A Performance Measurement Case for Managerial Accounting

■ The Journal of Business Cases and Applications ■

L. Melissa Walters, The University of Tampa Teresa Pergola, The University of Tampa

ABSTRACT

This instructional case is designed to develop students’ understanding of strategic performance measurement concepts. Case requirements ask students to interpret operating results, evaluate a current performance measurement system, and then construct a balanced scorecard for the company described in the fictitious case narrative. The case is appropriate for MBA and upper- level undergraduate accounting students.

LEARNING OBJECTIVES THE MASQUERADE MASQUE COMPANY1 The specific learning objectives for the case are to develop students’ ability to: Case Abstract This case is designed to help you develop a 1. Analyze standard cost variance results working understanding of strategic and deduce likely causes. performance measurement and the use of the 2. Analyze changes in non-financial balanced scorecard framework for operating measures and deduce likely managerial purposes. The case narrative causes. describes a business scenario and a problematic performance measurement 3. Understand the importance of aligning system. The case requirements ask you to performance measurement with apply performance measurement concepts to organizational vision and strategy. interpret production results, evaluate the 4. Apply balanced scorecard concepts to company’s current performance evaluate an existing performance measurement system, discuss the measurement system. applicability of the balance scorecard framework for improving the current 5. Understand the potential benefits of the performance measurement system, construct balanced scorecard approach to a balanced scorecard for the company, and performance management. then effectively communicate the results of 6. Articulate an organization’s business your analysis, evaluation, and vision and strategy and construct a recommendations in the form of a balanced scorecard based thereon. professional written memo.

7. Effectively communicate the results of an analysis in professional written form.

1 Alternative case materials based on an alternative case scenario are presented in Appendix A.

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Case Narrative aspect of Masquerade’s business. The Masquerade Masque Company Masquerade’s masks are known for their produces high quality costumes and superior theatrical quality and attention to theatrical props for theatrical and movie detail as well as their reasonable price. productions. Masquerade started out as the hobby of an eccentric artist, Erasmus Raven. The masks are made from a high quality Erasmus’ peculiar hobby budded into a rubber latex compound that is sprayed onto small family-owned company that made and a plaster cast by high precision machinery. sold hand-detailed Halloween and Mardi The company maintains a minimal inventory Gras masks and faces. Masquerade, set apart policy and as such, raw materials are by a strong positive rapport with its generally purchased as needed to fill customers, a long-standing reputation for standard and custom orders and finished quality and service, and the company’s orders/products are normally shipped out as unique product offering, soon found itself a soon as they are completed. Original plaster very small company in an intensely cast templates are sculpted by hand by competitive holiday novelty market skilled employees for detail and made into characterized by high volume, low cost molds; molds are then inspected for quality manufacturers. Over time, in response such before they are used to make production competitive pressures and customer needs, casts. Production casts are reproduced as the company has grown and diversified its needed using the molds. Approximately 5 product offering; and recently, the company masks can be made with each production has expanded into the custom (to-order) cast; if too many masks are made with any production of professional props, scene one production cast, the detail is lost due to creation, costumes, masks, and special the softness of the casting material effects to serve its small but diverse (necessary to create lifelike skin texture and customer base. Additionally, the company detail). Once the masks are removed from has begun to incorporate computer the production cast, they are meticulously technology into its design creation function detailed by individual employees with paint, and is now considering expansion into the feathers, scales, or other materials. Finally, arena of computer animation and visual each order is inspected for quality before it effects. is shipped to the customer. Many of Masquerade’s employees have Erasmus has become concerned with undergraduate degrees in art (painting or maintaining control over operations central sculpting); and the company regularly sends to the company’s competitiveness and well- its employees to training workshops so that being; recently he has expressed a desire to they may improve their skills. The company improve performance measurement within relies heavily on its employee artists to the mask division. The mask division maintain its rapport with customers and manufactures latex masks and faces for quality image and wholeheartedly decorative use, holiday costumes (such as encourages its employees to make Halloween and Mardi Gras), and suggestions for redesigning existing professional theatrical props (for theatrical products, take creative liberties while and movie productions); holiday masks and working on custom projects, and propose festival faces were among the first product imaginative new products. offerings of the company and remain a core

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■ The Journal of Business Cases and Applications ■

