Horngren\'s Cost Accounting: A Managerial Emphasis, 16th Global Edition Chapter 12 Questions and solutions PDF

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Horngren's Cost Accounting: A Managerial Emphasis, 16th Global Edition ...

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CHAPTER 12 STRATEGY, BALANCED SCORECARD, AND STRATEGIC PROFITABILITY ANALYSIS 12-1

Define strategy.

Strategy specifies how an organization matches its own capabilities with the opportunities in the marketplace to accomplish its objectives. 12-2

Describe the five key forces to consider when analyzing an industry.

The five key forces to consider in industry analysis are: (1) competitors, (2) potential entrants into the market, (3) equivalent products, (4) bargaining power of customers, and (5) bargaining power of input suppliers. 12-3

Describe two generic strategies.

Two generic strategies are (1) 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, and (2) 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. 12-4

What is a customer preference map, and why is it useful?

A customer preference map describes how different competitors perform across various product attributes desired by customers, such as price, quality, customer service, and product features. 12.5

What is reengineering?

Reengineering is the fundamental rethinking and redesign of business processes to achieve improvements in critical measures of performance such as cost, quality, service, speed, and customer satisfaction. 12-6

What are four key perspectives in the balanced scorecard?

The four key perspectives in the balanced scorecard are (1) Financial perspective—this perspective evaluates the profitability of the strategy and the creation of shareholder value; (2) Customer perspective—this perspective identifies the targeted customer and market segments and measures the company’s success in these segments; (3) Internal business process perspective —this perspective focuses on internal operations that further both the customer perspective by creating value for customers and the financial perspective by increasing shareholder value; and (4) Learning and growth perspective—this perspective identifies the capabilities at which the organization must excel to achieve superior internal processes that create value for customers and shareholders.

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What are the five types of conditions to consider when evaluating a strategy map?

A strategy map is a diagram that describes how an organization creates value by connecting strategic objectives in explicit cause-and-effect relationships with each other in the financial, customer, internal business process, and learning and growth perspectives. The structural analysis of strategy maps identifies (1) how strongly the strategic objectives relate to one another (2) orphan objectives (3) focal points (4) trigger points and (5) distinctive objectives. 12-8

Describe three features of a good balanced scorecard.

A good balanced scorecard design has several features: 1. It tells the story of a company’s strategy by articulating a sequence of cause-and-effect relationships. 2. It helps to 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. 3. It places strong emphasis on financial objectives and measures in for-profit companies. Nonfinancial measures are regarded as part of a program to achieve future financial performance. 4. It limits the number of measures to only those that are critical to the implementation of strategy. 5. It highlights suboptimal trade-offs that managers may make when they fail to consider operational and financial measures together. 12-9

What are three important pitfalls to avoid when implementing a balanced scorecard?

Pitfalls to avoid when implementing a balanced scorecard are the following: 1. Don’t assume the cause-and-effect linkages are precise; they are merely hypotheses. An organization must gather evidence of these linkages over time. 2. Don’t seek improvements across all of the measures all of the time. 3. Don’t use only objective measures in the balanced scorecard. 4. Don’t fail to consider both costs and benefits of different initiatives before including these initiatives in the balanced scorecard. 5. Don’t ignore nonfinancial measures when evaluating managers and employees. 12-10 Describe three key components in doing a strategic analysis of operating income. Three key components in doing a strategic analysis of operating income are: 1. The growth component, which measures the change in operating income attributable solely to the change in quantity of output sold from one year to the next. 2. The price-recovery component, which measures the change in operating income attributable solely to changes in the prices of inputs and outputs from one year to the next. 3. The productivity component, which measures the change in costs attributable to a change in the quantity and mix of inputs used in the current year relative to the quantity and mix of inputs that would have been used in the previous year to produce current year output.

