MS 3407 Balanced Scorecard and Responsibility Accounting
MS 3407 Balanced Scorecard and Responsibility Accounting
MS 3407 Balanced Scorecard and Responsibility Accounting
Since 1977
LECTURE NOTES
Product differentiation vs cost leadership main application of this principle is that managers
Product differentiation is an organization's ability to should not be held accountable for costs outside
offer products or services perceived by its customers their control. One major difficulty in applying this
to be superior and unique relative to the products or occurs when revenues and costs are jointly earned
services of its competitors. or incurred. Separating these component revenues
and costs can involve intricate, and often
Cost leadership is an organization's ability to achieve arbitrary, accounting procedures.
lower costs relative to competitors through A segment margin is the level of controllable profit
productivity and efficiency improvements, elimination reported by an organizational unit or product line.
of waste, and tight cost control. Each unit’s segment margin is an estimate of its
short-term effect on the organization’s profit.
Reengineering is the rethinking of business processes, Interpreting segment margins should be done
such as the order delivery process, to improve critical carefully, as:
performance measures such as cost, quality, or • Segment margins can represent highly
customer satisfaction. It can be contrasted to a kaizen aggregated summaries of each organizational
approach to change in that reengineering is most often unit’s performance. Thus, other critical success
a sudden, drastic change, while a kaizen approach factors should be used as well to assess
involves small, incremental but continual performance.
improvements. • Some segment reports contain arbitrary
numbers. Accountants call these soft
RESPONSIBILITY UNITS & PERFORMANCE numbers since they rest on subjective
EVALUATION assumptions over which there can be
legitimate disagreement.
Why decentralize decision-making responsibility • The revenue figures often reflect assumptions
Decentralization enables units of an organization to and allocations that can be misleading. These
respond more quickly and effectively to the assumptions relate to how the revenues that
uncertainties of markets and economic change. the organization earned are divided among the
Decentralization requires that senior level managers responsibility centers.
delegate decision-making responsibilities to operating
level managers who are closer to the action and who Transfer Pricing - A transfer price is the price paid
have access to more timely, relevant information for for goods or services transferred within an
making decisions. organization. Transfer prices facilitate the attribution
of revenues earned by the organization to
In a centralized environment, control moves from task organizational sub-units. Transfer pricing can be very
control to results control. In a task control arbitrary, especially if there is a high degree of
environment, the focus is on getting a particular task interaction among the various responsibility centers.
done. In a results control environment, the focus is There are four broad approaches to transfer pricing:
on motivating people to use their skill, knowledge, and Market-Based Transfer Prices. Market prices provide
creativity to improve operating results. an independent valuation of products that are
A responsibility center is an organizational subunit transferred between divisions and reflect jointly
for which a manager has been assigned earned revenue in a manner that reflects the
accountability. market’s assessment. One difficulty is that clear
A cost center is a responsibility center whose market prices often do not exist for many
employees control costs but do not control its products.
revenues or investment level. Cost-Based Transfer Prices. If goods or services do
A revenue center is a responsibility center whose not have market prices, transfer prices are often
employees control revenues but do not control based on cost. Common cost basis methods
costs or the level of investment. Revenue center include variable cost plus a markup, full cost, and
employees can control the mix of items carried in full cost plus a markup.
their stores, prices of products and promotional Negotiated Transfer Prices. When market prices do
activities. Revenue center managers are often at not exist, another possibility is to allow divisions to
the mercy of others who determine the costs of negotiate transfer prices. Critics argue that
their goods (e.g., a service station manager has negotiated transfer prices reflect both negotiating
no control over the cost of the gas sold). skills as well as economic considerations, and
A profit center is a responsibility center whose therefore lead to less valid as indices of economic
employees control revenues and costs but not the performance.
level of investment; the level of investment is Administered Transfer Prices. Administered transfer
usually controlled by senior management. Most prices are set by an arbitrator or by a rule or
outlets of fast-food restaurant chains and motel policy. Some find them appealing because they are
chains are profit centers. easy to administer. An example is to use the
An investment center is a responsibility center variable cost of a product plus 25%. Others view
whose employees control its revenues, costs, and these types of prices as unappealing because they
the level of investment. The investment center is are quite arbitrary.
essentially an independent business.
