Super Chicken operates a chain of takeaway chicken shops. The company is operating in a very competitive market, and it is difficult to gain and maintain market share.
Management believes it is important to monitor competitors’ actions closely, and to continually offer new products and special promotions to create high visibility among customers. The management team has recently reviewed its mission, which is: To be a caring and environmentally responsible company, providing fresh and nutritious meals at an affordable price.
Required:
Consider the four perspectives of Kaplan and Norton’s balanced scorecard. For each perspective, develop objectives and a series of performance measures. Consider both lag and lead indicators. Make sure that your objectives and measures support the mission of Super Chicken.
Solution to Self-study problem
Performance measures
Objectives Lag indicators Lead indicators
1 Financial
Improve returns to shareholders. Return on equity Number of new outlets opened Product profitability
2 Customer
Increase customer satisfaction. Customer satisfaction measure Number of new products released each quarter
Number of customer complaints
Market share Number of customers
participating in special promotion
Increase in sales revenue Average time to serve a customer
Average price per meal
continues …
Performance measures
Objectives Lag indicators Lead indicators
3 Internal business processes
Maintain the quality of products. Wastage in kitchen
Create new innovative products. Number of products currently Time to develop new products under development Number of promotions in process
Improve efficiency of Average cost per meal Cycle time
production processes. Labour productivity
4 Learning and growth
Improve employee satisfaction. Employee satisfaction survey Improvements in working conditions
Improve employees’ knowledge Number of employees completing Number of employee suggestions of company systems. company training program Number of employees achieving
‘gold star’ status
Questions
14.1 Describe the various ways in which performance measurement systems can support customer value.
14.2 Describe the major limitations of conventional financial performance measures.
14.3 Why do many operational managers develop their own non-financial measures of performance? What are the problems with this approach to performance measurement?
14.4 Does adding non-financial measures always improve a performance measurement system?
14.5 Describe the problems associated with non-financial performance measures.
14.6 What advantages do non-financial performance measures offer for managing resources and creating value, compared with financial measures?
14.7 Describe the Kaplan and Norton balanced scorecard approach to performance measurement.
14.8 Select a business that you are familiar with, and, for each of the four perspectives of Kaplan and Norton’s balanced scorecard, select two performance measures that could be used for this business.
14.9 Explain why effective management of non-financial measures may not always flow through to improved financial performance.
14.10 Distinguish between lead and lag indicators. Provide an example to illustrate your answer.
14.11 What is a Du Pont chart? How can it help in managing performance?
14.12 Outline the characteristics of a good performance measurement system.
14.13 Describe the various ways in which continuous improvement can be built into a performance measurement system. Illustrate your answer with examples.
14.14 Outline the various warning signs that may indicate that an organisation has an inadequate performance measurement system.
14.15 Describe the meanings of productivity, set-up time and machine downtime. Which competitive strategies might these measures support?
14.16 How do performance measures for service firms differ from those for manufacturers?
14.17 Outline the features of contemporary performance measurement systems.
14.18 Outline the steps involved in benchmarking.
14.19 What are the advantages and limitations of the four types of benchmarking?
14.20 Explain the following terms, as they relate to benchmarking: performance gap, normalisation, best practice company.
14.21 What role can management accountants play in benchmarking activities?
Exercises
E14.22 Financial and non-financial measures
Classify each of the following statements as true or false. In each case give reasons for your answer.
1 Financial performance measures provide essential information in order to assist managers at the operational level to take actions to correct problems.
2 Non-financial measures assist managers to manage the drivers of future financial performance.
3 Both financial and non-financial measures can assist in communicating the strategy of the business and in encouraging goal congruence.
4 Financial measures provide an indication of how well the organisation has performed across a range of strategically important areas.
E14.23 Non-financial performance measures
For each of the following businesses, select three performance measures that could be used to support the competitive strategy of quality. Make sure that your measures are specific to each type of business.
1 A law firm.
2 A company that manufactures pool-cleaning equipment.
3 A firm that prepares personal taxation returns.
4 A company that sells fruit and vegetables.
5 A pizza and pasta restaurant.
6 A bus company.
E14.24 Non-financial performance measures: manufacturer
Scotch Thistles weaves fine wool, which it then manufactures into woollen clothing.
The senior management team believes that critical success factors for the business are cost effectiveness, product innovation and product quality.
Required:
For each of the critical success factors, suggest three performance measures.
