Chapter 20 – Performance measurement and the balance scorecard
TRUE/FALSE
1. A manager is responsible for all costs of producing product X but does not set the selling price.
This means the manager is responsible for a cost centre.
2. Agricola Ltd is a diversified entity that has several central departments to service its various
operating divisions. These include payroll, accounting and finance, and legal departments. As the
divisions have no alternative but to use these ‘in-house’ services, the charges are referred to as
‘uncontrollable’ charges.
3. The rate of return on assets is an appropriate performance measure for an investment centre.
4. A report that shows variances between actual and budgeted performance for a particular centre is
referred to as a charge report.
5. Participation by responsible managers in the setting of budgets enhances the probability of
effective planning and control within an organisation.
6. A major strength of financial measures is that they provide a standardised measure in monetary
terms, whereas non-financial measures are difficult to measure and therefore are rarely used in
performance assessment systems.
7. A balanced scorecard is a measurement system that incorporates financial measures that tell the
result of actions already taken and operational measures that are the drivers of future financial
performance.
8. Economic value is the economist’s way to measure profit.
9. A key performance indicator that measures which direction a firm should be taking is termed a
strategic KPI.
10. An operating KPI measures whether a business is moving in the right direction.
11. A driver KPI measures factors that will cause a change, whereas an outcome KPI measures the
result of a change.
12. An internal business process perspective of a balanced scorecard system addresses the question
‘What do we need to do to develop our employees?’
13. The economic value added (EVA) is a method of measuring how effectively a company achieves
the objective of creating shareholder value.
14. Non-financial measures of performance assess items such as customer satisfaction and employee
morale.
15. Non-financial indicators of performance are easier to measure than financial indicators.
16. The equation for calculating economic value added (EVA) is as follows:
EVA = before-tax profit + interest – (cost of capital x total capital employed).
17. In the context of performance measurement, drivers are the indicators that measure the items that
will cause a change in the outcome measures.
18. The four dimensions of the balanced scorecard are: the financial perspective; the monetary
perspective; the customer perspective; and the learning and growth perspective.
19. The financial perspective of a balanced scorecard contains driver measures such as return on assets
and return on shareholders’ equity.
20. It is primarily the non-financial measures in the internal business process and learning and growth
perspectives of the balanced scorecard that drive future financial performance.
MULTIPLE CHOICE
1. Which of the following is an example of a performance measure that is appropriate for an
investment centre but not a profit centre or cost centre?
A.
Quality of service
B.
Income from operations
C.
Rate of return on assets
D.
Gross profit margin
2. In assessing the performance of a manager of a profit centre, which of the following would be an
appropriate measure?
A.
Net profit margin
B.
Income from operations
C.
The centre’s budget with actual performance
D.
All of the above
3. Which of the following statements regarding performance assessment is incorrect?
A.
Measures should focus on the areas over which a manager has no capacity to influence the
outcome.
B.
Assessment should be to reward good performance.
C.
Negative and positive feedback should be given within a reasonable timeframe.
D.
Measures should assist the entity in achieving the objectives of the entity.
4. An objective or outcome of performance assessment in an organisation is not to:
A.
reward good performance.
B.
encourage behaviour consistent with an entity’s goals.
C.
allow an entity to understand the goals of a manager.
D.
provide feedback on each centre’s contribution to the achievement of an entity’s goals.
5. Which of the following factors under management’s control distinguishes an investment centre
from a profit centre?
A.
Selling prices
B.
Output quantity
C.
Controllable costs
D.
Investment in assets
6. Of the following statements regarding strengths and weaknesses of measures, which statement
does not apply to non-financial measures?
A.
Takes into account the human element.
B.
Readily available.
C.
Less susceptible to manipulation.
D.
Setting inappropriate targets can result in ineffective and inefficient performance.
7. Benefits of the balanced scorecard include:
I
integral to the development of an entity’s strategy.
II
focuses on major performance indicators, and measures achievement.
III
provides managers with complex information, and prevents information overload by
limiting the number of measures used.
IV
requires cooperation of all those involved in selecting the indicators, and takes
considerable time and effort.
A.
I and II
B.
I, II and III
C.
II, III and IV
D.
I, II, III and IV
8. Which of the following examples would not normally be considered a strategic KPI?
A.
The amount invested in capital investments.
B.
Setting the level of debt used to fund assets.
C.
Comparing actual to budgeted sales.
D.
Determining the amount to be budgeted for research and development.
9. Which of the following would not be categorised as an outcome KPI?
A.
Increase in profit from last year.
B.
Increased customer numbers resulting from an advertising campaign.
C.
Implementing staff training to increase output.
D.
Increased return on shareholders’ equity.
10. A business introduced employee training for all production staff, and discovered that product
quality improved, which resulted in an increase in sales and ultimately profit. Based on this
information, which of the following statements would be the least correct?
A.
