New Dimension of Management Accounting Tools Analysis of Literature and Own Research

Beata Zyznarska-Dworczak New Dimension of Management Accounting Tools Analysis of Literature and Own Research 1. Introduction The tools for management accounting used by contemporary businesses evolve constantly, usually in response to the shifting conditions of doing business. The changing corporate environment (both internal and external) determines the objectives pursued by cost managers. More and more often, the pursuance of those objectives combines various aspects of management with management accounting tools. As a result of this integration, the repertoire of those tools expands significantly, as exemplified by the use of benchmarking in cost management. Benchmarking allows organizations to look at their accounting systems from a different perspective, not only internal (being the traditional domain of management accounting), but also external, i.e. in comparison to other organizations. The purpose of this article is to determine whether or not the tools for management accounting, used predominantly in internal management of a business organization, can be effectively given a new, external dimension, achieved by means of benchmarking. The author sets out to analyze how benchmarking improves cost management using traditional management accounting tools. The article also analyzes opinions on the role of benchmarking in cost management presented in accounting literature, following which the author presents its own view on the potential scope of using benchmarking as a tool for management accounting. Using a model approach to benchmarking in cost management, a new dimension of management accounting tools is presented. 1

2. Benchmarking in cost management overview of management accounting literature 2.1. Approaches to benchmarking in management accounting presented in literature Following others and comparing oneself to the best was practiced already in ancient times. The famous classical sentence verba docent, exempla trahunt means that words instruct and illustrations (or examples) lead 1. Benchmarking, whose essence is to compare one s own performance and solutions to those of others, has been practiced since long, although its forms and names may have been different. In the last three decades its current form has been popularized thanks to outstanding results of benchmarking achieved by the American company Rank Xerox. Benchmarking contributed to halving per unit costs, reducing stocks of production in progress by two thirds and reducing the cost of labor by one third, accompanied by cutting the employment by a half 2. Since then this tool has become subject to scientific analysis, and the term benchmarking has entered corporate management theory. Nowadays, various classifications of benchmarking are presented in literature 3. The application area of benchmarking is one of the key division criteria. It allows to differentiate between strategic benchmarking, performance benchmarking and process benchmarking. The origin of the reference value is another key criterion, according to which benchmarking can be classified as internal, external, functional or general. The use of each of the types of benchmarking requires one to follow a predefined procedure, basically including the preliminary stage (or simply pre-benchmarking), followed by benchmarking proper and then by the implementation stage (or post-benchmarking). Benchmarking was originally used as a management tool for increasing productivity and improving the quality of goods and services. In the recent years it has come to be increasingly important in other business areas, including cost management. In principle, the exact moment of introducing benchmarking to the realm of accounting has never been identified. The early comparisons of performance of different companies gradually evolved towards more detailed 1 Cf. K. Zimniewicz, Współczesne koncepcje i metody zarządzania, wyd. 3 zm., Polskie Wydawnictwo Ekonomiczne, Warszawa 2009, p. 22. 2 Cf. W. H. Grudzewski, Benchmarking w przedsiębiorstwie, in: Przedsiębiorstwo przyszłości, red. W. H. Grudzewski, I. K. Hejduk, Wydawnictwo Difin, Warszawa 2000, p. 148. 3 A sophisticated classification of benchmarking is presented e.g. by A. Węgrzyn, Benchmarking: nowoczesna metoda doskonalenia przedsiębiorstwa, Wydawnictwo Antykwa, Kluczbork-Wrocław 2000, pp. 85 to 96; R. Pieske, Benchmarking in der Praxis: erfolgreiches Lernen von führenden Unternehmen, Moderne Industrie Verlag, Landsberg-Lech 1995, pp. 39 to 48. 2

