IT is a central component and foundation for contemporary business and accounting has been called the language of business as it provides the necessary analytics for managerial planning and the requisite metrics for managerial direction and control (Bieleski, 2008; Garrison, Noreen, & Brewer, 2006;  Kotler & Keller, 2007; Porter, 1985; Wild, 2007).  Unfortunately we only have a limited number of electives in the CIS curriculums therefore I realize not every student will take an Accounting class.  As a result, I provide the following necessary basis and introduction to contemporary Accounting principles.  Having said this, if you plan on opening and running your own business or if you are considering computer security and forensics, I highly recommend you take an Accounting course.

Definitional Foundation and Impact

“Accounting is an information and measurement system that identifies, records and communicates relevant, reliable, and comparable information about an organization’s business activities” (Wild, 2007, p. 4).  Now you have heard me state that several disciplines (e.g. Accounting, Marketing, OB & IS) are all speaking the same language.  Reread the above definition from an IS perspective and hopefully you will see the linkages.

There are 2 discrete branches of accounting – financial and managerial.  Financial accounting’s focus is on recording the past and present to present a picture of an organization’s financial status whereas managerial accounting focuses on the future by providing decision makers with information tailored to the various segments of an organization (Garrison, Noreen, & Brewer, 2006; Wild, 2007).

To illustrate the import and broad application of accounting information to decision making consider that accounting information provides: (a) cost and sales statistics required by research and development managers, (b) quality and quantity information required by purchasing managers, (c) payroll information required human resource managers, (d)  delivery costs and schedules required by distribution managers,  (e) cost and sales projections required by marketing managers and, (f) warranty and maintenance costs required by service managers (Garrison, Noreen, & Brewer, 2006; Harrison, 1991; Kotler & Keller, 2007).   Now of course we understand the IS is instrumental in managing the supply and value chains and the above information describes the supply and value chain.  BTW – again reread the above paragraph thinking about what an ERP does and facilitate.

Generally Accepted Accounting Principles (GAAP) & the Global Marketplace

As a basis, GAAP are general concepts and rules that have been communally developed and subsequently applied over time.   Within the United States, accounting principles are established and regulated by the Financial Accounting Standards Board (FASB) and the federal government’s Securities and Exchange Commission (SEC). It is intuitive that neither of these groups have authority over international companies based outside of the United States. Implicit in GAAP is proper ethical behavior however this presents challenges to international organizations as ethics have been shown to vary dependent upon cultural, social, organizational and situational norms (Chatman, 1991; Chen, Silverthorne, & Hung, 2006; Ethics, 2008; Victor & Cullen, 1987).

Achieving and maintaining a competitive advantage has become increasingly complex in today’s global marketplace citing the acceleration of technology and the increasing number of organizations that operate across national boundaries (Friedman, 2005; Globalization, 2008; Porter, 1985; Robbins & Judge, 2007). International competition has increased even further citing the reduction in international tariffs and improvements to global transportation further leveling the playing field thereby allowing all organizations to participate in the global economy (Garrison, Noreen & Brewer, 2008).  Intuitively, international tariffs and delays in global transportation also result in added accounting complexity.

Citing the present competitive and transitory economies it becomes even more important to have comparable relevant information necessary for business intelligence (BI).  To meet this need, organizations must standardize their GAAP in order to provide decision makers with comparable information.  It should be noted that managerial accounting is not mandatory or bound by GAAP, however efficient and effective management requires objective, comparable and relevant information and feedback necessary for planning and control (Garrison, Noreen, & Brewer, 2006; Robbins & Judge, 2007; Wild, 2007).

It has been proposed that the emergent International Accounting Standards Board (IASB) may provide guidance to international companies however, while the IASB is acknowledged by many country’s accounting standards bodies, the IASB does not possess any real authority (Wild, 2007).  Fortunately the differences between the US GAAP and the IASB’s International Financial Reporting Standards (IFRS) are declining (Wild, 2007).  This convergence in accounting standards is critically important to US and international companies as objective comparable practices are a necessity when assessing and contrasting information and business decisions.


Correctly assigning costs to products leads to an understanding of an organization’s cost structure and is likely to improve internal processes and product quality (Reyhanoglu, 2004).  A proper understanding of an organization’s cost structure is critically important in today’s emergent and transitory global economy as it provides the necessary foundation for differential and opportunity analysis (Horngren & Foster, 2009).  With this basis, cost accounting systems provide an organization with the analytics necessary to make decisions, pursue goals and achieve and sustain a competitive advantage (Garrison, Noreen & Brewer, 2008; Harrison, 1991; Porter, 1985).  For clarity, this presentation will consistently cite product costs however evaluation of service costs is similar.

