comparison of financial and managerial accounting

Comparison of Financial and Managerial Accounting

Opportunity Costs

The potential benefit that is given up when one alternative is selected over another.

Example: If you werenot attending college,you could be earning$15,000 per year. Your opportunity costof attending college for one year is $15,000.

Sunk Costs

Sunk costs have already been incurred and cannot be changed now or in the future. They should be ignored when making decisions.

Example: You bought an automobile that cost $10,000 two years ago. The $10,000 cost is sunk because whether you drive it, park it, trade it, or sell it, you cannot change the $10,000 cost.

The ProductThe Product

DirectMaterials

DirectMaterials

DirectLaborDirectLabor

ManufacturingOverhead


Manufacturing Costs

Non-manufacturing Costs

Marketing or Selling Cost

Costs necessary to get the order and deliver

the product.

Administrative Cost

All executive, organizational, and

clerical costs.

Product Costs Versus Period Costs

Product costs include direct materials, direct labor, and manufacturing overhead.

Period costs include all marketing or selling costs and administrative costs.

Inventory Cost of Good Sold

BalanceSheet

IncomeStatement

Sale

Expense

IncomeStatement

Comparing Merchandising and Manufacturing Activities

Merchandisers . . .– Buy finished goods.

– Sell finished goods.

Manufacturers . . .– Buy raw materials.

– Produce and sell finished goods.

Types of Product Costing Systems

ProcessCosting

Job-orderCosting

A company produces many units of a single A company produces many units of a single product. product.

One unit of product is indistinguishable from One unit of product is indistinguishable from other units of product.other units of product.

The identical nature of each unit of product The identical nature of each unit of product enables enables assigning the same average cost per unit.assigning the same average cost per unit.

A company produces many units of a single A company produces many units of a single product. product.

One unit of product is indistinguishable from One unit of product is indistinguishable from other units of product.other units of product.

The identical nature of each unit of product The identical nature of each unit of product enables enables assigning the same average cost per unit.assigning the same average cost per unit.

Types of Product Costing Systems

ProcessCosting

Job-orderCosting

Many different products are produced each period. Many different products are produced each period.

Products are manufactured to order.Products are manufactured to order.

The unique nature of each order requires tracing or The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost allocating costs to each job, and maintaining cost

records for each job.records for each job.

Many different products are produced each period. Many different products are produced each period.

Products are manufactured to order.Products are manufactured to order.

The unique nature of each order requires tracing or The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost allocating costs to each job, and maintaining cost

records for each job.records for each job.

Manufacturing Overhead


Job No. 1Job No. 1

Job No. 2Job No. 2

Job No. 3Job No. 3

Charge Charge direct direct

material and material and direct labor direct labor

costs to costs to each job as each job as

work is work is performed.performed.

Charge Charge direct direct

material and material and direct labor direct labor

costs to costs to each job as each job as

work is work is performed.performed.

Direct Manufacturing Costs

Direct MaterialsDirect Materials

Direct LaborDirect Labor

Manufacturing Manufacturing Overhead, Overhead, including including indirect indirect

materialsmaterials and and indirect laborindirect labor, ,

are allocated to are allocated to jobs rather than jobs rather than directly traced directly traced to each job.to each job.

Manufacturing Manufacturing Overhead, Overhead, including including indirect indirect

materialsmaterials and and indirect laborindirect labor, ,

are allocated to are allocated to jobs rather than jobs rather than directly traced directly traced to each job.to each job.

Indirect Manufacturing Costs

Direct MaterialsDirect Materials

Direct LaborDirect Labor

Job No. 1Job No. 1

Job No. 2Job No. 2

Job No. 3Job No. 3Manufacturing Overhead


The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the

period begins.

Manufacturing Overhead Application

Estimated total manufacturingoverhead cost for the coming period

Estimated total units in theallocation base for the coming period

POHR =

Ideally, the allocation base is a cost driver that causes

overhead.

Ideally, the allocation base is a cost driver that causes

overhead.

Using a predetermined rate makes itpossible to estimate total job costs sooner.

