CHAPTER 16: STRATEGIC PERFORMANCE MEASUREMENT Cost Management, Canadian Edition © John Wiley & Sons, 2009 Chapter 16: Strategic Performance Measurement.

CHAPTER 16: STRATEGIC PERFORMANCE MEASUREMENT

Cost Management, Canadian Edition

© John Wiley & Sons, 2009 Chapter 16: Strategic Performance MeasurementCost Management, Cdn Ed, by Eldenburg et al Slide # 1

Learning Objectives

© John Wiley & Sons, 2009

Chapter 16: Strategic Performance MeasurementCost Management, Cdn Ed, by Eldenburg et al Slide # 2

• Q1: What is strategic decision making?• Q2: How are financial and nonfinancial

measures used to evaluate organizational performance?• Q3: What is a balanced scorecard?

• Q4: How is a balanced scorecard implemented?• Q5: What are the strengths and weaknesses of the balanced scorecard?

• Q6: What is the future direction of cost accounting?

© John Wiley & Sons, 2009 Chapter 16: Strategic Performance MeasurementCost Management, Cdn Ed, by Eldenburg et al Slide 3

Q1: What is strategic decision making?

Overview of Management Decision

Making



Organizational

VisionCore

Competencies

OperatingPlans

ActualOperations

Organizational

Strategies

Strategic Decision Making



• Managers determine performance objectives to monitor the results of actual operations.

• Performance objectives are specific goals.

• Measurements of the performance objectives are compared to management’s expectations.

• Adjustments are made to either change operations or adjust the long-term strategies.


Q2: How are financial and nonfinancial measures

used to evaluate organizational performance?

Financial Performance Measures



• Financial measures provide information in dollars or ratios of dollars.– These measures come from the accounting

information system.– Traditionally these often were the only

measures used.

• Examples include:– division revenue,– division profit margin or return on sales, and– variances of actual operating results from

the budget.

Nonfinancial Performance Measures



• Nonfinancial measures cannot be measured in dollars.

• Examples include:– Defect rates,– Customer satisfaction levels,– Number of days from a candidate’s interview

to his or her start date,– Average service time, and– Employee satisfaction levels.


Q3: What is a balanced scorecard?

Balanced Scorecard



• The balanced scorecard is a method of organizing the financial and nonfinancial performance measures used to monitor operations.

• The chosen measures are carefully related to the organization’s vision and long-term strategies.

• The balanced scorecard serves as a means of communicating the organization’s strategies throughout the organization.

Balanced Scorecard (BSC) Perspectives



• A balanced scorecard usually consists of four categories of measures, with 4 ~ 5 specific measures per category.

• The four common categories are called the balanced scorecard perspectives.1. The financial perspective measures progress

towards the organization’s financial goals.2. The customer perspective evaluates the

organization’s performance from the viewpoint of customers.

3. The internal business process perspective assesses the organization’s ability to produce and deliver goods and services.

4. The learning and growth perspective measures the organization’s ability to change and develop improved strategies.

The BSC Translates Strategy to a Series of Cause and

Effect Relationships



Long-Term Strategy

Internal Perspective

Customer Perspective

Learning & Growth

Financial Perspective

How do shareholders view

organization?

How do customers view

organization?How do

employees view organization?

How can organizations grow and improve?

Performance measurements for each perspective can be used to determine appropriate operational and strategic

changes.

The Financial Perspective



• Examples of possible performance measures for the financial perspective include:– Profit margin– Return on equity– Sales growth– Operating income– Residual income

The Customer Perspective



• Examples of possible performance measures for the customer perspective include:

– Market share– Results from customer satisfaction

surveys– Number of new customers– Number of customer complaints– Customer reorder rates

The Internal Business Process Perspective



• The internal business process perspective contains three stages:– In the innovation cycle, customer preferences

are determined and the products are designed.

– In the operations cycle, goods and services are produced and delivered to the customer.

– The post-sales service cycle supports the customer after the sale.

The Internal Business Process Perspective



• Examples of possible performance measures for the:– Innovation cycle include the number of new

technologies developed and new product development time.

