1. Balanced Scorecard Approach and its Perspectives
Balanced Scorecard (BSC) is a radical way of appraising organizational performance and the concept was officially unveiled in the year 1992 by Robert Kaplan and David Norton. BSC, born in the Harvard Business School, was a radical concept at its time. Prior to the origination of BSC, only financial measures were used for organizational performance evaluation. However, BSC was the first concept ever which went beyond pure financial measures for evaluating an organization’s performance. This concept was the first to use a holistic approach toward performance evaluation of organizations as also using indictors which might actually envisage into the future rather than just considering the historical measures alone.
The concept evolved from a radical performance measurement tool into a comprehensive strategic management tool that is documented in several Harvard Business Review articles, for example (Kaplan, 1994; Kaplan and Norton, 1992; 1993; 1996a). The balanced scorecard approach was first introduced by Kaplan and Norton as a performance management tool after a one-year study of several companies in 1990. BSC aims to present the organization management team with a solid summary of the key performance indicators (KPI) and to integrate the day-to-day operations with the overall strategy. Kaplan and Norton intended to provide a medium that attempts to translate the overall organization vision into a set of clear objectives that could be translated into a system of performance management
This concept was developed on the basis that most organizations depend on measurement approaches that rely on financial accounting measures (Such as ROI and payback period), which gives an incomplete narrow picture of the organization performance. Instead they developed the BSC to complement financial measures of previous performance with measures of future performance by considering other intangible factors that has been previously considered both of a little value and immeasurable. However, the BSC goes beyond being just a combination of financial and non-financial measures. Kaplan and Norton in their recent book (2001) argue that the BSC goes beyond this limited concept because it is a dynamic tool rather than static one that is aimed to consider various elements such as implementation, application, expected benefits and satisfaction. They argue that their original design of BSC goes beyond being a measurement tool to becoming a mean for implementing strategy by creating alignment and focus.
BSC was explained in more detail in Kaplan and Norton’s book titled The Balanced Scorecard: Translating Strategy into Action, where they defined the BSC as a tool that “translates an organizations’ mission and strategy into a comprehensive set of performance measures and provides the framework for strategic measurement and management”.
This explanation gives an accurate yet simple overview of the concept; however it does not fully quantify the radical approach that the BSC offers. Alice C. Stewart and Julie Carpenter-Hubin in their study about implementation of Balanced Scorecard which according to them is beyond reports and rankings, feel that making use of balanced scorecard process, highlighting specially on integrative examination and trade-offs, can impact performance management from an superficially driven concern for image of the institution to an internally driven concern for superior institutional effectiveness. If strategic decision making is to be done, the strategy must be focused in the direction of some overarching purpose. Many of the colleges and universities in the world have a mission or vision statement which describes the goals of the institution in a broader perspective. It is in the context of the vision and mission that an institution has to decide what would be benchmarked and what the performance that would be measured is. This was what was the process described by Kaplan and Norton as “translating the vision.” “For people to act on the words in vision and strategy statements, those statements must be expressed as an integrated set of objectives and measures, agreed upon by all senior executives, that describe the long term drivers of success”.
2. Importance of Balanced Scorecard (BSC)
Balanced Scorecard as an Operational Control Application
Operational control essentially entails asking the following few questions:
- What are the processes that are to be monitored?
- What specific aspects of the process are to be assessed?
- What is regarded as the best practice?
The primary motive for using the BSC as an operational control application is to assist managers in monitoring and controlling the supply of a pre-defined set of actions. More often than not, this is done with a motive of achieving "best practice" performance ranks. The BSC helps in organisations from sinking in measures. Today, technology is so vast that it literally makes life easy for organizations for measuring anything and everything, provided the management dynamically picks what to measure and which eventually demands that the management team comes to a consensus about what is vital and imperative. Selecting the right things to measure is hard, and when this cannot be done in an effective manner, organisations end up with numerous measures, and fatefully they lack the capability to differentiate between the information that updates on crucial activities from those that are less significant.