As a basis, costs can be classified as prime costs (e.g. direct materials, direct labor), manufacturing overhead (e.g. indirect materials and indirect labor), selling and administrative costs.  Costs can be further distinguished from a behavioral perspective as variable or fixed costs or from a finished goods or inventory standpoint as product or period costs.  It is these latter behavioral and inventory perspectives that distinguish VBC and ABC.   VBC separates variable and fixed costs in accord with Cost-Volume-Profit (CVP) analysis whereas ABC is a Strategic Managing Accounting (SMA) absorption inventory cost model that accounts for all activities that contribute to a product.  Both VBC and ABC support managerial decision making and this illustrates the need to present managers with comprehensive information in different frameworks evidenced by today’s push towards balanced scorecards and marketing dashboards (Davenport & Harris, 2007; Kaplan & Norton, 1996).

Implicit in all costing models is the need to accurately and comparably represent all costs associated with a cost object (Encyclopedia Britannica, 2009).  This presents challenges to costing models as organizations contain cost objects that cannot be directly traced to individual units or batches.  This complexity is exacerbated by the increasing number of organizations that produce diverse product lines across extended supply and value chains.  Prime costs may be determined from real verified data since this historical information is available on material requisition forms, time tickets and job order cost sheets.  It must be noted that prime cost information is a snapshot of past costs and therefore is not guaranteed to be completely accurate at future dates.  In contrast to prime costs, manufacturing overhead is a periodic cost and its impact on individual products in a heterogeneous environment is only an estimate.  With this basis, costing methods can only serve as a prediction of future costs and the onus of correctly planning, directing and controlling will remain with an organization’s management.  To provide an introductory basis necessary for analysis, behavioral variable costs and fixed costs and inventory product costs and period costs are introduced below.

Behavioral variable costs are associated with specific units of production and vary in relation to production levels.  These variable costs include both prime costs and variable overhead.  As cited above, prime costs are typically based on historical data hence they may accurately be applied on a per-unit basis.  In contrast, variable overhead is classified as a periodic cost that varies proportionately with production levels and must be estimated when applied to specific units.  For clarity, total variable costs vary in proportion to a production level which means that per-unit variable costs remain constant.

In contrast to behavior variable costs, behavioral fixed costs cannot be traced directly to units of production and remain constant with respect to production levels.  These fixed costs may be further classified as committed long term expenses (i.e. greater than one year) or discretionary short term expenses (i.e. shorter than one year).  For the purposes of this paper, subsequent references to fixed costs will imply discretionary fixed costs as these are integral to short term managerial decision making in accord with the thrust of this paper.  It must be noted that when fixed costs are absorbed in finished goods product costs, per-unit fixed costs will behave inversely to production levels.  It must also be recognized that fixed costs only remain constant within specific intervals as dramatic increases in volume will intuitively increase fixed costs.

Finished goods costs are comprised of all costs associated with and directly traceable to a specific product.  Finished goods costs will vary depending on whether VBC or absorption costing is used.  Both VBC and absorption product costs include direct materials and direct labor however absorption costing methods also include components of manufacturing overhead in the per-unit product costs.  In either costing model, costs are expensed when the product is sold.  In contrast to product costs, period costs that include selling and administrative costs are expensed during the period they are incurred.

Variable Based Costing

In accord with the definitional basis above, VBC is an accounting method that focuses on direct labor, direct materials and variable overhead product costs.  Fixed manufacturing overhead, selling and administrative costs are expensed periodically and therefore are not included in an organization’s inventory costs. This perspective provides managers with a clear distinction between variable and fixed costs and allows the manager to focus on short term costs and profits in accord with Cost-Volume-Profit (CVP) analysis (Garrison, Noreen & Brewer, 2008).  As an example, a manager using a CVP Decision Support System (DSS) can quickly assess the cost-structure and determine the differential and break-even point when replacing variable cost direct labor with a fixed cost automated system.  It must be noted that VBC does not adhere to GAAP financial accounting practices that require absorption costing.  To continue analysis, it is necessary to briefly introduce absorption costing to serve as a contrast to VBC.

Absorption costing also known as full cost is required for financial accounting statements and must account for both prime and manufacturing overhead costs as components of its finished goods costs (Garrison, Noreen & Brewer, 2008; Wild, 2007).  As introduced above, manufacturing overhead cannot be directly traced to individual jobs or batches and therefore must be estimated.  This estimation of manufacturing overhead requires an organization to predetermine an overhead rate and subsequently apply this rate to a cost object based on an allocation base known as the cost driver.  Predetermining a manufacturing overhead rate is a three-step process that requires an organization to: (a) estimate its periodic level or volume of production, (b) determine and identify a relevant allocation base, (c) determine the amount of manufacturing overhead per allocation base unit.  Following the determination of the manufacturing overhead’s relation to the allocation base, application of manufacturing overhead to specific units simply requires computing the product of the predetermined manufacturing overhead and the unit’s specific allocation base.   This result is recorded on the job cost sheet and becomes a component of finished goods and cost of goods sold.