– Operations cycle include defect rates and the percent of on-time deliveries.

– Post-sales service cycle include the accounts receivable turnover ratio and warranty repair times.

BSC ExampleThe School for Future Artists is a private, for-profit, high school for students that are gifted in painting, drawing, and sculpture. Its mission is to train students in techniques and give them the confidence to be innovative, while at the same time preparing them to earn a living. Students are admitted to the school after a review of their portfolios. Half of the students are given full scholarships and the parents of the other half pay the expensive tuition. Parents who are paying tuition are given the opportunity to pay reduce tuition if they become shareholders. The school also receives donations from successful alumni. Identify some performance measures the school might use for the financial perspective on its balanced scorecard.


• Operating income• Return on equity• Donations as a percent of

total revenues

• Variances between actual and budgeted expenditures

• Dollar amount of provincial and federal grant money received this year

BSC ExampleIdentify some performance measures the School for Future Artists might use for the customer perspective on its balanced scorecard.


• Percent of graduates who eventually complete masters degrees in fine arts or related fields

• Percent of graduates who eventually become art professors

• Number of graduates who were involved in art expositions this year

• Number of graduates who received federal or provincial grants this year

• Number of families with 2 or more children at the school

• Responses to satisfaction surveys given to students and parents

BSC ExampleIdentify some performance measures the School for Future Artists might use for the 3 categories of the internal business processes perspective on its balanced scorecard.


Innovation cycle• Number of new courses

developed• Course development timeOperations cycle

• Percent of students who graduate

• Art supply costs per studentPost-sales service cycle• Accounts receivable turnover

ratio• Results of alumni satisfaction

surveys

BSC ExampleIdentify some performance measures the School for Future Artists might use for the learning and growth perspective on its balanced scorecard.


• Teacher turnover• Number of training workshops attended by teachers

this year• Results of teacher satisfaction surveys• Teacher and student use of newly purchased kiln

equipment• Number of management efficiency and leadership

conferences attended by administrators this year


Q4: How is a balanced scorecard implemented?

Balanced Scorecard Implementation



• A BSC implementation includes the following stages:– Clarify vision, competencies, and strategies.– Analyze the four BSC perspectives to develop

objectives and measures.– Communicate the components of the BSC

throughout the organization.– Establish performance targets and action

plans.– Collect and analyze scorecard data.– Investigate variances and reward employees.– Provide feedback and refine the scorecard.


Q5: What are the strengths and weaknesses of the balanced scorecard?

Balanced Scorecard Strengths



• The greatest strength of the BSC is the communication of strategies throughout the organization.

• The BSC forces top management to clarify the vision and strategies of the organization.

• The BSC links employee rewards to performance objectives that are linked to the organization’s vision and strategies, so short-term and long-term strategies are more likely to be in alignment.

Balanced Scorecard Potential Weaknesses



• If based on inappropriately defined visions and strategies, the BSC provides the wrong incentives for managers.

• Sometimes performance measures are chosen because the data is easy to obtain, rather than because they are linked to the vision and strategies.

• If performance measure targets are unattainable, employees may not buy in to the BSC initiative.


Q6: What is the future direction of cost

accounting?

Future Direction of Cost Accounting



• Information technology advances free accountants from preparing detailed reports.

• More time is available to concentrate on providing the best information possible to support management decision making.

• Accountants increasingly need to become aware of and understand emerging management tools (such as the balanced scorecard).

Copyright

Copyright © 2009 John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation of this work beyond that permitted by Access Copyright (The Canadian Copyright Licensing Agency) is unlawful. Requests for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his or her own use only and not for distribution or resale. The author and the publisher assume no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information contained herein.

© John Wiley & Sons, 2009 Slide 28Chapter 16: Strategic Performance Measurement

Cost Management, Cdn Ed, by Eldenburg et al

CHAPTER 16: STRATEGIC PERFORMANCE MEASUREMENT Cost Management, Canadian Edition © John Wiley & Sons, 2009 Chapter 16: Strategic Performance Measurement.

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