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Advantages of ABC Accounting/Management

Besides appearing more precise than traditional accounting, ABC accounting offered several advantages. ABC accounting:

Gave companies (and accounting departments) hope that they could do something to reverse their poor business performance;

Validated claims by operations people that small runs of “special” products cost more to produce than did long runs of common or commodity-type products;

Silenced, for the most part, “fairness” arguments concerning overhead allocations;

Provided much detailed information that could be analyzed for improvement initiatives, leading to the development of activity-based management (ABM; Cokins, 2001).

In addition to these advantages, companies that have taken the first step of charting all flows from purchase of raw materials through production processes to finish goods and shipping prior to implementing ABC have universally reported benefits achieved from their increased knowledge of their systems. Making use of all the data collected and updating it to track frequent changes in the business environment, however, has proven quite difficult and costly.

Disadvantages of ABC Accounting

As originally developed, ABC accounting and ABM required tremendous amounts of quantitative data on anticipated and actual driver (allocation base) consumption.8 Complex original implementation efforts and continuing data collection issues resulted in complaints that ABC accounting:

Requires too much detailed data collection efforts by operating employees who did not want or use the information provided;

Permits subjective selection of pools and drivers;

Lacks an easy way to identify erroneously reported data;

Mixes fixed and variable costs in the same pool (by assuming all costs are variable);

Focuses on reducing costs, not generating revenue;

Generates costs that greatly exceed benefits attained (Palmer and Vied, 1998; Geri and Ronen, 2005; Bragg, 2007a, 207–209; Ricketts, 2008, 54.).

Even though the adoption of ABC accounting or ABM has been low and scattered (Kiani and Sangeladji, 2003; Cohen et al., 2005; Bhimani et al., 2007), academics and consultants continue to support the methodology (Stratton et al., 2009).

Balanced Scorecard

Recognizing the importance of appropriate performance measures to motivate employees to coordinate their activities (and later to implement company strategy), a performance scorecard that included nonfinancial metrics was developed by industry leaders.9 “The scorecard measures organizational performance across four balanced perspectives: financial, customers, internal business processes, and learning and growth.” (Kaplan and Norton, 1992; Kaplan and Norton, 1996, 2.) While the most well-known advocate of the balanced scorecard has not abandoned activity-based costing (Kaplan and Norton, 1996, 55–57), a more balanced set of measures is intended to include the guidance of nonfinancial metrics and provide a more global perspective.

Surveys indicate that balanced scorecard concepts are used in most large companies in the United States and throughout the world. Despite reported successful implementations, however, there is little empirical evidence that implementing a balanced scorecard results in increased earnings (Speckbacher et al., 2003).

Advantages of a Balanced Scorecard Performance Reporting System

One of the major benefits of a balanced scorecard system, its ease of understanding, also may be one of its biggest flaws. It is entirely possible that managers, easily accepting the basic idea of balancing metrics across all aspects of a business and therefore prone to implementing balanced scorecards without outside consultants, have not sufficiently customized their balanced scorecard systems. Nevertheless, companies expect that a balanced scorecard performance reporting system will:

Focus all employees on longer-term goals;

Clarify the relationships and importance of various