Chapter 16 - Operational Performance Measurement: Further Analysis of Productivity and Sales

Read ings

16-1: PROFIT VARIANCE ANALYSIS:

A STRATEGIC FOCUS
that variance analysis becomes most meaningful
By Vijay Govindarajan and John K. Shank
when it is tied exp licitly to strategic analysis.

Profit variance analysis is the process of

summarizing what happened to profits during the
period to highlight the salient managerial issues.
Variance analysis is the formal step leading to
determining what correct ive actions are called fo r by
management. Thus it is a key link in the management
control process. We believe this element is
underutilized in many co mpanies because of the lack
of a meaningful analytical framework. It is handled
by accountants in a way that is too technical. This
paper proposes a different profit variance framework
as a “new idea” in management control.
Historically, variance analysis involved a simple
methodology where actual results were compared
with the budget on a line-by-line basis. We call this
Phase I thinking. Phase II thinking was provided by
Shank and Churchill [1977] who proposed a
management-oriented approach to variance analysis.
Their approach was based on the dual ideas of profit
impact as a unifying theme and a mult ilevel analysis
in which co mplexity was added gradually, one level
at a time. We believe that the Shank and Churchill
approach needs to be modified in important ways to
take explicit account of strategic issues. Our
framework, which we call Phase III thinking, argues

TABLE 1
UNITED INSTRUMENTS, INC.
Budget (1,000s)
Sales $16,872
Cost of goods sold 9,668
Gross margin $ 7,204
Less: Other operating expenses
Marketing $1,856 $1,440
R&D 1,480 932
Administration 1,340 4,676 1,674
Profit before taxes $ 2,528

16-4
Chapter 16 - Operational Performance Measurement: Further Analysis of Productivity and Sales
This paper presents a short disguised case,
United Instruments, Inc., to illustrate the three phases
or generations of thinking about profit variance
analysis. We believe it also demonstrates the
superiority of integrating strategic planning and
overall financial performance evaluation, wh ich is the
essence of Phase III thinking. The purpose of this
paper is to emphasize how variance analysis can be,
and should be, redirected to consider the strategic
issues that have, during the past 15 years, become so
widely accepted as a conceptual framewo rk for
decision making.
UNITED INSTRUMENTS, INC.:
AN INS TRUCTIONAL CAS E1
Steve Park, president and principal stockholder
of Un ited Instruments, Inc., sat at his desk reflecting
on the 1987 results (Table 1). For the second year in
succession, the company had exceeded the profit
budget. Steve Park was obviously very happy with
the 1987 results. All the same, he wanted to get a
better feel for the relat ive contributions of the R&D,
manufacturing, and market ing departments in this
overall success. With this in mind, he called his
assistant, a recent graduate of a well-known business
school, into his office.
“Amy,” he began, “as you can see from our
recent financial results, we have exceeded our profit
targets by $622,000. Can y ou prepare an
analysis showing how much R&D,
manufacturing, and marketing contributed to t his
overall favorable profit variance?”
Amy Shult z, with all the fervor of a recent
convert to professional management, set to her task
immed iately. She collected the data in Table 2 and
was wondering what her next step should be.
United Instruments’ products can be grouped
into two main lines of business: electric meters (EM)
and electronic instruments (EI). Both EM and EI are
industrial measuring instruments and perform similar
functions. However, these products differ in their
manufacturing technology and their end-use
characteristics. EM is based on mechanical and
electrical technology, whereas EI is based on
microchip technology. EM and EI are substitute
products in the same sense that a mechanical watch
and a digital watch are substitutes.
United Instruments uses a variable costing
system for internal reporting purposes.
16-5
PHAS E I THINKING: THE “ ANNUAL REPORT
APPROACH” TO VARIANCE ANALYS IS
A straightforward, simple -minded explanation of the
difference between actual profit ($3,150) and the
budgeted profit ($2,528) might proceed according to
T-3. Incidently, this type of variance analysis is what
one usually sees in published annual reports (where
the comparison is typically between last year and this
year). If we limit ourselves to this type of analysis,
we will draw the following conclusions about
United’s performance:
1. Good sales performance (slightly above plan).
2. Good manufacturing cost control (marg ins as per
plan).
3. Good control over marketing and R&D costs
(costs down as percentage of sales).
4. Admin istration overspent a bit (slightly up as
percentage of sales).
5. Overall Evaluation: Nothing of major
significance; profit performance above plan.
How accurately does this summary reflect the
actual performance of United? One objective of this
paper is to demonstrate that the analysis is
misleading. The plan for 1987 has embedded in it
certain expectations about the state of the total
industry and about United’s market share, its selling
prices, and its cost structure. Results from variance
computations are more “actionable” if changes in
actual results for 1987 are analyzed against each of
these expectations. The Phase I analysis simp ly does
not break down the overall favorable variance of
$622,000 according to the key underlying causal
factors.
PHAS E II THINKING: A MANAGEMENT-
ORIENT ED APPROACH TO VARIANCE
ANALYS IS
The analytical framework proposed by Shank and
Churchill [1977] to conduct variance analysis
incorporates the following key ideas:
1. Identify the key causal factors that affects profit.
2. Break down the overall profit variance by these
key causal factors.
3. Focus always on the profit impact of variat ion in
each causal factor.
Chapter 16 - Operational Performance Measurement: Further Analysis of Productivity and Sales

