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Cost Accounting Horngreen, Datar, Foster Strategy, Balanced Scorecard, and Strategic Profitability Analysis Chapter 13.

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Presentation on theme: "Cost Accounting Horngreen, Datar, Foster Strategy, Balanced Scorecard, and Strategic Profitability Analysis Chapter 13."— Presentation transcript:

1 Cost Accounting Horngreen, Datar, Foster Strategy, Balanced Scorecard, and Strategic Profitability Analysis Chapter 13

2 Cost Accounting Horngreen, Datar, Foster Learning Objective 1 Recognize which of two generic strategies a company is using.

3 Cost Accounting Horngreen, Datar, Foster What is Strategy? Strategy describes how an organization matches its own capabilities with the opportunities in the marketplace to accomplish its overall objectives. What is the focus of industry analysis? Competitors Potential entrants into the market Equivalent products Bargaining power of customers Bargaining power of input suppliers

4 Cost Accounting Horngreen, Datar, Foster Basic Strategies Implementation of Strategy : Management accountants design reports to help managers track progress in implementing strategy. 1. Product differentiation 2. Cost leadership

5 Cost Accounting Horngreen, Datar, Foster The Balanced Scorecard The scorecard measures an organizations performance from four perspectives: 1.Financial 2.Customer 3.Internal business processes 4.Learning and growth

6 Cost Accounting Horngreen, Datar, Foster Learning Objective 2 Identify what comprises reengineering.

7 Cost Accounting Horngreen, Datar, Foster Reengineering Definition: Reengineering is the fundamental rethinking and redesign of business processes to achieve improvements in critical measures of performance such as cost, quality, service, speed, and customer satisfaction.

8 Cost Accounting Horngreen, Datar, Foster Reengineering Example Customers needs identified Purchase order issued Production scheduled Manufacturing completed Finished goods to inventory Quantities to be shipped matched against purchase order Shipping documents sent to Billing Department Invoice issued Customer payment follow up Dallas Co. order delivery system:

9 Cost Accounting Horngreen, Datar, Foster Reengineering Example The following was determined: Frequently, there is a long waiting time before production begins in the manufacturing department. Sometimes items are held in inventory until a truck is available for shipment. If the quantity shipped does not match the number of items requested by the customer, a special shipment must be scheduled. Dallas discovered that the many transfers across departments slowed down the process and created delays. A multifunctional team reengineered the order delivery process.

10 Cost Accounting Horngreen, Datar, Foster Reengineering Example A customer relationship manager is responsible for each customer. Dallas will enter into long-term contracts with customers specifying quantities and prices. The customer relationship manager will work with the customer and manufacturing to specify delivery schedules one month in advance. The schedule of customer orders will be sent electronically to manufacturing. Completed items will be shipped directly from the manufacturing plant to customer sites. Each shipment will automatically trigger an invoice to be sent electronically to the customer.

11 Cost Accounting Horngreen, Datar, Foster Learning Objective 3 Present the four perspectives of the balanced scorecard.

12 Cost Accounting Horngreen, Datar, Foster Perspectives of Performance 1. Financial 2. Customer 3. Internal business process 4. Learning and growth

13 Cost Accounting Horngreen, Datar, Foster Financial Perspective Objective: Increase shareholder value Measures: Increase in operating income Initiatives: Target Performance Actual Performance Manage costs of unused capacity Build strong customer relationships $2,000,000 $3,000,000 6% Build strong customer relationships $2,100,000 $3,420, %

14 Cost Accounting Horngreen, Datar, Foster Customer Perspective Objectives: Increase market share & Increase customer satisfaction Measures: Market share & Customer satisfaction survey Initiatives: Target Performance Actual Performance Identify future needs of customer Identify new target customer segments 6% 7 90% give top two ratings Increase customer focus of sales organization 7% 8 87% give top two ratings

15 Cost Accounting Horngreen, Datar, Foster Internal Business Process Perspective Objectives: Improve manufacturing quality and productivity, Meet specified delivery dates Measures: Yield, On-time delivery Initiatives: Target Performance Actual Performance Identify problems and improve quality Reengineer order delivery process 78% 92% 79.3% 90%

16 Cost Accounting Horngreen, Datar, Foster Learning and Growth Perspective Objectives: Align employee and organization goals, Improve manufacturing processes Measures: Employee satisfaction survey, Improvements in process controls Initiatives: Target Performance Actual Performance Employee participation and suggestion program to build teamwork Organize R&D/ manufacturing teams to modify processes 80% of employees give top two ratings 5 88% of employees give top two ratings 5

17 Cost Accounting Horngreen, Datar, Foster Aligning the Balanced Scorecard to Strategy Different strategies call for different scorecards. What are some of the financial perspective measures? Operating income Revenue growth Cost reduction is some areas Return on investment What are some of the customer perspective measures? Market share Customer satisfaction Customer retention percentage Time taken to fulfill customers requests

18 Cost Accounting Horngreen, Datar, Foster Aligning the Balanced Scorecard to Strategy What are some of the internal business perspective measures? Innovation Process: Manufacturing capabilities, Number of new products or services, New product development time, Number of new patents Operations Process: Yield Defect rates, Time taken to deliver product to customers, Percentage of on-time delivery, Percentage of on-time delivery, Setup time, Manufacturing downtime Post-sales service: Time taken to replace or repair defective products, Hours of customer training for using the product

19 Cost Accounting Horngreen, Datar, Foster Aligning the Balanced Scorecard to Strategy What are some of the learning and growth perspective measures? Employee education and skill level Employee satisfaction scores Employee turnover rates Information system availability Percentage of processes with advanced controls

20 Cost Accounting Horngreen, Datar, Foster Pitfalls When Implementing a Balanced Scorecard What pitfalls should be avoided when implementing a balanced scorecard? Dont assume the cause-and-effect linkages to be precise. Dont seek improvements across all measures all the time. Dont use only objective measures on the scorecard. Dont fail to consider both costs and benefits of initiatives such as spending on information technology and research and development. Dont ignore nonfinancial measures when evaluating managers and employees. Dont use too many measures.