E14.25 Financial and non-financial performance measures: service firm
Canny Catering Ltd specialises in catering for office parties. Over the past six months, business has started to pick up, particularly as the number of ‘employee farewell’ parties has increased in the larger corporations. The prime control tool is the monthly performance report, which contains comparisons between actual and budgeted revenues and costs. Budgeted costs were developed last year, and now with the increased business activity, monthly cost variances are always unfavourable. The budget was based on an average of two parties per week, whereas the company is currently catering for three parties per week.
The manager of Canny Catering says she has little use for the monthly cost and revenue reports—they always show favourable variances. However, she has noticed that in the recent quarterly profit statement, the actual profit margin was 3 per cent, whereas the budgeted profit margin was 5 per cent. ‘How can this be?’ she asks.
Required:
1 How can monthly cost and revenue variances be favourable when the quarterly profit margin percentage is below budget?
2 Can you suggest how Canny Catering can improve its monthly performance reporting system?
3 Explain to the manager of Canny Catering the advantages of expanding the monthly performance reports to include non-financial measures.
E14.26 Benchmarking: manufacturer
Sleepy Time is a multinational manufacturer of herbal teas. The Australian plant, located at Hawthorn in Victoria, is currently attempting to lift its performance through benchmarking activities. The best performing plant in the Sleepy Time Group is located in Zurich, Switzerland. The general manager of the Hawthorn
plant has approved a benchmarking visit to the Zurich plant by a team of employees. The benchmarking team consists of the manufacturing manager, two manufacturing team leaders, a member of a third manufacturing team and the plant’s human resources manager. The functions that the benchmarking team has identified for study include employment contracts, the operation of self-managed teams in manufacturing, and the processes that have resulted in high safety performance and short cycle times at the Zurich plant.
Required:
1 What type of benchmarking is the Hawthorn plant planning to undertake?
2 Explain the advantages and limitations of this type of benchmarking.
3 What are the advantages of forming a multidisciplinary benchmarking team similar to the one used by the Hawthorn plant?
E14.27 Performance Measures: manufacturer
Juggernaut Industries manufactures mobile telephones, a product that has one of the fastest growing markets in Australia. The accountant of Juggernaut is considering designing a new performance measurement system for the company.
As part of this process, the management team has established the following objectives for the company for 2003:
To achieve 25 per cent market share.
To achieve a return on investment of 15 per cent.
To provide mobile phones that meet customers’ needs for leading-edge design and performance at a reasonable price.
Management has taken each objective and established the following critical success factors: customer satisfaction, cost effectiveness and new product introduction.
Required:
1 For each of the three objectives, suggest another critical success factor.
2 Suggest two performance measures that would support each of the company’s critical success factors listed in the question.
E14.28 Performance measures in a service business
Identify specific lead and lag measures that may be used in each of the following three businesses to measure
(i) quality, and (ii) customer loyalty.
(a) a bank, (b) a school, and (c) a hairdresser.
E14.29 Performance measures in a service environment
The head of the Accounting Department at the University of Utopia wants to develop a performance measurement system to improve the performance of her department in both teaching and research.
Required:
You are hired as a consultant to identify performance measures for the Accounting Department. Suggest three objectives for the Accounting Department. List the performance measures that should be included and give reasons for each measure chosen. (Hint: As a customer of an Accounting Department, you should have some great ideas about how performance in teaching can be measured and improved!) What problems do you envisage in the implementation of these performance measures?
E14.30 Key performance indicators and key performance drivers; Du Pont chart: service firm St Andrews Bank is currently redesigning its performance measurement system. Up until now it has relied heavily on monthly cost variance reports to control the costs
in each bank branch, and would now like to have a more comprehensive performance measurement system that can help the bank detect problem areas before they become significant.
The bank is committed to achieving a high return on investment for shareholders and believes that careful management of customer service and costs will help achieve that goal.
Required:
1 Identify some key performance indicators (KPIs) for the bank and some key performance drivers (KPDs) that could be used to manage operations at the bank branch level. Draw these in the form of a Du Pont chart.
2 Explain how continuous improvement could be built into the KPDs, to help encourage improved performance over time.
Problems
P14.31 Performance measures in manufacturing
Joe Evans is a line supervisor in the Paint Shop of the General Australian Car Company (GACC). The GACC manufactures cars for the domestic and export markets. Jim Kent is the manager of the Finishing Department, which includes the Paint Shop. It is the end of the first week in May when Kent approaches Evans for help.
Kent: Joe, here are the results for our department for the month of April. I need your help to explain these variances at the meeting with the plant manager tomorrow. Just look at them. I’m in for a really hard time.
(Evans examines the performance report for the Finishing Department for April, which is shown below.)
Evans: Jim, why do you bother with these measures? They’re not worth the paper they’re written on. Tell those blokes at the top that when they introduce some decent measures they’ll start to get some decent results!
