Cost Accounting
Seventeenth Edition, Global Edition
Chapter 13
Strategy, Balanced Scorecard, and
Strategic Profitability Analysis
Copyright © 2021 Pearson Education Ltd.
Learning Objectives
13.1 Recognize which of two generic strategies a company
is using
13.2 Understand the four perspectives of the balanced
scorecard
13.3 Analyze changes in operating income to evaluate
strategy
13.4 Identify unused capacity and how to manage it
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Strategy
• Strategy specifies how an organization matches its own
capabilities with the opportunities in the marketplace to
accomplish its objectives.
• Strategy describes how an organization can create value
for its customers while differentiating itself from its
competitors.
• A thorough understanding of the industry is critical to
formulating and implementing a successful strategy.
Industry analysis focuses on five forces.
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Industry Analysis Focuses on Five
Forces
1. Number and strength of competitors
2. Potential entrants to the market
3. Availability of equivalent products
4. Bargaining power of customers
5. Bargaining power of input suppliers
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Two Basic Business Strategies
1. Product differentiation is an organization’s ability to
offer products or services perceived by its customers to
be superior and unique relative to the products or
services of its competitors.
– Competitive advantage: Brand loyalty and the
willingness of customers to pay higher prices.
2. Cost leadership is an organization’s ability to achieve
lower costs relative to competitors through productivity
and efficiency improvements, elimination of waste, and
tight cost control.
– Competitive advantage: Lower selling prices.
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Strategy Implementation and the
Balanced Scorecard (1 of 2)
Many companies have introduced a balanced scorecard to
track progress and manage the implementation of their
strategies. The balanced scorecard translates an
organization’s mission and strategy into a set of performance
measures that serves as the framework for implementing the
organization’s strategy. The scorecard measures from four
perspectives:
1. Financial
2. Customer
3. Internal business processes
4. Learning and growth
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Strategy Implementation and the
Balanced Scorecard (2 of 2)
The measures that a company uses to track performance
depend on its strategy. This set of measures is called a
“balanced scorecard” because it balances the use of
financial and nonfinancial performance measures.
A useful first step in designing a balanced scorecard is a
strategy 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.
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Strategy Map Example
Exhibit 13.2 Strategy Map for Chipset, Inc., for 2020
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Structural Analysis of Strategy Maps
(1 of 2)
Structural analysis is used to think carefully about the causal
links in the strategy map before developing the balanced
scorecard. Five types of conditions are considered in a
structural analysis (defined in the next slide):
1. Strength of ties
2. Orphan objectives
3. Focal points
4. Trigger points
5. Distinctive objectives
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Structural Analysis of Strategy Maps
(2 of 2)
1. Strength of ties—Ties are the causal links between strategic
objectives and can be qualified as strong, moderate, or weak.
2. Orphan objectives—An orphan objective has only weak ties
leading out of it to other strategic objectives.
3. Focal points—A focal point is a strategic objective that has
many other links funneling INTO it.
4. Trigger points—A trigger point is a strategic objective where
many ties spur OUT from it, resulting in the achievement of
many strategic objectives.
5. Distinctive objectives—These are strategic objectives that
distinguish an organization from its competitors, based on the
organization’s strategy.
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The Four Perspectives of a Balanced
Scorecard (1 of 5)
1. Financial—profits and value created for shareholders
2. Customer—the success of the company in its target
market
3. Internal business perspective—the internal operations
that create value for customers
4. Learning and growth—the people and systems
capabilities that support operations
The particular measure a company uses to track
performance will depend on its strategy.
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The Four Perspectives of a Balanced
Scorecard (2 of 5)
FINANCIAL: Evaluates the profitability of the strategy
and the creation of shareholder value
Uses the most objective measures in the scorecard
The other three perspectives eventually feed back into this
dimension
Exhibit 13.3 The Balanced Scorecard for Chipset, Inc., for
2020
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The Four Perspectives of a Balanced
Scorecard (3 of 5)
CUSTOMER: Identifies targeted customer and market
segments and measures the company’s success in these
segments
Here we see some measures that might be used, including market
share, number of new customers, and customer-satisfaction
ratings.
Exhibit 13.3 The Balanced Scorecard for Chipset, Inc., for 2020
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The Four Perspectives of a Balanced
Scorecard (4 of 5)
INTERNAL BUSINESS: Focuses on internal operations that create
value for customers which, in turn, help achieve financial
performance
Exhibit 13.3 The Balanced Scorecard for Chipset, Inc., for 2020
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The Four Perspectives of a Balanced
Scorecard (5 of 5)
LEARNING AND GROWTH: Identifies the people and information
capabilities necessary for an organization to learn, improve, and
grow. These capabilities help achieve superior internal processes
that in turn create value for customers and shareholders.
Exhibit 13.3 The Balanced Scorecard for Chipset, Inc., for 2020
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Balanced Scorecard Implementation
A successful balanced scorecard implementation
• must have commitment and leadership from top
management and
• must be communicated to all employees.
For the balanced scorecard to be effective, managers must
view it as a fair way to assess and reward all important
aspects of a manager’s performance and promotion
prospects.
