Cost Accounting, Chapter 13 11ch13

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Strategy, Balanced Scorecard,

and

Strategic Profitability Analysis

Strategy, Balanced Scorecard,

and

Strategic Profitability Analysis

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Learning Objective 1

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What is Strategy?

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What is Strategy?

What is the focus of industry analysis? Competitors

Potential entrants into the market Equivalent products

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Basic Strategies

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Implementation of Strategy

Management accountants design reports to help managers track progress in

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The Balanced Scorecard

The scorecard measures an organization’s performance from four perspectives:

1. Financial 2. Customer

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Learning Objective 2

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Reengineering

Reengineering is the fundamental rethinking of business processes delivery to achieve

improvements in critical measures of performance such as cost, quality, service,

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Reengineering Example

Customers needs identified

Purchase order issued

Production scheduled

Manufacturing completed

Finished goods to inventory

Quantities to be shipped

matched against purchase order

Shipping documents sent to Billing Department

Invoice issued

Customer payment follow up

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Reengineering Example

The following was determined:

Frequently, there is a long waiting time before

production begins in the manufacturing department. Sometimes items are held in inventory until

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If the quantity shipped does not match the number of items requested by the customer,

a special shipment must be scheduled. Dallas discovered that the many transfers

across departments slowed down the process and created delays.

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Reengineering Example

A customer relationship manager is responsible for each customer.

Dallas will enter into long-term contracts with customers specifying quantities and prices. The customer relationship manager will work with the customer and manufacturing to specify

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The schedule of customer orders will be sent electronically to manufacturing.

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Learning Objective 3

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Perspectives of Performance

1. Financial 2. Customer

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Financial Perspective

Objective:

Increase shareholder value

Measures:

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Financial Perspective

Initiatives: PerformanceTarget PerformanceActual

Manage costs and unused capacity

Build strong customer relationships

$2,000,000

$3,000,000

6% Build strong customer

relationships

$2,100,000

$3,420,000

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Customer Perspective

Objectives:

Increase market share

Measures:

Market share in communication networks segment

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Customer Perspective

Initiatives: PerformanceTarget PerformanceActual

Identify future needs of customer

Identify new target customer segments

6%

7

90% give top two ratings Increase customer focus

of sales organization

7%

8

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Internal Business

Process Perspective

Internal Business

Process Perspective

Objectives:

Improve manufacturing quality and productivity

Measures:

Yield

On-time delivery

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Internal Business

Process Perspective

Internal Business

Process Perspective

Initiatives: PerformanceTarget PerformanceActual

Identify problems and improve quality

Reengineer order delivery process

78%

92%

79.3%

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Learning and Growth Perspective

Objectives:

Align employee and organization goals

Measures:

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Learning and Growth Perspective

Initiatives: PerformanceTarget PerformanceActual

Employee

participation and suggestion program

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Aligning the Balanced

Scorecard to Strategy

Aligning the Balanced

Different strategies call for different scorecards. What are some of the financial

perspective measures? Operating income

Revenue growth

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Scorecard to Strategy

What are some of the customer perspective measures?

Market share

Customer satisfaction

Customer retention percentage

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What are some of the internal business perspective measures?

Innovation Process:

Manufacturing capabilities

Number of new products or services New product development time

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Aligning the Balanced

Operations Process:

Yield

Defect rates

Time taken to deliver product to customers Percentage of on-time delivery

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Post-sales service:

Time taken to replace or repair defective products

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Aligning the Balanced

What are some of the learning and growth perspective measures?

Employee education and skill level Employee satisfaction scores

Employee turnover rates

Information system availability

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Pitfalls When Implementing

a Balanced Scorecard

What pitfalls should be avoided when implementing a balanced scorecard? 1. Don’t assume the cause-and-effect

linkages to be precise.

2. Don’t seek improvements across all measures all the time.

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a Balanced Scorecard

4. Don’t fail to consider both costs and benefits of initiatives such as spending on information technology and research and development.