TABLE 2
ADDITIONAL INFORMATION
Electric Electronic
Meters Instruments
(EM) (EI)
Selling prices per unit
A verage standard price $40.00 $180.00
A verage actual prices, 1987 30.00 206.00
Variable product costs per unit
A verage standard manufacturing cost $20.00 $50.00
A verage actual manufacturing cost 21.00 54.00
Volume information
Units produced and sold–actual 141,770 62,172
Units produced and sold–planned 124,800 66,000
Total industry sales, 1987–actual $44 million $76 million
Total industry variable product costs, 1987–actual $16 million $32 million
United’s share of the market (percent of physical units)
Planned 10% 15%
Actual 16% 9%
Planned Actual
Firm-wide fixed expens es (1,000s)
Fixed manufacturing expenses $3,872 $3,530
Fixed marketing expenses 1,856 1,440
Fixed administrative expenses 1,340 1,674
Fixed R&D expenses
(exclusively for electronic instruments) 1,480 932

4. Try to calculate the specific, separable impact of Marketing

each causal factor by varying only that factor Co mments:
while hold ing all other factors constant Market Share (SOM) increase benefited
(“spinning only one dial at a time”). the firm $1,443 F
But, unfortunately, sales mix was managed
5. Add complexity sequentially, one layer at a time,
toward the lower marg in product 921 U
beginning at a very basic “common sense” level
(“peel the onion”). Control over marketing expenditure
benefited the firm (especially in the face of
6. Stop the process when the added complexity at a an increase in SOM) 416 F
newly created level is not justified by added
useful insights into the causal factors underlying Net effect $938 F
the overall profit variance. Uncontrollables: Unfortunately, the overall
market declined and cost the firm $680 U
T-4 and 5 contain the explanation for the overall Overall evaluation: Very good performance
favorable profit variance of $622,000 using the above Manufacturing
approach. In the interest of brevity, most of the Co mments:
calculation details are suppressed (detailed Manufacturing cost control cost the $ 48 U
calculations are available fro m the authors). firm
What can we say about the performance of Overall evaluation: Sat isfactory performance
United if we now consider the variance analysis R&D
summarized in T-5? The following insights can be Co mments:
offered organized by functional area: Savings in R& D budget $ 548 F
Overall evaluation: Good perfo rmance
Administration
Co mments:
Admin istration budget overspent $ 334 U
Overall evaluation: Poor performance

