Advantages and Disadvantages of Traditional Management Accounting

Traditional Management accounting is a methodical system where financial aspects of a business or organisation are managed. There are various advantages of using traditional management accounting such as it being simple to use. The method of traditional costing involves allocating costs based on the average overhead rate. The way in which the overhead is used is by applying the machine hours or direct labour hours used. After this, the cost of a specific product or service is calculated based on this rate. In comparison to the activity-based costing method, this method is simpler because when using activity-based costing you are using the particular costs involved to calculate the expense of every product or service. An additional benefit of this system is that it is cost effective. Due to the simplicity of this method, companies do not have to spend money on expensive machinery and systems to keep track of expenses. It is also less time consuming since it is not as complex as activity-based costing. Furthermore, the history behind traditional costing means that it is well understood by businesses and increases reliability. Even though activity based-costing still has a good amount of history, traditional costing pre-dates this method. Lastly, when it comes to external assessment and explanation, traditional costing is a preferred method for businesses to incorporate as it is easier to analyse the value of products or services as compared to activity-based costing.

Disadvantages of Traditional Management Accounting

On the other hand, there are some disadvantages to traditional management accounting. One disadvantage is its limited accuracy. In traditional costing there is a lack of detailed calculations resulting in a misrepresentation of actual overhead costs. There are significant measures, such as a product’s profitability, which can be misrepresented since traditional costing does not take into consideration the fact that the activity rate of each product can differ. Additionally, traditional costing fails to account for unexpected costs which can result in a business spending more money to make a product than expected. Furthermore, traditional management accounting concentrates on financial measures generally on an annual or short-term basis. This approach does not cater for progression in accordance with customer requirements, strength against competition and long-term targets. For instance, the development of different products and services and improving building work could be important targets, however they could jeopardize accounting performance in the short-term. Lastly, traditional management accounting has a quantitative bias and because of this, other important factors such as employee welfare and task efficiency are not taken into consideration.

Perspectives of Balance Scorecard

Due to the above disadvantages of traditional management accounting, balanced scorecard was introduced to overcome these limitations. When using balance scorecard, there are four different perspectives that are used to assess a business. The first perspective is the financial perspective. This analyses and examines a company’s financial performance and how their financial resources are being utilized. Another perspective of the Balanced scorecard is from the perspective of the customer. Customer perspectives are gathered to determine the level of customer satisfaction about various products or services. The third perspective used in balance scorecard is the business processes. The business processes are evaluated by analysing the quality and efficiency in the manufacturing of products, the delivering of services and any other significant processes of the business. The final perspective used in balanced scorecard is learning and growth. This is evaluated through the investigation and assessment of infrastructure, technology and other vital resources used in training and attaining knowledge.

Advantages of BSC

There are various advantages of implementing Balanced Scorecard. Firstly, it provides structure to your strategic plan. The Balanced Scorecard produces a strong and stable system for the enhancement and communication of strategy. It provides a rational and efficient way of making sure that all aspects of the business are covered in a simplistic manner. The organisational targets are kept at the heart and foundation of the business and particular measures are used to monitor progression. Another advantage of the Balanced Scorecard is that it provides simplicity when communicating a strategy. A strategy map is a visual guide used to assign each department in order to achieve organisational targets. This provides employees with clear targets while they are working, and it assists workers in identifying important goals. In addition, it enables employees to gain a better insight and understanding of the strategic elements which need work and it also allows workers to observe the way in which certain objectives would impact each other. Furthermore, it coordinates the various departments within the organisation. Through the correct implementation, every department should align with a common strategy and the Balanced Scorecard is a useful framework that aids this process. When using the Balanced Scorecard format, it allows you to relate your critical targets to the targets of an enterprise. Furthermore, it allows you to analyse how your measures may connect with the measures of the enterprise and the way in which projects link to the enterprise projects. A Balanced Scorecard also formulates an efficient structure when large projects are distributed across several departments. Aside from this, it assists employees in assessing how their individual targets collaborate with a strategy.

The Balanced Scorecard provides workers with the ability to designate their targets across the business when using the Strategy-Organised framework. For instance, if consistent performance targets are set by an employee for a personal review, their targets can be linked to those targets in their department and other targets throughout the business. Due to this, the Balanced Scorecard enables employees to establish a connection between their work and the improvement of their department and the business as a whole. Lastly, another advantage of the Balanced Scorecard is that it keeps your strategy front and centre of the reporting process. Several businesses make strategic plans and then leave them to the side to be ignored. The Balanced Scorecard is based on assessing strategy regularly. This can only be done if the strategy is well organised. Through regular meetings on a monthly basis to review your strategy and an annual strategy refreshment, will ensure that your strategy is constantly referenced and is maintained at the heart of your reporting management process. When reviewing your strategy, it will provide you with a better understanding for it to be used in the business and it will be a useful contributing factor in the way in which your organisation is managed. Additionally, the business will always know where it stands when it comes to achieving their targets.

