9/10/22, 8:27 PM CMA Exam Review - Part 1 - Section C: Performance Management
Section C: Performance Management
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9/10/22, 8:27 PM CMA Exam Review - Part 1 - Section C: Performance Management
Study Guide
Section C: Performance Management
Once an organization has established a master budget, it is critical to compare actual financial performance against the master budget plan to measure variances
and in turn, success in achieving goals. This financial measure comparison or feedback process allows an organization to confirm the overall vision of where it wants
to be against actual results. Without this feedback, the budgeting process is not very useful.
This section reviews the process of how to:
Break down variances from the master budget into subcategories so an organization can better assess the specific reasons for the variances.
Utilize performance feedback from responsibility centers or strategic business units (SBUs) to help manage profitability.
Understand the financial measures of profitability used in responsibility centers and in the organization as a whole.
After covering financial measures, this section also shows a balanced approach to performance measurement. The balanced scorecard measures both financial and
nonfinancial aspects of an organization and is integrated with strategy so that readingthe scorecard will tell anyone in the organization what the strategy is and how
the organization plans to achieve it.
LOS
Learning Outcome Statements Overview: Performance Management
1. Section C.1. Cost and Variance Measures
The candidate should be able to:
a. Analyze performance against operational goals using measures based on revenue, manufacturing costs, nonmanufacturing costs, and profit depending on the
type of center or unit being measured.
A. An organization can analyze performance against operational goals by studying variances at the end of the accounting period. Variances are differences
between the actual results and the planned revenues and costs. For example, if the operating budget estimated manufacturing costs to be $150,000 and
the actual results came in at $165,000, management can analyze the variance to determine what created the increase. The variance can be broken down
into multiple factors as discussed below.
b. Explain the reasons for variances within a performance monitoring system.
A. Variances create a starting point for management to assess why actual results were different from what was planned. The variances could be due to
efficiency or effectiveness issues within the organization or come from external factors. Without computing variances, the forecast would be meaningless
since there would be no follow-up on differences between the budget and actual performance.
c. Prepare a performance analysis by comparing actual results to the master budget, calculate favorable and unfavorable variances from the budget, and provide
explanations for variances.
A. The table below compares the actual results of a company to the master budget. The third column presents the variances from the budget. A favorable
variance exceeds the planned amount of earnings or is less than the planned costs. An unfavorable variance is the opposite.
Plan Actual Variance
Unit Sales 30,000 24,000 6,000 Ua U = Unfavourable effect on operating income.
Revenue 3,600,000 3,000,000 600,000 U
Variable Cost of Goods Sold 2,640,000 2,280,240 359,760 Fb F = Favourable effect on operating income.
Contribution Margin 960,000 719,760 240,240 U
Fixed Manufacturing Cost 300,000 294,000 6,000 F
Fixed Selling, General and Administrative Expenses 390,000 390,000 0
Operating Income 270,000 35,760 234,240 U
The results must be analyzed further to determine if the variances were due simply to a decrease in actual units sold or if there are effectiveness or
efficiency problems with the organization's operational structure. For more information on the reasons for variances, see the discussion of price/rate and
efficiency/usage variances later in this topic.
d. Identify and describe the benefits and limitations of measuring performance by comparing actual results to the master budget.
A. The chart above provided management with the opportunity to measure major differences between actual performance and expectations. However,
comparing the actual results to a static budget (master budget) does not provide answers on exactly why the results were different. For example, was the
operating income variance due solely to a decrease in the demand of a product, or was it because the firm had cost overruns? Without adjusting the
budget to what it would have been if the correct unit sales had been estimated, it is difficult to pinpoint the reasons. A flexible budget is used to adjust
the master budget to standards based on the actual units sold.
e. Analyze a flexible budget based on actual sales (output) volume.
A. The following chart summarizes what a flexible budget would look like for the company identified above. The sales and variable expenses are adjusted
based on the per-unit cost and the actual units sold.
