- Combines:

CHAPTER 20 - Financial Performance Measures = past

action; important to owner, creditors,
Balance Scorecard
employees
_________________________________________ - Nonfinancial Performance Measures =
current action; drivers of future financial
4 Management Functions performance
1.) Strategic Management - Integrated system of performance measures
a.) development of sustainable competitive derived from and supports the company’s
position strategy.
b.) strategy = set of goals and specific action
plans, achieve comp adv. 4 Key Areas

2.) Planning and Decision Making (1) Financial Perspective

a.) Budgeting and Planning, cash flow - Measures profitability and market value
management - owners and shareholders satisfaction
- Impact of policies on financial position and
3.) Control return
a.) Operational = monitor activities of operating
level management and employees by mid (2) Customer Satisfaction
b.) Management = Upper evaluates mid - Measures quality of service
- Customer satisfaction
4.) Prep of FS
a.) Compliance with reporting req. (3) Internal Business Processes
- efficiency and effectiveness of production
Strategic Competitive Analysis
(1) Cost Leadership (4) Innovation and Learning
- Produce at lowest cost - Ability to develop and utilize human resources to
- Makes sustainable profits at low price meet goals
- Large market share, avoids
niche/segment market Good Balance Scorecard
- Focus on cost reduction 1. Articulate the sequence of cause and effect
- LIMIT: cut costs = cut features = lower demand relationships
a. Links strategy to results
(2) Differentiation 2. Translate strategy to targets
- Maintain unique value for product a. Managers and employees’ actions are
- Charge higher price, without reducing costs guided
- LIMIT: Undermine strength by lowering costs 3. Strong emphasis on financial objectives
4. Focus only on key measures
(3) Focus 5. Highlight suboptimal trade offs that managers
- Targeting its segment market may make when they fail to consider operational
- Customers and financial measures together.
- Product line
- place/geography INTERNAL BUSINESS PROCESS PERFORMANCE
- Market niche where competition is weak 1. Delivery Cycle Time
- LIMIT: Niche may disappear because of change - Order received to order shipped
in consumer preference 2. Velocity of Production/Manufacturing
Cycle/Throughput Time (TPT)
The Balance Scorecard - turn raw materials to completed
- Growth in sales, growth in earnings, cash flow, products
stock price, market share, product quality, a. Process Time (VA) - work is done
customer satisfaction and growth opportunities = b. Inspection Time (NVA) - ensure product
chart competitive course + benchmark for is not defective
success
 c.Move Time (NVA) - move materials or - stock options - right to buy company stock;
products from station to station encourage to improve long term performance
d. Queue Time (NVA) - time waiting to be and stock price
worked on or moves or inspected or - 3 Factors
shipped - Achievement of org goals
3. Manufacturing Cycle Efficiency (MCE) - Ease of administering plans
- Eliminate NVAs! - Ensure executives perceive the plan
- MCE = VA/TPT
- MCE < 1 = Bonus Plan
- Fastest growing element of total compensation
and often the largest
1. Base of the Compensation
CHAPTER 20 a. Stock price
b. Cost, revenue, profit, or investment
EXECUTIVE PERFORMANCE MEASURES AND
unit-based performance
COMPENSATION c. Balanced scorecard
_________________________________________
2. Compensation Pools
*Recruiting, Motivating, Rewarding, Retaining - Source of funding for bonus
Effective Managers, Effective Compensation Plan = - Unit Based Pool = Earnings
Competitive Success from managers unit
- Firmwide Pool = Firm’s total
Objective earning
1. Motivate managers to achieve goal
2. Make decisions in line with goal 3. Payment Options
3. Fairly determine the rewards earned for efforts, - How to award bonus
skill, and effective decision making a. Current Bonus = Cash and Stock Option
(Ordinary Shares); current annual
Executive Performance Measures and performance
Compensation b. Deferred Bonus = not paid for two or
- Earnings = salary, bonus, long-term more years; avoid or delay taxes; retain
compensation key managers
- Stock price = stock options, non cash c. Stock Options = right to purchase stock
compensation at some future date; increase stock
- Survey: price; increase executive ownership;
- 57% of current salary = cash & stock aligns executive to shareholders interest
comp = long run d. Performance Shares = grant stock for
- 40% of current salary = bonus = short achieving goal over two years or more
run

Cash Compensation Performance Measures/Evaluation

- Salaries and bonuses 1. Design perf measures that require multiple tasks
- Periodic salary raises = permanent a. Should measure different aspects of an
- Bonuses = flexible employee’s job
- Unethical Practices of Income-Based 2. Design perf measures for activities in teams
Compensation a. team accomplishes better securities
- Postponing needed maintenance exp. b. Encourage to help one another towards
- Postponing revenue recognition goal
c. Encourage dev of team skills
Non Cash Compensation d. Criticism:
- improvement in title, office location, trappings i. Incentives for excelling
- Use of expense account, corporate country club individuals are diminished
facilities ii. Unproductive team members
share in rewards
Environmental and Ethical Responsibilities
TOTAL QUALITY MANAGEMENT
- reprimand unethical conduct irrespective of the
Quality
benefits of such action
- Meets or exceeds customer’s expectations
- Have a strong underlying system
- Requirement among all individual dept or
- Socially responsible companies set very strict
subdivisions. in orgs to strive for customer
environmental goals and measures
satisfaction
- Component of employee compensation and
TQM
appraisal
- P&G - unyielding and improving efforts to meet
and exceed customer expectations.

