ABC & BSC 1

Management accounting techniques are highly effective in emerging economies:

ABC & BSC

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Introduction

Activity based costing (ABC) is one of the best management accounting techniques used

in emerging economies (Schaltegger & Burritt, 2017). Several articles have discussed ABC to

analyze how well it serves organizations in emerging economies. One research article found that

its implementation in Jordanian companies has been highly disappointing in spite of facilitating

and motivating environmental factors. The article however analyzes and determines factors that

catalyze, facilitate and motivate the decision to implement ABC in these companies (Nassar, et

al. 2013). The findings were that most of these companies require training as one of the

facilitating factors because they find it hard to use the technique. The main motivation to

implement this technique was the availability of overhead costs. Other articles have also

identified ho useful ABC model is to companies in emerging economies like China and the

findings are that its benefits outweigh its limitations.

This paper will focus on the comparison between activities based costing (ABC) and the

BSC. ABC is an accounting management technique that identifies a company’s activities and

then allocates indirect costs such as overhead costs to products in a more effective manner as

opposed to the traditional method that used the basis of machine hours. ABC first assigns costs

that are not directly related to manufacture of products or delivery of services that range from

marketing costs to administrative costs (DRURY, 2013). The methods of management

accounting in ABC are more complex and accurate than the traditional methods because instead

of just assigning costs based on arbitrary average, it first assigns them to activities before

assigning to products based on their usage of activities. However, every accounting management

method has its strengths and weaknesses thus the paper will focus on both ways for ABC and

BSC.
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ABC and BSC

Both ABC and BSC are qualitative data driven management accounting techniques that

are heavily dependent on judgmental and logical assessments (Lionis & Kougioumitzaki, 2018).

Activity Based Costing is one of the best accounting management techniques that identifies the

relationship between cost, activities and products which ensures that indirect costs are assigned

to products less arbitrarily.

There are several benefits accrued to firms that adopt ABC technique including the fact

that it is the most accurate and complex method of product and service costing thus it leads to

better costing decisions for an organization. This is because ABC accounts for costs similar to

the way production activities are carried out thus allowing managers to easily account for

overhead cost (Nassar, et al. 2013). In addition, Activity Based Costing enhances the costing

process by expanding the pool of costs by activity instead of accumulating all the company costs

together (Lueg & Storgaard, 2017). However, ABC management accounting technique is very

expensive and time consuming to implement. This is because when analyzing business activities,

they must be broken down into individual components of each activity which is likely to

consume valuable resources during data collection, analysis and entry into a new system (Nassar,

et al. 2013).

On the other hand, BSC was proposed to evaluate performance in a multi-dimensional

way, but soon it turned to focus on performance management (Dreveton,2013). The BSC

evaluates the performance in four dimensions of a sector: innovation and learning, internal

business process, the customer and financial (Greiling, 2010). Clearly, the BSC locates financial

aims as the last aim, which also inconsistent with the objectives of most PSOs and non-profit

organizations. According to Kaplan (2012), though adopted for business firms at the first, the
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BSC can also be used in public sector organizations by replacing the customers at the top of the

hierarchy.

BSC evaluates performance in a multi-dimensional way from the point of different

stakeholders and aims, which satisfies the requirement of public sector and non-profit

organizations (Barnabè, 2011). Moreover, key performance indicators (KPIs) are the focus of

BSC. It reduces transparence and accountability among employees (Malmi & Brown, 2008).

Hence, they are usually seen as a drain of economy. This paper attempts to research whether the

BSC is a suitable tool for PSOs and non-profit organizations to improve performance

management. The disadvantage of the BSC method is that the index settings are complex and

difficult to quantify. And because the indicators may not be positively correlated, the weight

allocation is difficult to determine, and the evaluation orientation is not clear. Therefore, the

application of BSC method should be combined with EVA value management.

Practices of Management Accounting Techniques in Emerging Economies

Management accounting in emerging economies has grown considerably over the past

twenty years which is a good sign because such work has been marginalized in the past despite

most people living in emerging economies (Alao, 2014). It is important to note that their

accounting needs are as pressing as the needs of people living in more developed countries. In

fact, emerging economies form a large part of the world’s mosaic trade thus more developed

countries can learn a thing or two from them including issues to do with reconciling ethnic

tensions and poverty reduction.

