Strategic Management Accounting


Performance measures are used to deliver information to support decisions of corporate or divisional management, and to deliver information to assess divisional performance. Business world becomes extremely complex due to the technological development in the field of operation along with the logical demand of the consumer groups for quality product at a minimum price. The companies are getting serious to incorporate all of these in a single package. Employee motivation is also getting preference since a highly motivated employee will work hard toward achieving performance goals. Along with motivation, performance evaluation comes up to evaluate the extent of motivation. People are searching for a better performance measurement tool, that will help them to read the pulses of the employees rightly. In a word, performance measurement becomes a continuous effort and challenging style on part of the management to drive the workforce towards goal congruence.

Management accounting is concerned with the provisions and use of accounting information to managers within organizations, to provide them with the basis to make informed business decisions that will allow them to be better equipped in their management and control functions.

All accounting based rate of returns (ROI, RONA, ROCE, ROIC), that are used as a performance measurement tool, fail to assess the true or economic return of a firm, because they are based on the concept of historical asset values, which in turn are distorted by inflation and other factors (Villiers, 1997)

 Under the Balanced scorecard approach, top management translates its strategy into performance measures that employees can understand and can do something about clear performance measurement. Performance measure used in the Balanced scorecard approach tend to fall in to four (04) groups such as financial, customers, internal business processes and learning and growth.

In the Balanced scorecard approach, continual improvement is encouraged. In many industries, this is a matters of survival. If an organization does not continually improve, it will eventually lose to competitors that do. That case through appropriate Balanced scorecard we can easily set our vision i.e what is our future in long run and mission i.e how we want to accomplish it.

 We also know that every organization try to benefit in long run consequences rather then in short position. That case Balanced scorecard performance measurement gives and accurate and Longley survival performance indication while the entire organization will have an overall Balanced scorecard each responsible individual will have his or her own personal scorecard as well. This scorecard should consist of items the individual can personally influence that relate directly to the performance measures on the overall Balanced scorecard.


 A Balanced Scorecards consists of an integrated set of performance measures that are derived from the company’s strategy and that support the company’s strategy throughout the organization.

Significance of Balanced Scorecard

Under the Balanced Scorecards approach top management translates its strategy in to performance measures that employees can understand and can do something about it. A well constructed Balanced Scorecards provides a means for guiding the company and also provide feedback concerning the effectiveness of the company’s strategy.

Basic Concept/Observation of Balanced Scorecards

  1. The Balanced Scorecard should be tailored to the company’s strategy, each company’s Balanced Scorecards should be unique.
  2. The Balanced Scorecard reflects a particular strategy or theory, about how a company can further its objectives by tatting specific actions.
  3.  The Balanced Scorecards should be viewed as a dynamic system that evolves as the company’s strategy evolves.

Common Characteristics of Balanced Scorecards

Performance measures used in the balanced scorecard approach tend to fall in to four groups such as financial, customer, internal business processes and  learning and growth. Internal business processes are what the company does in an attempt to justify customers. For example in a manufacturing company, assembling a product is an internal business process. In an air line handling baggage is an internal business process.

In the balance scorecard approach, continual improvement is encouraged. In many industries, this is a matter of survival. If an organization does continually improve, it will eventually lose out to competitors that do.

Financial performance measures appear at the top of Ultimately, most companies exist to provide financial rewards to owners. There are exceptions. Some com­panies -for example. The Body Shop- may have loftier goals such as providing environmentally friendly products to consumers. However, even nonprofit organizations must generate enough financial resources to stay in operation.

Ordinarily, top managers are responsible for the financial performance measures lower-level managers. The supervisor in charge of checking in passengers can be held responsible for how long passenger to wait in line. However, this supervisor cannot reasonably be held responsible for the entire company’s profit. That is the responsibility of the airline’s top managers.

