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Cost Accounting Chapter 12
Cost Accounting Chapter 12
Cost Accounting Chapter 12
Porter identified 4 generic strategies that can be used to both classify company behaviour and
drive company behaviour.
Cost Leadership - Minimizing the costs incurred in providing value (product or service) to a
customer or client. Example: McDonalds, Walmart
Market standard: A set of criteria within a market/industry relating to the standard functioning
and carrying out of operations in their respective fields of production. In other words, it is the
generally accepted requirements followed by the members of an industry/market.
Benchmark: A standard or point of reference against which things may be compared.
Process: A set of interrelated and consecutive activities.
Business Process Reengineering (BPR): It is the redesign of business processes and the
associated system and organization structure to achieve dramatic improvement in business
performance.
Example: Switching from manual to automation;
Business process improvement (BPI): is a practice in which enterprise leaders analyse their
business processes to identify areas where they can improve accuracy, effectiveness and
efficiency and then make changes within the processes to realize these improvements. A part of
the process is changed and incrementally.
Example: Moving from paper to digital documentation to speed processing
Revenue: Revenue is the total amount of income generated by the sale of goods or services
related to the company's primary operations. Revenue, also known simply as "sales", does not
deduct any costs or expenses associated with operating the business.
Profit: is the amount of income that remains after accounting for all expenses, debts, additional
income streams, and operating costs.
Operating income—Operating income is an accounting figure that measures the amount of
profit realized from a business's operations, after deducting operating expenses such as wages,
depreciation, and cost of goods sold (COGS).
Net Income: Earnings after all expenses, interests and tax.
Balance Scorecard: The balanced scorecard translates an organization’s mission and strategy
into a set of performance measures that provides the framework for implementing its strategy.
Not only does the balanced scorecard focus on achieving financial objectives, it also highlights
the nonfinancial objectives that an organization must achieve to meet and sustain its financial
objectives.
A major benefit of the balanced scorecard is that it promotes causal thinking—where
improvement in one activity causes an improvement in another. The balanced scorecard is a
linked scorecard or a causal scorecard. Managers must search for empirical evidence (rather than
rely on intuition alone) to test the validity and strength of the various connections. A causal
scorecard enables a company to focus on the key drivers that steer the implementation of its
strategy. Without convincing links, the scorecard loses much of its value.
The scorecard measures an organization’s performance from four perspectives:
1. Financial: the profits and value created for shareholders
2. Customer: the success of the company in its target market
3. Internal business processes: the internal operations that create value for customers
4. Learning and growth: the people and system capabilities that support operations
The balanced scorecard helps managers to emphasize on long-run financial performance rather
than short run (such as quarterly earnings), because the key strategic nonfinancial and
operational indicators, such as product quality and customer satisfaction, measure changes that a
company is making for the long run. The financial benefits of these long-run changes may not
show up immediately in short-run earnings; however, strong improvement in nonfinancial
measures usually indicates the creation of future economic value. Exhibit 12.3 (Balanced
Scorecard) (pg. 506 of Horngren’s Management Accounting Book)
For example, an increase in customer satisfaction, as measured by customer surveys and
repeat purchases, signals a strong likelihood of higher sales and income in the future.
Strategic Map: A strategy map is a diagram that describes how an organization creates value by
connecting strategic objectives in explicit cause-and-effect relationships with each other in the
financial, customer, internal business-process, and learning-and-growth perspectives.
Structural Analysis of Strategy Maps: Structural analysis is used to give insight of causal links
in the strategy map. It helps companies both to implement and refine their strategies.
There are five types of conditions to consider in a structural analysis:
Strength of ties (causal links) : Ties are the causal links between strategic objectives and can be
qualified as strong, moderate, or weak. Strong [Bold arrow] ties are those causal links where
the impact of one strategic objective on realization of another is very high, relative to other ties
in the map. Weak [Dot arrow] ties are those causal links where the impact of one strategic
objective on realization of another is very low, relative to other ties in the map. Moderate
[Arrow] ties are those causal links where the impact of one strategic objective on realization of
another is average, relative to other ties in the map.
Tie strengths affects allocation of resources across strategic objectives, crafting initiatives
and metrics in the balanced scorecard, and the weights that managers put on different elements of
the scorecard.
Orphan objectives: An orphan objective is a strategic objective with only weak ties leading out
of it to other strategic objectives. Orphan status indicates an opportunity to evaluate the value the
strategic objective brings to the overall strategy. Orphan objectives do not contribute to the larger
strategy in a way that warrants allocation of resources.
Focal points: A focal point is a strategic objective that has many other links funneling into it. A
focal point indicates strategic complexity; many strategic objectives need to be coordinated to
achieve the focal objective. If the focal point has only weak ties emanating from it, the strategy
map analysis would suggest that the company not invest resources on the focal point objective.
That’s because it is complex to deliver and has questionable benefits even if it is successfully
achieved.
Trigger points: A trigger point is a strategic objective where many ties spur out from it,
resulting in the achievement of many strategic objectives. Trigger points are exciting because if
an organization can achieve the trigger point strategic objectives, they enable multiple strategic
objectives to be achieved. It requires special attention from managers. Trigger points are
interesting even if one of links emanating from it is weak because there are other strong and
moderate ties.
Distinctive objectives: Strategic objectives that distinguish an organization from its competitors,
based on the organization’s strategy are distinctive objectives. They are frequently located within
the learning and growth and internal-business-process perspectives, because they define
important activities undertaken by a company to satisfy customers and achieve financial
performance. In the map these strategic objectives are labeled with a “D.” If no strategic
objective is truly distinctive, managers would need to revisit the strategy objectives and think
about how to modify or replace them to achieve a strategy that distinguishes the company from
its competitors while creating value for its customers.
Features and Pitfalls of Balanced Scorecard (pg. 513-514 of Horngren’s Management
Accounting Book)