Actual overhead for the period is notknown until the end of the period.

The Need for a POHR

Actual amount of the allocation based upon the actual level of

activity.

Actual amount of the allocation based upon the actual level of

activity.

Based on estimates, and determined before the

period begins.

Based on estimates, and determined before the

period begins.

Application of Manufacturing Overhead

Overhead applied = POHR × Actual activity

For each direct labor hour worked on a particular job, $4.00 of factory overhead

will be applied to that job.

For each direct labor hour worked on a particular job, $4.00 of factory overhead

will be applied to that job.

Overhead Application Rate

POHR = $4.00 per DLH

$640,000

160,000 direct labor hours (DLH)POHR =

Estimated total manufacturingoverhead cost for the coming period

Estimated total units in theallocation base for the coming period

POHR =

Job-Order Cost Accounting

Cost Classifications for Predicting Cost Behavior

How a cost will react to changes in the level of activity

within the relevant range.

– Total variable costs change when activity changes.

– Total fixed costs remain unchanged when activity changes.

How a cost will react to changes in the level of activity

within the relevant range.

– Total variable costs change when activity changes.

– Total fixed costs remain unchanged when activity changes.

Cost Classifications for Predicting Cost Behavior

Behavior of Cost (within the relevant range)

Cost In Total Per Unit

Variable Total variable cost changes Variable cost per unit remainsas activity level changes. the same over wide ranges

of activity.

Fixed Total fixed cost remains Average fixed cost per unit goesthe same even when the down as activity level goes up.

activity level changes.

The Activity Base

A measure of what causes the

incurrence of a variable cost

A measure of what causes the

incurrence of a variable cost

UnitsUnitsproducedproduced

UnitsUnitsproducedproduced

Miles driven

Miles driven

Labor hours

Labor hours

Machine hours

Machine hours

Extent of Variable Costs

The proportion of variable costs differs across organizations. For example . . .

A public utility withA public utility withlarge investments inlarge investments inequipment will tendequipment will tend

to have to have fewerfewervariable costs.variable costs.

A public utility withA public utility withlarge investments inlarge investments inequipment will tendequipment will tend

to have to have fewerfewervariable costs.variable costs.

A manufacturing companyA manufacturing companywill often have will often have manymany

variable costs.variable costs.

A manufacturing companyA manufacturing companywill often have will often have manymany

variable costs.variable costs.

A merchandising companyA merchandising companyusually will have a usually will have a highhigh

proportionproportion of variable costs of variable costslike cost of sales.like cost of sales.

A merchandising companyA merchandising companyusually will have a usually will have a highhigh

proportionproportion of variable costs of variable costslike cost of sales.like cost of sales.

A service companyA service companywill normally have a will normally have a highhigh

proportionproportion of variable costs. of variable costs.

A service companyA service companywill normally have a will normally have a highhigh

proportionproportion of variable costs. of variable costs.

Examples of Variable Costs

1. Merchandising companies – cost of goods sold.

2. Manufacturing companies – direct materials, direct labor, and variable overhead.

3. Merchandising and manufacturing companies – commissions, shipping costs, and clerical costs such as invoicing.

4. Service companies – supplies, travel, and clerical.

1. Merchandising companies – cost of goods sold.

2. Manufacturing companies – direct materials, direct labor, and variable overhead.

3. Merchandising and manufacturing companies – commissions, shipping costs, and clerical costs such as invoicing.

4. Service companies – supplies, travel, and clerical.

RelevantRange

A straight line closely

approximates a curvilinear

variable cost line within the

relevant range.

A straight line closely

approximates a curvilinear

variable cost line within the

relevant range.

Activity

To

tal

Co

st

Economist’sCurvilinear Cost

Function

The Linearity Assumption and the Relevant Range

Accountant’s Straight-Line Approximation (constant

unit variable cost)

ExamplesAdvertising and Research and Development

ExamplesAdvertising and Research and Development

ExamplesDepreciation on Equipment and

Real Estate Taxes

ExamplesDepreciation on Equipment and

Real Estate Taxes

Types of Fixed Costs

DiscretionaryMay be altered in the short-term by current managerial decisions

DiscretionaryMay be altered in the short-term by current managerial decisions

CommittedLong-term, cannot be significantly reduced

in the short term.

