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Chapter 18 - Strategic Performance Measurement: Cost Centers, Profit Centers, and the Balanced Scorecard
18-61
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
invested. This is particularly important for a large, diverse company
in chapter 19.
18-51 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
Chapter 18 - Strategic Performance Measurement: Cost Centers, Profit Centers, and the Balanced Scorecard
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18-51 (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
assets are so liquid.
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
local autonomy will also likely have a negative impact on the
banks in a coordinated manner, then a greater emphasis on
centralization would be advisable.
Chapter 18 - Strategic Performance Measurement: Cost Centers, Profit Centers, and the Balanced Scorecard
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18-52 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,
product lines, and sales territories because of the separation of
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.
Traceable fixed costs can also be further distinguished as controllable
or not. Controllable fixed costs could be discontinued if the business
Chapter 18 - Strategic Performance Measurement: Cost Centers, Profit Centers, and the Balanced Scorecard
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18-52 (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
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
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18-52 (continued -2)
4. Recognize and communicate professional limitations or other
constraints that would preclude responsible judgment or successful
performance of an activity.
II. CONFIDENTIALITY
Each member has a responsibility to:
1. Keep information confidential except when disclosure is
advantage.
III. INTEGRITY
Each member has a responsibility to:
1. Mitigate actual conflicts of interest. Regularly communicate with
Chapter 18 - Strategic Performance Measurement: Cost Centers, Profit Centers, and the Balanced Scorecard
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18-52 (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,
a continued emphasis on customer service, without additional efforts in
product innovation?
Chapter 18 - Strategic Performance Measurement: Cost Centers, Profit Centers, and the Balanced Scorecard
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18-52 (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
ranking of importance. Some suggested measures in each perspectives
follow. Each measure should be determined for each business unit, and
when practical, for each product line and sales region.
Customer Perspective
Number of new customers this period
Number of customers lost this period
Number of complaints
Contribution by CPC
Sales growth
Change in stock price
Selected financial ratios: the current ratio, gross margin
percentage, etc.
Operations Perspective
Cycle time
Chapter 18 - Strategic Performance Measurement: Cost Centers, Profit Centers, and the Balanced Scorecard
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18-53 Profit Centers (20 min)
The main point of this problem is that using segment profit as
determined using generally accepted financial reporting principles
contains the allocation costs that are not traceable to the business
unit and also costs that are not controllable by the unit manager. This
leads to frustration and lack of motivation for business unit managers.
Also, business units identified for public reporting purposes may not
coincide with actual managerial responsibilities, resulting in bias and
inaccurate unit profit figures and lack of controllability. For these
profit measure does not tell us whether the business unit was a good
investment; the investment center approach is necessary for this (see
Chapter 19). Note however that return on investment can be
determined from the segment footnote using “identifiable assets”
which is part of the required disclosure in the footnote.
Also, when profit is compared across units, managers may be
unfairly rewarded or penalized for the favorable or unfavorable
conditions in the markets in which the manager operates. For
Chapter 18 - Strategic Performance Measurement: Cost Centers, Profit Centers, and the Balanced Scorecard
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18-54 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
in each of the five SBUs. These managers would have wide authority,
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
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18-54 (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
18-71
18-55 Choice of Strategic Business Unit (20 min)
This case is intended for a brief discussion of the effects of
different cost allocation methods on the behavior of SBU managers.
The context is one in which maintenance costs have not increased
significantly, but they are a little high relative to the industry. The
presented in the case itself.
Ask the class to suggest the important questions that would be
needed to come to a better answer about how maintenance costs are
treated. Is it strategically important to maintain a high level of
equipment productivity and quality, because the firm is operating near
the following issues.
The incentive effect of an allocation of cost based on square
feet is not clear. Some users will perhaps interpret this as an
incentive to use maintenance heavily, since the allocation is based on
square feet, and their excess usage will be in effect charged to all
directly to that department. The proper way to allocate the fixed costs
of the maintenance department (supervisory salaries, space
utilization costs, etc.) is less clear. Many would argue that an
allocation based on size (square feet, headcount, revenues,...) would
be fair. An important point, as noted in the discussion of dual
Chapter 18 - Strategic Performance Measurement: Cost Centers, Profit Centers, and the Balanced Scorecard
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18-56 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
about the costs incurred in that department. Information services is
viewed as a critical resource to support the growth of the firm. The
key question should be to what extent, if any, the information services
department plays a strategic role in the success of the firm. Certainly
it appears that there is some recognition of the importance of
good, not charged to the users. This approach would encourage
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 centeralso 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
18-73
18-57 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
underutilize this service.
18-58 Strategy; Balanced Scorecard (30 min)
1. WaveCrest’s strategy appears to be differentiation: focused on
innovation and customer service with a particular emphasis on ease-
of-use features for first-time sailboat owners. The company views
the target market as (1) individual sailors who are new to the sport,
but have an interest in boating and perhaps own other types of boats,
based on innovation and customer service.
2. Based on the firm’s strategy, as discussed in (1), the firm’s first
balanced scorecard perspectives are likely to be the customer
perspective and learning/innovation. Suggested potential measures
for each of the perspectives are suggested below.
Customer Perspective
market share
Chapter 18 - Strategic Performance Measurement: Cost Centers, Profit Centers, and the Balanced Scorecard
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18-58 (continued -1)
Learning and Innovation Perspective
new products
new features in existing products
enhancements of the production process
training time for Tom relative to boat design
Operations Perspective
cycle time
quality
inventory levels
productivity by work unit
Chapter 18 - Strategic Performance Measurement: Cost Centers, Profit Centers, and the Balanced Scorecard
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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
emphasis on key measures. The two perspectives, quality and process
improvement, were combined in 2001, for this reason. Both of these
perspectives were related to performance in meeting patients’ expectations
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
Process and Quality Improvement
Operational Performance
Volume and Market Share Growth
Customer
Financial Health
Financial
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
Quality Improvement
patient satisfaction survey scores, patient safety
measures, score on Connecticut quality award,
measurable progress to implementing a minimally
invasive surgery program
Volume and Market
Share Growth
medical volume, surgical volume, urgent care visits,
primary care visits, home care visits
Financial Health
measured growth in group purchasing, measured
growth in funding, managed care price increases,
cost per discharge
