CHAPTER 13
Strategy, Balanced Scorecard
and
Strategic Profitability Analysis
13-2To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Strategy
Strategy specifies how an organization matches its own capabilities with the opportunities in the marketplace to accomplish its objectives
A thorough understanding of the industry is critical to implementing a successful strategy
13-3To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Five Aspects of Industry Analysis
1. Number and strength of competitors
2. Potential entrants to the market
3. Availability of equivalent products
4. Bargaining power of customers
5. Bargaining power of input suppliers
13-4To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Basic Business Strategies
1. Product Differentiation – an organization’s ability to offer products or services perceived by its customers to be superior and unique relative to the products or services of its competitors
Leads to brand loyalty and the willingness of customers to pay high prices
2. Cost Leadership – an organization’s ability to achieve lower costs relative to competitors through productivity and efficiency improvements, elimination of waste, and tight cost control
Leads to lower selling prices
13-5To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Implementation of Strategy
Many companies have introduced a Balanced Scorecard to manage the implementation of their strategies
13-6To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
The Balanced Scorecard
The balanced scorecard translates an organization’s mission and strategy into a set of performance measures that provides the framework for implementing its strategy
It is called the balanced scorecard because it balances the use of financial and nonfinancial performance measures to evaluate performance
13-7To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Balanced Scorecard Perspectives
1. Financial
2. Customer
3. Internal Business Perspective
4. Learning and Growth
13-8To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
The Financial Perspective
Evaluates the profitability of the strategy Uses the most objective measures in the
scorecard The other three perspectives eventually feed
back into this dimension
13-9To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
The Customer Perspective
Identifies targeted customer and market segments and measures the company’s success in these segments
13-10To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
The Internal Business Prospective
Focuses on internal operations that create value for customers that, in turn, furthers the financial perspective by increasing shareholder value
Includes three subprocesses:1. Innovation
2. Operations
3. Post-sales service
13-11To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
The Learning and Growth Perspective
Identifies the capabilities the organization must excel at to achieve superior internal processes that create value for customers and shareholders
13-12To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
The Balanced Scorecard Flowchart
Financial CustomerInternal
BusinessProcess
Learning&
Growth
13-13To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Balanced Scorecard Implementation
Must have commitment and leadership from top management
Must be communicated to all employees
13-14To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
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
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
13-15To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Features of a Good Balanced Scorecard Must motivate managers to take actions that
eventually result in improvements in financial performance Predominately applies to for-profit entities, but has
some application to not-for-profit entities as well Limits the number of measures, identifying only the
most critical ones Highlights less-than-optimal tradeoffs that managers
may make when they fail to consider operational and financial measures together
13-16To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Balanced Scorecard Implementation Pitfalls Managers should not assume the cause-and-
effect linkages are precise: they are merely hypotheses
Managers should not seek improvements across all of the measures all of the time
Managers should not use only objective measures: subjective measures are important as well
13-17To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Balanced Scorecard Implementation Pitfalls Managers must include both costs and
benefits of initiatives placed in the balanced scorecard: costs are often overlooked
Managers should not ignore nonfinancial measures when evaluating employees
Managers should not use too many measures
13-18To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Evaluating Strategy
Strategic Analysis of Operating Income – three parts:
1. 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
2. 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
13-19To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Evaluating Strategy
Strategic Analysis of Operating Income3. Productivity Component – measures the
change in costs attributable to a change in the quantity of inputs between the current and prior periods
13-20To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Revenue Effect of Growth
Actual Units of Output Sold in
the Prior Period
Actual Units of Output Sold in the Current Period
X
CurrentPeriodSellingPrice
RevenueEffect
OfGrowth
=
13-21To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Cost Effect of Growth for Variable Costs
Actual Units of Input used to produce
Prior Period Output
Units of Input required to produce Current Output in the Prior Period
X
CurrentPeriodInputPrice
CostEffect
OfGrowth
For Variable
Costs
=
13-22To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Cost Effect of Growth for Fixed Costs Assuming Adequate Current Capacity:
Actual Units of Capacity
in the Prior
Period
Actual Units of capacity in Prior Period to Produce Current Period Output
X
Prior Period Price
per unit of
capacity
CostEffect
OfGrowth
For FixedCosts
=
13-23To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Cost Effect of Growth for Fixed Costs Assuming Inadequate Current Capacity:
Actual Units
of Capacity in the Prior
Period
Units of Capacity required to produce Current Period Output in the Prior Period
X
Prior Period Price
per unit of
capacity
CostEffect
OfGrowth
For FixedCosts
=
13-24To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Revenue Effect of Price Recovery
Prior Period Selling Price
Current Period Selling Price X
CurrentPeriod Units Sold
RevenueEffect
OfPrice-
Recovery
=
13-25To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Cost Effect of Price Recovery
Variable Costs:
Prior Period Input Price
Current Period Input Price X
Units of Input
required to produce Current Period’s Output in the Prior Period
CostEffect
OfPrice-
Recovery for
Variable Costs
=
13-26To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Cost Effect of Price Recovery
Fixed Costs with Adequate Capacity
Prior Period Price per Unit
of Capacity
Current Period Price per Unit of Capacity
X
Actual Units of Capacity on
Prior Period to Produce Current
Period’s Output
CostEffect
OfPrice-
Recovery for Fixed
Costs
=
13-27To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Cost Effect of Price Recovery
Fixed Costs without Adequate Capacity
Prior Period Price per Unit
of Capacity
Current Period Price per Unit of Capacity
X
Units of Capacity
Required to Produce Current Period’s Output
in the Prior Period
CostEffect
OfPrice-
Recovery for Fixed
Costs
=
13-28To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Cost Effect of Productivity for Variable Costs
Units of Input Required to
Produce Current Period’s Output
in Prior Period
Actual Units of Input used to Produce Current Period Output
X Input Price in Current Period
CostEffect
OfProductivity for Variable
Costs
=
13-29To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Cost Effect of Productivity for Fixed Costs With Adequate Capacity
Actual Units of Capacity in Prior
Period to Produce Current Period’s Output
Actual Units of Capacity in Current Period
XPrice Per Unit of
Capacity in Current Period
CostEffect
OfProductivity
for Fixed Costs
=
13-30To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Cost Effect of Productivity for Fixed Costs Without Adequate Capacity
Units of Capacity Required to
Produce Current Period’s Output in
the Prior Period
Actual Units of Capacity in Current Period
XPrice Per Unit of
Capacity in Current Period
CostEffect
OfProductivity
for Fixed Costs
=
13-31To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
The Management of Capacity
Managers can reduce capacity-based fixed costs by measuring and managing unused capacity
Unused Capacity is the amount of productive capacity available over and above the productive capacity employed to meet consumer demand in the current period
13-32To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Analysis of Unused Capacity
Two Important Features:1. Engineered Costs result from a cause-and-
effect relationship between the cost driver and the resources used to produce that output
2. Discretionary Costs have two parts:1. They arise from periodic (annual) decisions
regarding the maximum amount to be incurred
2. They have no measurable cause-and-effect relationship between output and resources used
13-33To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Managing Unused Capacity
Downsizing (Rightsizing) is an integrated approach of configuring processes, products, and people to match costs to the activities that need to be performed to operate effectively and efficiently in the present and future
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