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A company making data communication devices has adopted a Total Quality philosophy for working with suppliers, employees, and customers. The finance group finds its existing cost system has become obsolete because of a shift from manual to automatic production technologies. As part of its improvement activities, the group develops an activity-based costing system to replace the obsolete standard costing system. The new system is being used to value inventory for financial reporting, provide monthly feedback on operational efficiencies, and inform product managers about the cost and profitability of their products. It is also being used for target costing, influencing decisions made by product design and development engineers so that future generations of products can be produced at lower cost. The case enables discussion about how well a single system functions for these diverse roles, and to compare this company's target costing approach with those used by Japanese companies, such as Nissan, Komatsu, and Olympus.

Pillsbury is transforming itself from an integrated producer of flour and bakery products to a value-added supplier of premium branded products. After initial successes applying activity-based costing to manufacturing operations, two senior executives decide to collaborate to propose a major reengineering project across the company's entire value chain. The case describes the project's definition and scope to yield projected annual cost savings and margin improvement between $100 and $300 million.

A British bank with strong roots in the cooperative movement encounters declining profitability in an increasingly competitive and deregulated financial services industry. It attempts to grow by broadening its customer base and increasing the range of products and services offered. It turns to activity-based costing as part of its reengineering effort to learn more about the process and product costs and customer profitability, and contemplates what actions to take based on this new information.

The retail bank division of Chemical Bank faces declining margins and increased competition in its credit and deposit gathering and processing business. It wishes to implement a new strategy to become a preferred financial service provider to target customer groups. The division adapts the balanced scorecard to clarify and communicate the new strategy and to identify the key drivers for strategic success. The case describes the development of strategic objectives and measures for four perspectives: financial, customer, internal, and learning growth, and the process for implementing the new measurement and management system.

Spreadsheet Supplement for case 195210.

Describes six characteristics of cost systems: standard vs. actual costs; job-order vs. process costing; variable vs. full costs; disaggregate vs. aggregate cost accumulation; and specific vs. average rates for labor and overhead. A rewritten version of an earlier case.

A newly reopened automobile engine plant has been organized along total quality and teamwork principles. Employees now is to solve problems and ensure quality, rather than watch parts being produced. New operating and financial systems have been installed to promote continuous improvement, waste elimination, and cost reduction activities.

In an earlier, groundbreaking article, Balanced Scorecard -- Measures That Drive Performance, the authors proposed a new measurement system that provided managers with a comprehensive framework to translate a company's strategic objectives into a coherent set of performance measures. Now the authors show how several companies are putting the balanced scorecard to work. Effective measurement, the authors point out, must be an integral part of the management process. Much more than a measurement exercise, the balanced scorecard is a management system that can motivate breakthrough improvements in such critical areas as product, process, customer, and market development. Several examples--Rockwater, Apple Computer, and Advanced Micro Devices--illustrate how the scorecard combines measurement and management in different companies. From the experiences of these companies and others, the authors have found that the balanced scorecard is most successful when it is used to drive the process of change.

The pharmaceutical division of a diversified company has been asked to develop a Balanced Scorecard. Research and development projects take about ten years to bring a new product to the marketplace and the division depends on good relations and active feedback from its customers for continued success. But currently, the division is evaluated by meeting monthly financial objectives. The case describes an early and less-than-successful attempt to develop a Balanced Scorecard encompassing financial, customer, internal process, and innovation perspectives.

Activity-based cost management (ABC) can help managers find the places in their organizations where improvement is likely to have the greatest financial payoff. To best utilize ABC, managers must separate whatever expenses are required to produce individual products from those required to process batches, to maintain a product, or to keep a manufacturing facility up and running.

Burlington Northern's decision whether to invest in ARES, an automated train control system, is a ($350 million) strategic investment in information technology. Although set in a service industry (railroad) the issues around this decision arise in many organizations and require the company to analyze the project from many perspectives. ARES offers the potential to change the basis of competition in the industry through technology. The company must consider the value, if any, of being first in the industry to adopt a technology; the potential impact on customer services, quality, and reliability; and the role and value of information systems technology. Burlington grapples with how to quantify both tangible and intangible benefits, and deliberates whether investments that yield improvement in hard-to-quantify factors such as reduced delivery time and improved service reliability can be subjected to the same financial scrutiny as equipment replacement decisions such as new locomotives. Demonstrates thoughtful, creative approaches to measuring hard-to-quantify benefits.

The ARES team formally proposes that Burlington Northern implement the ARES system. The project meets resistance. In light of financial restructuring and high level of debt, executives wonder whether the company can afford ARES. Weak links during the ARES development process to corporate strategic planning, corporate capital planning, and other corporate functions raise concerns. Executives also worry about whether their 100-year-old, traditional organization can adapt to and exploit ARES's modern electronic technology. When ARES team members' zealous advocacy of the project raise concerns about objectivity in evaluation, an outside consultant is hired to audit benefits, technologies, and whether benefits can be unbundled and implemented selectively.

Banking company noting declining profitability from its traditional lending activities has started to measure the total profitability of its lending relationships. A loan pricing model estimates the profit and return-on-equity from commercial loans. Additional work was required to recognize the revenue from fee-for-service business for the same customer that is performed by other units in the bank. The case raises the problem of how revenues and expenses from diverse activities can be combined to produce an accurate picture of customer profitability.

Explores how a cost system can help support a firm's decision to change strategies. In the process, the students are introduced to a simple activity-based cost system. Siemens Electric Motor Works found itself facing an increasingly competitive environment and so made a decision to move from mass production of specialty motors to the production of small lots of custom motors. In doing so, they found their old cost system led them to poor decision making. By switching to a simple activity-based system, more accurate product costs were computed, facilitating better divisional performance.

The company has committed to major improvements in quality, cost, and on-time delivery performance. Despite strong senior management support, however, the actual rate of improvement was disappointing until a new measurement philosophy was introduced. The new approach specified expected rates of improvement and compared actual improvements to the expected rate. Operational people preferred the new measures to the monthly financial reports they continued to receive. The case explores the conflicts between financial measurements and operating improvements.

Spreadsheet Supplement for case 198061

The company as part of a commitment to Total Quality Management has installed a computer system that accumulates 30,000 observations on its processes every 2-4 hours. Operating people have found the monthly summaries of financial performance not too useful in this environment. Recently a department manager has created a daily income statement for his operators. Case explores role for financial summary information in an environment where extensive, timely data on product processes and products already exist.

Multinational company needs an improved cost system to determine the profitability of individual customer orders. Its strategy is to have significant sales and profitability growth without adding additional administrative and support people. The new cost system assesses a charge to each customer order received and an additional surcharge if the item ordered is not normally stocked. The goal is to direct sales resources to the most profitable customers: those who buy standard products in large predictable quantities with minimal demands on technical resources.

Describes actions taken by senior management of Kanthal after seeing the results of the newly installed account management system. Designed as a class handout. A rewritten version of an earlier case by the same author.

A division questions whether to retain, modify, or abandon its cost of quality system now that more direct measures of quality have been adopted. Discusses the role of quality cost measurement in a mature quality management system.