Chapter 18 – Strategic Performance Measurement: Cost Centers, Profit Centers, and the Balanced Scorecard
18-56 (continued -1)
There are at least two possible approaches:
1. develop a charge-back system for printing and duplicating,
so that each of the users of this service will be directly charged for the
service. The effect will be to reduce demand of printing and
2. make the printing and duplicating department a profit center.
Allow users to purchase printing and duplicating services outside the
firm. This will take the charge-back idea in (1) above one step further.
Now, in addition to reducing demand, there is an incentive for the
printing and duplicating department to recruit services from the other
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Chapter 18 – Strategic Performance Measurement: Cost Centers, Profit Centers, and the Balanced Scorecard
18-57 Design of Strategic Business Unit (30 min)
This short case is intended to provide a basis for discussion of
the situation where a support function might be viewed as simply an
important resource, or alternatively, it might be viewed as having a
critical strategic role in the bank. Cost centers are more often viewed
as resources, while profit centers are more often viewed as having a
strategic role in the success of the firm. This discussion is played out
in the context of an information services department.
The information services department is a cost center, and the
case description suggests that management is principally concerned
about the costs incurred in that department. Information services is
viewed as a critical resource to support the growth of the firm. The
wider and more extensive use of information services, to provide the
desired integration of information services into the firm. Alternatively,
information services might be viewed as a profit center, to enhance its
role in the firm, and to more clearly define the benefits obtained. The
profit center also sets out a higher expectation for the unit. Can it
compete with services provided outside the firm? Can it develop
internal (and external) customers on the basis of quality service and
low cost?
Another way to use the case is to develop a discussion of the
appropriate allocation method, based on the assumption that
information services will be a cost center. Here the discussion should
be much like that for 18-55 above. The only difference is we are now
talking about information services instead of maintenance.
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Chapter 18 – Strategic Performance Measurement: Cost Centers, Profit Centers, and the Balanced Scorecard
18-58 Profit Centers: Hospitals (20 min)
If all of the service lines are charged the same percentage for
Guest Services, then managers and employees will not really monitor
their use of Guest Services and may even tend to overuse the
service. However, this method may help the most in improving
patient relations and customer service because these objectives will
be supported by all of the service lines utilizing this department. If
18-59 Performance Measurement; Balanced Scorecard; Hospital (20
min)
1. The number of perspectives was likely reduced to further refine the
focus of the scorecard and the performance measurement system. Too
many perspectives and critical success factors could reduce the desired
through improved operations, and the combination of the two provide
greater focus on operational improvement. The remaining four
perspectives could be related to the conventional balanced scorecard in the
following way:
Perspectives in the BHHS and Conventional Balanced Scorecard:
BHHS Scorecard (2001) Balanced Scorecard
Organizational Health Learning and Innovation
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Chapter 18 – Strategic Performance Measurement: Cost Centers, Profit Centers, and the Balanced Scorecard
18-59 (continued -1)
2. The CSFs used by BHHS in the 2000 BSC include the following:
Organizational
Health
percentage of employee development plans in
place, number of employee survey action plans, job
vacancy rates, turnover rates
Process
Improvement
operating room turnaround time, number of
physicians using online hospital clinical information
systems
cost per discharge
3. The scorecard perspectives appear to be correctly aligned with the
mission statement which has goals for improvement in terms of patient
care, physician satisfaction, and overall staff satisfaction. The
perspectives of process and quality improvement should support the
satisfaction of patients, while the focus on the organizational health
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Chapter 18 – Strategic Performance Measurement: Cost Centers, Profit Centers, and the Balanced Scorecard
18-59 (continued -2)
4. The strategy map is likely to follow the sequence of perspectives
provided in the article.
Organization Health, as the foundation of the
strategy map, supports…
5. It is unlikely that a profit center approach alone would be able to
capture the breadth of goals that BHHS has. In this case, because of the
Source: “Journey to Destination 2005,” by Andra Gumbus, Bridget Lyons,
and Dorothy E. Bellhouse, Strategic Finance, August 2002, pp. 46-50.
18-75
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Chapter 18 – Strategic Performance Measurement: Cost Centers, Profit Centers, and the Balanced Scorecard
18-60 Value Streams and Profit Centers (30 min)
1. The value stream income statements for the two value streams of
Levine Company is shown below. The value stream income
statement is based on a contribution type income statement (variable
costing-based) to which is added the effect of a change in inventory
level on income, thereby converting the variable costing income
statement to a full cost statement.
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Chapter 18 – Strategic Performance Measurement: Cost Centers, Profit Centers, and the Balanced Scorecard
18-60 (continued -1)
Note that the effect on value stream income of a change in inventory
is displayed separately in the income statement; there is a $5,000
increase in income for the DVD group (because of an increase in
that nontraceable fixed costs are not allocated to the value streams
but are subtracted from total company profit to produce a total
2. The value stream income statements show that both value streams
are profitable though the DVD value stream has a higher value
Levine is in.
3. The value stream income statement is a combination of the variable
costing and full costing income statement that shows as a separate
line item in the statement the effect of inventory change on income.
For a useful reference on lean accounting and value streams, see:
Frances A. Kennedy and Peter C. Brewer, “Lean Accounting: What’s it All
About,” Strategic Finance, November 2005, pp. 27-34.
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Chapter 18 – Strategic Performance Measurement: Cost Centers, Profit Centers, and the Balanced Scorecard
18-61 Cost Centers; The Finance Function; Spreadsheet Application
(25 min)
The data are for selected countries from the A.T. Kearney 2007 survey.
1. There are a large number of strategies for ranking the countries, so there
are a number of possible rankings. Here are a few ways to develop the
ranking:
1. Sum the three criteria and then rank the countries on this number;
this would be useful if the criteria are equally weighted, though the
weight since it is scored on the range 0-4 while the other two are
scored on a smaller range, 0-3.
2. Weight the three criteria; for example, if the firm is interested
could be given higher weight.
3. One or more of the measures could be required to achieve a
certain level (for example, skills availability must be above 1.0);
A variety of different ranking methods are possible. The following ranking is
developed using the approach that is similar to the third approach above.
A country is deleted if business environment is less than 1.5 or skills
are shown below.
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Chapter 18 – Strategic Performance Measurement: Cost Centers, Profit Centers, and the Balanced Scorecard
18-61 (continued -1)
The results show that China is the most highly ranked and Thailand,
Bulgaria and Malaysia are a close second. China’s relatively low scores on
financial attractiveness and business environment are more than made up
for by the highest score on skills availability. A firm should carefully
brought new (opposition) leadership to the country that is civilian and
democratically-elected. Also, in 2011 Thailand is suffering from disastrous
flooding. The 2011 measure of business environment might be somewhat
lower than for 2007.
2.
Strategic issues to consider in the potential outsourcing of the finance
function include:
Before choosing to outsource, the firm must first determine if the finance
function is strategically critical in day-to-day decision making. This would
be true for example if the firm operated in a dynamic, differentiated market,
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Chapter 18 – Strategic Performance Measurement: Cost Centers, Profit Centers, and the Balanced Scorecard
18-61 (continued -2)
function is to pay the bills and record customer payments and the like, then
outsourcing to a reliable, low cost provider makes sense.
If the decision is made to outsource, then additional measures of the
country’s suitability should be considered. These could include political
Reference: Kate O’Sullivan, “Where in the World is Your Offshore Finance
Team?” CFO.com, January 31, 2008. Source cited: A. T. Kearney Global
Services Location Index.
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