CHAPTER 13

STRATEGIC PLANNING AND CONTROL

TRUE/FALSE
1. To build and preserve a significant market share in any competitive market, a
firm must offer a unique value proposition, the key source of customer value, to
its target market.
LO1 True
2. Firms following Kaizen Strategy couple their strategy with market power to raise
significant barriers to potential entrants thereby preserving their market share
and long-term profitability.
LO1 False
Firms following cost leadership
3. Firms following a value differentiation strategy focus on continuous improvement
and customer satisfaction.
LO1 False
Firms following a value differentiation strategy focus on R&D and
product innovation activities.
4. With differentiation strategy, innovation is more important than cost control.
LO1 True
5. Product costs do not play as critical a role in pricing as the markets perception
of the value differentiation.
LO1 True
6. A value chain is a set of logically sequenced, value adding activities that convert
input resources into products or services in a manner consistent with the chosen
business strategy.
LO2 True
7. It is typically best for a firm to outsource or form strategic alliances with outside
suppliers to perform those value activities in which it does not have a unique
advantage.
LO2 True
8. The value chain should never extend beyond the boundaries of the firm.
LO2 False
The value chain often extends beyond the boundaries of a firm.
9. The activity-based approach to configuring the value chain is useful for both
value differentiation and cost leadership strategies.
LO2 True
10.Firms following the cost leadership strategy intensively scrutinize costs, starting
once the product is finished to after the customer purchases the product.
LO2 False
Firms following the cost leadership strategy intensively
scrutinize costs, starting with the product design and development stage to the
last operation.

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Balakrishnan Managerial Accounting

11.Product life cycle is an important element of a business strategy because it
determines the rate at which companies have to develop and introduce new
products to compete effectively.
LO3 True

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Strategic Planning and Control

12.In the development stage of a products life cycle we expect sales revenue only
sufficient to cover costs.
LO3 False
In the development stage of a products life cycle, we expect no
sales revenue from the product. Instead, we expect significant expenditures in
product R&D activities.
13.In the introduction and growth stage of a products life cycle profitability typically
begins slow and picks up as the scale of marketing and production goes up.
LO3 True.
14.Product life cycle analysis emphasizes that the objective is to maximize
profitability of a product in its early stages to sustain it over the later stages of
the cycle.
LO3 False
Product life cycle analysis emphasizes that the objective is to
maximize profitability of a product over its entire life and not stage-by-stage.
15.Target costing is particularly effective for products with well-defined and discrete
features because it helps in making proper tradeoffs among price, quality and
functionality with respect to each product feature.
LO3 True
16.The primary reason ROI is by itself not enough to communicate strategy is that
it only reflects the effect of components of the income statement.
LO4 False
The primary reason ROI is by itself not enough to communicate
strategy is that it is a lagging measure that reflects past performance.
17.Critical success factors are performance measures that must go right for an
organization to implement its strategy successfully and achieve its mission.
LO4 True
18.One characteristic of a critical success factor is that it is readily quantifiable.
LO4 True
19.Strategic critical success factors are short-term, industry-specific measures that
can be used to measure customer satisfaction.
LO4 False
Strategic critical success factors are long-term, firm-specific
measures.
20.Once a firm chooses critical success factors, little importance is placed on setting
targets and monitoring progress.
LO4 False
Once a firm chooses critical success factors, it is important to
set targets and monitor progress.
21.The balanced scorecard stresses the importance of linking long-term
performance measures to the firms strategy and for linking the various
measures in the organizational perspectives.
LO5 True