From Strategy to Performance Measures the Balanced Scorecards

Grand Azad Hotel Balanced Scorecard

The hypotheses underlying the balanced scorecard are indicated by the arrows in the diagram. Reading from the bottom of the balanced scorecard, the hypotheses are:

  • Ø If the percentage of dining room staff who complete the hospitality course increases, then the average time to take an order will decrease.
  • Ø If the percentage of dining room staff who complete the hospitality course increases, then dining room cleanliness will improve.
  • If the percentage of kitchen staff who complete the cooking course increases, then the average time to prepare an order will decrease.
  • Ø If the percentage of kitchen staff who complete the cooking course increases, then the number of menu items will increase.
  • Ø If the dining room cleanliness improves, then customer satisfaction with service will increase.
  • Ø If the average time to take an order decreases, then customer satisfaction with service will increase.
  • Ø If the average time to prepare an order decreases, then customer satisfaction with service will increase.
  • Ø If the number of menu items increases, then customer satisfaction with menu choices will increase.
  • Ø If customer satisfaction with service increases, sa1es will increase.
  • Ø If customer satisfaction with menu choices increases, sales will increase.
  • Ø If sales increase, total profits for the Lodge will increase. Each of these hypotheses is questionable to some degree.

For example. even if the number of menu item increases, customer satisfaction with the menu choices may not increase. The items added to the menu may appeal to customer. The fact that each of the hypotheses can be questioned does not, however, invalidate the balanced scorecard. If the scorecard is used correctly, management will be able to identify which, if any, of the hypotheses is incorrect.

Management will be able to tell if a hypothesis is false if an improvement in a performance measure at the bottom of an arrow does not, in fact, lead to improvement in the performance measure at the tip of the arrow. For example, if the number of menu items is increased but the customer satisfaction with the menu choices does not increase mama gent will immediately know that something was wrong with their assumptions.

Mathematical Computation

 Assume that Grand Azad Hotel Chinese restaurant division weekly movement number of customers 3000. And on an average per customer charge is tk. 250. And variable cost per customer is tk. 150.

On the other hand through balanced scorecard Grand Azad Hotel want to enhance its financial performance. So at learning and growth stages hotel has been trained up its dinning room staff and kitchen room staff entirely. Restaurant management also assumed that their proportional balanced scorecard (BSC) activities are as follows:

At learning & growth stages if dinning room staff complete their hospitality course fully and kitchen staff complete their cooking course completely that case customer entrance in the Chinese restaurant his increase by 33%. That case total customer 3000×1.33%= 4000. Also note that fixed cost is relevant that is same on the in crease of customers is tk. 3,00,000.

So total sales revenue

4000 @ of 250                        =                 10,00,000

Variable overhead expresses

4000 @ 150                                      =                 6,00,000

Contribution margin                =                 4,00,000

(-) fixed expenses                              =                 3,00,000

NOI                                                   =                 1,00,000

Margin =     =       =10%

Turnover = = = 3.33

So, ROI = Margin x turnover = 10% x 3.33

= 33.33%

Before Balanced Scorecard performance measurement is

So total sales revenue

3000 @ of 250                        =                 7,50,000

Variable overhead expresses

3000 @ 150                                      =                 4,50,000

Contribution margin                =                 3,00,000

(-) fixed expenses                              =                 3,00,000

 NOI                                                   =                           0

Margin =                     = 0

Turnover = = = 2.5

So, ROI = Margin x turnover = 0% x 2.5

= 0

There is no return on investment.

But through BSC we can get ROI 33.33%

Mitsubishi Motors Limited Performance Measure Through Balanced Scorecard

Mathematical Computation

We know that balanced scorecard may be maintain for individual department, service department, marketing department, regional basis, location basis and as well as particular employee and single customer basis.

Here we can draw an experimental case (note that it is absolutely hypothetical) on “Mitsubishi Motors Limited where sole distributor in Bangladesh is “Rangs Motors Limited which company is doing marketing “Mitsubishi Pajaro” in Bangladesh.

For better marketing in Bangladesh by facing competition against other motor distributors in Bangladesh such as “Navana Ltd. – Toyota Parado.” “Uttara Motors Ltd. isuzu trooper” Pacific Motors – Nissan Petrol.”

Mitsubishi Motors Ltd. customized their product for Bangladesh. To enhance their sales volume.

So at learning and growth stage this company has enhanced their employee skill in installing options.

  • Ø At internal business processes number of options and time to install an option is available.
  • Ø Customer survey indicates satisfaction with option is available.

So, number of Pajaro sales in Bangladesh increased by 25% than previous sales record. In previous year each month number of selling car is 100 units. Each car retail price is 25 lac and variable expenses for each is car 15 lac. Also note that fixed cost is tk. 8 crore which also relevant with additional no. of sales car. Also note that net operating assets is 10 crore.

