Republic of the Philippines

CAMARINES NORTE STATE COLLEGE

F. Pimentel Avenue, Brgy. 2, Daet, Camarines Norte, 4600 Philippines

COLLEGE OF BUSINESS AND PUBLIC ADMINISTRATION

TOPIC: BALANCED SCORECARD

Schedule for Instruction: FM 105 – Management Accounting

BSBA FM 3A / TTh – 3:30 – 5:00 pm

BSBA FM 3B / MW – 2:00 – 3:30 pm
BSBA FM 3C / TTh – 2:00 – 3:30 pm

Learning Objectives:

Students should be able to

1. Create a simple balanced scorecard

BALANCED SCORECARD

A Balanced Scorecard consists of an integrated set of performance measures that are derived from
and support a company’s strategy.

It is a strategic management system that defines a strategic-based responsibility accounting system.

A strategy is essentially a theory about how to achieve the organization’s goals.

A strategy is defined as choosing the market and customer segments the business unit intends to
serve, identifying the critical internal and business processes that the unit must excel at to deliver the
value propositions to customers in the targeted market segments, and selecting the individual and or-
ganizational capabilities required for the internal, customer, and financial objectives.

The Balanced Scorecard translates an organization’s mission and strategy into operational objectives
and performance measures for four different perspectives: the financial perspective, the customer per-
spective, the internal business process perspective, and the learning and growth perspective.

COMMON CHARACTERISTICS OF BALANCED SCORECARDS

1. It should be possible, by examining a company’s balanced scorecard, to infer its strategy and
the assumptions underlying that strategy.
2. The balanced scorecard should emphasize continuous improvement rather than just meeting
present standards or targets.
3. Some of the performance measures on the balanced scorecard should be non-financial.
4. The scorecards for individuals should contain only those performance measures they can actu-
ally influence.
5. The ultimate objective of the organization are usually financial, but better financial results can-
not be attained without improving customers’ perceptions of the company’s products and ser-
vices. In order to improve customers’ perceptions of products and services, it is usually neces-
sary to improve internal business processes so that the products and services are actually bet-
ter. And in order to improve the business processes, it is necessary that employees learn.

The Balanced Scorecard translates an organization’s mission and strategy into operational objectives
and performance measures for the following four perspectives:
 Republic of the Philippines
CAMARINES NORTE STATE COLLEGE
F. Pimentel Avenue, Brgy. 2, Daet, Camarines Norte, 4600 Philippines

THE FINANCIAL PERSPECTIVE

The financial perspective establishes the long- and short- term financial performance objectives. The
financial perspective is concerned with the global financial consequences of the other three perspec-
tives. Thus, the objectives and measures of the other perspectives must be linked to the financial ob-
jectives. The financial perspective has three strategic themes: revenue growth, cost reduction, and as-
set utilization.

CUSTOMER PERSPECTIVE

The customer perspective is the source of the revenue component for the financial objectives. This per-
spective defines and selects the customer and market segments in which the company chooses to com-
pete.

PROCESS PERSPECTIVE

To provide the framework needed for this perspective, a process value chain is defined. The process
value chain is made up of three processes: the innovation process, the operations process, and the
post sales process.

Cycle time – is the time required to produce one unit of product.

Velocity – is the number of units that can be produced in a given period of time (e.g.,
units per hour)

LEARNING/INNOVATION AND GROWTH PERSPECTIVES

The learning and growth perspective is the source of the capabilities that enable the accomplishment of
the other three perspectives’ objectives.
 Republic of the Philippines
CAMARINES NORTE STATE COLLEGE
F. Pimentel Avenue, Brgy. 2, Daet, Camarines Norte, 4600 Philippines

From Strategy to Performance Measures: The Balanced Scorecard

Performance Measures

What are our

Financial
financial “Has our financial performance im-
goals? proved?

What customers do
Vision Customer
we want to serve and
and “Do customers recognize that we are
how are we going to
Strategy delivering more value?
win and retain them

What internal busi- Internal Business Processes

ness processes are “Have we improved key business
critical to providing processes so that we can deliver
value to customers? more value to customers?”

Learning and Growth

“Are we maintaining our ability to
change and improve?”