CommittedLong-term, cannot be significantly reduced

in the short term.

The Trend Toward Fixed Costs

The trend in many industries is toward greater fixed costs relative to variable costs.

As machines take overAs machines take overmany mundane tasksmany mundane taskspreviously performedpreviously performed

by humans, by humans, ““knowledge workersknowledge workers””

are demanded forare demanded fortheir minds rathertheir minds ratherthan their musclesthan their muscles

As machines take overAs machines take overmany mundane tasksmany mundane taskspreviously performedpreviously performed

by humans, by humans, ““knowledge workersknowledge workers””

are demanded forare demanded fortheir minds rathertheir minds ratherthan their musclesthan their muscles

Knowledge workersKnowledge workerstend to be salaried,tend to be salaried,highly-trained andhighly-trained and

difficult to replace. Thedifficult to replace. Thecost to compensatecost to compensate

these valued employeesthese valued employeesis is relatively fixedrelatively fixed

rather than variable.rather than variable.

Knowledge workersKnowledge workerstend to be salaried,tend to be salaried,highly-trained andhighly-trained and

difficult to replace. Thedifficult to replace. Thecost to compensatecost to compensate

these valued employeesthese valued employeesis is relatively fixedrelatively fixed

rather than variable.rather than variable.

Ren

t C

ost

in

T

ho

usa

nd

s o

f D

oll

ars

0 1,000 2,000 3,000 Rented Area (Square Feet)

0

30

60

Fixed Costs and Relevant Range

90

Relevant

Range

Total cost doesn’t change for a wide range of activity,

and then jumps to a new higher cost for

the next higher range of activity.

Total cost doesn’t change for a wide range of activity,

and then jumps to a new higher cost for

the next higher range of activity.

Let’s put our knowledge of cost

behavior to work by preparing a

contribution format income statement.

The Contribution Format

Total Unit

Sales Revenue 100,000$ 50$

Less: Variable costs 60,000 30

Contribution margin 40,000$ 20$

Less: Fixed costs 30,000

Net operating income 10,000$

Total Unit

Sales Revenue 100,000$ 50$

Less: Variable costs 60,000 30

Contribution margin 40,000$ 20$

Less: Fixed costs 30,000

Net operating income 10,000$

The contribution margin format emphasizes The contribution margin format emphasizes cost behavior. Contribution margin covers fixed cost behavior. Contribution margin covers fixed

costs and provides for income.costs and provides for income.

The contribution margin format emphasizes The contribution margin format emphasizes cost behavior. Contribution margin covers fixed cost behavior. Contribution margin covers fixed

costs and provides for income.costs and provides for income.

The Contribution Format

Used primarily forUsed primarily forexternal reporting.external reporting.

Used primarily byUsed primarily bymanagement.management.

Break-Even Analysis

Here is the information from Racing Bicycle Company:

Total Per Unit PercentSales (500 bikes) 250,000$ 500$ 100%Less: variable expenses 150,000 300 60%Contribution margin 100,000$ 200$ 40%

Less: fixed expenses 80,000 Net operating income 20,000$

Total Per Unit PercentSales (500 bikes) 250,000$ 500$ 100%Less: variable expenses 150,000 300 60%Contribution margin 100,000$ 200$ 40%

Less: fixed expenses 80,000 Net operating income 20,000$

Contribution Margin Method

The contribution margin method has two key equations.

Fixed expensesUnit contribution margin

=Break-even point

in units sold

Fixed expenses CM ratio

=Break-even point intotal sales dollars


Let’s use the contribution margin method to calculate the break-even point in total sales

dollars at Racing.

Fixed expenses CM ratio

=Break-even point intotal sales dollars

$80,000$80,00040%40% = $200,000 break-even sales= $200,000 break-even sales


Let’s use the contribution margin method to calculate the break-even point in units sold at

Racing.