Based on the descriptions of VBC and absorption costing above, it is apparent the primary difference between VBC and absorption costing is when manufacturing overhead costs are expensed.  With VBC, manufacturing overhead and fixed costs are expensed in the period they are incurred.  This perspective may provide a better reflection of an organization’s short term or present financial status.  VBC is particularly important for companies that rely on cash flow as VBC’s net operating income reflects the current period’s cash flow.  From financial accounting, net income is determined by subtracting cost of goods sold and fixed expenses from total revenue (Wild, 2007).  In absorption costing, manufacturing overhead is included in the finished goods and therefore a product’s inventory (Garrison, Noreen & Brewer, 2008; Wild, 2007).  This can be misleading to decision makers since inventory may be carried forward and expensed in subsequent periods (Rich, Jones, Heitger, Mowen, & Hansen, 2010).  In the extreme case, when a large inventory that contains absorbed fixed expenses as a component of its finished goods is carried forward, it is even possible to show a positive net income even when sales are below the break-even point (Garrison, Noreen & Brewer, 2008).

Activity Based Costing (ABC)

During the 1980s, managers became increasingly dissatisfied with their traditional absorption based management accounting systems (Horngren & Foster, 2009).  Kaplan’s ABC was a revolutionary and necessary response to the increased complexity of a turbulent economy (Katz, 2002).  Furthermore ABC is in accord with best practices holistic marketing and organic corporate culture by looking at the organization as a comprehensive whole and engaging diverse work teams in a unified vision (Garrison, Noreen & Brewer, 2008; Kotler & Keller, 2007; Robbins & Judge, 2007). Recall that fixed manufacturing overhead is shared by many cost objects and therefore cannot be traced to individual units (Beaulieu & Mikulecky, 2008; Garrison, Noreen & Brewer, 2008).  As introduced above, traditional absorption costing arbitrarily allocates fixed overhead to products based on estimates of volume in relation to an allocation base.  ABC seeks to provide a deeper understanding than provided by conventional absorption costing systems by focusing on precise activities and their contribution to particular cost objects (Katz, 2002; Reyhanoglu, 2004).  This focus allows ABC to account for fixed costs that are not typically included in traditional absorption costing (Garrison, Noreen & Brewer, 2008).  Advocates of ABC assert this enhanced method provides managers with the mechanism to control overhead and improve their decisions regarding internal processes and product mixes (Reyhanoglu, 2004).  A testament to ABC’s utility is its adoption by United States Marine Corps (Katz, 2002).

ABC was first documented by Kaplan and Bruns (1987) as a mechanism to correctly assign activity costs in today’s decentralized and transitory business climate.  In essence, ABC classification systems allow more fixed costs to be appropriately allocated to products based on correctly identified cost drivers (Wegman, 2007).  This is particularly relevant citing; (a) the rapid acceleration of emergent technology, (b) expanded value and supply chains, (c) the decreased focus on labor and, (d) the increased number of salaried knowledge workers (Friedman, 2005; Pearlson & Saunders, 2006; Reyhanoglu, 2004; Robbins & Judge, 2007).  ABC may be classified as Strategic Management Accounting (SMA) initiative since it facilitates continuous organizational improvement by analyzing and linking activities and processes to operational and strategic management goals (Albright & Lam, 2006; Wegman, 2007).

In contrast to traditional absorption costing that is driven by volume, ABC is driven by the following five levels of activities: (a) unit level activities that include direct materials and direct labor, (b) batch level activities, (c) product level activities, (d) customer level activities and,  (e) organization sustaining activities (Beaulieu & Mikulecky, 2008; Garrison, Noreen & Brewer, 2008).  From a design and implementation perspective, ABC can be thought of as a five-step process than requires an organization to: (a) define its activities, cost pools, and measures or cost drivers, (b) assign overhead costs to its activity cost pools, (c) calculate its activity rates, (d) assign overhead costs to its cost objects and, (e) assign overhead to its customers (Beaulieu & Mikulecky, 2008; Garrison, Noreen & Brewer, 2008). This methodology allows overhead costs to be assigned to each activity in proportion to their organizational usage using specific and diverse cost measures (Garrison, Noreen & Brewer, 2008; Reyhanoglu, 2004).  As previously cited, knowledge based costs (e.g. engineering design) are increasing due to shorter product life spans resulting from the acceleration of emergent and transitory technology and increased international competition (Friedman, 2005; Garrison, Noreen & Brewer, 2008; Kotler & Keller, 2007).  ABC supports the continuing evolution of an automated workplace and the emergence of a knowledge based economy and therefore provides a robust mechanism to account for today’s complex organizational costing.