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Balakrishnan/Managerial Accounting, 2e
22.The balanced scorecard uses only financial measures to evaluate short-term
versus long-term objectives, past outcomes versus futures outcomes, and
external versus internal factors.
LO5 False
The balance scorecard uses financial and non-financial measures
of performance.
23.An example of a hard measure when using a balanced scorecard approach is
asset turnover.
LO5 True
24.Firms following the low-cost-producer strategy constantly seek process
innovations to reduce costs and increase efficiencies.
LO5 True
25.There is no sense in achieving customer satisfaction and improving business
process if these actions do not translate into financial returns for the companys
owners.
LO5 True
26.The first step in target costing is to compute the allowable cost of the product.
Appendix False
The first step in target costing is to conduct market
research to identify the features of proposed products.
27.A firm using target costing obtains the allowable cost by subtracting the targeted
profit margin from the expected price point.
Appendix True
28.In target costing, functional analysis involves assessing the value that the target
market attaches to each function or feature of the product, and stressing only
those functions that are valued the most.
Appendix True
29.Value engineering is an organized effort directed at assessing the value that the
target market attaches to each engineered feature of the product, and stressing
only those that are valued the most.
Appendix False
Value engineering is an organized effort directed at
achieving essential product functions at the lowest life cycle cost consistent with
required performance, quality, reliability and safety.
30.If a firm determines that it is not possible to produce a product under the
allowable cost, the best course of action is always to abandon the product.
Appendix False
If a firm determines that it is not possible to produce a
product under the allowable cost, the best course of action may be to redefine
the product and the target market and seek an alternate price point.

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Strategic Planning and Control

MULTIPLE CHOICE
31.Techniques that help a firm to incorporate a long-term view when making
strategic planning decisions are:
A. Life cycle analysis.
B. Target costing.
C. Kaizen analysis.
D. A and B.
E. A, B and C.
LO1 D
32.If a company is pursuing a cost leadership strategy, which of the following
management accounting functions will not be critical to its success?
a. Product differentiation analysis
b. Role of costs in pricing
c. Role of budgets in control
d. Benchmarking costs against the competition
LO1-A
33.Management of Padi Manufacturing created a full-fledged, activity-based costing
system to support its strategy. Which of the following is not a concern for Padi?
a. Focusing on cost reduction
b. Making decisions based on who has the greater cost advantage, considering
costs throughout the value chain
c. Identifying the cost of an activity to the entire value chain by taking all
linkages into account
d. Outsourcing activities that do not help differentiate
LO1D
34.A firm has determined the cost of constructing storage buildings for the City of
Atlantic Beach by working backward from the value that city managers have
established. Which of the following terms is best associated with this idea?
a. Cost gap
b. Current cost
c. Target cost
d. Allowable cost
LO3-C
35.Vita Drinks produces smoothies and other juice drinks for health conscious
individuals. Its managers are considering a new juicer that will extract the
unneeded parts of pomegranates to create new drinks. Vita Drinks believes it
may be able to sell 2,000 of the new product at an average price of $4.00 per
drink. Management specifies a target profit margin of 20% return on sales. If the
products current cost is $3.38 per unit, how much is the cost gap?
a. $0.18
b. $0.62
c. $0.80
d. $0.68
LO3-A

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Balakrishnan/Managerial Accounting, 2e
36.What action should management most likely take during the decline stage of the
product life cycle?
a. Increase its market reach
b. Aggressive pricing
c. Ensure maximum efficiencies
d. Implement cost reduction initiatives
LO3-B
37.Which one of the following is a measure that would be helpful in monitoring
customer behavior in an E-tail store?
a. Time spent in a companys website
b. Number of phone calls to help lines
c. Number of canceled transactions
d. Number of billing complaints
LO4-A
38.Malrado Construction is very efficient in its production completion times, has a
low rate of warranty repairs due to the high level of satisfaction with the new
homes it builds. It also has very low employee turnover. Under which component
of the balanced scorecard does this fall?
a. Financial perspective
b. Customer perspective
c. Internal business perspective
d. Innovation and learning perspective
LO5-C
39.Which of the following is not one of the three main considerations in formulating
business strategy?
a. Competitive landscape
b. Sustainability
c. Core competencies and capabilities
d. Cost leadership
LO1-D
40.The CEO of Estes Enterprises is primarily concerned with the companys
activities involved in warehousing finished goods, packing, shipping, and
installation of the companys products at the customers site. With which area of
the value chain is the CEO primary concerned?
a. Inbound logistics
b. Production operations
c. Outbound logistics
d. Service activities
LO2-C
41.Which stage in the product life cycle yields the maximum revenue generation?
a. Development
b. Growth
c. Maturity
d. Decline
LO2-C

