5-1

Strategic Performance Measurement

CHAPTER 11
Managerial Accounting
Facilitator:
Dr Irfan Sahibzada
Contact Details:
Irfan.sahibzada@nbs.nust.edu.pk
Ph/Mob: 051 90853154/0342 5093739
Office: Room 311

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 5-2

Chapter Theme
This chapter illustrates how companies can use a
performance measurement system called:
The Balanced Scorecard
to track nonfinancial measures, such as tons of food
wasted, and link improvements in those measures to
results valued by stakeholders, such as higher
profits and increased charitable giving. 

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 5-3

The Balanced Scorecard – An Overview

i. A company's balanced scorecard must emanate
from its vision and strategy. A strategy is a “game
plan” that enables a company to attract customers
by distinguishing itself from competitors. These
are more formally called customer value
propositions and are the essence of strategy.
ii. Performance measures included in a balanced
scorecard usually fall into four categories:
learning and growth, internal business processes,
customer, and financial.

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 The Balanced Scorecard – From
12-2

Strategy to Performance Measures

Performance Measures
Financial What are our
Has our financial
financial goals?
performance improved?

Customer What customers do Vision

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

Internal Business Processes What internal busi-

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

Learning and Growth

Are we maintaining our ability
to change and improve?
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 11-5

The Balanced Scorecard – From

Strategy to Performance Measures
The premise of these four groups of measures is that learning is
necessary to improve internal business processes, which in turn
improves the level of customer satisfaction, which in turn improves
financial results.
1. Note the emphasis is on improvement, not just attaining some
specific objective.
2. The balanced scorecard relies on non-financial measures in addition
to financial measures for two reasons:
a) Financial measures are lag indicators that summarize the results of past
actions. Non-financial measures are leading indicators of future financial
performance.
b) Top managers are ordinarily responsible for financial performance
measures – not lower-level managers. Non-financial measures are more
likely to be understood and controlled by lower-level managers.

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 12-3

Learning Objective 1

Identify examples of
performance measures that are
appropriate for each of the four
balanced scorecard categories

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 12-4

The Balanced Scorecard

Management translates its strategy into
performance measures that employees
understand and influence.

Financial Customer

Performance
measures
Internal Learning
business and growth
processes
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 11-8

Learning and Growth Performance

Measures
Learning and growth measures that organizations might
include in their balanced scorecards are organized under six
categories that influence employee learning and growth:
Recruiting, skills development, compensation and
advancement, wellness/safety, job satisfaction, and
retention.
These are shown on the next slide.
Each measure should influence other measures within the
scorecard; i.e., a company may hypothesize that increasing
its average training hours per employee will lead to process
improvements such as fewer errors.
Or it may hypothesize that lowering its employee turnover
percentage will lead to greater loyalty from customers.
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 12-5

Learning and Growth Performance Measures

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 11-10

Internal Business Process Measures

Effective managers understand that business processes,
rather than functional departments, serve the needs of a
company’s most important stakeholders — its customers.
A business process is a series of steps that are followed in
order to carry out some task in a business.
The next slide includes 18 examples of internal business
process measures that organizations might include in their
balanced scorecards.
The measures are organized under six dimensions:
Innovation, product and service quality, agility, cost, time,
and lean resource management.

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 12-6

Internal Business Process Measures

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 11-12

Customer Measures
If a company improves its learning and growth and internal
business process measures, these improvements must
ultimately have a positive influence on its customer
measures.
If not, it suggests the company does not have a complete
understanding of the performance attributes that are shaping
its customers perceptions and behaviors.
The next slide includes examples of customer measures that
organizations might include in their balanced scorecards.
The measures are organized under six headings:
Customer satisfaction, customer acquisition/retention,
customer lifetime value, customer loyalty, customer service,
and customer value proposition.
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 12-7

Customer Measures

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 11-14

Financial Measures
The next slide includes 20 examples of financial measures
that are organized under six headings:
Sales, profits, profitability ratios, trend performance, cash
flows, and market performance.
Improving process-oriented measures does not automatically
lead to financial success.
The scorecard includes a financial perspective for the
express purpose of holding organizations accountable for
translating improvements in nonfinancial performance to
“bottom-line” results.