The production manager for the mask performance within the mask division. The division, Erasmus’ daughter Lenore Raven, consulting group has argued that such has historically maintained a set of internal measures are more objective, will motivate operating measures that she uses as cost efficient behavior, and will accurately performance indicators. Ms. Raven has measure the financial impact of operating argued that these non-financial operating performance. Ms. Raven has expressed measures serve as good indicators of reservations about the new standard cost production efficiency and product quality variance analysis system and is concerned and moreover, since they are dynamic, they that undue emphasis on variance results will support the company’s focus on continuous result in a lack of attention to key operating improvement and innovation. Ms. Raven concerns such as inventory levels, product has conceded however, that these operating quality, and customer satisfaction. Mr. measures, while serving as good indicators Bedloe, the company’s chief accountant, has of internal process activities, do not provide likewise expressed his doubts and has the firm with an indication of the financial argued that such standards may encourage impact of these operations. On the advice of behavior inconsistent with Masquerade’s an outside consulting firm where Erasmus’ core values ultimately resulting in negative nephew works, the mask division recently consequences for the company. The started using traditional standard cost performance results for the most recent variance analysis to evaluate operating period appear below.

Results of Production Manager’s Operations Analysis Operating Measure Change Operating Measure Change Production Cycle Time2 Increase Raw Materials Store Time Increase Delivery Cycle Time3 Increase Finished Goods Store Time Increase Inspection Time Decrease Raw Material Inv Levels Increase Rework Time4 Increase Finished Goods Inv Levels Increase Scheduled Downtime Decrease Customer Orders (Sales) Decrease Unscheduled Downtime Increase Customer Complaints Increase % Defective Products Increase Customer Returns Increase % Scrap5 Decrease Employee Absenteeism Increase Average Unit Cost Increase Employee Turnover Increase Raw Materials Processed Increase Employee Attitude Survey N/A6

2 Production cycle time is measured as the amount of time required to turn raw materials into completed products from the time raw materials are received to the time goods are transferred to finished goods inventory. Since defective products are reworked before being transferred to finished goods, Masquerade includes rework time in cycle time. 3 Delivery cycle time is measured as the amount of time required to get the finished product to the customer (from customer order receipt to the time the goods are shipped); it includes wait time between order receipt and the start of production as well as production cycle time. 4 Rework time is measured as the amount of time necessary to correct for defects found in products by inspectors. The consulting company accounted for rework time separately from original work time; as such, rework time was not incorporated into the direct labor time variance. 5 % Scrap refers to discards and wasted materials measured as a percentage of total raw materials processed.

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■ The Journal of Business Cases and Applications ■

Results of Consulting Firm’s Variance Analysis

Resource Standard Stated As Variance Materials Rubber Materials Price Variance Price per ounce Favorable Rubber Materials Usage Variance Ounces per mask Favorable

Resource Detail Materials Price Variance Price per package Favorable Detail Materials Usage Variance Usage per mask Favorable

Labor Direct Labor Rate Variance Rate per detail labor hour -0- Direct Labor Time Variance Detailing time spent per mask Favorable

Indirect Materials Plaster Cast Price Variance Price per pound of plaster Favorable Plaster Cast Usage Variance Uses per 5 masks Favorable

Indirect Inspection Labor Inspection Spending Rate per hour -0- Inspection Labor Efficient Time per batch Favorable

Machine Maintenance Maintenance Spending Cost per maintenance hour Favorable Maintenance Efficiency Maintenance hours per run Favorable

Fixed Overhead FOH Spending Variance7 Cost per period -0-

6 The employee attitude survey was discontinued on the advice of the consulting firm; the consulting firms questioned the usefulness of the survey as it did not provide objective, quantifiable information. The employee attitude survey was used as a means of soliciting employee attitudes, comments, feedback, and suggestions regarding process improvements and new product designs. 7 Fixed overhead consists primarily of factory depreciation and insurance.

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■ The Journal of Business Cases and Applications ■

The consulting firm was quite pleased at the performance measurement system. Are results of the variance analysis. However, these concerns valid? Discuss the Mr. Bedloe and Ms. Raven were disturbed accountant’s and production manager’s about the results of the operating measures; concerns in turn and then summarize and Mr. Raven is particularly concerned your own assessment of the company’s with the operating measures having to do current performance management with employee and customer dimensions. system. Mr. Bedloe has expressed the opinion that the standards used as a basis for the variance 4. Categorize each of the company’s analysis are not entirely consistent with the current performance measures (variances organization’s core values; he has been and operating measures) into the four researching the balanced scorecard basic balanced scorecard perspectives; framework and has suggested that the note that some performance measures strategic performance management concepts may fall into more than one perspective. underlying the balanced scorecard might Next, categorize each of the company’s prove helpful. current performance measures as lead or lag, financial or non-financial, internal Case Requirements or external, and objective or subjective.

