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12.E: Balanced Scorecard and other Performance Measures (Exercises)

  • Page ID
    12146
  • Multiple Choice

    1. Components of the organization that are demotivating for purposes of performance management are known as ________.
      1. business goals
      2. strategic plans
      3. uncontrollable factors
      4. incentives
    Answer:

    c

    1. When managerial accountants design an evaluation system that is based on criteria for which a manager is responsible, and it is structured to encourage managers to make decisions that will meet the goals of the company as well as their own personal job goals, the framework used is ________.
      1. a controllable factors framework
      2. an uncontrollable factors framework
      3. a strategic plan framework
      4. a responsibility accounting framework
    2. Goal congruence in well-designed performance measurement systems best explains a congruence between ________.
      1. employees and the company
      2. strategic plans and the future
      3. decisions and outcomes
      4. feedback and measurement
    Answer:

    a

    1. Responsibility accounting holds managers responsible for ________.
      1. all costs charged to their subunit
      2. all costs charged to their subunit plus a share of company-wide fixed costs
      3. only the costs that they can control
      4. only the costs that they have personally approved
    2. Performance measures are only useful if ________.
      1. there are both controllable and uncontrollable factors to evaluate managers
      2. manager reward systems are designed by the chief financial officer prior to implementation
      3. all of the measures used are accounting numbers
      4. there is a baseline against which to compare the measured results
    Answer:

    a

    1. Which of the following is not a characteristic of a good performance measurement system?
      1. timely
      2. consistent
      3. based on activities over which managers have no control or influence
      4. uses both long- and short-term performances and standards
    2. A good performance measurement system will align the goals of management with ________.
      1. the goals of the city manager and the mayoral staff
      2. the goals of the corporation, and both parties will benefit
      3. the priorities of the stockholders as listed at the annual meeting
      4. the investment department’s response to the annual audit
    Answer:

    b

    1. What should an organization do if performance measures change?
      1. Make sure that the manager being evaluated is aware of the measurement change, as this may affect his or her decision-making.
      2. Make sure that the manager benefits without the corporation also benefiting.
      3. Make sure that there are significant overriding opportunities for each manager, if the manager is unaware of the change.
      4. Obtain customer surveys on the change before communicating the change to the manager.
    2. A good performance measurement system will include which of the following?
      1. short-term goals
      2. long-term goals
      3. short-term and long-term goals
      4. no goals at all
    Answer:

    c

    1. Without proper performance measures, goal congruence is almost impossible to achieve and will likely lead to ________.
      1. more stable targets
      2. decreased defects
      3. lost profits
      4. employees satisfied with the status quo
    2. Dixon Construction Materials has collected this information:
    Cost of the machine $2,000,000. Income to be generated by the machine 1,000,000. Income without the new machine 7,000,000. Beginning of the year capital assets (without the machine) 12,000,000. End of the year capital assets (without the machine) 12,400,000. Tax rate 30 percent. Minimum required rate of return 15 percent. Weighted average cost of capital 9 percent. Sales revenue without the machine 18,000,000. Sales revenue with the machine 19,400,000.

    Based on this information, what is the EVA for the project?

    1. \(\$100,000\)
    2. \(\$10,000\)
    3. \(\$450,000\)
    4. \(\$110,000\)
    Answer:

    b

    1. The cost of equity is ________.
      1. the interest associated with debt
      2. the rate of return required by investors to incentivize them to invest in a company
      3. the weighted average cost of capital
      4. equal to the amount of asset turnover
    2. Which of the following measures the profitability of a division relative to the size of its investment in capital assets?
      1. residual income (RI)
      2. sales margin
      3. return on investment (ROI)
      4. economic value added (EVA)
    Answer:

