■ The Journal of Business Cases and Applications ■
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■ 7 ■ Summer, 2008
A Performance Measurement Case for
Managerial Accounting
L. Melissa Walters, The University of Tampa
Teresa Pergola, The University of Tampa
ABSTRACT
This instructional case is designed to develop students’ understanding of strategic performance
measurement concepts. Case requirements ask students to interpret operating results, evaluate a
current performance measurement system, and then construct a balanced scorecard for the
company described in the fictitious case narrative. The case is appropriate for MBA and upper-
level undergraduate accounting students.
LEARNING OBJECTIVES
The specific learning objectives for the case
are to develop students’ ability to:
1. Analyze standard cost variance results
and deduce likely causes.
2. Analyze changes in non-financial
operating measures and deduce likely
causes.
3. Understand the importance of aligning
performance measurement with
organizational vision and strategy.
4. Apply balanced scorecard concepts to
evaluate an existing performance
measurement system.
5. Understand the potential benefits of the
balanced scorecard approach to
performance management.
6. Articulate an organization’s business
vision and strategy and construct a
balanced scorecard based thereon.
7. Effectively communicate the results of
an analysis in professional written form.
THE MASQUERADE MASQUE
COMPANY
1
Case Abstract
This case is designed to help you develop a
working understanding of strategic
performance measurement and the use of the
balanced scorecard framework for
managerial purposes. The case narrative
describes a business scenario and a
problematic performance measurement
system. The case requirements ask you to
apply performance measurement concepts to
interpret production results, evaluate the
company’s current performance
measurement system, discuss the
applicability of the balance scorecard
framework for improving the current
performance measurement system, construct
a balanced scorecard for the company, and
then effectively communicate the results of
your analysis, evaluation, and
recommendations in the form of a
professional written memo.
1
Alternative case materials based on an alternative
case scenario are presented in Appendix A.
■ The Journal of Business Cases and Applications ■
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■ 8 ■ Summer, 2008
Case Narrative
The Masquerade Masque Company
produces high quality costumes and
theatrical props for theatrical and movie
productions. Masquerade started out as the
hobby of an eccentric artist, Erasmus Raven.
Erasmus’ peculiar hobby budded into a
small family-owned company that made and
sold hand-detailed Halloween and Mardi
Gras masks and faces. Masquerade, set apart
by a strong positive rapport with its
customers, a long-standing reputation for
quality and service, and the company’s
unique product offering, soon found itself a
very small company in an intensely
competitive holiday novelty market
characterized by high volume, low cost
manufacturers. Over time, in response such
competitive pressures and customer needs,
the company has grown and diversified its
product offering; and recently, the company
has expanded into the custom (to-order)
production of professional props, scene
creation, costumes, masks, and special
effects to serve its small but diverse
customer base. Additionally, the company
has begun to incorporate computer
technology into its design creation function
and is now considering expansion into the
arena of computer animation and visual
effects.
Erasmus has become concerned with
maintaining control over operations central
to the company’s competitiveness and well-
being; recently he has expressed a desire to
improve performance measurement within
the mask division. The mask division
manufactures latex masks and faces for
decorative use, holiday costumes (such as
Halloween and Mardi Gras), and
professional theatrical props (for theatrical
and movie productions); holiday masks and
festival faces were among the first product
offerings of the company and remain a core
aspect of Masquerade’s business.
Masquerade’s masks are known for their
superior theatrical quality and attention to
detail as well as their reasonable price.
The masks are made from a high quality
rubber latex compound that is sprayed onto
a plaster cast by high precision machinery.
The company maintains a minimal inventory
policy and as such, raw materials are
generally purchased as needed to fill
standard and custom orders and finished
orders/products are normally shipped out as
soon as they are completed. Original plaster
cast templates are sculpted by hand by
skilled employees for detail and made into
molds; molds are then inspected for quality
before they are used to make production
casts. Production casts are reproduced as
needed using the molds. Approximately 5
masks can be made with each production
cast; if too many masks are made with any
one production cast, the detail is lost due to
the softness of the casting material
(necessary to create lifelike skin texture and
detail). Once the masks are removed from
the production cast, they are meticulously
detailed by individual employees with paint,
feathers, scales, or other materials. Finally,
each order is inspected for quality before it
is shipped to the customer. Many of
Masquerade’s employees have
undergraduate degrees in art (painting or
sculpting); and the company regularly sends
its employees to training workshops so that
they may improve their skills. The company
relies heavily on its employee artists to
maintain its rapport with customers and
quality image and wholeheartedly
encourages its employees to make
suggestions for redesigning existing
products, take creative liberties while
working on custom projects, and propose
imaginative new products.