Employee training is a learning and growth perspective.
B.
Improved product quality is an internal process perspective.
C.
Increased sales was the real driver of the increased profits.
D.
Increased sales and profits are the outcomes of improved employee skills.
11. In asking the question ‘What do we need to do within the core processes of our business in order to
develop our employees?’ an entity is looking at which main perspective of a balanced scorecard
system?
A.
Learning and growth perspective
B.
Internal business process perspective
C.
Customer perspective
D.
Financial perspective
12. The Friendly Bank has been offering online banking facilities for several months, and wants to
determine whether customer usage has increased over the period since the inception of the
facilities. Which of the following KPIs would be the most appropriate to achieve the bank’s
outcome?
A.
Site response time
B.
Sessions per active online customer
C.
Profit per customer
D.
Percentage decrease of in-house banking
13. The Petrol House service station has introduced a balanced scorecard. The company wants to
measure the amount of repeat business from customers. Which of the following measures would be
most representative of this objective?
A.
Profit per new customer.
B.
Percentage of a day’s sales per customer.
C.
Percentage of a day’s sales to new versus existing customers.
D.
Profit per existing customer.
14. For each of the following industry-specific KPIs indicate whether it is a financial, customer,
internal process or learning and growth perspective.
1
Manufacturing:
2
Banking:
3
Retail:
4
Insurance:
A.
(1) internal process, (2) learning and growth, (3) financial, (4) customer
B.
(1) financial, (2) customer, (3) internal process, (4) learning and growth
C.
(1) financial, (2) internal process, (3) customer, (4) learning and growth
D.
(1) customer, (2) learning and growth, (3) financial, (4) internal process
15. The Big Bed Furniture chain has identified as one of its major KPIs the average number of items
bought per customer visit. In identifying this KPI, which of the following perspectives is Big Bed
most likely to be targeting?
A.
Financial
B.
Customer
C.
Process
D.
Learning and growth
16. Fast Forward Pty Ltd. has been expanding into new markets in recent months. The CEO wishes to
know what the sales revenue is from these new markets. This KPI is considered to be a:
A.
financial perspective.
B.
customer perspective.
C.
process perspective.
D.
learning and growth perspective.
17. The Demons fast food outlet provides intensive training for new staff, and ongoing training for
existing staff. A focus of the ongoing training is to improve customer satisfaction. The training is
considered to be a:
A.
financial perspective.
B.
customer perspective.
C.
process perspective.
D.
learning and growth perspective.
18. The store manager of the Red Shoe has asked the store’s staff to make a record of customer
requests for stock that is unavailable. Determining the percentage of stock that is unavailable when
customers ask for it would normally be considered to be a:
A.
financial perspective.
B.
customer or financial perspective.
C.
process or customer perspective.
D.
learning and growth perspective.
19. The Orange Bank measures each business unit’s contribution to the bank’s total revenue on a
monthly basis. Which of the following classifications would best describe this KPI?
A.
Strategic and outcome
B.
Strategic and driver
C.
Operating and outcome
D.
Operating and driver
20. Over the past two years, the Orange Bank has closed numerous country branches and significantly
reduced staff numbers. In the same period, the bank has posted record profits and paid its top
executives significant salary increases. However, the bank has also received a significant increase
in customer complaints. In an attempt to redress the situation, the bank has decided to improve its
image, and one major focus is to determine the average waiting time for calls to be answered.
Which of the following would best describe this KPI?
A.
Strategic and outcome
B.
Strategic and driver
C.
Operating and outcome
D.
Operating and driver
21. The finance director of AKP Ltd has observed that outstanding debtors have significantly
increased in the past two months. An examination of possible causes has determined that part of
the problem may be the new computerised invoicing system, which, due to input errors, has sent a
number of accounts to wrong addresses. The director has asked the credit department to determine
how many accounts have been sent to wrong addresses. This indicator would be classified as:
A.
strategic and outcome
B.
operating and driver
C.
strategic and driver
D.
operating and outcome
22. The economic value added (EVA) method of assessing performance involves:
A.
after tax profit.
B.
cost of capital.
C.
total capital employed.
D.
all of the above.
23. The balanced scorecard:
A.
has equal financial and non-financial measures.
B.
includes financial and non-financial measures.
C.
is the same as triple bottom line reporting.
D.
reports on corporate governance.
24. The balanced scorecard:
A.
demonstrates how an entity can improve outcome measures.
B.
provides a view of a firm’s performance from four perspectives.
C.
includes driver measures.
D.
all of the above.
25. Which of the following statements about performance measurement is not correct?
A.
Drivers are measures of the items that will cause a change in outcome measures.
B.
Improved customer satisfaction is a driver of repeat business.
C.
The EVA performance measure is financial in nature.
D.
Cost management is an outcome measure.
Use the data below to answer the next 2 questions for EVA Ltd.
