ACC336: Chapter 13 - The Balanced Scorecard
Terms in this set (80)
What are the four essential elements of the responsibility accounting model?
Establishing performance measures/benchmarks
Why was activity-based responsibility accounting developed?
To cater to firms operating in a dynamic environment that requires continuous improvement
(not a control system, a performance management system)
What are the most significant limitations of responsibility accounting?
Continuous improvement efforts were fragmented
Efforts failed to connect with an organization's overall mission and strategy
Strategic-based responsibility accounting system
A responsibility accounting system that translates an organization's mission and strategy into operational objectives and measures for four different perspectives
What are the four perspectives used in a balanced scorecard?
Learning and growth
A strategic-based performance management system that typically identifies and measures for four different perspectives
Converts a company's strategy into executable actions that are deployed throughout the organization
How does a strategic based responsibility accounting system add direction to improvement efforts?
By tying responsibility to the firm's strategy
Diffuses responsibility for the perspectives throughout the entire organization
How are performance measures integrated in a strategic based responsibility accounting system?
They are integrated so they are mutually consistent and reinforcing
Designed so that they are derived from and communicate an organization's strategy/objectives
How does a firm have balanced measures (4)?
The measures selected are balanced between:
Lag and lead
Objective and subjective
Financial and nonfinancial
External and internal
Measures results from past efforts
Factors that drive future performance
Indicate how outcomes are going to be realized
Measures that can readily quantified and verified
Measures that are nonquantifiable whose values are judgmental in nature
Expressed in monetary terms
Expressed in nonmonetary units
Relate to customer and shareholder objectives
Relate to the processes and capabilities that create value for customers and shareholders
Why are lead measures important?
Because they have a causal linkage with the strategy
What is required to communicate the organization's strategy through measurements (2)?
Scope (internal and external)
Flexibility (subjective, objective, nonfinancial)
In general, what does a Balanced Scorecard express?
A company's strategy through an integrated set of financial and nonfinancial measures that are both predictive and historical and that may be measured subjectively or objectively
How does a strategic based responsibility accounting system evaluate performance (6)?
Expanded set of metrics
Stretch targets for all 4 perspectives
Targets that are set at levels that, if achieved, will transform the organization within a period of 3-5 years
(performance evaluated by comparing actuals to targets)
What makes stretch targets feasible (2)?
The measures are linked by causal relationships
The targets are not set in isolation, they are a consensus through the whole organization
What are the strategic based rewards (5)?
Performance evaluated on 4 or more dimensions
Bonuses, profit sharing, gainsharing
What should the reward system be linked to?
Performance measures from all 4 dimensions
Choosing the market and customer segments, identifying critical internal business processes at which the firm must excel to increase customer value, and selecting the individual and organizational capabilities required to achieve the firm's internal, customer, and financial objectives.
Specifying objectives, measures, targets, and initiatives for each perspective
What is the role of financial objectives?
They serve as the objectives, measures, and initiatives for the other 3 perspectives
Establishes the LT and ST financial performance objectives expected from an organization's strategy
Describes the economic consequences of actions taken in the other 3 perspectives
What are the strategic themes of the financial perspective (3)?
(constrained by need for managers to manage risk)
What is important for achieving cost reduction objectives?
The accuracy of cost assignments
Financial - Revenue growth objectives and measures (4)
Increase number of new products - % of rev from new products
Create new applications - % of rev from new applications
Develop new customers/markets - % of rev from new sources
Adopt a new pricing strategy - Product and customer profitability
Financial - Cost reduction objectives and measures (3)
Reduce unit product cost - Unit product cost
Reduce unit customer cost - Unit customer cost
Reduce distribution channel cost - Cost per distribution channel
Financial - Asset utilization objectives and measures (1)
Improve asset utilization - ROI/Economic value added
How can company's lower risk?
Diversification of customer types, product lines, and suppliers
Defines the customer and market segments in which the business unit will compete
Describe the way value is created for customers
How is the customer perspective related to financial objectives?
It is the source of the revenue component
Core objectives and measures
Those that are common to most organizations
Customer - core objectives and measures (5)
Increase market share - % of market
Increase customer retention - % growth of business from existing/repeating customers
Increase customer acquisition - number of new customers
Increase customer satisfaction - ratings from surveys
Increase customer profitability - individual and segment profitability
Difference between what customer receives (realization) and what the customer gives up (sacrifice)
(provide basis for core outcomes)
What are the strategic themes of the customer perspective (2)?