Return on Investment and Economic Value Added
Performance measures to evaluate the
performance for each type of responsibility ROI = return on sales x asset turnover
center.
Return on sales = operating income/sales
Controllability, a principle often used in control, Return on sales is a measure of operating efficiency.
asserts that people should only be held On return on sales, efficiency is a measure of an
accountable for results that they can control. The organization’s ability to control costs.
a. What is the margin earned at this level of sales? 1.From the standpoint of the Audio Division, what
b. What is the turnover at this level of sales? is the lowest acceptable transfer price for
2. Assume that the Valve Division’s current ROI is just speakers sold to the Hi-Fi Division?
equal to the minimum required 14%. In order to 2.From the standpoint of the Hi-Fi Division, what is
increase the division’s ROI, the divisional manager the highest acceptable transfer price for
wants to increase the selling price per valve by 4%. speakers purchased from the Audio Division?
Market studies indicate that an increase in the 3.If left free to negotiate without interference,
selling price would cause sales to drop by 20,000 would you expect the division managers to
units each year. However, operating assets could be voluntarily agree to the transfer of 5,000
reduced by P50,000 due to decreased needs for speakers from the Audio Division to the Hi-Fi
accounts receivable and inventory. Compute the Division? Why or why not?
margin, turnover, and ROI if these changes are 4.From the standpoint of the entire company,
made. should the transfer take place? Why or why
3. Refer to the original data. Assume again that the not?
Valve Division’s current ROI is just equal to the
minimum required 14%. Rather than increase the B. Assume that the Audio Division is selling all of the
selling price, the sales manager wants to reduce the speakers it can produce to outside customers on the
selling price per valve by 4%. Market studies intermediate market.
indicate that this would fill the plant to capacity. In 1.From the standpoint of the Audio Division, what
order to carry the greater level of sales, however, is the lowest acceptable transfer price for
operating assets would increase by P50,000. speakers sold to the Hi-Fi Division?
Compute the margin, turnover, and ROI if these 2.From the standpoint of the Hi-Fi Division, what is
changes are made. the highest acceptable transfer price for
4. Refer to the original data. Assume that the normal speakers purchased from the Audio Division?
volume of sales is 280,000 valves each year at a 3.If left free to negotiate without interference,
price of P5 per valve. Another division of the would you expect the division managers to
company is currently purchasing 20,000 valves voluntarily agree to the transfer of 5,000
each year from an overseas supplier, at a price of speakers from the Audio Division to the Hi-Fi
P4.25 per valve. The manager of the Valve Division Division? Why or why not?
has adamantly refused to meet this price, pointing 4.From the standpoint of the entire company,
out that it would result in a loss for his division: should the transfer take place? Why or why
Selling price per P4.25 not?
valve
Costs per valve PROBLEM NO. 8.
Variable 3.00 The Box Division of EDSA, Inc. produces boxes that can
Fixed [P462,000/300,000 1.54 4.54 be sold externally or internally to EDSA' candy division.
valves] Sales and cost data on the most popular box are given
Net loss per valve P(0.29) below:
Unit selling price P9.50
The manager of the Valve Division also points out Unit variable cost 6.00
that the normal P5 selling price barely allows his Unit product fixed cost
division the required 14% rate of return. “If we (P750,000/500,000) 1.50
take on some business at only P4.25 per unit, then Practical capacity 500,000 units
our ROI is obviously going to suffer,” he reasons,
“and maintaining that ROI figure is the key to my During the coming year, the Box Division expects to sell
future. Besides, taking on these extra units would 350,000 units of this box. The Candy Division currently
require us to increase our operating assets by at plans to buy 150,000 units of the box on the outside
least P50,000 due to the larger inventories and market for P9.50 each. The manager of the Box Division
receivables we would be carrying.” Would you has approached the manager of the Candy Division and
recommend that the Valve Division sell to the other offered to sell the 150,000 boxes for P9.40 each. The
division at P4.25? Show ROI computations to manager of Box Division explained that she can avoid
support your answer. selling costs of P0.20 per box and that she would split
the savings by offering a P0.10 discount on the usual
PROBLEM NO. 7. price.
