Chapter 13 The Balanced Scorecard: Strategic-Based Control

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2 Chapter 13 The Balanced Scorecard: Strategic-Based Control

3 Chapter 13 Objectives 1. Compare and contrast ac0vity- based and strategic- based responsibility accoun0ng systems. 2. Discuss the basic features of the Balanced Scorecard. 3. Explain how the Balanced Scorecard links measures to strategy. 4. Describe how an organiza0on can achieve strategic alignment.

4 Activity-Based Versus Strategic-Based Responsibility Accounting The ac'vity- based system adds a process perspec've to the financial perspec've of the func'onal based responsibility accoun'ng system A strategy- based responsibility accoun'ng system translates the strategy of the organiza'on into opera'onal objec'ves and measures Objec0ve

5 13.2 Basic Concepts of the Balanced Strategy: Scorecard choosing the market and customer segments the business unit intends to service iden0fying the cri0cal internal and business processes that the unit must excel at to deliver the value proposi0ons to customers in the targeted market segments selec0ng the individual and organiza0onal capabili0es required for the internal, customer, and financial objec0ves. 5

6 Activity-Based Versus Strategic-Based Responsibility Accounting Objec0ve

7 Activity-Based Versus Strategic-Based Responsibility Accounting Objec0ve

8 Basic Concepts of the Balanced The Balanced Scorecard permits an organiza0on to create a strategic focus by transla0ng an organiza0on s strategy into opera0onal objec0ves and performances measures for four different perspec0ves: 1. The financial perspec0ve 2. The customer perspec0ve Scorecard 3. The internal business process perspec0ve 4. The learning and growth perspec0ve Objec0ve

9 Basic Concepts of the Balanced Scorecard Strategy is choosing the market and customer segments the business unit intends to serve, iden0fying the cri0cal internal and business processes that the unit must excel at to deliver the value proposi0ons to customers in the targeted market segments, and selec0ng the individual and organiza0onal capabili0es required for the internal, customer, and financial objec0ves. Objec0ve

10 Basic Concepts of the Balanced Scorecard Objec0ve 2

11 Basic Concepts of the Balanced Scorecard Objec0ve 2

12 Basic Concepts of the Balanced Scorecard Objec0ve 2

13 Basic Concepts of the Balanced Scorecard Customer Value: the difference between realiza0on and sacrifice, where realiza0on is what the customer receives and sacrifice is what is given up Responsiveness is the 0me it takes a company to respond to a customer order Cycle 'me is the length of 0me it takes to produce a unit of output from the 0me materials are received un0l the good is delivered to finished goods inventory Velocity is number of units of output that can be produced in a given period of 0me Objec0ve

14 13.2 Basic Concepts of the Balanced Scorecard Process Conversion Cost Example 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 14

15 13.2 Basic Concepts of the Balanced Scorecard 15

16 Basic Concepts of the Balanced Scorecard Manufacturing Cycle Efficiency MCE = Processing 'me / (Processing 'me + Move 'me + Inspec'on 'me + Wai'ng 'me + Other non- value- added 'me) In this equa0on, processing 0me is the efficient or ideal 0me it takes to convert materials into a finished good. The other ac0vi0es and their 0mes are viewed as wasteful and the goal is to reduce those 0mes to zero. Objec0ve

17 Basic Concepts of the Balanced Scorecard Objec0ve 2

18 Basic Concepts of the Balanced Scorecard Objec0ve 2

19 Linking Measures to Strategy If Then Objec0ve 3

20 20 Linking Measures to Strategy

21 Strategic Alignment Objec0ve 4

22 Chapter 14 Quality and Environmental Cost Management

23 Chapter 14 Objectives 1. Define quality, describe the four types of quality costs, and discuss the approaches used for quality cost measurement. 2. Prepare a quality cost report and explain its use. 3. Explain why quality cost informa0on is needed and how it is used. 4. Describe and prepare three different types of quality performance reports. 5. Discuss how environmental costs can be measured, reported, and reduced. 6. Show how environmental costs can be assigned to products and processes.