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12-11 Why might an analyst incorporate the industry-market-size factor and the interrelationships among the growth, price-recovery, and productivity components into a strategic analysis of operating income? An analyst can incorporate other factors such as the growth in the overall market and reductions in selling prices resulting from productivity gains into a strategic analysis of operating income. By doing so, the analyst can attribute the sources of operating income changes to particular factors of interests. For example, the analyst will combine the operating income effects of strategic price reductions and any resulting growth with the productivity component to evaluate a company’s cost leadership strategy. 12-12 How does an engineered cost differ from a discretionary cost? Engineered costs result from a cause-and-effect relationship between the cost driver, output, and the (direct or indirect) resources used to produce that output. Discretionary costs arise from periodic (usually annual) decisions regarding the maximum amount to be incurred. They have no measurable cause-and-effect relationship between output and resources used. 12-13 What is downsizing? Downsizing (also called rightsizing) is an integrated approach 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. Downsizing is an attempt to eliminate unused capacity. 12-14 What is a partial-productivity measure? A partial productivity measure is the quantity of output produced divided by the quantity of an individual input used (e.g., direct materials or direct manufacturing labor). 12-15 “We are already measuring total factor productivity. Measuring partial productivities would be of no value.” Do you agree? Comment briefly. No. Total factor productivity (TFP) and partial productivity measures work best together because the strengths of one offset weaknesses in the other. TFP measures are comprehensive, consider all inputs together, and explicitly consider economic substitution among inputs. Physical partial productivity measures are easier to calculate and understand and, as in the case of labor productivity, relate directly to employees’ tasks. Partial productivity measures are also easier to compare across different plants and different time periods.

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12-16 Jacobs Inc. is a relatively new company that has established a position in the highly competitive biotechnology industry. Which of the following statements is correct regarding Jacobs’ profitability? a. Profits will increase when buyers have lower switching costs. b. Significant up-front capital requirements for new entrants will help Jacobs’ profit margins. c. Profitability is diminished when there are many suppliers. d. Rival firms willing to spend a lot of money on advertising will increase Jacobs’ profits SOLUTION

Choice “b” is correct. Since Jacobs is already established in its industry, profits will increase when barriers to entry are higher because it helps to prevent new firms from entering the industry. Significant up‐front capital requirements are high barriers to entry which make it more difficult for new firms trying to enter into the industry and help keep profits higher for those firms already in the industry. Choice “a” is incorrect. Profits will increase when buyers have higher switching costs because they are less likely to search for other firms to meet their needs. Choice “c” is incorrect. Profitability increases when there are many suppliers. Choice “d” is incorrect. If rival firms are willing to spend a lot on advertising, Jacobs’ profits will likely suffer as it tries to keep up with its competitors. 12-17 The balanced scorecard describes all of the following except which one? a. The descriptions of critical initiatives for the organization’s performance. b. The strategic goals. c. The related measures associated with strategic and tactical goals. d. The definition of strategic business SOLUTION

Choice “d” is correct. The balanced scorecard does not define strategic businesses of a company. It takes the businesses and strategies as given and describes objectives and measures to implement those strategies. Similarly, the balanced scorecard does not define strategic business units. Strategic business units (or responsibility centers) are organizational units managed by an individual who is responsible for its activities. Examples are cost centers, revenue centers, etc. The responsibility centers may be evaluated using the balanced scorecard approach. Choices “a”, “b” and “c” are incorrect. Each of these is described by the balanced scorecard. The balanced scorecard gathers information on multiple dimensions of an organization’s performance defined by critical success factors classified as financial, customer, internal business processes, and learning and growth. 12-18 Canarsie Corporation uses a balanced scorecard to evaluate its digital camera manufacturing operation. Which of the following statements with respect to balanced scorecards is/are correct? I. A balanced scorecard reports management information regarding organizational performance in achieving goals classified by critical success factors to demonstrate that no single dimension of organizational performance can be relied upon to evaluate success.