Departmental Store Agora-Credit Sales Performance Measurement through Balanced Scorecard


The performance measures that are not included above may have an impact on total profit, but they are not linked in any obvious way with the two key problems that have been identified by management-accounts receivables and unsold inventory. If every performance measure that potentially impacts profit is included in a company’s balanced scorecard, it would become unwieldy and focus would be lost.

The results can be exploited for information about the company’s strategy. Each link in the balanced scorecard should be regarded as a hypothesis of the form “If…, then …”. For example, the balanced scorecard on the previous page contains the hypothesis “If customers express greater satisfaction with the accuracy of their charge account bills, then there will be improvement in the average age of accounts receivable.” If customers in fact do express greater satisfaction with the accuracy of their charge account bills, but there is not an improvement in the average age of accounts receivable, this would have to be considered evidence that is inconsistent with the hypothesis. Management should try to figure out why there has been no improvement in the average age of receivables.

In general, the most important results are those in which there has been an improvement in something that is supposed to lead to an improvement in something else, but none has occurred. This evidence contradicts a hypothesis underlying the company’s strategy and provides invaluable feedback that can lead to modification of the strategy.

This evidence is inconsistent with two of the hypotheses underlying the balanced scorecard. The first of these hypotheses is “If customers express greater satisfaction with the accuracy of their charge account bills, then there will be improvement in the average age of accounts receivable.” The second of these hypotheses is “If customers express greater satisfaction with the accuracy of their charge account bills, then there will be improvement in bad debts.” There are a number of possible explanations. Two possibilities are that the company’s collection efforts are ineffective and that the company’s credit reviews are not working properly. In other words, the problem may not be incorrect charge account bills at all. The problem may be that the procedures for collecting overdue accounts are not working properly. Or, the problem may be that the procedures for reviewing-credit card applications let through too many poor credit risks. If so, this would suggest that efforts should be shifted from reducing charge account billing errors to improving ‘the internal business processes dealing with collections and credit screening. And in that case, the balanced scorecard should be modified.

This evidence is inconsistent with three hypotheses. The f rst of these is “If the average age of receivables declines, then profits will increase.” The second hypothesis is “If the written-off accounts receivable decrease as a percentage of sales, then profits will increase.” The third hypothesis is “If unsold inventory at the end of the season as a percentage of cost of sales declines, then profits will increase.”

Again, there are a number of possible explanations for the lack of results consistent with the hypotheses. Managers may have decreased the average age of receivables by simply writing off old accounts earlier than was done previously. This would actually decrease reported profits in the short term. Bad debts as a percentage of sales could be decreased by drastically cutting back on extensions of credit to customers—perhaps even canceling some charge accounts. (There would be no bad debts at all if there were no credit sales.) This would have the effect of reducing bad debts, but might irritate otherwise loyal credit customers and reduce sales and profits.

The reduction in unsold inventories at the end of the season as a percentage of cost of sales could have occurred for a number of reasons that are not necessarily good for profits. For example, managers may have been too cautious about ordering goods to restock low inventories-creating stock outs and lost sales. Or, managers may have cut prices drastically on excess inventories in order to eliminate them before the end of the season. This may have »educed the willingness of customers to pay the store’s normal prices. Or, managers may have gotten rid of excess inventories by selling them to discounters before the end of the season.

Ratio Analysis for Business Performance Measures

Some organizations, aware of the limitations of budgetary control, are using management  ratio to an increasing extent. So far as these ratios represent the relationships between results achieved and the resources used to achieve them, it can be claimed that they provide some measure of comparison. The return inn capital ratio is used by many companies and by the nationalized industriesed and provides a useful year by year comparison of the profitable use of capital resources. Some companies go father than this and product schedules of subsidiary ratios at monthly or quarterly intervals. For the most part there ratio are based on sales and income and the more common ones used are:

i.        Profit/sales ratio– this gives a measure of sales productivity (in terms of profit), but as there are many types of cost which affect the final profit this is a very crude form of productivity measurement.

ii.       Mot contribution/spins ratio –calculating the ‘contribution’ earned by each saints commodity provides a measure of the productivity of each commodity and of any increase in sales volume this again is assuming a very loose definition of ‘produc’ivily1.

