Solutions Guide: Please do not present as your own



Solutions Guide:   Please do not present as your own.  This is only meant as a solutions guide for you to answer the problem on your own. I recommend doing this with any content you buy online whether from me or from someone else.

7-55 Benchmarking As a manager interested in learning more about target costing, you are contemplating three approaches to obtaining the best information possible. The first is to bring in an outside consultant; the sec is to develop your own system inside your organization with little to no outside assistance; and the third is to engage in a benchmarking project with several other firms.Required Critique each of these approaches, discussing their pros and cons. On what basis will you your approach to learning about target costing? Explain.

Bringing in outside consultants to implement a target costing system can be

effective, but costly. Consultants often have a great deal of knowledge that they can

bring to an organization and in this sense the organization does not have to “start

from scratch.” A downside of using consultants is that, in some instances,

consultants want to use an existing template for implementing a new method, such

as target costing. The template is often designed generically and is meant to be

superimposed on any organization. Some organizations object to this and want a

more tailored approach, especially if they are in an industry in which the

consultants have not worked at all. Consultants may agree to tailor the approach,

but the cost of implementation of a target costing system will increase significantly.

A second downside is that many organizational members may not be involved with

implementing the changes. Thus, they may simply rely on what the consultants do.

If organizational members do not understand what the consultants have done or

how the system works, then the system will likely fail after the consultants leave.

A second approach is for organizational members to develop a target costing system

internally with little or no assistance from outside consultants. This approach can be

satisfying, but it can be costly and time-consuming, especially if the organization has

little experience in implementing these types of systems. The positive side of this is

that organizational members may get more of a “buy-in” to the new method because

they have to understand it well to convince others of the need to implement it. Once

organizational members know that they can develop these systems themselves, they

may be more confident in the future regarding the implementation of other

organizational innovations.

The third approach, known as benchmarking, requires that organizational

members first understand their current cost reduction methods and then look

externally to the best target costing systems of other organizations for guidance on

change. Benchmarking is often highly cost-effective since organizations can save

time and money avoiding the mistakes that other companies have made or by

avoiding reinventing a process or method that other companies have already

developed and tested. Benchmarking allows organizations to gain insights on target

costing from others, but at the same time to assume responsibility for the changes.

In this way, organizational members feel like they have ownership of the changes

and this can lead to developing more confidence about future changes and

improvements to their management accounting system.

LO 4 7-56 Target costing versus traditional cost reduction methods According to this chapter, the target costing and traditional cost reduction methods approa the relationships among cost, selling price, and profit margin quite differ Required Write an essay that illustrates how the target costing and traditional cost reduction method? using the appropriate symbols and equations. In addition to the equations, describe ho processes differ in deriving costs.

The answer to this question is very similar to the solution for 7-53 but it is more detailed. The process involved in traditional cost reduction as practiced in the United States is significantly different from target costing. The traditional costing method begins with market research into customer requirements followed by product specification. Then, companies engage in product design and engineering, and they obtain prices from suppliers. Traditionally, at this stage, product cost is not a significant factor for product design. After the engineers and designers have determined product design, they estimate product cost [pic], where the t subscript indicates numbers derived under traditional thinking. If the estimated cost is considered to be too high, then it might be necessary to modify product design. In order to find the desired profit margin [pic], it is necessary to subtract the estimated cost from the expected selling price [pic]. The profit margin is the result of the difference between the expected selling price and the estimated production cost. This relationship in the traditional system is expressed as: [pic].

Another widely used traditional approach is the cost-plus method. Under cost-plus, an expected profit margin Pcp is added to the expected product cost Ccp where the subscript cp indicates numbers derived under cost-plus thinking. Selling price Scp, then, is simply the result of the sum of these two variables. In equation form, this relationship for the cost-plus approach is: [pic]. As in the first traditional method described above, product designers do not attempt to achieve a particular cost target.

LO 4 7-57 Target costing and service organization Imagine that you are the mansger of a large bank. Having heard about a management accounting method called target costing, you are wondering whether it can be applied to the banking industry. In particular, you are trying to determine how to benchmark other organizations to gain more information. Required a. Can target costing be applied to the banking industry? To what products or services can 1 costing be applied? b. Devise a benchmarking plan for the bank. Your plan should include which banks to benchmark with and the kinds of information sought

(a) In theory there is no reason to assume that target costing, or at least parts of it, cannot be applied to service organizations. However, the method was developed for products requiring discrete manufacturing processes and short product life cycles. In a bank, products (or services, depending on how you look at it) would include checking accounts, savings accounts, all types of loans, etc. The bank could follow the steps outlined in Exhibit 7-5 and do market research to determine customer requirements and product specification. Customer requirements would include the desired interest rate on a checking account, the level of attention needed to open these accounts, the choices for colors and designs on checks, etc. Next, the “target selling price” or the cost to the customer of opening and maintaining the checking account would be determined as well as the target volume or the number of checking accounts that the company desires to service. The target profit margin would have to be determined based on calculations related to the amount of income earned from customer accounts. The target cost then would be the difference between the target selling price and the target profit margin.