comparisons and analyses of costs, eventually to include the entire accounting systems. The early methods of comparing cost information today make part of benchmarking. Contemporary accounting literature sees benchmarking as a tool for management accounting, controlling and cost management, and as a management technique used in the area of cost management. Last but not least, in accordance with the official position of the Association of Chartered Certified Accountants (ACCA) it is seen as a management method complementing state-of-the-art management accounting concepts 4. The place of benchmarking in the area of accounting varies in literature, and the opinions of authors differ as regards possible methods and applications of benchmarking. Not unlike in its original setting, in the area of management accounting benchmarking is used to identify the best practices and effects of cost management on the basis of an analysis of experience and performance of benchmarking partners. The ultimate goal of benchmarking in the area of accountancy is generally believed to be continuous comparison of product costs, solutions applied or processes implemented in an organization against their counterparts in that organization s competitors or market leaders from various industries. The intended objective is to implement new procedures, as a result of which the organization in question will become the best 5. Benchmarking in accounting can also be used to compare the organization of book-keeping, IT systems used for accounting purposes, the scope of reporting, the forms and techniques of cost planning, control and analysis 6. Furthermore, literature points out to the benefits of using benchmarking in such areas as invoicing, managing receivables, financial analysis and internal audit 7. In fact, accounting can be a source of information for benchmarking, and can be the object of benchmarking as well 8. Usually, however, accounting is seen as a source of data necessary for undertaking a benchmarking exercise. Benchmarking is referred to as a complex, external measure constituting a reference value for the cost level of a given enterprise and simultaneously as a modus operandi allowing to 4 ACCA P5 Advanced Performance Management Study Text: ACCA Key Study Text, International Financial Publishing Limited, United Kingdom 2007, p. 143. 5 Cf. I. Sobańska, Współczesne systemy rachunku kosztów i metody zarządzania kosztami, in: Rachunek kosztów i rachunkowość zarządcza. Najnowsze tendencje, procedury i ich zastosowanie w przedsiębiorstwach, red. Sobańska I., C.H. Beck, Warszawa 2006, p. 414. 6 Cf. M. Smith, Nowe narzędzia rachunkowości zarządczej, tłum. Stolarek J., wyd. 1, Fundacja Rozwoju Rachunkowości w Polsce, Warszawa 1998, pp. 62 and 63. 7 Cf. D. Elnathan, T. W. Lin, S. M. Young, Benchmarking and Management Accounting: A Framework for Research, Journal of Management Accounting Research 1996, No. 8. 8 Cf. T. Kiziukiewicz, Benchmarking, in: Od auditingu do sponsoringu w rachunkowości, red. Czubakowska K., Polskie Wydawnictwo Ekonomiczne, Warszawa 2007, p. 50. 3

