Balanced Scorecard

The Balanced Scorecard:
Strategic-Based Control
© 2019 Cengage. All rights reserved.

Learning Objectives
1. Compare and contrast activity-based and strategic-

based responsibility accounting systems
2. Discuss the basic features of the Balanced Scorecard
3. Explain how the Balanced Scorecard links measures to
strategy
4. Describe how an organization can achieve strategic
alignment
Introduction
© 2019to Cost management
Cengage. All rights reserved.
ACTIVITY-BASED Management
• Describes the fundamental economics that drive a firm

– Allows managers to have a better understanding of the
causes of cost
▪ Enables effective improvement of performance by
continuously improving processes
Introduction
ACTIVITY-BASED VERSUS STRATEGIC-
BASED RESPONSIBILITY ACCOUNTING
• Activity-based system
– Adds a process perspective to the financial perspective
of the functional-based responsibility accounting system
• Strategic-based responsibility accounting system
– Translates the strategy of an organization into
operational objectives and measures
– Takes the form of a Balanced Scorecard
▪ Balanced Scorecard: Identifies objectives and measures
for financial, customer, process, and learning and growth
perspectives
Introduction
Elements of RESPONSIBILITY
ACCOUNTING Model
• Assigning responsibility
• Establishing performance measures or benchmarks
• Evaluating performance
• Assigning rewards
Introduction
EXHIBIT 1 - responsibility
assignments compared
Activity-Based Responsibility Strategic-Based Responsibility

1. No tie to strategy 1. Linked to strategy
2. Systemwide efficiency 2. Systemwide efficiency
3. Team accountability 3. Team accountability
4. Financial perspective 4. Financial perspective
5. Process perspective 5. Process perspective
6. Customer perspective
7. Learning and growth
perspective

EXHIBIT 2 - Performance measures
compared
Activity-Based Measures Strategic-Based Measures
1. Process-oriented and financial 1. Standards for all four
standards perspectives
2. Value-added standards 2. Used to communicate strategy
3. Dynamic standards 3. Used to help align objectives
4. Optimal standards 4. Linked to strategy and
objectives
5. Balanced measures

Balanced Measures
• In a firm, measures selected should be balanced

between:
– Lag and lead measures
– Objective and subjective measures
– Financial and nonfinancial measures
– External and internal measures
Introduction
EXHIBIT 3 - Performance Evaluation
Compared
Activity-Based Performance Strategic-Based Performance
Evaluation Evaluation
1. Time reductions 1. Time reductions
2. Quality improvements 2. Quality improvements
3. Cost reductions 3. Cost reductions
4. Trend measurements 4. Trend measurements
5. Expanded set of metrics
6. Stretch targets for all four
perspectives

Stretch targets
• Set at levels that, if achieved, will transform the

organization within a period of three to five years
• Features that make stretch targets feasible
– Measures are linked by causal relationships
– Targets are not set in isolation because of linkages
Introduction
EXHIBIT 4 - rewards compared
Activity-Based Rewards Strategic-Based Rewards

1. Performance evaluated on two 1. Performance evaluated on four
or more dimensions or more dimensions
2. Group rewards 2. Group rewards
3. Salary increases 3. Salary increases
4. Promotions 4. Promotions
5. Bonuses, profit sharing, and 5. Bonuses, profit sharing, and
gainsharing gainsharing

Balanced Scorecard
• Permits an organization to create a strategic focus

– Involves translating the organization’s strategy into
operational objectives and performance measures
for the following perspectives:
▪ Financial perspective
▪ Customer perspective
▪ Internal business process perspective
▪ Learning and growth (infrastructure) perspective
Introduction
EXHIBIT 13.5 - Strategy Translation
Process

Financial Perspective
• Establishes the long- and short-term financial

performance objectives expected from the
organization’s strategy
• Describes the economic consequences of actions
taken in the other three perspectives
• Strategic themes - Revenue growth, cost reduction,
and asset utilization
– Constrained by the need for managers to manage risk
Introduction
EXHIBIT 6 - Summary of Objectives and
Measures: Financial Perspective
Objectives Measures
Revenue Growth:
Increase the number of new products Percentage of revenues from new products
Create new applications Percentage of revenues from new
applications
Develop new customers and markets Percentage of revenues from new sources
Adopt a new pricing strategy Product and customer profitability
Cost Reduction:
Reduce unit product cost Unit product cost
Reduce unit customer cost Unit customer cost
Reduce distribution channel cost Cost per distribution channel
Asset Utilization:
Improve asset utilization Return on investment
Economic value added

