The Balanced Scorecard And Eva Accounting Essay

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The economic environment is constantly changing and highly, understanding the business functions, cost management, critical success factors is cardinal. Organisations have to adopt techniques such as Activity Based Costing, Balance Scorecard and Economic Value Added. [1] It has been important to implement well balanced performance management tools and models that can work along the overall corporate objective.

2The Balance Scorecard offers the variety and balance as it integrates financial and non financial performance measures and incorporates it into the control system.

Activity Based Costing main purpose is to increase and maintain the level of accuracy of costs and activity drivers, and can work as a supportive measurement tool for the successful implementation of the Balance Scorecard.

The Activity Based Costing and Balance Scorecard provide managers with informed decisions that create value, Economic Value Added is the financial performance measurement tool that asses this value created, and its main focus is on operating efficiency, and its emphasis is on the management of assets by earning more profit using accurate capital allocation and investing this in products/services that generate high returns.

The measures can be implemented separately, but are most likely to gain more benefits if the organisations implemented all three as they are highly compatible and complement each other's strengths.

2.0 Activity Based Costing

Activity Based Costing is a costing model that aims at identifying activity centres and costs, and allocates the costs to the products and services. This will be based on the number of events and transactions that have driven and been involved in the process of providing or producing the service or product respectively. [3] Essentially it is an important tool that can help managers ascertain ways of maximising shareholders wealth and improving the performance of the organisation.

2.1 Benefits of ABC

Product and Customer Profitability - It assists in identifying the most and the least profitable products/services and customers.

Factors and Activities affecting financial performance - It helps identify and base decisions on true activities and contributors and any negative factors and detractors that may affect [4] financial performance of the organisation.

Accurate Forecasting and Budgeting - Using Activity Based Costing as an analysis and measurement tool can help accurately foresee and predict costs, revenue and profits. It can also identify any resources that will be needed if the productivity volumes changed, or if the organisation structure was amended.

Financial Analysis - It can help analyse costs at every stage of a product life cycle. It can easily identify the reasons and causes of poor financial performance, both on an operational and corporate level.

Monitoring Costs and Activities - ABC can track and monitor the costs of the activities and the work flow process. This can help equip the managers with cost intelligence that would drive and push for improvements.

Competitive Market position of Products and Services - ABC can facilitate better marketing mix. It would enhance the bargaining power with customers as the marketing mix offers varying mix elements, for instance a high profile product or service, using ABC can determine whether the increase should focus on promoting it, or render insensible the weight given to price. [5] This can achieve better market positions of the products and services accordingly.

I believe Activity Based Costing should be a continuous improvement process, in terms of analysis, achieving efficiency and effectiveness. The market conditions change rapidly, hence using a tool such as ABC gives the organisation a competitive advantage in ensuring that they supply better quality products and services at competitive prices.

Top management have appreciated the effective use of ABC model as it has contributed to the decision making process, managers are more confident with a model whose main focus is on product and customer profitability. It has also enabled organisations to structure and establish the impact of cost reduction and finally confirm if any savings have been made, and continuously add value to the organisation.

3.0 Balance Scorecard

The Balance Scorecard is a set of measures that look at four important performance areas of an organisation which was developed by Robert Kaplan and David Norton;

Financial Performance - This looks at the financial measurement of past actions, and evaluates whether the organisation has made a profit or created value. An evaluation tool that could be used to measure the value created is the Economic Value Added Method. This helps senior management in identifying high demand markets, make investment strategies, cost reduction activities and also make market strategies.

Customer Satisfaction - This measure helps the organisation assess how the organisation is performing from the customer's perspective; this looks at the customer relationship, customer satisfaction, the reputation and image of the organisation in the public eye. It also helps senior management make strategies of how to increase its customer base and improve on ways of how to retain current customers.

Operational Measures - This measure lets the organisation know about what it must do internally to meet the customer and financial expectation. This involves allocation of resources and their costs associated the quality of the service or product, and the level of productivity.

Learning and Innovation - This measure looks at the organisational capacity to continually improve, innovate and sustain its operations to a good quality. It will look at aspects such as leaning capacity, investment in training of employees, motivation and reward schemes. Another aspect encompassed in this measure is the leadership and accountability and corporate governance

According to the study by Chow 1997, Cravens 2000 and Kaplan 1992, the Balance Score card is an effective method that is able to interpret the organisations strategy and vision into a model that is able to effectively communicate the strategic purpose and is able to instigate and motivate performance by setting up strategic objectives and goals.

The benefit of the Balance Scorecard is that it helps the development of an agreed vision and strategy of the firm, thus allowing management to disseminate the organisations, and this will drive managers towards concentrating on the most important and critical measures to ensure the firms success.

This is an important process, as employees across the board are part of the system in terms of understanding the firms Market position and what the long term goals are, and how their actions affect the strategic goals and objectives of the organisation as a whole.

