1. CHAPTER 16: STRATEGIC PERFORMANCE MEASUREMENT Cost Management, Canadian Edition © John Wiley & Sons, 2009 Chapter 16: Strategic Performance Measurement Cost Management, Cdn Ed, by Eldenburg et al Slide # 1

2. Learning Objectives © John Wiley & Sons, 2009 Chapter 16: Strategic Performance Measurement Cost Management, Cdn Ed, by Eldenburg et al Slide # 2 Q1: What is strategic decision making? Q2: How are financial and nonfinancial measures used to evaluate organizational performance? Q3: What is a balanced scorecard? Q4: How is a balanced scorecard implemented? Q5: What are the strengths and weaknesses of the balanced scorecard? Q6: What is the future direction of cost accounting?

3. © John Wiley & Sons, 2009 Chapter 16: Strategic Performance Measurement Cost Management, Cdn Ed, by Eldenburg et al Slide 3 Q1: What is strategic decision making?

4. Overview of Management Decision Making © John Wiley & Sons, 2009 Chapter 16: Strategic Performance Measurement Cost Management, Cdn Ed, by Eldenburg et al Slide # 4 Organizational Vision Core Competencies Operating Plans Actual Operations Organizational Strategies

5. Strategic Decision Making © John Wiley & Sons, 2009 Chapter 16: Strategic Performance Measurement Cost Management, Cdn Ed, by Eldenburg et al Slide # 5 Managers determine performance objectives to monitor the results of actual operations. Performance objectives are specific goals. Measurements of the performance objectives are compared to management’s expectations. Adjustments are made to either change operations or adjust the long-term strategies.

6. © John Wiley & Sons, 2009 Chapter 16: Strategic Performance Measurement Cost Management, Cdn Ed, by Eldenburg et al Slide 6 Q2: How are financial and nonfinancial measures used to evaluate organizational performance?

7. Financial Performance Measures © John Wiley & Sons, 2009 Chapter 16: Strategic Performance Measurement Cost Management, Cdn Ed, by Eldenburg et al Slide # 7 Financial measures provide information in dollars or ratios of dollars. –These measures come from the accounting information system. –Traditionally these often were the only measures used. Examples include: –division revenue, –division profit margin or return on sales, and –variances of actual operating results from the budget.

8. Nonfinancial Performance Measures © John Wiley & Sons, 2009 Chapter 16: Strategic Performance Measurement Cost Management, Cdn Ed, by Eldenburg et al Slide # 8 Nonfinancial measures cannot be measured in dollars. Examples include: –Defect rates, –Customer satisfaction levels, –Number of days from a candidate’s interview to his or her start date, –Average service time, and –Employee satisfaction levels.

9. © John Wiley & Sons, 2009 Chapter 16: Strategic Performance Measurement Cost Management, Cdn Ed, by Eldenburg et al Slide 9 Q3: What is a balanced scorecard?

10. Balanced Scorecard © John Wiley & Sons, 2009 Chapter 16: Strategic Performance Measurement Cost Management, Cdn Ed, by Eldenburg et al Slide # 10 The balanced scorecard is a method of organizing the financial and nonfinancial performance measures used to monitor operations. The chosen measures are carefully related to the organization’s vision and long-term strategies. The balanced scorecard serves as a means of communicating the organization’s strategies throughout the organization.

11. Balanced Scorecard (BSC) Perspectives © John Wiley & Sons, 2009 Chapter 16: Strategic Performance Measurement Cost Management, Cdn Ed, by Eldenburg et al Slide # 11 A balanced scorecard usually consists of four categories of measures, with 4 ~ 5 specific measures per category. The four common categories are called the balanced scorecard perspectives. 1.The financial perspective measures progress towards the organization’s financial goals. 2.The customer perspective evaluates the organization’s performance from the viewpoint of customers. 3.The internal business process perspective assesses the organization’s ability to produce and deliver goods and services. 4.The learning and growth perspective measures the organization’s ability to change and develop improved strategies.

12. The BSC Translates Strategy to a Series of Cause and Effect Relationships © John Wiley & Sons, 2009 Chapter 16: Strategic Performance Measurement Cost Management, Cdn Ed, by Eldenburg et al Slide # 12 Long-Term Strategy Internal Perspective Customer Perspective Learning & Growth Financial Perspective How do shareholders view organization? How do customers view organization? How do employees view organization? How can organizations grow and improve? Performance measurements for each perspective can be used to determine appropriate operational and strategic changes.

13. The Financial Perspective © John Wiley & Sons, 2009 Chapter 16: Strategic Performance Measurement Cost Management, Cdn Ed, by Eldenburg et al Slide # 13 Examples of possible performance measures for the financial perspective include: –Profit margin –Return on equity –Sales growth –Operating income –Residual income

14. The Customer Perspective © John Wiley & Sons, 2009 Chapter 16: Strategic Performance Measurement Cost Management, Cdn Ed, by Eldenburg et al Slide # 14 Examples of possible performance measures for the customer perspective include: –Market share –Results from customer satisfaction surveys –Number of new customers –Number of customer complaints –Customer reorder rates

15. The Internal Business Process Perspective © John Wiley & Sons, 2009 Chapter 16: Strategic Performance Measurement Cost Management, Cdn Ed, by Eldenburg et al Slide # 15 The internal business process perspective contains three stages: –In the innovation cycle, customer preferences are determined and the products are designed. –In the operations cycle, goods and services are produced and delivered to the customer. –The post-sales service cycle supports the customer after the sale.

