MANAGEMENT ACCOUNTING - Solutions Manual CHAPTER 23 STRATEGIC COST MANAGEMENT; BALANCED SCORECARD I Questions Strategy Cost leadership Differentiation Focus Weakness The tendency to cut costs in a way that undermines demand for the product or service The firm’s tendency to undermine its strength by attempting to lower costs or by lacking a continual and aggressive marketing plan to reinforce the perceived difference The market niche may suddenly disappear due to technological change in the industry or change in consumer tastes The balanced scorecard is an accounting report that includes the firm’s critical success factors in four areas: customer satisfaction, financial performance, internal business processes, and innovation and learning (human resources) The primary objective of the balanced scorecard is to serve as an action plan, a basis for implementing the strategy expressed in the critical success factors The balanced scorecard is important to integrate both financial and non-financial information into management reports Financial measures reflect only a partial- and short-term measure of the firm’s progress Without strategic non-financial information, the firm is likely to stray from its competitive course and to make strategically wrong product decisions – to choose the wrong products, the wrong customers The balanced scorecard provides a basis for a more complete analysis than is possible with financial data alone An analyst can incorporate other factors such as the growth in the overall market and reductions in selling prices resulting from productivity gains into a strategic analysis of operating income To so, the analyst attributes the sources of operating income changes to the particular factors of interests For example, the analyst will combine the operating income effects of strategic price reductions and 23-1 Chapter 23 Strategic Cost Management; Balanced Scorecard any resulting growth with the productivity component to evaluate a company’s cost leadership strategy A company’s balanced scorecard should be derived from and support its strategy Since different companies have different strategies, their balanced scorecards should be different The difference between the delivery cycle time and the throughput time is the waiting period between when an order is received and when production on the order is started The throughput time is made up of process time, inspection time, move time, and queue time These four elements can be classified between value-added time (process time) and non-value-added time (inspection time, move time, and queue time) The balanced scorecard is constructed to support the company’s strategy, which is a theory about what actions will further the company’s goals Assuming that the company has financial goals, measures of financial performance must be included in the balanced scorecard as a check on the reality of the theory If the internal business processes improve, but the financial outcomes not improve, the theory may be flawed and the strategy should be changed If a company has an MCE of less than 1, it means the production process includes non-value-added time An MCE of 0.40, for example, would mean that 40% of the throughput time consists of actual processing, and that the other 60% consists of moving, inspection, and other non-value-added activities II Problem (Measures of Internal Business Process Performance) Requirement a, b, and c Month Throughput time in days: Process time 0.6 Inspection time 0.7 Move time 0.5 Queue time 3.6 Total throughput time 5.4 Manufacturing cycle efficiency (MCE): 23-2 0.5 0.7 0.5 3.6 5.3 0.5 0.4 0.4 2.6 3.9 0.4 0.3 0.5 1.7 2.9 Strategic Cost Management; Balanced Scorecard Chapter 23 11.1% 9.4% Process time  Throughput time 12.8% 13.8% 5.3 3.9 9.2 4.7 2.9 7.6 Delivery cycle time in days: Wait time 9.6 8.7 Total throughput time 5.4 5.3 Total delivery cycle time 15.0 14.0 Requirement The general trend is favorable in all of the performance measures except for total sales On-time delivery is up, process time is down, inspection time is down, move time is basically unchanged, queue time is down, manufacturing cycle efficiency is up, and the delivery time is down Even though the company has improved its operations, it has not yet increased its sales This may have happened because management attention has been focused on the factory – working to improve operations However, it may be time now to exploit these improvements to go after more sales – perhaps by increased product promotion and better marketing strategies It will ultimately be necessary to increase sales so as to translate the operational improvements into more profits Requirement a and b Month Throughput time in days: Process time Inspection time Move time Queue time Total throughput time Manufacturing cycle efficiency (MCE): Process time  Throughput time 0.4 0.3 0.5 0.4 1.2 0.9 33.3% 44.4% 0.5 As a company pares away non-value-added activities, the manufacturing cycle efficiency improves The goal, of course, is to have an efficiency of 100% This will be achieved when all non-value-added activities have been eliminated and process time equals throughput time 23-3 Chapter 23 Strategic Cost Management; Balanced Scorecard III Multiple Choice Questions D D C A A 10 C D C D A 23-4 ... have been eliminated and process time equals throughput time 23- 3 Chapter 23 Strategic Cost Management; Balanced Scorecard III Multiple Choice Questions D D C A A 10 C D C D A 23- 4 ... Manufacturing cycle efficiency (MCE): 23- 2 0.5 0.7 0.5 3.6 5.3 0.5 0.4 0.4 2.6 3.9 0.4 0.3 0.5 1.7 2.9 Strategic Cost Management; Balanced Scorecard Chapter 23 11.1% 9.4% Process time  Throughput... processing, and that the other 60% consists of moving, inspection, and other non-value-added activities II Problem (Measures of Internal Business Process Performance) Requirement a, b, and c Month