    c

    1. The capital structure of Ridley Enterprises is: Debt \(40\%\), Equity \(60\%\). The cost of debt is \(13\%\), and the cost of equity is \(16.5\%\). What is the weighted average cost of capital for Ridley Enterprises?
      1. \(14.4\%\)
      2. \(15.1\%\)
      3. \(16.2\%\)
      4. \(13.8\%\)
    2. Calculate the ROI for Gardner Chemical given the following information:
    Income $6,000. Revenue $24,000. Average assets $10,000.
    1. \(25\%\)
    2. \(24\%\)
    3. \(60\%\)
    4. \(40\%\)
    Answer:

    c

    1. Which of the following statements is false?
      1. The four dimensions of performance that are considered in a balanced scorecard are financial, customer, internal process, and learning and growth
      2. A balanced scorecard will include qualitative and quantitative measures.
      3. Stakeholders cannot include stockholders.
      4. A balanced scorecard is the compatibility between personal goals and the goals of the organization.
    2. The metrics based on nonfinancial information are known as ________.
      1. quantitative factors
      2. qualitative factors
      3. stakeholders
      4. stockholders
    Answer:

    b

    1. The metrics based on financial numbers produced by the accounting system are ________.
      1. quantitative factors
      2. qualitative factors
      3. stakeholders
      4. stockholders
    2. People affected by decisions made by a company, including investors, creditors, employees, managers, regulators, customers, suppliers, and laypeople, are known as ________.
      1. quantitative factors
      2. qualitative factors
      3. stakeholders
      4. stockholders
    Answer:

    c

    1. The owners of company stock are ________.
      1. quantitative factors
      2. qualitative factors
      3. stakeholders
      4. stockholders

    Questions

    1. Why might a manager focused solely on accounting numbers miss opportunities for future benefits?
    Answer:

    Answers will vary. Responses may focus on the short-term view versus long-term views and include examples such as: managers focusing on only profitability might avoid spending the money for long-term assets to fuel the future; managers may miss other opportunities like funding the expense for creation of a customer database, if profitability is the focus in the short term; managers may avoid research and development costs that would be used to create the next generation of their product to achieve profitability in the short term.

    1. Is there a way to prevent managers from focusing on accounting measures as performance measures?
    2. Should an organization focus on controllable or uncontrollable factors to effectively implement a successful performance measurement system? Explain your answer.
    Answer:

    Controllable. Responses will vary based on students’ prior experiences.

    1. What are the components of a strategic plan? Find one of these components for the company you work for and share (if you are not currently employed, use the college you attend).
    2. What are the four types of centers and their corresponding responsibilities?
    Answer:

    Revenue center—the manager has control over the revenues that are generated for the corporation but not over the costs of the organization. Cost center—the manager has control over costs but not over revenues. Profit center—the manager has control over both revenues and costs. Investment center— the manager has control over revenues, costs, and capital assets.

    1. What would be wrong with using two points of data in a performance measurement system to tell a company whether the amount of variation is normal or abnormal?
    2. Compare and contrast short- and long-term goals for a company. Give an example of each, and explain why they are important for performance measurement systems.
    Answer:

    Short-term goals include goals such as reducing costs of production by a certain percentage for the current year or increasing year-over-year sales by a certain percentage. Long-term goals may include goals such as expanding into new territories or adding new products over the next five years. A good performance measurement system will include both short- and long-term measures in order to motivate managers to make decisions that will fulfill both the corporations and their own short- and long-term goals.

    1. Can a short-term goal also be a long-term goal? Where is the division, and why is it important for an employee to understand whether the goal is short or long term?
    2. What does goal congruence mean? Provide an example with your explanation.
    Answer:

    Answers will vary and should lead to discussions. Goal congruence means aligning the goals of the business with the personal goals of the manager. For example, when a company has a goal to significantly improve sales of a certain product, the regional sales manager will have an increased sales goal as a result.

    1. What are the six characteristics of a good performance measurement system?
    2. What is EVA and why is it superior to other performance measures?
    Answer:

    EVA is residual income adjusted for accounting distortions. Like residual income, it encourages managers to make appropriate levels of investment. In addition, it treats items such as research and development costs as having a long-term benefit to the company.