16-6
 Chapter 16 - Operational Performance Measurement: Further Analysis of Productivity and Sales
TABLE 3
THE “ANNUAL REPORT APPROACH” TO VARIANCE ANALYSIS
Budget (1,000s)
Sales $16,872
Cost of goods sold 9,668
Gross margin $ 7,204
Less: Other expenses
Marketing $1,856 (11% )
R&D 1,480 (9%)
Administration 1,340 (8%) 4,676
Profit before tax $ 2,528
Thus, the overall evaluation of the general
manager under Phase II thinking would probably be
“good,” though specific areas (such as manufacturing
cost control or admin istrative cost control) need
attention. The above summary is quite different—
and clearly superior —to the one presented under
Phase I thinking. But, can we do better? We believe
that Shank and Churchill’s framework needs to be
modified in important ways to accommodate the
following ideas.
Sales volume, share of market, and sales mix
variances are calculated on the presumption that
United is essentially co mpeting in one industry (i.e.,
it is a single product firm with two different varieties
of the product). That is to say, the target customers
for EM and EI are the same and that they view the
two products as substitutable. Is United a single
product firm with two product offerings, or does the
firm co mpete in two different markets? In other
words, does United have a single strategy for EM and
EI or does the firm have two different strategies for
the two businesses? As we argue later, EM and EI
have very different industry characteristics and
compete in very different markets, thereby, requiring
quite different strategies. It is, therefore, more useful
to calculate market size and market share variances
separately for EM and EI. Just introducing the
concept of a sales mix variance implies that the
average standard profit contribution across EM and
EI together is meaningful.
For an ice cream manufacturer, for examp le, it is
probably reasonable to assume that the firm operates
in a single industry with multip le product offerings,
all targeted at the same customer group. It would,
therefore, be meaningful to calculate a sales mix
variance because vanilla ice cream and strawberry ice
cream, for instance, are substitutable and more sales
of one imp lies less sales of the other for the firm (for
an elaboration on these ideas, refer to the Midwest
Ice Cream Co mpany case [Shank, 1982, pp. 157–
173]). On the other hand, for a firm such as General
Electric, it is much less clear whether a sales mix
16-7
Actual (1,000s)
(100%) $17,061 (100%)
(58% ) 9,865 (58% )
(42% ) $ 7,196 (42% )
$1,440 (8%)
932 (6%)
(28% ) 1,674 (10% ) 4,046 (24% )
(14% ) $ 3,150 (18% )
variance across jet engines, steam turbines, and light
bulbs really makes any sense. This is more nearly the
case for United because one unit of EM (which sells
for $30) is not really fully substitutable for one unit
of EI (wh ich sells for $206).
An important issue in the history of many
industries is to determine when product
differentiation has progressed sufficiently that what
was a single business with two varieties is now two
businesses. Some examp les include the growth of the
electronic cash register for NCR, the growth of the
digital watch for Bu lova, or the growth of the
industrial robot for General Electric.
Following Phase II thinking, performance
evaluation did not relate the variances to the differing
strategic contexts facing EM and EI.
PHAS E III THINKING: VARIANCE ANALYS IS
US ING A STRATEGIC FRAMEWORK
We argue that performance evaluation, which is a
critical co mponent of the management control
process, needs to be tailored to the strategy being
followed by a firm o r its business units. We offer the
following set of arguments in support of our position:
(1) different strategies imply different tasks and
require different behaviors for effective performance
[Andrews, 1971; Gupta and Govindarajan, 1984a;
and Govindarajan, 1986a]; (2) different control
systems induce different behaviors [Govindarajan,
1986b; Gupta and Govindarajan, 1984b]; (3) thus,
superior performance can best be achieved by
tailoring control systems to the requirements of
particular strategies [Govindarajan, 1988; Gupta and
Gov indarajan, 1986].
Chapter 16 - Operational Performance Measurement: Further Analysis of Productivity and Sales