The framework of BSC, as already mentioned earlier, provides a holistic but more focused interpretation of performance measurement and the same makes sure that the users are involved in the process of design. By assisting the management teams in identifying a brief set of operationally focused measures across the perspectives of BSC, the framework makes it easier to focus on the vitally required information – that essentially reflects the customer satisfaction levels as well as the impact of innovation and development activities apart from the typical financial and operational measures. The following are the advantages of using BSC as an operational control application:
- Better understanding, cognizance and orientation about the operations across the entire management that are a result of the discussions at the time of the design process;
- Broader and more effective assessment of performance improvement measures;
- Better understanding of the associations between measures enhances the understanding while making target setting much easier;
- A single succinct management report defines operational performance across a plethora of perspectives.
BSC as a Strategic Management Application
Actually, there is a lack of agreed theoretical framework resulting in a gap in the literature and in the knowledge base regarding both measuring and executing of long-term goals and strategies. As a result of this gap, new performance management frameworks evolved to bridge operational budgeting and strategic planning. These performance measures are considered multidimensional and they gradually replace the financially focused metrics with broader non-financial ones.
Over the last two decades, management and accounting practices have been highly criticized from both academic researchers and practitioners for example for their lack of relevance and usefulness, and gradually they started to be less perceived as tools that support top management making complex strategic decisions into tools that separate top management from the organization by being too abstract. Eventually, organizations of different kinds have realized that the conventional means of control, which involve separating financial plus non-financial measures, can no longer be. The BSC attempts to overcome the shortcomings of traditional management accounting and control while also linking the organizations’ long-term strategic orientations with its short-term operational procedures.
Lukka (1998) argues that there are two approaches for the integration on non- financial measures within an organization. The first approach has been described in several Scandinavian studies, where non-financial measures are developed in local units mainly through experience and learning. They are related to the activities within the organization without being related to the strategic goals of the organization. The other approach is the opposite where non-financial measures are developed from organizations’ strategies in a top-down approach. BSC is an example of the latter approach where missions, goals, and strategies are supposed to cascade down through the organization.
The BSC defines and evaluates the critical success factors (CSFs) that are considered necessary to achieve the goals of any organization and ensure future success. This is achieved through analysis and understanding of cause and effect relationship on both the short and long run. This is reflected in the term “balanced scorecard” as it shows the balance between the short and long-term goals, financial as well as non-financial measures. This term also reflects a balance between external and internal performance perspectives, thus offering mangers, who were traditionally overwhelmed with data, the time for decision making rather than pure data analysis.
BSC as a Performance Evaluation System
As discussed earlier, the BSC is a blend of both strategic planning as well as reporting. It is a method where the company’s objectives are divided between four significant parameters namely the customer, Financial, Operational and lastly people, eventually offering a clear path for implementation of strategies. Essentially, the BSC focuses on those different measures which primarily focus and drive the performance of employees. Performance Evaluation, if done using BSC, evaluates performance in a comprehensive style rather than being biased. BSC offers the complete view of each employee while also giving a broad picture of the organizational performance thus helping the management in aligning the performance of its employees and the action plans with the long-term goals of the organization.
Responsibility Accounting
1. Concept of Responsibility accounting
Responsibility accounting is a system of apportioning an organization into identical and individual entities, to each of which specific responsibilities are assigned. These individual entities may be either sub-division, SBUs, branches, outlets, etc. Each department is encompassed of personnel responsible for specific tasks or managerial roles. It is the responsibility of the managers of the different departments to make sure that the personnel in their specific department are contributing their part for the overall goal achievement. “Responsibility accounting refers to the various concepts and tools used by managerial accountants to measure the performance of people and departments in order to ensure that the achievement of the goals set by the top management”.
Responsibility accounting, thus, denotes a process of performance measurement of various individual division of a particular organization. The biggest challenge in classifying the division is that the operating performance of each individual unit is distinctly identifiable and measurable in a manner which is of practical importance to the management. Responsibility accounting gathers and reports strategic and authentic accounting information regarding the various inputs and outputs of individual responsibility centres.
2. Describe the role that responsibility centers play in performance management and evaluation.
The focus of responsibility accounting is to measure, project, and analyse the performance of the individual responsibility centres. Responsibility accounting systems essentially measure and allocate actual and planned revenues as well as costs to responsibility centres depending on the responsibility of the manager of the specific responsibility centre’s inputs and/or outputs. When there is such feasibility and also the same is cost-effective, costs and revenues are outlined directly to responsibility centres. Essentially, costs which cannot be traced are allocated directly to the responsibility centres.
