CHAPTER 13
Strategy, Balanced Scorecard
and
Strategic Profitability Analysis
Strategy
 Strategy specifies how an organization
matches its own capabilities with the
opportunities in the marketplace to
accomplish its objectives
 A thorough understanding of the industry is
critical to implementing a successful strategy
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
13-2
Five Aspects of Industry Analysis
1.
2.
3.
4.
5.
Number and strength of competitors
Potential entrants to the market
Availability of equivalent products
Bargaining power of customers
Bargaining power of input suppliers
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
13-3
Basic Business Strategies
1.
2.
Product Differentiation – an organization’s ability to offer
products or services perceived by its customers to be superior
and unique relative to the products or services of its
competitors

Leads to brand loyalty and the willingness of customers to
pay high prices
Cost Leadership – an organization’s ability to achieve lower
costs relative to competitors through productivity and
efficiency improvements, elimination of waste, and tight cost
control

Leads to lower selling prices
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
13-4
Implementation of Strategy
 Many companies have introduced a Balanced
Scorecard to manage the implementation of
their strategies
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
13-5
The Balanced Scorecard
 The balanced scorecard translates an
organization’s mission and strategy into a set
of performance measures that provides the
framework for implementing its strategy
 It is called the balanced scorecard because it
balances the use of financial and nonfinancial
performance measures to evaluate
performance
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
13-6
Balanced Scorecard Perspectives
Financial
2. Customer
3. Internal Business Perspective
4. Learning and Growth
1.
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
13-7
The Financial Perspective
 Evaluates the profitability of the strategy
 Uses the most objective measures in the
scorecard
 The other three perspectives eventually feed
back into this dimension
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
13-8
The Customer Perspective
 Identifies targeted customer and market
segments and measures the company’s
success in these segments
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
13-9
The Internal Business Prospective

Focuses on internal operations that create
value for customers that, in turn, furthers the
financial perspective by increasing
shareholder value
 Includes three subprocesses:
1.
2.
3.
Innovation
Operations
Post-sales service
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
13-10
The Learning and Growth Perspective
 Identifies the capabilities the organization
must excel at to achieve superior internal
processes that create value for customers
and shareholders
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
13-11
The Balanced Scorecard Flowchart
Financial
Customer
Internal
Business
Process
Learning
&
Growth
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
13-12
Balanced Scorecard Implementation
 Must have commitment and leadership from
top management
 Must be communicated to all employees
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
13-13
Features of a Good
Balanced Scorecard
 Tells the story of a firm’s strategy, articulating a
sequence of cause-and-effect relationships: the links
among the various perspectives that describe how
strategy will be implemented
 Helps communicate the strategy to all members of
the organization by translating the strategy into a
coherent and linked set of understandable and
measurable operational targets
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
13-14
Features of a Good
Balanced Scorecard
 Must motivate managers to take actions that
eventually result in improvements in financial
performance

Predominately applies to for-profit entities, but has
some application to not-for-profit entities as well
 Limits the number of measures, identifying only the
most critical ones
 Highlights less-than-optimal tradeoffs that managers
may make when they fail to consider operational and
financial measures together
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
13-15
Balanced Scorecard Implementation
Pitfalls
 Managers should not assume the cause-and-
effect linkages are precise: they are merely
hypotheses
 Managers should not seek improvements
across all of the measures all of the time
 Managers should not use only objective
measures: subjective measures are important
as well
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
13-16
Balanced Scorecard Implementation
Pitfalls
 Managers must include both costs and
benefits of initiatives placed in the balanced
scorecard: costs are often overlooked
 Managers should not ignore nonfinancial
measures when evaluating employees
 Managers should not use too many measures
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
13-17
Evaluating Strategy

Strategic Analysis of Operating Income –
three parts:
1.
2.
Growth Component – measures the change
in operating income attributable solely to the
change in the quantity of output sold
between the current and prior periods
Price-Recovery Component – measures the
change in operating income attributable
solely to changes in prices of inputs and
outputs between the current and prior
periods
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
13-18
Evaluating Strategy

