Creating a Balanced Scorecard
Mason Paper Company (MPC) manufactures commodity grade paper; for use in computer printers and photocopiers. MPC has reported net operating losses for the last two years due to intense price pressure from much larger competitors. The MFC management team—including Kristen Townsend (CEO), Mike Martinez (VP of Manufacturing), Tom Andrews (VP of Marketing), and Wendy Chen (CFO)—is contemplating a change in strategy to save the company from impending bankruptcy. Excerpts from a recent management team meeting are shown below:
Townsend: As we all knew, the commodity paper manufacturing business is all about economies of scale. The largest competitors with the lowest cost per unit win. The limited capacity of our older machines prohibits us from competing in the high-volume commodity paper grades. Furthermore, expanding our capacity by acquiring a new paper-making machine is out of the question given the extraordinarily high price tag. Therefore, I propose that we abandon cost
reduction as a strategic goal and instead pursue manufacturing flexibility as the key to our future success.
Chen: Manufacturing flexibility? What does that mean?
Martinez: It means we have to abandon our "crank out as many tons of paper as possible1 mentality" Instead, we need to pursue the low-volume business opportunities that exist in the nonstandard, specialized paper grades. To succeed in this regard, we'll need to improve our flexibility in three ways. First, we must improve our ability to switch between paper grades. Right now; we require an average of four hours to change over to another paper grade. Timely
customer deliveries are a function of changeover performance. Second, we need to expand the range of paper grades that we can manufacture. Currently, we can only manufacture three paper grades. Our customers must perceive that we are a "'one-stop shop" that can meet all of their paper grade needs. Third, we will need to improve our yields (e.g., tons of acceptable output relative to total tons processed) in the nonstandard paper grades. Our percentage of waste
within these grades will be unacceptably high unless we do something to improve our processes. Our variable costs will go through the roof if we cannot increase our yields!
Chen: Wait just a minute! These changes are going to destroy our equipment utilization numbers!
Andrews: You're right Wendy; however, equipment utilization is not the name of the game when it comes to competing in terms of flexibility". Our customers don't care about our equipment utilization. Instead, as Mike just alluded to, the" want just-in-time delivery of smaller quantities of a full range of paper grades. If we can shrink the elapsed time from order placement to order delivery and expand our product offerings, it will increase sales from current customers and bring in new customers. Furthermore, we will be able to charge a premium price because of the limited competition within this niche from our cost-focused larger competitors. Our contribution margin per ton should drastically improve!
Martinez: Of course, executing the change in strategy will not be easy. We'll need to make a substantial investment in training because ultimately it is our people who create our flexible manufacturing capabilities.
Chen: If we adopt this new strategy, it is definitely going to impact how we measure performance. We'll need to create measures that motivate our employees to make decisions that support our flexibility goals.
Townsend: Wendy. you hit the nail right on the head. For our next meeting, could you pull together some potential measures that support our new strategy?
Required:
1. Contrast MPC’s previous manufacturing strategy with its new manufacturing strategy.
2. Generally speaking, why would a company that changes its strategic goals need to change its performance measurement system as well? What are some examples of measures that would have been appropriate for MFC prior to its change in strategy? Why would those measures fail to support MPC’s new strategy?
3. Construct a balanced scorecard that would support MPC’s new manufacturing strategy. Use arrows to show the causal links between the performance measures and show whether the performance measure should increase or decrease over time. Feel free to create measures that may not be specifically mentioned in the chapter, but nonetheless make sense given the strategic goals of the company.
4. What hypotheses are built into MPC's balanced scorecard? Which of these hypotheses do you believe are most questionable and why?