1. Deduce likely cause(s) for the materials, Based on your categorizations, respond labor, and overhead variances. Note that to the following: (a) Do the current interpretations of individual variances performance measures appear to be will most likely be interrelated. derived from the company’s vision and Summarize your interpretations. In your strategy? Explain. (b) Do you believe opinion, should the consulting firm be that all four balanced scorecard pleased with the results of the variance perspectives are adequately represented analysis? That is, are the favorable in the company’s current performance variances really “favorable”? Explain. measurement? Discuss. (c) Is the company’s current performance

2. Deduce likely cause(s) for the changes in measurement system balanced? Explain. the operating measures. Note that (d) Do you believe that the company interpretations of individual operating would benefit from the implementation measure will most likely be interrelated. of a balanced scorecard framework? Summarize your interpretations. In your Explain. opinion, should the accountant, owner, and production manager be disturbed 5. Design a balanced scorecard for the about the results of the operating company: (a) First, succinctly articulate measures? Explain. Why do you suppose Masquerade Masque Company’s vision the employee and customer dimensions and strategy. That is, describe what you are of particular concern to the owner? believe to be Masquerade Masque Explain. Company’s key values and/or strategic objectives and explain why each 3. In the narrative above, the company’s value/objective would be considered accountant and the production manager appropriate for the company. (b) Second, have both expressed reservations about consider the four balanced scorecard the company’s new standard cost perspectives and explain how each

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■ The Journal of Business Cases and Applications ■

perspective relates to or supports the company’s vision and strategy. (c) Kaplan, R. and Norton, D. (1996). Using the Third, translate the company’s overall balanced scorecard as a strategic vision and strategy into specific management system. Harvard operational objectives (i.e., objectives Business Review, January/February, that can be measured) for each of the 75-85. balanced scorecard perspectives. (d) Finally, for each operational objective Kaplan, R. and Norton, D. (1997). Why does you constructed, list two or more a business need a balanced performance measures that you believe scorecard? Journal of Cost will support the objective (you may management, May/June, 5-10. choose measures already being used by Masquerade or alternative measures you Lawson, R., Stratton, W. and Hatch, T. select). Justify the relevance of each (2006). Scorecarding goes global. performance measure selected. (e) Strategic Finance, March, 36-41. Develop initiatives for the operational objectives you constructed for the customer perspective only (i.e., describe APPENDIX A: ALTERNATIVE CASE how each of your stated operational MATERIALS objectives for this perspective might be accomplished). Case Materials –The Comfy Company Case Abstract 6. In a professional memo (use proper This case is designed to help you develop a headings and formatting) directed to the working understanding of strategic company owner, (a) Succinctly performance measurement and the use of the summarize your assessment of the balanced scorecard framework for effectiveness and suitability of the managerial purposes. The case narrative company’s current performance describes a business scenario and a management system, and (b) Outline problematic performance measurement your recommendations for improving the system. The case requirements ask you to performance measurement system from apply performance measurement concepts to the perspective of a balanced scorecard interpret production results, evaluate the framework. Be Explicit. company’s current performance measurement system, discuss the REFERENCES applicability of the balance scorecard framework for improving the current Gumbus, A. and Johnson, S. D. (2003). The performance measurement system, construct balanced scorecard at Futura Industries. a balanced scorecard for the company, and Strategic Finance, July, 1-5. then effectively communicate the results of your analysis, evaluation, and Kaplan, R. and Norton, D. (1992). The recommendations in the form of a balanced scorecard – measures that professional written memo. drive performance. Harvard Business Review, January/February, 71-79.

