MANAGEMENT SERVICES TRINIDAD/CRUZ

HO07 – Balanced Scorecard and Responsibility Accounting MAY 2024

LECTURE NOTES

The primary purpose of the balanced scorecard is to Internal Process Perspective

translate an organization's mission and strategy into a Processes are the means for creating customer and
set of performance measures that put that strategy shareholder value. Thus, the process perspective
into action with clearly stated objectives, measures, entails the identification of the processes needed to
targets, and initiatives. achieve customer and financial objectives. To provide
the framework needed for this perspective, a process
The four key perspectives in the balanced scorecard value chain is defined. The process value chain is
are: made up of three processes: the innovation process,
a. the financial perspective, the operations process, and the post sales process.
b. the customer perspective,
c. the internal business processes perspective, and Some internal business process performance
d. the learning and growth perspective. measures.
a. Delivery Cycle Time. This is the total elapsed
Common characteristics of balanced scorecards. time between when an order is placed by a
a. It should be possible, by examining a customer and when it is shipped to the customer.
company’s balanced scorecard, to infer its Part of this time is wait time that occurs before the
strategy and the assumptions underlying that order is placed into production. The remainder of
strategy. this time is the throughput time, which is defined
b. The balanced scorecard should emphasize below.
continuous improvement rather than just b. Throughput (Manufacturing Cycle) Time. This
meeting present standards or targets. is the total elapsed time between when an order is
c. Some of the performance measures on the initiated into production and when it is shipped to
balanced scorecard should be non-financial. the customer. It consists of process time,
Financial measures tend to be lagging inspection time, move time, and queue time. The
indicators, rather than leading indicators. only element that adds value is processing time.
d. While there will be a comprehensive scorecard Inspection time, move time, queue time, and their
for the entire company, the scorecards for associated activities do not add value and should
individuals should contain only those be minimized.
performance measures they can actually c. Manufacturing Cycle Efficiency (MCE). MCE is
influence. the ratio of value-added time (i.e., process time)
e. Most, but certainly not all, balanced scorecards to total throughput time. It represents the
will contain performance measures that fall percentage of time an order is in production in
into at least four main categories: financial, which useful work is being done. The rest of the
customer, internal business process, and time represents non-value-added time (i.e.,
learning and growth. The ultimate objectives of inspection time, move time, and queue time).
the organization are usually financial, but
better financial results cannot be attained Learning and Growth Perspective
without improving customers’ perceptions of The learning and growth perspective is the source of
the company’s products and services. In order the capabilities that enable the accomplishment of the
to improve customers’ perceptions of products other three perspectives’ objectives. This perspective
and services, it is usually necessary to improve has three major objectives: increasing employee
internal business processes so that the capabilities; increasing motivation, empowerment, and
products and services are actually better. And alignment; and increasing information systems
in order to improve the business processes, it capabilities.
is necessary that employees learn.
The three key components in performing a strategic
The Financial Perspective analysis of operating income include:
The financial perspective establishes the long- and a. the growth component, which measures the
short-term financial performance objectives. The change in operating income attributable solely to
financial perspective is concerned with the global an increase in the quantity of output sold from one
financial consequences of the other three year to the next.
perspectives. Thus, the objectives and measures of b. the price-recovery component, which measures
the other perspectives must be linked to the financial the change in operating income attributable solely
objectives. The financial perspective has three to changes in the prices of the inputs and the
strategic themes: revenue growth, cost reduction, and outputs from one year to the next.
asset utilization. c. the productivity component, which measures the
change in costs attributable to a change in the
Customer Perspective quantity of inputs used in the current year relative
The customer perspective is the source of the revenue to the quantity of inputs that would have been
component for the financial objectives. This used in the previous year to produce current year
perspective defines and selects the customer and output.
market segments in which the company chooses to
compete.