Role of management accountants in developing countries

Defining developing countries is problematic because development rates vary and

poverty may not be a universal aspect for all developing countries. However, they are in most
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cases characterized by low per capita income and capital formulation (Alao, 2014). Good

management accounting involves a responsibility to manage critical information that influences

organizational decision making. Therefore, the competitive global business must employ

proactive management accountants whose roles are interchangeable with the changing market

situations. Therefore, for developing countries that are faced with the problem of scarce

resources as well as high cost on debts represented by interest charges from bank loans, a

management accountant is supposed to be very careful in order to manage the limited resources

available for each business organization adequately (Alao, 2014).

Sometimes management accountants can identify diverse resources such as personal

resources in form of assets like equipment, debt or equity but investors are still challenged by the

problem of early closure of their businesses. Therefore, management accountants must establish

ways in which resources should be provided to run businesses as well as maintain them to last

longer in developing countries which are highly associated with poverty. In addition,

management accountants are supposed to take and keep a proper record on businesses activities

in these developing countries in order to give the management something to analyze for decision

making at the end of every financial year or anytime need arises (Alao, 2014). However, their

role exceeds just record keeping because management accounting is an incorporation of all

accounting functions including auditing, financial accounting and taxation to mention but a few.

Management accounting techniques in China

China has been developing a management accounting system for the last thirty years

since it has been purposing to step into a market oriented economy, which can only be possible if

it reorganizes its economic and social approaches. In view of this, Management accounting is

one of the areas that are undergoing rapid change.

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Most enterprises in China have adopted some of the best management accounting

techniques like ABC and BSC. The adoption of management accounting practices in China is

determined by the nature of management techniques adopted or the type of an enterprise. China,

being a developing country highly relies on traditional methods of management accounting like

budgeting but it has to some extent adopted new techniques like ABC, which have played a great

role in its competitiveness in the global economy.

Management accounting techniques are highly effective in emerging economies. For

instance, XuJi Electric Co, which is China’s one of the largest manufacturing companies had

been a state owned enterprise for a long time before recently transforming into a public limited

company. In December, 2001, the company decided to use activity based costing in one of its

main production divisions when ABC concepts were just a theory in Chins and it yield several

benefits that contributed to most of its success up to date (Yan et al., 2018). Due to the

tremendous results that the company experienced, it extended the sue of ABC to other sectors

like sales and subsidiaries in 2005 and 2008.this was by far the best decision that the company

had ever made because the management accounting technique improved the company’s decision

making process towards implementing an information system that improved interactions between

personnel at various levels of the organization, to evaluate changes between organizational

relationships as well as improve both individuals and organizational learning. The ABC model

acted as the catalyst to the company’s IT developments which started with accounting and office

computerization to development of an incredible information system (Hadi-Vencheh, 2010). This

was possible because ABC was able to identify the relationship between activities costs and

products in the company. In addition, standardization was not common in the Chinese business
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culture but ABC experience in Xi Ji electric Co. induced the practice successfully thus it has

spread to other Chinese companies over the years.

Consequently, the management gathered together again to make strategic plan for the

organization in a long term from 2008 to 2013(Gomes and Liddle, 2009). In the beginning of the

meeting, each head of sector described their results they have made so far. And then, they

evaluated the benefit or damage the BSC contributing to the process of management. Actually,

the result was good. All heads of sectors believed that the BSC framework did help for

employees to pay attention to goals, and these performance indicators also were helpful to

control performance. Learned from earlier mistakes, the management may look at the objectives

used before and seek for more on accurate performance indicators (Gomes and Liddle, 2009).

Management techniques in Vietnam

Vietnam is a developing country located in Southeast Asia. Vietnam has constantly

carried out economic reforms to transform from a centrally planned market economy into a

socialist market economy. This transitional period has seen the country adopt rapid social and

economic changes including emergence of privately owned foreign investment enterprises and a

more competitive domestic market (Dung & Aoki, 2014). At the same time, Vietnam has been

integrated into international economy thus it has tried adopting more practical management

accounting practices in order to survive in a more competitive market environment.

Vietnam used a centrally planned economy in the past and is accounting management

followed the Soviet Union management system that focused on government and taxation

authorities’ management requirements. the word accounting almost meant bookkeeping the time

and there were many signs of what is today referred to management accounting. However, the

country has carrying out economic reforms since 1986 and accounting laws and regulations have
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been set up to conform to international an accounting standard which recognizes management

accounting as part of the accounting systems (Dung & Aoki, 2014). Management accounting

practices have also made the drinks and beverages sector the largest manufacturing sector for

years based on gross output and net turnover.

Management accounting techniques are highly effective in emerging economies like

Vietnam in constantly changing the intensive manufacturing process (Hasan, 2017).