Finishing Department Performance Report for April Direct material:
Standard cost $115 000
Material usage variance 17 000 U
Material price variance* 3 000 F
Actual material cost 129 000
Direct labour:
Standard cost 55 000
Direct labour efficiency variance 12 000 U
Direct labour rate variance 10 000 U
Actual labour cost 77 000
Variable manufacturing overhead:
Standard cost 27 500
Variable overhead efficiency variance 6 000 U
Variable overhead spending variance 5 000 U
Actual variable overhead 38 500
Fixed manufacturing overhead:
Standard cost applied 41 250
Fixed overhead volume variance 6 000 U Fixed overhead budget variance 9 000 U
Actual fixed overhead 56 250
* Material price variance is based on actual quantity used.
Required:
1 Outline the major criticisms of standard costing variances as measures of performance. (Hint: You may find it useful to review Chapter 11.)
2 Suggest some alternative performance measures for the Finishing Department that might be useful.
P14.32 Designing a performance measurement system; Du Pont chart: service firm
Fabrizzi’s Cafe is a chain of coffee shops that has been operating successfully for the past two years. However, competition is becoming more intense, particularly in the trendier suburbs of the city. Mark Fabrizzi, the managing director, no longer directly manages any of the shops and is interested in developing a performance measurement system that can help him to evaluate the relative performance of each shop and to anticipate any problems. It is important that he knows of any problems, particularly those concerning customers and profitability, as soon as they happen.
He would like to know this information for each of his eight shops. In this type of business, customer loyalty can be short-lived and profits may be erratic.
Required:
1 Advise Mark Fabrizzi on how he should set about designing a performance measurement system. In your answer, consider the various features of an effective performance measurement system.
2 Select some performance measures that may address the various concerns of Fabrizzi.
3 Develop a Du Pont chart, similar to that in Exhibit 14.6, to show how the performance measures flow through to improving customer satisfaction and cost effectiveness, and ultimately profit.
P14.33 Balanced scorecard: service firm
Clean Living Ltd is a travel company that specialises in ‘green tours’—package tours to environmentally sensitive destinations. These types of tours are growing in popularity, and while Clean Living has had little problem attracting customers, it has noticed a number of competing businesses have just commenced operations.
Even some of the regular travel companies are starting to offer green tours.
Saffron Phelong, the managing director, has asked the financial controller, Clarence Kent, to design and implement a new performance measurement system that may help protect the business against competitors. Phelong has spent many years working for large multinationals and appreciates the value of strategic planning and a good performance measurement system. Recently she attended a seminar on balanced scorecards.
To provide the foundation for the new performance measurement system, all of the managers of the company participated in a strategic planning retreat. The managers used the Kaplan and Norton approach to outline a set of objectives to support the four perspectives of a balanced scorecard:
Perspectives Objectives
Financial perspective Increase return on investment.
Improve cash flow.
Customer perspective Increase market share.
Improve customer satisfaction.
Internal business perspective Improve office cost effectiveness.
Have available a variety of different tours.
Learning and growth Improve environmental skills of employees.
Required:
For each of the four perspectives, provide lead and lag measures that would support the objectives. Make sure that your measures relate specifically to Clean Living Ltd.
P14.34 Performance measures for operational control: manufacturer
Australian Plastics Ltd manufactures a range of moulded plastic products, such as kitchen utensils and desk accessories. The production process in the Whyalla plant is highly automated. The plant uses a just-in-time production management system.
An automatic material-handling system is used to transport products between production operations. Each month the accountant prepares a production efficiency report, which is sent to corporate headquarters. The data compiled in these reports, for the first six months of the current year, are as follows:
Australian Plastics Ltd: Whyalla Plant Production Efficiency Report
1 January–30 June 2000
Jan. Feb. Mar. Apr. May June Average
Overtime hours 60 70 75 80 85 105 79.2
Total setup time (hours) 70 70 65 64 62 62 65.5
Cycle time (average in hours) 20 20 19 18 19 17 18.8
Percentage of orders filled 100 100 100 100 100 100 100
Percentage of on-time deliveries 99 98 99 100 96 94 97.7
Inventory value/sales revenue 5% 5% 5% 4% 5% 5% 4.8%
Number of defective units, 80 82 75 40 25 22 54
finished goods
Number of defective units, 10 30 35 40 60 60 39.2
in process
Number of raw material shipments 3 3 2 0 0 0 1.3
with defective materials
Number of products returned 0 0 0 0 0 0 0
Power consumption (kWh, ’000s) 800 795 802 801 800 800 799.7
Machine downtime (hours) 30 25 25 20 20 10 21.7
Bottleneck machine 0 0 2 0 15 2 3.2
downtime* (hours)
Number of unscheduled machine 0 0 1 0 2 3 1
maintenance calls
* The concept of bottlenecks is explained in Chapter 15.