Page 1 of 5
Product differentiation vs cost leadership main application of this principle is that managers
Product differentiation is an organization's ability to should not be held accountable for costs outside
offer products or services perceived by its customers their control. One major difficulty in applying this
to be superior and unique relative to the products or occurs when revenues and costs are jointly earned
services of its competitors. or incurred. Separating these component revenues
and costs can involve intricate, and often
Cost leadership is an organization's ability to achieve arbitrary, accounting procedures.
lower costs relative to competitors through A segment margin is the level of controllable profit
productivity and efficiency improvements, elimination reported by an organizational unit or product line.
of waste, and tight cost control. Each unit’s segment margin is an estimate of its
short-term effect on the organization’s profit.
Reengineering is the rethinking of business processes, Interpreting segment margins should be done
such as the order delivery process, to improve critical carefully, as:
performance measures such as cost, quality, or • Segment margins can represent highly
customer satisfaction. It can be contrasted to a kaizen aggregated summaries of each organizational
approach to change in that reengineering is most often unit’s performance. Thus, other critical success
a sudden, drastic change, while a kaizen approach factors should be used as well to assess
involves small, incremental but continual performance.
improvements. • Some segment reports contain arbitrary
numbers. Accountants call these soft
RESPONSIBILITY UNITS & PERFORMANCE numbers since they rest on subjective
EVALUATION assumptions over which there can be
legitimate disagreement.
Why decentralize decision-making responsibility • The revenue figures often reflect assumptions
Decentralization enables units of an organization to and allocations that can be misleading. These
respond more quickly and effectively to the assumptions relate to how the revenues that
uncertainties of markets and economic change. the organization earned are divided among the
Decentralization requires that senior level managers responsibility centers.
delegate decision-making responsibilities to operating
level managers who are closer to the action and who Transfer Pricing - A transfer price is the price paid
have access to more timely, relevant information for for goods or services transferred within an
making decisions. organization. Transfer prices facilitate the attribution
of revenues earned by the organization to
In a centralized environment, control moves from task organizational sub-units. Transfer pricing can be very
control to results control. In a task control arbitrary, especially if there is a high degree of
environment, the focus is on getting a particular task interaction among the various responsibility centers.
done. In a results control environment, the focus is There are four broad approaches to transfer pricing:
on motivating people to use their skill, knowledge, and Market-Based Transfer Prices. Market prices provide
creativity to improve operating results. an independent valuation of products that are
A responsibility center is an organizational subunit transferred between divisions and reflect jointly
for which a manager has been assigned earned revenue in a manner that reflects the
accountability. market’s assessment. One difficulty is that clear
A cost center is a responsibility center whose market prices often do not exist for many
employees control costs but do not control its products.
revenues or investment level. Cost-Based Transfer Prices. If goods or services do
A revenue center is a responsibility center whose not have market prices, transfer prices are often
employees control revenues but do not control based on cost. Common cost basis methods
costs or the level of investment. Revenue center include variable cost plus a markup, full cost, and
employees can control the mix of items carried in full cost plus a markup.
their stores, prices of products and promotional Negotiated Transfer Prices. When market prices do
activities. Revenue center managers are often at not exist, another possibility is to allow divisions to
the mercy of others who determine the costs of negotiate transfer prices. Critics argue that
their goods (e.g., a service station manager has negotiated transfer prices reflect both negotiating
no control over the cost of the gas sold). skills as well as economic considerations, and
A profit center is a responsibility center whose therefore lead to less valid as indices of economic
employees control revenues and costs but not the performance.
level of investment; the level of investment is Administered Transfer Prices. Administered transfer
usually controlled by senior management. Most prices are set by an arbitrator or by a rule or
outlets of fast-food restaurant chains and motel policy. Some find them appealing because they are
chains are profit centers. easy to administer. An example is to use the
An investment center is a responsibility center variable cost of a product plus 25%. Others view
whose employees control its revenues, costs, and these types of prices as unappealing because they
the level of investment. The investment center is are quite arbitrary.
essentially an independent business.
Return on Investment and Economic Value Added
Performance measures to evaluate the
performance for each type of responsibility ROI = return on sales x asset turnover
center.
Return on sales = operating income/sales
Controllability, a principle often used in control, Return on sales is a measure of operating efficiency.
asserts that people should only be held On return on sales, efficiency is a measure of an
accountable for results that they can control. The organization’s ability to control costs.

