Linking Activity-Based Costing and the Balanced Scorecard

Activity-based costing (ABC), activity-baseddetailed "drill down" and analysis of this information in
management (ABM) and the balanced scorecardABC may reveal the root cause of the problem and
(BSC) are established management methods. Theyallow corrective action to be taken. Decision support is
are building blocks of performance managementparticularly effective if ABC data can be accessed
systems. ABC and ABM provide cost and otherfrom within the BSC.
business intelligence about key business elementsSuccessfully linking ABC and the BSC requires a
including resources, activities, products, services anddifferent type of ABC model. The BSC relies on
customers. They enable managers to make decisionsup-to-date ABC data on a monthly or quarterly basis,
that improve cost and profit performance. The BSCso the ABC model must be up-dated monthly or
translates strategic goals into a set of performancequarterly and data fed to the scorecards in the BSC.
measures balanced according to the importantThis ABC enterprise reporting system is quite different
dimensions of performance. It helps communicate andfrom the one-off desk-top models typical of early
execute the strategic plan by defining success inapplications. Data sources unique to ABC-such as
quantitative terms at each level of the organization.employee time reporting--are automated to reduce the
ABC and the BSC are often viewed as independentcost and enhance the timeliness of data capture. Data
methods each with its own purpose. However, theyfeeds from legacy systems or enterprise resource
are complementary and offer greater value whenplanning systems are automated using extract,
linked together. The benefits of linkage includetransform and load (ETL) tools.
additional performance measures-measures for whichABC's role as an analytic decision support tool
ABC is the only reliable source-and morechanges the design of the ABC model and reporting
comprehensive decision support.system. The ABC model must be forward-looking to
The BSC benefits from the inclusion of ABCsupport planning efforts as well as a source of
performance measures. These include the cost ofaccurate historical performance data. A good reporting
activities and activity outputs which are used in thesystem-such as a modern web-based tool-allows
internal business process dimension of the BSC ofmanagers to access, analyze and display ABC
public and private organizations. This activityinformation on their desktop. This reporting capability
information covers support services as well as primaryshould allow a manager to follow the trail of
business processes. For private organizations, ABCinvestigation from the targeted performance measure
profit measures by customer, market segment, marketin the scorecard to the underlying details in the ABC
area and distribution channel are used in the customermodel.
dimension of the BSC.In summary, linking ABC and the BSC enhances the
ABC can provide as much as 20-30% of thevalue of two proven management methods. The BSC
performance measures in the BSC. For example, thescorecard benefits from access to performance
South Dakota Department of Transportation'smeasures for the business process and customer
activity-based costing model provided 22% of thedimensions. The BSC also benefits from the analytic
measures in the BSC.capability of ABC to support performance analyses.
The users of the BSC benefit from the analyticABC transitions from costing tool to analytic method
capabilities available in ABC. For example, a managersupplying up-to-date business intelligence to support
of a transportation department may find that theperformance improvement initiatives.
actual cost of maintaining a mile of highway exceedsWhy link ABC and the balanced scorecard? ABC and
the target in the scorecard. ABC allows the managerthe BSC are proven management methods. They
to access detailed information about the activities andwork well on their own, but they work better together.
resources associated with maintaining highways. A