ADVANCED MANAGEMENT ACCOUNTING PPT 14 1 Balance Score

ADVANCED MANAGEMENT ACCOUNTING PPT 14 -1

Balance Score Card PPT 14 -2

10 -3 Learning Objective Understand how to construct and use a balanced scorecard. PPT 14 -3

Strategic-Based Responsibility Accounting System A strategic-based responsibility accounting system (Balanced Scorecard) translates the mission and strategy of an organization into operational objectives and measures for four different perspectives: v The financial perspective v The customer perspective v The process perspective v The infrastructure (learning and growth) perspective PPT 14 -4

Elements of a Strategic-Based Responsibility Accounting System Customer Financial Process Communicate Strategy Alignment of Objectives Responsibility is Defined Performance Measures are Established Infrastructure Balanced Measures Link to Strategy PPT 14 -5

Elements of a Strategic-Based Responsibility Accounting System Financial Measures Process Measures Promotions Gainsharing Performance is Measured Individuals are Rewarded Based on Multidimensional Performance Customer Measures Infrastructure Measures Bonuses Salary Increases PPT 14 -6

The Balanced Scorecard The balanced scorecard translates an organization’s mission and strategy into a comprehensive set of performance measures. The balanced scorecard does not focus solely on achieving financial objectives. It highlights the nonfinancial objectives that an organization must achieve in order to meet its financial objectives. PPT 14 -7

10 -8 The Balanced Scorecard The balanced scorecard relies on non-financial measures in addition to financial measures for two reasons: Financial measures are lag indicators that summarize the results of past actions. Non-financial measures are leading indicators of future financial performance. Top managers are ordinarily responsible for financial performance measures – not lower level managers. Non-financial measures are more likely to be understood and controlled by lower level managers. PPT 14 -8

10 -9 The Balanced Scorecard Consists of an integrated set of performance measures that are derived from and support a company’s strategy. Customers Financial Performance measures Internal business processes Learning and growth PPT 14 -9

10 -10 The Balanced Scorecard Performance Measures Financial What are our financial goals? Customer What customers do we want to serve and how are we going to win and retain them? Internal Business Processes What internal business processes are critical to providing value to customers? Has our financial performance improved? Do customers recognize that we are delivering more value? Have we improved key business processes so that we can deliver more value to customers? Learning and Growth Are we maintaining our ability to change and improve? Vision and Strategy PPT 14 -10

The Balanced Scorecard Flowchart PPT 14 -11

Financial Perspective The financial perspective have three strategic themes: l Revenue Growth l Cost Reduction l Asset Utilization PPT 14 -12

Summary of Objectives and Measures: Financial Perspective Objectives Revenue Growth: Increase the number of new products Create new applications Develop new customers and markets Adopt a new pricing strategy Cost Reduction: Reduce unit product cost Reduce unit customer cost Reduce distribution channel cost Asset Utilization: Improve asset utilization Measures Percentage of revenue from new products Percentage of revenue from new sources Product and customer profitability Unit product cost Unit customer cost Cost per distribution channel Return on investment Economic value added PPT 14 -13

Summary of Objectives and Measures: Customer Perspective Objectives Measures Core: Increase market share Increase customer retention existing customers Market share (percentage of market) Percentage growth of business from Increase customer acquisition Increase customer satisfaction Increase customer profitability Performance Value: Decrease price Decrease postpurchase costs Improve product functionality Improve product quality Increase delivery reliability Improve product image and reputation Percentage of repeating customers Number of new customers Ratings from customer surveys Customer profitability Price Postpurchase costs Ratings from customer surveys Percentage of returns On-time delivery percentage Aging schedule Ratings from customer surveys PPT 14 -14

Summary of Objectives and Measures: Process Perspective Objectives Measures Innovation: Increase the number of new products Number of new products vs. planned Increase proprietary products Percentage revenue from proprietary products Decrease new product development time Time to market (from start to finish) Operations: Increase process quality Increase process efficiency Decrease process time Quality costs Output yields Percentage of defective units Unit cost trends Output/input(s) Cycle time and velocity MCE PPT 14 -15

Summary of Objectives and Measures: Process Perspective (continued) Objectives Measures Postsales Service: Increase service quality First-pass yields Increase service efficiency Cost trends Output/input Decrease service time Cycle time PPT 14 -16

Process Perspective (continued) Definitions Cycle Time: The time required to produce one unit of product Velocity: The number of units that can be produced in a given period of time (e. g. , units per hour) Manufacturing Cycle Efficiency (MCE) = Processing time + Move Time + Inspection Time + Wait time PPT 14 -17

Operational Measure of Responsiveness (time based) (continued) Example 1 A plant has theoretical capability of producing 10, 000 bikes per quarter. There are 20, 000 production hours available each quarter. Compute theoretical cycle time and velocity. Cycle time = 20, 000 hrs/10, 000 bikes = 2 hrs per bike Velocity = 10, 000 bikes/20, 000 hours = 0. 5 bikes per hour PPT 14 -18