    1. What are the drawbacks to ROI? Give examples of each.
    2. Describe. the history and purpose of the balanced scorecard.
    Answer:

    Answers may vary but should include some of these ideas. The idea for using both quantitative and qualitative measures in the form of a balanced scorecard was first suggested by Art Schneiderman of Analog Devices in 1987 and was later added to by Kaplan and Norton. The resulting design incorporated various performance measures grouped under four categories: financial perspective, internal operations perspective, customer perspective, and learning and growth. These areas were chosen because the success of a company is dependent on how it performs financially, which is directly related to the company’s internal operations, how the customer perceives and interacts with the company, and the direction in which the company is headed.

    1. What are the characteristics of successful balanced scorecards?

    Exercise Set A

    1. For the following situations, identify whether the description is probably a centralized or decentralized organization.
      1. Seaside Furniture, a small builder of side tables managed solely by its sole proprietor
      2. Harbor Marketing, which wants Advertising Team Leaders to be able to respond quickly to needs of potential clients so Team Leaders have the authority to make decisions about advertising and pricing
      3. Couture’s Creations, with a single owner who manages the production, accounting, engineering, sales, and other administrative functions
      4. British Navy
      5. McDonalds franchise #3101 in Canton, Ohio
      6. United States Army
    2. For the following descriptions state whether the cost is controllable or uncontrollable by responsibility center managers.
      1. property tax of an existing manufacturing facility
      2. research and development of a product
      3. advertising of a product
      4. insurance cost of the existing manufacturing facility
      5. design of a product
    3. Identify the type of responsibility center (revenue center, cost center, profit center, or investment center) for each of the following situations.
      1. the accounting department for Tubelite Inc.
      2. the Best Buy in Traverse City, Michigan
      3. the reservation department of Allegiant airlines
      4. the sales department of Four Winns
      5. the Kohl’s store in Mount Pleasant, Michigan
      6. The Hershey Company
      7. Procter and Gamble
      8. the shoe department in the Kohl’s store in Mount Pleasant, Michigan
    4. Sara has just taken a job as the middle school assistant principal for an area school district. Prior to this, she was a teacher. She has received the following performance measurements for her first administrative job. Her first order of business is to determine if these performance measurements are short-term goals or long-term goals based on her individual situation. She has completed her administrative degree but has not yet worked as an administrator. Identify each of the following goals as short term or long term.
      1. Conduct teacher walk-throughs/observations/evaluations for teachers of grades \(6\) and \(7\).
      2. Assist the district’s mission in seeking to educate all youth in the school district.
      3. Train to become a building instructional leader. Act as building administrator in the absence of the principal.
      4. Attend meetings with building principals and the administrative team when called to do so.
      5. Engage all students in a meaningful way, and support teachers and staff in providing rigor and relevance. Success of school-wide discipline and attendance policies and enforcement depends on a combination of creativity and sound pedagogy while adhering to district, state, and federal law, guidelines, and regulations.
      6. Facilitate and supervise all federal- and state-mandated drills (fire, lockdowns, tornado, others).
      7. Dress professionally.
      8. Assist the building principal in all job duties and responsibilities.
    5. During the current year, Sokowski Manufacturing earned income of \(\$350,000\) from total sales of \(\$5,500,000\) and average capital assets of \(\$12,000,000\). What is the sales margin?
    6. During the current year, Sokowski Manufacturing earned income of \(\$350,000\) from total sales of \(\$5,500,000\) and average capital assets of \(\$12,000,000\).
      1. Based on this information, calculate asset turnover.
      2. Using the sales margin from the previous exercise, what is the total ROI for the company during the current year?
    7. Assume Skyler Industries has debt of \(\$4,500,000\) with a cost of capital of \(7.5\%\) and equity of \(\$5,500,000\) with a cost of capital of \(10.5\%\). What is Skyler’s weighted average cost of capital?
    8. Why do managers want a high ROI, and how would they strive to increase their ROI?
    9. Classify each of the following performance measures into the balanced scorecard perspective to which it relates: financial perspective, internal operations perspective, learning and growth perspective, or customer perspective.
      1. Number of improved products
      2. Time from packaging to delivery or display
      3. Production costs
      4. Number of customer suggestions
      5. Sales mix revenues
      6. Number of repeat customers

