How the balance scorecard system evaluates performance

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The balance scorecard is responsible for measuring cost and revenue, employees, improvement, innovation, management and growth. Balance scorecard system is very changing for an organization:

Translating the vision: through using the four perspectives or components of the balance score card. The objectives behind this are to clarify the vision of the organization and gaining consensus.

Communication: through providing the proper education, setting the correct goals and linking reward to performance management.

Business planning: sets targets, establish milestones and align strategic initiatives.

Feedback and learning: Supplies strategic planning, facilitate strategies and learning.

Briefly summarize the main components of balance scorecard system.

The balanced scorecard is used in order to overcome deficiencies existing in measuring systems. There are four perspectives and they are as following: 1. Financial: It examines the organization's ability to implement the strategy of the organization in the long run and the funding and budgeting of the projects must be done. 2. Customer: This perspective cares about providing the customers with satisfaction and how it is a huge part of the organization's vision. It is also about the things that must be done from the perspective of the customers. 3. Internal: This prospective is about how the organization can excel at providing value to the customers. 4. Innovation: This perspective is about providing how can an organization learn and what to improve

What do you think are the important points authors have introduced in this article?

The article discusses the four important components (perspectives) of a balance scorecard and they are: Financial: It is important for organizations to have accurate financial information. Customers: Customers' satisfaction is vital for the companies' success. Internal and business process: this deals with the value of chain until the after sale services. Learning and growth: cares about the organization's ability to grow and learn with time so it achieves its goals and customers' satisfaction. The article has also discussed that the Balance scorecard is important because it helps an organization to understand its short-term activities and that leads to understand the long-term objectives and goals.

Critically discuss some of the points where you don't agree with the authors.

The authors believed that implementing the balance scorecard lead to organizational success. I don't agree with this because BSC has implementation issues, therefore the implementation would not be 100% successful. The four perspectives focus on the strategies of the organization rather than the outcome.

Exercise-3

(a.1) What is the relationship between management by exception and variance analysis?

Management by exception means that the attention of the manager focuses on those parts of the organization where plans are not working out for any reason. Time and effort should not be wasted focusing on those parts of the organization where things are going smoothly.

The budgets and standards used in a company in conducting its operations reflect the management's plans. If all goes according to what the management planned, there will be little difference between actual results and the expected results. However, if actual results do not conform to the budget and to standards, the performance reporting system warns the management that what is not expected has occurred. This signal is in the form of a variance from the budget or standards. Variances are not conclusions in themselves but foundations for further analysis, investigation, and action. Standard costs and their variances are aid to keeping management informed of the effectiveness of production effort as well as that of the supervisory personnel. Variances also allow supervisory personnel to guard themselves and their employees against failures that were not caused by them. Variances provide the gauge to measure the equality of the standard, allowing management to redirect its effort and make reasonable adjustments. Action to eliminate the causes of unwanted variances and to support and reward desired performance lies within the authority of the management, but supervisory and operating personnel depend on the accounting information system for facts that facilitate intelligent action toward the control of costs.

Not all variances are worth investigating. Differences between definite results and what is actually expected will almost always happen. If all variances were investigated, management would waste a great deal of time tracking down near unimportant differences. Variances may occur for any of a variety of reasons. For example, a more than normally hot summer may result in higher than expected electrical bills for air conditioning.

Therefore it is necessary that the main objective of variance analysis should be to identify and understand the reasons behind their happening and not to allocate the blame for failure to achieve the standard all the time.

Costs of production are affected by internal factors that the management controls. Standard costs and their variances assist the management in order to keep the management informed of the effectiveness of production effort as well as that of the supervisory personnel. Factory overhead variances indicate the failure or success of the control of variable and fixed overhead expenses in each department. However an overemphasis on performance evaluation through variance analysis may result in detrimental actions on the part of the managers, which may hamper the company's performance in the long run.

(a.2) What type of variances would be most likely to suggest that a company should consider making a change in its strategy?

Management should look for reasons behind every variances. There are three types of variances that might be responsible for causing differences in comparing the real results to the budget.

Volume variances; It is a variance that represents the difference between budgeted fixed overhead and fixed overhead applied to production of the period.

Efficiency/productivity variances; It is the difference between inputs (labor and materials) that were actually used and the standard budget owed. The efficiency variance is unwanted if the actual quantity exceeds the standard quantity: it is favorable if the actual quantity is less than the standard.

Price variances; where positive result indicate an increase in costs, while negative results mean a decrease in costs

(a.3) Do you think variance analysis helps in continuous improvement? Support your arguments.

Variable analysis helps an organization to identify variances from standards whether they are favorable or unfavorable. Therefore, the use of variance analysis helps in building a better informed performance management that can identify the causes of the variance, which may or may not need corrections as a result of the analysis.

'Benchmarking against other companies enables a company to identify the lowest-cost producer. This amount should become the performance measure for next year." Critically comment on this statement.