dramatically slim down enterprises 9. Therefore, it constitutes a highly valued controlling tool, supporting for instance the formation of profit and cost centers 10. Benchmarking supports cost management not only at the operational, but also at the strategic level, as it allows to develop the optimum methods for supporting strategies by means of cost management and to identify the best cost management system for optimization and rationalization of costs 11. Furthermore, benchmarking in accounting increases cost managers awareness of the necessary rationalization measures (or the awareness of the company s excellence). Cost leaders, who are sure of their cost leadership, act differently than those who lack that knowledge. A fully aware leader takes strategic decisions in a more decisive way, which contributes to a more rapid improvement in the company s performance 12. Benchmarking, by allowing companies to determine their own competitive position, is not only about comparing oneself to one s competitors. It additionally involves an analysis of one s own strengths and weaknesses and involves some form of cooperation between the compared entities 13. The broad range of benchmarking applications in cost management is well exemplified by ACCA s four-level breakdown of benchmarking applications in accounting: 14 1) comparison of costs, being the simplest form of benchmarking, indicating potential savings in areas where costs are higher than in other companies, 2) comparison of key performance indicators, being the most common form of benchmarking, based on the assumption that quantitative and qualitative indicators allow one to compare the performance of various companies and identify the directions of improvement, 9 Cf. A. Jarugowa, Jarugowa A., Zarządzanie kosztami a metody rachunkowości zarządczej, in: Jarugowa A., Nowak W. A., Szychta A., Zarządzanie kosztami w praktyce światowej, ODDK, Gdańsk 2000, p. 8. 10 Cf. A. Węgrzyn, op. cit., p. 32. Similar positions are presented by Ch. T. Horngren, G. Foster and S. M. Datar, pointing out to the use of benchmarking in budgeting using the example of airlines - Ch. T. Horngren, G. Foster, S. M. Datar, Cost accounting: a management emphasis, 10 edition, Prentice Hall, Upper Saddle River, NJ, 2000, p. 236. 11 More about strategic benchmarking: see for instance R. Kowalak, Benchmarking strategiczny, in: Strategiczna rachunkowość zarządcza, red. E. Nowak, Polskie Wydawnictwo Ekonomiczne, Warszawa 2008, p. 68. 12 Cf. Ch. Heinen, A. H. Hoffjan, The Strategic Relevance of Competitor Cost Assessment an Empirical Study of Competitor Accounting, Jamar 2005, No. 3 (1), p. 17. 13 Cf. A. H. Hoffjan, Cost Benchmarking als Instrument des strategischen Kostenmanagement, in: Kostenmanagement - Aktuelle Konzepte und Anwendungen, red. Freidank C.-C., Götze U., Huch B., Weber J., Springer Verlag, Berlin, Heidelberg 1997, p. 345. 14 Cf. Benchmarking, Directors' Briefing 2008, No. 1, p. 1, article available at ACCA s website ACCA http://www.accaglobal.com/ pdfs/members_pdfs/directors_briefings/st4bench.pdf, (date accessed: Nov. 28, 2008). 4

3) comparison of operating processes, being characteristic for a high degree of difficulty; however, if this comparison is carried out successfully, it allows the company to identify the best ideas for ensuring operating efficiency, 4) comparison of operations at the strategic level, including the methodology of pursuing strategic and operating objectives. The above benchmarking levels confirm that the potential area of application in accounting is fairly broad, and is further expanded by the possibility of integrating benchmarking with other management accounting tasks, increasing their usefulness in cost management. 2.2. Integrating benchmarking with other management accounting tools Benchmarking can be used in parallel with other management accounting tools, increasing their efficiency in cost management. Particularly positive results can be achieved by combining benchmarking with activity based management (ABM), budgeting, balanced scorecard (BSC), target costing, kaizen costing, and finally life cycle costing. The use of benchmarking in the ABM concept is seen as a separate direction of benchmarking development. It is believed that managing the cost of activity becomes more efficient if supported by data provided by benchmarking, which provides information about functions, processes, and products, helpful in designing an efficient ABM system. Companies frequently develop their ABM systems on their own, relying on historical information on costs and on experience of other companies as presented in literature, which hardly ever is detailed enough to be considered as external benchmarks. Thus, without reference to the experience and best practices of others, an ABM system may prove insufficient and ineffective 15. Furthermore, benchmarking is a helpful tool in the actual application of ABM. By comparing their respective cost drivers, benchmarking partners can identify potential cost reduction opportunities, e.g. by improving cost control over cost drivers or reconfiguration of the value chain 16. When used in activity cost management, benchmarking also allows to reduce the difficulties in exchanging cost information. Namely, it is believed that as long as the cost structure is the main source of one s competitive advantage, one cannot expect the partners to fully disclose their cost information. Nonetheless, they may be more prone to exchange 15 Cf. D. Elnathan, T. W. Lin, S. M. Young, Benchmarking and Management Accounting: A Framework for Research, Journal of Management Accounting Research 1996, No. 8, p. 51. 16 Cf. C. Kochalski, Koszty w przedsiębiorstwie zarządzanym przez wartość. Ujęcie modelowe, Prace Habilitacyjne, nr 29, Wydawnictwo Akademii Ekonomicznej w Poznaniu, Poznań 2006, p. 79. 5