Disadvantages of the Balance Scorecard

However, aside from all these advantages of the Balanced Scorecard, there are some disadvantages as well. One disadvantage is that the Balanced Scorecard can be quite mind-boggling. The amount of material and resources on the Balanced Scorecard can make it quite difficult to fully comprehend. The biggest topic on the Harvard Business Review website is the Balanced Scorecard and if you try to analyse all the material in a detailed manner by reading each article or case study, it can prove to be pretty overwhelming. In addition, if you read Norton and Kaplan’s fifth book, you may struggle on how to proceed. Secondly, another disadvantage is that the Balanced Scorecard can easily be copied from other examples.

An organisation’s certain strategy will be different to that of another company’s strategy. It can be tempting to copy business’ strategy example, therefore you must be aware that your strategy will be completely unique to your requirements. The best way to overcome this problem is to use other business templates in order to get an idea of what they have implemented in their Balanced Scorecard, but then move away so that you can create a framework which is unique to you. Aside from this, the Balanced Scorecard is dependent upon strong leadership in order to be successful. Organisations may struggle with the Balanced Scorecard since new leadership doesn’t take the BSC to be a viable option or the current leadership could dislike or not fully understand its structure. The BSC requires a complete overhaul in the way in which your management is set up. If u create a BSC and then go back to business as usual, the Balanced Scorecard process will probably be unsuccessful. Furthermore, the BSC can make it challenging to keep everyone on the same page and may prove to be too rigid for the way in which your management process has been set up.

Strategies

There are various strategies companies can adopt in order to increase efficiency and sustenance within the organisation. One example of a strategy that businesses can adopt is Porter’s generic strategies. Porter’s generic strategies are methods used in order to gain a competitive advantage. This is basically developing products or services to make them more unique in order for you to stand out from your competitors. When taking on a cost leadership strategy, there are two main methods used for achieving this.

The first way is to increase profits through the reduction of expenses, while charging industry-average prices. The second way is to charge reduced prices in order to increase market share. At the same time, a substantial amount of profit still needs to be made on each sale due to cost reduction. The second type of strategy used in Porter’s generic strategies is the differentiation strategy. This strategy includes creating your products or services in such a way that they are more appealing than those of your competitors. The way in which the company does this is dependent upon the type of industry, products and services. However, differentiation usually involves performance, endurance, support and branding that is valued amongst your customers. In order for this differentiation strategy to derive success, companies must have good research, development and innovation. They also must be capable of providing good quality products and services. Additionally, the company must incorporate effective sales and marketing techniques in order for the market to understand the advantages provided in their products or services. The third component of Porter’s generic strategies is the focus strategy. Businesses that use focus strategies pay attention to specific niche markets. In order for these companies to use focus strategies, they must gain a wider understanding of the dynamics of that particular market and the various needs of the customers subject to that market. As a result of this, the development of lower costing, unique and clearly specified products for that market can be established.

My Balanced Scorecard

Financial Perspective Establish an increase in shareholder value

Customer Perspective Consistent and reliable departures Comparable to other airlines in the market Keep ticket prices as low as possible

Internal Process Perspective Innovation

• Quick turnaround
• Favourable destinations
• Direct flights

Relationships

• Enjoyable experience
• No Elites Cost Effective
• No extras
• Standard expenses
• Increased productivity
• Increased employee ownership

Learning and Growth Perspective Good Compensation Various contracts that will meet people’s requirements.

The four perspectives of the Balanced Scorecard are presented on the left of the strategy map. They are the financial perspective, customer perspective, internal process perspective and the learning and growth perspective. These four perspectives make the Balanced Scorecard a unique framework as traditional systems of reporting mainly analyse just the financial perspective. The other bullet points in the Balanced Scorecard are the targets set out by British Airways for them to achieve. Each target has been categorised in the four perspectives. The objectives set out are ordered in terms of importance with the most important goal being listed first. The first goal listed for British Airways is their financial goal which is to increase shareholder value. The second category of targets listed is the customer perspective targets since British Airways believe that the way in which they will achieve their most important objective of increasing shareholder value is by pleasing their customers. The things that will make customers happy is the lowest possible ticket prices and consistent reliable departures.

British Airways are aware of the fact that if they wish to please their customers and meet their financial targets, they must pay attention to Innovation. They can achieve this by delivering a quick turnaround, favourable destinations to better appeal to their customers and direct routes in order to increase efficiency of service. They will form good relationships with their customers if create enjoyable experiences and no elites since they consider all customers as equal to one another. Lastly, they will focus on how they can make their service more cost effective. If they don’t allow for lavish upgrades, maintain simplicity and cleanliness of their planes, and accommodate customers to full capacity on their planes, they will be able to please customers with affordable tickets. In order for all this to work successfully, British Airways will analyse their last perspective which is Learning and Growth. Through good compensation, suitable and flexible contracts and more employee ownership, they believe this will help improve the business. To conclude, it is clearly shown that every perspective relates to the next resulting in an organised approach. This strategy proves to be of great effect to British Airways and it allows them to constantly increase value to their business.