TABLE 4
VARIANCE CALCULATIONS US ING SHANK AND CHURCHILL’S
MANAGEMENT-ORIENT ED FRAMEWORK

Key Causal Factors:

Total Market Expected Actual Actual Actual Actual Actual
Market share Expected Expected Actual Actual Actual Actual
Sales mix Expected Expected Expected Actual Actual Actual
Selling price Expected Expected Expected Expected Actual Actual
Costs Expected Expected Expected Expected Expected Actual

Profit Calcu lation:

Sales $16,872 $15,836 $18,034 $16,862 $17,060 $17,060
Variable costs 5,769 5,440 6,195 5,944 5,944 6,334
Contribution $11,076 $10,396 $11,839 $10,918 $11,116 $10,726
Fixed costs 8,548 8,548 8,548 8,548 8,548 7,576
Profit $ 2,528 $ 1,848 $ 3,291 $ 2,370 $ 2,568 $ 3,150
Variance Analysis:
Level 1
Overall variance=$622 F

Level 2
Sales volu me and mix=$158 U Sales prices and costs=$780 F

Level 3 Sales mix Sales prices Costs

Sales volu me=$763 F =$921 U =$198 F =$582 F
Level 4
Market EM EI Variable costs of Fixed costs
Size Market Share $1,418 U $1,616 manufacturing  Manufacturing $342 F
=$680 U =$1,443F EM $142 U  Marketing $416 F
EI $248 U  Admin istration $334 U
 R&D $548 F

Note: F indicates a favorable variance and U indicates an unfavorable variance.

16-8
Chapter 16 - Operational Performance Measurement: Further Analysis of Productivity and Sales
TABLE 5
VARIANCE SUMMARY FOR THE PHASE II APPROACH
Overall market decline
Share of market increase
Sales mix change
Sales prices improved
EM
EI
Manufacturing cost control
Variable costs
Fixed costs
Other
R&D
Administration
Marketing
Total
We will first define and briefly elaborate the
concept of strategy before illustrating how to link
strategic considerations with variances for
management control and evaluation. Strategy has
been conceptualized by Andrews [1971], Ansoff
[1965], Chandler [1962], Gov indarajan [1989], Hofer
and Schendel [1978], M iles and Snow [1978], and
others as the process by which managers, using a
three- to five-year t ime horizon, evaluate external
environmental opportunities as well as internal
strengths and resources in order to decide on goals
as well as a set of action plans to accomplish these
goals. Thus, a business unit’s (or a firm’s) strategy
depends upon two interrelated aspects: (1) its
strategic mission or goals, and (2) the way the
business unit chooses to compete in its industry to
accomplish its goals—the business unit’s competitive
strategy.
Turning first to strategic mission, consulting
firms such as Boston Consulting Group [Henderson,
1979], Arthur D. Little[Wright, 1975], and A. T.
Kearney [Hofer and Davoust, 1977], as well as
academic researchers such as Hofer and Schendel
[1978], Bu zzell and Wiersema [1981], and
Gov indarajan and Shank [1986], have proposed the
following three strategic missions that a business unit
can adopt:
B UILD:
This mission implies a goal of increased market
share, even at the expense of short-term earn ings
and cash flow. A business unit following this
mission is expected to be a net user of cash in
that the cash throw-off fro m its current
operations would usually be insufficient to meet
Blocher,Stout,Cokins: Cost Management 5e 16-9
$ 680 U
1,443 F
921 U
198 F
$1,418 U
$1,616 F
48 U
$390 U
$342 F
548 F
334 U
416 F
$ 622 F
its capital investment needs. Business units with
“low market share” in “high growth industries”
typically pursue a “build” mission (e.g., Apple
Co mputer’s MacIntosh business, Monsanto’s
Biotechnology business).
HOLD:
This strategic mission is geared to the protection
of the business unit’s market share and
competitive position. The cash outflows for a
business unit follo wing this mission would
usually be more or less equal to cash inflows.
Businesses with “high market share” in “high
growth industries” typically pursue a “hold”
mission (e.g., IBM in main frame co mputers).
HARVEST:
This mission imp lies a goal of maximizing short-
term earn ings and cash flow, even at the expense
of market share. A business unit following such
a mission would be a net supplier of cash.
Businesses with “high market share” in “low
growth industries” typically pursue a “harvest”
mission (e.g., American Brands in tobacco
products).
In terms of co mpetitive strategy, Porter [1980]
has proposed the following two generic ways in
which businesses can develop sustainable
competitive advantage:
©The M cGraw-Hill Companies, Inc 2010
 Chapter 16 - Operational Performance Measurement: Further Analysis of Productivity and Sales

