Cost Accounting

Foundations and Evolutions

Kinney, Prather, Raiborn

Chapter 19
Performance Measurement,
Balanced Scorecards, and Performanc
e Rewards
 Learning Objectives (1 of 3)
• Explain the importance of the mission state
ment
• Describe the role of performance measures i
n organizations
• Identify the guidelines that apply to the desi
gn of performance measures
• Calculate and use common short-term finan
cial performance measures
 Learning Objectives (2 of 3)
• Explain why management should focus on lon
g-run performance
• Describe factors to consider when selecting no
nfinancial performance measures
• Clarify why it is necessary to use multiple perf
ormance measures
• Explain how a balanced scorecard is used to m
easure performance
 Learning Objectives (3 of 3)
• Describe the difficulties in measuring the perf
ormance of multinational firms
• Define compensation strategy and explain the
factors to be considered in designing the comp
ensation plan
 Mission Statement
• Expresses the organization’s purposes
• Identifies how the organization will meets it
s customers’ needs through products or serv
ices
• Communicates organizational purpose and i
ntentions to employees
• Provides a basis for setting organizational st
rategy
 Values Statements
• Reflects the organization’s culture
• Identifies fundamental beliefs about what is
important to the organization
 Use Performance Measures to
• Assess organizational performance
• Relate missions and goals to managerial perf
ormance
• Foster growth of subordinate managers
• Motivate managers
• Enhance organizational communication
• Evaluate comparative managerial performan
ce
• Implement organizational control
Designing a Performance Measurem
ent System
1. Assess progress toward goals and objectives
2. Awareness of and participation in developin
g measures
3. Appropriate skills, equipment, information,
and authority to achieve goals and objective
s
4. Timely and useful feedback
5. Able to adapt to changing environment
 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
 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
 Short-run vs. Long-term Objectives

Short-run Objectives Long-term Objectives

• Effective and efficient • Investments in resource
management of s
– Operating activities • Enhance competitive po
– Financing activities sition through customer
– Investing activities satisfaction
 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 be
nchmarks
 Multiple Performance Measures
• Cost of quality
– Prevention
– Appraisal
– Internal failure
– External failure
• Lead time – how quickly customers receive
their goods
• Activity-based management
• Throughput
 Balanced Scorecard Measures
• Financial
– Shareholder-relevant issues
– Profitability
– Organizational growth
– Market price of stock
• Customer
– Lead time
Internal
Financial
– Quality Business

– Service Learning
Customer
and Growth
– Price
 Balanced Scorecard Measures
• Internal Business Internal
Financial
– Quality Business

– Cycle efficiency Customer

Learning
and Growth
– Time to market
– On-time delivery
• Learning and Growth
– Number of patents or copyrights
– Percentage of R&D projects that are patentable
– Time of R&D from conception to commercializ
ation
 Multinational Performance Measures
• Flexible performance measures should
• recognize differences in sales volumes, ac
counting standards, economic conditions,
and risks
• use qualitative measures such as marke
t share, quality improvements, inve
ntory management improvements,
new product development
 Traditional Compensation Strategy
• Top managers
– salary and significant financial incentives
• Middle managers
– salary and raises based on performance and bon
uses
• Workers
– wages and small bonuses
 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
• Age of employee
• Balance of group and individual benefits
 Profit Sharing
• Contingent on organizational success
• Current and/or deferred incentives in form o
f cash or stock
• Allocated among employees based on
– personal performance measures Profit Sharing
– seniority
– team performance
– managerial judgment
– specified formulas
Employee Stock Ownership Plan (E
SOP)
• Profit-sharing compensation invested in co
mpany stock
• More valuable as company stock price incre
ases
• Employees lose some or all benefit
s if company goes bankrupt
 Global Compensation
Expatriate compensation
• Domestic base salary and fringe benefits plu
s adjustments for
– cost of living - housing, education, security, spo
use’s loss of employment
– currency fluctuations
– tax implications
– retirement benefits in home currency
 Questions
• What are some short-term financial perform
ance measures for investment centers?
• What factors should be considered when sel
ecting nonfinancial performance measures?
• How is the balanced scorecard used to meas
ure performance?