iii.      Soiling cost/sales ratio—relating the sales achieved to the selling cost incurred gives a measure of the soiling function’s productivity.

iv       Administrative cost/sales ratio–although useful in the absence of anything better, this is hardly a measure of productivity, sincere income alone is no guide to the amount of administrative work required.

v.       Stocks/Cost of Sales Ration this provides a guide to then rain of productivity of the stock holding function

vi.      Working capital/sales ratio-the relationship between working capital and sales income gives some indication of the productive use of working capital

Those, and similar, ratios are being produced by the accounting functions of many of the more progressive companies with very little difficulty. If the accounting system is organized of the basis of ‘responsibility amounting’, and a suitable coding system is used, all income and expenditure can be collected under the required heads as a matter of routine. The calculation of ‘lie various ratios at regular intervals should thon present no problems’. Few, if any, of these ratios can, howsoever, He said really to productivity, unless one is willing to stretch the definition of ‘productivity’ to considerable. Their main weakness in this respect is that they are not directly related to the volume of useful work done. Some companies have tried to improve upon these ratios by introducing supplementary control data related to physical ‘output’. Examples of these are:

i.        Cost per invoice prepared—the total cost of the invoicing function is related to the number of invoices prepared.

ii.       Cost per order executed—the total order processing costs, including handling and dispatch, are related to the number of orders, or the number of items, dispatched.

iii.      Cost per call—salesmen’s cost are related to the number of calls made.

iv.      Sales value per square foot of shop space.

v.       Sales value per employee.

Here again, the required costs or sales values can be easily ascertained if the accounting system is well organized and little extra work is required to obtain the additional data relating to the number of invoices or number of orders, etc. processed.

Ratios of this type get nearer to the true concept of productivity measurement, but they rarely provide the ideal yardstick. In the first place, most of the factors are in monetary terms of cost or income which. Although suitable in some cases do not apply to all cases.

Users of Analytical Information

It is now generally accepted that a firm can, by comparing certain of its accounting, costing and other performance figures with those of other firms in its industry, discover otherwise possibly unnoticed weaknesses in its policy and operations. This supposes that a firm can use figures of other firms as an instrument of self diagnosis, as a means of evaluating its own profitability and productivity, and as a basis for setting targets of performance.

Management ratios are often much wider in implication than purely financial ratios. Specialized ratios, which reflect the performance of a wider range of industry and commerce, are numerous, for example:

Electricity Supply                   :         Load factor

Supermarkets                :         Sales per square foot

Property Development  :         Plot ratio

‘Transport                      :         Cost per mile Passenger mile

Manufacturing Industry :         Overhead/ate

Hotels                            :         Occupancy rate

Ratio Analysis

For the purposes of explanation it is convenient to divide ratio analysis into three sections. These are:

i.        Ratio analysis for profitability comparisons (profitability ratios)

ii.       Ratio analysis for liquidity comparisons (liquidity ratios).

iii.      A residual category (ratio)

There are a number of this note is to give a general outline of each of these.

I horn hip n number of which can be used for comparative exorcise Heinous both in assess the relative probability of a firm and to isolate any factors inside it which are working to the detriment of its profitability performance.

Financial ratios a similar to a thermometer i.e. used to take the temperature of p. business. Like n thermometer they give only a limited part of the diagnosis and must be interpreted in the light of size, history and activity of the business. The ratios are comparative measures in appraising the financial condition, efficiency and profitability of a business.

Financial ratios are not ends in themselves, they just help to answer significant questions. From the many ratios available to the manager only a limited number may be appropriate to any particular problem. One of the most common financial ratios used is the return on capital employment sometimes described as the primary ratio.

A return on capital employed =

Advantages of concept of Return on Capital I Employed

The return on capital employed concept has many advantages over other methods of measuring efficiency. It is the only measure which can he said to show satisfactorily the benefits benefit obtained for the sacrifice involved, the latter being represented by capital invested. Some of the benefits and advantages of colonization the return on capita! employed are shown below:-

a.       Regular and satisfactory dividend paid to shareholders.

b.       Adequate services, allowing progress to be made so that the company can grow at a healthy rate.

c.       A outside funds are required, then, because of the financial standing of the company, there should be no difficulty in obtaining those funds

d.       Business should be able to ward off any competition or other adversities without great difficulty

B. Liquidity or Acid test ratio:

This is the measure of solvency. Stocks are excluded, because in many firms stocks are not capable of quick reali7ation

C. Outstanding Debits =

This ratio gives the average number of weeks for which debts have been outstanding. An increase in the figure shows that money is coming in more slowly.