Flex. Bud. Overall
Variance Variance
Static Budget (1) Flexible Budget (2) Actual (3) (4)=(2)−(3) (5)=(1)−(3)
Unit Sales 30,000 24,000 24,000 0 6,000 U
Revenue $3,600,000 $2,880,000 $3,000,000 $120,000 F $600,000 U
Variable Cost of Goods Sold 2,640,000 2,112,000 2,280,240 168,240 U 359,760 F
Contribution Margin $960,000 $768,000 $719,760 $48,240 U $240,240 U
Fixed Manufacturing Cost 300,000 300,000 294,000 6,000 F 6,000 F
Fixed SG&A Expenses 390,000 390,000 390,000 0 0
Operating Income $270,000 $78,000 $35,760 $42,240 U $234,240 U
B. Notice from the chart that the variable expenses are adjusted to values assuming the company had estimated 24,000 units. The fixed expenses are not
changed since they do not vary based on actual output. The results using the flexible budget allow for a more meaningful comparison with actual results
than using the static budget.
f. Calculate the sales volume variance and the sales price variance by comparing the flexible budget to the master (static) budget.
A. The sales volume variance is calculated as the difference between the actual volume of sales at the standard price and the expected volume of sales at
the standard price. This variance provides information on how total revenue is affected by the difference between the expected volume of sales and the
actual volume of sales. Note that this variance can also be calculated at the level of contribution margin rather than total revenue.
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9/10/22, 8:27 PM CMA Exam Review - Part 1 - Section C: Performance Management
B. The sales price variance is calculated as the difference between the actual volume of sales at the actual price and the actual volume of sales at the
standard price. This variance provides information on how total revenue is affected by the difference between the actual price and the standard price.
C. From the table presented earlier, the sales volume variance would be $3,600,000 − $2,880,000 = $720,000 (unfavorable). The sales price variance would
be $3,000,000 − $2,880,000 = $120,000 (favorable).
g. Calculate the flexible budget variance by comparing actual results to the flexible budget.
A. The flexible budget variance is calculated as the difference between actual operating income and the operating income that would be expected (given
standard costs) given the actual sales volume (that is, the flexible budget operating income).
B. From the table presented earlier, the flexible budget variance would be $35,760 − $78,000 = $42;240 (unfavorable).
h. Investigate the flexible-budget variance to determine individual differences between actual and budgeted input prices and input quantities.
A. After the flexible budget is prepared, management can use the report to determine individual differences between actual and budgeted prices and
quantities. For example, the flexible budget shows that the budgeted sales price per unit was $120 (2,880,000 / 24,000), but the actual per-unit sales price
was $125 (3,000,000 / 24,000), $5 higher. Despite a difference in the master budget due to lack of demand, the company had a favorable sales price
variance of $120,000 (24,000 units × $5).
i. Explain how budget variance reporting is utilized in a management by exception environment.
A. The breakdown of variances into flexible budget variances and sales budget variances can allow a firm to make business decisions based on these
variances. Management by exception is a method of focusing management attention on only significant variances from the budget. Significant variances
are the exceptions that require more attention than other areas.
j. Define a standard cost system, and identify the reasons for adopting a standard cost system.
A. A standard cost is any carefully determined price, quantity, service level, or cost, usually expressed in a per-unit amount, which is determined before
actual costs are available. A standard cost system can be a valuable management tool, because it enables the firm to identify variances from what was
planned. When a variance arises between actual and standard costs, management becomes aware that costs have differed from the standard (planned,
or expected) costs.
k. Demonstrate an understanding of price (rate) variances and calculate the price variances related to direct material and direct labor inputs.
A. A price variance measures the portion of a variance due to differences in the price paid for an item (either materials or labor). A price variance is the
actual input quantity of an item multiplied by the difference between the actual input price and the standard input price. Price variances are used for
direct materials, and rate variances are used for direct labor.
Price (Rate) Variance = Actual Input Quantity × (Actual Input Price − Standard Input Price)
l. Demonstrate an understanding of efficiency (usage) variances, and calculate the efficiency variances related to direct material and direct labor inputs.
A. An efficiency variance measures the portion of a variance due to differences in quantities consumed or hours used. An efficiency variance is the standard
input price multiplied by the difference between the actual input quantity and the standard input quantity (“standard input quantity” means the amount
of the input that should have been used to produce the actual quantity produced, sometimes referred to as the standard quantity allowed).
Efficiency Variance = Budgeted Input Price × (Actual Input Quantity − Standard Input Quantity)
m. Demonstrate an understanding of spending and efficiency variances as they relate to fixed and variable overhead.