TABLE 6 STRATEGIC CONTEXTS OF THE TWO BUSINESSES

LOW COST:
Electric Meters (EM) Electronic Instruments (EI)
Overall market (units):
Plan 1,248,000 440,000
Actual 886,080 690,800
Declining Market Growth Market
(29% Decrease) (57% Increase)
United’s share:
Plan 10% 15%
Actual 16% 9%
United’s prices:
Plan $40 $180
Actual 30 206
We apparntly cut price to build We apparently raised price to ration
United’s margin : share the high demand.
Plan $20 $130
Actual 9 152
Industry prices:
Actual $50 $110
We are well below “market.” We are well above “market.”
Industry costs:
Actual $18 $46
Procuct/market characteristics: Mature Evolv ing
Lower technology Higher technology
Declining market Growth market
Lower margins Higher margins
Low unit price High unit price
Industry prices holding up Industry prices falling rapidly
United’s apparent strategic mission “Build” “Skim” or “Harvest”
United’s apparent competitive strategy The low p rice imp lies we are trying The high price imp lies we are try ing
for low cost position for a d ifferentiation position.
A more plausible strategy “Harvest” “Build”
Key success factors (arising fro m the Hold sales prices vis-à-vis Co mpetitively price to gain SOM.
plausible strategy) competition.
Do not focus on maintaining and Product R&D top create differentiat ion
improving SOM.
Aggressive cost control Lower cost through
Process R&D to reduce unit costs. experience curve effects

The primary focus of this strategy is to achieve DIFFER ENTIATION:

low cost relat ive to co mpetitors. Cost leadership
can be achieved through approaches such as
economies of scale in production, learning curve
effects, tight cost control, and cost minimizat ion
in areas such as R&D, service, sales force, or
advertising. Examp les of firms following this
strategy include: Texas Instruments in consumer
electronics, Emerson Electric in electric motors,
Chevrolet in automobiles, Briggs and Stratton in
gasoline engines, Black and Decker in mach ine
tools, and Commodore in business machines.
The primary focus of this strategy is to
differentiate the product offering of the business
unit, creating something that is perceived by
customers as being unique. Approaches to a
product differentiation include brand loyalty
(Coca-Co la in soft drinks), superior customer
service (IBM in co mputers), dealer network
(Caterp illar Tractors in construction equipment),
product design and product features (Hewlett-
Packard in electronics), and/or product
technology (Coleman in camp ing equip ment).

Blocher,Stout,Cokins: Cost Management 5e 16-10 ©The M cGraw-Hill Companies, Inc 2010

 Chapter 16 - Operational Performance Measurement: Further Analysis of Productivity and Sales

TABLE 7 VARIANCE CALCULATIONS USING A STRATEGIC FRAMEWORK

Key Casual Factors:
Total market Expected Actual Actual Actual Actual
Market share Expected Expected Actual Actual Actual
Selling price Expected Expected Expected Actual Actual
Variable costs Expected Expected Expected Expected Actual
Electric Meters (EM)
Sales $ 4,992 $ 3,544 $ 5,671 $ 4,253 $ 4,253
Variable costs 2,496 h are als 2,835 2,835 2,835 2,977
Contribution $ 2,496 $ 1,772 $ 2,836 $ 1,418 $ 1,276