ABC is not without its pitfalls and detractors.  ABC’s documented disadvantages include: (a) staff resistance, (b) implementation and adjustment difficulties, (c) questionable reliable information, (d) scaling difficulties and, (e) significant complexity (Kaplan & Anderson, 2003; Reyhanoglu, 2004; Wegman, 2007).  ABC requires complex internal data gathering and large portions of this data are derived from time expensive employee surveys.  Surveys intuitively contain a subjective element that may be biased and contain errors rendering it difficult to assess (Robbins & Judge, 2007; Wegman, 2007).  As an example, when employees are asked to estimate the time spent on various activities with a percentage, employees will invariably provide an estimate that adds up to 100% (e.g. 70% on activity A, 20% on activity B and 10% on activity C).  This obviously does not account for the inevitable idle time and thus this data is flawed from the outset.  Additionally, when internal and external processes and products change, this expensive analysis must repeated in order to remain relevant (Kaplan & Anderson, 2003).

Despite its merits, ABC lost ground in the 1990s to other SMAs that include Kaplan’s Balanced Scorecards ( Kaplan & Norton, 1996; Katz, 2002).  ABC lost additional support in the late 1990’s due to accounting scandals that made executives fear complex accounting systems (Katz, 2002).  In response to these concerns and to mitigate ABC’s complexity, several ABC variants have emerged and include: (a) customer-driven ABC, (b) benchmarking-driven ABC, (c) environmental-driven ABC and, (d) time-driven ABC (Kaplan & Anderson, 2003; Wegman, 2007).  These emergent ABC variants attempt to reduce the complexity of a holistic ABC and quicken development time by focusing on specific key value factors linked to organizational success (Kaplan & Anderson, 2003; Wegman, 2007).  To provide an example, consider that customer-driven ABC focuses on Customer Relationship Management (CRM) and uses this key value factor as the primary cost driver (Wegman, 2007).  This is particularly relevant in times of economic downturn as it allows organizations to focus on and identify which products and customers are the most profitable (Kotler & Keller, 2007; Wegman, 2007).  To provide an example while constraining the length of this paper, a single ABC time-based variant will be presented below.

Time-driven ABC mitigates the complexity of early ABC systems as it only requires the estimation of two parameters: (a) the unit cost of supplying capacity and, (b) the time required to perform a transaction and consume the capacity (Kaplan & Anderson, 2003).  This solution is simple enough that it may be quickly designed, implemented and modified.  Time-based ABC has also benefited from evolving information systems technology since systems can retrieve time based activity data directly from ERP and CRM systems (Kaplan & Anderson, 2003; Reyhanoglu, 2004).  Relying on ERP and CRM data for inputs may also diminish the amount of subjective data introduced into the system therefore increasing accuracy.  Inputs and outputs can be validated by direct observation further ensuring accurate assessment and measurement (Kaplan & Anderson, 2003).  This results in a scalable ABC system that can quickly respond to organizational changes while supporting the need for continuous improvement (Albright & Lam, 2006; Kaplan & Anderson, 2003; Wynder, 2008).

The goal of managerial accounting is to provide relevant timely information to decision makers so that they may properly use resources, cut costs, improve quality, increase profitability and remain competitive (Reyhanoglu, 2004; Garrison, Noreen & Brewer, 2008).  Cost accounting is an integral component of managerial accounting since it serves as a fundamental Business Intelligence (BI) basis for differential and opportunity cost analysis in addition to the aforementioned managerial activities of planning, directing and controlling.  Decision makers need different perspectives of unit and activity costs that depend on their specific needs and responsibilities (Beaulieu & Mikulecky, 2008; Harrison, 1991).  Both VBC and ABC provide managers with unique perspectives to aid their decision making.  A rational conclusion to this analysis in accord with contemporary strategic marketing and organizational management tenets is to assert that decision makers need a dashboard that can present costing information from several perspectives (Davenport & Harris, 2007; Garrison, Noreen & Brewer, 2008; Kaplan & Norton, 1996; Kotler & Keller, 2007; Robbins & Judge, 2007).

VBC is critical to short-term planning and differential and opportunity analysis in accord with CVP analysis.  VBC and CVP analysis are particularly relevant to organizations that must maintain a positive cash flow as their net sales may be directly related to the product’s variable costs.  It is intuitive that a healthy cash flow can enhance an organization’s agility and this in itself can provide a competitive advantage in today’s emergent and transitory global economy.  Lastly, VBC’s separation of variable and fixed costs allows managers to focus on fixed costs and their relationships with profits facilitating the opportunity to pursue continuing improvement.

ABC is a natural response in the face of increasing global competition and transitory cost structures as managers seek a better understanding of their processes through their real-time information and accounting systems (Garrison, Noreen & Brewer, 2008).  ABC also supports the ongoing transition from a labor driven economy to an automated production environment and increased reliance on knowledge workers (Friedman, 2005; Pearlson & Saunders, 2006; Reyhanoglu, 2004).  While ABC is expensive to implement, ABC can more correctly reallocate indirect costs to direct costs and therefore provide decision-makers with more accurate cost calculations (Beaulieu & Mikulecky, 2008).  This is particularly relevant in times of economic downturn as companies often focus existing resources of existing customers and ABC excels at separating profitable customers and products from money losers (Katz, 2002).  To further illustrate ABC’s utility, consider that it produced more profits than the Theory of Constraints in a laboratory setting (Cooper, Bray & Parzen, 2007).