5. Don’t ignore nonfinancial measures when evaluating managers and employees.

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Evaluating the Success

of a Strategy

Evaluating the Success

of a Strategy

Assume the following operating incomes:

Year 2003 Year 2004 Revenues:

(1,000,000 × $26) $26,000,000

(1,100,000 × $24) $26,400,000 Expenses:

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of a Strategy

How can the increase in operating income of $818,680 be evaluated?

Growth

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Growth Component

Assume that for 2003, Dallas produced and sold 1,000,000 units at $26 per unit.

During the year 2004, Dallas produced and sold 1,100,000 units at $24 per unit.

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Growth Component

Revenue effect of growth component (Actual units of output sold in 2004 Actual units of output sold in 2003)

Output price in 2003

(1,100,000 – 1,000,000) × $26 = $2,600,000 F This component is favorable because

it increases operating income.

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Growth Component

Cost effect of growth component

Actual units of input or capacity that would have been used in 2003 to produce year 2004

output assuming the same input-output relationship that existed in 2003

Actual units or capacity to produce 2003 output Input prices in 2003

=

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Growth Component

To produce 1,100,000 units in 2004 compared with the 1,000,000 units produced in 2003

(a 10% increase), Dallas would require a proportional increase in direct materials. Assume that 3,000,000 square centimeters of materials were used to produce the 1,000,000

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Growth Component

Assume that manufacturing conversion costs, selling and customer service costs and research

and development costs were $16,000,000 and remained stable during 2004.

What is the cost effect of the growth component? 3,000,000 × 110% = 3,300,000 centimeters

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Operating Income and Growth

What is the net increase in operating income as a result of growth?

Revenue effect of growth component $2,600,000 F

Cost effect of growth component 405,000 U

Increase in operating income

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Price-Recovery Component

Revenue effect of price-recovery component = (Output price in 2004 – Output price in 2003)

× Actual units of output sold in 2004 What is the revenue effect of the

price-recovery component?

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Price-Recovery Component

Cost effect of price-recovery component (Input prices in 2004 – Input prices in 2003) Actual units of inputs or capacity that would

have been used to produce year 2004 output assuming the same input-output relationship

that existed in 2003

Assume that in the year 2004, direct materials costs were $1.31 per square centimeter.

=

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Price-Recovery Component

What is the cost effect of the price-recovery component?

($1.31 – $1.35) × 3,300,000 = $132,000 F What is the total effect on operating

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Operating Income and

Revenue effect

of price-recovery component $2,200,000 U

Cost effect

of price-recovery component 132,000 F Decrease in operating income

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Productivity Component

Productivity component

Actual units of inputs or capacity to produce year 2004 output

=

Actual units of inputs or capacity that would have been used to produce

year 2004 output assuming the same

input-output relationship that existed in 2003

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Productivity Component

Assume that 2,772,000 actual square centimeters of direct materials were

used in the year 2004.

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What is the productivity component of cost changes? (2,772,000 – 3,300,000) × $1.31 = $691,680 F

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Change in Operating Income

Increase in operating income $818,680

Growth component $2,195,000 F

Price-recovery component $2,068,000 U

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Learning Objective 5

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Engineered Costs

Engineered costs result specifically from a clear cause-and-effect relationship between output and the resources needed to produce that output.

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Discretionary Costs

Discretionary costs have two important features. They arise from periodic (usually yearly)

decisions regarding the maximum amount to be incurred.

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Relationships Between

Inputs and Outputs

Relationships Between

Inputs and Outputs

Engineered costs differ from discretionary costs along two key dimensions:

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Inputs and Outputs

Engineered costs pertain to processes that are detailed, physically observable, and repetitive. Discretionary costs are associated with processes

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Learning Objective 6

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Managing Unused Capacity

What actions can management take when it identifies unused capacity?

Attempt to eliminate the unused capacity

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End of Chapter 13