■ The Journal of Business Cases and Applications ■
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■ 9 ■ Summer, 2008
The production manager for the mask
division, Erasmus’ daughter Lenore Raven,
has historically maintained a set of internal
operating measures that she uses as
performance indicators. Ms. Raven has
argued that these non-financial operating
measures serve as good indicators of
production efficiency and product quality
and moreover, since they are dynamic, they
support the company’s focus on continuous
improvement and innovation. Ms. Raven
has conceded however, that these operating
measures, while serving as good indicators
of internal process activities, do not provide
the firm with an indication of the financial
impact of these operations. On the advice of
an outside consulting firm where Erasmus’
nephew works, the mask division recently
started using traditional standard cost
variance analysis to evaluate operating
performance within the mask division. The
consulting group has argued that such
measures are more objective, will motivate
cost efficient behavior, and will accurately
measure the financial impact of operating
performance. Ms. Raven has expressed
reservations about the new standard cost
variance analysis system and is concerned
that undue emphasis on variance results will
result in a lack of attention to key operating
concerns such as inventory levels, product
quality, and customer satisfaction. Mr.
Bedloe, the company’s chief accountant, has
likewise expressed his doubts and has
argued that such standards may encourage
behavior inconsistent with Masquerade’s
core values ultimately resulting in negative
consequences for the company. The
performance results for the most recent
period appear below.
Results of Production Manager’s Operations Analysis
Operating Measure Change Operating Measure Change
Production Cycle Time
2
Increase Raw Materials Store Time Increase
Delivery Cycle Time
3
Increase Finished Goods Store Time Increase
Inspection Time Decrease Raw Material Inv Levels Increase
Rework Time
4
Increase Finished Goods Inv Levels Increase
Scheduled Downtime Decrease Customer Orders (Sales) Decrease
Unscheduled Downtime Increase Customer Complaints Increase
% Defective Products Increase Customer Returns Increase
% Scrap
5
Decrease Employee Absenteeism Increase
Average Unit Cost Increase Employee Turnover Increase
Raw Materials Processed Increase Employee Attitude Survey N/A
6
2
Production cycle time is measured as the amount of time required to turn raw materials into completed
products from the time raw materials are received to the time goods are transferred to finished goods
inventory. Since defective products are reworked before being transferred to finished goods, Masquerade
includes rework time in cycle time.
3
Delivery cycle time is measured as the amount of time required to get the finished product to the
customer (from customer order receipt to the time the goods are shipped); it includes wait time between
order receipt and the start of production as well as production cycle time.
4
Rework time is measured as the amount of time necessary to correct for defects found in products by
inspectors. The consulting company accounted for rework time separately from original work time; as
such, rework time was not incorporated into the direct labor time variance.
5
% Scrap refers to discards and wasted materials measured as a percentage of total raw materials
processed.
■ The Journal of Business Cases and Applications ■
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■ 10 ■ Summer, 2008
Results of Consulting Firm’s Variance Analysis
Resource Standard Stated As Variance
Materials
Rubber Materials Price Variance Price per ounce Favorable
Rubber Materials Usage Variance Ounces per mask Favorable
Resource
Detail Materials Price Variance Price per package Favorable
Detail Materials Usage Variance Usage per mask Favorable
Labor
Direct Labor Rate Variance Rate per detail labor hour -0-
Direct Labor Time Variance Detailing time spent per mask Favorable
Indirect Materials
Plaster Cast Price Variance Price per pound of plaster Favorable
Plaster Cast Usage Variance Uses per 5 masks Favorable
Indirect Inspection Labor
Inspection Spending Rate per hour -0-
Inspection Labor Efficient Time per batch Favorable
Machine Maintenance
Maintenance Spending Cost per maintenance hour Favorable
Maintenance Efficiency Maintenance hours per run Favorable
Fixed Overhead
FOH Spending Variance
7
Cost per period -0-
6
The employee attitude survey was discontinued on the advice of the consulting firm; the consulting
firms questioned the usefulness of the survey as it did not provide objective, quantifiable information. The
employee attitude survey was used as a means of soliciting employee attitudes, comments, feedback, and
suggestions regarding process improvements and new product designs.
7
Fixed overhead consists primarily of factory depreciation and insurance.
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■ 11 ■ Summer, 2008
The consulting firm was quite pleased at the
results of the variance analysis. However,
Mr. Bedloe and Ms. Raven were disturbed
about the results of the operating measures;
and Mr. Raven is particularly concerned
with the operating measures having to do
with employee and customer dimensions.