Activity Based Accounting

To provide a necessary basis, this analysis will summarize traditional Volume Based Costing (VBC) to introduce cost classifications and serve as a reference for analysis of Activity Based Costing (ABC).

At the top or least granular level, costing can be differentiated as job-order costing or process costing where costs are respectively ascribed to particular orders or to entire processes.  Both job-order and process costs may be further categorized as direct costs that can be traced to individual units or indirect costs also know as manufacturing overhead that is shared by many products and cannot be traced to individual units (Beaulieu & Mikulecky, 2008; Garrison, Noreen & Brewer, 2008).  Direct costs are comprised of direct materials and direct labor.  Manufacturing overhead includes all remaining costs not identified as direct materials or direct labor and includes selling costs and administrative costs (Garrison, Noreen & Brewer, 2008).  .  Costs can also be classified according to their behavior or relationship with different levels of activity classified as variable costs and fixed costs (Garrison, Noreen & Brewer, 2008).   Variable costs that may be correlated with units of production whereas fixed costs remain relatively constant independent of units of production (Beaulieu & Mikulecky, 2008).

Costs can also be distinguished as product costs also known as inventoriable costs that include all costs to acquire or manufacture a product or, period costs that are incurred independent of product costs (Garrison, Noreen & Brewer, 2008).  Product costs are comprised of direct materials, direct labor and manufacturing overhead whereas period costs are comprised of selling and administrative costs.  Two additional definitions relevant to the future analysis are the prime cost comprised of the direct material cost plus the direct labor cost and the conversion cost comprised of the direct labor cost plus manufacturing overhead costs.

While these classifications appear to be clear-cut, they present challenges to decision-makers as even complex costing systems have difficulty equitably assigning manufacturing overhead, fixed costs, period costs, common costs and even in some cases, variable costs to finished product costs (Beaulieu & Mikulecky, 2008; Garrison, Noreen & Brewer, 2008).  As introduced above, managers need relevant accounting information tailored to their needs to make decisions and perform their diverse tasks.

It has been recently asserted that providing relevant activity based accounting information to all employees increases their organizational understanding and enhances their sense of empowerment (Wynder, 2008).  It has been argued this increased understanding and empowerment can drive employee innovation and lead to decreased overhead and improved organizational efficiency consistent with TQM and CI tenets (Wynder, 2008).   Central to this initiative is the goal to provide employees with information beyond the traditional VBC presented above as employees need to understand the financial impacts of their work and processes (Beaulieu & Mikulecky, 2008; Wynder, 2008).  A proposed solution to this complex accounting problem is an increased emphasis on Activity Based Costing (ABC) (Beaulieu & Mikulecky, 2008; Wynder, 2008).  This approach is also consistent with the goal of managerial accounting as ABC can be tailored to all constituencies within an organization.

ABC was first documented by Kaplan and Bruns (1987) as a mechanism to correctly assign activity costs in today’s decentralized and JIT driven business climate.  ABC creates a four-tiered costing hierarchy where two levels are comprised of classifications of items with direct and variable costs, one level contains items with direct and fixed costs and one level contains items with indirect and fixed costs.  Two separate classifications are necessary for direct and variable levels to accommodate unit level costs (e.g. direct material and direct labor) and batch level costs (e.g. setup) (Beaulieu & Mikulecky, 2008).  Examples of the third tier’s direct and fixed costs are product sustaining activities such as engineering design. It should be noted that engineering design costs are increasing due to shorter product life spans resulting from the acceleration of emergent and transitory technology and increased international competition (Friedman, 2005; Garrison, Noreen & Brewer, 2008; Kotler & Keller, 2007).  Lastly, indirect and fixed costs are comprised of facility level activities that sustain the entire organizational process rather than a specific product (Beaulieu & Mikulecky, 2008). While ABC is expensive to implement it can more correctly reallocate indirect costs to direct costs and therefore provide decision-makers with more accurate, flexible and individualized cost calculations (Beaulieu & Mikulecky, 2008).  As suggested above, ABC can provide employees with the financial import of their positions provide the driver for innovation and CI (Wynder, 2008).


It is well understood that decision makers need different calculations of or adjustments to unit and activity costs that depend on their specific needs and responsibilities (e.g. operations or marketing) (Beaulieu & Mikulecky, 2008). Managerial accounting satisfies this goal as it provides the necessary information to relevant decision makers.

