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Chapter 14 – Operational Performance Measurement: Sales, Direct Cost Variances, and the Role of Nonfinancial
Performance Measures
Reading 14-5: Larry Grasso, “Are ABC and RCA Accounting Systems Compatible with Lean
Management?,” Management Accounting Quarterly, Vol. 7, No. 1 (Fall 2005), pp. 12-27.
This paper provides a critical analysis of several alternative cost systems to traditional cost accounting
systems. It then evaluates these alternatives in terms of how they might support, or not, companies that
adopt a lean philosophy. An example of nonfinancial performance indicators that support a lean
philosophy is offered in Tables 1 and 2. This discussion in the article of the historical development of
management accounting systems reinforces in the minds of students the evolving nature of cost system
design: as the environment changes, so should management accounting systems. (Note: this reading could
also be used in conjunction with Chapter 15 of the text.)
Discussion Questions:
1. Describe what is meant by the term lean manufacturing.
Lean manufacturing or lean production, often shortened more simply to “lean,” is a production
practice that considers the expenditure of resources for any goal other than the creation of value of the
end customer to be wasteful, and thus a target for elimination. Working from the perspective of the
customer who consumes a product or service, “value” is defined as any action or process that a
customer would be willing to pay for. Lean is centered around creating more value with less work.
2. According to the author of this article, what are the primary uses (or roles) of management
accounting data within organizations today?
According to the author, cost accounting information—and, more generally, accounting information
—has three basic roles in organizations:
3. According to the author of this article, what are the primary implications of adopting a lean
philosophy in terms of the design of management accounting systems?
Overall, one might refer to these accounting-related implications as “lean accounting.” The author
points out that “lean accounting” carries two dimensions: (1) accounting for lean—what information
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Chapter 14 – Operational Performance Measurement: Sales, Direct Cost Variances, and the Role of Nonfinancial
Performance Measures
4. Explain the importance of the examples provided in Tables 1 and 2 of this article.
As an example of the lean approach, the performance measures used at the corporate level and at the
factory floor level of The Wiremold Company are shown in Tables 1 and 2, respectively. The
company is organized into production cells capable of producing a family of products from start to
finish. The performance measures are largely nonfinancial, especially at the production-cell level.
The instructor can point out to students that the discussion here focuses fundamentally on the
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Chapter 14 – Operational Performance Measurement: Sales, Direct Cost Variances, and the Role of Nonfinancial
Performance Measures
Reading 14-6: Attiea Marie, Walid Cheffi, Rosmy Jean Louis, and Anath Rao, “Is Standard
Costing Still Relevant? Evidence from Dubai,” Management Accounting Quarterly (Winter
2010), pp. 1-10.
Reports of the death of standard costing are greatly exaggerated, say the results of our study of
companies based in Dubai. Because of its simplicity, flexibility, and affordability, standard costing
remains a favorite cost accounting method among accounting and finance professionals in both
industrial and service sectors in this rapidly expanding part of the globe.
Discussion Questions
1. In the introductory section, Global Acceptance of Standard Costing, the authors of this article
cite various studies to support the authors’ claim that, particularly outside the U.S., standard
costing is not “dead.” What principal counterargument might you raise in response to the authors’
contention?
The principal counterargument might be the dated nature of the studies cited by the authors. Most of
the citations are from the 1990s. Globalization and competitive pressures have combined to motivate
2. Provide an overview of the research study (case study: Dubai) conducted by the authors.
As stated on page 2 of the article, the basic purpose of the study was to “shed light on the level of use
of standard costing tools in Dubai.” Information in this regard was obtained via survey administered to
a random sample of Dubai companies (see footnote 9), segregated into two major business sectors:
3. Summarize the major findings reported in the paper.
Primary findings are reported in Tables 4 - 10 of the article.
1. Table 4 reveals that 77% of respondent manufacturing companies and 39% of respondent service
companies in Dubai report the use of standard costing. (Table 4 also includes comparative data from
Malaysia, New Zealand, and the U.K, as reported by Sulaiman et al. (2004).)
2. Table 5 reports Likert-scale results for various functions of standard costing. Results for Dubai
companies show that for industrial companies, standard costing is used principally (in decreasing
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Chapter 14 – Operational Performance Measurement: Sales, Direct Cost Variances, and the Role of Nonfinancial
Performance Measures
4. Table 7 presents information regarding the performance level embodied in standard costs for
respondent companies in Dubai, along with comparison data for Japanese firms. In this regard,
5. Table 8 reports information regarding the frequency with which standard costs are revised, both for
respondent companies from Dubai and a comparison of Malaysian and U.K. firms. The majority of
6. Table 9 contains information regarding decision rules used to investigate reported standard cost
variances. What seems interesting in these data is the fact that while a majority of respondent firms
7. Table 10 reports on the importance of particular standard cost variances “for control purposes.” As
indicated on page 7: “Some 95% of industrial companies in Dubai were extremely sensitive to
4. What are some limitations associated with the survey-based study summarized in this article?
As indicated in the paper (p. 7), the study is subject to two primary limitations:
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Chapter 14 – Operational Performance Measurement: Sales, Direct Cost Variances, and the Role of Nonfinancial
Performance Measures
Reading 14-7: Marc J. Epstein and F. Warren McFarlan, “Measuring Efficiency-Based
Effectiveness of a Nonprofit’s Performance,” Strategic Finance (October 2011), pp. 27-34.