Strategic Analysis of Operating Income
3.
Productivity Component – measures the
change in costs attributable to a change in
the quantity of inputs between the current
and prior periods
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
13-19
Revenue Effect of Growth
Revenue
Effect
Of
Growth
=
Actual Units of
Output Sold in
the Current
Period
Actual Units of
Output Sold in
the Prior
Period
X
Current
Period
Selling
Price
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
13-20
Cost Effect of Growth for
Variable Costs
Cost
Effect
Of
Growth
For
Variable
Costs
=
Units of Input
required to
produce Current
Output in the
Prior Period
Actual Units of
Input used
to produce
Prior Period
Output
X
Current
Period
Input
Price
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
13-21
Cost Effect of Growth for
Fixed Costs
 Assuming Adequate Current Capacity:
Cost
Effect
Of
Growth
For
Fixed
Costs
=
Actual Units of
capacity in
Prior Period to
Produce Current
Period Output
Actual Units
of Capacity
in the
Prior
Period
X
Prior
Period
Price
per unit
of
capacity
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
13-22
Cost Effect of Growth for
Fixed Costs
 Assuming Inadequate Current Capacity:
Cost
Effect
Of
Growth
For
Fixed
Costs
=
Units of
Capacity
required to
produce Current
Period Output in
the Prior Period
Actual
Units
of Capacity
in the
Prior
Period
X
Prior
Period
Price
per unit
of
capacity
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
13-23
Revenue Effect of Price Recovery
Revenue
Effect
Of
PriceRecovery
=
Current Period
Selling Price
Prior Period
Selling Price
X
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Current
Period
Units
Sold
13-24
Cost Effect of Price Recovery
 Variable Costs:
Cost
Effect
Of
PriceRecovery
for
Variable
Costs
=
Current Period
Input Price
Prior Period
Input Price
X
Units of
Input
required to
produce
Current
Period’s
Output in
the Prior
Period
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
13-25
Cost Effect of Price Recovery
 Fixed Costs with Adequate Capacity
Cost
Effect
Of
PriceRecovery
for Fixed
Costs
=
Current Period
Price per Unit
of Capacity
Prior Period
Price per Unit
of Capacity
X
Actual Units of
Capacity on
Prior Period to
Produce
Current
Period’s Output
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
13-26
Cost Effect of Price Recovery
 Fixed Costs without Adequate Capacity
Cost
Effect
Of
PriceRecovery
for Fixed
Costs
=
Current Period
Price per Unit
of Capacity
Prior Period
Price per Unit
of Capacity
X
Units of
Capacity
Required to
Produce Current
Period’s Output
in the Prior
Period
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
13-27
Cost Effect of Productivity for
Variable Costs
Cost
Effect
Of
Productivity
for Variable
Costs
=
Actual Units of
Input used to
Produce
Current Period
Output
Units of Input
Required to
Produce Current X
Period’s Output
in Prior Period
Input Price in
Current Period
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
13-28
Cost Effect of Productivity for
Fixed Costs
 With Adequate Capacity
Cost
Effect
Of
Productivity
for Fixed
Costs
=
Actual
Units of
Capacity in
Current
Period
Actual Units of
Capacity in Prior
Price Per Unit of
Period to X
Capacity in
Produce Current
Current Period
Period’s Output
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
13-29
Cost Effect of Productivity for
Fixed Costs
 Without Adequate Capacity
Cost
Effect
Of
Productivity
for Fixed
Costs
=
Actual
Units of
Capacity in
Current
Period
Units of Capacity
Required to
Price Per Unit of
Produce Current X
Capacity in
Period’s Output in
Current Period
the Prior Period
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
13-30
The Management of Capacity
 Managers can reduce capacity-based fixed
costs by measuring and managing unused
capacity
 Unused Capacity is the amount of productive
capacity available over and above the
productive capacity employed to meet
consumer demand in the current period
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
13-31
Analysis of Unused Capacity

Two Important Features:
1.
2.
Engineered Costs result from a cause-andeffect relationship between the cost driver
and the resources used to produce that
output
Discretionary Costs have two parts:
1.
2.
They arise from periodic (annual) decisions
regarding the maximum amount to be incurred
They have no measurable cause-and-effect
relationship between output and resources used
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
13-32
Managing Unused Capacity
 Downsizing (Rightsizing) is an integrated
approach of configuring processes, products,
and people to match costs to the activities
that need to be performed to operate
effectively and efficiently in the present and
future
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
13-33