ABC is the natural evolution of managerial accounting as it provides a deeper understanding of organizational costs and can be tailored to provide managers with the necessary information foundation to conduct their planning, directing and controlling activities (Garrison, Noreen & Brewer, 2008).  Also central to this premise is the need for standardized accounting practices citing that organizations increasingly operate across international borders and accounting is the language of business.  It has been proposed that ABC is the rational approach to recording and communicating managerial accounting information since it provides more relevant information in light of today’s decentralized organizations and JIT processes (Kaplan & Bruns, 1987).

Balanced Scorecards (BSC)

In today’s emergent global economy, knowledge workers and the creation and management of institutional knowledge have become an organizational goal and a significant source of competitive advantage (Choi, Cheng, Hilton, & Russell, 2005; Friedman, 2005; Irala, 2007; Pearlson & Saunders, 2006; Porter, 1985).   This is a dramatic shift from traditional businesses where success could be achieved by effectively managing physical and financial assets.  With this basis, it is intuitive that business planning, directing and controlling and their supporting analytics must also evolve beyond traditional financial asset management to accommodate the shift to a knowledge-based economy.  The BSC was proposed as a solution to provide managers with a quick comprehensive view of their business in relation to an organization’s strategic objectives and competitive environment (Garrison, Noreen & Brewer, 2008).  Consistent with contemporary thinking in strategic marketing and organizational management, a BSC acknowledges that financial performance is only one measure of an organization’s success and it is often nonfinancial measures that allow an organization to achieve its strategic objectives (Albright & Lam, 2006; Kotler & Keller, 2007; Robbins & Judge, 2007).

A BSC is a responsibility-based Strategic Management Accounting (SMA) system that aggregates important elements of a business and its competitive climate thereby providing both management and employees with an understanding of the relationships of the organization’s functional areas (Irala, 2007; Rich, Jones, Heitger, Mowen & Hansen, 2010).   In essence, a BSC translates an organization’s mission and strategy into operational objectives and performance measures going far beyond a traditional accounting and budgeting systems that only focus on financial measures (Albright & Lam, 2006; Irala, 2007; Rich, Jones, Heitger, Mowen & Hansen, 2010).   The performance measures and objectives are derived from an organization’s vision and strategy and are carefully balanced between internal and external, objective and subjective and financial and nonfinancial measures (Rich, Jones, Heitger, Mowen & Hansen, 2010).   Central to the BSC’s purpose is its ability to tailor and communicate an organization’s strategic objectives through personal and unit-level scorecards to be addressed in more detail below.

To illustrate the need for a new business communications and performance measurement system in light of today’s knowledge driven economy, consider a pharmaceutical company whose goal is to develop and patent new medications.  Traditional accounting systems that focus solely on financial measures cannot convey this strategic goal however a BSC articulates and links an organization’s financial measures to its strategic objectives (Albright & Lam, 2006).  With this basis, a BSC can lead to a competitive advantage along the following dimensions: (a) a BSC provides the necessary communications congruence to disseminate a strategic vision throughout an organization, (b) a BSC provide a basis for performance measurement and its relationship to incentives and compensation and, (c) a BSC creates and sustains institutional knowledge.  These BSC dimensions are particularly relevant to organizations such as Wells Fargo OFS as their competitive advantage is their knowledge-based organizational efficiency and institutional knowledge.

BSC Analysis

A BSC categorizes an organization’s key strategic objectives and measures into the following four distinct but interrelated perspectives: (a) the financial perspective that provides consequents of successfully realizing the other three perspectives measured in various types of earnings and improvements, (b) the customer perspective that defines an organization’s competitive customer and market segments measured through customer satisfaction, retention and turnover, (c) the internal business process perspective that defines the processes necessary to drive customer satisfaction and achieve a competitive advantage measured in terms of customer surveys that reveal an organization’s timeliness, quality, performance, service and cost, (d) the learning and growth perspective that defines the infrastructure capabilities necessary for continued organizational growth and improvement and includes information systems and employee capabilities and attitudes measured by employee attraction and retention (Albright & Lam, 2006; Irala, 2007; Kaplan & Norton, 1996; Lipe & Salterio, 2000;  Rich, Jones, Heitger, Mowen & Hansen, 2010).   This last perspective is particularly important in a global knowledge-based economy citing that organizations must continually innovate to remain relevant by launching new products, creating more value and improving operating efficiencies (Irala, 2007; Kotler & Keller, 2007).

Kaplan and Norton (1996) outline four important processes or stages when developing a BSC: (a) gain consensus at the top layer of management about the organization’s strategic objectives and clearly articulate this vision to all affected constituencies, (b) develop and refine objective measures linked to the strategic objectives and communicate this information to all affected units and employees throughout the hierarchy using personal and unit-level scorecards, (c) include the unit and personal scorecards in business planning and budgeting as this simplifies and translates the strategic vision into measurable short-term targets and, (d) foment an organizational culture based on feedback and communications congruence as this is the critical component for testing and validation and provides the necessary platform for institutional learning, innovation and process improvement (Kaplan & Norton, 1996).