CHAPTER 23 Core Principles

1. Focus on Satisfying Customer
Management Accounting in a Changing a. identify internal and external customer
Environment b. Determine their requirements
_________________________________________ c. Requirements will serve as bases for
specifications (e.g., design req).
Integrative Framework 2. Continuous Improvement (Kaizen)
5.) Technological Innovation and Market Conditions a. Quality is a way of life, not a destination
- external shocks; affect firm’s business strategy, 3. Involve everyone
investment, org architecture, incentives, action, a. Simple information sharing, dialogue, or
and value of the firm. group problem solving, self direction
6.) Business Strategy 4. Involve top management actively
a.) Asset Structure. Customer Base. Nature of a. Should be supported by managers
Knowledge Creation b. Demonstrate their dedication to TQM to
b.) interacts with the firm’s org architecture to everyone.
provide incentives for managers and 5. Use SMART objectives
employees. a. So that progress can be seen
7.) Organizational Architecture b. Forge efforts towards a common goal.
a.) Decision rights partitioning c. Help ensure quality improvements and
b.) Performance Eval System supporting systems.
c.) Performance Reward and Punishment 6. Recognize quality achievements timely
System a. emphasize firm’s continuous struggle
8.) Incentives and Actions for better quality
9.) Firm Value b. Efforts are short lived if there are no
changes to the compensation and
Observations: appraisal system.
a. Accounting changes happen with Business and 7. Provide training on TQM
Org Changes a. Communication link to convey
i. Decision Rights commitment to quality
ii. Perf Eval System
b. Org Arch alterations happen due to external TQM Implementation Guidelines as per Institute of
shocks Management Accountants (IMA)
1. Year one - Preparation and Planning
Implications: a. Create quality council and staff
a. Understand what is driving change b. Conduct Executive - Quality training
b. Do not apply an acc system because of other programs
firms using it c. Conduct Quality audits
c. Acc systems should not be changed without d. Prepare gap analysis (Best in Class vs
concurrent, consistent, changes in the way Company)
decisions rights are partitioned. e. Develop strategy on TQM
2. Year two - Training and Implementation
_____________________________________________
 a. Conduct employee communications and g. Maintenance of testing equipment
training program h. Plant utilities in the inspection area
b. Establish quality terms i. field testing and appraisal at customer
c. Create a measurement system and set site
goals
3. Year three - Assessment, Review, and Revise COST OF NONCONFORMANCE - costs incurred and
a. Revise comp & appr. systems opportunity costs due to rejection of products
b. Launch external initiatives with suppliers
c. Review and revise 3. Internal Failure Costs - Costs incurred AFTER
INSPECTION from appraisal process
Types of Conformance a. Net cost of scrap
1. Goalpost/Zero-defects Conformance b. Net cost of spoilage
a. expects output to be within a range c. Reword labor and overhead
around a target d. Reinspection of reworked products
b. Target - ideal or desired outcome e. Retesting of reworked products
2. Absolute/Robust Quality Conformance f. Downtime caused by quality problems
a. exactly meeting the target without g. Disposal of defects
variation or allowance h. Analysis of the cause of defects
b. Deviation from target = quality failure i. re-entering data because of errors key
and weakness j. debugging software errors

Costs of Quality 4. External Failure Costs - poor-quality products

- Grade quality, design quality, and performance detected AFTER SHIPPED
quality a. Cost of field servicing and handling
complaints
COST OF CONFORMANCE - ensure products meet b. warranty repairs and replacements
expectations c. Repairs and replacements beyond
warranty period
1. Prevention Costs - AVOID poor-quality goods or d. Sales return and allowances from
REDUCE defects in production (BEFORE quality problems
PRODUCTION) e. Product recalls
a. Systems development f. Liability from defective products
b. Quality engineering g. Lost sales from a reputation for poor
c. Quality training quality products
d. Quality circles
e. Statistical process control act. Quality Cost Information
f. Supervision of prevention activities - gather all quality costs from each activity and
g. Quality data gathering. analysis , and accumulate all in a report
reporting - USAGE:
h. Quality improvement projects - Basis for budgets for quality costs -
i. Technical support to suppliers reduce costs
j. audits of the effectiveness of quality - See financial significance of quality
system - identify importance off quality problems
- See whether quality costs are poorly
2. Appraisal Costs - INSPECTION costs, identify distributed and when needed
products DURING THE PRODUCTION - LIMITATIONS:
a. Test and inspection of incoming - some info are omitted: opportunity costs
materials - does not automatically solve quality
b. Supervision of testing and inspection problems in programs
activities - Log between improvements and results
c. Test and inspection of in-process goods
d. Finished product testing and inspection Nonfinancial Measures of Quality and Customer
e. Supplies used in testing and inspection Satisfaction
f. Depression of testing equipment
 - Indicate future needs and specific preferences (2) Improving Plant Layout
and areas of improvement - Improve manufacturing flow lines
- Factory focus approach - bring all machines in
Customer Satisfaction one location; reduces throughput/cycle time -
1. On Time Delivery Rate - % of shipments made time to create a product
on or before the scheduled delivery date
2. Delivery Delays - actual delivery date vs date (3) Reduce Setup Time
requested by customer - Setup - moving materials, changing mach
3. % of Product Failure settings, running tests
4. No. of Customer Complaints - estimate that
10-20% had bad experience too (4) Improving Production Scheduling
5. No. of Defective Units shipped as % of total - Schedule production in small batches
shipped - Good coordination of efforts from value chain
6. Market research info on customer preference
and satisfaction (5) Zero Defects
- Continuous monitoring - makes workers
Internal Performance responsible for spotting defective units and
1. No. of defects for each product immediately spotting the cause and correcting it
2. Employee turnover as % of ave total employees - Early detection = saves rework and scrap costs
3. Process yield - ratio of good output to total
output (6) Maintaining Flexible Workforce
- Workers are flexible and multi-skilled.
TIME - Should know how to operate all eqp. on a
- Driver of strategy product flow line.
- Measure it to manage it - Cross training

