Question

Variance Analysis and Balanced Scorecards" Please respond to the following: Use the Internet and/or Strayer Learning Resource Center to research a company that has implemented a balanced scorecard system for evaluating performance. Suggest at least two (2) variance measures the identified company can employ in a balanced scorecard performance evaluation system, and examine how the company can use these variances to improve performance. Examine the main reasons service companies are more sensitive to labor and price variances, as compared to material price variances, and determine the importance of companies managing these variances in relation to sustaining profitability.

Answer 1

The Balanced Scorecard Links Performance Measures

• How do customers see us? (customer perspective)

• What must we excel at? (internal perspective)

• Can we continue to improve and create value? (innovation and learning perspective)
• How do we look to shareholders? (financial perspective)

Customer perspective :

Many companies today have a corporate mission that focuses on the customer. “To be number one in delivering value to customers” is a typical mission statement. How a company is performing from its customers’ perspective has become, therefore, a priority for top management. The balanced scorecard demands that managers translate their general mission statement on customer service into specific measures that reflect the factors that really matter to customers.

Customers’ concerns tend to fall into four categories: time, quality, performance and service, and cost. Lead time measures the time required for the company to meet its customers’ needs. For existing products, lead time can be measured from the time the company receives an order to the time it actually delivers the product or service to the customer. Quality could also measure on-time delivery, the accuracy of the company’s delivery forecasts. The combination of performance and service measures how the company’s products or services contribute to creating value for its customers.

Internal Business Perspective: What Must We Excel at?

Customer-based measures are important, but they must be translated into measures of what the company must do internally to meet its customers’ expectations. After all, excellent customer performance derives from processes, decisions, and actions occurring throughout an organization. Managers need to focus on those critical internal operations that enable them to satisfy customer needs. The second part of the balanced scorecard gives managers that internal perspective. The internal measures for the balanced scorecard should stem from the business processes that have the greatest impact on customer satisfaction—factors that affect cycle time, quality, employee skills, and productivity, for example.

Main reasons for service companies are more sensitive to labour and price variances :

Service industry provides services to the customers and employees are the main sources of generating services to the customers this is why, labor force is the most important element of the service industry. Service companies are more sensitive to labor and price variances as compared to material variance due to certain reasons. The service industry is core dealing with labor in order to manage their operations of providing customers satisfaction. So the service industry major expenditure is spend on labor cost as compared to material cost. The most of the service industry dealings are based on employees performance. So the service industry is highly depend on labor force. In this way, the variance related to labor cost is more important as compare to material cost variance. In service industry, the organizations need to focus on labor cost as its main cost consists of labour/professional charges.

These variance needs to be manged strictly as increase in variance ratio will affect companies profitablity and costs. Company can prepare budgets for labour cost and then measure actual versus budgeted to take proper measures for managing these variances.