Page 2 of 5
Asset turnover = sales/investment 4. What is the division's residual income?
Asset turnover is a measure of productivity.
Productivity is a ratio of output to input. PROBLEM NO. 3.
The following data pertain to Dana Industries:
Assessing Return on Investment
Interest rate on debt capital 9%
Compare an organization’s ROI to the ROI of its
Cost of equity capital 12%
competitors.
Before-tax operating income P35 million
Decompose ROI into its efficiency and productivity
Market value of debt capital P60 million
measures and compare to those of other
Market value of equity capital P120 million
organizations.
Total assets P150 million
Income tax rate 30%
Economic Value Added
Total current liabilities P15 million
Economic value analysis evaluates an organization
segment’s (for example, a division, product line, or
Requirements:
product) financial desirability using the segment’s
1. Compute Dana's weighted-average cost of capital.
income less a financial charge that is computed by
2. Compute Dana's economic value added.
multiplying the organization’s cost of capital by the
investment in the segment.
PROBLEM NO. 4.
Economic value added is used primarily to encourage
The following data refer to the AIM division of Master
managers to improve the relationship between return
Company.
and assets employed. This can be done by making
Average selling price P100
assets more efficient or using assets more effectively.
Average variable cost 40
Total fixed costs P2,000,000
Average investment P5,000,000
STRAIGHT PROBLEMS
Requirements:
PROBLEM NO. 1.
1. How many units must AIM sell to earn an 18% ROI?
For each of the following measures, identify which
2. If the division sells 60,000 units, what will ROI be?
perspective of the balanced scorecard it represents.
3. The minimum desired ROI is 14%. At the sales
Please indicate whether it is financial perspective,
volume of 55,000 units, what is RI?
customer perspective, internal-business-process
4. The manager desires a 22% ROI and wishes to sell
perspective, or learning-and growth perspective.
1. service response time 50,000 units. What selling price must the division
2. market share charge?
3. gross margin percentage 5. Using the original information, if the minimum ROI
is 20% and RI is P300,000, what are sales in units?
4. defect rates
5. customer satisfaction
PROBLEM NO. 5.
6. new-product development time
7. economic value added The Valve Division of Bench Co. produces a small valve
8. employee education that is used by various companies as a component part
9. manufacturing downtime in their products. Bench operates its divisions as
10. earnings per share autonomous units, giving its divisional managers great
11. manufacturing cycle efficiency discretion in pricing and other decisions. Each division is
12. Machine downtime expected to generate a rate of return of at least 14% on
13. Number of patents held its operating assets. The Valve Division has average
14. Employee suggestions operating assets of P700,000. The valves are sold for P5
15. Number of repeat sales each. Variable costs are P3 per valve, and fixed costs
16. Levels of inventories held total P462,000 per year. The division has a capacity of
17. Number of vendors used 300,000 valves each year.
18. Cash flow from operations
Requirements:
19. Employee training hours
20. Gross margin 1. How many valves must the Valve Division sell each
21. number of customer complaints year to generate the desired rate of return on its
assets?
22. number of warranty claims
23. number of products returned a. What is the margin earned at this level of sales?
24. number of new products introduced b. What is the turnover at this level of sales?
25. the efficient and effective use of employees 2. Assume that the Valve Division’s current ROI is just
equal to the minimum required 14%. In order to
PROBLEM NO. 2. increase the division’s ROI, the divisional manager
El Campo is a division of a major corporation. The wants to increase the selling price per valve by 4%.
following data are for the latest year of operations: Market studies indicate that an increase in the
Sales P10,890,000 selling price would cause sales to drop by 20,000
Net operating income P609,840 units each year. However, operating assets could be
Average operating assets P3,000,000 reduced by P50,000 due to decreased needs for
The company’s minimum accounts receivable and inventory. Compute the
required rate of return 16% margin, turnover, and ROI if these changes are
made.
Requirements: 3. Refer to the original data. Assume again that the
1. What is the division's margin? Valve Division’s current ROI is just equal to the
2. What is the division's turnover? minimum required 14%. Rather than increase the
3. What is the division's return on investment selling price, the sales manager wants to reduce the
selling price per valve by 4%. Market studies
(ROI)?