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hCase Narrative The Comfy Company makes high quality, All rockers and gliders are constructed, hand-made, solid wood furniture. The assembled, detailed, and finished by hand Comfy Company started out as the based on detailed specifications and woodworking hobby of eccentric real estate customer preferences. The furniture is made developer, Charles Chare. Charles’ hobby from the highest quality wood (mostly ash, eventually budded into a small family- cherry, teak, oak and mahogany) purchased owned business that made and sold hand- from a small group of suppliers that the made rocking chairs and gliders. Comfy company has used for years. The company Company, set apart by a strong positive maintains a minimal inventory policy and as rapport with its customers, a long-standing such, materials are generally purchased as reputation for quality and service, and the needed to fill standard and custom orders company’s unique product offering, soon and finished products are normally shipped found itself a very small company in an out as soon as they are completed. For each intensely competitive market characterized rocker or glider, the desired wood is by high volume, low quality, low cost selected, component pieces are hand- manufacturers. In response such competitive measured and cut based on specifications, pressures and customer needs, the company and then components are inspected for has grown and diversified its product defects before assembly. Next, component offering expanding into standard production pieces are finished and assembled, with of hand-made writing desks, roll-top desks, workers making small adjustments as bookshelves, and media cabinets as well as needed to make sure all pieces fit together other custom ordered items to serve its small neatly and firmly. Finally, a final finish is but diverse customer base. Additionally, the put on assembled rockers and gliders and company has incorporated computer each completed piece is inspected for quality technology into its design function and is before it is shipped to the customer. Comfy considering expansion into the area of relies heavily on its workers to maintain its historic reproductions and antique quality image and regularly sends its restoration. workers to training workshops so that they may improve their skills and learn new As the company has grown and diversified woodworking techniques. Moreover, Mr. its product offerings, Mr. Chare has become Chare wholeheartedly encourages workers concerned with maintaining control over to make suggestions for redesigning existing operations central to the company’s products, take creative liberties while competitiveness and well-being; recently he working on custom projects, and propose has expressed a desire to improve imaginative new products. performance measurement within the rocker and glider division. The rocking chairs and The production manager for the rocker and gliders were the first product offerings of the glider division, Ms. Cabenet, has historically company and remain a core aspect of Comfy maintained a set of internal operating Company’s product offerings and business. measures that she uses as performance The Comfy Company’s rockers and gliders indicators. She has argued that these non- are known for their superior durability, financial operating measures serve as good quality, and attention to detail as well as for indicators of production efficiency and their reasonable price. product quality and moreover, since they are

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dynamic, they support the company’s focus financial impact of operating performance. on continuous improvement and innovation. Ms. Cabenet has expressed reservations Ms. Cabenet, has conceded however, that about the new standard cost variance these operating measures, while serving as analysis system and is concerned that undue good indicators of internal process activities, emphasis on variance results will result in a do not provide the firm with an indication of lack of attention to key operating concerns the financial impact of these operations. On such as inventory levels, product quality, the advice of the outside consulting firm and customer satisfaction. Mr. Dehsk, the where Mr. Chare’s nephew works, the company’s chief accountant, has likewise rocker and glider division recently started expressed his doubts and has argued that using a traditional standard cost variance such standards may encourage behavior analysis system to evaluate the performance inconsistent with Comfy Company’s core of rocker and glider division. The consulting values, ultimately resulting in negative group has argued that such measures are consequences for the company. The more objective, will motivate cost efficient performance results for the most recent behavior, and will accurately measure the period appear below.

Results of Production Manager’s Operations Analysis

Operating Measure Change Operating Measure Change Production Cycle Time8 Increase Raw Materials Store Time Increase Delivery Cycle Time9 Increase Finished Goods Store Time Increase Inspection Time Decrease Raw Material Inv Levels Increase Rework Time10 Increase Finished Goods Inv Levels Increase Scheduled Downtime Decrease Customer Orders (Sales) Decrease Unscheduled Downtime Increase Customer Complaints Increase % Defective Products Increase Customer Returns Increase % Scrap11 Decrease Employee Absenteeism Increase Average Unit Cost Increase Employee Turnover Increase Raw Materials Processed Increase Employee Attitude Survey N/A12

8 Production cycle time is measured as the amount of time required to turn raw materials into completed products from the time raw materials are received to the time goods are transferred to finished goods inventory. Since defective products are reworked before being transferred to finished goods, Comfy Company includes rework time in cycle time. 9 Delivery cycle time is measured as the amount of time required to get the finished product to the customer (from customer order receipt to the time the goods are shipped); it includes wait time between order receipt and the start of production as well as production cycle time. 10 Rework time is measured as the amount of time necessary to correct for defects found in products by inspectors. The consulting company accounted for rework time separately from original work time; and as such, rework time was not incorporated into the direct labor time variance. 11 % Scrap refers to discards and wasted materials measured as a percentage of total raw materials processed. 12 The employee attitude survey was discontinued on the advice of the consulting firm; the consulting firms questioned the usefulness of the survey as it did not provide objective, quantifiable information. The

