The Innovation and Learning Perspective of the Balanced Scorecard - Research Paper Example

The main objectives of any business are to create profits, minimization of costs of production and stability that ensures continuation of operations. However, these objectives are faced by various challenges in the dynamic business world. Therefore, the ability of a business to overcome these challenges ensures its survival. One of the main challenges in a business environment is budget variances. In business, a variance is the difference between what the business managers expected and budgeted for and what they really received at the end of a financial year. In this case, a budget is a financial preparation that covers a specific period of business operations (Berry et. al. 2006). The budget usually shows different expectations of expenditure and revenues of a business. Under normal circumstances, a large organization creates departmental budgets while small organizations create a single budget for the whole firm. The comparison between the budget estimates and the end results of all business operations gives the management a variance. There are two main causes of variances in a business’s budget. One of the main causes is spending more than the budget allows. This could be due to the fact that the management budgeted for less than required; there was mismanagement of funds or general poor planning. Secondly, there may be an unexpected emergency in a business that may cause a major drift in the use of funds from the budget (Berry et. al. 2006). Mechanical damages to a major processing asset for instance could lead to an urgent purchase of another one in order to maintain the expected level of production. As an example, the Manchester Meerkat Company (MMC) suffered a blow when floods drained the fibre filling. This caused an emergency spending that may have resulted to variance in the budget. This would cause destabilization in the budget hence a variance. These variances can either cause adverse effects to an organization if ignored or lead to success in business if noted and improved. This is because there exists two categories of variances namely favorable and unfavorable variances. The favorable variances occur where the results of business operations are better as compared to the expected results. On the other hand, the unfavorable variances occur whenever the end results of business operations are worse than expected results. Therefore, managers always carry out variance analysis in order to look-after-the fact at what caused the difference. Furthermore, according to Blocher & Cokins (2005) this analysis helps the management to pinpoint the effects the variances have to the business and how to correct or improve on them. The identification and isolation of the variance by the managers of an organization is crucial because diverse causes will dictate different remedies or opportunities. Furthermore, the causes of variance fall under the controllable and the uncontrollable categories. The controllable factors are changeable by the management. Poor planning and labor costs for instance are controllable factors where the management can correct by use of better planning and monitoring methods. On the other hand, there are other external factors that are uncontrollable. These factors are determined by outside entities of an organization. An increase in utility prices and/or an increase in the cost of raw materials for example are uncontrollable factors that may cause variance (Clinton, Matuszewski & Tidrick 2011). In all business organizations, there are people in the management who are responsible for various operations. The operations may be delegated to the relevant departments in order to ensure a smooth running of the business. In our MMC case, the direct materials price variance is placed under the sales manager. The reason is that the manager determines the prices paid for goods, the quantity in units ordered, the delivery price conditions and the quality of the purchased materials. Therefore, the purchase manager is always, even though not entirely, responsible for any variance in direct materials prices. Other factors that may cause this variance include fluctuation of the prices of the direct materials, shortage of the materials and the need of such materials on urgent basis. According to Julie, the new purchases manager, the quality of direct materials is low and sub standard. This led to deviations from the standard production plans. Moreover, there was need for overtime required to meet the increased sales demand. The material price variance is determined by the difference between the real price paid for raw materials and the standard prices of the same materials (Carlberg 2010 p 56). In this case, whenever the standard price budgeted for is less than the real prices of the raw materials purchased by the MMC, the direct material price variance is said to be unfavorable. On the other hand, if the real price for the raw materials budgeted for is less as compared to the standard prices of the same materials, then the variance is said to be favorable. A favorable price variance may show that MMC purchasing manager was efficient to secure cheaper sources of direct materials without jeopardizing the quality. The materials price variance can be calculated using the following formula: Material price variance= (real quantity purchased*real price)-(real quantity purchased*standard price). The material quantity variance is also referred to as direct materials efficiency variance. This variance is given by the deviation of quantity of materials used in production from the standard quantity of materials that ought to have been used instead. This variance deals directly with the physical usage of materials. However, its quotation is done in monetary terms in order to assist in gauging its importance. The material quantity variance can be calculated as follows: Material quantity variance= (real quantity used*standard price)-(standard quantity allowed*standard price) Whenever the materials used exceed the standard materials to be used, then it is said to have an unfavorable material quantity variance. If the materials used are less than the standard materials to be used, it is said to be a favorable material quantity variance. The production managers of MMC are partly responsible for the variance in the material quantity. Normally, the production managers segregate the material quantity variance when the materials are positioned for the production procedure. During this process, the standard bill of materials is set for each unit. The materials are then drawn for the quantity of units manufactured by MMC. Any deviation from this process in terms of materials can therefore be detected and corrected before a major variance occurs. The direct labor rate variance is defined as the deviation shown between the standard and the real average hourly rate paid to direct labor workers in an organization. That