Benchmarking of costing and performance measurement systems in the new economy

Benchmarking: An International Journal

ISSN: 1463-5771

Article publication date: 1 August 2002

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Citation

Gunasekaran, A. (2002), "Benchmarking of costing and performance measurement systems in the new economy", Benchmarking: An International Journal, Vol. 9 No. 3. https://doi.org/10.1108/bij.2002.13109caa.001

Publisher

:

Emerald Group Publishing Limited

Copyright © 2002, MCB UP Limited


Benchmarking of costing and performance measurement systems in the new economy

Benchmarking of costing and performance measurement systems in the new economy

The present era of global competition requires a renewed commitment to excellence in manufacturing or services. During the past decade, attention to quality of products or services and process, level of inventories and improvement of workforce policies have provided an edge to become world class companies. In a virtual enterprise/supply chain, it is imperative to adopt a new costing system based on performance that focuses on critical success factors and traces the measures and metrics to those factors that would ultimately lead to improved organizational perfomance and in turn competitiveness. There is a need to link cost and performance measurements with business performance objectives.

Companies with advanced manufacturing/service environments operate in a physically distributed environment. They rely more on the partnerships and suppliers for services and goods for providing the final products/services in a networked economy. Traditional volume based costing systems may not be suitable for a virtual environment or supply chain. Since most activities that add value cannot be seen as the manufacturing/service activities are outsourced to suppliers or partners, application of ABC seems difficult. In the virtual enterprise environment one may not be able to see all the activities except the activities of strategic alliances and information sharing, and payment using personal meetings, online or paperless mechanisms. However, traditional costing and ABC are still useful for external financial reporting purposes and controlling the utilization of resources for producing tangible goods at the factory of suppliers or partners. Coming to performance measurements in a virtual enterprise or supply chain, due emphasis has to be given to the productivity of knowledge and information technology capital. However, there is limited research on this challenging problem area as most of the organizations do not have suitable performance measures, metrics and costing systems in the so-called new enterprise which comprises of supply chain, physically distributed operations and virtual environment.

During the last 25 years, we have come across a number of costing systems that include target costing, total costing, process costing, job costing, activity-based costing (ABC), and backflush costing. These costing systems have been aimed to provide accurate and timely information for controlling resources in producing quality goods and services, and in turn to improve organizational competitiveness. Companies have been forced to change their cost accounting practices, including performance measures, to enable their system to function effectively in a global market since organizational productivity and competitiveness depend upon the nature of business and organizations. For example, ABC has been widely used in flexible manufacturing systems (FMS) and just-in-time (JIT) systems. Both financial and non-financial performance measures and metrics have been successful in making use of available resources for wealth creation activities. In a physically distributed virtual enterprise/supply chain, intangibles play a major role in determining the success of an organization in terms of offering quality goods/services in competitive prices. In the new economy, some of the costs that have been treated, as direct costs will become indirect costs, and vice versa. Moreover, allocation basis for overhead costs will change depending upon the cost drivers and their volume in the new economy. In the virtual/supply environment, strategic and tactical level performance measures and metrics have a major stake in determining the cost of a product/service and hence the overall competitiveness of an organization.

Researchers and practitioners should attempt to develop a framework for identifying more suitable costing and performance measurement systems for enterprises in the new economy. This could be accomplished if research is directed at the following areas:

  • Analyze the characteristics and present practices of operations in manufacturing/service companies.

  • Study the costing and performance measurement of best-in-class performing companies with the help of a benchmark study of cost accounting and performance measurement systems in twenty-first century organizations.

  • Develop a theoretical framework for costing and performance measurement systems in the new economy.

  • Empirically test the framework by collecting field data.

  • Develop a generic framework for cost accounting and performance measures and metrics in new economy (Gunasekaran and Williams, 2002). The new costing and performance measurement systems should be proactive in their application and encourage productivity of knowledge and information technology investments and strategies. In a supply chain/virtual enterprise, transfer pricing, agency theory and employment contracting concepts could be used in costing, allocating resources and seeking areas accountable. ABC would be suitable where tangible value adding activities are taking place. Determining suitable cost drivers for virtual enterprise would be a challenging issue.

Some of the key perfomance measures and metrics should include the following:

  • measure the integration of partners;

  • level of alignment of different strategies;

  • connectivity;

  • productivity of knowledge workers and information technology investments;

  • time to develop partnership;

  • criteria for partnership formation;

  • logistics cost;

  • time to respond to customer inquires;

  • inventory turnover;

  • cost of reverse logistics;

  • cost of quality;

  • evaluation of IT systems.

There are numerous benchmarking organizations in practice working on variety of areas to identify respective best practices. However, there is a need for benchmarking the costing and performance measurement systems in the new economy. This area certainly deserves more attention from researchers and practitioners for further development. Cost accounting and performance measures in business to customer (B2C), business to business (B2B) and business to administration (B2A) e-commerce environments are a necessity and they open up further challenges. While benchmarking costing and performance measures, different industries and their best practices in these areas can be looked at to arrive at the most suitable system.

The editors of BIJ welcome contributions or a proposal for special issues on benchmarking cost accounting and performance measurement systems with the objective of identifying most suitable costing systems and performance measures and metrics in the new economy.

ReferenceGunasekaran, A. and Williams, J.H. (2002), "Performance-based costing systems and measures in new enterprises", working paper, University of Massachusetts, Dartmouth, MA.

A. Gunasekaran

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