Operational Measure of Responsiveness (time based) (continued) Example 2 A product has the following activities and times: Processing (three departments): 10 hours Moving (four moves): 3 hours Waiting (for the second and third processes): 8 hours Storage (before delivery): 19 hours Compute MCE = 10/(10+3+8+10) = 10/40 = 0. 25 or 25% PPT 14 -19

Summary of Objectives and Measures: Learning and Growth Perspective Objectives Measures Increase employee capabilities Employee satisfaction ratings Employee turnover percentages Employee productivity (revenue/employee) Hours of training Strategic job coverage ratio (percentage of critical job requirements filled) Increase motivation and alignment Suggestions per employee Suggestions implemented per employee Increase information systems capabilities Percentage of processes with realtime feedback capabilities Percentage of customer-facing employees with on-line access to. PPT 14 -20 customer and product information

Features of a Good Balanced Scorecard Tells the story of a firm’s strategy, articulating a sequence of cause-and-effect relationships: the links among the various perspectives that describe how strategy will be implemented PPT 14 -21

10 -22 The Balanced Scorecard A balanced scorecard should have measures that are linked together on a cause-and-effect basis. If we improve one performance measure. . . Then Another desired performance measure will improve. The balanced scorecard lays out concrete actions to attain desired outcomes. PPT 14 -22

Features of a Good Balanced Scorecard l Helps communicate the strategy to all members of the organization by translating the strategy into a coherent and linked set of understandable and measurable operational targets l Must motivate managers to take actions that eventually result in improvements in financial performance l Limits the number of measures, identifying only the most critical ones l Highlights less-than-optimal tradeoffs that managers may make when they fail to consider operational and financial measures together PPT 14 -23

Balanced Scorecard Implementation Pitfalls l Managers should not assume the cause-and-effect linkages are precise: they are merely hypotheses l Managers should not seek improvements across all of the measures all of the time l Managers should not use only objective measures: subjective measures are important as well PPT 14 -24

Balanced Scorecard Implementation Pitfalls l Managers must include both costs and benefits of initiatives placed in the balanced scorecard: costs are often overlooked l Managers should not ignore nonfinancial measures when evaluating employees l Managers should not use too many measures PPT 14 -25

Evaluating Strategy Strategic Analysis of Operating Income – 3 parts: n Growth Component – measures the change in operating income attributable solely to the change in the quantity of output sold between the current and prior periods n Price-Recovery Component – measures the change in operating income attributable solely to changes in prices of inputs and outputs between the current and prior periods n Productivity Component – measures the change in costs attributable to a change in the quantity of inputs between the current and prior periods PPT 14 -26

Revenue Effect Analysis Price Recovery Component P 2 P 1 Q 2 Q 1 Growth Component PPT 14 -27

Cost Effect Analysis Price Recovery Component P 2 P 1 Q 2 Q Q 1 Productivity Component Growth Component PPT 14 -28

10 -29 The Balanced Scorecard for Individuals The entire organization should have an overall balanced scorecard. Each individual should have a personal balanced scorecard. A personal scorecard should contain measures that can be influenced by the individual being evaluated and that support the measures in the overall balanced scorecard. PPT 14 -29

10 -30 The Balanced Scorecard and Compensation Incentive compensation should be linked to balanced scorecard performance measures. PPT 14 -30

10 -31 The Balanced Scorecard ─ An Example Profit Financial Contribution per car Number of cars sold Customer satisfaction with options Internal Business Processes Learning and Growth Number of options available Time to install option Employee skills in installing options PPT 14 -31

10 -32 The Balanced Scorecard ─ An Example Profit Contribution per car Number of cars sold Customer satisfaction with options Strategies Increase Options Increase Skills Number of options available Time to install option Employee skills in installing options Results Satisfaction Increases Time Decreases PPT 14 -32

10 -33 The Balanced Scorecard ─ An Example Profit Contribution per car Number of cars sold Customer satisfaction with options Number of options available Results Cars sold Increase Satisfaction Increases Time to install option Employee skills in installing options PPT 14 -33

10 -34 The Balanced Scorecard ─ An Example Profit Results Contribution per car Contribution Increases Number of cars sold Customer satisfaction with options Number of options available Time to install option Employee skills in installing options Satisfaction Increases Time Decreases PPT 14 -34

10 -35 The Balanced Scorecard ─ An Example If number of cars sold and contribution per car increase, profits increase. Profits Increase Contribution per car Contribution Increases Number of cars sold Cars Sold Increases Customer satisfaction with options Number of options available Results Time to install option Employee skills in installing options PPT 14 -35

End of Week PPT 14 -36