Balance Scorecard also assists organisations allocate their resources adequately by setting priorities, and be able to give feedback, this is also an avenue of promotion of learning (Kaplan and Norton, 1996)

The Balance Scorecard is also a feedback tool, for both internal business process and external outcomes. The focus is obviously on the core elements and critical success factors of the firm. They will connect the daily operations and activities to the strategic objectives and long term goals, and ensure that all efforts are directly linked to the success of the firm.

"The Balance Scorecard automates and centralised the issuance and tracking of the objectives, targets, measures and initiatives."

Balance Scorecard is an improving tool, other benefits include;

Improves Strategic Alignment - Individual employee performance objectives are set and evaluated based and tied to the overall organisation goals, that way, employees can directly contribute to ultimate success of the organisation.

Achieve Effective Performance - Retaining of employees that perform through reward schemes and identifying and investing into their training.

Achieve Goals - Balance Scorecard assists managers in identifying the gap between the business goals and the actual outcomes, and therefore analyse and identity the skill level employees need to close the gap or any other additional resources needed.

4.0 Economic Value Added.

Measuring performance is the foundation of any business, it looks at measuring your activities and how you manage them. Therefore an important element of reporting corporate performance is how to evaluate the performance of the products/services. An estimate of performance can be assumed based on gathered knowledge and information, and an expected value can be derived from that. EVA rectifies any challenges that other measurement tools may have in terms of forming decisions of allocation of resources to revenue generating product/services; it sorts out the issue of over-investment and under-investment.

EVA is the best method of measuring the true profitability of the business. This method of measurement will help the managers steer correctly the activities that will influence profitability.

Economic Value Added is basically the excess return to investors/entrepreneur and in principle the bigger the EVA, the bigger the market value. EVA is not only a financial metric, but can also be used as a management system that is focussed on wealth creation.

The advantage of EVA as a measurement tool for any business is that it would cover profit and loss and the balance sheet, and give an evaluation on all factors of production. The ultimate goal should be to improve EVA.

6Erik Stern's notion is that managers should focus on higher returns with EVA as the balance mechanism as it looks at all drivers of value.

5.0 Integrating the Balance Scorecard with the ABC and EVA

7It has been studied that the implementation of Balance Scorecard and ABC can exclusively improve the performance of the originations. On the other hand, evidence has showed that implementing them both would increase the performance of the firm. A balance has to be found that establishes what the priorities of the implementations would be and what the expected results are.

8It has been suggested that ABC is an important and integral part of the Balance Scorecard. ABC as a tool tries to accurately establish cost drivers and activities and link them to how effectively the resources are being used, to how the final output is designed, therefore ABC can most of the part, help in the measurements of the four aspects of the Balance Scorecard, and can analyse the opportunity cost inherent of the four part of BSC. Therefore the first connection is the allocation of resources expenses to the cost drivers and activities, and the processes; this comes about on the Balance Scorecard internal perspective; these being cost, quality, and time, all of which are easily physically measured with the exception of cost. ABC is a model that accurately analyse the expenses involved from the manufacturing process to the point of distribution of finished product/service.

Within in mind, ABC can be seen as an enabling tool that supports and forms the basis of the development and design of a cost effective product or service, through to the manufacturing process.

"Fred, A. Jacobs (Journal of Managerial Issues) stated an example that explains how accountants would provide important inputs into the product deign and development decision. In this scenario, he tries to explain the [9] ABC tries to mirror the manufacturing process, so that engineers and production managers easily can see hoe design change will affect costs"

Going further, the implementation of ABC and BSC along through out the productions and value chain, information can be extracted and provided on the costs and relative cost drivers of a continued production challenges and any perceived product design change; [10] therefore production managers can ascertain and bale to evaluate what other choices available when they are faults or poor design quality issue arise.

Economic Value Added does provide and workable structure for the arranging and creating a system of the financial perspective of a Balance Scorecard a compatible. [11] The Balance Scorecard assists in clearly identifying the pure Economic Value approach; it clearly defines what the main drivers and critical success factors are for increase revenue, those being the specific objective and goals, the performance measurement, internal business processes and improving customer relations.

6.0 Conclusion

The use and implementation of the Balance Scorecard, Activity Based Costing and Economic Value Added is most beneficial to organisations when they are done so inter connected systems.

The implementation of ABC would assist in the support of process improvement (Turney, 1991), it would also help in establishing a cost effective and efficient product/service design (Cooper and Turney, 1989), and consequently the Balance Scorecard would provide management with an amalgamated system whose main focus is on the organisation's activities.

It helps top management, employees understand the wide number of activities and costs, and are able to classify value and non value activities. There have been testaments to the use of these systems that have gained competitive advantage by providing better quality products at competitive prices. And as such it has effectively contributed to the decision making processes on resource allocation, wealth creation, efficiency and productivity levels and cost reduction activities that do not compromise the quality of the products/services.