Manufacturing
Market sizee Market share Sales price Cost
=$724 U =$1,064 F =$1,418 U =$142 U

Electronic Instruments (EI)

Sales $11,880 $18,652 $11,191 $12,807 $12,807
Variable costs 3,300 5,181 3,109 3,109 3,357
Contribution $ 8,580 $13,471 $ 8,082 $ 9,698 $ 9,450

Market size Market share Sales price Manufacturing

Cost
=$4,891 F =$5,389 U =$1,616 F =$248 U

Firmwide Fixed Costs (by responsibility centers)

Budget Actual Vari ance
Manufacturing $3,872 $3,530 $342 F
Marketing 1,856 1,440 416 F
Admin istration 1,340 1,674 334 U
R&D 1,480 932 548 F

The above framework allows us to consider
explicit ly the strategic positioning of the two
product groups: electric meters and electronic
instruments. Though they both are industrial
measuring instruments, they face very different
competitive conditions that very probably call
for different strategies. T-6 summarizes the
differing environments and the resulting strategic
issues.
How well did electric meters and electronics
instruments perform, given their strategic contexts?
The relevant variance calculations are given in Tables
7 and 8. These calculations differ fro m Phase II
analysis (given in T-4) in one important respect. T-4
treated EM and EI as two varieties of one product,
competing as substitutes, with a single strategy. Thus,
a sales mix variance was computed. Tables 7 and 8
treat EM and EI as different products with dissimilar
Blocher,Stout,Cokins: Cost Management 5e 16-11
strategies. Therefore, no attempt is made to calcu late
a sales mix variance. The basic idea is that even
though a sales mix variance can always be calcu lated,
the concept is meaningful only when a single
business framework is applicable. For the same
reason, Tables 7 and 8 report the market size and
market share variances for EM and EI separately, and
T-4 reported these two variances for the instruments
business as a whole. Obviously, a high degree of
subjectivity is involved in deciding whether United is
in one business or two. The fact that the judgment is
to a large extent subjective does not negate its
importance. T-9 summarizes the managerial
performance evaluation that would result if we were
to evaluate EM and EI against their plausible
strategies, using the variances reported in T-7 and 8.
©The M cGraw-Hill Companies, Inc 2010
Chapter 16 - Operational Performance Measurement: Further Analysis of Productivity and Sales
TABLE 8 VARIANCE SUMMARY FOR THE PHASE III APPROACH
Electric Meters
Market size
Market share
Sales price
Variable manufacturing cost
Electronic Instruments
Market size
Market share
Sales price
Variable manufacturing cost
R&D
Firm wide Fixed Costs
Manufacturing
Marketing
Admin istration
TOTA L
The overall performance of United would
probably be judged as “unsatisfactory.” The firm has
not taken appropriate decisions in its functional areas
(marketing, manufacturing, R&D, and
administration) either for its harvest business (EM ) or
for its build business (EI). The summary in T-9
indicates a dramatically different picture of United’s
performance than the one presented under Phase II
thinking. This is to be expected because Phase II
thinking did not tie variance analysis to strategic
objectives. Neither Phase I nor Phase II analysis
explicit ly focused on ways to improve performance
en route to accomplishing strategic goals. This would
then imply that management compensation and
rewards ought not to be tied to performance
assessment undertaken using Phase I or Phase II
frameworks.
CONCLUS IONS
Variance analysis represents a key link in the
management control process. It involves two steps.
First, one needs to break down the overall profit
variance by key causal factors. Second, one needs to
put the pieces back together most meaningfully with
a view to evaluating managerial performance. Putting
the bits and pieces together most meaningfully is just
as crucial as computing the pieces. This is a
managerial function, not a computational one.
Blocher,Stout,Cokins: Cost Management 5e 16-12
$ 724 U
1,064 F
1,418 U
142 U
4,891 F
5,389 U
1,616 F
248 U
548 F
342 F
416 F
334 U
$ 622 F
Phase I, Phase II, and Phase III thinking yield
different imp licat ions for this first step. That is, the
detailed variance calculations do differ across the
three approaches. Their implications differ even more
for the second step. The computational aspects
identify the variance as either favorable or
unfavorable. However, a favorable variance does not
necessarily imp ly favorable performance; similarly,
an unfavorable variance does not necessarily imply
unfavorable performance. We argue that the link
between a favorable or unfavorable variance, on the
one hand, and favorable or unfavorable performance,
on the other, depends upon the strategic context of
the business under evaluation.
No doubt, judgments about managerial
performance can be dramatically different under
Phase I, Phase II, and Phase III thin king (as the
United Instruments case illustrates). In our view,
moving toward Phase III thinking (i.e., analyzing
profit variances in terms of the strategic issues
involved) represents progress in adapting cost
analysis to the rise of strategic analysis as a major
element in business thinking [Shank and
Gov indarajan, 1988a, 1988b, and 1988c].
©The M cGraw-Hill Companies, Inc 2010
Chapter 16 - Operational Performance Measurement: Further Analysis of Productivity and Sales