is, the difference between the real hours worked and the standard rate of hours a worker is supposed to work. A positive deviation between these two variables shows a favorable direct labor rate variance while a negative deviation shows an unfavorable direct labor rate variance. Even though the payment rates are predictable, the variance can arise in the way that labor is used. The skilled workers for instance may be assigned tasks that require little skill yet the hourly rates of pay are high. Therefore, a negative variance may arise since the high hourly pay rates exceed the standard pay rate for such a task. In our case, the MMC employees are paid one-and-a-half times as much during the extra hours worked beyond the 8 hr day. This may lead to a variation since some of these workers have higher hourly rates as compared to the standard rate. On the other hand, a favorable direct labor rate variance may occur where low skilled workers are paid below the standard rate having performed the same task. In a production firm, it is the responsibility of the production supervisors to ensure the direct labor rate variance is controlled. As an example, the managers of the MMC are enjoying high salaries in addition to high commissions and incentives been rewarded to them despite the fact that a lot of work is done by the junior staff. The direct labor rate variance can be calculated as follows: Direct labor rate variance= (real hours worked*real rate)-(real hours worked*standard rate) The labor efficiency variance also referred to as the quantity variance for direct labor computes the productivity of labor time. This variance receives more attention from the management because of the influence it has on the reduction of costs for an organization. This is because managers believe that the increase in direct labor productivity leads to an eventual reduction of costs. In this case, the production manager and the purchases manager are jointly responsible for labor efficiency variance. The labor efficiency variance is calculated as follows: Labor efficiency variance= (real hours worked*standard rate)-(standard hours allowed*standard rate) According to Drury, Collin (2005) whenever the time allowed for standard processing exceeds the time for real processing, the firm is said to be experiencing a favorable labor efficiency variance. On the other hand if the time for real processing exceeds time allowed for the standard processing, the firm is said to be experiencing an unfavorable labor efficiency variance. In our case, there is an unfavorable variance experienced by the MMC since most employees resigned due to exhaustion. This led to hiring of more workers who demanded higher than standard wage rates The factory overhead spending variance is measured by the difference between the budgeted payments on authentic hours worked and the real expenses sustained. The variance is caused by a change in the prices of the indirect materials in addition to the indirect labor prices. The factory overhead spending variance is calculated as follows: (Real factory overhead-budgeted allowance based on real hours worked) Further, Fixed expenses budgeted + variable expenses (real hours worked * variable overhead rate) The factory overhead spending variance is normally under the responsibility of the department managers who is basically responsible for all expenses within a budget. Whenever the expected overhead expenses incurred exceeds the real variable overhead expenses, a department is said to be experiencing a favorable variance while the variance turns out to be unfavorable when the real variable overhead expenses exceeds the expected overhead expenses (Drury and Collin 2005 p 156). In a production firm, there is always the estimated amount of inputs requirements used in the production a unit of output and the real amounts used in the same production. Therefore, the difference between these two variables gives us the overhead efficiency variance. The overhead efficiency variance can also be used in analyzing the efficiency of production with respect to machine instance, manufacturing factors and materials. The overhead efficiency is obtained by adding the variable overhead efficiency variance to the fixed overhead efficiency variance. The variable overhead efficiency variance calculated as: (Real hours worked*fixed overhead rate) - (standard hours allowed*fixed overhead rate) According to Hugh et. al. (2005)The capacity variance of a firm can either be the fixed overhead capacity variance or the idle capacity variance. The fixed overhead capacity variance measures the variation between the budgeted fixed overhead and the absorbed fixed overheads. The fixed overhead capacity variance is the variation between the budgeted hours and the real number of hours worked while the idle capacity variance is the computation of the utilization of a plant’s assets. Even though there was maximum utilization of the available assets, the MMC employees used to work extra amounts of hours. The Manchester Meerkat Company’s management considers introducing a balanced scorecard to measure, manage and improve its performance. A balanced scorecard is a tactical planning and management scheme that is used extensively in organizations to sustain them in their vision and strategy. This helps to progress the internal and external communications, and examine organizations routine against strategic objectives. The proposal of using the balanced score card is justified. This is because the balanced scorecard presents the much needed framework that not only offers performance measurements but also assists the planners in the Manchester Meerkat Company to make out what should be done and measured. Secondly, BSC would help the managers to correct the previous vagueness of preceding management approaches that caused the variances in the company’s budget. Moreover, the BSC is an effective management tool successful in providing response around both the internal business operations and results. The balanced scorecard has four traditional perspectives that link various measures of a firm’s operations and their respective objectives. These perspectives include the financial, customer, the internal business and the innovation and learning perspectives (Hugh et. al. 2005). Each of this perspective has various objectives and their associated measures. To start with, the financial perspective of the balanced scorecard aims at attaining the survival and the continuity objective of a company (Nair & Mohan 2004). Moreover, it is also associated with the profitability of the company’s objective that ensures prosperity of the business’s operations. In this perspective, the associated measures of the above objectives include the cash flow, the enlarged market share and the quarterly sales growth. The cash flow measure concentrates on the cash inflows and the cash outflows. This is where a company ensures that the cash inflows exceed the cash outflows to