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II. Performance measures used in a balanced scorecard tend to be divided into financial, customer, internal business process, and learning and growth. III.In a balanced scorecard, internal business processes are what the company does in its attempts to satisfy customers. 1. I and II only are correct. 2. II and III only are correct. 3. III only is correct. 4. I, II, and III are correct SOLUTION

Choice 2 is correct. The balanced scorecard divides performance measures into financial, customer, internal business process, and learning and growth (item II) and internal business processes are what the company does in its attempt to satisfy customers (item III). It is not a comprehensive management information system as described in item I. Some students may interpret item I as only describing multiple measures of performance to evaluate success. If interpreted this way, item I would be a correct statement about the balanced scorecard. In this case, Choice 4 would be correct since all three statements (I, II, and III) would be correct statements with respect to the balanced scorecard. 12-19 Balanced scorecard. Pineway Electric manufactures electric motors. It competes and plans to grow by selling high-quality motors at a low price and by delivering them to customers in a reasonable time after receiving customers’ orders. There are many other manufacturers who produce similar motors. Pineway believes that continuously improving its manufacturing processes and having satisfied employees are critical to implementing its strategy in 2017. Required: 1. Is Pineway’s 2017 strategy one of product differentiation or cost leadership? Explain briefly. 2. Ramsey Corporation, a competitor of Pineway, manufactures electric motors with more sizes and features than Pineway at a higher price. Ramsey’s motors are of high quality but require more time to produce and so have longer delivery times. Draw a simple customer preference map as in Exhibit 12-1 for Pineway and Ramsey using the attributes of price, delivery time, quality, and design features. 3. Draw a strategy map as in Exhibit 12-2 with at least two strategic objectives you would expect to see under each balanced scorecard perspective. Identify what you believe are any (a) strong ties, (b) focal points, (c) trigger points, and (d) distinctive objectives. Comment on the structural analysis of your strategy map. 4. For each strategic objective indicate a measure you would expect to see in Pineway’s balanced scorecard for 2017.

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SOLUTION

(15 min.)

Balanced scorecard.

1. Pineway Electric’s 2017 strategy is a cost leadership strategy. Pineway plans to grow by producing high-quality motors at a low cost delivered to customers at a low price and in a timely manner. Pineway’s motors are not differentiated, and there are many other manufacturers who produce similar motors. To succeed, Pineway must produce high-quality motors at lower costs relative to competitors through productivity and efficiency improvements. 2. Solution Exhibit 12-19A shows the customer preference map for electric motors for Pineway and Ramsey on price, timeliness, quality, and design. SOLUTION EXHIBIT 12-19A Customer Preference Map for Electric Motors

Pineway Ramsey

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3. Solution Exhibit 12-19B presents the strategy map for Pineway for 2017. SOLUTION EXHIBIT 12-19B Strategy Map for Pineway for 2017

The strategy map indicates that developing process skill is an important objective because it has a strong tie to improving manufacturing processes that is a trigger point that has strong ties to improving productivity to reduce costs, improving quality, and delivering on-time, all of which are necessary to increase customer satisfaction (a focal point). Improving productivity and quality are distinctive objectives that give Pineway competitive advantage. The overlap between strong ties and distinctive objectives means that Pineway has a very good ability to successfully implement its strategy.

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4.

Measures that we would expect to see on a Pineway’s balanced scorecard for 2017 are

