ACCOUNTING 7

PERFORMANCE MEASURES & BALANCED SCORECARDS

The primary purpose of the balanced scorecard is to translate an organization's mission and strategy
into a set of performance measures that put that strategy into action with clearly-stated objectives,
measures, targets, and initiatives.
The four key perspectives in the balanced scorecard are:
a. the financial perspective,
b. the customer perspective,
c. the internal business processes perspective, and
d. the learning and growth perspective.
1.

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.
Financial measures tend to be lagging indicators, rather than leading indicators.
d. While there will be a comprehensive scorecard for the entire company, the scorecards for
individuals should contain only those performance measures they can actually influence.
e. Most, but certainly not all, balanced scorecards will contain performance measures that fall
into at least four main categories: financial, customer, internal business process, and learning
and growth. 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 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.
Internal Process Perspective
Processes are the means for creating customer and shareholder value. Thus, the process
perspective entails the identification of the processes needed to achieve customer and financial
objectives. 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 post-sales process.
Some internal business process performance measures.
a. Delivery 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. The remainder of this time is the throughput time, which is
defined below.
b. Throughput (Manufacturing Cycle) Time. This is the total elapsed time between when an
order is initiated into production and when it is 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 is 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).

Learning and Growth Perspective

The learning and growth perspective is the source of the capabilities that enable the
accomplishment of the other three perspectives objectives. This perspective has three major
objectives: increasing employee capabilities; increasing motivation, empowerment, and alignment;
and increasing information systems capabilities.
The three key components in performing a strategic analysis of operating income include:
a. the growth component, which measures the change in operating income attributable solely to
an increase in the quantity of output sold from one year to the next.
b. the price-recovery component, which measures the change in operating income attributable
solely to changes in the prices of the inputs and the outputs from one year to the next.
c. the productivity component, which measures the change in costs attributable to a change in
the quantity of inputs used in the current year relative to the quantity of inputs that would
have been used in the previous year to produce current year output.
Product differentiation vs cost leadership
Product differentiation is 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.
Cost leadership is an organization's ability to achieve lower costs relative to competitors through
productivity and efficiency improvements, elimination of waste, and tight cost control.
What is reengineering. Reengineering approach change contrasted with a kaizen approach to change?
Reengineering is the rethinking of business processes, such as the order delivery process, to
improve critical performance measures such as cost, quality, or customer satisfaction. It can be
contrasted to a kaizen approach to change in that reengineering is most often a sudden, drastic
change, while a kaizen approach involves small, incremental but continual improvements.
RESPONSIBILITY UNITS & PERFORMANCE EVALUATION
Why decentralize decision-making responsibility
1. Decentralization enables units of an organization to respond more quickly and effectively to
the uncertainties of markets and economic change.
2. Decentralization requires that senior level managers delegate decision-making responsibilities
to operating level managers who are closer to the action and who have access to more timely,
relevant information for making decisions.
3. In a centralized environment, control moves from task control to results control. In a task
control environment, the focus is on getting a particular task done. In a results control
environment, the focus is on motivating people to use their skill, knowledge, and creativity to
improve operating results.
A responsibility center is an organizational subunit for which a manager has been assigned
accountability.

A cost center is a responsibility center whose employees control costs but do not control
its revenues or investment level.

A revenue center is a responsibility center whose employees control revenues but do not
control costs or the level of investment. Revenue center employees can control the mix of
items carried in their stores, prices of products and promotional activities. Revenue center
managers are often at the mercy of others who determine the costs of their goods (e.g., a
service station manager has no control over the cost of the gas sold).

A profit center is a responsibility center whose employees control revenues and costs but
not the level of investment; the level of investment is usually controlled by senior
management. Most outlets of fast food restaurant chains and motel chains are profit
centers.

An investment center is a responsibility center whose employees control its revenues,

costs, and the level of investment. The investment center is essentially an independent
business.
Performance measures to evaluate the performance for each type of responsibility center.
1. Controllability, a principle often used in control, asserts that people should only be held
accountable for results that they can control. The main application of this principle is that
managers should not be held accountable for costs outside their control. One major difficulty
in applying this occurs when revenues and costs are jointly earned or incurred. Separating
these component revenues and costs can involve intricate, and often arbitrary, accounting
procedures.
2. A segment margin is the level of controllable profit reported by an organizational unit or
product line. Each units segment margin is an estimate of its short-term effect on the
organizations profit. Interpreting segment margins should be done carefully, as:

Segment margins can represent highly aggregated summaries of each organizational units
performance. Thus, other critical success factors should be used as well to assess
performance.