Performance value (realization and sacrifice)
Customer - Performance value objectives and measures (6)
Decrease price - Price
Decrease post-purchase costs - PPC
Improve product functionality - Ratings from customer surveys
Improve product quality - % of returns
Increase delivery reliability - on time delivery %/aging schedule
Improve product image/reputation - ratings from customer surveys
Internal business process perspective
Describes the internal processes need to provide value for customers and owners
How do we develop the framework for the internal business process perspective?
By defining a process value chain
Process value chain (strategic themes for internal business process perspective)
The innovation, operations, and post-sales service processes
Anticipates the emerging and potential needs of customers and creates new products to satisfy those needs
(long wave value creation)
Produces and delivers existing products to customers
(begins with order and ends with delivery)
(short wave value creation)
Post-sales service process
Provides critical and responsive service to customers after the product has been delivered
Internal Process - Innovation objectives and measures (3)
Increase number of new products - Number of new/total products, R&D exp
Increase proprietary products - % of rev from proprietary products, number of patents pending
Decrease product devel cycle time - Time to market
Internal Process - Operations objectives and measures (3)
Increase process quality - Quality costs, output yields, % of defective units
Increase process efficiency - Unit cost trends, output/input
Decrease process time - Cycle time and velocity, MCE
What are common process time measures (3)?
Manufacturing cycle efficiency (MCE)
Internal Process - Post-sales service objectives and measures (3)
Increase service quality - First pass yields
Increase service efficiency - Cost trends, output/inputs
Decrease service time - Cycle time
Time it takes a company to respond to a customer order
(measured by cycle time and velocity)
Length of time to produce a unit of product from the time materials are receive until the good is delivered to finished good inventory
(time required for production
Formula for cycle time
The number of units that can be produced in a given period of time
Formula for velocity
Formula for standard cost per minute
Cell conversion costs/Minutes available
Formula for conversion cost per unit
Standard cost per minute x Actual cycle time used to produce the units during the period
Formula for MCE
Processing time/(Processing time + Move time + Inspection time + Wait time + Other non-value added time
The efficient/ideal time it takes to convert materials into a finished good
What is an ideal MCE?
How do you interpret an MCE of 0.25?
Indicates that 75% of the manufacturing cycle is attributable to waste
Learning and growth (infrastructure) perspective
Defines the capabilities an organization needs to create LT growth and improvement
What are the enabling factors of the learning and growth perspective (3)?
Information system capabilities
How is the learning and growth perspective related to the other 3 perspectives?
It is the source of the capabilities that enable the accomplishment of the other 3 perspectives
Learning and Growth - Increase employee capabilities measures (5)
Employee satisfaction ratings
Employee turnover %
Hours of training
Strategic job coverage ratio
Learning and Growth - Increase motivation and alignment measures (2)
Suggestion per employee
Suggestions implemented per employee
Learning and Growth - Increase information systems capabilities measures (2)
% of processes with real-time feedback capabilities
% of customer-facing employees with online access to customer/product information
What are the special properties of the performance measures included in the Balanced Scorecard (3)?
Measures are derived from strategy and objectives
Measures are balanced between outcome and lead
All measures should be linked by cause and effect relationships (most important)
A set of linked objectives aimed at an overall goal that can be restated into a sequence of cause and effect hypotheses
How can managers test the reasonableness of the strategy?
Through strategic feedback
Occurs when managers receive information about both the effectiveness of strategy implementation and the validity of assumptions underlying the strategy
(foundation for strategic learning)
Information about the effectiveness of strategy implementation
Validity of assumptions underlying the plan is not questioned
What is the benefit of hypothesis testing?
It makes it possible to change an adapt once it become clear that some parts of the strategy may not be viable
A detailed graphical representation of an organization's strategic objectives and the cause and effect relationships that exist among them
What is the key to the Balanced Scorecard being successful?
The entire organization must be committed to its achievement
What are the steps that must happen for the Balanced Scorecard to bring about organizational change (4)?
Employees must be fully informed of the strategy
Employees must share ownership for the objectives, measures, targets, and initiatives
Incentives must be structured to support the strategy
Resources must be allocated to support the strategy
How are performance expectations communicated?
By setting targeted values for the measures associated with each objective
What must change so that resources can be effectively allocated to strategic targets (2)?
An organization must decide how much of the strategic target will be achieved for the coming year
The operational budgetary process must be structured to provide the resources necessary for achievement of the ST advances along the strategic path
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