The true measure of a nonprofit’s performance has to include its overall mission, no matter how difficult
that is to evaluate. The metrics to consider are the organization’s inputs, activities, outputs, outcomes, and
impacts. The authors show how a Causal Linkage Map can provide a comprehensive view of these
otherwise separate measures.
Discussion Questions
1. What is the principal connection between this article and the material covered in Chapter 14 of
the text?
Chapter 14 begins a discussion of “operational performance measures.” In the chapter, we discuss
various dimensions of control, including operational control systems. The chapter makes the point that
whatever measures are chosen and used as the financial control system, those measures should be
2. Conceptually, what does the article provide in the way of guidance for developing performance
metrics for nonprofit organizations?
The authors offer a model or framework for developing appropriate performance metrics for a
nonprofit organization. This framework consists of grouping resource-related activities of such
organizations into the following subgroups:
Collectively, the above components constitute what the authors call a Causal Linkage Map (see
Figure 1, p. 29, for a generic representation of this Map; see Figure 2, p. 30, for sample performance
indicators in each of the above-five subgroups, for two broad types of nonprofit organizations: social-
impact-focused organizations, and member-focused organizations). As the authors indicated (p. 30),
“These (performance) measures provide a quantitative analysis of how the organization is doing in
fulfilling its mission.
3. Provide a synopsis of the two “best practice” examples offered in the article.
The two best-practice examples reported in the article are: Opportunity International and AARP.
Opportunity International (OI): OI is a large and growing microfinance network, whose mission is “to
provide opportunities for people in chronic poverty to transform their lives.” Its comprehensive
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Chapter 14 – Operational Performance Measurement: Sales, Direct Cost Variances, and the Role of Nonfinancial
Performance Measures
AARP: AARP is the largest not-for-profit membership organization in the U.S. for individuals 50 and
4. What do the authors propose as relevant financial-performance indicators for non-profit
organizations?
The authors suggest that free cash flow and revenue growth are financial-performance indicators that
should be relevant to a wide variety of not-for-profit organizations. In addition, philanthropy in its
various forms (annual giving, capital campaigns, and planned giving) is an important metric for most
if not all not-for-profit organizations. Table 3 (p. 32) provides a summary of important accounting
Students (and the instructor) may want to consult Charity Navigator (www.charitynavigator.org/), an
organization that provides various financial-performance metrics for non-profit organizations.
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Chapter 14 – Operational Performance Measurement: Sales, Direct Cost Variances, and the Role of Nonfinancial
Performance Measures
Reading 14-8: Jason Porter and Teresa Stephanson “Calculating Operating Variances:
Completing a Benchmarking Analysis with Your Excel-Based Master Budget,” Strategic
Finance (September 2011), pp. 45-51.
This is the third article in a series that describes how you can use an Excel-based Master Budget for
making managerial decisions. Following the “Flexible Budget” created in part two, the authors now focus
on the final statement to calculate the company’s operating variances. They build a third budget in the
Contribution Margin Income Statement format and compare the original budget and flexible version to
determine variances.
This assignment is an extension of the Master Budgeting extended example by Porter & Stephanson, as
reported in the following issues of Strategic Finance: February-March-April-May-June-July, 2010. A
student handout containing information needed to prepare the master budget is available for students (pdf
file), as is an Excel template (“Student Template [Master Budgeting Example]”).
Discussion Questions
1. Explain the information contained in the CM IS tab (i.e., explain the difference between each of
the three forms of the Contribution Margin Income Statement).
See Figure 1 of the article. The left-most Contribution Margin (CM) Income Statement (IS) is the
original (i.e., master or static) budget for the period. The actual results for year are presented in the
right-most column of Figure 1. The middle column in Figure 1 is the Flexible Budget (based on
2. Use the information from the three CM Income Statements to calculate and interpret the direct
labor variances for the year.
Actual labor hours worked (viz., 77,559) are provided in Figure 2 of the article. Figure 3 of the article
shows that the total flexible-budget variance for direct labor during the period was an Unfavorable
$63,254. By introducing a second flexible budget into Figure 3 (i.e., the middle column, $1,085,826)
we see that the total price (rate) variance for direct labor during the period was $40,420 Unfavorable,
3. Calculate and interpret the total direct materials flexible budget variance for the year. Show the
breakdown of the flexible budget variance for steel and expanded shift component, into price and
quantity components.
The total flexible budget variance for all direct materials combined is given in Figure 5 of the article.
For the actual output produced during the period (17,074 basic bicycles and 8,356 deluxe bicycles) the
company should have used a total of $2,447,298 of direct materials. Actual direct materials used
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Chapter 14 – Operational Performance Measurement: Sales, Direct Cost Variances, and the Role of Nonfinancial
Performance Measures
below both the background information needed to construct the budget, as well as an Excel file
containing both a worked-out master budget and the analyses referred to in Reading 14-7.)
Bob's Bicycles -
Master Budget and Va
Master Budget
Example--Assumption
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