Quiz 14: Management Accounting in a Changing Environment

Business

Balance Scorecard: It is a planning tool or technique which is being used by many organizations worldwide. It helps in using the main products or services of the organization towards the completion of objectives and plans of the organization. Balance Scorecard also helps in formulating various techniques due to which the daily working is aligned in connection with the goals of the organization. In the present case, the information regarding the year to year working and techniques adopted by the corporation are provided. The result of such techniques is also given. a.In lieu of adopting the balanced scorecard by any firm or any organization, it tells the fundamental concept of how firms relate their business strategies to the tool of balanced scorecard. In the given case, the company has taken the decisions of changing all of its plans and the provisions which were related to their adoption of new policies. But the concept of balanced scorecard is used for measuring the decisions with their result and evaluation of the activities. The strengths of the balanced scorecard are as follows: 1. It helped the company in forming new business strategies for becoming a highly rated net worth company. 2. It increases the scope of the managers of the company for adopting various new strategies and to become top-ranked managers. 3. It helps the organization to keep an eye on the managers and their working internally. 4. Balance Scorecard helps the organization in evaluating their ideas which were formed with the actual outcome of such ideas. The Weaknesses of the balanced scorecard are as follows: 1. The formulation of the balanced scorecard is such that it doesn't allow the organizations to directly go in the end part of the structure, but the management in the given case has already entered in that structure. 2. Under this technique, there are numerous ways for doing the work and planning the resources. These numerous ways always create a dilemma in the mind of the managers regarding the adoption of the one way. Hence the work becomes hectic and the managers get confused regarding the solution of the problem. 3. The numerous ways under the balanced scorecard technique create a confusion about whether all of them are important and needs to be followed or not. 4. The employees of the company that works on the clerk level or are employed at the lower level are always in confusion regarding the work to be done. The performance of such employees is not taken for consideration under the balanced scorecard approach. b.In the balanced scorecard approach, there are many ways of working and dealing with the framed policies. The success or decline of any company cannot be measured on any one criteria. In the given case, the company has turned around all of the plans and the company has adopted the last stage of the balanced scorecard. Therefore it is very difficult to analyze whether the success of the company is based upon only one change or all of them.

Balance Scorecard: It is a planning tool or technique which is being used by many organizations worldwide. It helps in using the main products or services of the organization towards the completion of objectives and plans of the organization. Balance Scorecard also helps in formulating various techniques due to which the daily working is aligned in connection with the goals of the organization. Return on Invested Capital The given performance indicator matches with the Financial perspective of the balanced scorecard.Reason: The income or return generated by the company on the amount of money invested in the form of capital in the business is related to terms of finance. It is one of the option available with the company for arranging money for the running of the business. Earnings Growth The given performance indicator matches with the Financial perspective of the balanced scorecard.Reason: The income earned by the company helps the company for the distribution of profits to the shareholders. The shareholders are always interested in knowing the growing pattern of the profits of the company. Therefore it is linked with the financial perspective. Lost Baggage The given performance indicator matches with Customer perspective of the balanced scorecard.Reason: The term baggage is always linked with a person or a group of persons. Baggage is used to carry the things of the person by the person. Therefore it has been linked with the Customer Perspective.Employee Training The given performance indicator matches with Innovation and Learning perspective of the balanced scorecard.Reason: The hours arranged by the management for the betterment and the training of the staff is done to encourage them for learning new things in the market. It also increases the innovation skills of the employees. Therefore it has been linked to the Innovation and Learning Perspective.On Time Arrivals The given performance indicator matches with Internal Business perspective of the balanced scorecard.Reason: The employees of the company are duty bound to arrive at a time in the company and it is the responsibility of the management to ensure such a thing happens on regular basis. It can be done by implementing internal controls in the company. So, therefore, it has been linked with the Internal Business perspective of the balanced scorecard.Percent Empty Seats The given performance indicator matches with the Financial perspective of the balanced scorecard.Reason: If the employees of the company are not present in the organization for working then the profits and growth of the organization will decline for sure. So the declined profits of the company will affect the financial position of the company. Therefore it has been linked with the financial perspective.Employee Turnover The given performance indicator matches with Innovation and Learning perspective of the balanced scorecard.Reason: The number of employees employed in the company doesn't matter, the thing that matter is how many of the employees are always present in the company for doing the work of the company. While working the employee turnover always learn new things. Therefore it has been linked with the Innovation and Learning. Number of Frequent Flyers The given performance indicator matches with Customer perspective of the balanced scorecard.Reason: The number of a person flying in the airways is always linked to knowing the average daily earnings of the airways. The airways always want to know the number of passengers or customers traveling on daily basis. Therefore it has been linked with customer perspective.