Benchmarking is an important tool of continuous quality improvement. To be successful, an organization must have a basis for competitive advantage. While an organization needs to do a reasonable job in various competitive dimensions, it can not be all things to all people. The enterprise must focus on one or two dimensions of competition to truly excel and be successful. The competitive dimension of lowest-cost producer is typically associated with product development. To achieve this, the company needs to follow process benchmarking to identify the best practices.

Many companies use benchmarking in order to be challenging to their competitors. However, a company can gain very little if its goal for benchmarking is merely to achieve status quo. Benchmarking is a continuous improvement tool that used by companies that are striving to achieve better-quality performance in their respective marketplace. When benchmarking is used properly, it can make a major contribution to the continuous improvement process.

When compa­nies benchmark their core competencies, they can easily fall into the trap of thinking a benchmark should be a performance indicator. A company receives greater benefits when the tools and techniques used by the company against which it is trying to benchmark, to achieve a level of performance are understood. This understanding allows the company not only to reach a certain number, but also to develop a vision of how to achieve an even more advanced goal. By focusing on reaching a certain number, some companies may have changed their organizations negatively (e.g., by downsizing or cutting ex­penses). However, they may have also removed the infrastructure (people or information systems) and soon find they are not able to sustain or im­prove the benchmark. In such cases, benchmarking becomes a curse

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Exercise-4

(a) XUZ Company produces readymade garments for men. The purchasing officer collects the following information:-

Annual demand for Jeans 40,000 yards

Ordering cost per purchase order AED 120/-

Carrying cost per year 26% of purchase costs

Safety-stock requirements None

Cost of fabric AED 10 per yard

The purchasing lead time is 3 weeks. The fabric center is open 250 days a year (50 weeks for 5 days a week).

(b) What do you understand by backflush costing? Describe three different versions of backflush costing.

Backflush costing describes a costing system that delays recording some or all of the journal entries relating to the cycle from purchase of direct materials to the sale of the finished goods. When journal entries for one or more stages in the cycle are omitted, the journal entries for a subsequent stage use normal or standard costs to work backward to "flush out" the costs in the cycle for which journal entries were not made. While the traditional normal and standard costing systems use sequential tracking, in which journal entries are recorded in the same order as actual purchases and progress in production.

Backflush costing has fewer trigger points at which journal entries are made. The term trigger point refers to a stage in a cycle going from purchase of direct materials to sale of finished goods at which journal entries are made in the accounting system.

Different versions of backflush costing differ in the number and the placement of trigger points at which journal entries are made in the accounting system:

Usually the traditional costing systems follow four trigger points:

Stage A: Purchase of direct materials

Stage B: Production resulting in work in progress

Stage C: Completion of good finished units of product

Stage D: Sale of finished goods.

Exercise-5

Hamadi Corporation manufactures an electronic component 'AZ-101'. This component is significantly different from its peer companies and has gained a high repute. The company presents the following data for 2008 and 2009.

The management uses its discretion every year in the beginning as to how many design staff members are required. The design staff and its costs have no direct relationship with the quantity of 'AZ-101' produced or the number of customers to whom this product is sold. Though company takes all due diligence in producing no defective machines, however, it wants to reduce materials usage per 'AZ-101' product in 2009. Conversion costs in each year depend on production capacity defined in terms of 'AZ-101' units that can be produced, not the actual units produced. Selling and customer service costs depend on the number of customers the company can support, not the actual number of customers it serves. The company has 75 customers in 2008 and 80 customers in 2009.

Is Hamadi's strategy one of product differentiation or cost leadership? Explain briefly.

From the facts given, it can be inferred that Hamadi Corporation has been keen on following a product differentiation strategy to create products that are valued by the customers and are perceived to be better than or different from the products of the competitors. The fact that Hamadi employs complete discretion in appointing its design staff and also that, no relationship has been pre-conceived between the design staff and its costs with the production units substantiates the inference. Further, the value added by the uniqueness of the product may allow the firm to charge a premium price for it.

Describe briefly the key elements Hamadi should include in its balanced scorecard and the reasons it should do so.

Hamadi would require more external information including customer, supplier, competitor and industry, because when companies employing a differentiation strategy, wish to gain competitive advantage, they have to distinguish themselves from competitors by providing differentiated product attributes. The information would include external, financial as well as non-financial data. Performance measures should be organized around the four traditional balanced scorecard perspectives (financial, customer, internal, and learning & growth).

Hamadi could select a variety of traditional accounting based measures of performance for the financial perspective of its scorecard. In addition to sales growth and asset utilization metrics, its can also monitor several different profitability metrics including gross profit, controllable contribution, EBITDA, and return on capital deployed. All financial performance metrics may be collected and monitored on a quarterly basis.

Performance measures in the customer perspective of the balanced scorecard could be monitored quarterly. Hamadi Corporation should attempt to measure the extent to which the company was achieving its strategic objective of say - making the shopping experience a fun, or define in a different manner. It may also try to capture a strategy-specific customer outcome metric related to its differentiation strategy. Metrics for the customer-perspective should be collected on the basis of customer rankings on the unique attributes related to the differentiation strategy that the customers found appealing. These metrics could be designates as strategy specific customer outcome measures of the differentiation strategy.