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 12-8

Financial Measures

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 The Balanced Scorecard – Financial v.
12-9

Nonfinancial Measures
The balanced scorecard framework rejects the notion that
improving process-oriented measures automatically leads to
financial success

Including a financial perspective serves the purpose of holding

organizations accountable for translating improvements in
nonfinancial performance to “bottom-line” results

If favorable trends in a company's learning and growth, internal

business processes, and customer measures do no translate to
financial results, the balanced scorecard is designed to force the
organization to re-examine its strategy for differentiating itself from
competitors.

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 12--10

Learning Objective 2

Identify the four types of quality

costs and use them to create a
quality cost report.

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 12-11

Quality of Conformance
Costs incurred to prevent defects or that
result from defects in products are known as
quality costs. Many companies are working
hard to reduce their quality costs.

Those companies that are succeeding have a

high quality of conformance in the sense that
the overwhelming majority of products
produced conform to design specifications
and are free from defects.

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 12-12

Prevention and Appraisal Costs

Support activities
Prevention whose purpose is to
Costs reduce the number
of defects

Incurred to identify
defective products
Appraisal Costs before the products
are shipped to
customers

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 12-13

Internal and External Failure Costs

Incurred as a result
Internal Failure of identifying defects
Costs before they are
shipped

Incurred as a result
of defective
External Failure
products being
Costs
delivered to
customers

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 11-21

Example (The Ice Cream Company)

Suppose an ice cream company has been having problems with unpleasant gritty ice
crystals in its ice cream. One approach would be to investigate the manufacturing
process. Perhaps the gritty ice crystals are caused by temperature variations in the
freezer. Controlled experiments could be run varying the temperature and inspecting
for ice crystals. If this is the cause, the variation in temperature could be decreased
or the ingredients changed so they would be less sensitive to temperature changes.
Continuing the ice cream example, how to “inspect out” the ice crystal problem. This
may be more difficult and expensive than it first appears. For example, the problem
could occur only in half-gallon containers or at random in a small (but important)
number of containers. Or the ice crystals could only be detected by tasting ice cream
near the bottom of the container. “Inspecting out” the problem would make a lot of
ice cream unsaleable.
Continuing with the ice cream example, Internal failure costs could result from
throwing away defective ice cream.
Continuing with the ice cream example, External failure costs could result from
customers returning defective ice cream or failing to purchase the ice cream
company’s product later.

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 12-14

Examples of Quality Costs

Prevention Costs Appraisal Costs
• Testing and inspecting
• Quality training
• Quality circles incoming materials
• Final product testing
• Statistical process
• Depreciation of testing
control activities
equipment

Internal Failure Costs External Failure Costs

• Cost of field servicing and
• Scrap
• Spoilage handling complaints
• Warranty repairs
• Rework
• Lost sales

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 12-15

Quality Cost Reports

Quality cost reports provide an estimate of the financial
consequences of the company’s current defect rate.

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 11-24

Interpreting Quality Cost Reports

When interpreting a cost of quality report managers
should look for two trends.
First, increases in prevention and appraisal costs
should be more than offset by decreases in internal
and external failure costs.
Second, the total quality costs as a percent of sales
should decrease.

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 12-16

Uses of Quality Cost Information

Help managers see the financial significance of
defects.

Help managers identify the relative importance of

the quality problems.

Help managers see whether their quality costs are

poorly distributed. In general, costs should be
distributed more toward prevention and to a lesser
extent appraisal than toward failures.

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 12-18

Limitations of Quality Cost Information

Simply measuring and reporting quality cost

problems does not solve quality problems.