(b) The following approach can be used. Using the five-stage benchmarking model below, the instructor may wish to select various approaches beginning with the choice of variables in Stage 3 and continuing into Stage 4 for different members of the class and then have them compare the plans that they devise. For instance, in Stage 3 you might ask some students to devise a plan for benchmarking organizations within the banking industry and for those outside of banking. Some might be asked to benchmark with many partners and some with few. For Stage 4 the methods of information gathering and sharing can be varied. Some students can be assigned the unilateral form of benchmarking, while others can be assigned one of the three forms of cooperative benchmarking. What are the implications of each? Also, students need to determine the performance measures that they will use and a time frame over which the study will occur. This can be a very interesting and informative exercise for students.

Stage 1:

Internal study and preliminary competitive analyses

Preliminary internal and external competitive analyses

Determining key areas for study

Determining scope and significance of the study

Stage 2:

Developing long-term commitment to the benchmarking project

➢ Gaining senior management support

➢ Developing a clear set of objectives

➢ Empowering employees to make change

• Coalescing the benchmarking team

➢ Using an experienced coordinator

➢ Training employees

Stage 3:

Identifying benchmarking partners

Size of partners

Number of partners

Relative position within and across industries

Degree of trust among partners

Stage 4:

Information gathering and sharing methods

Type of benchmarking information:

➢ Product

➢ Functional (Process)

➢ Strategic (includes management accounting methods)

Method of information collection:

➢ Unilateral

➢ Cooperative:

❑ Database

❑ Indirect/third party

❑ Group

Determining performance measures

Determining the benchmarking performance gap in relation to performance measures

Stage 5:

Taking action to meet or exceed the benchmark

Making comparisons of performance measures

LO 2, 3, 7 9-43 Implementing the Balanced Scorecard Either by visiting a Web site or from a description in a published article, find a description of the implementation of a balanced scorecard Required • a. Document in detail the elements (objectives, measures, and targets) of the balanced scorecard b. Identify the purpose of each Balanced Scorecard element c. Describe, if the facts are available, or infer, if the facts are not. available, how the balanced Scorecard elements relate to the organization's strategy. d. Evaluate the Balanced Scorecard by indicating whether you agree that the choice of balanced Scorecard performance measures is complete and consistent with the organization’s plan and stakeholder set. 12, 3, 4

The Balanced Scorecard consists of a set of integrated performance measures that are derived from the company’s strategy throughout the organization. Under the balanced scorecard approach, top management translate the company’s strategy into performance measures that the employees can understand and do something about. For example, the time a person has to wait before someone takes his order in a McDonalds restaurant might be a performance measure. Such a performance measure is easily understood by the employee and can be improved by the employee’s actions.

When building a balanced scorecard, management must establish the company’s vision, mission, and strategy, and once those are established, the balanced scorecard would start with some statements that convey the company’s vision to the employees. Such statements are called Objectives, and those describe what the company is trying to accomplish.

Measures describe how success in achieving objectives will be determined; in other words measures are the yardstick upon which success in meeting the objectives would be measured. For example if the objective was to decrease the waiting time in a bank queue, the measure would be the percentage reduction in waiting time. Targets are the goals or the rate of improvement required by the objective (a 20% reduction in wait time, for example).

Performance measures used in the balanced scorecard approach tend to fall into four groups: 1) Financial: has our financial performance improved?, 2) Customer: do customers recognize that we are delivering more value?, 3) Internal Business Process: have we improved key business processes so that we can deliver more value to customers?, and 4) Learning and Growth: are we maintaining our ability to change and improve?

Looking at the balanced scorecard of Jaguar – which offers distinctive, richly furnished luxury automobiles to wealthy individuals who prize individualized products such as leather seats, interior and exterior color combinations, and wooden dashboard- we can see that the performance measures used are closely linked to the company’s vision. “Dealership performance was measured throughout the year against a balanced scorecard including sales versus objective, customer satisfaction and product knowledge.”[i]

Jaguar is concerned about quality, which is why one of their performance measures is measuring how well the employees’ skills in installing options. Jaguar’s management stresses the availability of options, and the time taken to install such options; this is an internal business Process measure. This performance measure would ensure the satisfaction of customers which in turn would increase sales.

From the above we can see that Jaguar’s[ii] choice of performance measures in its balanced scorecard is complete and consistent with the organization’s objectives.