The internal perspective of Hamadi's balanced scorecard may include measures of corporate level execution of the company's unique operating standards. Hamadi should translate the components of its strategy into a set of division-level operating standards and measure the division-level conformance to these standards via walk-through audits. During these announced visits, management could evaluate divisional/departmental performance on various dimensions and quantify the audit score obtained. Scores on the announced and unannounced visits could be compared. The company could also monitor net gross profit from new concepts at the corporate level as part of the internal perspective of its scorecard, which may reflect any of the focuses of its differentiation strategy.

Employee capabilities are generally considered critical to consistent implementation of the division/department-level strategy. Accordingly, Hamadi could select various measures of employee capabilities in the learning & growth perspective of the scorecard. Measures of the tenure of division managers and crew should be included in Hamadi's scorecard to reflect the management's belief (if that is the case) that the retention of experienced employees was necessary for strong division-level operational performance. Employee capabilities could also be directly measured through bi-annual evaluations of manager and crew skill levels. Managers could be rated, on a five-point scale, on many dimensions including ability to retain, train, and interact with crew; customer service; merchandising; time and labor management; maintaining store safety; and technology use. In addition to measures of employee capabilities, the learning & growth perspective of Hamadi's balanced scorecard could include corporate and regional measures of employee satisfaction and information technology use.

Calculate the growth, price-recovery, and productivity components that explain the change in operating income from 2008 to 2009.

Evaluation of Increase in Operating Income in terms of growth, price recovery and productivity.

Growth Component

Revenue Effect

(Actual units of output Sold in 2009 - Actual units of output Sold in 2008)*Output Price in 2008

= (210 - 200)* 40000 = $ 400000 (Favourable).

Cost Effect

(Actual units of input or capacity that would have been used in 2008 to produce year 2009 output assuming the same input-output relationship that existed in 2008 - Actual units or capacity to produce 2008 output) * Input prices in 2008

To produce 210 units in 2009 compared with the 200 units produced in 2008 (a 5% increase), Hamadi would require a proportional increase in direct materials i.e. (300000*105%) = 315000.

Direct Material Costs = (315000 - 300000)*8 = $ 120000

Conversion Costs = (250-250)*8000 = 0

Selling and Customer Service Costs = (100-100)*10000 = 0

Design Costs = (12-12)*100000 = 0

Cost effect of Growth Component = $ 120000 (U)

Increase in Operating Income due to Growth Component =

(Revenue Effect) $ 400000 (F) + (Cost Effect) $ 120000 (U) = $ 280000 (F)

Price Recovery Component

Revenue effect of PRC =

(Output price in 2009 - Output price in 2008)Ã- Actual units of output sold in 2009

= (42000 - 40000) * 210 = 420000 (Favourable)

Cost effect of price-recovery component

(Input prices in 2009 - Input prices in 2008) * Actual units of inputs or capacity that would have been used to produce year 2009 output assuming the same input-output relationship that existed in 2008

Direct Material Costs = (8.5-8)*315000 = $ 157500 (Unfavourable)

Conversion Costs = (8100-8000)*250 = $ 25000 (Unfavourable)

Selling & Customer Service Costs = (10000-9900)*100 = $ 10000 (Unfavourable)

Design Costs = (101000-100000)*12 = $ 12000 (Unfavourable)

Total Cost Effect of Price Recovery Component = $ 204500 (Unfavourable)

The Net Increase in Operating Income attributable to price recovery =

(Revenue Effect) $ 420000 (F) + (Cost Effect) $ 204500 (U) = $ 215500 (F)

Productivity Component

(Actual units of inputs or capacity to produce year 2009 output - Actual units of inputs or capacity that would have been used to produce year 2009 output assuming the same input-output relationship that existed in 2008)* Input prices in 2009

Direct Material Costs = (310000 - 315000) * 8.5 = $ 42500 (F)

Conversion Costs = (250-250) * 8100 = 0

Selling & Customer Service Costs = (95-100)*9900 = $ 49500 (F)

Design Costs = (12-12)* 101000 = 0

The Productivity Component of Cost Changes = $ 92000 (F)

$ 280000 (F) + $ 215500 (F) + $ 92000 (F) = 587500 (F)

The absence of a cause and effect relationship makes identifying unused capacity for discretionary cots difficult. It is not possible to determine the Design resources used for the actual output produced to compare to the Design Capacity.

Comment on your answer in requirement (d). What does each of these components indicate?

Growth Component - This explains how successful the company has been with regard to growth in increasing its operating income. The goal is to isolate the increase in costs caused solely by the growth in the units of 'AZ-101' sold between 2008 and 2009.

Price Recovery Component - The objective of the revenue effect of price recovery is to isolate the changes in revenues between 2008 and 2009 that was solely due to the change in selling prices. The price recovery analysis indicates that, as the prices of its inputs increased, Hamadi could also pass these increases to the customers in the form of higher prices.

Productivity Component - The objective of the productivity component is to isolate the changes in costs between 208 and 2009 caused solely by the change in the units, mix and capacities of the inputs. The productivity component indicates that Hamadi was able to increase the operating income by improving quality and productivity.

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