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Introduction To Managerial Accounting
- At the end of 20x1, Mejorar Company implemented a low-cost strategy to improve its competitive position. Its objective was to become the low-cost producer in its industry. A Balanced Scorecard was developed to guide the company toward this objective. To lower costs, Mejorar undertook a number of improvement activities such as JIT production, total quality management, and activity-based management. Now, after two years of operation, the president of Mejorar wants some assessment of the achievements. To help provide this assessment, the following information on one product has been gathered: Required: 1. Compute the following measures for 20x1 and 20x3: a. Actual velocity and cycle time b. Percentage of total revenue from new customers (assume one unit per customer) c. Percentage of very satisfied customers (assume each customer purchases one unit) d. Market share e. Percentage change in actual product cost (for 20x3 only) f. Percentage change in days of inventory (for 20x3 only) g. Defective units as a percentage of total units produced h. Total hours of training i. Suggestions per production worker j. Total revenue k. Number of new customers 2. For the measures listed in Requirement 1, list likely strategic objectives, classified according to the four Balance Scorecard perspectives. Assume there is one measure per objective.arrow_forwardSuspicious Acquisition of Data, Ethical Issues Bill Lewis, manager of the Thomas Electronics Division, called a meeting with his controller, Brindon Peterson, and his marketing manager, Patty Fritz. The following is a transcript of the conversation that took place during the meeting: Bill: Brindon, the variable costing system that you developed has proved to be a big plus for our division. Our success in winning bids has increased, and as a result our revenues have increased by 25%. However, if we intend to meet this years profit targets, we are going to need something extraam I right, Patty? Patty: Absolutely. While we have been able to win more bids, we still are losing too many, particularly to our major competitor, Kilborn Electronics. If we knew more about their bidding strategy, we could be more successful at competing with them. Brindon: Would knowing their variable costs help? Patty: Certainly. It would give me their minimum price. With that knowledge, Im sure that we could find a way to beat them on several jobs, particularly on those jobs where we are at least as efficient. It would also help us to identify where we are not cost competitive. With this information, we might be able to find ways to increase our efficiency. Brindon: Well, I have good news. Ive been talking with Carl Penobscot, Kilborns assistant controller. Carl doesnt feel appreciated by Kilborn and wants to make a change. He could easily fit into our team here. Plus, Carl has been preparing for a job switch by quietly copying Kilborns accounting files and records. Hes already given me some data that reveal bids that Kilborn made on several jobs. If we can come to a satisfactory agreement with Carl, hell bring the rest of the information with him. Well easily be able to figure out Kilborns prospective bids and find ways to beat them. Besides, I could use another accountant on my staff. Bill, would you authorize my immediate hiring of Carl with a favorable compensation package? Bill: I know that you need more staff, Brindon, but is this the right thing to do? It sounds like Carl is stealing those files, and surely Kilborn considers this information confidential. I have real ethical and legal concerns about this. Why dont we meet with Laurie, our attorney, and determine any legal problems? Required: 1. Is Carls behavior ethical? What would Kilborn think? 2. Is Bill correct in supposing that there are ethical and/or legal problems involved with the hiring of Carl? (Reread the section on corporate codes of conduct in Chapter 1.) What would you do if you were Bill? Explain.arrow_forwardBannister Company, an electronics firm, buys circuit boards and manually inserts various electronic devices into the printed circuit board. Bannister sells its products to original equipment manufacturers. Profits for the last two years have been less than expected. Mandy Confer, owner of Bannister, was convinced that her firm needed to adopt a revenue growth and cost reduction strategy to increase overall profits. After a careful review of her firms condition, Mandy realized that the main obstacle for increasing revenues and reducing costs was the high defect rate of her products (a 6 percent reject rate). She was certain that revenues would grow if the defect rate was reduced dramatically. Costs would also decline as there would be fewer rejects and less rework. By decreasing the defect rate, customer satisfaction would increase, causing, in turn, an increase in market share. Mandy also felt that the following actions were needed to help ensure the success of the revenue growth and cost reduction strategy: a. Improve the soldering capabilities by sending employees to an outside course. b. Redesign the insertion process to eliminate some of the common mistakes. c. Improve the procurement process by selecting suppliers that provide higher-quality circuit boards. Required: 1. State the revenue growth and cost reduction strategy using a series of cause-and-effect relationships expressed as if-then statements. 2. Illustrate the strategy using a strategy map. 3. Explain how the revenue growth strategy can be tested. In your explanation, discuss the role of lead and lag measures, targets, and double-loop feedback.arrow_forward
