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THE BALANCED SCORECARD: STRATEGIC- BASED CONTROL

The Balanced Scorecard is a strategic management system that defines a strategic-based

responsibility accounting system.

Strategy is defined as choosing the market and customer segments the business unit intends to
serve, identifying the critical internal and business processes that the unit must excel at to deliver
the value propositions to customers in the targeted market segments, and selecting the individual
and organizational capabilities required for the internal, customer, and financial objectives.

The Balanced Scorecard translates an organizations mission and strategy into operational
objectives and performance measures for four different perspectives: the financial perspective,
the customer perspective, the internal business process perspective, and the learning and growth
(infrastructure) perspective.

Common characteristics of balanced scorecards

a. It should be possible, by examining a companys balanced scorecard, to infer its strategy and
the assumptions underlying that strategy.
b. The balanced scorecard should emphasize continuous improvement rather than just meeting
present standards or targets.
c. Some of the performance measures on the balanced scorecard should be non-financial.
d. The scorecards for individuals should contain only those performance measures they can
actually influence.
e. The ultimate objectives of the organization are usually financial, but better financial results
cannot be attained without improving customers perceptions of the companys products and
services. In order to improve customers perceptions of products and services, it is usually
necessary to improve internal business processes so that the products and services are actually
better. And in order to improve the business processes, it is necessary that employees learn.

The balanced scorecard serves as a motivation and feedback mechanism. The Performance
measures on the balanced scoreboard provide motivation and feedback for improving.

The Financial Perspective

The financial perspective establishes the long- and short-term financial performance
objectives. The financial perspective is concerned with the global financial consequences of the
other three perspectives. Thus, the objectives and measures of the other perspectives must be
linked to the financial objectives. The financial perspective has three strategic themes: revenue
growth, cost reduction, and asset utilization.
Customer Perspective
The customer perspective is the source of the revenue component for the financial
objectives. This perspective defines and selects the customer and market segments in which the
company chooses to compete.

Process Perspective
To provide the framework needed for this perspective, a process value chain is defined.
The process value chain is made up of three processes: the innovation process, the operations
process, and the postsales process.

Cycle time is the time required to produce one unit of product.

Velocity is the number of units that can be produced in a given period of time
(e.g., units per hour).

Learning/Innovation and Growth Perspective

The learning and growth perspective is the source of the capabilities that enable the
accomplishment of the other three perspectives objectives.

SOME INTERNAL BUSINESS PROCESS PERFORMANCE MEASURES.

a. Deliver Cycle Time. This is the total elapsed time between when an order is placed by a
customer and when it is shipped to the customer. Part of this time is wait time that occurs before
the order is placed into production.
b. Throughput (Manufacturing Cycle) Time. This is the total elapsed time between when an
order is initiated into production and when it s shipped to the customer. It consists of process
time, inspection time, move time, and queue time. The only element that adds value is processing
time, inspection time, move time, queue time, and their associated activities do not add value and
should be minimized.
c. Manufacturing Cycle Efficiency (MCE). MCE is the ratio of value-added time (i.e., process
time) to total throughput time. It represents the percentage of time an order in production in
which useful work is being done. The rest of the time represents non-value-added time (i.e.,
inspection time, move time, and queue time).

Manufacturing Cycle Efficiency (MCE) can be found as follows:

QUALITY COST MEASUREMENT:

Quality-linked activities are those activities performed because poor quality may or does exist.
Costs of quality are costs that exist because poor quality may or does exist.

Control activities are performed by an organization to prevent or detect poor quality. Control
costs are the costs of performing control activities. There are two broad categories of control
costs: prevention costs and appraisal costs. Prevention costs are incurred to prevent poor quality
in the products or services being produced.
Appraisal costs are incurred to determine whether products and services are conforming to their
requirements or customer needs.
Failure activities are performed by an organization or its customers in response to poor quality.
Failure costs are the costs incurred by an organization because failure activities are performed.
There are two broad categories of failure costs: internal failure costs and external failure costs.
Internal failure costs are incurred because products and services do not conform to specifications
or customer needs and the nonconformance s detected prior to being delivered to outside parties.
External failure costs are incurred because products or services fail to conform to requirements
or satisfy customer needs and the nonconformance is detected after being delivered to outside
parties.

PRODUCTIVITY MEASUREMENT

Productivity measures the relationship between actual inputs used (bath quantities and costs)
and actual outputs produced.
Partial productivity compares the quantity of output produced with the quantity of an
individual input used.
Total Factor Productivity the ratio of quantity of output produced to the costs of all inputs
used based on current period prices.