A. The variable overhead spending variance is calculated by taking the difference between actual overhead cost and the actual quantity of the cost driver
multiplied by the standard variable overhead rate. This variance tells management how favorable or unfavorable spending on variable overhead costs
was compared to how much “should have been spent” on those costs during the period based on an appropriate cost driver.
Variable Overhead Spending (or Price) Variance = Actual
Overhead Cost − (Actual Quantity of Cost Driver × Standard
Variable Overhead Rate)
B. The variable overhead efficiency variance is the product of the actual quantity of the cost driver multiplied by the standard variable overhead rate, less
the product of the standard quantity of cost driver allowed (for actual output) multiplied by the standard variable overhead rate.
Variable Overhead Efficiency Variance = (Actual Quantity of Cost Driver×
Standard Variable Overhead Rate)−(Standard Quantity of
Cost Driver Allowed (for Actual Output) × Standard Variable Overhead Rate)
C. The total fixed overhead variance represents the difference between actual fixed overhead and applied fixed overhead. This variance can be broken
down further into the fixed overhead production volume variance and the fixed overhead spending variance.
Fixed Overhead Spending Variance = Actual Fixed Overhead
−Budgeted Fixed Overhead
Fixed Overhead Production Volume Variance = Budgeted Fixed
Overhead − Applied Fixed Overhead
Applied fixed overhead is computed by taking the standard allowed quantity times the standard fixed overhead rate.
n. Calculate a sales mix variance, and explain its impact on revenue and contribution margin.
A. A sales mix variance for a particular type of product is calculated by multiplying the budgeted contribution margin per unit for that merchandise, the
total number of all merchandise sold, and the difference between the actual sales mix ratio and the budgeted sales mix ratio. The total sales mix variance
is the sum of the sales mix variance of each type of merchandise sold by the company.
Sales Mix Variance = (Actual Sales Mix Ratio for a Product − Budgeted
Sales Mix Ratio for a Product)×Actual Units Sold × Budgeted
Contribution Margin per Unit of Product
o. Calculate and explain a mix variance.
A. The efficiency variance can be broken down into a direct materials (or labor) mix variance and a direct materials (or labor) yield variance. The mix
variance results from using direct materials/labor inputs in a ratio that differs from standard specifications. Three amounts must be known to break an
efficiency variance down into its subcomponents:
i. Standard Cost / Unit × Actual Total Quantity Used × Actual Mix Ratio for the Item
ii. Standard Cost / Unit × Actual Total Quantity Used × Standard Mix Ratio for the Item
iii. Standard Cost / Unit × Standard Total Quantity Used × Standard Mix Ratio for the Item
The mix variance is computed by subtracting item i from item ii above.
p. Calculate and explain a yield variance.
A. The yield variance results because the yield (output) obtained differs from the expected on the basis of input.
The yield variance is computed by subtracting item ii from item iii above.
q. Demonstrate how price, efficiency, spending, and mix variances can be applied in service companies as well as manufacturing companies.
A. The variance computations discussed above can be applied to service industries as well as manufacturing companies. However, the direct materials
price and usage variances typically aren't used to the same extent because the amount of materials that are used is not a large portion of the business.
The labor rate and efficiency variances as well as overhead variances play a larger role in service companies.
r. Analyze factory overhead variances by calculating variable overhead spending variance, variable overhead efficiency variance, fixed overhead spending
variance, and production volume variance.
A. See item m above for the formulas for variable and fixed overhead variances.
s. Analyze variances, identify causes, and recommend corrective actions.
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9/10/22, 8:27 PM CMA Exam Review - Part 1 - Section C: Performance Management
A. Variance analysis is an important aspect of performance measurement and helps to explain why certain goals weren't met. See the formulas listed above
as well as Topic 1: Cost and Variance Measures for additional information.
2. Section C.2. Responsibility Centers and Reporting Segments
The candidate should be able to:
a. Identify and explain the different types of responsibility centers.