Fixed expenses Unit CM

=Break-even point in

Units sold

$80,000$80,000$200/unit$200/unit = 400 break-even units= 400 break-even units

Target Profit Analysis

The contribution margin method can be used to determine the sales volume needed to achieve a target

profit.

Suppose Racing Bicycle Company wants to know how many bikes must be sold to earn a

profit of $100,000.

The Contribution Margin Approach

The contribution margin method can be used to determine that 900 bikes must be sold to earn the

target profit of $100,000.

Fixed expenses + Target profit Unit contribution margin

=Unit sales to attain

the target profit

$80,000 + $100,000 $200/bike

= 900 bikes

Cost Structure and Profit Stability

Cost structure refers to the relative proportion of fixed and variable costs in an organization.

Managers often have some latitude in determining their organization’s cost structure.

Operating Leverage

• A measure of how sensitive net operating income is to percentage changes in sales.

Contribution margin Net operating income

Degree ofoperating leverage

=

Operating Leverage Example

Low-Lev Company High-Lev Company

(1,000,000 units) (1,000,000 units)

Amount % Amount %

Sales $1,000,000 100 $1,000,000 100

Var. Costs 750,000 75 250,000 25

CM 250,000 25 750,000 75

Fixed Costs 50,000 5 550,000 55

Operating Profit

200,000 20 200,000 20

Breakeven Point

200,000 units 733,334

CM per unit $0.25/unit $0.75/unit

Operating Leverage

1.25 3.75

Operating Leverage Example

Low-Lev Company High-Lev Company

(1,100,000 units) (1,100,000 units)

Amount % Amount %

Sales $1,100,000 100 $1,100,000 100

Var. Costs 825,000 75 275,000 25

CM 275,000 25 825,000 75

Fixed Costs 50,000 5 550,000 55

Operating Profit

225,000 20 275,000 20

Breakeven Point

200,000 units 733,334

CM per unit $0.25/unit $0.75/unit

Operating Leverage

1.25 3.75

10% increase in sales

10% * 1.25 = 12.5%increase in profit

10% * 3.75 = 37.5%increase in profit

Cost Structure and Profit Stability

There are advantages and disadvantages to high fixed cost (or low variable cost) and low fixed

cost (or high variable cost) structures.

An advantage of a high fixedcost structure is that incomewill be higher in good years

compared to companieswith lower proportion of

fixed costs.

An advantage of a high fixedcost structure is that incomewill be higher in good years

compared to companieswith lower proportion of

fixed costs.

A disadvantage of a high fixedcost structure is that income

will be lower in bad yearscompared to companieswith lower proportion of

fixed costs.

A disadvantage of a high fixedcost structure is that income

will be lower in bad yearscompared to companieswith lower proportion of

fixed costs.

The Basic Framework of Budgeting

A budget is a detailed quantitative plan for acquiring and using financial and other resources

over a specified forthcoming time period.

1. The act of preparing a budget is called budgeting.

2. The use of budgets to control an organization’s activity is known as budgetary control.

Planning and Control

PlanningPlanning – – involves developing involves developing objectives and preparing objectives and preparing various budgets to various budgets to achieve these objectives.achieve these objectives.

PlanningPlanning – – involves developing involves developing objectives and preparing objectives and preparing various budgets to various budgets to achieve these objectives.achieve these objectives.

ControlControl – – involves the steps taken involves the steps taken by management that by management that attempt to ensure the attempt to ensure the objectives are attained.objectives are attained.

ControlControl – – involves the steps taken involves the steps taken by management that by management that attempt to ensure the attempt to ensure the objectives are attained.objectives are attained.

Advantages of Budgeting

Advantages

Define goalDefine goaland objectivesand objectives

Uncover potentialUncover potentialbottlenecksbottlenecks

CoordinateCoordinateactivitiesactivities

CommunicateCommunicateplansplans

Think about andThink about andplan for the futureplan for the future

Means of allocatingMeans of allocatingresourcesresources

Responsibility Accounting

Managers should be held responsible for those items — Managers should be held responsible for those items — and and onlyonly those items — that those items — that

the manager can actually controlthe manager can actually controlto a significant extent.to a significant extent.