Customer Perspective (1 of 2)
• Defines the customer and market segments in which

the business unit will compete
• Describes the way that value is created for customers
• Core objectives and measures are developed once
the customers and segments are defined
Introduction
Customer Perspective (2 of 2)
• Requires measures that drive the creation of customer

value and the core outcomes
– Customer value: Difference between realization and
sacrifice
▪ Realization - What the customer receives
▪ Sacrifice - What is given up
– Post-purchase costs: Costs incurred by the customer
after purchase
Introduction
Measures: customer Perspective
Objectives Measures
Core:
Increase market share Market share (percentage of market)
Increase customer retention Percentage growth, existing customers
Percentage of repeating customers
Increase customer acquisition Number of new customers
Increase customer satisfaction Ratings from customer surveys
Increase customer profitability Customer profitability
Performance Value:
Decrease price Price
Decrease post-purchase costs Post-purchase costs
Improve product functionality Ratings from customer surveys
Improve product quality Percentage of returns

Increase delivery reliability On-time delivery percentage
Aging schedule
Ratings from customer surveys

Internal Business Process Perspective
• Describes the internal processes needed to provide

value for customers and owners
• Process value chain is defined to provide the required
framework
– Process value chain: Made up of innovation,
operations, and post-sales service processes
Introduction
Measures: process Perspective
Objectives Measures
Innovation:
Increase the number of new products Number of new products/total products;
R&D expenses
Increase proprietary products Percentage revenue from proprietary products
Number of patents pending
Decrease product development cycle time Time to market (from start to finish)
Operations:
Increase process quality Quality costs
Output yields
Percentage of defective units
Increase process efficiency Unit cost trends
Output/input(s)
Decrease process time Cycle time and velocity
MCE
Post-Sales Service:
Increase service quality First-pass yields
Increase service efficiency Cost trends
Output/input(s)
Decrease service time Cycle time

Operational Measures of Responsiveness -
Cycle Time and Velocity
• Cycle time (manufacturing): Time required to
produce a product
– Time ÷ units produced
• Velocity: Number of units of output that can be
produced in a given period of time
– Units produced ÷ time
• Using incentives, operational managers can improve
delivery performance by:
– Reducing manufacturing cycle time
– Increasing velocity
Introduction
Calculating Cycle Time and Velocity –
Example (1 of 3)
• Assume that a company has the following data for one
of its manufacturing cells:
– Theoretical velocity: 40 units per hour
– Productive minutes available (per year): 1,200,000
– Annual conversion costs: $4,800,000
– Actual velocity: 30 units per hour
• Calculate the actual conversion cost per unit using
actual cycle time and the standard cost per minute
Introduction
Example (2 of 3)
• Calculate the ideal conversion cost per unit using
theoretical cycle time and the standard cost per minute
– What incentive exists for managers when cycle time
costing is used?
• Solution:
– Actual cycle time = 60 minutes/30 units = 2 minutes per
unit
– Standard cost per minute = $4,800,000/1,200,000 = $4
per minute
– Conversion cost per unit = $4 × 2 = $8 per unit
Introduction
Example (3 of 3)
– Theoretical cycle time = 60 minutes/40 units = 1.5
minutes per unit
▪ Conversion cost per unit = $4 × 1.5 = $6 per unit
▪ Incentive is to reduce cycle time because it reduces the
cost per unit
Introduction
Operational Measures of Responsiveness -
Manufacturing Cycle Efficiency (MCE)
• MCE = Processing time/(Processing time + Move time
+ Inspection time + Waiting time + Other non-value-
added time)
– Processing time - Efficient or ideal time it takes to
convert materials into a finished good
– Other activities and their times are viewed as wasteful
▪ Goal - To reduce time of other activities to zero
Introduction
Calculate Manufacturing Cycle Efficiency
(MCE) – Example (1 of 3)
• A company has provided the following information for
one of its products for each hour of production:
– Actual velocity: 100 units (per hour)
– Move time: 20 minutes
– Inspection time: 15 minutes
– Rework time: 10 minutes
• Calculate MCE and comment on its significance
Introduction
• What is the theoretical cycle time?
– Calculate MCE using actual and theoretical cycle times
• Solution:
– Process time = 60 minutes − 20 minutes − 15 minutes −
10 minutes = 15 minutes
▪ MCE = Process time/(Process time + Move time +
Inspection time + Rework time)
=15/(15 + 20 + 15 + 10) = 0.25
▪ A value of 0.25 indicates that 75 percent of the
manufacturing cycle is attributable to waste
Introduction
– Theoretical cycle time = 15 minutes/100 units = 0.15
minute
▪ Actual cycle time = 60 minutes/100 units = 0.60 (includes
theoretical cycle time plus the waste)
▪ MCE = Theoretical cycle time/Actual cycle time
= 0.15/0.60 = 0.25
Introduction
Learning and Growth Perspective
• Defines the capabilities that an organization needs to