16. The Internal Business Process Perspective © John Wiley & Sons, 2009 Chapter 16: Strategic Performance Measurement Cost Management, Cdn Ed, by Eldenburg et al Slide # 16 Examples of possible performance measures for the: –Innovation cycle include the number of new technologies developed and new product development time. –Operations cycle include defect rates and the percent of on-time deliveries. –Post-sales service cycle include the accounts receivable turnover ratio and warranty repair times.

17. BSC Example The School for Future Artists is a private, for-profit, high school for students that are gifted in painting, drawing, and sculpture. Its mission is to train students in techniques and give them the confidence to be innovative, while at the same time preparing them to earn a living. Students are admitted to the school after a review of their portfolios. Half of the students are given full scholarships and the parents of the other half pay the expensive tuition. Parents who are paying tuition are given the opportunity to pay reduce tuition if they become shareholders. The school also receives donations from successful alumni. Identify some performance measures the school might use for the financial perspective on its balanced scorecard. © John Wiley & Sons, 2009 Chapter 16: Strategic Performance Measurement Cost Management, Cdn Ed, by Eldenburg et al Slide # 17 Operating income Return on equity Donations as a percent of total revenues Variances between actual and budgeted expenditures Dollar amount of provincial and federal grant money received this year

18. BSC Example Identify some performance measures the School for Future Artists might use for the customer perspective on its balanced scorecard. © John Wiley & Sons, 2009 Chapter 16: Strategic Performance Measurement Cost Management, Cdn Ed, by Eldenburg et al Slide # 18 Percent of graduates who eventually complete masters degrees in fine arts or related fields Percent of graduates who eventually become art professors Number of graduates who were involved in art expositions this year Number of graduates who received federal or provincial grants this year Number of families with 2 or more children at the school Responses to satisfaction surveys given to students and parents

19. BSC Example Identify some performance measures the School for Future Artists might use for the 3 categories of the internal business processes perspective on its balanced scorecard. © John Wiley & Sons, 2009 Chapter 16: Strategic Performance Measurement Cost Management, Cdn Ed, by Eldenburg et al Slide # 19 Innovation cycle Number of new courses developed Course development time Operations cycle Percent of students who graduate Art supply costs per student Post-sales service cycle Accounts receivable turnover ratio Results of alumni satisfaction surveys

20. BSC Example Identify some performance measures the School for Future Artists might use for the learning and growth perspective on its balanced scorecard. © John Wiley & Sons, 2009 Chapter 16: Strategic Performance Measurement Cost Management, Cdn Ed, by Eldenburg et al Slide # 20 Teacher turnover Number of training workshops attended by teachers this year Results of teacher satisfaction surveys Teacher and student use of newly purchased kiln equipment Number of management efficiency and leadership conferences attended by administrators this year

21. © John Wiley & Sons, 2009 Chapter 16: Strategic Performance Measurement Cost Management, Cdn Ed, by Eldenburg et al Slide 21 Q4: How is a balanced scorecard implemented?

22. Balanced Scorecard Implementation © John Wiley & Sons, 2009 Chapter 16: Strategic Performance Measurement Cost Management, Cdn Ed, by Eldenburg et al Slide # 22 A BSC implementation includes the following stages: –Clarify vision, competencies, and strategies. –Analyze the four BSC perspectives to develop objectives and measures. –Communicate the components of the BSC throughout the organization. –Establish performance targets and action plans. –Collect and analyze scorecard data. –Investigate variances and reward employees. –Provide feedback and refine the scorecard.

23. © John Wiley & Sons, 2009 Chapter 16: Strategic Performance Measurement Cost Management, Cdn Ed, by Eldenburg et al Slide 23 Q5: What are the strengths and weaknesses of the balanced scorecard?

24. Balanced Scorecard Strengths © John Wiley & Sons, 2009 Chapter 16: Strategic Performance Measurement Cost Management, Cdn Ed, by Eldenburg et al Slide # 24 The greatest strength of the BSC is the communication of strategies throughout the organization. The BSC forces top management to clarify the vision and strategies of the organization. The BSC links employee rewards to performance objectives that are linked to the organization’s vision and strategies, so short-term and long-term strategies are more likely to be in alignment.

25. Balanced Scorecard Potential Weaknesses © John Wiley & Sons, 2009 Chapter 16: Strategic Performance Measurement Cost Management, Cdn Ed, by Eldenburg et al Slide # 25 If based on inappropriately defined visions and strategies, the BSC provides the wrong incentives for managers. Sometimes performance measures are chosen because the data is easy to obtain, rather than because they are linked to the vision and strategies. If performance measure targets are unattainable, employees may not buy in to the BSC initiative.

26. © John Wiley & Sons, 2009 Chapter 16: Strategic Performance Measurement Cost Management, Cdn Ed, by Eldenburg et al Slide 26 Q6: What is the future direction of cost accounting?

27. Future Direction of Cost Accounting © John Wiley & Sons, 2009 Chapter 16: Strategic Performance Measurement Cost Management, Cdn Ed, by Eldenburg et al Slide # 27 Information technology advances free accountants from preparing detailed reports. More time is available to concentrate on providing the best information possible to support management decision making. Accountants increasingly need to become aware of and understand emerging management tools (such as the balanced scorecard).

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