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144. Syed Ali, an accountant, was recently hired by Logan Industries, Inc. As part of his first
task, Syed was asked to develop a balanced scorecard for the company. He developed the
following measures:
On-time deliveries
Customer retention
Customer profitability
Product innovation
Market share
Return on assets
Number of defectives
Employee satisfaction
Employee training
Ali knows that some of these indicators are what are called leading indicators and others are
lagging indicators. However, he does not know enough and has approached you to help him.
Required:
(a) Re-arrange the above indicators to reflect whether they are lead or lag indicators. Also identify
the cause-effect relationships that may exist.
(b) Why is it important for managers to differentiate between leading and lagging indicators?
(c) Classify the above indicators under the different perspectives of the balanced scorecard.
(d) How many measures under each perspective of the balanced scorecard should a company
use? Why?
(e) Briefly discuss the major benefits of the balanced scorecard.
(f) Identify and briefly discuss three types of costs associated with the balanced scorecard.
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(a) Here is one possible ordering of the 9 items:
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145. Companies are continuously seeking ways to improve quality of production and reduce
costs. One of the areas is to work with suppliers to improve the quality and reliability of parts and
products shipped. In an article entitled “In Defense of Activity-Based Cost Management,” Robert
S. Kaplan says:
An ABC model can play a major role in improving supplier relationships as well. These
relationships must be a vital part of any quality and cycle-time improvement program. A key
insight is to use ABC to distinguish between low-price and low-cost suppliers. Traditional cost
accounting, with its emphasis on purchase price variances, encourages purchasing people to
continually scan the population of potential suppliers to obtain low price quotations. Most
companies have learned, the hard way, that many of their low-price suppliers are actually
extremely high-cost suppliers. (Source: Management Accounting: November, 1992)
Required:
(a) Explain what Kaplan means by “many of their low-price suppliers are actually extremely high–
cost suppliers.”
(b)What general prevention and appraisal activities can be used to improve the quality and
reliability of parts and products shipped from suppliers?
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146. Levis Strauss and Co., maker of Levi’s familiar 501 and 505 brands of jeans, also make a
“Signature” brand that was introduced several years ago for discount retailers such as Wal-Mart.
Levi’s strategy with the new jeans was to sell a competitively priced pair. The jeans were to be
about one-half the price of the familiar 501 and 505 jeans. To get costs down Levi’s would:
• Use cheaper fabrics and materials.
• Shun costly mass-market advertising.
• Strictly limit the number of fits, styles, and colors.
The Signature brand had a good first year of sales; assume that results for the second year and
later are not yet in.
Required:
1. Assess the new strategy at Levi. What do you think are the potential benefits and risks?
2. How will the firm’s value chain and balanced scorecard change as a result of the new strategy?
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147. Gordon Manufacturing produces high-end furniture products for the luxury hotel industry.
Gordon has succeeded through excellence in design, careful attention to quality in manufacturing,
and in customer service, and through continuous product innovation. The manufacturing process
at Gordon begins with a close consultation with each customer so that the finished product
exactly meets the customer’s specifications. This commonly means unique designs, special
fabrics, and high levels of manufacturing quality. In addition, Gordon believes that a key
competitive edge it has over other competitors is that it has an outstanding design staff that is
able to work with customers to come up with product designs that go beyond the customer’s
expectations.
Required:
Present a balanced scorecard for Gordon Manufacturing with 3-4 perspectives and 3-4
quantitative critical success factors in each perspective.
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148. Julie Hilger started New Treads to combine fashion and sustainability. The original
production of sandals made from recycled plastic has expanded to a complete line of casual
footwear. Current sales total over $2 million. Julie hired the firm’s first controller early this year,
and has asked him to detail suggestions for ways to increase profits. Adrian Warring, the new
controller, has compiled a list of recommended changes that focus on quality improvements. New
Treads customers expect high quality at a low price, a “value” product. So the company must
simultaneously watch costs and quality. After receiving his list of suggestions, Julie calls Adrian to
her office and says, “I don’t see how improving quality can increase productivity. In fact, it seems
to me that efforts to improve quality will slow down production and decrease productivity.”
Required:
Using specific examples, help Adrian explain to Julie why efforts to improve quality can also boost
productivity. How does productivity play a role in the firm’s strategy and competitive
environment?
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149. Dr. Howard Abelson is the director of the Wellness House, a residential center for
recovering alcoholics. A typical patient spends 3-4 weeks in an intensive program of rehabilitation.
The Wellness House has a staff of 45, including 12 certified therapists, to serve an average
patient load of 15. Howard Abelson is attempting to develop some productivity measures for the
center, but is not aware of the limitations of productivity measurement in not-for-profit
organizations. You have been called in as a consultant to help develop appropriate productivity
measures.
Required:
(a) Identify any major differences/limitations you face in developing performance measures for
the Wellness House. (b) Recommend two or three overall measures of productivity that are
appropriate for the Wellness House as a not–for-profit organization.
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150. Divisional managers of SIU Incorporated have been expressing growing dissatisfaction
with the current methods used to measure divisional performance. Divisional operations are
evaluated every quarter by comparison with the static budget prepared during the prior year.
Divisional managers claim that many factors are completely out of their control but are included in
this comparison. This results in an unfair and misleading performance evaluation. The managers
have been particularly critical of the process used to establish standards and budgets. The annual
budget, stated by quarters, is prepared six months prior to the beginning of the operating year.
Pressure by top management to reflect increased earnings has often caused divisional managers
to overstate revenues and/or understate expenses. In addition, once the budget had been
established, divisions were required to “live with the budget.” Frequently, external factors such as
the state of the economy, changes in consumer preferences, and actions of competitors have not
been adequately recognized in the budget parameters that top management supplied to the
divisions. The credibility of the performance review is curtailed when the budget cannot be
adjusted to incorporate these changes. Top management, recognizing the current problems, has
agreed to establish a committee to review the situation and to make recommendations for a new
performance evaluation system. The committee consists of each division manager, the Corporate
Controller, and the Executive Vice President who serves as the chairman. At the first meeting, one
division manager outlined an Achievement of Objectives System (AOS). In this performance
evaluation system, divisional managers would be evaluated according to three criteria:
• Doing better than last year – Various measures would be compared to the same measures of the
prior year.
• Planning realistically – Actual performance for the current year would be compared to realistic
plans and/or goals.
• Managing current assets – Various measures would be used to evaluate the divisional
management’s achievements and reactions to changing business and economic conditions.
A division manager believed this system would overcome many of the inconsistencies of the
current system because divisions could be evaluated from three different viewpoints. In addition,
managers would have the opportunity to show how they would react and account for changes in
uncontrollable external factors. A second division manager was also in favor of the proposed AOS.
However, he cautioned that the success of a new performance evaluation system would be limited
unless it had the complete support of top management. Further, this support should be visible
within all divisions. He believed that the committee should recommend some procedures which
would enhance the motivational and competitive spirit of the divisions.
Required:
(1) Explain whether or not the proposed AOS would be an improvement over the measure of
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divisional performance now used by SIU Incorporated. (2) Develop specific performance measures
for each of the three criteria in the proposed AOS which could be used to evaluate divisional
managers. (3) Discuss the motivational and behavioral aspects of the proposed performance
system. Also, recommend specific programs which could be instituted to promote morale and give
incentives to divisional management.
