1. Chapter 14: Performance Measurement, Balanced Scorecards, and Performance Rewards
Cost Accounting:
Foundations & Evolutions, 8e
Kinney and Raiborn

2. 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. Mission Statements and Value 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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