information on their general structure of activities, cost of activities, measuring the extent of activities 17. Process benchmarking can also be significantly supportive in cost budgeting. To that end, it should include identification of processes occurring in the company in order to determine those requiring improvement and benchmarking. Comparative analyses of results of the selected processes vis-à-vis similar processes in other companies make it possible to identify those processes that can serve as models in terms of costing. At a further stage, benchmarking supports the development of model process performance metrics, determining the target values, and then budgeting 18. As a result, directions for the given budget period are shown. If they are successfully followed, the company will get closer to the leader s performance. Specialist literature also points out to the possible use of benchmarking in life cycle costing and in kaizen costing. Understanding the key stages in the life cycle of the leader s products (and the related costs) facilitates cost estimation over the life cycle of one s own products. Already at the designing stage one can refer to the best practices, owing to which the running cost will be reduced to an acceptable level 19. Thus, benchmarking supports the company in attaining the target cost, approximately at the estimated level, and further allows to recognize any potential obstacles at an early stage, which is particularly important in target costing. When used together with value analysis, benchmarking allows to search for new, better solutions, which coupled with kaizen costing subsequently allow the company to develop its own agenda for reducing the future costs of new products planned for implementation 20. Benchmarking is helpful not only at the designing stage, but also at the other product life cycle stages. At the manufacturing stage, benchmarking can be used by working teams at the manufacturing plant level in order to identify any weaknesses and possible improvements in all processes taking place in those plants. It must be remembered, however, that when it comes to reducing product costs, benchmarking is less effective at the manufacturing stage than at the designing stage. Improvements are possible mostly in the area of variable costs, whose share in the total cost of businesses is increasingly smaller. Another result of 17 Cf. D. Elnathan, T. W. Lin, S. M. Young, op. cit., p. 50. 18 Por. R. Piechota, Budżetowanie w nowoczesnych systemach zarządzania, in: Budżetowanie w przedsiębiorstwie: organizacja, procedury, zastosowanie, red. Nowak E., Nita B., Wydawnictwo Oficyna a Wolters Kluwer business, Kraków 2007, p. 429. 19 Cf. B. Nita, Nita B., Rachunkowość w zarządzaniu strategicznym przedsiębiorstwem, Wydawnictwo Oficyna a Wolters Kluwer business, Kraków 2008, p. 361. 20 Cf. I. Sobańska, op. cit., p. 417. 6

benchmarking at the manufacturing stage can be the reduction of overheads, e.g. by means of outsourcing 21. Furthermore, benchmarking is also useful in quality costing, where it allows the company to understand the customer-perceived quality of products of market leaders. Incorporation of such information makes it easier to estimate the cost of quality, to determine its necessary level and then to reduce it, including in particular the cost of nonconformance 22. Another possible use of benchmarking in the area of accounting consists of integration with BSC, in the form of the so-called BSC-Based Benchmarking, where the latter becomes an instrument for verifying corporate business strategies and an indicator of corporate development. BSC-Based Benchmarking makes it possible to analyze the influence of adherence to strategies on cost levels as seen in the perspectives of the balanced scorecard, balancing financial and non-financial, as well as operational and strategic dimensions of one s business. Furthermore, BSC-Based Benchmarking supports benchmarking partners in translating strategies into measurable goals and in formulating the related metrics, as well as in defining perspectives, using IT systems, applying specific templates of scorecards and finally in analyzing the scope of necessary staff training 23. At the stage of using scorecards by benchmarking partners, it can serve as a tool for improving the results measured by means of indicators in each perspective 24. In addition, it reduces the risk of incorrect BSC implementation. 2.3. Benchmarking as a practical tool for management accounting The broad scope of possible uses of benchmarking in corporate management is limited by its inherent weaknesses, such as problems with obtaining up-to-date and reliable information matching the information needs of the company, problems with ensuring reliable partners, incomparability of data, reactive nature of benchmarking, perceiving benchmarking as espionage, organizational resistance to external ideas, as well as high costs and long time of 21 Ibidem, p. 416-417. 22 Cf. B. Nita, op. cit., p. 361. 23 Cf. A. Chodyński, A. p. Jabłoński, M. M. Jabłoński, Strategiczna karta wyników (Balanced Scorecard) w implementacji założeń rozwoju organizacji, Krakowskie Towarzystwo Edukacyjne - Oficyna Wydawnicza AFM, Kraków 2007, p. 53. 24 For more information about BSC-based benchmarking, see: G. Westermann, I. Sehl, Developing a Balanced Scorecard Based Benchmarking Approach for Tourist Destinations, Innovation Pressure Conference in Tampere (conference proceedings), March 2006; as far as benchmarking in the process of BSC implementation is concerned: see e.g. A. Chodyński, A. S. Jabłoński, M. M. Jabłoński, op. cit., p. 47-53. 7