create long-term growth and improvement
• Enabling factors
– Employee capabilities
– Information systems capabilities
– Employee attitudes
Introduction
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 Suggestions per employee
alignment Suggestions implemented per employee
Increase information systems Percentage of processes with real-time
capabilities feedback capabilities
Percentage of customer-facing employees with
online access to customer and product
Information

LINKING MEASURES TO STRATEGY
• Performance measures are derived from a company’s

vision, strategy, and objectives
– Should be chosen so that they are balanced between
outcome and lead measures
• All scorecard measures should be linked by cause-
and-effect relationships
Introduction
Testable Strategy and Strategic Feedback
(1 of 2)
• Testable strategy: Set of linked objectives aimed at an
overall goal
– Testability is achieved by restating the strategy into a set
of cause-and-effect hypotheses
▪ Hypotheses are expressed by a sequence of if-then
statements
Introduction
Testable Strategy and Strategic Feedback
(2 of 2)
• Strategic feedback allows managers to test the
reasonableness of the strategy
– Double-loop feedback: Occurs whenever managers
receive information about:
▪ Effectiveness of strategy implementation
▪ Validity of the assumptions underlying the strategy
– Single-loop feedback: Emphasizes only the
effectiveness of implementation
▪ Actual results deviating from planned results are a signal
to take corrective action
Introduction
Strategy map
• Tool that graphically illustrates the cause-and-effect

relationships
• Connects the Balanced Scorecard strategy with an
organization’s operating activities
• Provides a concise and pictorial representation of the
firm’s strategy
• Linkages are portrayed for each of the firm’s objectives
– Show how the objectives are linked for each of the
perspectives
Introduction
Strategy Map – Example (1 of 2)
• Consider the following value-growth strategy

expressed as a sequence of if-then statements:
– If employee skills are upgraded and if the manufacturing
process is redesigned, then manufacturing cycle time
will be decreased
– If cycle time decreases, then delivery reliability will
improve and process costs will decrease
– If delivery reliability improves, then customer retention
will increase
Introduction
Strategy Map – Example (2 of 2)
– If customer retention increases, then market share will

increase
– If market share increases, then sales will increase
– If sales increase and costs decrease, then profits will
increase
– If profits increase, then shareholder value will increase
Introduction
Exhibit 13.10 - Strategy Map

STRATEGIC ALIGNMENT
• For the Balanced Scorecard to be successful, the

entire organization must be committed to its
achievement
– Employees must be fully informed of the strategy and
share ownership for the objectives, measures, targets,
and initiatives
– Incentives should be structured, and resources must be
allocated to support the strategy
Introduction

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The Balanced Scorecard:

© 2019 Cengage. All rights reserved.

1. Compare and contrast activity-based and strategic-

• Describes the fundamental economics that drive a firm

Activity-Based Responsibility Strategic-Based Responsibility

© 2019 Cengage. All rights reserved.

© 2019 Cengage. All rights reserved.

• In a firm, measures selected should be balanced

© 2019 Cengage. All rights reserved.

• Set at levels that, if achieved, will transform the

Activity-Based Rewards Strategic-Based Rewards

© 2019 Cengage. All rights reserved.

• Permits an organization to create a strategic focus

© 2019 Cengage. All rights reserved.

• Establishes the long- and short-term financial

© 2019 Cengage. All rights reserved.

• Defines the customer and market segments in which

• Requires measures that drive the creation of customer

Improve product quality Percentage of returns

© 2019 Cengage. All rights reserved.

• Describes the internal processes needed to provide

© 2019 Cengage. All rights reserved.

• Defines the capabilities that an organization needs to

© 2019 Cengage. All rights reserved.

• Performance measures are derived from a company’s

• Tool that graphically illustrates the cause-and-effect

• Consider the following value-growth strategy

– If customer retention increases, then market share will

© 2019 Cengage. All rights reserved.

• For the Balanced Scorecard to be successful, the

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