D. Turnover =

This ratio shows how often stocks ‘flow’ through a firm in a year.

An example of the no of financial ratios exists in the application of control in the many operating units of G F.C.

Six key firms are used for this purpose, and these are:

a) Profit/Capital employed

b) Profit/Sales

c) Sales/Capital Employed

d) Snips/Fixed Assets

e) Sales/Stocks

f) Sales per employee

E. Vulnerability of Stock = = = 1.5

If stocks form a largo par of working capital price fall may necessitate considerable write offs from profile; thus the business is vulnerable to trade fluctuations. A large investment in stocks can also result in cash shortages.

F. Collection Period:

          = 75 days

This ratio indicates the number of days, Credit has been allowed to customers, find therefore, whether excessive capital is tied up. If the company sells both for cash and on credit, a more accurate measurement is average doily steles on credit.

 G. Current Ratio:

          = = 1.5:1

This current ratio is widely used by banks and other lending institutions as a measure of the solvency of a company. It is commonly claimed that companies with a current ratio of 2 or mom are, and therefore good risk for a loan from the bank. In practice, many companies operate quite satisfactorily on current ratios of 1.5 or oven loss. As with all ratio analysis the trend is the more significant consideration.

 H. Liquidity Ratio:

= = 75:1

This ratio also measures I’m ability of the business to meet its current obligations. It is far more server test since it concentrates on strictly liquid assets whose value is fairly certain. It is sometime known as the “acid tent” ratio. Liquid assets include cash and debtors but no’ stock A ratio of 1 is generally considered satisfactory, but again the important point is the trend.

I. Sales vulnerability:

Companies operating near their break even points will have more volatile profits for a given change in volume than those operating well above (or below) their break even level. The following example illustrate this:

Selling price Tk. 100 per unit

Variable cost Tk. 50 per unit

Fixed costs Tk. 1,00,000


Ratio of profit      Infinite        5.0              3.0                        2.0

Note that an increase in volume from 2,500 to 3000 units (20%) results in an increase in profit of 100%. Looking at it the other way, a decline in volume from 3000 to 2500 units (17%) cuts profits to half. Thus, the higher the ratio of contribution to operating profit, the more vulnerable the business is to a fall in sales volume

J. Financial gearing:

Fixed Interest capital includes loans, mortgages, debenture and preference shares. The term “Gearing” signifies that portion of a company’s long term capital on which it has a fixed return, as opposed to that option on which the return varies with profits. The ratio is a measure of the extent to which the business is owned by external bodies rather than by its shareholders Obviously if the ratio is higher than 50, the company could be forced out of business by the creditors. A safe target to aim for is no more than 40%, but a slightly higher figure is not necessarily imprudent. There is always a conflict of interest between profit and survival. The more a firm can use borrowed money to finance profitability operations, the better will be the return on its shareholders’ investments provided the rate of borrowed money is lower than the rate of profit being earned It a business minimizes its borrowing in the interest of survival, its profitability will to lower than if it borrowed money on cheap terms Gearing is also referred to as a “Financial leverage” or “trading on the Equity”.

K.An unfavorable trend in this ratio indicates a disproportionate increase in Debtors’ a/c in relation to sales volume. Collection performance may have deteriorated, or there may have been a change in credit terms.

L. Interpretation of Ratio Analysis -A correct interpretation of the, static picture presented by one year’s figure requires considerable skill and care. For instances, if the fixed assets of land and buildings are under valued in terms of the current market price, a false impression may be given in the profit ratios I ho companion of one business wild another should not be undertaken without utmost care and unless the analyst is thoroughly familiar with both businesses different another may be used to evaluate assets. Different depreciation methods may be used, policies on spending or advertising may be different, the treatment of R&D costs may vary, changing price levels may invalidate attempts to compare and so on. The main value of analyzing ratios lies in studying the trend with one company over a period of years Since the approach helps comparing like with like, there is little risk of misinterpretation of the main trends.