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42.When is target costing most effective?

a. When firms can obtain substantial and sustainable price premiums
b. In firms offering products with well-defined and discrete features
c. In firms offering commodity-type products
d. In firms that have little or no competition
LO3-B
43.By which of the following is ROI best characterized?
a. A lagging financial measure that reflects past performance
b. A lagging financial measure that provides specific information about
potential areas of concern for the entire company
c. A leading financial measure that measures limited information about an
organizations potential for future performance
d. A leading non-financial measure that provides information needed in a timely
manner to take immediate and on-the-spot corrective actions
LO4-A
44.Which component of a balanced scorecard considers how the company looks
from a shareholders perspective?
a. Internal business perspective
b. Financial perspective
c. Customer perspective
d. Innovation and learning perspective
LO5-B
45.Which of the following considerations does not influence the formulation of a
successful business strategy?
a. Verifiability.
b. Sustainability.
c. Competitive landscape.
d. Core competencies and capabilities.
e. All of the above are considerations that influence the formulation of a
successful strategy.
LO1 A
46.Which of the following is not a competitive force firms should consider when
formulating a business model?
a. Intensity of competition.
b. Barriers to new entrants.
c. Threats from substitute products.
d. Bargaining power of suppliers.
e. All of the above are competitive forces firms should consider.
LO1 E

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Balakrishnan/Managerial Accounting, 2e
47.Firms following a value differentiation strategy stay ahead of competition by:
a. Being quicker to develop and market the next generation of products.
b. Finding innovative ways to improve their business processes and cut costs.
c. Providing their target customer base a unique experience with their products
and services.
d. A and C only.
e. A, B and C.
LO1 D
48.Which of the following is not a characteristic of firms following the strategy of
cost leadership?
a. Exploit economies of scale.
b. Institute tight cost controls.
c. Adopt organization-wide policies of cost minimization.
d. Focus on innovation more than cost control.
e. All of the above are characteristics of firms following the strategy of cost
leadership.
LO1 D
49.Which of the following is not an example of an activity included in the category
of inbound logistics?
a. Inventory control of input materials.
b. Purchasing.
c. Inspection.
d. Machine setup.
e. All of the above are examples of inbound logistics.
LO2 D
50.Which of the following is not one of the generic categories in the value chain of
primary activities for manufacturing?
a. Production operations.
b. Inspection.
c. Marketing and sales.
d. After-sales service.
e. All of the above are generic categories in the value chain.
LO2 B
51.Which of the following is not an example of an activity included in the category
of service activities?
a. Market research.
b. Customer support.
c. Warranty work.
d. Maintenance at the customer site.
e. All of the above are examples of service activities.
LO2 A

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52.Under differentiation strategy, a firm evaluates activities based on how they
enhance the success of a business strategy. Which of the following is such an
activity?
a. Product research and development.
b. Generation of new ideas.
c. Systematic cost reduction initiatives.
d. A and B.
e. A and C.
LO2 D
53.Which of the following is not an example of an activity included in the category
of marketing and sales activities?
a. Advertising.
b. Customer support.
c. Pricing.
d. Market research.
e. All of the above are examples of marketing and sales activities.
LO2 B
54.The life cycle of a product depends on all the following except:
a. Nature of the product.
b. Nature of the industry.
c. Level of competition in the industry.
d. Rate at which technology is changing.
e. All of the above are factors affecting the life cycle of a product.
LO2 E
55.Which of the following is the profitability expectation during the maturity stage
of a product?
a. Maximum revenue/minimum cost of operations.
b. No profit/ net cash outflow.
c. Declining revenues/declining profit.
d. Maximum revenue generation/maximum cost of operations.
e. Revenue/low profits.
LO3 A
56.Which of the following is not a key activity in the introduction and growth stage
of a product?
a. Marketing and distribution.
b. Promotion.
c. Test marketing.
d. Improve production efficiencies.
e. All of the above are key activities in the introduction and growth stage.
LO3 C

