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02-07 JBCA Performance Measure PDF
02-07 JBCA Performance Measure PDF
ABSTRACT
1
Alternative case materials based on an alternative
case scenario are presented in Appendix A.
The production manager for the mask performance within the mask division. The
division, Erasmus’ daughter Lenore Raven, consulting group has argued that such
has historically maintained a set of internal measures are more objective, will motivate
operating measures that she uses as cost efficient behavior, and will accurately
performance indicators. Ms. Raven has measure the financial impact of operating
argued that these non-financial operating performance. Ms. Raven has expressed
measures serve as good indicators of reservations about the new standard cost
production efficiency and product quality variance analysis system and is concerned
and moreover, since they are dynamic, they that undue emphasis on variance results will
support the company’s focus on continuous result in a lack of attention to key operating
improvement and innovation. Ms. Raven concerns such as inventory levels, product
has conceded however, that these operating quality, and customer satisfaction. Mr.
measures, while serving as good indicators Bedloe, the company’s chief accountant, has
of internal process activities, do not provide likewise expressed his doubts and has
the firm with an indication of the financial argued that such standards may encourage
impact of these operations. On the advice of behavior inconsistent with Masquerade’s
an outside consulting firm where Erasmus’ core values ultimately resulting in negative
nephew works, the mask division recently consequences for the company. The
started using traditional standard cost performance results for the most recent
variance analysis to evaluate operating period appear below.
2
Production cycle time is measured as the amount of time required to turn raw materials into completed
products from the time raw materials are received to the time goods are transferred to finished goods
inventory. Since defective products are reworked before being transferred to finished goods, Masquerade
includes rework time in cycle time.
3
Delivery cycle time is measured as the amount of time required to get the finished product to the
customer (from customer order receipt to the time the goods are shipped); it includes wait time between
order receipt and the start of production as well as production cycle time.
4
Rework time is measured as the amount of time necessary to correct for defects found in products by
inspectors. The consulting company accounted for rework time separately from original work time; as
such, rework time was not incorporated into the direct labor time variance.
5
% Scrap refers to discards and wasted materials measured as a percentage of total raw materials
processed.
Resource
Detail Materials Price Variance Price per package Favorable
Detail Materials Usage Variance Usage per mask Favorable
Labor
Direct Labor Rate Variance Rate per detail labor hour -0-
Direct Labor Time Variance Detailing time spent per mask Favorable
Indirect Materials
Plaster Cast Price Variance Price per pound of plaster Favorable
Plaster Cast Usage Variance Uses per 5 masks Favorable
Machine Maintenance
Maintenance Spending Cost per maintenance hour Favorable
Maintenance Efficiency Maintenance hours per run Favorable
Fixed Overhead
FOH Spending Variance7 Cost per period -0-
6
The employee attitude survey was discontinued on the advice of the consulting firm; the consulting
firms questioned the usefulness of the survey as it did not provide objective, quantifiable information. The
employee attitude survey was used as a means of soliciting employee attitudes, comments, feedback, and
suggestions regarding process improvements and new product designs.
7
Fixed overhead consists primarily of factory depreciation and insurance.
The consulting firm was quite pleased at the performance measurement system. Are
results of the variance analysis. However, these concerns valid? Discuss the
Mr. Bedloe and Ms. Raven were disturbed accountant’s and production manager’s
about the results of the operating measures; concerns in turn and then summarize
and Mr. Raven is particularly concerned your own assessment of the company’s
with the operating measures having to do current performance management
with employee and customer dimensions. system.
Mr. Bedloe has expressed the opinion that
the standards used as a basis for the variance 4. Categorize each of the company’s
analysis are not entirely consistent with the current performance measures (variances
organization’s core values; he has been and operating measures) into the four
researching the balanced scorecard basic balanced scorecard perspectives;
framework and has suggested that the note that some performance measures
strategic performance management concepts may fall into more than one perspective.
underlying the balanced scorecard might Next, categorize each of the company’s
prove helpful. current performance measures as lead or
lag, financial or non-financial, internal
Case Requirements or external, and objective or subjective.
1. Deduce likely cause(s) for the materials, Based on your categorizations, respond
labor, and overhead variances. Note that to the following: (a) Do the current
interpretations of individual variances performance measures appear to be
will most likely be interrelated. derived from the company’s vision and
Summarize your interpretations. In your strategy? Explain. (b) Do you believe
opinion, should the consulting firm be that all four balanced scorecard
pleased with the results of the variance perspectives are adequately represented
analysis? That is, are the favorable in the company’s current performance
variances really “favorable”? Explain. measurement? Discuss. (c) Is the
company’s current performance
2. Deduce likely cause(s) for the changes in measurement system balanced? Explain.
the operating measures. Note that (d) Do you believe that the company
interpretations of individual operating would benefit from the implementation
measure will most likely be interrelated. of a balanced scorecard framework?