Some segment reports contain arbitrary numbers. Accountants call these soft numbers
since they rest on subjective assumptions over which there can be legitimate
disagreement.
The revenue figures often reflect assumptions and allocations that can be misleading.
These assumptions relate to how the revenues that the organization earned are divided
among the responsibility centers.

Transfer Pricing A transfer price is the price paid for goods or services transferred within an
organization. Transfer prices facilitate the attribution of revenues earned by the organization to
organizational sub-units. Transfer pricing can be very arbitrary, especially if there is a high degree
of interaction among the various responsibility centers. There are four broad approaches to
transfer pricing:

Market-Based Transfer Prices. Market prices provide an independent valuation of products that
are transferred between divisions, and reflect jointly earned revenue in a manner that reflects
the markets assessment. One difficulty is that clear market prices often do not exist for
many products.

Cost-Based Transfer Prices. If goods or services do not have market prices, transfer prices are
often based on cost. Common cost basis methods include variable cost plus a markup, full
cost, and full cost plus a markup.

Negotiated Transfer Prices. When market prices do not exist, another possibility is to allow
divisions to negotiate transfer prices. Critics argue that negotiated transfer prices reflect both
negotiating skills as well as economic considerations, and therefore lead to less valid as indices
of economic performance.

Administered Transfer Prices. Administered transfer prices are set by an arbitrator or by a rule
or policy. Some find them appealing because they are easy to administer. An example is to use
the variable cost of a product plus 25%. Others view these types of prices as unappealing
because they are quite arbitrary.
Return on Investment and Economic Value Added
ROI = return on sales x asset turnover
Return on sales = operating income/sales
Return on sales is a measure of operating efficiency. On return on sales, efficiency is a
measure of an organizations ability to control costs.
Asset turnover = sales/investment
Asset turnover is a measure of productivity. Productivity is a ratio of output to input.
Assessing Return on Investment

Compare an organizations ROI to the ROI of its competitors.

Decompose ROI into its efficiency and productivity measures and compare to those of other
organizations.
Economic Value Added
Economic value analysis evaluates an organization segments (for example, a division, product
line, or product) financial desirability using the segments income less a financial charge that is
computed by multiplying the organizations cost of capital by the investment in the segment.
Economic value added is used primarily to encourage managers to improve the relationship
between return and assets employed. This can be done by making assets more efficient or using
assets more effectively.
EXERCISES
E-1. For each of the following measures, identify which perspective of the balanced scorecard it
represents: financial, customer, internal-business-process, or learning-and growth.
1.
2.
3.
4.
5.
6.
7.
9.
10.

service response time

market share
gross margin percentage
defect rates
customer satisfaction
new-product development time
economic value added
employee education
.manufacturing downtime

E-2. Match the following critical success factors with the appropriate perspective of the balanced
scorecard. Use the following key: F = Financial, C = Customer, IB = Internal business, and LG =
Learning and growth.
a. the efficient and effective use of employees

b.
c.
d.
e.
f.
g.
h.

increasing the quality of products and services

increasing the number of new products
improving quality throughout the production process
increasing information systems capabilities
increasing ROI
reducing delivery time
increasing customer satisfaction

E-3. Balanced scorecards contain a number of factors that are important to the success of a business.
These factors are often divided into four categories: financial, customer, learning and growth, and
internal operations.
Consider the twelve factors that follow.
1. Market share
2. Earnings per share
3. Manufacturing cycle efficiency
4. Machine downtime
5. Number of patents held
6. Employee suggestions
7. Number of repeat sales
8. Levels of inventories held
9. Number of vendors used
10. Cash flow from operations
11. Employee training hours
12. Gross margin
Required:
Determine the proper classification (financial, customer, learning and growth, or internal
operations) for each of the twelve factors listed.
E-4. Amber Products Inc. has two product lines: A-1 and A-2. Revenue and cost information for each
of the product lines for 2012 are as follows:
A-1
A-2
Selling price per unit
P60
P45
Variable costs per unit
25
15
Traceable fixed expenses

P40,000

P30,000

In 2012, Amber had common fixed expenses of P50,000, and the company produced and sold 4,000
units of A-1 and 6,000 units of A-2.
Prepare a segmented income statement with a column for each product line and the total company.
E-5. The following data refer to the AIM division of Master Company.
Average selling price
P100
Average variable cost
40
Total fixed costs
P2,000,000
Average investment
P5,000,000
1. How many units must AIM sell to earn an 18% ROI?
2. If the division sells 60,000 units, what will ROI be?
3. The minimum desired ROI is 14%. At the sales volume of 55,000 units, what is RI?
4. The manager desires a 22% ROI and wishes to sell 50,000 units. What selling must the
division charge?
5. Using the original information, if the minimum ROI is 20% and RI is P300,000, what are sales in
units?
E-6. Maxim Products has a division that generated P10,000,000 in sales and operating income of
P1,700,000 on average operating assets of P6,000,000. The company's management team
expects division managers to generate sufficient income to guarantee a minimum return of 30
percent.
1.
2.