Management accounting techniques like ABC have changed the ratio of cost structures into high

ratio of manufacturing overhead as well as reducin1g the ratio of direct labor cost. For example,

ABC has greatly improved the bicycle industry in Vietnam by encouraging technological

advancement which has increased the usage of automated production equipment thus creating a

competitive advantage for the bicycle industry in Vietnam (Lu, Wang, Wu & Cheng, 2017). The

benefit of using this accounting management technique is that it provides accurate information

cost information based on production activities and processes thus enhancing the decision

making process which enables the company to formulate a competitive strategy,

On the other hand, most developing countries in Asia including Vietnam have also

adopted BSC to enhance total quality management. Since Vietnam joined WTO back in 2006, its

enterprises have been paying attention on investing their management capacities that build strong

strategies to improve their competitive advantage.in a study investigating the adoption of self-

assessment approach to quality specifically adoption of BSC in textile companies in Vietnam,

findings prove that it has benefited these enterprises a great deal. However, of all the benefits of

the model, managers in these companies confirmed only one benefit of the model which is that it

helped them identify their current position and it gave directions for future directions thus

improving their performance (Lu et al. 2017). Some companies also confirmed that the model
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helped them identify their strengths and weaknesses thus enhancing organization learning and

awareness. The only limitation of adopting this model was that most companies did not have

knowledge about it thus they needed training which is very expensive because it involves

outsourcing consultants.

Management accounting practices in South Africa

Management accounting techniques are highly effective in developing economies like

South Africa where there are scarce resources including economic resources and information to

mention but a few. South Africa has undergone different changes especially in management

accounting in order to compete effectively in a global economy. A survey on management

accounting practices in south Africa in 2001 showed that it has been using modern management

accounting techniques such as balanced score cards and activity based costing performance

measures as well as traditional management techniques like budgeting (Rundora, Ziemerink &

Oberholzer, 2013). Management techniques like ABC have helped South African enterprises

identify accurate cost information that has enhanced financial decision making process.

ABC & BSC in South Africa

Most Small manufacturing firm in Gauteng, South Africa has adopted ABC. according to

a survey of experiences and perceptions of activity based costing as an alternative management

technique to traditional methods, 16 small manufacturing firms in south Africa out of the

sampled 48 firms have Implemented it (Rundora, Ziemerink & Oberholzer, 2013). The research

findings were that the users of ABC have been in the market longer than the non-users and it

made an assumption that the non-users will implement it ones they experience several

management accounting factors categorized as catalysts, motivators and facilitators (Rundora, et

al. 2013). The non-users found implementation and design very expensive and resistance to
 ABC & BSC 10

change by employees. On the other hand, those firms that had implemented it stated that the

benefits of innovation that came with the technique were worth investing in and support from top

management. They also stated that the benefits that came with ABC implementation including

innovation as a result of correcting deficiencies of traditional costing by providing more accurate

cost information. ABC helps small firm managers identify cost triggering factors and then come

up with effective methods of managing them.

On the other hand, South Africa is one of the developing countries that have proven the

effectiveness of BSC. A research on building sustainability through adoption of BSC models

identified 25 nations that have adopted the model including South Africa and Malaysia to

mention but a few (Shan, You, Wang & Liu, 2015). The main benefits of the model in South

African enterprises are that it increases the competitive advantage of these companies in a global

economy by improving performance. For example, Combine Cargo is one of the biggest

companies in South Africa which has been using South African Excellence business model for

years which was formulated using the international quality policies just like the five international

excellence models that include the BSC (Jeanjean & Stolowy, 2008). The model has enhanced

Combine Cargo’s competitive advantage in the global economy by managing quality procedures

and control, improving processes and delegating authority and empowerment of the workforce.

However, the company is proposing a better quality management model that can take a holistic

view of the organization in terms of quality.

Conclusion

In summation, traditional management accounting techniques such as budgeting and

variance analysis are said to be less successful in today’s business environment. For a business to

succeed in today’s dynamic business environment, it has to adopt new management accounting
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techniques such as ABC and BSC. These tools enhance the ability of organizations in emerging

economies to meet global competition requirements. These techniques come with major benefits

that lead to a competitive advantage in the long run including improved business practices,

processes and activities, improved business performance, better risk management and informed

decision making process to mention but a few. However, since the barriers to adoption of these

techniques remains the main limitation in emerging economies, more research should be done to

provide useful information for these countries to consider implementing these techniques.
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