Sounds Company’s Audio Division produces a speaker
that is widely used by manufacturers of various audio Requirements:
products. Sales and cost data on the speaker follow: 1. What is the minimum price that the Box Division
Selling price per unit on the intermediate market P60 would be willing to accept? What is the maximum
Variable cost per unit 42 transfer price that the Candy Division would be
Fixed costs per unit 8 willing to pay? Should an internal transfer take
Capacity in units 25,000 place? What would be the benefit(loss) to the
Sounds Company has just organized a Hi-Fi Division that whole company if the internal transfer takes place?
could use this speaker in one of its products. The Hi-Fi 2. Suppose the Candy Division knows that the Box
Division will need 5,000 speakers per year. It has Division has idle capacity. Do you think Candy
received a quote of P57 per speaker from another Division would agree to the transfer price of P9.40?
manufacturer. Sounds Company evaluates divisional Suppose that the manager of
managers based on divisional profits. 3. Candy Division counters with an offer to pay P8.50.
Would the manager of Box Division be interested in
Requirements: this price?
A. Assume that the Audio Division is now selling only 4. Suppose that EDSA, Inc. policy is that all internal
20,000 speakers per year to outside customers on transfers take place at full manufacturing cost.
the intermediate market.
What would the transfer price be? Would the 2. The internal business processes perspective of the
transfer take place? balanced scorecard comprises three subprocesses
that address all of the following EXCEPT:
PROBLEM NO. 9. a. innovative processes used to create new
The following information for a recent project was products, services, and processes
taken from the records of Great Company: b. motivating current employees
Processing time 15.0 days c. providing service and support to the customer
Inspection time 0.5 days after the sale
Waiting time: d. delivering existing products and services to
From order receipt until start of best meet the needs of customers
production 6.0 days
From start of production until project 3. All of the following relate to the balanced
completion 3.0 days scorecard’s learning and growth perspective
Move time 1.5 days EXCEPT:
a. How do we achieve greater employee
Requirements: satisfaction?
1. How long did it take to complete the project once b. What new products do we create?
production commenced? c. How do we provide information systems with
2. Compute the manufacturing cycle efficiency. updated technology?
d. How will we motivate and empower our
PROBLEM NO. 10. employees?
Charity Products Inc. produces a variety of electronic
products which it sells to retail stores throughout the 4. Which of these is the perspective of the balanced
country. The following data is available for the year for scorecard that is at the top of the list for a
one of the products: company’s lenders and shareholders?
Units started into production 2,000,000 a. financial perspective.
Total good units completed 1,950,000 b. internal business and production process
Total hours of value-added production time 300,000 perspective.
Total production hours 380,000 c. learning and growth perspective.
d. customer perspective.
Requirements:
1. Compute the manufacturing cycle efficiency 5. Performance measures for financial control
(MCE). include all of the following EXCEPT:
2. What is the total throughput per hour? a. reduced cycle times
b. ROI ( return on investment) and economic
PROBLEM NO. 11. value added
The Cute Corporation produces small plastic dolls in its c. profit
Florida manufacturing plant. The company is currently d. cost
evaluating ways to improve productivity. The
accountant of the firm's parent organization suggested 6. Division A is considering a project that will earn a
that management implement a new compensation plan rate of return which is greater than the imputed
based on throughput performance measure as an interest charge for invested capital, but less than
incentive to increase productivity. To demonstrate how the division's historical return on invested capital.
such a measure might work, the accountant gathered Division B is considering a project that will earn a
the following production data for a recent month: rate of return that is greater than the division's
Total units attempted 6,000,000 historical return on invested capital, but less than
Good units manufactured 4,800,000 the imputed interest charge for invested capital.
Processing time (total hours) 800 If the objective is to maximize residual income,
Value-added processing time 600 should these divisions accept or reject their
projects?