A. Responsibility accounting is a method of defining segments or subunits in an organization as types of responsibility centers based on their level of
autonomy and the responsibilities of their managers, and then basing performance evaluations on these factors. Responsibility centers are classified by
their primary effect on the company as a whole. There are four main types of responsibility centers:
i. Revenue centers—Responsible for sales but not for the manufacturing costs of the sales. Revenue centers are evaluated on their ability to provide a
contribution: sales less the direct revenue center costs.
ii. Cost centers—Responsible for controlling costs in a department that generates little or no revenue. Finance, administration, human resources,
accounting, customer service, and help desks are all examples of cost centers.
iii. Profit centers—Responsible for both costs and revenues. Since profit is a function of both revenue and costs, a manager for a profit center is
responsible for generating profits, managing revenue, and controlling costs.
iv. Investment centers—Responsible for investments, costs, and revenues in their department. Managers in such centers would be evaluated not only
by the center's profit but by relating the profit to the center's invested capital.
b. Recommend appropriate responsibility centers given a business scenario.
A. The four responsibility centers mentioned above are used to assess performance based on the actual items that a manager/department can control. It
would not be appropriate to evaluate the human resource manager (a cost center) on how much profit was generated in the department. Likewise, a
separate division or operating unit of a company should be evaluated on overall profit and return on investment, not just on revenues or costs.
c. Calculate a contribution margin.
A. Contribution margin is the amount that a business unit contributes toward fixed expenses and profits. The contribution margin shows managers how
profits are affected by changes in volume, because fixed costs and operating capacity are kept constant. To compute contribution margin, subtract
variable costs from revenue. Management performance can be evaluated more easily using a contribution income statement because the items outside
managers’ control are separated from the items within their control. However, many fixed costs are controllable, so managers often have their fixed costs
further divided into controllable fixed costs and uncontrollable fixed costs.
d. Analyze a contribution margin report and evaluate performance.
A. The next chart is an example of an income statement using the contribution margin approach:
Sales 31,200
Variable expenses
Variable manufacturing 5,200
Variable selling & administration 2,600
Total variable 7,800
Contribution margin 23,400
Fixed expenses
Fixed manufacturing 10,400
Fixed selling & administration 10,000
Total fixed expenses 20,400
Net income 3,000
Breaking costs out by their behavior (i.e., variable versus fixed) shows managers how profits are affected by changes in volume. Since the contribution
margin is 75% (23,400 / 31,200), each additional dollar in sales will increase net income by 75 cents. This is because the fixed expenses should not change
with changes in unit sales.
e. Identify segments that organizations evaluate, including product lines, geographical areas, or other meaningful segments.
A. Reporting segments are portions of a business divided for reporting purposes along product lines, geographical areas, or other meaningful segments to
provide individual information about that area. Segmented financial statements show the segment's own costs and revenues to indicate how profitable
each segment is by itself.
f. Explain why the allocation of common costs among segments can be an issue in performance evaluation.
A. Common fixed costs (such as the chief executive's salary) cannot be traced to a specific department because they are shared costs and must be
apportioned between two or more departments using some allocation basis that may or may not provide an accurate allocation. Because common costs
often are uncontrollable to some extent by the department manager who is held responsible for them, they make it more difficult to determine the
profitability of an individual segment.
g. Identify methods for allocating common costs, such as stand-alone cost allocation and incremental cost allocation.
A. Stand-alone cost allocation—A method that determines the relative proportion of cost driver for each party that shares a common cost and allocates the
costs by those percentages.
B. Incremental cost allocation—A method that allocates costs by ranking the parties by a primary user and incremental users, or those users who add an
additional cost because there is now more than one user of the cost.
h. Define transfer pricing and identify the objectives of transfer pricing.
A. Determining profits for a responsibility center or segment involves assigning pricing for the goods and services that pass between segments. Transfer
pricing sets prices for these internally exchanged goods and services.
i. Identify the methods for determining transfer prices and list and explain the advantages and disadvantages of each method.
A. Four models can be used to set transfer prices: market price, negotiated price, variable cost, and full cost.
i. Market price model—A true arm's-length model because it sets the price for a good or service at going market prices. The market price model keeps
business units autonomous, forces the selling unit to be competitive with external suppliers, and is preferred by tax authorities.
ii. Negotiated price model—Sets the transfer price through negotiation between the buyer and the seller. Negotiated prices also preserve divisional
autonomy and maintain goal congruence between the divisions and the company as a whole.
iii. Variable cost model—Sets transfer prices at the unit's variable cost, or the actual cost to produce the good or service less all fixed costs. This model
is advantageous for selling units that have excess capacity or for situations when a buying unit could purchase from external sources but the
company wants to encourage internal purchases. A disadvantage of this method is that it is not viewed favorably by tax authorities because it
lowers profits, and thereby taxes, for the location where the product was manufactured.
iv. Full cost model—Starts with the seller's variable cost for the item and then allocates fixed costs to the price. This method may create less incentive
for the buyer to purchase internally if the market price is less and may create less incentive for the seller to reduce costs.
