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RESPONSIBILITY
ACCOUNTING AND BALANCED
SCORECARD
JCP
Decentralization

 Decentralization
 The restructuring of the
organisation into smaller sub-units,
such as divisions and
departments, each with specific
operations and decision-making
responsibilities
 Benefits
 Managers of sub-units have better local information
about markets and operations to enable them to manage
their areas more effectively
 Provides managerial training for future higher-level managers
 May lead to greater motivation and job satisfaction for sub-
unit managers
 Allows corporate managers more time for strategic issues
 Allows the organization to react more
quickly to opportunities and problems as
they arise
 Negative consequences
 Managers may focus too narrowly on their own sub-
unit performance rather than on attaining the
organization's overall goals
 Some tasks and services may be duplicated unnecessarily
 Goal congruence: a behavioral challenge
 Goal congruence may be difficult to achieve
in a decentralized organization
 Performance measures and reward systems may provide
direction and incentives to achieve wider organizational
goals
 The Need for Information About
Responsibility Center
Performance

The accounting system provides information

about resources used and outputs achieved.
This information is used to:
 Plan and allocate resources.
 Control operations.
 Evaluate the performance
of center managers.
Decentralization and Responsibility
Accounting
 Responsibility accounting
Assign responsibility to managers to
run particular sub-units of the
organisation
Helps to reinforce the
advantages of decentralization
Responsibility Centers

 A responsibility center is a sub-unit of

an organization where the manager is
held accountable for the sub-unit’s
activities and performance
 Investment center
 Profit center
 Cost center
 Revenue center
 Cost Center
A business section that has
control over the incurrence of
costs, but no control over
revenues or investment funds.
 Profit investment funds.
Center
A part of the
business that has
control over both
costs and
revenues, but no
control over
Revenues
Sales Interest
Other
Costs
Mfg. costs
Commissions
Salaries Other
Investment Center
A profit center
where
management
also makes capital
investment
decisions.
 Terminology in practice
 Cost center is commonly used
 Revenue center seldom used
 Profit center may refer to both profit centers
and investment centers
 Strategic business unit (SBU) often used to refer
to investment centers and sometimes profit
centers where they have their own distinct
markets and strategies
New Developments in Organizational
Structuring

 Shared services
 The concentration of some support services that are typically
spread across a decentralized organization into a separate unit
to service multiple internal customers
 May focus on non-strategic areas, such as accounts payable,
payroll,
finance, information technology
 Capture the best aspects of centralized and decentralized
structures
 Business units may choose to use a shared service unit or an
outside provider, so there is an incentive for shared service units to
deliver high quality service to internal customers
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New Developments in Organizational
Structuring

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New Developments in Organizational
Structure

 Team-based structures
 Firms have moved away from hierarchical
structures towards flatter structures that involve
fewer levels of management
 Self-managed work teams may be used to manage
all aspects of a process
 In the production area, team responsibilities may
include
 Production
planning, ordering materials, liaising with suppliers
and customers, all aspects of the production process, cost
budgets and performance management
New Developments in Organizational
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Structure
 Team-based structures
 Teams may manage some processes more effectively
 Teams may promote employee satisfaction,
improved customer satisfaction and productivity
 Greater empowerment may result from transfer of
decision
making responsibility from middle managers to teams
 Teams are often set up as cost centers
 Non-financial measures may be more important in managing
a
team than cost measures
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Structure

17
 Responsibility Accounting Systems

An accounting system that provides information .

Relating to the responsibilities of individual managers. To evaluate managers on contr

  Prepare budgets for  Measure performance of
each responsibility center.
each responsibility center.

 Prepare timely performance reports

comparing actual amounts with budgeted amounts.
counting may use organization charts with clear lines of autho

Board of Directors

President

Vice President Vice President Vice President

of Finance of Operations of Marketing

Store Manager

Department Manager
Responsibility Accounting Systems
Amount of detail varies according to
level in organization.

A store manager receives summarized

information from each department.
A department manager
receives detailed reports.
 Amount of detail varies according to
level in organization.
Management by exception:
Upper-level management does not
receive operating detail unless
problems arise.

The vice president of operations receives

summarized information from each store.
To be of maximum benefit, responsibility
reports should . . .
 Be timely.
 Be issued regularly.
 Be understandable.
 Compare budgeted
and actual
amounts.
Responsibility Centers

Performance Measures
Cost control Quantity
Cost Center and quality of services

Profit Profitability
Center
Return on assets (ROA)
Investment Residual income (RI)
Center Economic Valued Added
Contemporary Approaches
to

Measuring and Managing

Performance
The Purposes of
Performance Measurement
 Communicate the strategy and plans of
the business and align employee’s
goals
 Track performance against targets
 Identify problem areas
 Evaluate subordinates’ performance and
as a basis of rewards
 Guide senior managers in developing future
strategies and operations
Problems with Conventional
Performance Measures
 They are not actionable
 Financial measures emphasise only one
perspective
 Financial performance measures
provide limited guidance for
future actions
 May encourage actions which decrease
shareholder and customer value
Contemporary
Performance Systems
Measurement

 Include non-financial and financial

measures
 Have a strategic orientation—directly
measure areas that provide
competitive advantage
 Use external benchmarks
 Emphasis continuous improvement
Non-Financial Measures for
Operational Control

 Non-financial measures reflect the drivers

of future financial performance
 More actionable
 More understandable and easier to relate to
Non-Financial Measures

