1. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Cost Accounting Principles, 8e Raiborn and Kinney Chapter 14: Performance Measurement, Balanced Scorecards, and Performance Rewards

2. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objectives Why is a mission statement important to an organization? What roles do performance measures serve in organizations? What guidelines or criteria apply to the design of performance measures? What are the common short-term financial performance measures, and how are they calculated and used? Why should company management focus on long-run performance? What factors should managers consider when selecting nonfinancial performance measures? Why is it necessary to use multiple performance measures? How can a balanced scorecard be used to measure performance? What is compensation strategy, and what factors must be considered in designing the compensation strategy? What difficulties are encountered in trying to measure performance and design compensation plans for multinational firms?

3. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Mission Statements and Value Statements  Mission Statements  Expresses the organization’s purposes  Identifies how the organization will meet its customers’ needs through products or services  Communicates organizational purpose and intentions to external parties and to employees  Provides a basis for setting organizational strategy  Value Statements  Reflects the organization’s culture  Identifies fundamental beliefs about what is important to the organization

4. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Performance Measures Use performance measures to:  Implement strategies that apply resources to activities  Gauge the effective and efficient use of organizational resources  Provide proof of a firm’s competitive advantages  Enhance organizational communication  Motivate managers  Implement organizational control over activities  Evaluate comparative managerial performance

5. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Designing a Performance Measurement System  Assess progress toward goals and objectives  Awareness of and participation in developing measures  Appropriate skills, equipment, resources, information, and authority to achieve goals and objectives  Timely and useful feedback  Flexible system for new conditions

6. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Short-Term Financial Performance Measures Divisional profits Achievement of budget objectives Variances from budget or standard Cash flow  Statement of Cash Flows shows sources and uses of cash quality of earnings

7. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Evaluating Responsibility Centers Cost Center  Variances from budgeted costs Revenue Center  Compare budget to actual revenue Profit and Investment Centers  Revenue and expense variances  Net cash flow  Return on investment  Residual income  Economic value added

8. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Short-Term vs. Long-Term Objectives Short-Term Objectives Effective and efficient management of  Operating activities  Financing activities  Investing activities Long-Term Objectives Investments in resources Enhance competitive position through customer satisfaction

9. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Nonfinancial Measurements Can be clearly articulated and defined Are relevant to the objective Can trace responsibility Rely on valid data Have set objectives Have established internal and/or external benchmarks

10. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Balanced Scorecard Measures  Financial  Shareholder-relevant issues  Profitability  Organizational growth  Market price of stock  Customer  Lead time  Quality  Service  Price Financial Customer Internal Business Learning and Growth

11. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Balanced Scorecard Measures  Internal Business  Process quality yield  Cycle efficiency  Time to market  On-time delivery  Cost variances  Learning and Growth  Number of patents or copyrights  Percentage of R&D projects that are patentable  Time of R&D from conception to commercialization  Percentage of capital invested in “high-tech” projects Financial Customer Internal Business Learning and Growth

12. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Multinational Performance Measures  Flexible performance measures should  recognize differences in sales volumes, accounting standards, economic conditions, and risks  use qualitative measures such as market share, quality improvements, inventory management improvements, and new product development

13. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Traditional Compensation Strategy  Top managers  salary and significant financial incentives  Middle managers  salary and raises based on performance and bonuses  Workers  wages and small bonuses

14. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Pay-for-Performance Plans  Correlation with organization goals  Maximization of shareholder wealth  Appropriate time horizon  Long-run perspective  Reward with stock or stock options  Subunit mission  Employee perspective relative to commitment  Balance of group and individual benefits

15. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Profit Sharing  Contingent on organizational success  Current and/or deferred incentives in the form of cash or stock  Allocated among employees based on  personal performance measures  seniority  team performance  managerial judgment  specified formulas

16. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Global Compensation  Expatriate compensation  Domestic base salary and fringe benefits plus adjustments for  cost of living — housing, education, security, spouse’s loss of employment  currency fluctuations  tax implications  retirement benefits in home currency

17. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Questions What are some short-term financial performance measures for investment centers? What factors should be considered when selecting nonfinancial performance measures? How is the balanced scorecard used to measure performance?

18. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Potential Ethical Issues Excessive emphasis on short-term measures Pressure on managers to hit earnings targets Manipulating profits to create higher bonuses Evaluation of managers using uncontrollable criteria Backdating managerial stock options Hiding performance criteria in evaluations Not providing timely feedback Ignoring nonfinancial performance criteria Suboptimization by managers Compensating foreign workers in inappropriate ways