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Results of Consulting Firm’s Variance Analysis

Resource Standard Stated As Variance

Materials Wood Materials Price Variance Price per board foot Favorable Wood Materials Usage Variance board feet per chair Favorable

Finishing Materials Price Variance Price per gallon Favorable Finishing Materials Usage Variance Quantity per chair Favorable

Direct Labor Direct Labor Rate Variance Rate per wood working labor hour -0- Direct Labor Time Variance Work time spent per chair Favorable

Wood Finishing Labor Direct Labor Rate Variance Rate per finishing labor hour -0- Direct Labor Time Variance Work time spent per chair Favorable

Indirect Inspection Labor Inspection Spending Rate per hour -0- Inspection Labor Efficiency Time per chair Favorable

Indirect Maintenance Labor Equip. Maintenance Spending Cost per maintenance hour Favorable Equip. Maintenance Efficiency Maintenance hours per run Favorable

Fixed Overhead FOH Spending Variance (factory insurance & depreciation) -0-

employee attitude survey was used as a means of soliciting employee attitudes, comments, feedback, and suggestions regarding process improvements and new product designs.

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The consulting firm was quite pleased with 3. In the narrative above, the company’s the results of the variance analysis. accountant and the production manager However, Mr. Chare and Ms. Cabenet were have both expressed reservations about very disturbed about the results of the the company’s new standard cost operating measures; and Mr. Chare is performance measurement system. Are particularly concerned with the operating these concerns valid? Discuss the measures having to do with employee and accountant’s and production manager’s customer dimensions. Mr. Dehsk has concerns in turn and then summarize expressed the opinion that the standards your own assessment of the company’s used as a basis for the variance analysis are current performance management not entirely consistent with the system. organization’s core values; he has been researching the balanced scorecard 4. Categorize each of the company’s framework and has suggested that the current performance measures (variances strategic performance management concepts and operating measures) into the four underlying the balanced scorecard might basic balanced scorecard perspectives; prove helpful. note that some performance measures may fall into more than one perspective. Case Requirements Next, categorize each of the company’s

1. Deduce likely cause(s) for the materials, current performance measures as lead or labor, and overhead variances. Note that lag, financial or non-financial, internal interpretations of individual variances or external, and objective or subjective. will most likely be interrelated. Based on your categorizations, respond Summarize your interpretations. In your to the following: (a) Do the current opinion, should the consulting firm be performance measures appear to be pleased with the results of the variance derived from the company’s vision and analysis? That is, are the favorable strategy? Explain. (b) Do you believe variances really “favorable”? Explain. that all four balanced scorecard perspectives are adequately represented

2. Deduce likely cause(s) for the changes in in the company’s current performance the operating measures. Note that measurement? Discuss. (c) Is the interpretations of individual operating company’s current performance measure will most likely be interrelated. measurement system balanced? Explain. Summarize your interpretations. In your (d) Do you believe that the company opinion, should the accountant, owner, would benefit from the implementation and production manager be disturbed of a balanced scorecard framework? about the results of the operating Explain. measures? Explain. Why do you suppose the employee and customer dimensions 5. Design a balanced scorecard for the are of particular concern to the owner? company: (a) First, succinctly articulate Explain. The Comfy Company’s vision and strategy. That is, describe what you believe to be Comfy Company’s key

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values and/or strategic objectives and constructed for the customer perspective explain why each value/objective would only (i.e., describe how each of your be considered appropriate for the stated operational objectives for this company. (b) Second, consider the four perspective might be accomplished). balanced scorecard perspectives and explain how each perspective relates to 6. In a professional memo (use proper or supports the company’s vision and headings and formatting) directed to the strategy. (c) Third, translate the company owner, (a) Succinctly company’s overall vision and strategy summarize your assessment of the into specific operational objectives (i.e., effectiveness and suitability of the objectives that can be measured) for company’s current performance each of the balanced scorecard management system, and (b) Outline perspectives. (d) Finally, for each your recommendations for improving the operational objective you constructed, performance measurement system from list two or more performance measures the perspective of a balanced scorecard that you believe will support the framework. Be Explicit. objective (you may choose measures already being used by Comfy Company or alternative measures you select). Justify the relevance of each Teaching Note/Instructor Manual available from performance measure selected. (e) the Journal of Business Cases and Applications. Develop initiatives for the objectives you