Requirements: A B
1. How many defective units were produced? a. Accept Accept
2. Compute manufacturing cycle efficiency. b. Reject Accept
3. Compute process productivity. c. Reject Reject
4. Compute process quality yield. d. Accept Reject
5. Compute hourly throughput.
7. Management of a company is attempting to build
MULTIPLE CHOICE QUESTIONS a reputation as a world-class manufacturer of
quality products. Which of the following measures
1. The purpose of the balanced scorecard is BEST would not be used by the firm to measure
described as helping an organization to: quality?
a. develop customer relations. A. The percentage of shipments returned by
b. mobilize employee skills for continuous customers because of poor quality.
improvements in processing capabilities, B. The number of parts shipped per day.
quality, and response times. C. The number of defective parts per million.
c. introduce innovative products and services D. The percentage of products passing quality tests
desired by target customers. the first time.
d. translate an organization’s mission and
strategy into a set of performance measures 8. What type of incentive compensation is utilized to
that help to implement the strategy. motivate employees to achieve financial targets
that increase the company's stock price?
a. Profit-sharing plans
9. A manager would like to see a decreasing trend in 16. Waldorf Company has two sources of funds: long-
all of the following operating measures except: term debt with a market and book value of P10
a. Customer complaints as a percentage of units million issued at an interest rate of 12%, and
sold. equity capital that has a market value of P8
b. Scrap as a percentage of total cost. million (book value of P4 million). Waldorf
c. Setup time. Company has profit centers in the following
d. Manufacturing cycle efficiency. locations with the following operating incomes,
total assets, and current liabilities. The cost of
10. When the selling division in an internal transfer equity capital is 12%, while the tax rate is 25%.
has unsatisfied demand from outside customers Operating Current
for the product that is being transferred, then the Income Assets Liabilities
lowest acceptable transfer price as far as the St. Louis P 960,000 P 4,000,000 P 200,000
selling division is concerned is: Cedar Rapids P1,200,000 P 8,000,000 P 600,000
a. variable cost of producing a unit of product. Wichita P2,040,000 P12,000,000 P1,200,000
b. the full absorption cost of producing a unit of
product. What is the EVA for St. Louis?
c. the market price charged to outside customers a. P255,740 c. P392,540
less costs saved by transferring internally. b. P327,460 d. P720,000
d. the amount that the purchasing division would
have to pay an outside seller to acquire a 17. Division X of Charter Corporation makes and sells
similar product for its use. a single product which is used by manufacturers
of fork lift trucks. Presently it sells 12,000 units
11. _________ starts with estimated product costs per year to outside customers at P24 per unit.
and next determines the estimated selling price. The annual capacity is 20,000 units and the
a. Standard costing variable cost to make each unit is P16. Division Y
b. Target costing of Charter Corporation would like to buy 10,000
c. Kaizen costing units a year from Division X to use in its products.
d. Traditional costing There would be no cost savings from transferring
the units within the company rather than selling
12. _________ starts with estimated product costs them on the outside market. What should be the
and next adds the expected profit margin. lowest acceptable transfer price from the
a. Cost-plus pricing perspective of Division X?
b. Target costing a. P24.00 c. P17.60
c. Kaizen costing b. P21.40 d. P16.00
d. Standard costing
18. Division P of Turbo Corporation has the capacity
13. Place the following steps for the implementation for making 75,000 wheel sets per year and
of target costing in order: regularly sells 60,000 each year on the outside
A = Derive a target cost market. The regular sales price is P100 per wheel
B = Develop a target selling price set, and the variable production cost per unit is
C = Perform value engineering P65. Division Q of Turbo Corporation currently
D = Determine target profit margin buys 30,000 wheel sets (of the kind made by
a. B D A C c. A D B C Division P) yearly from an outside supplier at a
b. B A D C d. A B C D price of P90 per wheel set. If Division Q were to
buy the 30,000 wheel sets it needs annually from
14. The Axle Division of LaBate Company makes and Division P at P87 per wheel set, the change in
sells only one product. Annual data on the Axle annual net operating income for the company as
Division's single product follow: a whole, compared to what it is currently, would
Unit selling price P50 be:
Unit variable cost P30 a. P600,000 c. P750,000
Total fixed costs P200,000 b. P225,000 d. P135,000
Average operating assets P750,000
Minimum required rate of return 12% 19. Rica Corporation has provided the following data
Suppose the manager of Axle desires an annual for one of its products:
residual income of P45,000. In order to achieve Process time 3 days
this, Axle should sell how many units per year? Queue time 4 days
A. 14,500. C. 18,250. Inspection time 0.7 days
B. 16,750. D. 19,500. Move time 0.3 days
Wait time 9 days
15. The following data are available for the South The throughput time for this operation would be:
Division of Redride Products, Inc. and the single a. 8 days c. 17 days
product it makes: b. 3 days d. 7.7 days
Unit selling price P20
Variable cost per unit P12 Use the following information for the next three
Annual fixed costs P280,000 questions.