guarantee profitability. Furthermore, long term stability of cash inflows leads to prosperity of a business due to constant profitability. In addition, the survival of business also depends on its market share. A large market share guarantees high sales and operating income. This results to profitability and continuation of a business’s operations. Secondly, we have the customer balanced scorecard perspective. Under this perspective, the main objectives of the company are to create a good customer-business relationship and the on-time delivery of products to their customers. The creation of a good customer-business relationship ensures customer loyalty. The end result is constancy in purchases of a company’s products leading to high sales volume (Nair & Mohan 2004). The measures associated with the above objectives are engineered research on the customer’s responses on the relationship and the on-time delivery of the products. The research measures the opinions of the customers regarding the quality and efficiency in delivery of the company’s products. The main aim of a company in this perspective is to be the leading company in delivering value to their customers. This enables such a company to gain an edge against their competitors. On-time delivery is a crucial part of the delivering value to the customers. It entails the analysis of the market regarding the products stock and the rate at which this stock runs out. A company that deals with manufacturing processes requires updated processing machines and processes. As an objective, these companies aim at gaining the technological capability and the manufacturing superiority in order to keep up or beat their competitors in the market in the internal business perspective in the balanced scorecard (Niven 2005). These improvements in the manufacturing department enable such a company to improve in the design and innovation of their products. The internal business perspective focuses on the processes, decisions and the actions that occur within the premises of the organization to ensure excellent customers performances. Here, the scorecard shows the managers the internal perspective of the company and the internal operations that have a great impact on the customer satisfaction. These factors include the production time, the quality and employee skills as examples. Finally, we have the innovation and learning perspective of the balanced scorecard. A company like Manchester Meerkat is faced by a dynamic business world and competitors. This environment required the management to oversee improvements of the existing products and the capacity to introduce new and unique products. This ensures that the company offers value to its customers and adds to its ability to improve its operating efficiencies (Niven 2005). Moreover, the company is also able to penetrate new markets in order to increase its customer base. In doing the above, the company advances in its effort to attain its technological leadership and product focus objectives. In an organization like Manchester Meerkat, there is the need to motivate the employees in order to increase productivity. The motivation is basically aimed at encouraging the employees to increase their innovativeness and productivity with regard to a given target. The set target serves as a bench mark for productivity. The bench mark helps in providing a realistic target for the comparison between various performances of either a group or individual employees. Moreover, the employees who reach this set target are rewarded. The rewards are meant to encourage the employees to continue their good work and also make the underperforming employees to put more effort with an aim of being rewarded. There are some advantages and disadvantages of the incentive program to the department heads of the MMC. In most cases, employees do not use their full potential in working for an organization for the ordinary salary. However, additional gifts and presents add to the motivation of the employees leading to higher production. The department heads benefit from good results of their respective departments and this may result to promotions. Moreover, the incentive program also creates an environment of healthy competition within departments. This leads to increased production hence recognition for the departmental heads (David, Palmer 2000). On the other hand, the incentive programs have some adverse effects. The incentives may create a rift among the employees since some would feel that they are being treated unjustly. Consequently, the overall performance of a department drops. This may jeopardize the departments head as it would raise the concern of the top level management (Incentive marketplace 2010). Furthermore, an unfair implementation of the program may lead to employees negative reaction where some of them would view it as been taken advantage of. The end results in under productivity of a department as a whole. In such a situation, the departmental heads gain negative publicity around the organizations management level. In addition to the incentive programs that concentrate more of employees’ performance and rewards, there are other methods of performance measurement employed by various organizations. They include the alternate ranking method, forced distribution method, the graphical rating scale method and the 360 degree feedback (Sales Creators 2007). These methods are used to evaluate employees past and current performances. These performances are them compared to the standard performance expectations of the employee. I would propose to the Manchester Meerkat Company to reconsider the incentive compensation plan for managers. This is because some employees feel that they have been taken advantage of since the program favors the managers only. I would recommend to the company to also include the junior staff and the subordinates in the incentive compensation (Incentive marketplace 2010). This would ensure a synchronized system for all employees hence increase productivity. Furthermore, the managers rewarding system is also discouraging to the junior employees. This is because the overall performance of a department depends on all the workers yet it’s only the department heads are rewarded. My recommendation will be to encourage the Manchester Meerkat company to engage all workers the performance appraisal and rewards (Sales Creators 2007). References Berry, Aidan, Peter, Jarvis, & Robin, Jarvis 2006, Accounting a Business Context, 4th edition, Patrick bond, USA. Blocher, Stout, & Cokins, Chen 2005, Cost Management: Strategic Emphasis, McGraw-Hill, New Jersey. Carlberg, Conrad 2010, Business Analysis with QuickBooks, Wiley Publishing Inc, Canada. Clinton, B, Matuszewski, L, & Tidrick, D 2011, Cost Management: Escaping Professional Dominance, New York: Thomas Reuters RIA Group. Drury, Collin 2005, Management Accounting for Business, 3rd edition, John Yales, Canada. 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