TABLE 9
PERFORMANCE EVALUATION SUMMARY FOR PHASE III APPROACH

Electric Meters Electronic Instruments

“Harvest” vs. “Build” “Build” vs. “Skim”

Marketing
Comments If we held prices and share, decline in We raised prices to maintain margins
this mature business would have cost and to ration our scarce capacity (our
us $ 724 U price was $206 vs. The industry price
of $110). In the process, we lost
But, we were further hurt by price cuts
significant SOM whic h cost us (netted
made in order to build our SOM (our
against $1,616 F from sales prices).
prices was $30 vs. the industry price
$3,773 U
of $50). $1,418 U
1,064 F This is a booming market that grew
57 percent during this period. Then
Net effect $1,078 U
why did we decide to improve
This is a market that declined 29 margins at the expense of SOM in
percent. Why are we sacrificing this fast growing, higher margin
margins to build market position in business?
this mature, declining lower margin
Fortunately, growt h in the total market
business?
improved our profit picture.
We unders pent t he marketing budget. $4,891 F
$ 416 F
We unders pent t he marketing budget.
But why are we cutting back here in $416 F
the face of our major marketing
But why are we cutting back here in
problems?
the face of our major marketing
problems?
Overall evaluation Poor performance Poor performance
Manufacturing
Comments Manufacturing cost cont rol was lousy Variable Manufacturing costs showed
and cost the firm $142 U an unfavorable variance of $248 U
(industry costs of $46 vs. our costs of
If we are trying to be a cost leader,
$54).
where are t he benefits of our
cumulative experience or our scale Does the higher manufacturing cost
economies? (industry unit costs of result in a product perceived as
$18 vs. our costs of $21) better? Apparently not based on
market share dat a.
Overall evaluation Poor performance Poor performance

R&D Not applicable Why are we not s pending sufficient

Comments dollars in product R& D? Could this
explain our decline in SOM?
Overall evaluation Poor performance

Administration Inadequate control over overhead Administration budget overspent.

Comments costs, given the need to become the $334 U How does this relate to cost
low cost producer ($334 U). control?
Overall evaluation Poor performance Not satisfactory

Blocher,Stout,Cokins: Cost Management 5e 16-13 ©The M cGraw-Hill Companies, Inc 2010