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Balakrishnan/Managerial Accounting, 2e
57.Which of the following is a management action during the declining stage of a
product?
a. Ensure maximal efficiencies.
b. Identify and implement cost reduction initiatives.
c. Aggressive pricing.
d. Increase capacity utilization.
e. All of the above are management actions during the declining stage.
LO3 C
58.In many industries, a large fraction of total product-life cycle costs become
committed at the:
a. Research stage.
b. Development stage.
c. Introduction and growth stage.
d. Maturity stage.
e. Decline stage.
LO3 B
59.Which of the following is not a deficiency of financial measures?
a. Financial measures often reflect the aggregate performance of the entire
company or division.
b. Financial measures do not provide information needed in a timely manner to
take immediate and on-the-spot corrective actions.
c. Financial measures do not provide specific information about potential areas
of concern.
d. Financial measures are generally subjectively assessed.
e. All of the above are deficiencies of financial measures.
LO3 D
60.Critical success factors are also known as:
a. Key performance indicators.
b. Outcome indicators.
c. Go right measures.
d. Industry-related measures.
e. None of the above.
LO4 A
61.Which of the following is a characteristic of operational critical success factors
(CSF)?
a. Operational CSFs are short-term measures.
b. Operational CSFs focus on the efficiency with which an organization is
utilizing its resources.
c. Operations CSFs may be financial or non-financial.
d. All of the above are characteristics of operational CSFs.
e. None of the above are characteristics of operational CSFs.
LO4 D

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62.Which of the following is not a characteristic of strategic critical success factors
(CSF)?
a. Strategic CSFs are long-term measures.
b. Strategic CSFs focus on the efficiency with which an organization is utilizing
its resources.
c. Strategic CSFs are firm-specific.
d. Strategic CSFs help companies monitor the success of their unique corporate
and business strategies.
e. All of the above are characteristics of strategic CSFs.
LO4 B
63.Which of the following is not a characteristic of a good critical success factor?
a. Simple and easy to understand.
b. Linked to strategy.
c. Subjective in nature.
d. Easy to monitor.
e. All of the above are characteristics of a good critical success factor.
LO4 C
64.The balanced scorecard approach to performance measurement:
a. Allows an organization to choose among numerous CSFs representing
organizational performance.
b. Allows management to organize the measurement in a way that
communicates the firms strategy.
c. Allows all employees to see how their decisions affect other dimensions of
organizational performance.
d. A and B only.
e. A, B and C.
LO5 E
65.In a balanced scorecard system, which of the following is not a performance
measurement dimension?
a. Short-term and long-term objectives.
b. Hard objective and short subjective measures of performance.
c. Past outcomes and forward looking measures of performance.
d. External and internal measures of performance.
e. All of the above are dimensions of performance measurement under a
balanced scorecard approach.
LO5 E
66.Balancing all the dimensions to design an effective corporate scorecard system
is challenging because:
a. It requires free and frank communication.
b. It requires a clear strategic vision on the part of senior executives.
c. It requires organization-wide buy into the chosen set of measures.
d. All of the above.
e. None of the above.
LO5 D

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Balakrishnan/Managerial Accounting, 2e
67.Which of the following is not a component of a balanced scorecard?
a. Financial perspective.
b. Technology perspective.
c. Customer perspective.
d. Internal business perspective.
e. All of the above are components of a balanced scorecard.
LO5 B
68.Which of the following is not a direct measure of customer perceptions?
a. Sales growth.
b. Customer satisfaction.
c. The number of customer complaints.
d. Market share.
e. All of the above are direct measures of customer perceptions.
LO5 A
69.Which of the following is not an alternative if the expected product cost is higher
than the allowable cost?
a. Identify cost reduction goals at various operation/activities.
b. Functional analysis.
c. Value engineering.
d. Increase volume of sales.
e. All of the above are alternatives.
Appendix D
70.Which of the following is not a characteristic that describes functional analysis?
a. Assess the value that the target market attaches to each function or feature
of the product.
b. Direct effort at achieving essential product functions at the lowest life-cycle
cost consistent with required performance, quality, reliability, and safety.
c. Stress only those functions that are valued the most.
d. Determine if it is possible to combine or eliminate some product functions
without losing much from the customers perspective.
e. All of the above are characteristics that describe functional analysis.
Appendix B
71.Which of the following is not a step in most target costing systems?
a. Set standard costs for the proposed product.
b. Compute the allowable cost of the product.
c. Compare the expected product cost with the allowable cost.
d. Review product launch.
e. All of the above are steps in most target costing systems.
Appendix A