    Exercise Set B

    1. For the following situations identify whether the description is a centralized or decentralized organization.
      1. the United States Navy
      2. Farah’s Domino’s franchise store
      3. Domino’s Pizza
      4. Middie’s Furniture, which is divided into separate operating units, such as living room, kitchen, flooring
      5. the local community college, which has a single payroll department, a single administrative headquarters, and a single human resources department since it “flattened” its organization structure
      6. Conner Corporation, which promotes managers from within the organization whenever possible and which has formal training programs for lower-level managers
    2. For the following descriptions, state whether the cost is controllable or uncontrollable by responsibility center managers.
      1. advertising for a merchandiser
      2. corporate income taxes
      3. office supplies for a merchandiser
      4. donations to the Salvation Army
      5. insurance for delivery vehicles
    3. Identify the type of responsibility center (revenue center, cost center, profit center, or investment center) for each of the following situations.
      1. the legal department for Avon Manufacturing
      2. the Macy’s store in Mansfield, Ohio
      3. the food and beverage division of the Best Western
      4. the marketing department of the Hershey Company
      5. the Walmart #5030 on Central Avenue in Toledo, Ohio
      6. Apple’s Braeburn Capital Inc., where most of Apple’s billions of dollars are invested
      7. Zappo’s department store
      8. the men’s clothing department in the Walmart #5030 in Toledo, Ohio
    4. Padma completed her doctoral degree and has taken a position as an assistant professor at a local university. She was given the following performance measures for her new position. Identify whether these goals are long or short term.
      1. Interact in a fair and impartial way with students.
      2. Promote and access student academic achievement.
      3. Counsel students within the norms of society and the regulations of the college.
      4. Motivate students.
      5. Effectively plan and organize lectures and labs in accordance with the college course outlines.
      6. Report class attendance in accordance with the college policy and procedure.
      7. Serve on academic committees as assigned.
      8. Make progress toward tenure necessary at her university.
    5. During the current year, Plainfield Manufacturing earned income of \(\$845,000\) from total sales of \(\$9,350,000\) and average capital assets of \(\$13,500,000\). What is the sales margin?
    6. During the current year, Plainfield Manufacturing earned income of \(\$845,000\) from total sales of \(\$9,350,000\) and average capital assets of \(\$13,500,000\). Using the sales margin from the previous exercise, what is the total ROI for the company during the current year?
    7. Assume Plainfield Manufacturing has debt of \(\$6,500,000\) with a cost of capital of \(9.5\%\) and equity of \(\$4,500,000\) with a cost of capital of \(11.5\%\). What is Tyler’s weighted average cost of capital?
    8. Though a high ROI is desired, what are some reasons that might lead to a low or decreased ROI?
    9. Classify each of the following performance measures into the balanced scorecard perspective to which it relates: financial perspective, internal operations perspective, learning and growth perspective, or customer perspective.
      1. Employee satisfaction surveys
      2. Units of waste per production process, uniformity of products and inventory control
      3. Number of energy-efficient bulbs replaced
      4. Management training course certificates awarded
      5. Divisional profit
      6. Number of customer referrals

    Problem Set A

    1. Match each of the following with its appropriate term.
    a. Controllable factors i. This is the part of an organization in which management is evaluated based on the ability to contain costs; the manager primarily has control only over costs.
    b. Cost center ii. This means to align the goals of the business with the personal goals of the manager.
    c. Metric iii. These components of the organization are components for which the manager is responsible and can control.
    d. Goal congruence iv. This is the means to measure something such as a goal or target.
    e. Investment center v. This is a system that evaluates management in a way that will link the goals of the corporation with those of the manager.
    f. Performance measurement system vi. For this center, management is responsible for revenues, costs, and assets and is evaluated based on these three components.
    1. Florentino Allers is the production manager of Electronics Manufacturer. Due to limited capacity, the company can only produce one of two possible products:
      • An industrial motherboard with a \(75\%\) probability of making a profit of \(\$1\) million and a \(25\%\) probability of making a profit of \(\$150,000\)
      • A regular motherboard with a \(100\%\) chance of making a profit of \(\$710,000\)