In general, the market price method is preferred in situations when the market price for a good or service is available. When a market price is not
available, the negotiated price method is preferred. When neither is acceptable, companies may turn to one of the cost models. Cost-based
methods are not recommended because they can lead to motivation problems between parties, such as the seller not actively controlling costs
because they are simply passed on to the buyer.
j. Identify and calculate transfer prices using variable cost, full cost, market price, negotiated price, and dual-rate pricing.
A. Using the information above, computation of the appropriate price is relatively straightforward. The variable cost method is used when there is excess
capacity and the seller is trying to cover additional fixed expenses by selling for a price that covers the variable costs. The full cost method considers all
costs by the operating segment, including estimated fixed and variable expenses. Under the market price model, the price is set by the amount that any
willing third party would pay for the product. The negotiated price is set by both departments to determine the transfer price.
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9/10/22, 8:27 PM CMA Exam Review - Part 1 - Section C: Performance Management
k. Explain how transfer pricing is affected by business issues such as the presence of outside suppliers and the opportunity costs associated with capacity usage.
A. The presence of outside suppliers creates motivation for the seller to produce at the lowest possible cost when the firm uses market-based or negotiated
transfer pricing. That motivation is reduced when transfer prices are based on cost-driven formulas. If the seller has no excess capacity, any transfer price
below the market price imposes an opportunity cost on the seller. If the seller has excess capacity, there is no opportunity cost of internal sales, and the
seller would be better off reducing the selling price to a point between its variable cost and full market price since the sale of additional goods would help
cover fixed costs.
l. Describe how special issues such as tariffs, exchange rates, taxes, currency restrictions, expropriation risk, and the availability of materials and skills affect
performance evaluation in multinational companies.
A. Multinational companies must consider how tariffs, exchange rates, taxes, currency restrictions, expropriation risk, and the availability and relative cost
of materials and skills can affect performance evaluations. The use of transfer pricing by multinationals to gain tax and income advantages can conflict
with the use of transfer pricing to evaluate performance or to create performance incentives. Selling products for above-market prices in a low-tax
jurisdiction to a segment in a high-tax jurisdiction would save the company money on taxes. However, taxing entities scrutinize this practice.
3. Section C.3. Performance Measures
The candidate should be able to:
a. Explain why performance evaluation measures should be directly related to strategic and operational goals and objectives; why timely feedback is critical; and
why performance measures should be related to the factors that drive the element being measured (e.g., cost drivers and revenue drivers).
A. Responsibility centers and the individuals involved need to be evaluated based on the performance of actual results versus standards. To be effective,
the standards and the evaluation measures need to be directly related to the goals and objectives of the organization. For example, if an organization's
strategic goal is to become the industry cost leader, it should focus on short-term goals that will result in cost reductions company wide. It should then
evaluate performance in accordance with that goal instead of focusing on other items that may be important in the goals of other organizations but not
its own. For example, it shouldn't evaluate performance based on innovation or the number of new products brought to market. Additionally, the
feedback should be timely in order to allow management to make appropriate adjustments if needed.
b. Explain the issues involved in determining product profitability, business unit profitability, and customer profitability, including cost measurement, cost
allocation, investment measurement, and valuation.
A. Profitability analysis focuses on the individual costs and revenues associated with a particular product, business unit, or customer. Whenever an
organization is analyzing the profitability of a segment of its business, it must take into account all relevant revenues and costs associated with the
segment. Some major issues that need to be considered include:
What costs can be eliminated and which will continue?
How will this decision affect the company strategy?
Can our efforts be focused elsewhere to provide a greater return?
Is this segment in line with our risk appetite, and are the returns adequate?
c. Calculate product-line profitability, business unit profitability, and customer profitability.
A. To calculate the profitability for a product, business unit, or customer, you need to determine all relevant revenues and costs. You can essentially
perform a what-if analysis assuming you were to get rid of the product, unit, or customer. To do so, you must adjust the income statement for the
product, unit, or customer to include only the costs that are traceable to that segment. For example, allocated common costs, such as the chief
executive's salary and company-wide administrative costs, should not be factored in the measure since they are outside of segment management and
would continue if the segment were discontinued.
d. Evaluate customers and products on the basis of profitability, and recommend ways to improve profitability and/or drop unprofitable customers and products.