Chapter 16 - Operational Performance Measurement: Further Analysis of Productivity and Sales
REFERENCES
Andrews, K.R., The Concept of Corporate Strategy
(Ho mewood, IL: Dow-Jones Irwin, 1971).
Ansoff, H.I., Corporate Strategy (New York:
McGraw-Hill, 1965).
Buzzell, R.D., B.T. Gale, and R.G.M . Su ltan,
“Market Share—A Key to Profitability,”
Harvard Business Review (January-February
1975), pp. 97–106. _______, and F.D.
Wiersema, “Modelling Changes in Market
Share: A Cross-Sectional Analysis,” Strategic
Management Journal (January-March 1981), pp.
27– 42.
Chandler, A.D., Strategy and Structure (Cambridge,
MA: The MIT Press, 1962).
Gov indarajan, V., “Imp lementing Co mpetit ive
Strategies at the Business Unit Level:
Implications of Matching Managers to
Strategies,” Strategic Management Journal
(May-June 1989), pp. 251–269.
_______, “Decentralization, Strategy, and
Effectiveness of Strategic Business Units in
Multi-Business Organizations,” Academy of
Management Review (October 1986a), pp. 844–
856.
_______, “Impact of Participation in the Budgetary
Process on Managerial Attitudes and
Performance: Universalistic and Contingency
Perspectives,” Decision Sciences (1986b), pp.
496–516.
_______, “A Contingency Approach to Strategy
Implementation at the Business Unit Level:
Integrating Management Systems with Strategy,”
Academy of Management Journal (September
1988).
_______, and A.K. Gupta, “Linking Control Systems
to Business Unit Strategy: Impact on
Performance,” Accounting, Organizations and
Society (1985), pp. 51– 66.
_______, and J.K. Shank, “Cash Sufficiency: The
Missing Link in Strategic Planning,” The
Journal of Business Strategy (Summer 1986), pp.
88– 95.
Gupta, A.K., and V. Govindarajan, “Business Unit
Strategy, Managerial Characteristics, and
Business Unit Effectiveness at Strategy
Implementation,” Academy of Management
Journal (March 1984a), pp. 25– 41.
_______, and _______, “Build, Hold, Harvest:
Converting Strategic Intentions into Reality,”
Journal of Business Strategy (Winter 1984b), pp.
34– 47.
_______, and _______, “Resource Sharing Among
SBUs: St rategic Antecedents and Admin istrative
Blocher,Stout,Cokins: Cost Management 5e 16-14
Implications,” Academy of Management Journal
(December 1986), pp. 695– 714.
Henderson, B.D., Henderson on Corporate Strategy
(Camb ridge, MA : Abt Books, 1979).
Hofer, C.W., and M.J. Davoust, Successful Strategic
Management (Chicago, IL: A.T. Kearney, 1977).
_______, and D.E. Schendel, Strategy Formulation:
Analytical Concepts (St. Pau l, M N: West
Publishing, 1978).
“Midwest Ice Cream Co mpany,” in J.K. Shank, Ed.,
Contemporary Management Accounting: A
Casebook (Englewood Cliffs, NJ: Prentice-Hall,
1982), pp. 157–173.
Miles, R.E., and C.C. Snow, Organizational Strategy,
Structure and Process (New Yo rk: McGraw
Hill, 1978).
Porter, M.E., Competitive Strategy: Techniques for
Analyzing Industries and Competitors (New
Yo rk: The Free Press, 1980).
Shank, J.K., Contemporary Management Accounting:
A Casebook (Englewood Cliffs, NJ: Prentice-
Hall, 1982).
_______, and N.C. Churchill, “Variance Analysis: A
Management-Oriented Approach,” The
Accounting Review (October 1977), pp. 950–
957.
_______, and V. Govindarajan, “Making Strategy
Exp licit in Cost Analysis: A Case Study, “ Sloan
Management Review (Spring 1988a), pp. 19– 29.
_______, and _______, “Transaction-Based Costing
for the Co mp lex Product Line: A Field Study,”
Journal of Cost Management (Su mmer 1988b),
pp. 31– 38.
_______, and _______, “Strategic Cost Analysis—
Differentiating Cost Analysis and Control
According to the Strategy Being Followed,”
Journal of Cost Management (Fall 1988c).
Wright, R.V.L., A System for Managing Diversity
(Camb ridge, MA : Arthur D. Little, Inc., 1975).
©The M cGraw-Hill Companies, Inc 2010