24 Quality Improving quality may actually be the key to survival for many firms. Improving process quality and the quality of products and services is a fundamental strategic objec0ve. If quality is improved, then customer sa0sfac0on increases. If customer sa0sfac0on increases, then market share will increase. If market share increases, then revenues will increase. If quality improves, then opera0ng costs will also decrease. 24

25 Costs of Quality A quality product or service is one that meets or exceeds customer expecta0ons. A defec've product is one that does not conform to specifica0ons. Quality is customer sa0sfac0on. Quality of conformance is a measure of how a product meets is specifica0ons. Zero defects means all products conform to specifica0ons. Robustness means exact conformance to target value. Objec0ve

26 Costs of Quality Costs of quality costs that exist because poor quality may or does exist Control ac'vi'es: performed by an organiza0on to prevent or detect poor quality Preven0on and appraisal ac0vi0es Control Costs: costs of performing control ac0vi0es Failure ac'vi'es: performed by an organiza0on or its customers in response to poor quality Failure costs: costs incurred by an organiza0on because failure ac0vi0es are performed Objec0ve

27 Costs of Quality Categories of quality costs Preven0on costs: incurred to prevent poor quality in product or services from being produced Appraisal costs: Incurred to determine whether products and services are conforming (Detec0on) Product acceptance: sample finished goods Process acceptance: sample goods while in process Internal failure costs: incurred because products or services do not conform; discovered prior to delivery External failure costs: incurred because products or services do not conform; discovered ayer delivery 27

28 Costs of Quality Objec0ve 14-28

29 Costs of Quality Observable Quality Costs are those costs that are available from an organiza0on s accoun0ng records. Hidden Quality Costs are opportunity costs resul0ng from poor quality Methods for es0ma0ng hidden quality costs: The Mul0plier Method The Market Research Method The Taguchi Quality Loss Func0on Objec0ve

30 Costs of Quality The mul0plier method assumes that the total failure cost is simply some mul0ple of measured failure costs: Total external failure cost = k(measured external failure costs) Where k is the mul0plier effect Objec0ve

31 Costs of Quality The Taguchi loss func0on assumes any varia0on from the target value of a quality characteris0c causes hidden quality costs Furthermore, the hidden quality costs decrease quadra0cally as the actual value deviates from the target value. Objec0ve

32 Costs of Quality The Taguchi Quality Loss Function L(y) = k(y- T)2 Where: K= A propor0onally constant dependent upon the organiza0on s external failure cost structure Y = Actual value of quality characteris0c T = Target value of quality characteris0c L = Quality loss Objec0ve

33 Costs of Quality Objec0ve 14-33

34 14.1 Costs of Quality a Actual sales of $5,000, b $1,000,000 $5,000,000 = 20%.

35 Reporting Quality Costs Objec0ve 2

36 Reporting Quality Costs Strategy to reduce quality costs recommended by the American Society for Quality Control: The strategy for reducing quality costs is quite simple: (1) take direct a;ack on failure costs in an a;empt to drive them to zero; (2) invest in the right to bring about improvement; (3) reduce appraisal costs according to results achieved; and (4) evaluate and redirect efforts to gain further improvement. This strategy is based on the premise that: For each failure, there is a root cause. Causes are preventable. Preven0on is always cheaper. Objec0ve

37 Quality Cost Information and Decision Making Repor0ng quality costs improves Managerial planning Control Decision making Managers need quality cost informa0on for Strategic Planning Cost- Volume- Profit Analysis Companies may also assess the quality of its supplies through ISO 9000 interna0onal quality standards apply to the way a company ensures quality like tes0ng products, training employees, keeping records, fixing defects. Objec0ve

38 Quality Cost Informa'on and Decision Making Cost-Volume-Profit Analysis and Strategic Decisions New Product Analysis, Project #675 Projected sales potential: 44,000 units Production capacity: 45,000 units Unit selling price: $60 Unit variable costs: $40 Fixed costs: Product development $ 500,000 Manufacturing 200,000 Selling 300,000 Total $1,000,000 Includes $5 quality costs Includes $100,000 quality costs 38 Break-even: 50,000 units Decision: Reject (breakeven exceeds capacity and potential)

39 Quality Cost Informa'on and Decision Making Cost-Volume-Profit Analysis and Strategic Decisions New Product Analysis, Project #675, Revised Projected sales potential: 44,000 units Production capacity: 45,000 units Unit selling price: $60 Unit variable costs: $40 $35 Fixed costs: Product development $ 500,000 $500,000 Manufacturing 200, ,000 Selling 300, ,000 Total $1,000,000 $900,000 -$3 scrap -$2 failure -$100K mfg 39 Break-even: 50,000 units Decision: Reject (breakeven exceeds capacity and potential) Break-even: 36,000 units Decision: Accept

40 Controlling Quality Costs The Total Quality Approach Zero- defect standards reflects a philosophy of total quality control and calls for products and services to be produced and delivered that meet the targeted value. Objec0ve

41 Controlling Quality Costs The Total Quality Approach Standard referred to as the robust zero- defects standard. Three types of progress can be measured and reported: 1) Progress with respect to a current- period standard or goal (an interim standard report) 2) The progress trend since the incep0on of the quality- improvement program (a mul0ple- period trend report) 3) Progress with respect to the long- range standard or goal (a long- range report) Objec0ve

42 Controlling Quality Costs Objec0ve

43 Controlling Quality Costs Objec0ve