implementing and maintaining this tool 25. The above limitations also apply to benchmarking in accounting, where the particularly challenging issue is the fear of cost information being used for dishonest purposes. Disclosing such information involves the risk of having one s competitive position affected, because product cost levels frequently determine product prices. Establishing cooperation between the compared organizations is extremely difficult, yet absolutely necessary. The results presented in one s financial statements do not suffice for analyzing the methods and results of cost management, and access to detailed cost data from other companies requires access to IT systems used in management accounting. Obviously, such systems are considered as strictly confidential. The scarcity of practical uses of benchmarking in accounting is confirmed by the results of a survey of Polish companies, carried out by a team headed by Anna Karmańska. None of the surveyed entities used benchmarking in managing the cost of quality, logistics, innovation or environmental protection. None of them used benchmarking in accounting or finances, although every one in three declared having used benchmarking for reducing variable costs and responsibility costing, as well as for comparing one s costs against those of one s competitors. Furthermore, the surveyed companies admitted having done strategic benchmarking by comparing their objectives, particularly those that can be achieved by implementing quality changes 26. The lack of empirical examples of benchmarking in cost management is further confirmed by the results of research by Andreas Hoffjan and Andreas Wömpener, who investigated the relationship between the strategic management accounting tools presented in literature and their application in practice. The authors found out that 85% of textbooks present the concept of benchmarking in accounting, whereas its practical use amounts to merely 5.8% 27. The lack of empirical studies in strategic management accounting, including in particular the practical use of its tools related to competitor accounting is also highlighted by Christoph Heinen and Andreas Hoffjan 28. 25 More about barriers to and mistakes in the use of benchmarking: see e.g. R. Pieske, op. cit., p. 184-189; A. Węgrzyn, op. cit., p. 152-156. 26 Cf. A. Karmańska, Badanie empiryczne analiza wyników, in: Zarządzanie kosztami jakości, logistyki, innowacji, ochrony środowiska a rachunkowość finansowa, red. A. Karmańska, Wydawnictwo Difin, Warszawa 2007, p. 246-247. 27 Target costing is presented in 95% of the surveyed publications and its practical use amounts to 8.6%, whereas life cycle costing is presented in 80% of publications, and its practical use is 7.1%. Cf. A. H. Hoffjan, A. Wömpener, Comparative Analysis of Strategic Management Accounting in German- and English-Language General Management Accounting Textbooks, Schmalenbach Business Review 2006, No. 58, p. 248. 28 Cf. Ch. Heinen, A. H. Hoffjan, The Strategic Relevance of Competitor Cost Assessment an Empirical Study of Competitor Accounting, Jamar 2005, No. 3 (1), p. 17. 8