STRATEGIC ANALYSIS OF OPERATING INCOME

STRATEGY - specifies how an organization matches its own capabilities with the opportunities
in the marketplace to accomplish its objectives.

Two Basic Strategies:

1. Product differentiation ability to offer products and services perceived by
customers to be superior and unique relative to the products or services of competitors
2. Cost leadership ability to achieve lower costs relative to competitors through
productivity and efficiency improvements, elimination of waste, and tight: cost control.

To evaluate the success of its strategy, a company can analyze the change in its operating income
by breaking it down into growth, price recovery, and productivity components.

Growth component measures the change in revenue and costs from selling more or less
units, assuming nothing else has changed.
Price recovery component measures changes in revenues and costs solely as a result of
changes in the prices of outputs and inputs.
Productivity component measures the decrease in costs from using fewer units, a better mix
of inputs, and reducing capacity.
EXERCISE:

1. The manager of Tagal Company would like to reduce the amount of time between when a
customer places an order and when the order is shipped. For the first quarter of operations during
the current year the following data were reported:

Inspection time 0.3 day

Wait time (from order to start of production) 14.0 days
Process time 2.7 days
Move time 1.0 day
Queue time 5.0 days
Required:

1) Compute the throughput time.

2) Compute the manufacturing cycle efficiency (MCE) for the quarter.
3) What percentage of the throughput time was spent in non-value-added activities?
4) Compute the delivery cycle time.
5) If by using Lean Production all queue time during production is eliminated, what will
be the new MCE?

2. The management of Bilispa Company would like to reduce the amount of time between when
a customer places an order and when the order is shipped. For the first quarter of operations
during the current year, the following data were reported:

Wait time (from order to start of production) 10 days

Inspection time 2 days
Process time 3 days
Move time 1 day
Queue time 8 days

Required:
1) Compute the throughput time.
2) Compute the manufacturing cycle efficiency (MCE) for the quarter.
3) What percentage of the throughput time was spent in non-value-added activities?
4) Compute the delivery cycle time and delivery cycle efficiency.
5) If by use of just-in-time (JIT) all queue time during production is eliminated, what will
be the new MCE?

3. Answer the following questions using the information below:

Following a strategy of product differentiation, Loftus Company makes a high-end

Appliance, AP15.
2011 2012
Units of AP15 produced and sold 20,000 21,000
Selling price P200 P220
Direct materials (square feet) 60,000 61,500
Direct materials costs per square foot P20 P22
Manufacturing capacity in units of AP15 25,000 25,000
Total conversion costs P1,000,000 P1,100,000
Conversion costs per unit of capacity P40 P44
Selling and customer-service capacity (customers) 60 58
Total selling and customer-service costs P360,000 P362,500
Selling and customer-service capacity cost per customer P6,000 P6,250

Loftus Company presents the following data for the years 2011 and 2012:
Loftus Company produces no defective units but it wants to reduce direct materials usage per
unit of AP15 in 2012. Manufacturing conversion costs n each year depend on production
capacity defined in terms of AP15 units that can be produced. Selling and customer-service costs
depend on the number of customers that the customer and service functions are designed to
support. Loftus Company has 46 customers in 2011 and 50 customers in 2012. The industry
market size for high-end appliances increased 5% from 2011 to 2012.
1) What is operating income for 2011?
A) P364,500 B) P1,804,500 C) P1,440,000 D) P200,000

2) What is operating income in 2012?

A) P1,440,000 B) P1,804,500 C) P364,500 D) P200,000

3) What is the change in operating income from 2011 to 2012?

A) P1,440,000 F B) P1,804,500 F C) P364,500 F D) P200,000 F

4) What is the revenue effect of the growth component?

A) P220,000 F B) P420,000 F C) P400,000 F D) 200,000 F

5) What is the cost effect of the growth component?

A) P60,000 U B) P140,000 F C) P60,000 F D) P200,000 F

6) What is the net effect on operating income as a result of the growth component?
A) P60,000 U B) P140,000 F C) P60,000 F D) P200,000 F

7) What is the revenue effect of the price-recovery component?

A) P220,000 F B) P420,000 F C) P400,000 F D) P200,000 F

8) What is the cost effect of the price-recovery component?

A) P179,000 F B) P179,000 U C) P241,000 U D) 420,000 F

9) What is the net effect on operating income as a result of the price-recovery component?
A) P179,000 F B) P179,000 U C) P241,000 U D) P420,000 F

10) What is the net effect on operating income as a result of the productivity component?
A) P179, 000 F B) P45,500 F C) P241,000 U D) P420,000 F