a. On the surface, it appears as if the firm is better off than it was last year. However, depending on relative price changes, the firm could actually be worse off. For example, output increased 14 percent ($2,850 ÷ 2,500), steel use increased 20 percent (1,200 ÷ 1,000), and labor increased 7 percent (320 ÷ 300). Therefore, the largest reason for the overall gain in productivity is that labor increased at a lower rate than the rate at which output was expanded. But suppose the price of labor increased far faster than the price of steel and that steel and labor are to some extent substitutes in production. Under this set of assumptions, the overall productivity measure still shows improvement, but net cash flows fall. b. It is important to note that profits can fall even though productivity improves. Managers who are evaluated and rewarded solely on productivity measures will ignore relative price changes in making input mix and output decisions. And this can cause firm value to fall even though productivity increased. The major appeal of productivity measures is to hold managers responsible for physical quantities instead of changes in prices and costs. However, as discussed in chapter 5, even though managers have no control over a variable, if they can influence the consequences resulting from it, the incentives to control these consequences should not be eliminated. Even though managers cannot control prices, they can use less of a more expensive input and more of a cheaper substitute. This is likely the single most important reason why productivity measures were not widely adopted.Another problem with productivity measures involves controlling for quality improvements in output. Personal computers today are faster, have more memory, better screens, and more user-friendly operating systems than three-year-old machines. Merely counting PCs produced ignores quality enhancements. Productivity can decline because PCs are better. Measuring output where quality changes is particularly severe in the service industry. Consider measuring productivity in health care. What is output? Patients seen? Patients cured? Increased life expectancy? There has been enormous technological innovation in health care. Diseases are treatable today that were not 10 years ago. Extremely premature infants now survive whereas 20 years ago they did not. However, such medical advances require large investments in technology and highly trained personnel. It is very difficult to measure productivity without controlling for changes in quality. Many of the proponents of productivity measures unilaterally dismissed traditional accounting measures as being flawed without understanding the basic reasons that U.S. firms had become less productive than their foreign competitors. Productivity accounting systems were proposed without concurrent changes in the other parts of the firm's organizational architecture, such as the systems to partition decision rights and the systems to reward performance. Because productivity measures focus only on physical quantities, they are not all-purpose measures. They do not capture the effects of marketing, relative price changes, quality changes, and new product development. Productivity measures are at best supplements to existing measures. They can also be misleading and induce dysfunctional decisions. On the other hand, a carefully chosen productivity ratio that captures the essence of the firm's or a department's key strategic factor can be of great benefit by removing from the manager the distraction of numerous irrelevant factors. Isolating just one or two variables focuses managers' attention on those variables. The real dangers are that the wrong variables may be chosen and that the world is too complex to be reduced to just one or two variables. The biggest problem with using physical measures is that managers ignore relative price changes. In summary, comprehensive productivity systems have been proposed but not widely adopted. These systems promised to focus more on factors that managers can control, such as the physical transformation of inputs into outputs, rather than an all-encompassing profit figure that contains relative price changes. While managers usually cannot affect prices of their inputs and outputs, they can make substitutions among inputs and outputs, and such substitutions are an important part of management. Without concurrent changes in the way decision rights are partitioned and performance is rewarded, it is unlikely that simply adopting productivity measures will have much effect. c. Direct labor productivity (1,680 ÷ 722) 2.33 (1,710 ÷ 701) 2.44 Dear Ms. Burk: Your idea to reward supervisors and managers based on labor productivity is probably a very bad one. Such a bonus scheme will induce managers to substitute material and capital for labor. Scrap will likely rise. If managers are evaluated and rewarded based only on labor productivity, they will reduce labor content, even at the expense of additional materials, capital, and scrap. Therefore, if you implement your plan, you must install strict controls to limit scrap, additional material, and capital. Labor productivity is only one factor affecting total productivity and profitability. If the price of labor falls relative to the price of aluminum, profit maximizing behavior calls for increasing labor and reducing aluminum. Focusing your managers on only one factor input reduces their incentives to respond to relative price changes. Finally, you are changing the compensation scheme and evaluation system. What changes do you propose making with respect to employee decision making authority? Is employee empowerment changing? (Note: Two of the three legs of the stool are being changed. Why not the third leg?)