What is the division's residual income?

What is the division's return on investment (ROI)?

E-7. Fun Treats Inc. sell a variety of drink and food products including juice and ice cream. The
segmented income statements for these two products are as follows:
Juice
Ice Cream
Sales
P500,000 P600,000
Variable expenses
200,000
300,000

Contribution margin
Traceable fixed expense
Segment margin

300,000
100,000
P200,000

300,000
100,000
P200,000

The company's management is considering a special advertising campaign that will run on a Saturday
morning when many children are watching television. The advertising campaign is expected to cost
P25,000 and only one product can be featured. In-house marketing studies show that the campaign
could increase sales of the juice division by P100,000 or increase sales of the ice cream division by
P100,000.
The marketing supervisor has decided that since both products have the same segment margin, the
company will be equally as well off regardless of which product is featured.
1.
2.

Do you agree or disagree with the marketing supervisor? Why or why not.
Which product do you feel should be featured? Show calculations to support your answer.

E-8. The Carpet Division of Home Products Corporation manufactures a single grade of residential
grade carpeting. The division has the capacity to produce 500,000 square yards of carpet each
year. Its current costs and revenues are shown here:
Sales (400,000 square yards)
P2,000,000
Variable costs per square yard:
Production
P2.00
SG&A
1.00
Fixed costs per square yard (based
on 500,000 yard capacity)
Production
P0.50
SG&A
1.00
The Housing Division currently purchases 40,000 yards of carpeting (of the grade produced by the
Carpet Division) each year at a cost of P6.50 per square yard from an outside vendor.

1.
2.

If the autonomous Housing and Carpet Divisions enter negotiations on the internal transfer of
40,000 square yards of carpeting, what is the maximum price that will be considered?
If the autonomous Housing and Carpet Divisions enter negotiations on the internal transfer of
40,000 square yards of carpeting, what is the Carpet Division's minimum price?

3.

If the Housing and Carpet Divisions agree on the internal transfer of 40,000 square yards of
carpet at a price of P4.50 per square yard, how will the profits of the Housing Division be
affected?

4.

If the Housing and Carpet Divisions agree on the internal transfer of 40,000 square yards of
carpet at a price of P4.00 per square yard, how will overall corporate profits be affected?

5.

Assume, for this question only, that the Carpet Division is producing and selling 500,000
square yards of carpet to external buyers at a price of P5 per square yard. What would be the
effect on overall corporate profits if Carpet Division reduces external sales of carpet by 40,000
square yards and transfers the 40,000 square yards of carpet to the Housing Division?

E-9. Seiko Companys Audio Division produces a speaker that is widely used by manufacturers of
various audio products. Sales and cost data on the speaker follow:
Selling price per unit on the intermediate market
P60
Variable cost per unit
42
Fixed costs per unit
8
PAGE 7
Capacity in units
25,000
Seiko Company has just organized a Hi-Fi Division that could use this speaker in one of its products.
The Hi-Fi Division will need 5,000 speakers per year. It has received a quote of P57 per speaker from
another manufacturer. Seiko Company evaluates divisional managers on the basis of divisional profits.
A. Assume that the Audio Divison is now selling only 20,000 speakers per year to outside
customers on the intermediate market.
1. From the standpoint of the Audio Division, what is the lowest acceptable transfer price for
speakers sold to the Hi-Fi Division?
2. From the standpoint fo the Hi-Fi Division, what is the highest acceptable transfer price for
speakers purchased from the the Audio Division?

B.

3. If left free to negotiate without interference, would you expect the division managers to
voluntarily agree to the transfer of 5,000 speakers from the Audio Divison to the Hi-Fi
Division? Why or why not?
4. From the standpoint of the entire company, should the transfer take place? Why or why
not?
Assume that the Audio Division is selling all of the speakers it can produce to outside
customers on the intermediate market.

1. From the standpoint of the Audio Division, what is the lowest acceptable transfer price for
speakers sold to the Hi-Fi Division?
2. From the standpoint of the Hi-Fi Division, what is the highest acceptable transfer price for
speakers purchased from the Audio Division?
3. If left free to negotiate without interference, would you expect the division managers to
voluntarily agree to the transfer of 5,000 speakers from the Audio Division to the Hi-Fi
Division? Why or why not?
4. From the standpoint of the entire company, should the transfer take place? Why or why
not?
MULTIPLE CHOICE
1.

Which of these is the perspective of the balanced scorecard that is at the top of a nonprofit
organizations mission statement?
a. financial perspective.
b. internal business and production process perspective.
c. learning and growth perspective.
d. customer perspective.

