Chapter 18 – Strategic Performance Measurement: Cost Centers, Profit Centers, and the Balanced Scorecard
18-53 (continued -2)
Variable Costs
Variable Variable Total
Units Mfg Selling Variable
Sold Cost/unit Cost/Unit Cost
(1) (2) (3) (1)x[(2)+(3)]
United States
Pharmaceutical 64,000 $4.00 $2.00 $384,000
Sports 72,000 9.50 2.50 864,000
Appliances 32,000 8.25 2.25 336,000
Canada
Pharmaceutical 16,000 4.00 2.00 96,000
Sports 72,000 9.50 2.50 864,000
Appliances 32,000 8.25 2.25 336,000
Europe
Pharmaceutical 80,000 4.00 2.00 480,000
$4,800,000 $ 500,000
Depreciation expense
Area Proportion
Total Units of Allocated
Depreciation Sold Total Depreciation
United States $400,000 168,000 33.6% $ 134,400
Chapter 18 – Strategic Performance Measurement: Cost Centers, Profit Centers, and the Balanced Scorecard
18-53 (continued -3)
2. Areas where Stratford Corporation should focus its attention in
order to improve corporate profitability include the following:
The income statement by product line shows that the
pharmaceutical product line may not be profitable. The
pharmaceutical product line does have a positive contribution.
However, because the fixed costs assigned to the product line result
in a loss, Stratford should investigate:
–the possibility of increasing the selling price of these products.
pharmaceuticals as this product line makes the smallest contribution
to profit.
Stratford should review the unallocated expenses in an attempt
to reduce these costs and improve overall profitability.
3. As a large multinational company, Stratford should develop a
strategic performance measurement system that includes the critical
success factors for such a company. These are likely to include the
effects of foreign exchange fluctuations, differences in taxes between
Europe, Canada, and the United States, as well as currency and
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Chapter 18 – Strategic Performance Measurement: Cost Centers, Profit Centers, and the Balanced Scorecard
Moreover, these income statements fail to include the amount
invested in each of the divisions and geographical areas. Managers
should be held accountable for the profits they generate per dollar
18-54 Centralization vs Decentralization; Banking (30 min)
1. The following advantages are attributed to a decentralized
organizational structure:
The manager making the decisions is closer to the situation and
can make better and faster decisions.
Top management has more time for strategic decisions and long-
managers resulting in a pool of trained managerial talent.
2. The following disadvantages of a decentralized structure and their
effect on RNB are as follows.
There is an increased risk of loss of control. RNB does not have
sufficient control over its individual banks as evidenced by the
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Chapter 18 – Strategic Performance Measurement: Cost Centers, Profit Centers, and the Balanced Scorecard
18-54 (continued -1)
There is less information flow to top levels. The individual banks
sometimes failed to notify the executive office of their plans and
programs.
Duplication of effort may result. This is the case at RNB as
3. The change appears to be risky. RNB has built a successful
business on the basis of local bank autonomy, allowing the local bank
executives to develop products and services that fit the needs of their
local customers. Local managers should be in the best position to
determine how to improve customer satisfaction. The reduction of
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Chapter 18 – Strategic Performance Measurement: Cost Centers, Profit Centers, and the Balanced Scorecard
18-55 Balanced Scorecard; Strategic Business Units; Ethics
(40 min)
1. The new CEO made the correct decision because the increased
contribution of sales from lighting fixtures upscale and electronic
timing devices more than made up for the increased selling costs and
2.
a. The benefits that an organization realizes from business unit
reporting include the following:
Improved evaluation of profit contributions of divisions, plants,
promising business units.
b. Business unit reporting on a variable cost basis not only focuses
on costs that vary with production and sales but also requires the
segregation of fixed costs between traceable fixed costs (i.e., those
directly assignable to the business unit) and common fixed costs.
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Chapter 18 – Strategic Performance Measurement: Cost Centers, Profit Centers, and the Balanced Scorecard
18-55 (continued -1)
3. The current approach of allocating common fixed expenses on the
basis of units produced is unfavorable to the Electronic Timing
Devices unit. The effect of the deletion of the unit in the Lighting
division and the increased production and sales in the electronics unit
4.The actions contemplated by the Lighting Fixtures Division
controller (i.e., deferring some revenues into the next year and
accruing, in the current year, expenditures that are applicable for the
next year, because of better than expected performance in the
current year) are considered unethical as they would be in conflict
Institute of Management Accountants’ Standards of Ethical Conduct:
I. COMPETENCE
Each member has a responsibility to:
1. Maintain an appropriate level of professional expertise by
Chapter 18 – Strategic Performance Measurement: Cost Centers, Profit Centers, and the Balanced Scorecard
18-55 (continued -2)
4. Recognize and communicate professional limitations or other
Each member has a responsibility to:
1. Keep information confidential except when disclosure is
authorized or legally required.
Each member has a responsibility to:
1. Mitigate actual conflicts of interest. Regularly communicate with
business associates to avoid apparent conflicts of interest. Advise all
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Chapter 18 – Strategic Performance Measurement: Cost Centers, Profit Centers, and the Balanced Scorecard
18-55 (continued -3)
IV. CREDIBILITY
Each member has a responsibility to:
1. Communicate information fairly and objectively.
5. The balanced scorecard for PWC
A variety of answers are possible. The important point is that the
balanced scorecard allows the firm to measure performance in a way that
is aligned with the firm’s strategy. For example, since customer service is a
key strategic factor, it should be included in performance evaluation, though
it does not appear to be included currently. Therefore, a good answer
should take into account PWC’s business strategy. The firm focuses on
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Chapter 18 – Strategic Performance Measurement: Cost Centers, Profit Centers, and the Balanced Scorecard
18-55 (continued -4)
Since customer service is critical, the balanced scorecard should begin with
the customer perspective. The learning and innovation perspective might
be left for last or omitted because of the firm’s approach in this area, while
the financial and operations perspectives should get a second and third
Customer Perspective
Number of new customers this period
Number of customers lost this period
Number of complaints
Customer satisfaction, as measured by reports from sales reps
Selected financial ratios: the current ratio, gross margin
percentage, etc.
Operations Perspective
Cycle time
Level of work-in-process inventory
Plant efficiency, by work unit
Delivery time
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Chapter 18 – Strategic Performance Measurement: Cost Centers, Profit Centers, and the Balanced Scorecard
18-56 Choice of Strategic Business Unit (20 min)
This case is intended to provide a basis for discussion of how to
determine the management control approach for a given situation.
The options include the various types of centers – cost, revenue,
profit, and investment. There will be good reasons to propose each of
these, though the discussion should eventually lead to consideration
of the advantages and disadvantages of each type of SBU in this
situation.
The following discussion takes the view that a profit centerwill
provide the most desirable results.
Each of the five SBUs represent an important category of client
service for the consulting firm. It is most appropriate therefore that
they be considered profit centers. There is not a large amount of
investment in consulting firms, other than professional salaries which
within overall firm policies, to manage their units. This is an effective
way to motivate SBU managers to work hard for profits in their unit,
which is what top management is after.
The administrative support areas are now managed as cost
centers, with top management watching closely the trend in costs.
When costs rise dramatically in one of these areas (printing and
duplicating in this case) top management must first decide if the
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