 Customer satisfaction
 Measured by survey administered
to customers
 Defect measures
 Measurement of faults in a product
that occur during manufacturing
process
 Support a high quality strategy

 Quality
 Periodic inspections or testing of products
Non-Financial Measures

 Productivity
 The ratio of outputs produced per unit of
input
Labor
productivity  Number of produced
units
Number of direct labor hours

Total factor productivity  Numberof units produced

Costof all inputs to production
Non-Financial Measures
 Stock status
 Accident report/safety reports
 Multiskilling
 Machine down time
 Numberof hours, or percentage of total production
hours that machines are unable to operate
 Delivery on time
Problems with Non-Financial
Performance Measures

 Wide choice of non-financial measures

available
 Their development can be ad-hoc
and undirected
 Managers must necessarily make trade-offs
 Some measures lack integrity
 Some measures not easily translated
into financial outcomes
Measuring Performance with
a
Balanced Scorecard
 A performance measurement system that
identifies and reports on performance measures
for each key strategic area of the business
 The Kaplan and Norton model translates an
organisation’s mission and strategies into
objectives and performance measures
 Four perspectives
Balanced Scorecard
 Financial perspective
 Reflectsperspective of the
shareholder
 Summarises the financial
outcomes of decision and
actions
 Measures include various cost
and product measures, return
on investment, cash flow
measures, shareholder value
measures
Measuring Performance with a
Balanced Scorecard

 Customer perspective
 Measures of the company’s success in
achieving customer value
 Outcome (lag) measures include
customer profitability, market share,
number of new customers
 Lead indicators include on-time delivery,
number of defects
Measuring Performance with
a
Balanced Scorecard
 Internal business processes
 Objectives relate to specific processes
that contribute to achieving customer and
financial objectives
 Processes critical to delivering products
to customers and achieving financial
strategies
 Product design, operations, marketing,
sales, customer service processes
 Measures of cost, product quality, time-based
measures, new product development
 Balanced Scorecard
 Learning and growth
 Focuses on the capabilities of the
organisation to achieve superior
internal processes that create both
customer and shareholder value
 To deliver long-term growth
and improvement
 Measures focus on employee capabilities,
information systems capabilities and
organisational climate
 Employee satisfaction, training,
skills, employee suggestions
Balanced Scorecard
Balanced Scorecard
 Lag indicators
 Monitor progress towards the organisation's
objectives
 Difficult to monitor directly
 Summary financial measures, market
share, customer satisfaction
 Lead indicators
 Measures that driver the outcomes and
provide information that is actionable and
management
 Relate to the processes and activities of
the business
Balanced Scorecard
 Measures in the balanced scorecard
provide balance between
 Short-term and long-term objectives
 Financial and customer measures, and
measures of business processes and learning
and growth
 Outcome measures and drivers of those outcomes
 Objective and easily quantified measures
and subjective performance measures
Linking Non-Financial Measures to
Financial Performance
 Improvements in non-financial measures will
not result in improved profits if:
 Management has selected the wrong critical
success factors
 Management fails to utilise freed up resources
 The performance measurement system
is incorrectly designed
Linking Non-Financial Measures to
Financial Performance

 Du Pont chart
 Identifies the linkages between key
performance drivers, key performance
indicators and financial
performance measures
Benchmarking

 A process of comparing the products,

functions and activities in an organisation
against external businesses
 Identify areas for improvement
 Implement a program of continuous
improvement
Steps in the Benchmarking Process

 Identify the functions/activities to be

benchmarked, and performance
measures
 Select benchmarking partners
 Data collection and analysis
 Establish performance goals
 Implement plans
Forms of
Benchmarking
 Internal benchmarking
 Benchmarking operations that are internal
to the larger business group
 Competitive benchmarking
 Benchmarking with other companies within
the same industry
 Identify the strengths and weaknesses
of competitors
 Industry benchmarking
 Comparing against companies that have
similar interests and technologies within
an industry
 Performance measures and practices may be
directly comparable
 Best-in class or process benchmarking
 Benchmarking against the best practices
that occur in any industry
Benchmarking Against
Competitor
Cost Structures
 Costs can be inferred by using
publicly available information, such a
sales volume, market share , product
mix
 Industry-sponsored databases
 Stockbroking firms
 Specialist benchmarking consulting firms
Inadequate Performance
Measurement System
 Performance is acceptable on all
dimensions, except profit
 Customers do not buy, even when prices
are competitive
 No one notices when performance reports
are not supplied
Measurement System
 Significant time is spent debating the
meanings of measures
 Measures have not changed for some time
 The business strategy has changed
An Effective
Performance
Measurement System
 Linked to strategy and goals of
the organisation
 Simple
 Recognise controllability
 Emphasises the positive
 Timely
Measurement System
 Includes benchmarking
 Embraces participation and empowerment
 Includes only a few performance measures
 Links to rewards
Designing Measures for
Continuous Improvement
 Continuous improvement can be built
into performance measurement systems
by
 Selecting relevant performance targets
 Defining and re-defining the measure
 Making the performance target more
challenging
Behavioural Implications of Changing
Performance Measures
 Resistance to change
 Individuals consider targets unfair
or unachievable
 Individuals’ pay is involved

 Changes are most likely to succeed if

 Supported across the entire organisation
 Not seen as an ‘add on’ to an
inadequate performance
measurement system