Managers should be held responsible for those items — Managers should be held responsible for those items — and and onlyonly those items — that those items — that

the manager can actually controlthe manager can actually controlto a significant extent.to a significant extent.

Human Factors in Budgeting

The success of budgeting depends upon three important The success of budgeting depends upon three important factors:factors:

1.1. Top management must be enthusiastic and committed to Top management must be enthusiastic and committed to the budget process.the budget process.

2.2. Top management must not use the budget to pressure Top management must not use the budget to pressure employees or blame them when something goes wrong.employees or blame them when something goes wrong.

3.3. Highly achievable budget targets are usually preferred Highly achievable budget targets are usually preferred when managers are rewarded based on meeting budget when managers are rewarded based on meeting budget targets.targets.

The success of budgeting depends upon three important The success of budgeting depends upon three important factors:factors:

1.1. Top management must be enthusiastic and committed to Top management must be enthusiastic and committed to the budget process.the budget process.

2.2. Top management must not use the budget to pressure Top management must not use the budget to pressure employees or blame them when something goes wrong.employees or blame them when something goes wrong.

3.3. Highly achievable budget targets are usually preferred Highly achievable budget targets are usually preferred when managers are rewarded based on meeting budget when managers are rewarded based on meeting budget targets.targets.

The Master Budget: An Overview

ProductionBudget

ProductionBudget

Selling andAdministrative

Budget

Selling andAdministrative

Budget

DirectMaterialsBudget

DirectMaterialsBudget


Budget


Budget

DirectLabor

Budget

DirectLabor

Budget

CashBudgetCash

Budget

SalesBudgetSales

Budget

Budgeted Financial StatementsBudgeted Financial StatementsBudgeted Financial StatementsBudgeted Financial Statements

EndingFinished GoodsBudget

EndingFinished GoodsBudget

Budgeting Example

Royal Company is preparing budgets for the quarter ending Royal Company is preparing budgets for the quarter ending June 30.June 30.

Budgeted sales for the next five months are:Budgeted sales for the next five months are: April April 20,000 units20,000 units May May 50,000 units50,000 units June June 30,000 units30,000 units July July 25,000 units25,000 units August August 15,000 units.15,000 units.

The selling price is $10 per unit.The selling price is $10 per unit.

Royal Company is preparing budgets for the quarter ending Royal Company is preparing budgets for the quarter ending June 30.June 30.

Budgeted sales for the next five months are:Budgeted sales for the next five months are: April April 20,000 units20,000 units May May 50,000 units50,000 units June June 30,000 units30,000 units July July 25,000 units25,000 units August August 15,000 units.15,000 units.

The selling price is $10 per unit.The selling price is $10 per unit.

Expected Cash Collections

• All sales are on account.All sales are on account.• Royal’s collection pattern is:Royal’s collection pattern is:

70% collected in the month of sale,70% collected in the month of sale, 25% collected in the month following sale,25% collected in the month following sale, 5% uncollectible.5% uncollectible.

• The March 31 accounts receivable balance of $30,000 The March 31 accounts receivable balance of $30,000 will be collected in full.will be collected in full.

• All sales are on account.All sales are on account.• Royal’s collection pattern is:Royal’s collection pattern is:

70% collected in the month of sale,70% collected in the month of sale, 25% collected in the month following sale,25% collected in the month following sale, 5% uncollectible.5% uncollectible.

• The March 31 accounts receivable balance of $30,000 The March 31 accounts receivable balance of $30,000 will be collected in full.will be collected in full.


From the Sales Budget for April.From the Sales Budget for April.From the Sales Budget for April.From the Sales Budget for April.


From the Sales Budget for May.From the Sales Budget for May.From the Sales Budget for May.From the Sales Budget for May.