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72.Texun Electronics manufactures scientific calculators. The product life of a
calculator is four years. Each model typically offers similar features. Texun
targets and average profit margin of 10% of its expected revenue over the
life cycle. It does not expect its manufacturing cost to vary materially over
the four-year life. Estimated volumes and unit price of model TE75 over its
expected life is given below:
Year
Year
Year
Year
Year

1
2
3
4

Volume
(units)
30,000
50,000
35,000
25,000

Unit
price
$85
$75
$50
$45

Applying the target costing model, the allowable unit cost of TE75 is:
a. $150.77
b. $58.98
c. $65.53
d. $63.75
e. $45
Appendix B

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Balakrishnan/Managerial Accounting, 2e
Problems
1. One of the most important tasks for top management is to develop the
organizations strategy. This decision charts the firms long-term course. The
chosen strategy must allow management to create and sustain a business
model that will yield sufficient returns to the suppliers of capital.
Required:
Enter the identifying letters in the blanks below to indicate the term that best
matches each description.

1.
2.
3.
4.
5.
6.
7.
8.
9.
10
.

A.
B.

Allowable cost
Core competency

Lagging measures
Leading measures

Cost gap
Cost leadership

F.
G
.
H.
I.

C.
D
.
E.

Critical success factors

J.

Value proposition

Target costing
Value differentiation

A technique for cost planning during product design and

development.
A strategy of competing on the basis of cost advantages.
The cost target we must meet to achieve profit targets.
The key source of customer value provided by an organization.
Measures that reflect past performance.
Skill set and expertise that characterize a firm and its employees.
Measures that capture the drivers of future performance.
Things that must go right for the organization to be successful.
The difference between current cost and allowable cost.
Strategy of competing on the basis of providing customer value
through innovation.

2. A value chain is a set of logically sequenced, value adding activities that

convert input resources into products or services in a manner consistent with
the chosen business strategy. The activity-based approach to configuring the
value chain is useful for both value differentiation and cost leadership
strategies. However, these strategies differ in the emphasis they place on
what each activity should achieve and how it should contribute to the
strategy.
Required:
a. List the five generic categories of a value chain.
b. Give two examples of primary activities in each of the five categories.
c. What is the primary difference between value differentiation strategy and
cost leadership strategy?
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Strategic Planning and Control

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Balakrishnan/Managerial Accounting, 2e
3. Fishing Manufacturing, which makes small engines, is planning for a new
product. Current sales projections call for 3,000 units at a sales price of $250
per engine. Management wants to earn a profit margin (measured as return
on sales) of 10% on products. The following is the products current cost
structure:
Item
Materials
Direct labor
Manufacturing overhead (fixed)
General and administrative costs
Total

Unit
cost
$80
$70
$40
$15
$205

Required:
a.

Compute the products unit allowable cost.

b. What is the cost gap?

4. Critical success factors (CSF) are performance measures that must go right
for an organization to implement its strategy successfully and achieve its
mission.
Required:
Indicate by placing a Y for Yes and an N for No in the columns indicating
whether each of the following items describes a critical success factor for two
retail outlets.
Wal-Mart

Neiman
Marcus

Description

1. _____

_____

Assistance from sales clerk in selecting item.

2._____

_____

Sales turnover of different items

3._____

_____

Delightful shopping experience for customers

4._____

_____

Geographical penetration

5_____

_____

Minimizing prices

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Strategic Planning and Control

5. A typical balanced scorecard suggests that managers look at their firms from
four different perspectives.
Required:
Indicate by placing an X in the appropriate column whether each of the
following items describe a financial perspective, a customer perspective, an
internal business perspective, or an innovation and learning perspective.
Financ
ial

Custom
er

Intern
al

Innovati
on

1.
2.
3.