Results usually lag behind quality

improvement programs.

The most important quality cost, lost sales,

is often omitted from quality cost reports
because it is difficult to estimate.

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 12-18

Learning Objective 3

Understand how to calculate

throughput (manufacturing cycle)
time, delivery cycle time,
manufacturing cycle efficiency
(MCE), and overall equipment
effectiveness (OEE)

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 12-19

Operating Performance Measures – Part 1

Order Production Goods
Received Started Shipped

Process Time + Inspection Time

Wait Time + Move Time + Queue Time

Throughput Time

Delivery Cycle Time

Process time is the only value-added time.

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 12-20

Operating Performance Measures – Part 2

Order Production Goods
Received Started Shipped

Process Time + Inspection Time

Wait Time + Move Time + Queue Time

Throughput Time

Delivery Cycle Time

Manufacturing
Value-added time
Cycle =
Efficiency Manufacturing cycle time
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 12-21

Operating Performance Measures – Part 3

Overall Equipment Effectiveness (OEE)

Measures the productivity of a piece of equipment

in terms of three dimensions—utilization, efficiency,
and quality.

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 12-22

Quick Check 6
A TQM team at Narton Corp has recorded the following
average times for production:
Wait 3.0 days Move 0.5 days
Inspection 0.4 days Queue 9.3 days
Process 0.2 days
What is the throughput time?
a. 10.4 days.
b. 0.2 days.
c. 4.1 days.
d. 13.4 days.

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 12-23

Quick Check 6a
A TQM team at Narton Corp has recorded the following average
times for production:
Wait 3.0 days Move 0.5 days
Inspection 0.4 days Queue 9.3 days
Process 0.2 days
What is the throughput time?
a. 10.4 days.
b. 0.2 days.
c. 4.1 days.
d. 13.4 days.
Throughput time = Process + Inspection + Move + Queue
= 0.2 days + 0.4 days + 0.5 days + 9.3 days
= 10.4 days

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 12-24

Quick Check 7
A TQM team at Narton Corp has recorded the following average
times for production:
Wait 3.0 days Move 0.5 days
Inspection 0.4 days Queue 9.3 days
Process 0.2 days
What is the delivery cycle time (DCT)?
a. 0.5 days.
b. 0.7 days.
c. 13.4 days.
d. 10.4 days.

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 12-25

Quick Check 7a
A TQM team at Narton Corp has recorded the following average
times for production:
Wait 3.0 days Move 0.5 days
Inspection 0.4 days Queue 9.3 days
Process 0.2 days
What is the delivery cycle time (DCT)?
a. 0.5 days.
b. 0.7 days.
c. 13.4 days. DCT = Wait time + Throughput time
d. 10.4 days. = 3.0 days + 10.4 days
= 13.4 days

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 12-26

Quick Check 8
A TQM team at Narton Corp has recorded the following average
times for production:
Wait 3.0 days Move 0.5 days
Inspection 0.4 days Queue 9.3 days
Process 0.2 days
What is the Manufacturing Cycle Efficiency (MCE)?
a. 50.0%.
b. 1.9%.
c. 52.0%.
d. 5.1%.

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 12-27

Quick Check 8a
A TQM team at Narton Corp has recorded the following average
times for production:
Wait 3.0 days Move 0.5 days
Inspection 0.4 days Queue 9.3 days
Process 0.2 days
What is the Manufacturing Cycle Efficiency (MCE)?
a. 50.0%. MCE = Value-added time ÷ Throughput time
b. 1.9%.
= Process time ÷ Throughput time
c. 52.0%.
= 0.2 days ÷ 10.4 days
d. 5.1%. = 1.9%

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 12-28

Quick Check 9
Narton Corp has provided the following information for a machine whose
limited capacity is prohibiting the company from producing and selling
additional units:
Actual run time this week 4,550   minutes
Machine time available/week 6,500   minutes
Actual run time this week    3.80 units per minute
Ideal run rate 4.00    units per minute
Defect-free output this week 16,000 units
Total output this week (including defects) 17,290 units
What is the machine’s OEE?
a. 50.3
b. .615
c. .984
d. 1.7