It is established that the online financial services market is highly competitive and transitory.  Tempest (1998) cited that prior to 1998; OFS was struggling to evaluate and implement numerous initiatives that were expected to expand and improve its online banking services and maintain its market leadership.  OFS’s lack of a structured initiative evaluation process resulted in continual changes in direction and wasted time as employees would often change projects prior to their completion.  This not only identifies flawed planning but also presents challenges to responsibility accounting and control as it is impossible to evaluate a manager or employee that is directed to continually change directions prior to project completion. In contrast, a BSC provides a mechanism to create personal and business unit level scorecards (i.e. measures) derived from the top level BSC and tailored to the individual or business unit (Kaplan & Norton, 1996; Lipe & Salterio, 2000).   This allows employees and business-units to be evaluated on non-financial criteria such as CSM or cross-functional collaboration and support.  This communications congruence can lead to employee empowerment and in turn drive innovation critical to OFS’s competitive business climate (Garrison, Noreen & Brewer, 2008; Robbins & Judge, 2007).  With this basis, a BSC would not only improve OFS’s planning but it would also provide a basis for both process and employee evaluation and employee compensation.

BSC Solution

From a presentational and communications standpoint, a BSC organizes and presents diverse information from multiple domains as four categories and provides the linkage between strategic goals and performance measurement (Lipe & Salterio, 2000).   This approach is particularly relevant to OFS’s competitive knowledge-based economic climate as proper information organization has been shown to improve decision-making (Ricchiute, 1992),  The four category BSC can improve understanding and communications congruence throughout an organization citing that schematically organized information affects both learning and memory therefore enhancing memory recall and retention (Frederick, 1991; Rabinowitz & Mandler, 1983).  Furthermore, BSC’s four category organization may be optimal as it has been shown that people can only handle up to seven items at any point in time (Miller, 1956). With this basis, organizing and succinctly presenting an organization’s vision and correlated performance measures in four BSC categories can intuitively improve managerial decision-making and communications congruence throughout an organization (Lipe & Salterio, 2000).

While the BSC articulates an organization’s strategic objectives in a four component scorecard, it must be reemphasized the four categories are inseparably integrated.  Albright and Lam (2006) describe this integration as a recurrent cascade of performance measurements presented in the following example applied to the first column of Tempest’s (1998) Exhibit 1 (p. 6).  To achieve OFS’s financial goal of growing revenue, it must add and retain high value customers by providing superior Customer Service Management (CSM) through time savings, security, price and reliability.    To enhance its CSM, OFS must achieve superior internal processes that support CSM and include maximizing reliability, developing superior support services and cost effective marketing, products and features.  To achieve superior internal processes, OFS must continually improve organizational knowledge and its constituents across the supply and value chains requiring successful attraction and retention of key OFS personnel.  Lastly, enhanced learning and growth will lead to innovation that subsumes cost savings and new products thereby closing the loop and improving OFS’s financial basis.  With this basis, it is intuitive the application of a BCS can lead to a cycle of Continuing Improvement allowing OFS to create and sustain a competitive advantage.

As cited above, the BCS is holistic approach in accord with contemporary business tenets whose focus is to exceed customer satisfaction while concomitantly improving cost control and enhancing organizational behavior (Albright & Lam, 2006; Kotler & Keller, 2007; Robbins & Judge, 2007).  This balanced approach places less emphasis on financial measures and leads to better business decisions (Kaplan & Norton, 1996; Lipe & Salterio, 2000).  As an example, managers have traditionally focused on financial measures (e.g. ROI, residual income, economic value added, etc.) however this narrow perspective can neglect strategic goals that include increasing customer satisfaction and customer loyalty.  Conversely, low-level managers and employees often do not perceive that they actively contribute to an organization’s financial measures and fail to see that their efforts to enhance customer satisfaction and loyalty are in accord with the organization’s vision.  To effectively realize this strategic initiative, an organization must carefully align its performance incentives and compensation in accord with the BSC measurement criteria.  These measures must be chosen and tailored to the relevant business unit and employees in accord with the organization’s strategic objectives as it is unreasonable to expect managers and employees to follow a scorecard if their performance is measured on other criteria (Irala, 2007; Lipe & Salterio, 2000; Kaplan & Norton, 1996).