    Florentino will get a \(20\%\) bonus from his department. Florentino has the responsibility to choose between the two products and is more of a risk-taker, more so than most of the top management at Electronics Manufacturer.

    1. Which option is Florentino more likely to choose and why?
    2. Which option would the company be more likely to choose and why?
    3. What changes should the company make to Florentino’s compensation to avoid unnecessary risks?
    1. Macon Mills is a division of Bolin Products, Inc. During the most recent year, Macon had a net income of \(\$40\) million. Included in the income was interest expense of \(\$2,800,000\). The company’s tax rate was \(40\%\). Total assets were \(\$470\) million, current liabilities were \(\$104,000,000\), and \(\$72,000,000\) of the current liabilities are noninterest bearing. What are the invested capital and ROI for Macon?
    2. Jefferson Memorial Hospital is an investment center as a division of Hospitals United. During the past year, Jefferson reported an after-tax income of \(\$7\) million. Total interest expense was \(\$3,200,000\), and the hospital tax rate was \(30\%\). Total assets totaled \(\$70\) million, and non-interest-bearing current liabilities were \(\$22,800,000\). The required rate of return established by Jefferson is equal to \(18\%\) of invested capital. What is the residual income of Jefferson Memorial Hospital?
    3. Crawford’s Books and Things has a traditional bookstore housed downtown Charlotte. The store has been there forty years, and many customers love the fact that they can hold the books in their hands and browse the offerings. Crawford’s just started an online book division for people who like to order books online. EVA for the Charlotte store is about \(\$13\) million, while EVA for the online division shows a value of \(-\$2.2\) million.
      1. Explain why it might be better to evaluate the online division using a balanced scorecard.
      2. Suggest two measures for the customer dimension that would be appropriate for the online division and two measures for the internal processes dimension of the balanced scorecard that would be appropriate for the online division.
    4. Coral Creations has strategic plans that call for rapid growth, a limited number of units for each design to enhance exclusivity, designs for the perfect fit, on-time delivery to customers, retention of highly trained employees with innovative skills, and excellent inventory control.
      1. Suggest one performance measure for each dimension of the balanced scorecard for Coral Creations.
      2. Take one of your measures and discuss the linkage it has to multiple strategies in Coral’s plan.

    Problem Set B

    1. Match each of the following with its appropriate term:
    a. Performance measures i. The decisions and outcomes over which a manager does not have control
    b. Profit center ii. That part of an organization in which management is evaluated based on the ability to generate revenues; the manager primarily has control only over revenues
    c. Responsibility accounting iii. The part of an organization in which management is evaluated based on the ability to generate profits because the manager has control over both revenues and costs
    d. Revenue center iv. A broad vision of how a company will be in the future
    e. Strategic plan v. A system that collects and reports data for which a manager has responsibility
    f. Uncontrollable factors vi. The metrics used to evaluate a specific attribute of a manager’s role
    1. Oleg Markov is the production manager of NASA Solvents. Due to limited capacity, the company can only produce one of two possible products:
      • an industrial concentrated solvent with a \(15\%\) probability of making a profit of \(\$1\) million and an \(85\%\) probability of making a profit of \(\$200,000\)
      • a household diluted solvent with a \(100\%\) chance of making a profit of \(\$310,000\)

    Oleg will get a \(20\%\) bonus from his department. Oleg has the responsibility to choose between the two products and is more risk averse than most of the top management at NASA Solvents.