A. After analyzing customers, products, or business units, an organization can determine all possible actions it can take, such as increasing marketing costs,
discontinuing the product, canceling the customer relationship, finding cost-cutting measures, or other actions to increase the profitability of the
company as a whole. Qualitative issues must also be considered to ensure that the overall impact on the company is not negative.
e. Define and calculate return on investment (ROI).
A. Return on investment—Measures profitability by dividing the net profit of the business unit by the investment in assets made to attain that income.
Income
Return on Investment (ROI) =
Investment
Note that “Income” means operating income unless otherwise noted. Also note that investment can have multiple definitions, including total assets
(which would yield a return on assets (ROA) measure), measures of equity (assets minus debt), or measures of capital employed (long-term debt plus
equity or total assets minus short-term debt).
f. Analyze and interpret ROI calculations.
A. The ROI calculation shows how much money is returned to shareholders for each $1 invested in assets. For example, an ROI of 25% means that for each
dollar of assets invested in the company, the shareholders’ return is 25 cents. An organization can compare the ROI with its cost of capital (or shareholder
required rate of return) to determine whether the business segment should be continued, sold off, or discontinued.
g. Define and calculate residual income (RI).
A. Residual income—The amount of income a business unit is able to earn above a required rate of return on its assets.
Residual Income (RI) = Income−
(Investment × Required Rate of Return)
Note that “Income” means operating income unless otherwise noted. Also note that “Investment” usually refers to the total assets of the business unit.
h. Analyze and interpret RI calculations.
A. Residual income is used to compute the excess return over and above the required rate of return. A positive RI means that the business unit is more
profitable than the company's required rate of return and should be continued. A negative RI doesn't necessarily mean that the business unit isn't
profitable. It just means that the rate of return is less than the company's required rate of return. For example, the ROI could be 10%, but the required
rate may be 12%.
i. Compare and contrast the benefits and limitations of ROI and RI as measures of performance.
A. ROI and RI should not be the only tools used for comparison. They should be used in consideration of the industry and risk associated with the company.
Additionally, both calculations may be skewed by accounting conventions for measuring assets and determining net income. When managers are
evaluated on the basis of ROI, they may reject projects that reduce their overall ROI, even though the projects may be beneficial to the company as a
whole. And while RI provides a dollar-value measure of wealth creation, a disadvantage is that it does not allow for meaningful comparison between
divisions.
j. Explain how revenue and expense recognition policies may affect the measurement of income and reduce comparability among business units.
A. Revenue and expense recognition policies need to be considered when computing return on investment (ROI) and residual income (RI). For example, in
an inflationary environment, if a company reports inventory on a lastin, first-out (LIFO) basis, it will be running more expenses through the income
statement than if inventory were reported on a first-in, first-out (FIFO) basis. Other accounting methods required by GAAP may skew the reported net
income, such as the treatment of depreciation, research and development costs, and other items that may increase value but reduce accounting profits.
k. Explain how inventory measurement policies, joint asset sharing, and overall asset measurement policies may affect the measurement of investment and
reduce comparability among business units.
A. Both return on investment (ROI) and residual income (RI) are computed on the basis of assets invested in the organization. Revenue and expense
recognition policies may skew results, and the book value of invested assets may not reflect the true economic outlay for assets. For example, assets that
may be reported at historical cost could have large off-balance sheet gains that reduce the investment base and make ROI and RI appear better than they
are. Inventory measurement policies—last-in, first-out (LIFO) versus first-in, first-out (FIFO)—also may report assets at a lower value than their true cost of
acquisition.
l. Define key performance indicators (KPIs), and discuss the importance of these indicators in evaluating a firm.
A. Key performance indicators (KPIs) are measures of factors critical to the success of the organization. Each KPI requires a defined business process, clear
objectives for the process, quantitative or qualitative measurements for the objectives, and a plan for identifying and correcting variances from plan.
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9/10/22, 8:27 PM CMA Exam Review - Part 1 - Section C: Performance Management
m. Define the concept of a balanced scorecard and identify its components.