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Frequently Cited Balanced Scorecard
Measures
Exhibit 13.4 Frequently Cited Balanced Scorecard Measures
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Different Strategies Lead to Different
Scorecards
A company that follows a cost-leadership strategy will likely
have designed their balanced scorecard to be different from
a company that follows a product-differentiation strategy.
Companies are increasingly recognizing that they must
continually earn the right to operate in the communities and
countries in which they do business. Failure to perform
adequately on environmental and social outcomes puts at
risk a company’s ability to deliver future value to
shareholders.
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Environmental and Social Performance
and the Balanced Scorecard (1 of 2)
A sustainable society is one where “the current generation
meets its needs without jeopardizing the ability of future
generations to meet their needs.” (Defined by the Brundtland
Commission)
Sustainability has two fundamental schools of thought.
1. Managers should focus only on long-run financial
performance, and not go beyond the minimum levels
required by law. According to this view, companies’
responsibilities in society are adequately captured by the
sole goal of long-run financial performance.
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Environmental and Social Performance
and the Balanced Scorecard (2 of 2)
2. Companies and managers must pursue environmental
and social objectives beyond what is legally required and
in addition to long-run financial goals—often called the
triple bottom line. According to this view, the
environmental and social objectives are overall goals
next to long-run financial performance, not just a means
to an end.
Managers interested in measuring environmental and social
performance incorporate these factors into their balanced
scorecards to set priorities for initiatives, guide decisions and
actions and fuel discussions around strategies and business
models to improve performance.
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Features of a Good Balanced
Scorecard (1 of 2)
1. Tells the story of a firms strategy, articulating a sequence
of cause-and-effect relationships—the links among the
various perspectives that align implementation of the
strategy.
2. Helps to communicate the strategy to all members of the
organization by translating the strategy into a coherent
and linked set of understandable and measurable
operational targets.
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Features of a Good Balanced
Scorecard (2 of 2)
3. Must motivate managers to take actions that eventually
result in improvements in financial performance.
– Applies primarily to for-profit entities but has some
application to not-for-profit entities as well
4. Limits the number of measures, identifying only the most
critical ones.
5. Highlights less-than-optimal trade-offs that managers
may make when they fail to consider operational and
financial measures together.
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Pitfalls in Implementing a Balanced
Scorecard
• Managers should not assume the cause-and-effect
linkages are precise: They are merely hypotheses.
• Managers should not seek improvements across all of the
measures all of the time.
• Managers should not use only objective measures;
subjective measures are important as well.
• Despite challenges of measurement, top management
should not ignore nonfinancial measures when evaluating
managers and other employees.
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Evaluating the Success of Strategy
and Implementation
• To evaluate the success of a company’s strategy and
implementation, management must compare the target and
actual performance columns in the balanced scorecard.
• If a company does not meet its targets on the two perspectives
that are more internally focused (learning and growth and
internal business processes), it would conclude that it did not
implement its strategy because it did not implement the
activities that would give it competitive advantage.
• If a company performs well in the internally focused
perspectives but not customer and financial measures, it may
conclude that the strategy was faulty because there was no
effect on customers or on long-run financial performance and
value creation.
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Strategic Analysis of Operating
Income (1 of 2)
To evaluate the success of a strategy, managers and
management accountants need to link strategy to the
sources of operating-income increases.
To do this evaluation, management accountants start by
analyzing three main factors:
1. The growth component measures the change in
operating income attributable solely to the change in
quantity of output sold between years.
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Strategic Analysis of Operating
Income (2 of 2)
2. The price-recovery component measures the change in
operating income attributable solely to changes in prices
of inputs and outputs between years. This component
measures the change in revenues as a result of a change
in output price compared with the change in costs as a
result of change in input prices.
3. The productivity component measures the change in
costs attributable to a change in the quantity of inputs
used in current year relative to the quantity of inputs that
would have been used in the prior year to produce the
current year output. This component measures the
amount by which operating income increases by using
inputs efficiently to lower costs.
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Formulas Used for Strategic Analysis
of Income Summary (1 of 2)
Here are the formulas used in the strategic analysis of
income categorized into three components:
Growth Component
• Revenue effect of growth
• Cost effect of growth
• Cost effect of growth for Fixed costs
Price-Recovery Component
• Revenue effect of price recovery
• Cost effect of price recovery
• Cost effect of price recovery for fixed costs
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Formulas Used for Strategic Analysis
of Income Summary (2 of 2)
Here are the remaining formulas used in the strategic
analysis of income:
Productivity Component
• Cost effect of productivity for variable costs
• Cost effect of productivity for fixed costs
These formulas for each of these components are reviewed
in the next eight slides.