Required:
1 Write a memo to the managing director of Australian Plastics Ltd, evaluating the Whyalla plant’s performance. Structure your report by dividing it into the following parts:
(a) production processing and productivity (b) product quality and customer satisfaction (c) delivery performance
(d) raw material, scrap and inventory (e) machine maintenance
(Some measures may be relevant to more than one area of performance.)
2 Identify any areas of concern in your memo and suggest appropriate action for management.
P14.35 Performance measures for operational control: manufacturer
Medical Systems Corporation manufactures diagnostic testing equipment used in hospitals. The company practises JIT production management and has a state-of-the-art manufacturing system. The following non-financial data were collected every two weeks in the Elizabeth plant during the first quarter of the current year.
Fortnightly measurement period
1 2 3 4 5 6
Cycle time (days) 1.5 1.3 1.3 1.2 1.2 1.1
Number of defective finished products 4 4 3 4 3 3
Customer complaints 6 7 6 5 7 8
Unresolved complaints 2 1 0 0 0 0
Products returned 3 3 2 2 1 1
Warranty claims 2 2 2 0 1 0
In-process products rejected 5 5 7 9 10 10
Average number of units produced 410 405 412 415 415 420
per day per employee
Percentage of on-time deliveries 94 95 95 97 100 100
Percentage of orders filled 100 100 100 98 100 100
Inventory value/sales revenue 2% 2% 2% 1.5% 2% 1.5%
Machine downtime (minutes) 80 80 120 80 70 75
Bottleneck machine 25 20 15 0 60 10
downtime* (minutes)
Overtime (minutes) per employee 20 0 0 10 20 10
Average setup time (minutes) 120 120 115 112 108 101
* The concept of bottlenecks is explained in Chapter 15.
Required:
1 For each non-financial performance measure, indicate which of the following areas of manufacturing performance is involved:
(a) production processing (b) product quality (c) customer satisfaction (d) in-process quality control (e) productivity
(f) delivery performance (g) raw material and scrap (h) inventory
(i) machine maintenance
(Some measures may relate to more than one area.)
2 Write a memo to management commenting on the performance data collected for the Elizabeth plant. Be sure to note any trends or other important results you see in the data. Evaluate the Elizabeth plant in each of the areas listed in requirement 1.
P14.36 Problems with conventional performance measures; strategy and performance measures:
manufacturer
Revor Mowers Ltd manufactures lawn mowers and grass-slashers. The manufacturing plant has three production departments: Metalwork, Mechanical Work and Assembly. The company uses monthly standard costing reports to
evaluate performance and control costs in the manufacturing areas. Typically, these reports are distributed to managers within two weeks of the end of the month.
Required:
1 Identify the performance measures that are likely to be included in the monthly standard costing reports. (You may need to revisit Chapters 10 and 11.)
2 How useful do you think this information will be for:
(a) the managing director?
(b) the manufacturing plant manager?
(c) production department managers?
(d) production line foremen and supervisors?
Explain your answer in each case.
3 Suggest strategic areas, apart from cost, where the company is likely to want to manage its performance.
4 Pick one strategic area that you have identified in requirement 3, and suggest an objective and two performance measures for each of the four management levels listed in (a)–(d) of requirement 2.
P14.37 Balanced scorecard: service firm
Rice Porterhouse and Company is a large chartered accounting firm. The company has four departments that work directly with clients: Auditing, Taxation, Management Consulting and Liquidation. In addition, the firm has an Administration Department. The managing partner uses the following measures to monitor the firm’s performance:
Performance measures Overall business: profit and return on investment
Client departments: revenues
costs
percentage of available time charged to clients Administration Department: costs
At the end of each month the managing partner compares the actual results for these measures with budgeted results. Department managers are asked to explain any significant variances. Rice Porterhouse has always been successful, but recently its profitability has declined. The managing partner asks the Management Consulting Department to review the firm’s performance measurement system.
Required:
Prepare a report for the managing partner that includes the following information.
1 Identification of the type of strategies that might be followed in a service firm such as Rice Porterhouse, operating in the modern business environment;
2 A review of the existing performance measurement system assessing:
(a) how well it measures performance to support the firm’s strategies;
(b) any potential adverse effects that the existing system may have on
(b) any potential adverse effects that the existing system may have on