Managerial Accounting 2nd Edition By Charles E. Davis – Test Bank

Unit 11.1

1. Lagging indicators are measures of outcomes that answer the questions “How did (fill in the blank) do?” and “What did (fill in the blank) achieve?” Their calculation “lags” the performance that is being measured, indicating whether a particular objective has or has not been met. Some examples of lagging indicators include net income, EVA, and market share.

Leading indicators are measures of inputs and help to predict a future result. Some examples include investment in employee training, percent of on-time deliveries, and number of new patents.

Depending on what is being examined, a measure can be both a leading and lagging indicator. For example, defect rate is a lagging indicator of production quality. However, it is a leading indicator of customer satisfaction.

2. Managers need to use leading indicators to help predict future performance and lagging indicators to provide evidence on the success of prior decisions or actions.

3. A financial measure of performance is one denominated in dollars. Some examples are net income, sales revenue from new customers, and cost per unit. Nonfinancial performance measures are denominated in a unit other than dollars. Some examples include defect rates, employee turnover, and customer satisfaction.

4. SMART measures are those that are specific, measurable, actionable, relevant, and timely.

5. Key performance indicators (KPIs) reflect critical success factors and measure successful progression toward the organization’s goals. Managers must understand the organization’s strategy and the cause-and-effect relationships that exist between measures before selecting KPIs.

Unit 11.2

1. The balanced scorecard integrates measures across four distinct perspectives to guide operations toward achieving a corporate strategy. The measures are selected based on an understanding of cause-and-effect relationships between the measures and the strategy.

2. The four areas of the balanced scorecard are learning and growth, internal business processes, customer, and financial.

3. Financial data are lagging indicators of performance, and leading indicators of performance are necessary to successfully guide the organization. Also, many important leading measures, such as customer satisfaction, are not measured in financial terms.

4. An organization’s strategy is at the heart of the balanced scorecard. Since each organization’s strategy differs, the balanced scorecard that monitors progress toward that strategy will differ.

5. A strategy map is a pictorial representation of an organization’s strategy and the cause-and-effect relationships embedded in that strategy.

6. An organization can spend significant financial resources attempting to improve customer satisfaction and market share. However, the additional contribution margin generated by the additional sales may not be adequate to cover the cost of the additional expenses. Therefore, the overall financial health of the organization will decrease, even though customer satisfaction and market share have increased.

Unit 11.3

1. Benchmarking is the practice of using data from other organizations to identify the processes and practices associated with world-class performance. Benchmarking is not about trying to achieve another company’s metrics, but about replicating the successful practices that led to their outstanding metrics.

2. Companies have many of the same processes, such as processing accounts payable invoices. The processing in these areas is not industry-specific, so benchmarking with a company in another industry still yields helpful benchmarks.

3. Best practices are processes and practices associated with world-class performance.

4. Companies should follow common-sense practices when benchmarking. Participants should adhere to the Benchmarking Code of Conduct, which provides general principles to follow during the benchmarking process. Benchmarking does not require an organization to share trade secrets or proprietary information. What is shared is information about processes and process metrics. Another option for collecting benchmarking data is to participate in collaborative efforts such as the APQC’s Open Standards Benchmarking CollaborativeSM.

Appendix

1. Delivery cycle time is the time between when a customer’s order is received and when that order is shipped to the customer.

2. Managers must make a trade-off between the reduced delivery cycle time and the cost to implement process changes needed to achieve that reduction.

3. Manufacturing cycle time, or throughput time, is the time from the start of production of a customer’s order to the shipment of the product to the customer.

4. Value-added activities: conversion of raw materials into finished products, i.e., the actual making of the product units.

Non-value-added activities: inspection, moving, waiting

5.

6. Perfect manufacturing efficiency is 1.0. That number is not attainable since there is no way to remove all non-value-added activities from the production process.

SOLUTIONS TO EXERCISES

Exercise 11-1

Hardware growth is a leading indicator of future sales of supplies because as sales of hardware increase or decrease, so do anticipated sales of supplies. The revenue from hardware sales is a lagging indicator of performance.

Exercise 11-2

Leading Lagging Qualitative Quantitative
a. Customer satisfaction score x x
b. Guest room cleanliness score x x
c. Annual investment in linens x x
d. Employee retention x x
e. Return visits per year x x
f. Time to respond to reservation requests x x
g. Percentage of guest rooms ready at check-in x x
h. Employee satisfaction x x
i. Customer referrals per year x x

Exercise 11-3

Possible measures include:
• Average wait in teller line
• Average wait in drive-through line
• Average wait to meet with customer service representatives
• Number of customer complaints per month
• Average time to resolve customer complaints
• Number of new accounts opened
• Number of accounts closed for reasons other than relocation
• Employee satisfaction
• Number of accounts/services per customer