13 - 1 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Strategy, Balanced Scorecard, and Strategic Profitability Analysis

13 - 1©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

Strategy, Balanced Scorecard, and

Strategic Profitability Analysis

Strategy, Balanced Scorecard, and

Strategic Profitability AnalysisChapter 13


Learning Objective 1Learning Objective 1

Recognize which of two generic

strategies a company is using.


What is Strategy?What is Strategy?

Strategy describes how an organization matchesits own capabilities with the opportunities in themarketplace to accomplish its overall objectives.


What is Strategy?What is Strategy?

What is the focus of industry analysis?

Competitors

Potential entrants into the market

Equivalent products

Bargaining power of customers

Bargaining power of input suppliers


Basic StrategiesBasic Strategies

1. Product differentiation

2. Cost leadership


Implementation of StrategyImplementation of Strategy

Management accountants design reportsto help managers track progress in

implementing strategy.


The Balanced ScorecardThe Balanced Scorecard

The scorecard measures an organization’sperformance from four perspectives:

1. Financial

2. Customer

3. Internal business processes

4. Learning and growth



Identify what comprises

reengineering.


ReengineeringReengineering

Reengineering is the fundamental rethinkingof business processes delivery to achieve

improvements in critical measures ofperformance such as cost, quality, service,

speed, and customer satisfaction.


Reengineering ExampleReengineering Example

Customers needs identified

Purchase order issued

Production scheduled

Manufacturing completed

Finished goods to inventory

Quantities to be shippedmatched against purchase order

Shipping documents sentto Billing Department

Invoice issued

Customer payment follow up

Dallas Co. order delivery system:



The following was determined:

Frequently, there is a long waiting time beforeproduction begins in the manufacturing department.

Sometimes items are held in inventory untila truck is available for shipment.



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

a special shipment must be scheduled.

Dallas discovered that the many transfersacross departments slowed down the

process and created delays.

A multifunctional team reengineered theorder delivery process.



A customer relationship manager is responsiblefor each customer.

Dallas will enter into long-term contracts withcustomers specifying quantities and prices.

The customer relationship manager will workwith the customer and manufacturing to specify

delivery schedules one month in advance.



The schedule of customer orders will be sentelectronically to manufacturing.

Completed items will be shipped directly fromthe manufacturing plant to customer sites.

Each shipment will automatically trigger aninvoice to be sent electronically to the customer.



Present the four perspectives

of the balanced scorecard.


Perspectives of PerformancePerspectives of Performance

1. Financial

2. Customer

3. Internal business process

4. Learning and growth


Financial PerspectiveFinancial Perspective

Objective:

Increase shareholder value

Measures:

Increase in operating income


Financial PerspectiveFinancial Perspective

Initiatives: TargetPerformance

ActualPerformance

Manage costs andunused capacity

Build strong customerrelationships

$2,000,000

$3,000,000

6%Build strong customerrelationships

$2,100,000

$3,420,000

6.48%


Customer PerspectiveCustomer Perspective

Objectives:

Increase market share

Measures:

Market share in communicationnetworks segment

Customer satisfaction survey

Increase customer satisfaction


Customer PerspectiveCustomer Perspective


ActualPerformance

Identify future needsof customer

Identify new targetcustomer segments

6%

7

90% give toptwo ratings

Increase customer focusof sales organization

7%

8

87% give toptwo ratings


Internal BusinessProcess PerspectiveInternal Business

Process Perspective

Objectives:

Improve manufacturingquality and productivity

Measures:

Yield

On-time delivery

Meet specified delivery dates


Internal BusinessProcess PerspectiveInternal Business

Process Perspective


ActualPerformance

Identify problems andimprove quality

Reengineer orderdelivery process

78%

92%

79.3%

90%


Learning and Growth PerspectiveLearning and Growth Perspective

Objectives:

Align employee andorganization goals

Measures:

Employee satisfaction survey

Improvements in process controls

Improve manufacturing processes


Learning and Growth PerspectiveLearning and Growth Perspective


ActualPerformance

Employeeparticipation and

suggestion programto build teamwork

Organize R&D/manufacturing teamsto modify processes

80% ofemployees

give toptwo ratings

5

88% ofemployees

give toptwo ratings

5


Aligning the BalancedScorecard to StrategyAligning the BalancedScorecard to Strategy

Different strategies call for different scorecards.

What are some of the financialperspective measures?

Operating income

Revenue growth

Cost reduction is some areas

Return on investment



What are some of the customerperspective measures?

Market share

Customer satisfaction

Customer retention percentage

Time taken to fulfill customers requests



What are some of the internal businessperspective measures?

