STRATEGIC PROFITABILITY ANALYSIS

Balance Scorecard

- A goal congruence tool or performance measurement system that strikes a balance between
financial and operating performance measures, links performance to rewards and gives explicit
recognition to the diversity of interests of stakeholders.
- It is a strategic management system that defines a strategic-based responsibility accounting
system

Four different perspectives:

1. FINANCIAL PERSPECTIVE
-describes the economic consequences of action taken in customer; internal business
process and learning and growth perspectives.
2. CUSTOMER PERSPECTIVE
-identifies and defines the customer and market segments in which the firm will
complete.
3. INTERNAL BUSINESS PROCESS PERSPECTIVE
-describes the internal process that will provide value for the firm’s customers and
owners.
4. LEARNING AND GROWTH (INFRASTRUCTURE) PERSPECTIVE
-identifies and defines the capabilities that an organization needs to create long-term
growth and improvement.

Strategic Profitability Analysis – a tool to evaluate the success of a business in generating profit from
the implementation of its strategy

Strategic profitability = profit (loss) from competitive effectiveness (drive sales on the profit wheel) +
profit (loss) from operating efficiencies (drive expenses on the profit wheel)

• Product efficiency and cost variances (operating efficiencies)

• Sales price variances • Market size, market share and product mix variance

• Variances for non-variable costs (operating efficiencies)

Profit Analysis Steps:

1. Prepare flexible budget

2. Calculate meaningful variances:

Competitive Effectiveness: did we achieve what we set out to do? – is applicable

primarily to business units that set and implement product market strategy (eg. Profit

center: market size, market share and product mix)

SAMPLE PROBLEM 12. 5. STRATEGIC PROFITABILITY ANALYSIS

Consider the following profit and loss statements data of BS Company for the years ended 2019 and
2020

2019 2020 Amount %

Change Change
Revenues P 16,000,000 P 22,000,000 P 6,000,000 10%
Materials (9,600,000) (10,648,000) (1,048,000)
Direct Labor (4,000,000) (6,072.000) (2,072,000)
Other (2,000,000) (2,000,000) -
expenses
Profit P 400,000 P 3,280,000 P 2,880,000

As analysis of related data as follows:

Quantity sold 400,000 440,000 40,000 10%

Unit sale price P 40 P 50 P 10 F
Actual direct 800,000 lbs. 968,000 lbs.
materials quantity
Actual direct P 12 P 11 P (1) F
materials

DM Productivity measure (400,000/50) 0.50

Standard DM quantity based on 2019 data (440,000/50) 880,000
DM Growth Change (800,000-880,000) 80,000 UF
DM Productivity variance (968,000-880,000) 88,000 UF
Actual DLH 200,000 264,000 64,000
Actual DLR P 20 P 23 P 3 UF
DL Productivity measure (400,000/200,000) 2
Standard DLH based on 2019 data (440,000/2) 220,000
DL Growth Change (200,000-220,000) 20,000 UF
DL Productivity variance (264,000-220,000) 44,000 UF

REQUIRED: Account for the change in profit in 2020 using the strategic profitability analysis

SOLUTIONS/DISCUSSIONS:

GROWTH FACTOR

Sales growth factor 40,000 F x P40 P1,600,000 F

DM growth factor 80,000 UF x P12 960,000 UF
DL growth factor 20,000 UF x P20 400,000 UF
P 240,000 F
PRICE-RECOVERY FACTOR

Sales price-recovery factor P 10 F x 440,000 4,400,000 F

DM price-recovery factor P (1) F x 880,000 (800,000) F
DL price-recovery factor P 3 UF x 220,000 660,000 UF
4,620,000 F

PRODUCTIVITY FACTOR

DM productivity factor 88,000 F x P 11 968,000 UF

DL productivity factor 44,000 UF x P 23 1,012,000 UF
1,980,000 UF

GROWTH FACTOR P 240,000 F

PRICE-RECOVERY FACTOR 4,620,000 F
PRODUCTIVITY FACTOR 1,980,000 UF

INCREASE IN PROFIT P 2,880,000 F

FORMULAS:

SALES DIRECT MATERIALS DIRECT LABOR

Price-recovery factor (AP-SP) x AQ (AP-SP) x AQ (AR-SR) x AH
Productivity-recovery factor n.a (AQ-SQ) x AP (AH-SH) x AR
Growth-recovery factor (AQ-SQ) x SP (SQ-BQ) x SP (SH-BH) x SR

Where:

SQ = Actual units sold x Std. materials per unit

SH = Actual units sold x Std. hours per unit

BQ= Base quantity

BH= Base hours

Standard materials per unit = DM used last year / Sales in units last year

Standard DLH per unit = DLH last year / Sales in units last year