Financial Perspective (1) Operating income from productivity gain, (2) operating income from growth, (3) cost reductions in key areas. These measures evaluate whether Pineway has successfully reduced costs and generated growth through cost leadership. Customer Perspective (1) Market share in electric motors market, (2) number of new customers, (3) customer satisfaction index. The logic is that improvements in these customer measures are leading indicators of whether Pineway’s cost leadership strategy is succeeding with its customers and helping it to achieve superior financial performance. Internal Business Process Perspective (1) Productivity, (2) defect rates (2) order delivery time, (3) on-time delivery, (4) number of major process improvements. Improvements in these measures are key drivers of achieving cost leadership, quality, and on-time delivery and are expected to lead to more satisfied customers and in turn to superior financial performance Learning and Growth Perspective (1) Percentage of employees trained in process and quality management, (2) employee satisfaction ratings. Improvements in these measures aim to improve Pineway’s ability to achieve cost leadership and have a cause-and-effect relationship with improvements in internal business processes, which in turn lead to customer satisfaction and financial performance. 12-20 Analysis of growth, price-recovery, and productivity components (continuation of 12-19). An analysis of Pineway’s operating-income changes between 2016 and 2017 shows the following:

The industry market size for electric motors did not grow in 2017, input prices did not change, and Pineway reduced the prices of its motors. Required: 1. Was Pineway’s gain in operating income in 2017 consistent with the strategy you identified in requirement 1 of Exercise 12-19? 2. Explain the productivity component. In general, does it represent savings in only variable costs, only fixed costs, or both variable and fixed costs? 12-8

SOLUTION

(20 min.) Analysis of growth, price-recovery, and productivity components (continuation of 12-19). 1. Pineway’s operating income gain is consistent with the cost leadership strategy identified in requirement 1 of Exercise 12-19. The increase in operating income in 2017 was driven by the $145,000 gain in productivity in 2017. Pineway took advantage of its productivity gain to reduce the prices of its motors and to fuel growth. It increased market share by growing even though the total market size was unchanged. 2. The productivity component measures the change in costs attributable to a change in the quantity and mix of inputs used in a year relative to the quantity and mix of inputs that would have been used in a previous year to produce the current year output. It measures the amount by which operating income increases and costs decrease through the productive use of input quantities. When comparing productivities across years, the productivity calculations use current year input prices in all calculations. Hence, the productivity component is unaffected by input price changes. The productivity component represents savings in both variable costs and fixed costs. With respect to variable costs, such as direct materials, productivity improvements immediately translate into cost savings. In the case of fixed costs, such as fixed manufacturing conversion costs, productivity gains result only if management takes actions to reduce unused capacity. For example, reengineering manufacturing processes will decrease the capacity needed to produce a given level of output, but it will lead to a productivity gain only if management reduces the unused capacity by, say, selling off the excess capacity. 12-21 Strategy, balanced scorecard, merchandising operation. Dhyanchand & Sons buys Tshirts in bulk, applies its own trendsetting silk-screen designs, and then sells the T-shirts to a number of retailers. Dhyanchand wants to be known for its trendsetting designs, and it wants every teenager to be seen in a distinctive Dhyanchand T-shirt. Dhyanchand presents the following data for its first two years of operations, 2016 and 2017.

1 2 3 4 5 6 7 8

Number of T-shirts purchased Number of T-shirts discarded Number of T-shirts sold (row 1 — (row 2) Average selling price Average cost per T-shirt Administrative capacity (number of customers) Administrative costs Administrative cost per customer (row 7 ÷ row 6)

2016 225,500 20,500 205,000 $ 32.00 $ 17.00 4,700 $ 1,739,000 $ 370

2017 257,000 24,000 233,000 $ 33.00 $ 15.00 4,450 $ 1,691,000 $ 380

Administrative costs depend on the number of customers Dhyanchand has created capacity to support, not on the actual number of customers served. Dhyanchand had 4,300 customers in 2016 and 4,200 customers in 2017.

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Required: 1. Is Dhyanchand’s strategy one of product differentiation or cost leadership? Explain briefly. 2. Describe briefly the key measures Dhyanchand should include in its balanced scorecard and the reasons for doing so. SOLUTION

(20 min.) Strategy, balanced scorecard, merchandising operation. 1. Dhyanchand & Sons follows a product differentiation strategy. Dhyanchand’s designs are “trendsetting,” its T-shirts are distinctive, and ...