Profitability Ratios the world Profit it self is meaningless’ unless if is related to the? size of the owner’s (shareholders) investment in the business. The ability to earn satisfactory rate of return on shareholders investment is the most important measure of business success. The real growth comes from the ability of management lo employ capital successfully, at a satisfactory rate of return.

Likewise (the Long-term rate of return should give a fair return to shareholders in relation to risks they take; provide for expansion: during inflation provide reserves to maintain real capital intact; attract new capital when required; and satisfy coeditors/employees as to the continued existent, of the business.

The rate of return on capital employed

The Key Measure of overall performance, provides starting point from which to analyze and discern trends in company’s performance. This gives rise pyramid of Ratio for analysis of all those factors which affect return on capital employed. These ratios also allow an examination of more detailed aspects of a company’s operations.

The use of profitability ratio is based on the assumption that, if two or more firms operate in a similar line of business, there will be some similarity between the various factors in their income/expenditure equations. The reasoning behind this assumption is obvious. Firms producing similar products are likely to have similar input ratios between machinery, labour, materials and other expenses. Also, due to market forces, they are likely to sell their products at similar process. As a result, for those firms the relationship of profit to sales, profit to capital employed, and the distribution of expenses, ought, all other things being equal, to the similar, if therefore, it appears on comparison that one firm has a lower profitability than others, there is a good chance that the shortfall is duo to some inefficiency in that firm’s operation.

Liquidity ratios are numerical measures of (a) a firm’s ability to finance its current trading and (b) the efficiency with which it is utilizing its current financial resources. Again, the measures so derived are compared against external yardsticks in order to assess how the business is doing. In this case, however, the comparisons do not always have to be with competitors. This is because all business, whatever their product, have to measure up to certain generally accepted standards of solvency in order to trade and those general standards constitute useful minimum against which comparison may he made. Sometimes, in order to assess the current financial strength a whole range of liquidity ratios are common use.

The residual category of other ratios obviously covers a wide range of topics thus for instance; ratios can be developed through which two such different matters as the long-term financial structure of a firm of particular aspects of its production costs structure may be studied. Very often, however, they are developed to deal with specific problems and situations. To many firms, one of these groups of ratios, or even one individual ratio, may be overwhelmingly significant because information is yielded thereby on the most sensitive of operations. Thus for instance, control of stock level or assets utilization would  critical problems for particular firms. Again, in the case of the cotton and allied textiles industry, it is arguable, generally, that profitability problems are significant than liquidity problems. The lesson here is that ratio comparison schemes must be tailored to the needs of the industry or the group of firms involved and not standardized to any particular theoretical formula.


Our study consists mainly of two parts. First part is the theoretical aspect and the second one has practical judgment on the basis of hypothetical data. A theoretical framework of applying Balanced Scorecard has been outline above from available literature in this respect. For practical judgment we take hypothetical data to prove Balanced Scorecards as performance evaluation on Motors car business, Hotel & Restaurant business and lastly on a department store.


Creation of values for the owners is important in business, irrespective of the volume of in investment on type of operation. We also know that every organization is input output transformation system that depends on their environment for survival. They are born, grow, develop, decline and eventually die, the speed at which they proceeds through different stages, reflect their ability to respond and adjust to their environment. That case effective Balanced Scorecards approach brings long run financial benefit instead of short-term benefit.

So in public limited company conflict between owners group and management group is a common phenomenon due to agency relationships. Management always try to show consequence benefit due to retain their high compensation and other financial and non-financial benefits. On the other hand owner group always want to see long run organizational growth and financial consequences. That case a well constructed Balanced Scorecards can mitigate this problems at a very negligence level. Because the Balanced Scorecard is a promising approach to managing organization. A Balanced Scorecard consists of an integrated system of performance measures that are derived from and support the company’s strategy.

Different companies will have different Balanced Scorecards because they have different strategies. A well constructed Balanced Scorecards provides a means for guiding the company and also provides feedback concerning the effectiveness of the company’s strategy. So in conclusion speech we can say that a well and effective constructed Balanced Scorecards is a excellent approach from strategy to performance measures.

Management Accounting