    1. Which option is Oleg more likely to choose and why?
    2. Which option would the company be more likely to choose and why?
    3. What changes should the company make to Oleg’s compensation to encourage managers to take appropriate risks
    1. Evaluate the two departments for Moxie Products.
    For Department 1 and Department 2, respectively: Total assets $138,000,000, $46,000,000; Noninterest-bearing liabilities $9,000,000, $4,600,000; Net operating income after taxes $24,000,000, $11,800,000. Required rate of return 12 percent, 11 percent.

    Compare the year’s performance of the two departments in terms of ROI and RI. Which department has created the most wealth for Moxie shareholders in the past year?

    1. Banyan Industries has two divisions, a tax rate of \(30\%\), and a minimum rate of return of \(20\%\). Division A has a weighted average cost of capital of \(9.5\%\) and is looking at a new project that will generate a profit of \(\$1,200,000\) from a machine that costs \(\$4,000,000\). Division B has a weighted average cost of capital of \(9.5\%\) and is looking at a new project that will generate a profit of \(\$1,350,000\) from a machine that costs \(\$5,000,000\).
      1. Calculate the EVA for each of Banyan’s divisions.
      2. Calculate the RI for each of Banyan’s division.
      3. If Banyan uses EVA to evaluate the projects, which division has the better project and by how much?
      4. If Banyan uses RI, which division has the better project and by how much?
      5. What are some of the reasons for the similarity or difference that you found in the use of EVA versus RI?
    2. Forty years ago, Vinfen was founded as a nonprofit company by psychiatrists and social workers at the Massachusetts Mental Health Center and Harvard Medical School to help people with psychiatric conditions transition to group homes for community living. Vinfen’s strategy map for fiscal 2006 shows how it is building from its mission to accelerating organizational learning and elevating agency performance through its balanced scorecard perspectives to bring value to the customer supported by operational excellence. 1 The following are elements in the balanced scorecard and the four key perspectives. Match the elements with the correct perspectives.
    a. Improve organizational trust and teamwork i. Financial perspective
    b. Strengthen government engagement ii. Learning and growth perspective
    c. Deliver quality services to special populations iii. Internal perspective
    d. Achieve financial stability iv. Customer perspective
    e. Increase public awareness and visibility
    f. Contribute to human services research and innovation
    g. Improve efficiency and effectiveness of contracting process
    h. Build professional competencies that support strategy
    i. Develop and implement an integrated information system
    j. Deliver services consistent in value and quality

    Thought Provokers

    1. What combination of quantitative factors and qualitative factors would you like your potential employer to use as a performance management system? Explain your answer.
    2. Josh O’Shea is the manager of the Cardiovascular/Respiratory Laboratory. This department is responsible for measuring blood gases, performing respiratory treatments, and distributing automated IV equipment. As a manager, Josh hires and trains personnel, prepares his departmental budget, and maintains the personnel schedule. Josh recommends equipment needs for the department, but he may be overruled in the acquisition process. Josh and his departmental personnel are paid for the professional credentials they hold, earn, and maintain and are reimbursed by the hospital for any approved training or professional credentials they acquire. Josh must use the equipment, reagents, and supplies provided to him from central purchasing. Based on this information, what incentives do you see as those that will motivate Josh as part of the hospital team, and why? Which incentives will be demotivating, and why?
    3. Kanye Achebe just became the operations manager of Weston Transportation. Weston transports large crates for online companies and transports containers overseas. Kanye would like to evaluate each divisional manager on a basis similar to segmental reporting required by generally accepted accounting principles (GAAP) financial statements contained in annual reports. These data include a presentation of net sales, operating profit and loss before and after taxes, total identifiable assets, and depreciation for segment reported. Kanye thinks that evaluating business division managers by the same criteria as the total company is appropriate.
      1. Explain why you think the chief financial officer (CFO) disagrees and tells Kanye that publicly reporting information might demotivate managers.
      2. For better evaluation of the managers, what type of information should Kanye propose that the CFO might accept?
    4. Which of the performance measures—ROI, RI, or EVA—is best, and why? Explain your answer thoroughly.

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