The measurement of actual performance by the responsibility accounting system is very closely related to the cost and financial accounting system of the company. The cost factors play an important role in pricing and its influence in pricing varies with the circumstances. In some pricing decisions costs play only a secondary or tertiary role. For instance, in liquidation sale, costs are relatively unimportant. On the other hand, the impact of the cost factors is great in some pricing decision.
For example, in a cost-plus contract, they become the primary determinant of price. Actually, these are two extremes. Typically, the influence of costs in pricing lies amid these two extremes. But within these limits, costs assume distinct gradations of importance in pricing decisions, since they play different roles in determining proposed price. For example, costs may play a significant role in pricing a new product, a differential product, or products produced to customer order.
On the contrary, in some situations of pricing, cost acts like an indication of profitability rather than a pricing tool. Whenever a standardized product competes in an established market with other products serving the same purpose, price is established by the competitive market through the law of supply and demand and is relatively unaffected by the costs of individual suppliers. Instead of providing a pricing tool, costs in this case serve primarily to indicate the profitability with which a product might participate in an established market at the current or predicted future market price. Or, if the costs of a product prohibit it from being sold in the competitive market at a satisfactory profit, management is asked to discontinue the production of the product or discover ways to produce and market it less expensively.
Majority of the studies that focus on ascertaining the role of accounting data for price-setting analyze decision makers in individual settings. Early studies came out with the opinion that the choice of cost system is very crucial as decision makers relied very much on the output of a particular cost system. Hence, “cost systems that are more accurate and perfect continued to bestow a significant advantage over imprecise cost data in individual settings without other supplementary market agents ”.
In a multimarket environment, traditional costing can produce prejudiced cost estimates in diverse markets. When such cost allocations overrate or underrate costs for a specific market segment, the cost systems of the firm may report accounting losses or profits for markets which in reality have been profitable (unprofitable). Briers et al. (1999) investigated the impact that biased cost data would have in a multiproduct context. There are numerous factors that result in changes in costs thereby resulting in changes in company profits.
Costs change due to inflationary trends in the economy, changes in the labor market, technological advances, or changes in the size or quality of production facilities. Also, all these are industry specific and every industry has got its own set of macro and micro factors which may have great influence on various issues relating to the company.
Meeting these objectives gratify the needs of the customers and all other stakeholders. “Strategy is the way that a firm positions and distinguishes itself from its competitors.” Divisions are made on the three different dimensions namely the quality, cost, and time. Different clientele have different outlooks about the description and performance dependability (quality) they require in a particular product, the price (cost) they are ready to pay for the same, and when and how quickly they would need the product or services delivered to them (time). Proper analysis of activities is believed to surely assist in better performance evaluation. At higher management levels, the activities can be aggregated to coincide with responsibility centers. Managers are the ones who would be accountable for the costs of the activities associated within the scope of their responsibility.
3. Controllability and responsibility accounting
Control is an essential function of management in every organization. The management process is imperfect and occasionally ineffective without the existence of the control function. The term ‘control’ has diverse meanings pertaining to various contexts. In the context of management ‘control’ refers to the assessment of performance and the execution of remedial actions to accomplish the objectives of the organization. Controlling plays an important role in helping managers detect irregularities, identify opportunities, handle complex situations, decentralize authority, minimize costs, and cope with uncertainty.
Responsibility accounting relates to controllability (management control) in the view that management control is highly reliant on measurement and responsibility accounting is something that is used for measuring the performance of responsibility centers. In order to effectively measure the operations as well as the performance, it is necessary that responsibilities are assigned and acknowledged for individual performance.
4. Relationship between BSC and Responsibility Accounting
A strategic-based responsibility accounting system essentially transforms the mission and strategy of an organization into operational objectives and measures under four different viewpoints, namely the financial, the customer, the process, and lastly the learning and growth perspective. "It differs from activity-based responsibility accounting because of the formal linkage to strategy and because it adds two perspectives to the responsibility dimension: the customer perspective and the learning and growth perspective”.
A Balanced Scorecard is a strategic-based performance management system that translates an organization’s vision and strategy into operational objectives and measures for four perspectives: financial, customer, process, and learning and growth. Balanced measures denote that the strategic measures that are used normally comprise of a proper blend of unified and cohesive financial and nonfinancial measures which are both foreseeable and also historical while also being subjective or objective.
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