Despite numerous theoretical arguments supporting the use of benchmarking in management accounting, the tool is hardly used in practice. Its use requires cost managers to carry out a detailed analysis of costs and benefits of cooperation with benchmarking partners. It is also necessary to clearly specify the rules of using benchmarking, in order to achieve the expected results on the one hand and to reduce the risk of dishonest use of disclosed information. 3. Role of benchmarking in accounting based on the author s own research 3.1. Possible systematization of functions of benchmarking as a tool for management accounting The views presented in specialist management accounting literature point out to the need for benchmarking in cost management. However, they do not propose any detailed principles or methods of using benchmarking in this particular area. In order to systematize benchmarking as a management accounting tool one can identify its three basic functions. The first function of benchmarking in cost management consists of identification of best practices as regards cost management systems, carried out on the basis of an analysis of benchmarking partners experience in shaping cost policies, existing sets of management accounting tools, as well as methods of evaluating the influence of strategic decisions on future cost levels. In the light of the already mentioned classification of benchmarking according to the origin of the reference value, the said tasks fall in the category of functional benchmarking. This type of benchmarking allows one to select the best cost management practices, simultaneously building a more innovative set of management accounting tools. Performance benchmarking is another cost management function. It allows the company to reliably evaluate its performance and to find the most adequate ways of cost rationalization. An analysis of benchmarking partners performance (including cost levels, cost structure and cost changes, as well as cost-generating factors) allows one to identify performance gaps, i.e. those areas where one s performance varies considerably from that of the leader. A detailed analysis of those gaps will indicate the directions for improvement. The third major function of benchmarking in cost management involves comparing and analyzing strategic assumptions, determining the results of cost management objectives. Namely, the analysis of conclusions provided by functional and performance benchmarking 9

should include one s strategic policies. Strategic benchmarking in the area of cost management is used to compare strategic objectives, and to assess their impact on future cost levels, and then to identify those measures that seem the most adequate from the perspective of cost management. An analysis of the vision, mission and strategy of benchmarking partners makes it possible to evaluate the methodology of pursuing operating goals and their alignment with the strategy, and then to propose improvements in this area. Resorting to strategic benchmarking, functional benchmarking and performance benchmarking increases the usefulness of cost information generated by means of traditional management accounting tools. 3.2. Possible modifications of benchmarking procedures The author is of the opinion that to ensure the above effect of benchmarking on cost management, the procedure applied to benchmarking as a management tool needs to be modified. Benchmarking in cost management should be two-staged, because in order to become the source of benchmarking information in cost management, accounting itself needs to be benchmarked first. In the first stage one should identify and implement the best cost management procedures and systems, including in particular the most supportive management accounting tools. In the next stage, based on cost information generated in the accounting system by means of management accounting tools, performance is compared. The goal of this comparison is to identify the leader and its best practices in cost optimization. It should be stressed that the feedback cycle in stage 2 should have a greater frequency than the same cycle in stage 1. The stages of benchmarking used in cost management are presented in Figure 1. 10

Possible modification of benchmarking in cost management Figure 1. Stage 1 Stage 2 accounting as the object of benchmarking accounting as the source of information for benchmarking purposes pre-benchmarking benchmarking proper benchmarking proper post-benchmarking post-benchmarking Source: by the author Pre-benchmarking is carried out jointly for both stages. It consists of selecting benchmarking partners, agreeing on the information collecting method and the steps planned in both stages, as well as an analysis of cost-affecting strategic objectives of the partners. Benchmarking proper in stage 1 consists of collecting and aggregating information on solutions used in cost management systems and of an analysis of factors determining their choice by benchmarking partners. On the basis of that analysis, the model cost management solution is selected. Thus, stage 1 enables an improvement of the cost management system by learning from the benchmarking partners experience in cost policy making, organization of cost information generation, management accounting tools and other ways of cost control and optimization. After the model cost management solution is complete, the implementation stage (postbenchmarking) takes place. It should be noted that the first stage of benchmarking is related to functional benchmarking, which involves comparison of cost-related processes, functions and procedures in order to identify cost rationalization possibilities. The next stage of benchmarking features its role most commonly presented in literature, i.e. comparison of costs by means of an adequately designed system of performance metrics. Thus, benchmarking proper in this stage can be seen as benchmarking of performance and processes. However, the scope of cost comparisons cannot be limited to comparing per unit or total costs only it should additionally allow for comparing cost structures as well as shortterm and long-term cost generation. Benchmarking historical results between partners should preferably include planned costs and their expected reduction rates. 11