Net profit before tax $100 000
Tax rate 30%
Total assets $500 000
Total debt $300 000
Total equity $200 000
Interest $24 000
The interest rate on the debt is 8% and shareholders expect to earn 12%.
26. The weighted average cost of capital is?
A.
8.16%.
B.
9.6%.
C.
10.4%
D.
12%
27. The economic value added for EVA Ltd is?
A.
$29 200
B.
$53 200.
C.
$83 300
D.
$100 000
SHORT ANSWER
1. Levels within an organisation are often categorised according to the types of responsibilities placed
on managers. When a responsibility centre is considered a cost centre,
(a)
over which aspects of the statement of comprehensive income does the manager have
control?
(b)
over which aspects of the statement of comprehensive income does the manager not
have control?
(c)
on what kinds of measures is the centre’s management evaluated?
(a)
In a cost centre, the manager has control of expenses within the centre such as a
department or manufacturing plant.
purchase or dispose of equipment or other property without approval from divisional or
corporate-level management.
(c)
Managers are evaluated in a cost centre on their ability to control costs. Measurement is
often made in relation to a budgeted amount. Measurements may include quality measures
such as defect rate and percentage of on-time deliveries.
2. Levels within an organisation are often categorised according to the types of responsibilities placed
on managers. When a responsibility centre is considered an investment centre,
(a)
over which aspects of the statement of comprehensive income does the manager have
control?
(b)
over which aspects of the statement of comprehensive income does the manager not
have control?
(c)
on what kinds of measures is the centre’s management evaluated?
(a)
In an investment centre the manager has control of most costs, revenues and assets.
(b)
Investment centre managers do not have control of expenses that occur outside of their
particular division, certain allocated corporate expenses and certain assets which may be
acquired at the group or corporate level.
(c)
Investment centre managers are evaluated using profitability measures such as profit
returns on assets such as ROI.
PROBLEM
1. For each responsibility centre described below, indicate the type of responsibility level that is the
most appropriate. Select one (or more) of the following levels. If you select more than one level,
explain your reasoning. Responsibility levels are:
CC = Cost centre PC = Profit centre IC = Investment centre
1.
A manufacturing plant that has no responsibility for sales.
2.
A division of the corporation that handles a single product line and whose division
manager has the authority to purchase manufacturing equipment, advertise, and make
decisions about changes to the product line. All legal matters are handled by the
corporate office. Also, computer systems are centralised and charged to the divisions
based on actual usage.
3.
A manufacturing plant that has responsibility for sales of the product it manufactures.
4.
The corporate accounting department that controls the majority of its operating budget
including salaries, but not including office rent.
2.
PC or IC
If the division has identifiable operating assets, it could be treated as an investment
centre; if not, it would be a profit centre.
3.
ESSAY
1. People constantly use information to evaluate their environment and help them make important
decisions. One such evaluation method used by corporations is called the ‘Balanced Scorecard’.
(a)
Explain the philosophy behind the ‘Balanced Scorecard’ approach to a firm’s evaluation
of its corporate strategy.
(b)
Name each of the four performance categories of key performance criteria used in
conjunction with the ‘Balanced Scorecard’ method.
(c)
For each of the four categories named in part b, list one performance measure that
would be used in that category.
2. Sallie’s Cleaning service is a large commercial cleaning service with two divisions. The Office
Division services businesses by cleaning their offices once a day during non-business hours. The
Residential Division offers cleaning services to individuals in their homes, usually on a weekly
basis, although other arrangements can be made.
Sallie’s competition is very aggressive, especially for the Office Division. In the past the division
managers have been evaluated primarily on sales volume. Although the divisions operate as
independent businesses, the corporate president would like to increase the accountability of the
division managers by making them also responsible for expenses. Since the company has no
manufacturing operations and capital investments are minimal, the president does not intend to
account for assets assigned to the divisions.
(a)
What kind of responsibility centre should the president establish?
(b)
What measurements should be used to evaluate the performance of the division
managers?
(c)
Discuss the effect that this change is likely to have on the performance of the division
managers.
labour hours per job, number of customer complaints, cost of cleaning supplies,
employee turnover rates, and number of new customers.
long-term ‘investments’ in expenses related to such things as employee training.
3. Kaplan and Norton’s Balanced Scorecard has principally been applied to for-profit organisations.
In such applications, the scorecard’s four perspectives (financial, customer, learning and growth,
and internal business) are highly appropriate. However, Kaplan and Norton also acknowledge the
applicability of the Balanced Scorecard to not-for-profit organisations; they state, though, that the
four traditional perspectives may need to be altered in such situations.
Required:
Suppose you were the manager of a not-for-profit shelter for the homeless. Suggest at least three
perspectives you would need to consider in developing performance evaluation metrics for your
organisation. For each perspective, identify two or three specific performance measures you would
include in your organisation’s Balanced Scorecard.