Summarize your interpretations. In your Explain.
opinion, should the accountant, owner,
and production manager be disturbed 5. Design a balanced scorecard for the
about the results of the operating company: (a) First, succinctly articulate
measures? Explain. Why do you suppose Masquerade Masque Company’s vision
the employee and customer dimensions and strategy. That is, describe what you
are of particular concern to the owner? believe to be Masquerade Masque
Explain. Company’s key values and/or strategic
objectives and explain why each
3. In the narrative above, the company’s value/objective would be considered
accountant and the production manager appropriate for the company. (b) Second,
have both expressed reservations about consider the four balanced scorecard
the company’s new standard cost perspectives and explain how each
hCase Narrative
The Comfy Company makes high quality, All rockers and gliders are constructed,
hand-made, solid wood furniture. The assembled, detailed, and finished by hand
Comfy Company started out as the based on detailed specifications and
woodworking hobby of eccentric real estate customer preferences. The furniture is made
developer, Charles Chare. Charles’ hobby from the highest quality wood (mostly ash,
eventually budded into a small family- cherry, teak, oak and mahogany) purchased
owned business that made and sold hand- from a small group of suppliers that the
made rocking chairs and gliders. Comfy company has used for years. The company
Company, set apart by a strong positive maintains a minimal inventory policy and as
rapport with its customers, a long-standing such, materials are generally purchased as
reputation for quality and service, and the needed to fill standard and custom orders
company’s unique product offering, soon and finished products are normally shipped
found itself a very small company in an out as soon as they are completed. For each
intensely competitive market characterized rocker or glider, the desired wood is
by high volume, low quality, low cost selected, component pieces are hand-
manufacturers. In response such competitive measured and cut based on specifications,
pressures and customer needs, the company and then components are inspected for
has grown and diversified its product defects before assembly. Next, component
offering expanding into standard production pieces are finished and assembled, with
of hand-made writing desks, roll-top desks, workers making small adjustments as
bookshelves, and media cabinets as well as needed to make sure all pieces fit together
other custom ordered items to serve its small neatly and firmly. Finally, a final finish is
but diverse customer base. Additionally, the put on assembled rockers and gliders and
company has incorporated computer each completed piece is inspected for quality
technology into its design function and is before it is shipped to the customer. Comfy
considering expansion into the area of relies heavily on its workers to maintain its
historic reproductions and antique quality image and regularly sends its
restoration. workers to training workshops so that they
may improve their skills and learn new
As the company has grown and diversified woodworking techniques. Moreover, Mr.
its product offerings, Mr. Chare has become Chare wholeheartedly encourages workers
concerned with maintaining control over to make suggestions for redesigning existing
operations central to the company’s products, take creative liberties while
competitiveness and well-being; recently he working on custom projects, and propose
has expressed a desire to improve imaginative new products.
performance measurement within the rocker
and glider division. The rocking chairs and The production manager for the rocker and
gliders were the first product offerings of the glider division, Ms. Cabenet, has historically
company and remain a core aspect of Comfy maintained a set of internal operating
Company’s product offerings and business. measures that she uses as performance
The Comfy Company’s rockers and gliders indicators. She has argued that these non-
are known for their superior durability, financial operating measures serve as good
quality, and attention to detail as well as for indicators of production efficiency and
their reasonable price. product quality and moreover, since they are
dynamic, they support the company’s focus financial impact of operating performance.
on continuous improvement and innovation. Ms. Cabenet has expressed reservations
Ms. Cabenet, has conceded however, that about the new standard cost variance
these operating measures, while serving as analysis system and is concerned that undue
good indicators of internal process activities, emphasis on variance results will result in a
do not provide the firm with an indication of lack of attention to key operating concerns
the financial impact of these operations. On such as inventory levels, product quality,
the advice of the outside consulting firm and customer satisfaction. Mr. Dehsk, the
where Mr. Chare’s nephew works, the company’s chief accountant, has likewise
rocker and glider division recently started expressed his doubts and has argued that
using a traditional standard cost variance such standards may encourage behavior
analysis system to evaluate the performance inconsistent with Comfy Company’s core
of rocker and glider division. The consulting values, ultimately resulting in negative
group has argued that such measures are consequences for the company. The
more objective, will motivate cost efficient performance results for the most recent
behavior, and will accurately measure the period appear below.