1.) Customer Response Time FINANCIAL BENEFITS OF JIT

a.) Time to place order to time delivered 1. Lower carrying costs
2.) On-time Performance 2. Greater transparency of the production process
a.) Delivered by the time it was scheduled 3. Eliminate the causes of rework, scrap, and
to be delivered waste
4. Lower manufacturing lead times
_____________________________________________
JUST-IN-TIME SYSTEM PRO-FORMA FOR JIT

Cost Savings
JIT/Lean Production System
Add: Incremental Contribution Margin
- Demand-pull manufacturing system; each Increase in Selling Price x No. of Units
component is produced as soon as and only Decrease in Var Cost x No. of Units
when needed Total
- Activity is prompted by the need of a station’s Less: Additional Costs in implementing JIT
output by another station = demand triggers an Net Benefit
order of steps
- Close coordination between stations PERFORMANCE MEASURES FOR JIT
- GOAL: 1. Financial
- Meet customer demand timely a. Inventory Turnover Ratio - inc
- High-quality products 2. NonFinancial
- Lowest cost a. Manufacturing Lead Time - dec
b. Units Produced/hour - inc
FEATURES c. No. of days of inv on hand - dec
(1.) Limited No. of Supplier d. Total Mach Set-up time/ total
- Rely on few ULTRAreliable suppliers, willing to Manufacturing time - dec
make frequent deliveries in small lots. e. No. of units to be reworked or scrap/
- DEPENDABILITY total units started and completed - dec
 3. Shift products that do not have to be made to
EFFECT ON COSTING SYSTEM the bottlenecks to non-bottlenecks
- Reduce overhead costs (mat handling, 4. Reduce setup time and processing time at
warehousing, inspecting) bottleneck operations
- Direct tracing of indirect costs 5. Improve the quality of parts or products
manufactured at the bottleneck operation
_____________________________________________
*ABC System - long run; TOC System - short run
PROCESS REENGINEERING
Reengineering PRO-FORMA FOR TOC
- rethinking and redesigning business processes
(1) COMPARE THROUGHPUT (TP) CM
- Changes roles and responsibilities
- Eliminate unnecessary activities Current TPCM
- Use IT Less: Modified TPCM
- Develop employee skills Total

_____________________________________________ *if negative = accept; otherwise, reject

THEORY OF CONSTRAINTS (2) TEST IF TPCM EXCEEDS INCREMENTAL COST

THEORY OF CONSTRAINTS Increase in TPCM (TPCM unit x No. of additional units)

Less: Increase in relevant/incremental costs
- Identify and manage constraints in making
Total
products
- Maximize operating income when faced with *If positive = accept; otherwise, reject
some bottlenecks and non-bottlenecks
_____________________________________________
operations
ACCOUNTING CHANGE
1.) Throughput Contribution
- Revenue = Direct Materials + Cost of Remember:
Goods Sold 1. Change in org arch = change in acc system
2.) Investments 2. Change in prod system (e.g., JIT) = change in
- Sum of Material Costs = DM + WIP + acc system
FG + R&D + PPE 3. Implementing productivity measurement system
3.) Operating Costs - fixed = no org change
- All costs of operations (other than DM) 4. No such thing as ideal management accounting
incurred to earn throughput contribution. system
- Salaries and wages, rent, utilities and
depreciation Signs of Poor Internal Accounting System
1. Dysfunctional behavior of managers
Bottleneck 2. Poor operating decisions
- Large quantities of inventory waiting to be
worked on
- Lowest capacity

GOAL = INCREASE THROUGHPUT CONTRIBUTION;

DECREASE INVESTMENT AND OPERATING COSTS

MANAGING BOTTLENECKS
- keep bottlenecks busy and increase bottleneck
efficiency and capacity
1. Eliminate Idle time
2. Process only those parts that increase
throughput contribution, not those that will
remain in FG or spare parts inventory