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Formulas Used for Strategic Analysis
of Income Details (1 of 8)
REVENUE EFFECT OF GROWTH
Revenue Actual Units of Actual Units of Prior
Effect Output Sold in Output Sold in Period
of the Current the Prior Selling
Growth Period Period Price
Throughout these slides, we’ll use values from the textbook
example to illustrate the formulas:
Here, actual units of output sold in the current period are
1,150,000; actual units of output sold in the prior period are
1,000,000; and the selling price in the prior period was
$23/unit. Therefore,
(1,150,000 – 1,000,000) × $23 = $3,450,000 F
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Formulas Used for Strategic Analysis
of Income Details (2 of 8)
COST EFFECT OF GROWTH
Units of input Actual units of
Required to Prior
Cost effect of Input used Period
growth for
Produce Current to Produce
Input
variable costs Output in the Prior Period Price
Prior Period Output
(3,000,000 sq. cm x (1,150,000/1,000,000)) – 3,000,000 sq.
cm x $1.40 input price = $630,000 U
The cost effect of growth measures how much costs would
have changed in the prior year if production would have
been at current year levels.
This is done separately for variable and fixed costs.
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Formulas Used for Strategic Analysis
of Income Details (3 of 8)
COST EFFECT OF GROWTH FOR FIXED COSTS
Assuming adequate current capacity: sq. cm = $0.00
Prior
Actual Units of Actual units
capacity in Period
Cost effect of of Capacity Price
growth for Prior Period to in the
per unit
fixed costs Produce Current Prior of
Period Output Period
capacity
(3,750,000 sq. cm – 3,750,000 sq. cm) × $4.28 per = $0
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Formulas Used for Strategic Analysis
of Income Details (4 of 8)
REVENUE EFFECT OF PRICE RECOVERY
Revenue Effect Current Period Prior Period Current Period
Of Price-Recovery Selling Price Selling Price Units Sold
($22 per unit current year – $23 per unit prior year) ×
1,150,000 actual units of output sold in current year =
$1,150,000 U
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Formulas Used for Strategic Analysis
of Income Details (5 of 8)
COST EFFECT OF PRICE RECOVERY
Units of Input
Cost Effect required to produce
Current Period Prior Period
Of Price-Recovery Current Period's
for Variable Costs Input Price Input Price
Output in the Prior
Period
($1.50 per sq. cm current year – $1.40 per sq. cm prior
year) × 3,450,000 sq. cm required for current year output
in prior year = $345,000 U
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Formulas Used for Strategic Analysis
of Income Details (6 of 8)
COST EFFECT OF PRICE RECOVERY FOR FIXED
COSTS
Cost
Actual Units of
Effect
Capacity on
Of Current Period Prior Period
Prior Period to
Price- Price per Unit Price per Unit
Produce
Recovery of Capacity of Capacity
Current
for Fixed
Period's Output
Costs
($4.35 per sq. cm – $4.28 per sq. cm) × 3,750,000 sq. cm
= $262,500 U
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Formulas Used for Strategic Analysis
of Income Details (7 of 8)
COST EFFECT OF PRODUCTIVITY FOR VARIABLE
COSTS
Actual Units of Units of Input
Cost Effect Input used to
Required to
Of Productivity Input Price in
Produce Produce Current
for Variable Current Period
Current Period Period's Output
Costs
Output in Prior Period
$2,900,000 sq. cm for current period output – 3,450,000
sq. cm for current period output in prior period) × $1.50
per sq. cm = $825,000 F
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Formulas Used for Strategic Analysis
of Income Details (8 of 8)
COST EFFECT OF PRODUCTIVITY FOR FIXED COSTS
Assuming adequate current capacity:
Actual Actual Units of
Cost Effect Units of
Capacity in Prior Price Per Unit of
Of Productivity
Capacity in Period to Produce Capacity in
for Fixed
Current Current Period's Current Period
Costs
Period Output
(3,500,000 sq. cm – 3,750,000 sq. cm) × $4.35 per sq. cm
= $1,087,500 F
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Further Analysis of Growth, Price-
Recovery, and Productivity Components
Exhibit 13.6 Strategic Analysis of Profitability
• Consistent with the organization’s strategy and its implementation,
productivity contributed $1,912,500 to the increase in operating
income, and growth contributed $2,820,000. Price recovery decreased
operating income by $1,757,500.
• Under different assumptions about the change in selling price, the
analysis will attribute different amounts to the different strategies.
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Downsizing and the Management of
Capacity
• Managers can reduce capacity-based fixed costs by
measuring and managing unused capacity.
• Unused capacity is the amount of productive capacity
available over and above the productive capacity
employed to meet consumer demand in the current period.
• To better understand this concept of unused capacity, it is
necessary to distinguish engineered costs from
discretionary costs.
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Managing Unused Capacity
• Downsizing (rightsizing) is an integrated approach of
configuring processes, products, and people to match
costs to the activities that need to be performed to operate
effectively and efficiently in the present and future.
• Many companies have downsized to focus on their core
businesses and have instituted organization changes to
increase efficiency, reduce costs, and improve quality.
• Downsizing often means eliminating jobs, which can
adversely affect employee morale and the company’s
culture.
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Terms to Learn
Balanced scorecard Product differentiation
Cost leadership Productivity
Discretionary costs Productivity component
Downsizing Rightsizing
Growth component Strategy map
Partial productivity Total factor productivity (TFP)
Price-recovery component Unused capacity
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