8
Production cycle time is measured as the amount of time required to turn raw materials into completed
products from the time raw materials are received to the time goods are transferred to finished goods
inventory. Since defective products are reworked before being transferred to finished goods, Comfy
Company includes rework time in cycle time.
9
Delivery cycle time is measured as the amount of time required to get the finished product to the
customer (from customer order receipt to the time the goods are shipped); it includes wait time between
order receipt and the start of production as well as production cycle time.
10
Rework time is measured as the amount of time necessary to correct for defects found in products by
inspectors. The consulting company accounted for rework time separately from original work time; and as
such, rework time was not incorporated into the direct labor time variance.
11
% Scrap refers to discards and wasted materials measured as a percentage of total raw materials
processed.
12
The employee attitude survey was discontinued on the advice of the consulting firm; the consulting
firms questioned the usefulness of the survey as it did not provide objective, quantifiable information. The
Materials
Wood Materials Price Variance Price per board foot Favorable
Wood Materials Usage Variance board feet per chair Favorable
Direct Labor
Direct Labor Rate Variance Rate per wood working labor hour -0-
Direct Labor Time Variance Work time spent per chair Favorable
Fixed Overhead
FOH Spending Variance (factory insurance & depreciation) -0-
employee attitude survey was used as a means of soliciting employee attitudes, comments, feedback, and
suggestions regarding process improvements and new product designs.
The consulting firm was quite pleased with 3. In the narrative above, the company’s
the results of the variance analysis. accountant and the production manager
However, Mr. Chare and Ms. Cabenet were have both expressed reservations about
very disturbed about the results of the the company’s new standard cost
operating measures; and Mr. Chare is performance measurement system. Are
particularly concerned with the operating these concerns valid? Discuss the
measures having to do with employee and accountant’s and production manager’s
customer dimensions. Mr. Dehsk has concerns in turn and then summarize
expressed the opinion that the standards your own assessment of the company’s
used as a basis for the variance analysis are current performance management
not entirely consistent with the system.
organization’s core values; he has been
researching the balanced scorecard 4. Categorize each of the company’s
framework and has suggested that the current performance measures (variances
strategic performance management concepts and operating measures) into the four
underlying the balanced scorecard might basic balanced scorecard perspectives;
prove helpful. note that some performance measures
may fall into more than one perspective.
Case Requirements Next, categorize each of the company’s
1. Deduce likely cause(s) for the materials, current performance measures as lead or
labor, and overhead variances. Note that lag, financial or non-financial, internal
interpretations of individual variances or external, and objective or subjective.
will most likely be interrelated. Based on your categorizations, respond
Summarize your interpretations. In your to the following: (a) Do the current
opinion, should the consulting firm be performance measures appear to be
pleased with the results of the variance derived from the company’s vision and
analysis? That is, are the favorable strategy? Explain. (b) Do you believe
variances really “favorable”? Explain. that all four balanced scorecard
perspectives are adequately represented
2. Deduce likely cause(s) for the changes in in the company’s current performance
the operating measures. Note that measurement? Discuss. (c) Is the
interpretations of individual operating company’s current performance
measure will most likely be interrelated. measurement system balanced? Explain.
Summarize your interpretations. In your (d) Do you believe that the company
opinion, should the accountant, owner, would benefit from the implementation
and production manager be disturbed of a balanced scorecard framework?
about the results of the operating Explain.
measures? Explain. Why do you suppose
the employee and customer dimensions 5. Design a balanced scorecard for the
are of particular concern to the owner? company: (a) First, succinctly articulate
Explain. The Comfy Company’s vision and
strategy. That is, describe what you
believe to be Comfy Company’s key
values and/or strategic objectives and constructed for the customer perspective
explain why each value/objective would only (i.e., describe how each of your
be considered appropriate for the stated operational objectives for this
company. (b) Second, consider the four perspective might be accomplished).
balanced scorecard perspectives and
explain how each perspective relates to 6. In a professional memo (use proper
or supports the company’s vision and headings and formatting) directed to the
strategy. (c) Third, translate the company owner, (a) Succinctly
company’s overall vision and strategy summarize your assessment of the
into specific operational objectives (i.e., effectiveness and suitability of the
objectives that can be measured) for company’s current performance
each of the balanced scorecard management system, and (b) Outline
perspectives. (d) Finally, for each your recommendations for improving the
operational objective you constructed, performance measurement system from
list two or more performance measures the perspective of a balanced scorecard
that you believe will support the framework. Be Explicit.
objective (you may choose measures
already being used by Comfy Company
or alternative measures you select).
Justify the relevance of each Teaching Note/Instructor Manual available from
the Journal of Business Cases and Applications.
performance measure selected. (e)
Develop initiatives for the objectives you