year. The yield on average interest-earning assets for the six-month period ended June 30, 2006 increased to 5.08% from 4.76% during the same period in 2005. The cost of average interest-bearing liabilities increased to 2.56% for the six-month period ended June 30, 2006 from 1.94% for the same six-month period in 2005. The net interest spread decreased to 2.52% for the six months ended June 30, 2006 from 2.82% from the same six month period in 2005.Because the Company's interest-bearing liabilities generally reprice or mature more quickly than its interest-earning assets, an increase in short term interest rates would initially result in a decrease in net interest income.
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