Quick Check

What will be the total cash collections for the quarter? What will be the total cash collections for the quarter?

a. $700,000a. $700,000

b. $220,000b. $220,000

c. $190,000c. $190,000

d. $905,000d. $905,000

What will be the total cash collections for the quarter? What will be the total cash collections for the quarter?

a. $700,000a. $700,000

b. $220,000b. $220,000

c. $190,000c. $190,000

d. $905,000d. $905,000

The Production Budget

Production must be adequate to meet budgetedProduction must be adequate to meet budgetedsales and provide for sufficient ending inventory.sales and provide for sufficient ending inventory.


• The management at Royal Company wants ending The management at Royal Company wants ending inventory to be equal to inventory to be equal to 20%20% of the following month’s of the following month’s budgeted sales in units.budgeted sales in units.

• On March 31, 4,000 units were on hand.On March 31, 4,000 units were on hand.

Let’s prepare the production budget.Let’s prepare the production budget.

• The management at Royal Company wants ending The management at Royal Company wants ending inventory to be equal to inventory to be equal to 20%20% of the following month’s of the following month’s budgeted sales in units.budgeted sales in units.

• On March 31, 4,000 units were on hand.On March 31, 4,000 units were on hand.

Let’s prepare the production budget.Let’s prepare the production budget.


March 31March 31ending inventoryending inventory

March 31March 31ending inventoryending inventory

Budgeted May sales 50,000

Desired ending inventory % 20%Desired ending inventory 10,000

Quick Check

What is the required production for May? What is the required production for May?

a. 56,000 unitsa. 56,000 units

b. 46,000 unitsb. 46,000 units

c. 62,000 unitsc. 62,000 units

d. 52,000 unitsd. 52,000 units

What is the required production for May? What is the required production for May?

a. 56,000 unitsa. 56,000 units

b. 46,000 unitsb. 46,000 units

c. 62,000 unitsc. 62,000 units

d. 52,000 unitsd. 52,000 units

The Cash Budget

The Budgeted Income Statement

Royal CompanyBudgeted Income Statement

For the Three Months Ended June 30

Sales (100,000 units @ $10) 1,000,000$ Cost of goods sold (100,000 @ $4.99) 499,000 Gross margin 501,000 Selling and administrative expenses 260,000 Operating income 241,000 Interest expense 2,000 Net income 239,000$

Royal CompanyBudgeted Balance Sheet

June 30

Current assets Cash 43,000$ Accounts receivable 75,000 Raw materials inventory 4,600 Finished goods inventory 24,950 Total current assets 147,550 Property and equipment Land 50,000 Equipment 367,000 Total property and equipment 417,000 Total assets 564,550$

Accounts payable 28,400$ Common stock 200,000 Retained earnings 336,150 Total liabilities and equities 564,550$

Cost, Profit, and Investments Centers

ResponsibilityCenter

ResponsibilityCenter

CostCenterCost

CenterProfit

CenterProfit

CenterInvestment

CenterInvestment

Center

Cost, profit,and investmentcenters are allknown asresponsibilitycenters.


Cost Center A segment whose manager has control over costs,

but not over revenues or investment funds.


Profit Center A segment whose manager

has control over both costs and revenues,

but no control over investment funds.

Revenues

Sales

Interest

Other

Costs

Mfg. costs

Commissions

Salaries

Other


Investment Center

A segment whose manager has control over costs, revenues, and investments in operating assets.

Evaluating Investment Center Performance:Return on Investment (ROI) Formula

ROI = ROI = Net operating incomeNet operating incomeAverage operating assets Average operating assets

Cash, accounts receivable, inventory,plant and equipment, and other

productive assets.

Cash, accounts receivable, inventory,plant and equipment, and other

productive assets.

Income before interestand taxes (EBIT)

Income before interestand taxes (EBIT)

Calculating Residual Income

Residual income

=Net

operating income

-Average

operating assets

Minimum

required rate of return

( )This computation differs from ROI.

ROI measures net operating income earned relative to the investment in average operating assets.

Residual income measures net operating income earned less the minimum required return on average

operating assets.

Residual Income – An Example

• The Retail Division of Zepher, Inc. has average operating assets of $100,000 and is required to earn a return of 20% on these assets.

• In the current period the division earns $30,000.

