Cost Accounting (14th Edition)

492 CHAPTER 13 STRATEGY, BALANCED SCORECARD, AND STRATEGIC PROFITABILITY ANALYSIS
Decision Points
The following question-and-answer format summarizes the chapter’s learning objectives. Each decision presents a
key question related to a learning objective. The guidelines are the answer to that question.
Decision
1. What are two generic strategies
a company can use?
Guidelines
Two generic strategies are product differentiation and cost leadership. Product
differentiation is offering products and services that are perceived by customers
as being superior and unique. Cost leadership is achieving low costs relative to
competitors. A company chooses its strategy based on an understanding of customer
preferences and its own internal capabilities, while differentiating itself
from its competitors.
2. What is reengineering? Reengineering is the rethinking of business processes, such as the order-delivery
process, to improve critical performance measures such as cost, quality, and customer
satisfaction.
3. How can an organization
translate its strategy into a
set of performance measures?
4. How can a company analyze
changes in operating income
to evaluate the success of its
strategy?
5. How can a company identify
and manage unused capacity?
An organization can develop a balanced scorecard that provides the framework
for a strategic measurement and management system. The balanced scorecard
measures performance from four perspectives: (1) financial, (2) customer,
(3) internal business processes, and (4) learning and growth. To build their balanced
scorecards, organizations often create strategy maps to represent the
cause-and-effect relationships across various strategic objectives.
To evaluate the success of its strategy, a company can subdivide the change in
operating income into growth, price-recovery, and productivity components.
The growth component measures the change in revenues and costs from selling
more or less units, assuming nothing else has changed. The price-recovery component
measures changes in revenues and costs solely as a result of changes in
the prices of outputs and inputs. The productivity component measures the
decrease in costs from using fewer inputs, a better mix of inputs, and reducing
capacity. If a company is successful in implementing its strategy, changes in components
of operating income align closely with strategy.
A company must first distinguish engineered costs from discretionary costs.
Engineered costs result from a cause-and-effect relationship between output and
the resources needed to produce that output. Discretionary costs arise from periodic
(usually annual) management decisions regarding the amount of cost to be
incurred. Discretionary costs are not tied to a cause-and-effect relationship
between inputs and outputs. Identifying unused capacity is easier for engineered
costs and more difficult for discretionary costs. Downsizing is an approach to
managing unused capacity that matches costs to the activities that need to be
performed to operate effectively.
Appendix
Productivity Measurement
Productivity measures the relationship between actual inputs used (both quantities and costs) and actual outputs produced.
The lower the inputs for a given quantity of outputs or the higher the outputs for a given quantity of inputs,
the higher the productivity. Measuring productivity improvements over time highlights the specific input-output relationships
that contribute to cost leadership.