The BSC is not without its limitations as it has been found to promote multiple objectives (Irala, 2007).  To resolve this shortcoming, organizations must carefully weight, rank and balance diverse financial and nonfinancial measures (Irala, 2007).  This can be particularly challenging when measuring and assessing subjective objectives initiatives (Lipe & Salterio, 2000).  OFS’s BSC implementation proved to be an immediate success as it allowed management to narrow over 100 project proposals to 11 worthy candidates that directly supported OFS’s identified strategic goals.  Following selection, more extensive business plans were developed for the 11 selected projects to provide a more comprehensive evaluation and overcome the BSC multiple objective limitation.  This structured approach is used in many emergent and knowledge-based disciplines since it is established that processes and their interrelationships must be thoroughly understood before they are improved (Albright & Lam, 2006; Pearlson & Saunders, 2006).   Most importantly, OFS’s implementation of the BSC not only ensured that the correct projects would be selected but that the projects would be seen through to completion.  This outcome is very similar to Roche Pharmaceutical’s Gene Chip fail fast implementation that provides early identification and avoidance of flawed research paths and wasted effort thereby improving organizational efficiency (Pearlson & Saunders, 2006).

BSC Justification

As presented above, a BSC goes far beyond traditional accounting systems by aggregating all elements of an organization’s competitive agenda and includes: (a) financial, (b) customer, (c) internal process and, (d) institutional learning perspectives.  As introduced above, a BSC can provide an organization with a competitive advantage by articulating and communication its strategic goals through an enhanced and accessible communications structure and performance measurement system.  With this basis, a BSC is the natural evolution of management accounting as it can engage all employees in the singular pursuit of the organization’s vision.    OFS’s BSC implementation was sound citing that the BSC has already established a proven track record evidenced by the following:

  • • 60% of Fortune 1000 companies in US have implemented BSCs (Silk, 1998)
  • • Verizon and Microsoft have adapted BSCs in their risk dashboards enabling them to locate risks that threaten organizational success (Rich, Jones, Heitger, Mowen & Hansen, 2010).
  • • Wal-Mart has adopted a balanced scorecard across its supply chain creating a comprehensive unified perspective leading to continual improvement across the value chain (Rich, Jones, Heitger, Mowen & Hansen, 2010; Wynder, 2008).

As a communications mechanism, a BSC can provide all constituencies with an accessible understanding of the interrelationships between strategic goals and performance measurements.  This allows an organization to articulate and communicate an organization’s strategic objectives in tangible performance measures to employees and units at all levels.  Equally important, BSC communications provides an accessible communications mechanism that can empower employees and enhance their direction and motivation. An integral artifact of effective BSC communication is enhanced institutional learning and innovation.   With this basis, OFS’s BSC implementation can lead to enhanced communications and a competitive advantage by:

  • • Providing the necessary communications congruence to disseminate a strategic vision throughout an organization.
  • • Providing a basis for performance measurement and its relationship to incentives and compensation.
  • • Creating and sustaining institutional knowledge.

In addition to the enhanced BSC planning efficiency cited above, the OFS BSC will also provide the mechanism for enhanced direction, motivation and control.  A BSC is a holistic approach to achieving strategic objectives by articulating objectives as measures that can be translated, tailored and applied to diverse and distinct employee and business-unit levels.  It has been established that information organization has an impact on communications and understanding.  With this basis OFS’s BSC provides the following enhanced communications infrastructure that facilitates communications congruence throughout an organizational hierarchy and across functional boundaries (Irala, 2007).

  • • Strategic objectives are articulated and carefully aligned with performance measurements.
    • o Top-level managers are provided with a quick comprehensive view of their business in relation to strategic objectives.
    • • Strategic objectives are tailored to specific business units and personnel.
    • o Mid and low-level managers are provided with a quick comprehensive view of their unit-level business in relation to strategic objectives.
    • o Employees are provided with a personal scorecard that relates their personal responsibilites to an organization’s strategic objectives.
    • • Feedback that includes performance measurement is built into the model facilitating a cycle of continuing improvement.

BSC Summary

Managerial accounting has evolved from simply measuring and reporting business activities into a multi-disciplinary strategic initiative that seeks to support managerial decision making and improve processes throughout the supply and value chains (Albright & Lam, 2006; Garrison, Noreen & Brewer, 2008).  The BSC is an important management tool that identifies both performance drivers and a correlated measurement system allowing organizations to quickly assess and react to volatile business environment (Irala, 2007; Lipe & Salterio, 2000).   To this extent, the BSC has been developed to complement traditional financial accounting by translating a company’s strategy into specific measurable objectives that are critical drivers of future financial performance (Irala, 2007; Kaplan & Norton, 1996; Lipe & Salterio, 2000).   This holistic SMA approach is critical to today’s knowledge-based economy since the inclusion of engineers, financial analysts and managers throughout supply chain is critical to planning and process control (Albright & Lam, 2006).  Most importantly, the BSC engages all employees in the organizational mission and this empowerment allows an organization to build internal assets, capabilities and institutional knowledge and achieve a competitive advantage (Garrison, Noreen & Brewer, 2008; Irala, 2007).  In conclusion, the OFS BSC implementation is a well founded rational solution to managing decision making and organizational communications in a complex, volatile and competitive knowledge-based business climate.





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