Average operating assets P1,500,000 Computer Solutions Corporation manufactures and
If South wants a residual income of P50,000 and sells various high-tech office automation products.
the minimum required rate of return is 10%, the Two divisions of Office Products Inc. are the Computer
Chip Division and the Computer Division. The 23. What is the return on sales (ROS) for the
Computer Chip Division manufactures one product, a division?
"super chip," that can be used by both the Computer a. 8% c. 10%
Division and other external customers. The following b. 4% d. 20%
information is available on this month's operations in
the Computer Chip Division: 24. What is the asset turnover ratio for the division?
a. .25 c. 2.5
Selling price per chip P50 b. 10 d. 8
Variable costs per chip P20
Fixed production costs P60,000 25. What is the return on investment (ROI) for the
Fixed SG&A costs P90,000 division?
Monthly capacity 10,000 chips a. 10% c. 4%
External sales 6,000 chips b. 8% d. 2%
Internal sales 0 chips
26. What is the amount of residual income (Rl) for
Presently, the Computer Division purchases no chips the division?
from the Computer Chips Division, but instead pays a. P2,000,000 c. P1,000,000
P45 to an external supplier for the 4,000 chips it b. P1,600,000 d. P 400,000
needs each month.
20. Assume that next month's costs and levels of Use the following information for the next two questions.
operations in the Computer and Computer Chip Fabro, Inc. produced 1,500 units of Product RX-6 last
Divisions are similar to this month. What is the week. The inputs to the production process for Product
maximum of the transfer price range for a RX-6 were as follows.
possible transfer of the chip from one division to • 450 pounds of Material A at a cost of P1.50 per
the other? pound.
a. P50 c. P35 • 300 pounds of Material Z at a cost of P2.75 per
b. P45 d. P30 pound.
• 300 labor hours at a cost of P15.00 per hour.
21. If a transfer between the two divisions is
arranged next period at a price (on 4,000 units of 27. What is the total factor productivity for Product
super chips) of P40, total profits in the Computer RX-6?
Chip division will a. 1.00 unit per peso input.
a. rise by P20,000 compared to the prior period. b. 5.00 units per hour.
b. drop by P40,000 compared to the prior period. c. 0.25 units per peso input.
c. drop by P20,000 compared to the prior period. d. 0.33 units per peso input.
d. rise by P80,000 compared to the prior period.
28. What is the best productivity measure for the
22. Assume, for this question only, that the Computer first-line supervisor in Fabro, Inc.'s production
Chip Division is selling all that it can produce to plant?
external buyers for P50 per unit. How would a. 5.00 units per labor hour.
overall corporate profits be affected if it sells b. 0.33 units per peso input.
4,000 units to the Computer Division at P45? c. 2.00 units per pound.
(Assume that the Computer Division can purchase d. P15.00 per labor hour.
the super chip from an outside supplier for P45.)
a. no effect Use the following information for the next two questions.
b. P20,000 increase Each month, Haddon Company has P275,000 total
c. P20,000 decrease manufacturing costs (20% fixed) and P125,000
d. P90,000 increase distribution and marketing costs (36% fixed).
Haddon’s monthly sales are P500,000.
Use the following information for the next four 29. The markup percentage on full cost to arrive at
questions. the target (existing) selling price is
The following is selected data for the Consumer a. 25%. c. 80%.
Products division of Aaron Corporations for 200X: b. 75%. d. 20%.
Sales P50,000,000
Average invested capital (assets) 20,000,000 30. The markup percentage on variable costs to
Net income 2,000,000 arrive at the existing (target) selling price is
Cost of capital 8% a. 20.00% c. 80.00%
b. 40.00% d. 66.67 %
“Obstacles are those frightful things you see when you take your eyes off your goals.” – Henry Ford
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