Source: Brewer/Garrison/Noreen, Introduction to Managerial Accounting, Seventh edition

 Republic of the Philippines
CAMARINES NORTE STATE COLLEGE
F. Pimentel Avenue, Brgy. 2, Daet, Camarines Norte, 4600 Philippines

Examples of Performance Measures for Balanced Scorecard

Financial Perspective
Performance Measure Desired Change
Sales +
Income from Operations +
ROI +
Profit margin and Investment turnover +
Residual income +
Actual versus budgeted (standard) costs +-
Customer Perspective
Performance Measure Desired Change
Customer satisfaction as measured by survey results +
Number of customer complaints -
Market share +
Product returns as a percentage of sales -
Percentage of customers retained from last period +
Number of new customers +
Number of repeat customers +
Customer brand recognition +
Delivery time to customers -
Internal Business Processes Perspective
Performance Measure Desired Change
Percentage of sales from new products +
Time to introduce new products to the market -
Percentage of customer calls answered within 20 seconds +
On-time deliveries as a percentage of all deliveries +
Work in process inventory as a percentage of sales -
Unfavorable standard cost variances -
Defect-free units as a percentage of completed units +
Delivery cycle time -
Throughput time -
Manufacturing cycle efficiency +
Quality costs -
Setup time -
Time from call by customer to repair of product -
Percent of customer complaints settled on first contact +
Time to settle a customer claim -
Number or stockouts -
Labor utilization +
Learning and Growth Perspective
Performance Measure Desired Change
Suggestions per employee +
Employee turnover -
Hours of in-house training per employee +
Number of new products +
Number of new patents +
Number of cross-trained employees +
Number of ethics violations -
 Republic of the Philippines
CAMARINES NORTE STATE COLLEGE
F. Pimentel Avenue, Brgy. 2, Daet, Camarines Norte, 4600 Philippines

LINKING THE BALANCE SCORECARD TO ORGANIZATIONAL STRATEGY

A key to making successful use of the balanced scorecard is linking the scorecard’s lead and lag
measures to the organization’s strategy. The organization’s vision and strategy drive the specification
of both goals and metrics in the scorecard’s financial, customer, internal business process and learning
and growth perspectives.

Key to understanding the value and construction of the balanced scorecard is the distinction between
lead and lag indicators of performance. Lead indicators of performance are measures of nonfinancial
and financial outcomes that guide management in making current decisions that will result in desirable
results in the future. In other words, lead indicators guide management to take actions now that will
have positive effects on enterprise performance later. Lag indicators are measures of the final out-
comes of earlier management decisions. The whole idea of the balanced scorecard is to use lead indi-
cators to communicate with, motivate and evaluate individuals with the expectation that their current ac-
tions will result in improvements in the company’s important lag measures.

One key to successfully using the balanced scorecard is linking the scorecard’s lead and lag measures
to the organizational strategy. According to Amazon.com, Inc., website, the company’s strategy is “ to
be Earth’s most customer-centric company: to build a place where people can come to find and dis-
cover anything they might want to buy online”

Leaving aside the issue of whether there might be a more customer-centric company on another planet
elsewhere in the universe, Amazon.com’s strategy of providing unparalleled customer service via its
online-only sales model drives the company’s efforts in each of the perspectives that comprise the bal-
anced scorecard.

Ama- Improved inter- Success

Learning and
zon.com’s nal processes Higher for the
growth initia-
strategy of and operations customer company,
Drives tives such as leading to leading to leading to
success such as cus- satisfac- as meas-
employee
through cus- tomer return tion ured in fi-
training
tomer service handling nancial
terms
 Republic of the Philippines
CAMARINES NORTE STATE COLLEGE
F. Pimentel Avenue, Brgy. 2, Daet, Camarines Norte, 4600 Philippines

The following selected balanced scorecard measures are among those relevant for Amazon.com to
successfully implement its strategy. Notice the frequency of the word customer in these measures.
Amazon.com’s strategy and its relevant balanced scorecard measures are dominated by its customer-
focused online sales business model.