A. Balanced scorecard—A performance evaluation tool that results from compiling and organizing the key performance indicators (KPIs) of an organization
into four segments: financial, customer, internal business process, and learning and growth. Each KPI can be measured in a specific way so that it can be
managed appropriately.
n. Identify and describe the perspectives of a balanced scorecard, including financial, customer, internal business process, and learning and growth.
A. Financial measures—Cover traditional financial metrics, such as return on equity, sales growth, return on assets, earnings per share, and the like.
B. Customer satisfaction measures—Focusing on the customer is critical to accomplishing goals since the customer drives the company's revenue. The
primary customer outcome measures include market share, acquisition, satisfaction, retention, and profitability.
C. Internal business process measures—Go beyond simple financial variance measures to include output measures, such as quality, cycle time, yield, order
fulfillment, production planning, throughput, and turnover.
D. Learing and growth and learning measures—Focus on becoming efficient and effective at producing new products. The measures include time to market,
percentage of sales from new products, and new products versus competitor's new products. Learning and growth measures also focus on education
and training of personnel and can be measured by training sessions provided, developing leadership skills, and reducing the number of defects.
o. Identify and describe the characteristics of successful implementation and use of a balanced scorecard.
A. Implementing the balanced scorecard basically involves executing strategy. Without execution, even the best vision remains a dream. The balanced
scorecard lends itself well to strategy execution because the scorecard itself is a method of describing strategy in a way that can be acted on. In order to
be effective, the balanced scorecard needs to be tied to the organization's strategy and goals, and the performance measures must be quantifiable.
Successful implementation also requires strong buy-in and commitment from top management.
p. Demonstrate an understanding of a strategy map and the role it plays.
A. A strategy map is a diagram that depicts the value creation process of a company by connecting strategic objectives in cause-and-effect relationships
across the four balanced scorecard perspectives. It provides a visual description of the company's strategy and can improve understanding, alignment,
and measurement around the company's strategy and objectives.
q. Analyze and interpret a balanced scorecard and evaluate performance on the basis of the analysis.
A. The following table is an example of a balanced scorecard for a company. Note that the main objective of the organization is to grow sales by 20% over
the next two years. The organization has identified its KPIs in order to accomplish that goal so that all of the measures are tied to the firm's goal.
Overall goal: Grow sales by 20% over next two years.
Current Year Year 1 Year 2
(Y0) (Y1) (Y2)
Revenues: $400,000 $432,000 $484,000
Y1 Y2
Perspective Strategic Objectives Measurements Target Target Programs
Financial F1: Maximize return on Return on equity 9% 13%
equity
F2: Positive economic value EVA $20,000 $30,000
added (EVA)
F3: 10% revenue growth % change in revenues 8% 12%
F4: Asset utilization Utilization rates 85% 88%
Customer C1: Price Competitive comparison −4% −5%
C2: Customer retention Retention % 75% 75% Implement customer relationship
management (CRM) program
C3: Lowest-cost suppliers Total cost relative to competition −6% −7% Implement supplier relationship
management (SRM) program
C4: Product innovation % of sales from new products 10% 15%
Internal business P1: Improve production Cycle time 0.3 days 0.25 Upgrade enterprise resource planning
process work flow days (ERP) system
P2: New product success Number of Orders 1,000 1,500
P3: Sales penetration Actual versus plan (variance) 0% 0%
P4: Reduce inventory Inventory as a % of sales 30% 28%
Learning and L1: Link strategy to reward Net income per dollar of variable pay 65% 68% Implement CRM
growth system (aggregate)
L2: Fill critical competency % of critical competencies satisfied on 75% 80% Tuition reimbursement
gaps tracking matrix
L3: Become customer-driven Survey index 77% 79% Implement CRM
culture
L4: Quality leadership Average ranking (on 10-point scale) of 8.9 9.2 Tuition reimbursement
executives
r. Recommend performance measures and a periodic reporting methodology given operational goals and actual results.
A. No matter what performance measure or methodology a company uses, it must align the measures to its goals and strategy. The balanced scorecard is
just one method that will help an organization to develop and implement strategy. A company can also measure performance with the quantitative
methods mentioned above, such as return on investment and residual income. For additional details and analysis, see Topic 3: Performance Measures.
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9/10/22, 8:27 PM CMA Exam Review - Part 1 - Section C: Performance Management
Notes
Section C: Performance Management
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