University:
California State University, Northridge
Course:
ACCT 230 | Introduction to Managerial Accounting
Academic year:

2024
Views:

321

Pages:

21
Author:

Ezra Hines

Chapter 12: Performance Evaluation and Decentralization Part 3 5 Appendix 12A: The Balanced Scorecard – Basic Concepts ► Segment income, ROI, residual income, and EVA are important measures of managerial performance, but they lead managers to focus only on dollar figures. ► The Balanced Scorecard translates an organization’s mission and strategy into operational objectives and performance measures for the following four perspectives: ► The financial perspective describes the economic consequences of actions taken in the other three perspectives. ► The customer perspective defines the customer and market segments in which the business unit will compete. ► The internal business process perspective describes the internal processes needed to provide value for customers and owners. ► The learning and growth perspective defines the capabilities that an organization needs to create long-term growth and improvement. 5 The Balanced Scorecard – An Example 5 Strategy Translation ► Strategy specifies management’s desired relationships among the four perspectives. ► Strategy translation, on the other hand, means specifying objectives, measures, targets, and initiatives for each perspective. Here is an example for the financial perspective. ► Objective: For the financial perspective, a company’s objective may be to grow revenues by introducing new products. ► Measure: The performance measure may be the percentage of revenues from the sale of new products. ► Target: The target or standard for the coming year for the measure may be 20 percent (i.e., 20 percent of the total revenues for the coming year must be from the sale of new products). ► Initiative: The initiative describes how this is to be accomplished. The ‘‘how,’’ of course, involves the other three perspectives. 5 The Role of Performance Measures ► The Balanced Scorecard is not simply a collection of critical performance measures. ► The performance measures are derived from a company’s vision, strategy, and objectives. ► These measures must be balanced between the following measures: ►performance driver measures (i.e., lead indicators of future financial performance) and outcome measures (i.e., lagged indicators of financial performance) ►objective and subjective measures ►external and internal measures ►financial and nonfinancial measures 5 Linking Performance Measures to Strategy ►Balancing outcome measures with performance drivers is essential to linking with the organization’s strategy. ►Performance drivers make things happen and are indicators of how the outcomes are going to be realized. ►Outcome measures are also important because they reveal whether the strategy is being implemented successfully with the desired economic consequences. ►A testable strategy can be defined as a set of linked objectives aimed at an overall goal. 5 A Testable Strategy Example 5 Invalid Strategy ►If the targeted levels of performance drivers were achieved and the expected outcomes did not materialize, then the problem could very well lie with the strategy itself. ►Double-loop feedback occurs whenever managers receive information about both the effectiveness of strategy implementation as well as the validity of the assumptions underlying the strategy. ►In a functional-based responsibility accounting system, typically only single-loop feedback is provided. ►Single-loop feedback emphasizes only effectiveness of implementation. ►In single-loop feedback, actual results deviating from planned results are a signal to take corrective action so that the plan (strategy) can be executed as intended. 5 The Four Perspectives and Performance Measures ►The four perspectives define the strategy of an organization and provide the structure or framework for developing an integrated, cohesive set of performance measures. ►These measures, once developed, become the means for articulating and communicating the strategy of the organization to its employees and managers. ►The measures also serve the purpose of aligning individual objectives and actions with organizational objectives and initiatives. 5 The Financial Perspective 5 Customer Perspective ► The customer perspective is the source of the revenue component for the financial objectives. ► It defines and selects the customer and market segments in which the company chooses to compete. 5 Internal (Process) Perspective ► The internal perspective typically focuses on identifying the organization’s core internal business processes needed for creating customer and shareholder value to achieve the customer and financial objectives. ► The framework for this perspective is the process value chain, made up of three processes: ► The innovation process anticipates the emerging and potential needs of customers and creates new products and services to satisfy those needs. It represents what is called the long-wave of value creation. ► The operations process produces and delivers existing products and services to customers. It begins with a customer order and ends with the delivery of the product or service. It is the short-wave of value creation. ► The postsales service process provides critical and responsive services to customers after the product or service has been delivered. 5 Internal (Process) Perspective (continued) 5 Responsiveness: Cycle Time and Velocity ►The time to respond to a customer order is referred to as responsiveness. Cycle time and velocity are two operational measures of responsiveness. ►Cycle time is the length of time it takes to produce a unit of output from the time raw materials are received (starting point of the cycle) until the good is delivered to finished goods inventory (finishing point of the cycle). ►Thus, cycle time is the time required to produce a product (Time ÷ Units produced). ►Velocity is the number of units of output that can be produced in a given period of time (Units produced ÷ Time). 5 Cornerstone 12-5 Computing Cycle Time and Velocity 5 Cornerstone 12-5 Computing Cycle Time and Velocity (continued) 5 Manufacturing Cycle Efficiency ►Another time based operational measure calculates MCE (manufacturing cycle efficiency). ►MCE is measured as value-added time ÷ total time. ►Total time includes both value-added time (the time spent efficiently producing the product) and nonvalue-added time (such as move time, inspection time, and waiting time). ►The formula for computing MCE is: 5 Cornerstone 12-6 Calculating Manufacturing Cycle Efficiency 5 Cornerstone 12-6 Calculating Manufacturing Cycle Efficiency (continued) 5 Learning and Growth Perspective ► The learning and growth perspective, which represents the source of the capabilities that enable the accomplishment of the other three perspectives’ objectives. ► This perspective has three major objectives: ► increase employee capabilities ► increase motivation, empowerment, and alignment ► increase information systems capabilities ► Employees must not only have the necessary skills, but they must also have the freedom, motivation, and initiative to use those skills effectively. ► Additionally, it is important to increase information system capabilities so employees can improve processes and effectively execute new processes. 5 Learning and Growth Perspective (continued)