2.

Which of these is the perspective of the balanced scorecard that indicates whether the companys
strategy and operations add value to shareholders?
a. financial perspective.
b. internal business and production process perspective.
c. learning and growth perspective.
d. customer perspective.

3.

Which of these is the perspective of the balanced scorecard that is at the top of the list for a
companys lenders and shareholders?
a. financial perspective.
b. internal business and production process perspective.
c. learning and growth perspective.
d. customer perspective.

4.

Assume an organizations cost of capital is 10% and Division X has operating income of P1.5
million and uses P10 million of capital. The economic value added for Division X is:
a. P100,000
b. P150,000
c. P500,000
d. P850,000

5. The return on investment is usually considered the most popular approach to incorporating the
investment base into a performance measure because
a. it blends all the ingredients of profitability into a single percentage.
b. once determined, there is no need to use it with other measures of performance.
c. it is similar to the company's price earnings ratio in that a corporation's return on investment
appears every day in The Wall Street Journal.
d. of both (a) and (c).
6.

__________ translates an organizations mission and strategy into a comprehensive set of

performance measures that provide the framework for implementing its strategy.
a. Productivity component
b. Product differentiation
c. Cost leadership
d. The balanced scorecard

7.

Identify the BEST description of the balanced scorecards financial perspective. To achieve our
firms vision and strategy,
a. how can we obtain greater profits for the current year?
b. how can we increase shareholder value?
c. how will we obtain continuous improvements?
d. how can we secure greater customer satisfaction?

8.

Identify the BEST description of the balanced scorecards internal business processes perspective.
To achieve our firms vision and strategy,
a. how do we lower costs?
b. how do we motivate employees?
c. how can we obtain greater profits?
d. what processes will increase value to customers?

9. Residual income is a better measure for performance evaluation of an investment center manager
than return on investment because

a.
b.
c.
d.

The problems associated with measuring the asset base are eliminated.
Desirable investment decisions will not be neglected by high return divisions.
Only the gross book value of assets needs to be calculated.
Returns do not increase as assets are depreciated.

10. The optimal transfer price from the viewpoint of the corporation is
a. variable cost
c. variable cost plus opportunity cost
b. absorption cost plus markup
d. absorption cost plus selling expenses
11.

In a decentralized company in which divisions may buy goods from one another, the transferpricing system should be designed primarily to
a. Aid in the appraisal and motivation of managerial performance.
b. Increase in the consolidated value of inventory.
c. Allow division managers to buy from outsiders.
d. Minimize the degree of autonomy of division managers.

12. The minimum potential transfer price is determined by

a. incremental costs in the selling division.
b. the lowest outside price for the good.
c. the extent of idle capacity in the buying division.
d. negotiations between the buying and selling division.
13. If the operating asset turnover increased by 30 percent and the operating income margin
decreased by 30 percent, the ROI would
a. decrease by 9 percent
c. increase by 69 percent
b. increase by 30 percent
d.
increase by 91 percent
14. A firm prepared a segmented income statement that included the following data for
marketing segment:
Fixed costs controllable by the suburban marketing segment manager
Fixed suburban marketing costs controllable by corporate management
Fixed manufacturing costs allocated to the suburban marketing segment
Variable manufacturing costs
Variable selling costs
Variable administrative costs
Net sales
The best measure of the economic performance of the suburban marketing segment
a. P370,000
c. P520,000
b. P10,000
d. P120,000

its suburban
P150,000
P250,000
P110,000
P200,000
P100,000
P130,000
P950,000
is:

15. The First Division of Furrow Company produces Part 1 that is used by OENs as a key part in their
products. Costs and sales data of Part 1 are as follows:
Selling price per unit
P100
Variable cost per unit
60
Fixed cost per unit (Based on 40,000 units capacity per annum)
24
Furrow Companys Second Division is introducing a new product that will use Part 1. An outside
supplier has quoted Second Division a price of P96 per unit. This represents the usual P100 price
less a quantity discount due to the large number of Second Divisions requirement.
If the Second Division would buy 15,000 units of Part 1 from the First Division, the effect on the
corporate profits would be
a. Increase by P240,000.
c. Increase by P210,000.
b. Increase by P1,500,000.
d. Reduce by P60,000.
16. Division A of Harkin Company has the capacity for making 3,000 motors per month and regularly
sells 1,950 motors each month to outside customers at a contribution margin of P62 per motor.
Division B of Harkin Company would like to obtain 1,400 motors each month from Division A.
What should be the lowest acceptable transfer price from the perspective of Division A?
a. P26.57
c. P35.70
b. P15.50
d. P62.00