Description
Cost per transaction
Return on equity
Number of training
hours
Sales growth
Market share
Percent defective
output
Number of complaints
Number of new
patents
Return on net assets
Cycle time

4.
5.
6.
7.
8.
9.
10
.

6. Washington Manufacturing produces and sells high-tech GPS receivers. The

product life of a GPS receiver is estimated to be three years. Each model
typically offers many similar features. Washington targets an average profit
margin of 10% of its expected revenue over the life cycle. It does not expect
its manufacturing cost to vary materially over the three-year life.
Washingtons estimates of sales volume and the unit price of the model over
its expected life is presented below:

Year 1
Year 2
Year 3

Volume
(units)
9,000
7,000
4,000

Unit
Price
$599
$559
$459

Required:
a. What is Washingtons unit allowable cost?

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Balakrishnan/Managerial Accounting, 2e
Problem solutions
1. Terms (LO1)
1.

2.
3.
4.
5.
6.
7.
8.
9.
10
.

D
A
J
F
B
G
E
C
I

A technique for cost planning during product design and

development.
A strategy of competing on the basis of cost advantages.
The cost target we must meet to achieve profit targets.
The key source of customer value provided by an organization.
Measures that reflect past performance.
Skill set and expertise that characterize a firm and its employees.
Measures that capture the drivers of future performance.
Things that must go right for the organization to be successful.
The difference between current cost and the allowable cost.
Strategy of competing on the basis of providing customer value
through innovation.

2. Value Chain (LO2)

a. Categories in value chain:
Inbound logistics
Production operations
Outbound logistics
Marketing and sales
After sales service
b. Examples:
Inbound logistics purchasing, receiving, inspection, inventory
control
Production operations production scheduling, setup, machining,
direct labor operation, assembly
Outbound logistics warehousing finished goods, packing, shipping,
installation at customer site.
Marketing and sales selling, promotion, advertising, pricing,
market research
Service activities customer support, warranty work, maintenance
at the customer site
c. Under a value differentiation strategy, we evaluate activities based on
how they enhance the success of a business strategy. In contrast, the
cost leadership strategy sustains the competitive edge by constantly
seeking ways to reduce costs throughout the value chain.

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Strategic Planning and Control

3. Allowable cost (LO3)
a.
Total expected sales revenue (3,000 x
$250)
Total target margin (.10 x $750,000)
Total allowable cost ($750,000 $75,000)
Unit allowable cost ($712,500
3,000)

$750,00
0
$75,000
$675,00
0
$225

b. $225 - $205 = $20

4. Implementing Strategy (LO4)

Wal-Mart

Neiman
Marcus

Description

1. __n___

__y___

Assistance from sales clerk in selecting item.

2.__y___

__n___

Sales turnover of different items.

3.__n___

__y___

Delightful shopping experience for customers.

4.__y___

__n___

Geographical penetration.

5__y___

__n___

Minimizing prices.

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Balakrishnan/Managerial Accounting, 2e
5. Monitoring Strategy Implementation (LO5)
Financ
ial
1.
2.
3.
4.
5.
6.

Intern
al
X

Innovati
on

X
X
X
X
X

7.
8.
9.
10
.

Custom
er

X
X
X
X

Description
Cost per transaction
Return on equity
Number of training
hours
Sales growth
Market share
Percent defective
output
Number of complaints
Number of new
patents
Return on net assets
Cycle time

6.
Allowable cost:
Total expected sales revenue
Total target margin
Total allowable cost
Unit allowable cost

13-20

$1,114,0
00
$111,40
0
$1,002,6
00
$50.13

Strategic Planning and Control

Short Answer
1. What are the two types of business strategy?
2. What are the five forces that affect the competitive landscape?
3. What is a value proposition?
4. Traditional management accounting plays a more critical role in firms that follow
a cost leadership strategy than in firms that seek to differentiate their products
and services. True or False?
5. What is a value chain?
6. List the four steps in configuring a value chain.
7. What is life-cycle analysis?
8. What are the five stages in a products life cycle?
9. What is target costing?
10.Why do organizations use both leading and lagging indicators of performance?
11.What are the three deficiencies of financial measures?
12.How does the problem of managing companies resemble the problem a pilot
faces when flying a jetliner?
13.What is a critical success factor (CSF)? What are two kinds of CSFs? What are
four properties of a well-defined CSF?
14.What is the balanced scorecard? What are the four components of a usual
balanced scorecard?
15.What is the balance in the balanced scorecard?