21 Cost Accounting Horngreen, Datar, Foster Learning Objective 4 Analyze changes in operating income to evaluate strategy.

22 Cost Accounting Horngreen, Datar, Foster Evaluating the Success of a Strategy Assume the following operating incomes: Year 2003 Year 2004 Revenues: (1,000,000 × $26)$26,000,000 (1,100,000 × $24)$26,400,000 Expenses: Materials 4,050,000 3,631,320 Other 16,000,000 16,000,000 Operating income$ 5,950,000$ 6,768,680

23 Cost Accounting Horngreen, Datar, Foster Evaluating the Success of a Strategy How can the increase in operating income of $818,680 be evaluated? Growth Price recovery Productivity Growth Component: For 2003, Dallas produced and sold 1,000,000 units at $26 per unit. During the year 2004, Dallas produced and sold 1,100,000 units at $24 per unit. What is the revenue effect of growth?

24 Cost Accounting Horngreen, Datar, Foster Growth Component Revenue effect of growth component Actual units of output sold in 2004 Actual units of output sold in 2003 Output price in 2003 (1,100,000 – 1,000,000) × $26 = $2,600,000 F This component is favorable because it increases operating income. = – ×

25 Cost Accounting Horngreen, Datar, Foster Growth Component Cost effect of growth component Actual units of input or capacity that would have been used in 2003 to produce year 2004 output assuming the same input-output relationship that existed in 2003 Actual units or capacity to produce 2003 output Input prices in 2003 = – ×

26 Cost Accounting Horngreen, Datar, Foster Growth Component To produce 1,100,000 units in 2004 compared with the 1,000,000 units produced in 2003 (a 10% increase), Dallas would require a proportional increase in direct materials. Assume that 3,000,000 square centimeters of materials were used to produce the 1,000,000 units in 2003 at a cost of $1.35 per square centimeter. Assume that manufacturing conversion costs, selling and customer service costs and research and development costs were $16,000,000 and remained stable during 2004.

27 Cost Accounting Horngreen, Datar, Foster Growth Component What is the cost effect of the growth component? 3,000,000 × 110% = 3,300,000 square centimeters (3,300,000 – 3,000,000) × $1.35 = $405,000 U What is the net increase in operating income as a result of growth? Revenue effect of growth component$2,600,000 F Cost effect of growth component 405,000 U Increase in operating income due to growth component $2,195,000 F

28 Cost Accounting Horngreen, Datar, Foster Price-Recovery Component Revenue effect of price-recovery component = (Output price in 2004 – Output price in 2003) × Actual units of output sold in 2004 What is the revenue effect of the price-recovery component? ($24 – $26) × 1,100,000 = $2,200,000 U

29 Cost Accounting Horngreen, Datar, Foster Price-Recovery Component Cost effect of price-recovery component (Input prices in 2004 – Input prices in 2003) Actual units of inputs or capacity that would have been used to produce year 2004 output assuming the same input-output relationship that existed in 2003 Assume that in the year 2004, direct materials costs were $1.31 per square centimeter. = ×

30 Cost Accounting Horngreen, Datar, Foster Price-Recovery Component What is the cost effect of the price-recovery component? ($1.31 – $1.35) × 3,300,000 = $132,000 F What is the total effect on operating income of the price- recovery component? Revenue effect of price-recovery component$2,200,000 U Cost effect of price-recovery component 132,000 F Decrease in operating income due to price-recovery component$2,068,000 U

31 Cost Accounting Horngreen, Datar, Foster Productivity Component Productivity component Actual units of inputs or capacity to produce year 2004 output Input prices in 2004 = × Actual units of inputs or capacity that would have been used to produce year 2004 output assuming the same input-output relationship that existed in 2003 –

32 Cost Accounting Horngreen, Datar, Foster Productivity Component Assume that 2,772,000 actual square centimeters of direct materials were used in the year Actual price was $1.31/square centimeter. What is the productivity component of cost changes? (2,772,000 – 3,300,000) × $1.31 = $691,680 F There is a $691,680 increase in operating income due to the productivity component.

33 Cost Accounting Horngreen, Datar, Foster Change in Operating Income Increase in operating income $818,680 Growth component $2,195,000 F Price-recovery component $2,068,000 U Productivity component $691,680 F

34 Cost Accounting Horngreen, Datar, Foster Learning Objective 5 Distinguish between engineered and discretionary costs.

35 Cost Accounting Horngreen, Datar, Foster Engineered Costs vs Discretionary Costs Engineered costs result specifically from a clear cause-and- effect relationship between output and the resources needed to produce that output. They can be variable or fixed in the short run. Discretionary costs have two important features. They arise from periodic (usually yearly) decisions regarding the maximum amount to be incurred. They have no measurable cause-and-effect relationship between output and resources used.

36 Cost Accounting Horngreen, Datar, Foster Relationships Between Inputs and Outputs Engineered costs differ from discretionary costs along two key dimensions: Type of process Level of uncertainty Engineered costs pertain to processes that are detailed, physically observable, and repetitive. Discretionary costs are associated with processes that are sometimes called black boxes, because they are less precise and not well understood.

37 Cost Accounting Horngreen, Datar, Foster Learning Objective 6 Identify unused capacity and how to manage it.

38 Cost Accounting Horngreen, Datar, Foster Managing Unused Capacity What actions can management take when it identifies unused capacity? Attempt to eliminate the unused capacity Attempt to use the unused capacity to grow revenue


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