Innovation Process:

Manufacturing capabilities

Number of new products or services

New product development time

Number of new patents



Operations Process:

Yield

Defect rates

Time taken to deliver product to customers

Percentage of on-time delivery

Setup time

Manufacturing downtime



Post-sales service:

Time taken to replace or repairdefective products

Hours of customer training forusing the product



What are some of the learning and growthperspective measures?

Employee education and skill level

Employee satisfaction scores

Employee turnover rates

Information system availability

Percentage of processes with advanced controls


Pitfalls When Implementinga Balanced Scorecard


What pitfalls should be avoided whenimplementing a balanced scorecard?

1. Don’t assume the cause-and-effectlinkages to be precise.

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

3. Don’t use only objective measureson the scorecard.




4. Don’t fail to consider both costs and benefitsof initiatives such as spending on informationtechnology and research and development.

5. Don’t ignore nonfinancial measures whenevaluating managers and employees.

6. Don’t use too many measures.



Analyze changes in operating

income to evaluate strategy.


Evaluating the Successof a Strategy


Assume the following operating incomes:

Year 2003 Year 2004Revenues:

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

Expenses:Materials 4,050,000 3,631,320Other 16,000,000 16,000,000

Operating income $ 5,950,000 $ 6,768,680




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

Growth

Price recovery

Productivity


Growth ComponentGrowth Component

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

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

What is the revenue effect of growth?



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 becauseit increases operating income.

=–×



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

=

–×



To produce 1,100,000 units in 2004 comparedwith the 1,000,000 units produced in 2003(a 10% increase), Dallas would require aproportional increase in direct materials.

Assume that 3,000,000 square centimeters ofmaterials were used to produce the 1,000,000

units in 2003 at a cost of $1.35per square centimeter.



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

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

What is the cost effect of the growth component?

3,000,000 × 110% = 3,300,000 centimeters

(3,300,000 – 3,000,000) × $1.35 = $405,000 U


Operating Income and GrowthOperating Income and Growth

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

Revenue effect of growth component $2,600,000 FCost effect of growth component 405,000 UIncrease in operating income

due to growth component $2,195,000 F


Price-Recovery ComponentPrice-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 theprice-recovery component?

($24 – $26) × 1,100,000 = $2,200,000 U



Cost effect of price-recovery component

(Input prices in 2004 – Input prices in 2003)

Actual units of inputs or capacity that wouldhave been used to produce year 2004 outputassuming the same input-output relationship

that existed in 2003

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

=

×



What is the cost effect of theprice-recovery component?

($1.31 – $1.35) × 3,300,000 = $132,000 F

What is the total effect on operatingincome of the price-recovery component?


Operating Income andPrice-Recovery Component

Operating Income andPrice-Recovery Component

Revenue effect of price-recovery component $2,200,000 UCost effect of price-recovery component 132,000 FDecrease in operating income due to price-recovery component $2,068,000 U


Productivity ComponentProductivity Component

Productivity component

Actual units of inputs or capacity toproduce year 2004 output

Input prices in 2004

=

×

Actual units of inputs or capacitythat would have been used to produceyear 2004 output assuming the same

input-output relationship that existed in 2003

–



Assume that 2,772,000 actual squarecentimeters of direct materials were

used in the year 2004.

Actual price was $1.31/square centimeter.



What is the productivity component of cost changes?

(2,772,000 – 3,300,000) × $1.31 = $691,680 F

There is a $691,680 increase in operatingincome due to the productivity component.


Change in Operating IncomeChange in Operating Income

Increase in operating income$818,680

Growthcomponent

$2,195,000 F

Price-recoverycomponent

$2,068,000 U

Productivitycomponent$691,680 F



Distinguish between engineered

and discretionary costs.


Engineered CostsEngineered Costs

Engineered costs result specifically from a clearcause-and-effect relationship between output

and the resources needed to produce that output.

They can be variable or fixed in the short run.


Discretionary CostsDiscretionary Costs

Discretionary costs have two important features.

They arise from periodic (usually yearly)decisions regarding the maximum

amount to be incurred.

They have no measurable cause-and-effectrelationship between output and resources used.


Relationships BetweenInputs and Outputs


Engineered costs differ from discretionarycosts along two key dimensions:

Type of process

Level of uncertainty




Engineered costs pertain to processes that aredetailed, physically observable, and repetitive.

Discretionary costs are associated with processesthat are sometimes called black boxes, becausethey are less precise and not well understood.



Identify unused capacity

and how to manage it.


Managing Unused CapacityManaging Unused Capacity

What actions can management takewhen it identifies unused capacity?

Attempt to eliminate the unused capacity

Attempt to use the unused capacity to grow revenue


End of Chapter 13End of Chapter 13

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13 - 1 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Strategy, Balanced Scorecard, and Strategic Profitability Analysis