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Balakrishnan/Managerial Accounting, 2e
Short Answer Solutions
1. (LO1) Cost leadership, and value differentiation
2. (LO1) (1) Industry competitors, (2) new entrants, (3) substitute products, (4)
supplier power, and (5) customer power.
3. (LO1) The key source of customer value.
4. (LO1) Yes, this is generally true.
5. (LO2) The value chain is a set of logically sequenced, value-adding activities
that convert input resources into products or services in a manner consistent
with the chosen business strategy.
6. (LO2) (1) List all activities and prepare the activity map, (2) Identify
performance linkages across activities, (3) Engineering activities, and (4)
Determine activity-sourcing.
7. (LO3) Product life-cycle analysis emphasizes that the objective is to
maximize the profitability of a product over its entire life cycle and not stageby-stage.
8. (LO3) (1) Development, (2) Introduction, (3) Growth, (4) Maturity, and (5)
Decline
9. (LO3) Target costing as a structured approach to cost planning and
management it determines cost by working backward from the customers
value.
10.(LO4) Because its important to know where we have been and where we are
going. Lagging indicators reflect past performance, whereas leading
indicators are drivers of future performance.
11.(LO4) Financial measures are (1) aggregate, (2) are not always timely, and
(3) do not provide specific information about potential areas of concern.
12.(LO4) Just like a pilot, managers need to attend to multiple measures and
gauges of a performance to ensure that the company is headed in the right
direction.
13.(LO5) Critical success factors, also known as key performance indicators, are
performance measures that must go right for an organization to implement
its strategy and successfully achieve its mission. Outcomes of the critical
success factors are the pulse of the organizations survival. Organizations
have both short- and long-term critical success factors. Critical success
factors should be: (1) simple and easy to understand, (2) readily quantifiable,
(3) easy to monitor, and (4) linked to strategy.

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Strategic Planning and Control

14.(LO5) A balanced scorecard is a performance measurement system that
includes a systematic approach for linking strategy to planning and control.
The four components, or perspectives, are (1) financial, (2) customer, (3)
internal business, and (4) innovation and learning.

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Balakrishnan/Managerial Accounting, 2e
15.(LO3) Balance is obtained by attending to (1) financial and non-financial
measures, (2) short- and long-term objectives, (3) past and forward-looking
measures, (4) hard and soft measures, and (5) external and internal
measures. That is, excessive weight is not placed on any single measure or
perspective.

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Strategic Planning and Control

Short Essays
1. Suppose a firm is not legally liable for how its product is disposed. Should it
consider disposal costs in its cost analyses? For example, consider a
manufacturer of lithium ion batteries such as watches or cathode-ray-tube
monitors, such as many computer monitors.
2. Products such as digital cameras sell at increasingly lower price points (e.g.,
$249, $199, and so on) as firms introduce newer models. How should we account
for this feature in life-cycle analysis?
3. Why is target costing not necessarily useful for a firm such as Tyson Foods, which
processes poultry and other animal products? Do these factors imply that cost
control is not a key focus in Tyson Foods?
4. Suppose an intensive target costing exercise concludes that a product could not
meet its allowable cost. However, the firms strategic group argues that the
product is vital for retaining the firms presence in an important market segment.
Should the firm abandon the product or develop it?
5. Consider a professional sports team such as the New York Yankees. What are its
leading measures of performance? What implications does it have for evaluating
the performance of a newly hired coach?
6. What might the components of a balanced scorecard be for a municipality? For a
not-for-profit hospital?

