Cost accounting chapter 13

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Strategy, Balanced Scorecard

andStrategic Profitability Analysis

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Strategy specifies how an organization

matches its own capabilities with the

opportunities in the marketplace to

accomplish its objectives

A thorough understanding of the industry is critical to implementing a successful strategy

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Five Aspects of Industry Analysis

1. Number and strength of competitors

2. Potential entrants to the market

3. Availability of equivalent products

4. Bargaining power of customers

5. Bargaining power of input suppliers

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Basic Business Strategies

1 Product Differentiation – an organization’s ability to

offer products or services perceived by its customers

to be superior and unique relative to the products or services of its competitors

 Leads to brand loyalty and the willingness of

customers to pay high prices

2 Cost Leadership – an organization’s ability to achieve

lower costs relative to competitors through

productivity and efficiency improvements,

elimination of waste, and tight cost control

 Leads to lower selling prices

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Implementation of Strategy

Many companies have introduced a Balanced Scorecard to manage the implementation of their strategies

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The Balanced Scorecard

The balanced scorecard translates an

organization’s mission and strategy into a set

of performance measures that provides the framework for implementing its strategy

It is called the balanced scorecard because it balances the use of financial and nonfinancial performance measures to evaluate

performance

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Balanced Scorecard Perspectives

1. Financial

2. Customer

3. Internal Business Perspective

4. Learning and Growth

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The Financial Perspective

Evaluates the profitability of the strategy

Uses the most objective measures in the

scorecard

The other three perspectives eventually feed back into this dimension

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The Customer Perspective

Identifies targeted customer and market segments and measures the company’s success in these segments

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The Internal Business Prospective

 Focuses on internal operations that create

value for customers that, in turn, furthers the financial perspective by increasing

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The Learning & Growth Perspective

Identifies the capabilities the organization

must excel at to achieve superior internal

processes that create value for customers and shareholders

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The Balanced Scorecard Flowchart

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Balanced

Scorecard

Illustrated

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Common Balanced Scorecard Measures

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Balanced Scorecard Implementation

Must have commitment and leadership from top management

Must be communicated to all employees

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Features of a Good

Balanced Scorecard

Tells the story of a firms strategy, articulating

a sequence of cause-and-effect relationships: the links among the various perspectives that describe how strategy will be implemented

Helps communicate the strategy to all

members of the organization by translating the strategy into a coherent and linked set of understandable and measurable operational targets

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Features of a Good

Balanced Scorecard

Must motivate managers to take actions

that eventually result in improvements in

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Balanced Scorecard Implementation Pitfalls

Managers should not assume the effect linkages are precise: they are merely hypotheses

cause-and-Managers should not seek improvements

across all of the measures all of the time

Managers should not use only objective

measures: subjective measures are important

as well

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Balanced Scorecard Implementation Pitfalls

Managers must include both costs and

benefits of initiatives placed in the balanced scorecard: costs are often overlooked

Managers should not ignore nonfinancial

measures when evaluating employees

Managers should not use too many measures

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Evaluating Strategy

 Strategic Analysis of Operating Income –

three parts:

operating income attributable solely to the change in the quantity of output sold between the current and prior periods.

change in operating income attributable solely to changes in prices of inputs and outputs between the current and prior periods

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Evaluating Strategy

 Strategic Analysis of Operating Income

change in costs attributable to a change in the quantity of inputs between the current and prior periods

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Revenue Effect of Growth

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Cost Effect of Growth for

Variable Costs

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Fixed Costs

Assuming Adequate Current Capacity:

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Fixed Costs

Assuming Inadequate Current Capacity:

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Revenue Effect of Price Recovery

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Cost Effect of Price Recovery

Variable Costs:

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Fixed Costs with Adequate Capacity

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Fixed Costs without Adequate Capacity

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Cost Effect of Productivity for Variable Costs

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Cost Effect of Productivity for Fixed Costs

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Cost Effect of Productivity for Fixed Costs

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Strategic Analysis of Profitability Illustrated

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The Management of Capacity

Managers can reduce capacity-based fixed costs by measuring and managing unused

capacity

Unused Capacity is the amount of productive capacity available over and above the

productive capacity employed to meet

consumer demand in the current period

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Analysis of Unused Capacity

 Two Important Features:

cause-and-effect relationship between the cost driver and the resources used to produce that

output

1 They arise from periodic (annual) decisions

regarding the maximum amount to be incurred They have no measurable cause-and-effect

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Differences Between Engineered and Discretionary Costs Illustrated

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Differences Between Engineered and Discretionary Costs Illustrated

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Managing Unused Capacity

Downsizing (Rightsizing) is an integrated

approach of configuring processes, products, and people to match costs to the activities that need to be performed to operate

effectively and efficiently in the present and future

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