Graduate Managerial Accounting - Serious work..No copy and paste. Chapter 12 Case 12-23

BA510 Chapter 12 556 achieved by working harder and smarter, but they can also usually be achieved by simply cutting prices. The increase in volume from cutting prices almost always results in greater total revenues; however, it does not always lead to greater total profits.Those who design performance measurement systems need to keep in mind that managers who are under pressure to perform may take actions to improve performance measures that have negative consequences elsewhere. Required: For each of the following situations, describe actions that managers might take to show improvement in the performance measure but which do not actually lead to improvement in the organization's overall performance. 1. Concerned with the slow rate at which new products are brought to market, top management of a consumer electronics company introduces a new performance measure-speed-to-market. The research and development department is given responsibility for this performance measure, which measures the average amount of time a product is in development before it is released to the market for sale. 2. The CEO of an airline company is dissatisfied with the amount of time that her ground crews are taking to unload luggage from airplanes. To solve the problem, she decides to measure the average elapsed time from when an airplane parks at the gate to when all pieces of luggage are unloaded from the airplane. For each month that an airport's ground crew can lower its "average elapsed time" relative to the prior month, the CEO pays a lump-sum bonus to be split equally among members of the crew. ~. A manufacturing company has been plagued by the chronic failure to ship orders to customers by the promised date. To solve this problem, the production manager has been given the responsibility of increasing the percentage of orders shipped on time. When a customer calls in an order, the production manager and the customer agree to a delivery date. If the order is not completed by that date, it is counted as a late shipment. 4. Concerned with the productivity of employees, the board of directors of a large multinational corporation has dictated that the manager of each subsidiary will be held responsible for increasing the revenue per employee cif his or her subsidiary. ::i I Cases Ill comecl:' Additional student resources are available with Connect. CASE 12-23 Balanced Scorecard [LO 12-4] Haglund Department Store is located in the downtown area of a small city. While the store ha,d been profitable for many years, it is facing increasing competition from large national chains}ha( have set up stores on the outskirts of the city. Recently the downtown area has been undergoing revitalization, and the owners of Haglund Department Store are somewhat optimistic that. . profitability can be restored. ... In- an attempt to accelerate the return to profitability, management of Haglund Depar Store is in the process of designing a balanced scorecard for the company. Management 9~ the company should focus on two key problems. First, customers are taking longer andlori pay the bills they incur using the department store's charge card, and the company hasf bad debts than are normal for the industry. If this problem were solved, the company wo~ more cash to make much needed renovations. Investigation has revealed that much ofthe_' with late payments and unpaid bills results from customers disputing incorrect charges bills. These incorrect charges usually occur because salesclerks incorrectly enter data on t_ account slip. Second, the company has been incurring large losses on unsold seasonaf Such items are ordinarily resold at a Joss to discount stores that specialize in such dis The meeting in which the balanced scorecard approach was discussed was diso ineffectively led-possibly because no one other than one of the vice presidents had r about how to build a balanced scorecard. Nevertheless, a number of potential perfor sures were suggested by various managers. These potential performance measures are: a. Percentage of charge account bills containing en-ors. .. b. Percentage of salesclerks trained to correctly enter data on charge account slips. ' r. o ~---------------------------------M_a_n_a_g_er_ia_l_A_cc_o_u_n_ti_ng_fo_r_M_a_n_a_g_er_s,_F_o__u_rt_h_E_d_iti_o_n_-+--. '55 Performance Measurement in Decentralized Organizations 557 c. d. e. f. g. h. i. j. Average age of accounts receivables. Profit per employee. Customer satisfaction with accuracy of charge account bills .from monthly customer survey. Total sales revenue. Sales per employee. Travel expenses for buyers for trips to fashion shows. Unsold inventory at the end of the season as a percentage of total cost of sales. Courtesy shown by junior staff members to senior staff members based on surveys of senior staff. k. Percentage of suppliers making just-in-time deliveries. I. Sales per square foot of floor space. m. Written-off accounts receivable (bad debts) as a percentage of sales. n. Quality of food in the staff cafeteria based on staff surveys. o. Percentage of employees who have attended the city's cultural diversity workshop. p. Total profit. Required: 1. As someone with more knowledge of the balanced scorecard than almost. anyone else in the company, you have been asked to build an integrated balanced scorecard. In your scorecard, use only performance measures listed previously. You do not have to use all of the performance measures suggested by the managers, but you should build a balanced scorecard that reveals a strategy for dealing with the problems with accounts receivable and with unsold merchandise. Construct the balanced scorecard following the format used in Exhibit 12-5. Do not be concerned with whether a specific performance measure falls within the learning and growth, internal business process, customer, or financial perspective. However, use arrows to show the causal links between performance measures within your balanced scorecard and explain whether the performance measures should show increases or decreases. 2. Assume that the company adopts your balanced scorecard. After operating for a year, some performance measures show improvements, but not others. What should management do next? 3. a. Suppose that customers express greater satisfaction with the accuracy of their charge account bills but the performance measures for the average age of accounts receivaqle and for bad debts do not improve. Explain why this might happen. b. Suppose that the performance measures for the average age of accounts receivable, bad debts, and unsold inventory improve, but total profits do not. Explain why this might happen. Assume in your answer that the explanation lies within the company. Appendix 12A: Transfer Pricing Divisions in a company often supply goods and services to other divisions within the same company. For example, the truck division of Toyota supplies trucks to other Toyota divisions to use in their operations. When the divisions are evaluated based on their profit, ROI, or residual income, a price must be established for such a transfer--otherwise, the division that produces the good or service will receive no credit. The price in such a situation is called a transfer price. A transfer price is the price charged when one segment of a company provides goods or services to another segment of the same company. For example, most companies in the oil industry, such as Shell, have petroleum refining and retail sales divisions that are evaluated on the basis of ROI or residual income. The petroleum refining division processes crude oil into gasoline, kerosene, lubricants, and other end products. The retail sales division tal(es gasoline and other products from the refining division and sells them through the company's chain of service stations. Each product has I