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Balakrishnan/Managerial Accounting, 2e
Short Essay Solutions
1. (LO2)

Obviously, the issue is one of ethics. Absent legal liability, a company

might choose to dispose dangerous material in a careless manner to avoid costs
of disposal. In this case, cost is not a consideration (The unfortunate Union
Carbide episode in Bhopal, India comes to mind). However, firms have a social
responsibility to dispose hazardous material in an environmentally safe manner.
Good economic analysis would dictate that such costs be taken into account in
decision making

2. (LO3)

At the time of product introduction, firms should estimate life-cycle

revenues by taking into account the expected downward trend in prices in order
to compute expected life-cycle profit. Failure to do so might well lead to the
launching of products that may be end up being loss makers for the firm.

3. (LO3)

In general, target costing is effective for products with well-defined and

discrete features because it helps make proper trade-offs among price, quality,
and functionality with respect to each product feature. Target costing is less
effective in firms that deal with commodity-type products because there is little
scope for differentiating products by their features. Poultry and other animal
products are commodity products with stable demand and little scope for
differentiation. Cost control should in fact be the key focus for Tyson foods
because of the low margins and high levels of competition. Factors such as cost
efficient distribution channels and timely delivery of supplies are keys to its
success.

4. (LO3)
This is a strategic decision. Sometimes marketing an apparently
unprofitable product is necessary to develop or hold on to a market segment so
that profits can be generated by marketing other profitable products. Such
synergies are often hard to quantify but are important to consider qualitatively.
5. (LO4)
New York Yankees serve one of the biggest sports markets in the
country. Keeping the large fan base excited is extremely important for its longtime survival. Fans come to the baseball stadium to cheer their team and see
their team win. We can think of many performance measures: number of games
won in a season, Number of home runs hit by Yankees, number of strikeouts,
bases stolen, star power in the team and so on.
6. (LO5)
Conceptually, there is no barrier to using a balanced scorecard for nonprofit organizations such as a municipality or a not-for-profit hospital. However,
the components will change to reflect the units missions. For example, a
municipality might track measures in categories such as financial, community,
infra-structure and learning. These categories broadly correspond to the
financial, customer, processes and learning categories. However, the measures
will be quite different. For example, the financial measure might just be breaking
even rather than making a profit, and might include targeted amounts of grants
from the Federal government.

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Strategic Planning and Control

Exercises
1. Target Costing. True to its name, Imaging Technologies produces testing
equipment used by forges to test their products. Imaging is considering a
new X-ray machine that substantially enhances the functionality of the
product it would replace. Imaging believes that it might be able to sell 4,500
units of the new product at an average price of $5,000 per unit. Management
specifies a target profit margin of 5% return on sales.
Required:
a. Compute the products allowable cost.
b. Suppose the products current cost is $4,900 per unit. What is the cost gap
(i.e., or the cost reduction that must be accomplished during the target
costing process)?
2. The following information pertains to a recent Bluetooth cordless headset
produced by Optronix, Inc. This device uses Bluetooth technology to allow for
hands-free operation of a cell phone. Increased awareness of the dangers of
using a cell phone when driving has led to new regulations pertaining to cell
phone use. Optronix expects the market for its products to increase rapidly
because of these regulations. Like most electronic products, the model has a
short life cycle of about a year. The firm also expects to cut product price at
least twice during the year and have a clearance sale at year-end.
Price $89 $69 $49 $29
Volume 450,000 400,000 500,000 200,000

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Balakrishnan/Managerial Accounting, 2e
Exercise Solutions
1. (LO3)
A. Total sales revenue
Desired margin
Allowable cost
B. Current cost
Allowable cost
Cost Gap

4,500 units $5,000 per unit

$22,500,000
5%
1,125,000
$21,375,000
4,500 $4,900
$22,050,000
21,375,000
$675,000

Thus, we need to reduce costs by $21,375,000 - $22,050,000 = $675,000

to achieve the cost target.
a.

2. (LO3)
The following table provides the required information.
Pric
e

Expecte
d
volume

Expected
Revenue

$89

450,00
0

$40,050,00
0

69

400,00
0

27,600,000

49

500,00
0

24,500,000

29

200,00
0

5,800,000

Tota
l
b.

$97,950,0
00

Many firms deal with uncertainty by considering multiple scenarios. A

popular method is to estimate benefits under the best case / worst
case / most likely scenarios. More sophisticated approaches include
simulations.

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