9-45 Designing a Balanced Scorecard Wells Fargo's 2001 annual report (p. 16) states that the company's vision is "to satisfy all our customers' needs, offer them sound financial advice and help them succeed financially." Similarly, the 2002 annual report (p. 16) states that the vision is "to earn all our customers' business." Both annual reports list the following 10 areas of strategic initiatives that the company has been benchmarking itself against for several years: •4 Investments, Trust, Brokerage and Insurance Going for "Gr-eight"! (Increase the average number of products per customer to eight) Doing It Right for the Customer 100 Percent Bank and Mortgage/Home Equity Cross-Sell Wells Fargo Cards in Every Wallet When, Where, and How Information-Based Marketing Be Our Customers' Payments Processor Outstanding Customers People as a Competitive Advantage : 2001 and 2002 annual reports provide some specific measures within the initiatives. Based on ; annual reports and any other information you are able to find, develop a Balanced Scorecard 1for Wells Fargo that will help it achieve its vision and monitor its performance on the strategic initiatives.

Wells Fargo describes itself as follows at (September 7, 2003):

Wells Fargo (NYSE: WFC) is a diversified financial services company—providing banking, insurance, investments, mortgage and consumer finance from 5,800+ stores, the world's leading internet banking site () and other distribution channels across North America and elsewhere internationally.

Further, the website states that Wells Fargo’s vision is “to satisfy all our customers' financial needs, help them succeed financially, and become known as one of America's great companies and the number one financial services provider in each of our markets.” Other facts reported include assets of $370 billion, over 20 million customer households served, and 6,290 ATMs.

A Balanced Scorecard for Wells Fargo can be developed similar to the chapter’s Balanced Scorecard for Metro Bank. Although Metro Bank is just beginning its transformation to a one-stop financial supermarket for targeted customers, its financial and customer objectives are similar to Wells Fargo’s. In the 1990’s, Wells Fargo already had a reputation for innovation and cost management (“Wells Fargo Online Financial Services (A),” Harvard Business School Case #9-198-146, p. 2). Examples of measures, targets, and initiatives (actions) described in Wells Fargo’s 2002 Annual Report (pages 18-20, strategic initiatives), focusing on the process perspective and learning and growth perspective, appear in the following table. Additional measures and initiatives are also provided.

| |Measures |Targets |Initiatives |

|Process perspective | | | |

|(1) Investments, trust brokerage and |Percentage of Wells Fargo’s|Increase profit of these|Add more private bankers, license more|

|insurance (satisfy customers’ |profit. |segments as a group to |bankers to sell mutual funds. |

|financial needs) | |25% of Wells Fargo’s | |

| | |profit. | |

|(2) Going for “gr-eight”! (cross-sell)|Number of products per |Increase average to 8. |Offer packages of products that save |

| |customer | |customers time and money. For example,|

| | | |the Homebuyers’ Package offers new |

| | | |mortgage customers a package of |

| | | |banking products that can save |

| | | |customers up to $340 per year. |

|(3) Doing it right for the customer |Proportion of customers |Cut proportion in half |Foster customer-focused culture and |

|(be advocates for customers) |lost per year |(to 1 in 10). |attitudes. |

|(4) 100 percent bank and mortgage/home|Percent of mortgage and |100% cross-selling |Initiative to migrate mortgage and |

|equity cross-sell |home-equity customers in |between banking |home-equity customers to become Wells |

| |Wells Fargo’s banking |customers and mortgage/ |Fargo banking customers. |

| |states who bank with Wells |home-equity customers | |

| |Fargo, and vice versa | | |

|(5) Wells Fargo cards in every wallet |Percent of bank customers |100% for each type of |Cross-selling initiative to existing |

| |who have a credit card or |card |banking customers without Wells Fargo |

| |debit card with Wells Fargo| |credit card. |

|(6) When, where, and how (match when, |Ranking of online services;|#1 ranking |Integrate delivery channels to match |

|where, and how customers want to be |number of active online | |when, where, and how customers want to|

|served) |customers in various | |be served. Some machines and web |

| |categories | |services have Spanish or Chinese |

| | | |language options. |

|(7) Information-based marketing |Percentage of customers |Offer right product at |Deploy customer relationship |

|(analyze and meet customer’s needs) |receiving personalized |the right time to save |management and data mining application|

| |marketing messages |customer time and money.|packages. |

|(8) Be our customers’ payments |Internet payments business | | |

|processor |revenue and transaction | | |

| |volume | | |

|(9) Outstanding customers (attract and|Retention rate for |100% | |

|retain “high-value” customers) |high-value customers | | |

| | | | |

|Learning and growth perspective | | | |

|(10) People as a competitive advantage|Percentage of key jobs | |Develop, reward, and recognize “team |

| |staffed with people with | |members”; build an inclusive |

| |requisite skills, | |workplace. |

| |knowledge, and training | | |

Development of a partial Balanced Scorecard for one of Wells Fargo’s segments appears in “Wells Fargo Online Financial Services (A),” Harvard Business School Case #9-198-146.

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[i]

[ii]

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