The objective of benchmarking proper in stage 2 is therefore to identify cost optimization areas, allowing the organization to take post-benchmarking actions in order to level out costrelated performance gaps. Once the improvements are implemented, one should once again take action aiming at identifying one s weaknesses, proceed to benchmarking proper and then implement the best cost optimization solutions. The recurrent benchmarking feedback cycle will allow to constantly improve cost management results. Comparing one s performance against the performance of market leaders is an inspiration to act and allows one to draw level with the best. Constant learning and creative improvement of an organization are the essence of each stage of benchmarking. 3.3. Cost management benchmarking scheme To test cost management benchmarking in practice, the author carried out a research in a number of companies offering natural gas distribution services in Poland. As a result, a scheme for cost management benchmarking in gas distribution was developed. To a fair degree the scheme is universal and can be used in any company if the following assumptions are adhered to: 1) benchmarking is a management accounting tool, supporting corporate cost management, 2) integration of benchmarking with other management accounting tools reinforces corporate cost management objectives, 3) benchmarking in corporate cost management requires a modified procedure, as presented by the author, 4) the operating environment of benchmarking partners as well as their cost management scopes allow to use benchmarking as a management accounting tool. The fundamental idea behind benchmarking in cost management is to reinforce constant improvement of operations, being one of the priorities of state-of-the-art cost management. To carry out that idea, one needs to apply benchmarking to three different levels and to follow a modified procedure, which is the basis of the cost management benchmarking scheme. The first level corresponds to strategic benchmarking, because as explained above its results need to be taken into account when evaluating the results of lower-level benchmarking, i.e. functional and cost benchmarking. The evaluation of cost management systems of benchmarking partners and their results in cost optimization through functional benchmarking 12

and cost benchmarking must involve an analysis of the possibility to pursue those cost management tasks and objectives that allow partners to follow their strategies. Simultaneously, the results of lower-level benchmarking affect the evaluation of higher-level benchmarking. Conclusions from cost benchmarking can be useful in reviewing conclusions from strategic benchmarking, or the partners needs pertaining to the organization of cost management systems, identified thanks to functional benchmarking. Similarly, conclusions from functional benchmarking may affect the evaluation of possible cost improvements identified by means of strategic benchmarking. Figure 2 shows the possible use of benchmarking and its influence on cost management by benchmarking partners (A, B, C, D, E and many others). 13

I Possible use of benchmarking in cost management Figure 2 E Strategic benchmarking Exchange of experience and results A B II Functional benchmarking A III Cost benchmarking D C E Exchange of experience and results B A D C E Exchange of experience and results B Benchmark: best ways of supporting strategies by means of cost management Benchmark: best ways to organize the management system D C Benchmark: best results in cost optimization * verification of strategies, missions and visions, * identification of strengths and weaknesses, * evaluation of the effect of cost management on the strategy, * identification and implementation of efficient ways of supporting strategy by means of cost management, * evaluation of the effect of strategic plans on costs, * analysis of the reasonability of the tasks of strategic and operational cost management *determination of the best ways of organizing cost management systems and shaping cost policies, * selection of the most adequate management accounting tools for a given environment, * evaluation of the methods of achieving cost management targets and raising the managers awareness of the necessary changes, * selection of optimized IT systems for cost management, * comparability of results * unbiased evaluation of one s own performance, * identification of the best performance as the directions for improvement in cost management, * identification of ways to achieve the best results in cost management, * identification of opportunities and areas for cost reduction, * supporting the process of motivation and cost planning and control, * reinforcing constant improvement integration of benchmarking with other management accounting tools COST MANAGEMENT Source: by the author 14