Let’s calculate residual income.Let’s calculate residual income.

Residual Income – An Example

Operating assets 100,000$ Required rate of return × 20%Minimum required return 20,000$

Operating assets 100,000$ Required rate of return × 20%Minimum required return 20,000$

Actual income 30,000$ Minimum required return (20,000) Residual income 10,000$

Actual income 30,000$ Minimum required return (20,000) Residual income 10,000$

ROI vs. Residual Income

Retail WholesaleOperating assets 100,000$ 1,000,000$ Required rate of return × 20% 20%Minimum required return 20,000$ 200,000$

Retail WholesaleActual income 30,000$ 220,000$ Minimum required return (20,000) (200,000) Residual income 10,000$ 20,000$

Retail WholesaleOperating assets 100,000$ 1,000,000$ Required rate of return × 20% 20%Minimum required return 20,000$ 200,000$

Retail WholesaleActual income 30,000$ 220,000$ Minimum required return (20,000) (200,000) Residual income 10,000$ 20,000$

The residual income numbers below suggest that the Wholesale Division outperformed the Retail Division because its residual income is $10,000 higher.

However, the Retail Division earned an ROI of 30% compared to an ROI of 22% for the Wholesale Division. The Wholesale Division’s residual income is larger than

the Retail Division simply because it is a bigger division.

The Balanced Scorecard

Management translates its strategy into performance measures that employees

understand and accept.

Management translates its strategy into performance measures that employees

understand and accept.

Performancemeasures

Customers

Learningand growth

Internalbusiness

processes

Financial

The Balanced Scorecard: FromStrategy to Performance Measures

Exh.10-11

FinancialHas our financial

performance improved?

CustomerDo customers recognize that

we are delivering more value?

Internal Business ProcessesHave we improved key business processes so that we can deliver

more value to customers?

Learning and GrowthAre we maintaining our ability

to change and improve?

Performance Measures

What are ourfinancial goals?

What customers dowe want to serve andhow are we going towin and retain them?

What internal busi-ness processes arecritical to providing

value to customers?

Vision and

Strategy

The Balanced Scorecard:Non-financial Measures

The balanced scorecard relies on non-financial measures in addition to financial measures for two reasons:

Financial measures are lag indicators that summarize the results of past actions. Non-financial measures are leading indicators of future financial performance.

Financial measures are lag indicators that summarize the results of past actions. Non-financial measures are leading indicators of future financial performance.

Top managers are ordinarily responsible for financial performance measures – not lower level managers. Non-financial measures are more likely to be understood and controlled by lower level managers.

Top managers are ordinarily responsible for financial performance measures – not lower level managers. Non-financial measures are more likely to be understood and controlled by lower level managers.

The balanced scorecard lays out concrete actions to attain desired outcomes.

A balanced scorecard should have measuresthat are linked together on a cause-and-effect basis.

If we improveone performance

measure . . .

Another desiredperformance measure

will improve.

The Balanced Scorecard

Then

The Balanced Scorecardand Compensation

Incentive compensation should be linked to balanced scorecard

performance measures.

You get the behavior you reward!!

The Balanced ScorecardJaguar Example

Employee skills in installing options

Number ofoptions available

Time toinstall option

Customer satisfactionwith options

Number of cars sold

Contribution per car

Profit

Learningand Growth

Internal Business

Processes

Customer

Financial

Exh.10-13






Number of cars sold


Profit

Increase Options Time

Decreases

Strategies

Satisfaction Increases

Increase Skills

Results





Number of cars sold


Profit

Increase Options

Strategies


ResultsCars sold Increase






Number of cars sold


Profit

Strategies

Results


TimeDecreases

Increase Skills

ContributionIncreases






Number of cars sold


ProfitResults

TimeDecreases

Increase Skills

ContributionIncreases

ProfitsIncrease

If numberof cars sold

and contributionper car increase,

profits increase.

Increase Options

Strategies


comparison of financial and managerial accounting

Documents

period costs product

direct labor costs

total variable costs

variable overhead

sunk costs

total job costs

fewer variable costs

administrative costs