Page 3 of 5
 indicate that this would fill the plant to capacity. In 1. From the standpoint of the Audio Division, what
order to carry the greater level of sales, however, is the lowest acceptable transfer price for
operating assets would increase by P50,000. speakers sold to the Hi-Fi Division?
Compute the margin, turnover, and ROI if these 2. From the standpoint of the Hi-Fi Division, what is
changes are made. the highest acceptable transfer price for
4. Refer to the original data. Assume that the normal speakers purchased from the Audio Division?
volume of sales is 280,000 valves each year at a 3. If left free to negotiate without interference,
price of P5 per valve. Another division of the would you expect the division managers to
company is currently purchasing 20,000 valves voluntarily agree to the transfer of 5,000
each year from an overseas supplier, at a price of speakers from the Audio Division to the Hi-Fi
P4.25 per valve. The manager of the Valve Division Division? Why or why not?
has adamantly refused to meet this price, pointing 4. From the standpoint of the entire company,
out that it would result in a loss for his division: should the transfer take place? Why or why
Selling price per P4.25 not?
valve
Costs per valve PROBLEM NO. 7.
Variable 3.00 The following information for a recent project was
Fixed [P462,000/300,000 1.54 4.54 taken from the records of Great Company:
valves] Processing time 15.0 days
Net loss per valve P(0.29) Inspection time 0.5 days
Waiting time:
The manager of the Valve Division also points out From order receipt until start of
that the normal P5 selling price barely allows his production 6.0 days
division the required 14% rate of return. “If we From start of production until project
take on some business at only P4.25 per unit, then completion 3.0 days
our ROI is obviously going to suffer,” he reasons, Move time 1.5 days
“and maintaining that ROI figure is the key to my
future. Besides, taking on these extra units would Requirements:
require us to increase our operating assets by at 1. How long did it take to complete the project once
least P50,000 due to the larger inventories and production commenced?
receivables we would be carrying.” Would you 2. Compute the manufacturing cycle efficiency.
recommend that the Valve Division sell to the other
division at P4.25? Show ROI computations to PROBLEM NO. 8.
support your answer. Charity Products Inc. produces a variety of electronic
products which it sells to retail stores throughout the
PROBLEM NO. 6. country. The following data is available for the year for
Sounds Company’s Audio Division produces a speaker one of the products:
that is widely used by manufacturers of various audio Units started into production 2,000,000
products. Sales and cost data on the speaker follow: Total good units completed 1,950,000
Selling price per unit on the intermediate market P60 Total hours of value-added production time 300,000
Variable cost per unit 42 Total production hours 380,000
Fixed costs per unit 8
Capacity in units 25,000 Requirements:
Sounds Company has just organized a Hi-Fi Division that 1. Compute the manufacturing cycle efficiency
could use this speaker in one of its products. The Hi-Fi (MCE).
Division will need 5,000 speakers per year. It has 2. What is the total throughput per hour?
received a quote of P57 per speaker from another
manufacturer. Sounds Company evaluates divisional PROBLEM NO. 9.
managers based on divisional profits. The Cute Corporation produces small plastic dolls in its
Florida manufacturing plant. The company is currently
Requirements: evaluating ways to improve productivity. The
A. Assume that the Audio Division is now selling only accountant of the firm's parent organization suggested
20,000 speakers per year to outside customers on that management implement a new compensation plan
the intermediate market. based on throughput performance measure as an
1. From the standpoint of the Audio Division, what incentive to increase productivity. To demonstrate how
is the lowest acceptable transfer price for such a measure might work, the accountant gathered
speakers sold to the Hi-Fi Division? the following production data for a recent month:
2. From the standpoint of the Hi-Fi Division, what is Total units attempted 6,000,000
the highest acceptable transfer price for Good units manufactured 4,800,000
speakers purchased from the Audio Division? Processing time (total hours) 800
3. If left free to negotiate without interference, Value-added processing time 600
would you expect the division managers to
voluntarily agree to the transfer of 5,000 Requirements:
speakers from the Audio Division to the Hi-Fi 1. How many defective units were produced?
Division? Why or why not? 2. Compute manufacturing cycle efficiency.
4. From the standpoint of the entire company, 3. Compute process productivity.
should the transfer take place? Why or why 4. Compute process quality yield.
not? 5. Compute hourly throughput.