- Rizzo Goal Inc. produces and sells hockey equipment, often custom made for online orders. The company has the following performance metrics on its balanced scorecard: days from ordered to delivered, number of shipping errors, customer retention rate, and market share. A measure map illustrates that the days from ordered to delivered and the number of shipping errors are both expected to directly affect the customer retention rate, which affects market share. Additional internal analysis finds that: Every shipping error over three shipping errors per month reduces the customer retention rate by 1.5%. On average, each day above three days from ordered to delivered yields a reduction in the customer retention rate of 1%. Each day before three days from order to delivery yields an increase in the customer retention rate of 1%, on average. Rizzo Goal Inc.s current customer retention rate is 60%. The company estimates that for every 1% increase or decrease in the customer retention rate, market share changes 0.5% in the same direction. Rizzo Goal Inc.s current market share is 21.4%. Ignoring any other factors, if the company has six shipping errors this month and an average of 3.5 days from ordered to delivered, determine (a) the new customer retention rate and (b) the new market share that Rizzo Goal Inc. expects to have.arrow_forwardScorecard Measures, Strategy Translation At the end of 20x1, Mejorar Company implemented a low-cost strategy to improve its competitive position. Its objective was to become the low-cost producer in its industry. A Balanced Scorecard was developed to guide the company toward this objective. To lower costs, Mejorar undertook a number of improvement activities such as JIT production, total quality management, and activity-based management. Now, after two years of operation, the president of Mejorar wants some assessment of the achievements. To help provide this assessment, the following information on one product has been gathered: 20x1 20x3 Theoretical annual capacity* 249,600 249,600 Actual production** 208,000 234,000 Market size (in units sold) 1,300,000 1,300,000 Production hours available (40 workers) 104,000 104,000 Very satisfied customers 62,400 117,000 Actual cost per unit $340 $272 Days of inventory 14 7 Number of defective…arrow_forwardScorecard Measures, Strategy Translation At the end of 20x1, Mejorar Company implemented a low-cost strategy to improve its competitive position. Its objective was to become the low-cost producer in its industry. A Balanced Scorecard was developed to guide the company toward this objective. To lower costs, Mejorar undertook a number of improvement activities such as JIT production, total quality management, and activity-based management. Now, after two years of operation, the president of Mejorar wants some assessment of the achievements. To help provide this assessment, the following information on one product has been gathered: 20x1 20x3 Theoretical annual capacity* 249,600 249,600 Actual production** 208,000 234,000 Market size (in units sold) 1,300,000 1,300,000 Production hours available (40 workers) 104,000 104,000 Very satisfied customers 62,400 117,000 Actual cost per unit $340 $272 Days of inventory 14 7 Number of defective…arrow_forward
- Only help with parts c, g, I and J Scorecard Measures, Strategy Translation At the end of 20x1, Mejorar Company implemented a low-cost strategy to improve its competitive position. Its objective was to become the low-cost producer in its industry. A Balanced Scorecard was developed to guide the company toward this objective. To lower costs, Mejorar undertook a number of improvement activities such as JIT production, total quality management, and activity-based management. Now, after two years of operation, the president of Mejorar wants some assessment of the achievements. To help provide this assessment, the following information on one product has been gathered: 20x1 20x3 Theoretical annual capacity* 249,600 249,600 Actual production** 208,000 234,000 Market size (in units sold) 1,300,000 1,300,000 Production hours available (40 workers) 104,000 104,000 Very satisfied customers 83,200 117,000 Actual cost per unit $340 $272 Days of…arrow_forwardKey success factors. Dominic Consulting has issued a report recommending changes for its newest manufacturing client, Casper Engines. Casper Engines currently manufactures a single product, which is sold and distributed nationally. The report contains the following suggestions for enhancing business performance: Develop a hybrid engine to stay ahead of competitors Increase training hours of assembly-line personnel to decrease the currently high volumes of scrap and waste. Reduce lead times (time from customer order of product to customer receipt of product) by 20% in order to increase customer retention. Negotiate faster response times with direct material suppliers to allow for lower material inventory levels Benchmark the company’s gross margin percentages against its major competitors. Link each of these changes to the key success factors that are important to managers.arrow_forwardStrategy, balanced scorecard, service company. Compton Associates is an architectural rm that has been in practice only a few years. Because it is a relatively new rm, the market for the rm’s services is very competitive. To compete successfully, Compton must deliver quality services at a low cost. Compton presents the following data for 2016 and 2017.arrow_forward
- Balanced scorecard, social performance. Comtex Company provides cable and Internet services in the greater Boston area. There are many competitors that provide similar services. Comtex believes that the key to financial success is to offer a quality service at the lowest cost. Comtex currently spends a significant amount of hours on installation and post-installation support. This is one area that the company has targeted for cost reduction. Comtex’s balanced scorecard for 2017 follows in the attatched: Q.Was Comtex successful in implementing its strategy in 2017? Explain.arrow_forwardEthics and the ManagerRichmond, Inc., operates a chain of 44 department stores. Two years ago, the board of directors of Richmond approved a large-scale remodelling of its stores to attract a more upscale clientele.Before finalizing these plans, two stores were remodelled as a test. Linda Perlman, assistant controller, was asked to oversee the financial reporting for these test stores, and she and other management personnel were offered bonuses based on the sales growth and profitability of these stores. While completing the financial reports, Perlman discovered a sizable inventory of outdated goods that should have been discounted for sale or returned to the manufacturer. She discussed the situation with her management colleagues; the consensus was to ignore reporting this inventory as obsolete because reporting it would diminish the financial results and their bonuses.1. Managerial Accounting2. Would it be easy for Perlman to take the ethical action in this situation?arrow_forwardStrategy, balanced scorecard, service company. Compton Associates is an architectural firm that has been in practice only a few years. Because it is a relatively new firm, the market for the firm’s services is very competitive. To compete successfully, Compton must deliver quality services at a low cost. Compton presents the following data for 2016 and 2017.arrow_forward
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