The above chart presents exchange, comparison and analysis of information at three levels of benchmarking in order to identify three key benchmarks, being - best ways of supporting strategies by means of cost management, - best ways to organize the management system, - best results in cost optimization. If those benchmarks are identified, benchmarking partners will be able to benefit in a number of ways, as presented in Figure 2, at all benchmarking levels. The three benchmarks show increased potential for achieving cost management objectives by means of management accounting tools. Positive effects are further multiplied by the benefits of integrating benchmarking with other instruments, listed in point 2.2. above. On the basis of an analysis of literature and the author s own research, one may conclude that benchmarking as a management accounting tool used in cost management enables: 1) actual retrospective and prospective analysis of the performance of benchmarking partners and possible cost reductions, 2) identification of optimum ways to support strategies by means of cost management, 3) identification of directions for improvement in cost management systems and processes based on the results of efficient cost optimization achieved by the leader partner, 4) identification of operating and strategic performance gaps among benchmarking partners by way of indicating failures on the basis of comparisons with the leader s process costs, 5) identification of weaknesses in cost management at all benchmarking partners and improvement of the managers awareness of the necessary changes, 6) improvement in the efficiency of cost management by means of management accounting tools integrated with benchmarking, 7) assisting the process of constant performance improvement by means of management accounting tools integrated with benchmarking, 8) reinforcement of the motivating function of cost management. The above advantages confirm that benchmarking adds a new dimension to the existing set of management accounting tools. Benchmarking makes possible actual evaluation of the company s performance generated by management accounting tools, allowing one to verify the assumptions of the partners cost policies. Furthermore, it allows to evaluate the management accounting tools already used by each of the partners, thus raising the awareness in this respect. It also contributes to making the existing set of tools more efficient and helps 15

in introducing new tools, relying on the experience of those organizations where those tools are already in use. Therefore, benchmarking supports the development and improvement of the entire set of tools used by benchmarking partners. This particular tool may significantly change the nature of the entire set of management accounting tools. 4. Final remarks Benchmarking, originally used as a tool for improving productivity and quality of products and services, has become increasingly important in other business areas, including cost management. The views presented in specialist management accounting literature point out to the need for benchmarking in cost management. They do not, however, propose any detailed principles or methods of using benchmarking in this particular area, and there are few practical examples of such use. In order to systematize benchmarking as a management accounting tool one can identify its three basic functions in cost management, carried out by strategic, functional and performance benchmarking. Those functions require a two-staged action, where accounting first becomes the object of and then the source of information for benchmarking. Benchmarking used in accordance with the principles presented above may significantly affect the dimensions of the traditional set of management accounting tools. By enabling actual evaluation of the management accounting tools in use, benchmarking makes those tools more efficient and supports their development by highlighting the most innovative, yet already tested solutions. Following the leader helps one to design and implement new management accounting tools. Also, benchmarking enables an actual evaluation of the company s performance generated by management accounting tools, thus allowing one to better understand one s own costs, to identify possible cost improvements, and to determine the directions of actions aiming at cost rationalization. Integration of benchmarking with other management accounting tools allows one to reinforce their efficiency in cost management, by comparing one s own results with those of the leader. Benchmarking may significantly expand the possible uses of management accounting tools and introduce a new quality to cost management. 16

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Abstract This paper presents a new dimension of management accounting tools, achieved by using benchmarking in cost management. It discusses the findings of an analysis of possible uses of this innovative tool in management accounting, as well as state-of-the-art knowledge presented in accounting literature. It points out to the lack of existing principles of using benchmarking in cost management. Relying on theoretical conclusions as well as conclusions from an empirical study by the author, the paper proposes an original approach to benchmarking as a management accounting tool, particularly demonstrating possible improvements of other management accounting tools. A scheme for using benchmarking in cost management and a modified benchmarking procedure show how benchmarking can contribute to increasing the operating scope of the existing set of management accounting tools and to developing this set towards a more modern and innovative form. 19