Profit (in relation to assets invested)

Financial Cash flow
Revenue Growth by customer segment
Gross margin by customer segment

Average revenue per customer

Customer Customer satisfaction survey score
Number of customer complaints received
Percent of customers subscribing to “Prime” service

Return rate due to Amazon.com error

Internal Business Process Percent of orders delivered on time
Order-to-shipment cycle time
Number of customer-focused process innovations

Training expenditures per employee

Employee turnover rate
Learning and Growth Number of new patents that protect Amazon.com’s
online sales business model
Employee satisfaction survey score

Amazon.com’s vision and strategy

(source: Hilton, Platt, Managerial Accounting)

 Republic of the Philippines
CAMARINES NORTE STATE COLLEGE
F. Pimentel Avenue, Brgy. 2, Daet, Camarines Norte, 4600 Philippines

GROUP ACTIVITY

ACTIVITY 1

Match each of the following performance measures to one or more of the four perspectives of the bal-
anced scorecard. Note that a performance measure could measure performance for more than one
perspective. Indicate the letter of choice on the space provided before the number.

Answer Performance Measures Balanced Scorecard Perspectives

1. Throughput time a. Learning and growth
2. Economic value added b. Internal business process
3. Employee productivity c. Customer
4. Percentage of peso sales invested in em- d. Financial
ployee training
5. Ratings of supplier performance
6. Increase in market share
7. Employee retention
8. On-time delivery performance to customers
9. Product quality
10. Residual income

ACTIVITY 2

The manager of TT Co. would like to reduce the amount of time between when a customer places an
order and when the order is shipped. For the first quarter of operations during the current year the fol-
lowing data were reported:

Inspection time 0.3 day

Wait time (from order to start of production) 14 days
Process time 2.7 days
Move time 1 day
Queue 5 days

Required: (show solutions)

1. Compute the throughput time.

2. Compute the manufacturing cycle efficiency (MCE) for the quarter.
3. What percentage of the throughput time was spent in non-value-added activities?
4. Compute the delivery time
5. If by using Lean Production all queue time during production is eliminated, what will be the new
MCE?
 Republic of the Philippines
CAMARINES NORTE STATE COLLEGE
F. Pimentel Avenue, Brgy. 2, Daet, Camarines Norte, 4600 Philippines

ACTIVITY 3

Classify the following quality costs as prevention, appraisal, internal failure, external failure, or not a
cost of quality.

Quality Costs Answer

1. Product testing
2. Product recalls
3. Rework labor and overhead
4. Quality circles
5. Downtime caused by defects
6. Cost of field servicing
7. Inspection of goods
8. Quality engineering
9. Warranty repairs
10. Statistical process control
11. Net cost of scrap
12. Depreciation of test equipment
13. Returns and allowances arising from poor quality
14. Disposal of defective products
15. Technical support to suppliers
16. Systems development
17. Warranty replacements
18. Field testing at customer site
19. Product design
20. Processing and responding to consumer complaints

ACTIVITY 4

Create a simple balanced scorecard for the following types of company:

a. Hotel/resort
b. Hospital
c. Restaurant/fastfood

Additional information:

1. Formulate/create your own vision/mission and strategy from the selected type of company.
2. More than three performance measures must be formulated for each balanced scorecard per-
spective.
 Republic of the Philippines
CAMARINES NORTE STATE COLLEGE
F. Pimentel Avenue, Brgy. 2, Daet, Camarines Norte, 4600 Philippines

INSTRUCTION FOR GROUP ACTIVITY

1. Every group member is expected to contribute to this group activity

2. All groups will work on Activities 1, 2, 3 and 4. For Activity 4, each group will be assigned one
type of company, as follows:

a. Hotel/resort – Group 1
b. Hospital – Group 2
c. Restaurant/fastfood – Group 3

3. For Activity 4, provide an explanation/narrative/discussion on how you created your balanced

scorecard. This is in lieu of presenting your output during class discussion due to time con-
straints.

4. Activities 1,2 and 3 will be graded objectively (based on the number of items). For activity 4,
the following rubric will be used:

Criteria 10 pts 8 pts 6 pts 4 pts

Vision/strategy Highly appropri- Fairly appropri- Less appropri- Not appropriate
ate with type of ate with type of ate with type of with type of
company company company company
Performance Highly re- Fairly re- Less re- Not related/con-
measures lated/connected lated/connected lated/connected nected to strat-
to strategy to strategy to strategy egy
Number of per- 4 or more 3 2 1
formance
measures in
each perspec-
tive
Explanation/dis- Complete With minor de- With major de- No explana-
cussion/narrative tails missing tails missing tion/discus-
sion/narrative

5. Ensure that group answers to the activities are discussed with group members before submit-
ting it.

6. Date and mode of submission will be announced later.