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 12-29

Quick Check 9a
Narton Corp has provided the following information for a machine whose
limited capacity is prohibiting the company from producing and selling
additional units:
Actual run time this week 4,550   minutes
Machine time available/week 6,500   minutes
Actual run time this week    3.8 units per minute
Ideal run rate 6,500   minutes
Utilization rate: .70
Defect-free output this week
(4,550 minutes ÷ 6,500 minutes)
16,000 units
Efficiency rate: .95
Total output this week (including defects)
(3.8 units per minute ÷ 4 units per
17,290 units
minute)
What is the machine’s OEE?
Quality rate: .925 (16,000 units ÷ 17,290 units)
a. 50.3
b. .615
c. .984
OEE: .615 ( .70 × .95 × .925)
d. 1.7

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 12-30

Learning Objective 4

Understand how to
construct and use a
balanced scorecard.

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 12-31

Selecting Balanced Scorecard Measures

The four categories of a balanced scorecard are interrelated
to one another.

A company’s employees need to continuously learn and

grow in order to improve internal business processes

Improving business processes is necessary to improve

customer satisfaction

Improving customer satisfaction is necessary to

improve financial results. 

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The Balanced Scorecard – Jaguar
12-32

Example

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 The Balanced Scorecard – Jaguar
12-33

Example – Part 2
• In essence, the balanced scorecard lays out a
theory of how the company can take concrete
actions to attain its desired outcomes (financial,
in this case)
•Jaguar’s strategy seems plausible, but it should
be regarded as only a theory.
• One of the advantages of the balanced scorecard
is that it continually tests the theories underlying
management’s strategy

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 Tying Compensation to the Balanced
12-34

Scorecard
• Incentive compensation should be linked
to balanced scorecard performance
measures
• Managers must be confident that the
performance measures are reliable,
sensible, understood by those who are
being evaluated, and not easily
manipulated.

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Corporate Social Responsibility
12-35

Performance Measures
Corporate social responsibility (CSR) is a concept
whereby organizations consider the needs of all
stakeholders when making decisions beyond those
that produce financial results to satisfy stockholders

Many of the world’s largest companies prepare corporate

social responsibility performance reports (also called
sustainability reports) that are shared with their external
stakeholders.

The Global Reporting Initiative (GRI) is a leading

organization in the field of social and environmental
performance measurement

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Corporate Social Responsibility and the
12-36

Balanced Scorecard

The balanced scorecard provides a useful

framework for organizing and managing the types
of social and environmental performance
measures that companies often include in their
sustainability reports.

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Corporate Social Responsibility and the
12-37

Balanced Scorecard – Part 2

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Guided Example

Ramlyss, Ltd., of Salt Lake City, Utah, is interested in cutting the amount of time between
when a customer places an order and when the order is completed. For the first quarter
of the year, the following data were reported:
Inspection time 0.8 days
Process time 2.7 days
Wait time 14.0 days
Queue time 5.0 days
Move time 0.5 days
Required:
1. Compute the throughput time.
2. Compute the manufacturing cycle efficiency (MCE) for the quarter.
3. What percentage of the throughput time was spent in non-value-added activities?
4. Compute the delivery cycle time.
5. If by using Lean Production all queue time can be eliminated in production, what will
be the new MCE?

[LO3]
Guided Example

Requirement 1: Compute the throughput time.

Requirement 2: Compute the manufacturing cycle efficiency (MCE)

for the quarter.

Requirement 3: What percentage of the throughput time was spent in

non–value-added activities?
Guided Example

Requirement 4: Compute the delivery cycle time.

Requirement 5: If by using Lean Production all queue time can be eliminated

in production, what will be the new MCE?
End of Chapter 11

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