B. Assume that the Audio Division is selling all of the

speakers it can produce to outside customers on the
intermediate market.

Page 4 of 5
 MULTIPLE CHOICE QUESTIONS quality products. Which of the following measures
would not be used by the firm to measure
1. The purpose of the balanced scorecard is BEST quality?
described as helping an organization to: A. The percentage of shipments returned by
a. develop customer relations. customers because of poor quality.
b. mobilize employee skills for continuous B. The number of parts shipped per day.
improvements in processing capabilities, C. The number of defective parts per million.
quality, and response times. D. The percentage of products passing quality tests
c. introduce innovative products and services the first time.
desired by target customers.
d. translate an organization’s mission and 8. What type of incentive compensation is utilized to
strategy into a set of performance measures motivate employees to achieve financial targets
that help to implement the strategy. that increase the company's stock price?
a. Profit-sharing plans
2. The internal business processes perspective of the b. Awards
balanced scorecard comprises three subprocesses c. Cash bonuses
that address all of the following EXCEPT: d. Stock option programs
a. innovative processes used to create new
products, services, and processes 9. A manager would like to see a decreasing trend in
b. motivating current employees all of the following operating measures except:
c. providing service and support to the customer a. Customer complaints as a percentage of units
after the sale sold.
d. delivering existing products and services to b. Scrap as a percentage of total cost.
best meet the needs of customers c. Setup time.
d. Manufacturing cycle efficiency.
3. All of the following relate to the balanced
scorecard’s learning and growth perspective 10. When the selling division in an internal transfer
EXCEPT: has unsatisfied demand from outside customers
a. How do we achieve greater employee for the product that is being transferred, then the
satisfaction? lowest acceptable transfer price as far as the
b. What new products do we create? selling division is concerned is:
c. How do we provide information systems with a. variable cost of producing a unit of product.
updated technology? b. the full absorption cost of producing a unit of
d. How will we motivate and empower our product.
employees? c. the market price charged to outside customers
less costs saved by transferring internally.
4. Which of these is the perspective of the balanced d. the amount that the purchasing division would
scorecard that is at the top of the list for a have to pay an outside seller to acquire a
company’s lenders and shareholders? similar product for its use.
a. financial perspective.
b. internal business and production process 11. starts with estimated product costs
perspective. and next determines the estimated selling price.
c. learning and growth perspective. a. Standard costing
d. customer perspective. b. Target costing
c. Kaizen costing
5. Performance measures for financial control d. Traditional costing
include all of the following EXCEPT:
a. reduced cycle times 12. starts with estimated product costs
b. ROI ( return on investment) and economic and next adds the expected profit margin.
value added a. Cost-plus pricing
c. profit b. Target costing
d. cost c. Kaizen costing
d. Standard costing
6. Division A is considering a project that will earn a
rate of return which is greater than the imputed 13. Place the following steps for the implementation
interest charge for invested capital, but less than of target costing in order:
the division's historical return on invested capital. A = Derive a target cost
Division B is considering a project that will earn a B = Develop a target selling price
rate of return that is greater than the division's C = Perform value engineering
historical return on invested capital, but less than D = Determine target profit margin
the imputed interest charge for invested capital. a. B D A C c. A D B C
If the objective is to maximize residual income, b. B A D C d. A B C D
should these divisions accept or reject their
projects?
A B
a. Accept Accept
b. Reject Accept
c. Reject Reject
d. Accept Reject

7. Management of a company is attempting to build

a reputation as a world-class manufacturer of

Page 5 of 5