Mr. Bedloe has expressed the opinion that
the standards used as a basis for the variance
analysis are not entirely consistent with the
organization’s core values; he has been
researching the balanced scorecard
framework and has suggested that the
strategic performance management concepts
underlying the balanced scorecard might
prove helpful.
Case Requirements
1. Deduce likely cause(s) for the materials,
labor, and overhead variances. Note that
interpretations of individual variances
will most likely be interrelated.
Summarize your interpretations. In your
opinion, should the consulting firm be
pleased with the results of the variance
analysis? That is, are the favorable
variances really “favorable”? Explain.
2. Deduce likely cause(s) for the changes in
the operating measures. Note that
interpretations of individual operating
measure will most likely be interrelated.
Summarize your interpretations. In your
opinion, should the accountant, owner,
and production manager be disturbed
about the results of the operating
measures? Explain. Why do you suppose
the employee and customer dimensions
are of particular concern to the owner?
Explain.
3. In the narrative above, the company’s
accountant and the production manager
have both expressed reservations about
the company’s new standard cost
performance measurement system. Are
these concerns valid? Discuss the
accountant’s and production manager’s
concerns in turn and then summarize
your own assessment of the company’s
current performance management
system.
4. Categorize each of the company’s
current performance measures (variances
and operating measures) into the four
basic balanced scorecard perspectives;
note that some performance measures
may fall into more than one perspective.
Next, categorize each of the company’s
current performance measures as lead or
lag, financial or non-financial, internal
or external, and objective or subjective.
Based on your categorizations, respond
to the following: (a) Do the current
performance measures appear to be
derived from the company’s vision and
strategy? Explain. (b) Do you believe
that all four balanced scorecard
perspectives are adequately represented
in the company’s current performance
measurement? Discuss. (c) Is the
company’s current performance
measurement system balanced? Explain.
(d) Do you believe that the company
would benefit from the implementation
of a balanced scorecard framework?
Explain.
5. Design a balanced scorecard for the
company: (a) First, succinctly articulate
Masquerade Masque Company’s vision
and strategy. That is, describe what you
believe to be Masquerade Masque
Company’s key values and/or strategic
objectives and explain why each
value/objective would be considered
appropriate for the company. (b) Second,
consider the four balanced scorecard
perspectives and explain how each
■ The Journal of Business Cases and Applications ■
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■ 12 ■ Summer, 2008
perspective relates to or supports the
company’s vision and strategy. (c)
Third, translate the company’s overall
vision and strategy into specific
operational objectives (i.e., objectives
that can be measured) for each of the
balanced scorecard perspectives. (d)
Finally, for each operational objective
you constructed, list two or more
performance measures that you believe
will support the objective (you may
choose measures already being used by
Masquerade or alternative measures you
select). Justify the relevance of each
performance measure selected. (e)
Develop initiatives for the operational
objectives you constructed for the
customer perspective only (i.e., describe
how each of your stated operational
objectives for this perspective might be
accomplished).
6. In a professional memo (use proper
headings and formatting) directed to the
company owner, (a) Succinctly
summarize your assessment of the
effectiveness and suitability of the
company’s current performance
management system, and (b) Outline
your recommendations for improving the
performance measurement system from
the perspective of a balanced scorecard
framework. Be Explicit.
REFERENCES
Gumbus, A. and Johnson, S. D. (2003). The
balanced scorecard at Futura Industries.
Strategic Finance, July, 1-5.
Kaplan, R. and Norton, D. (1992). The
balanced scorecard – measures that
drive performance. Harvard
Business Review, January/February,
71-79.
Kaplan, R. and Norton, D. (1996). Using the
balanced scorecard as a strategic
management system. Harvard
Business Review, January/February,
75-85.
Kaplan, R. and Norton, D. (1997). Why does
a business need a balanced
scorecard? Journal of Cost
management, May/June, 5-10.
Lawson, R., Stratton, W. and Hatch, T.
(2006). Scorecarding goes global.
Strategic Finance, March, 36-41.
APPENDIX A: ALTERNATIVE CASE
MATERIALS
Case Materials –The Comfy Company
Case Abstract
This case is designed to help you develop a
working understanding of strategic
performance measurement and the use of the
balanced scorecard framework for
managerial purposes. The case narrative
describes a business scenario and a
problematic performance measurement
system. The case requirements ask you to
apply performance measurement concepts to
interpret production results, evaluate the
company’s current performance
measurement system, discuss the
applicability of the balance scorecard
framework for improving the current
performance measurement system, construct
a balanced scorecard for the company, and
then effectively communicate the results of
your analysis, evaluation, and
recommendations in the form of a
professional written memo.
■ The Journal of Business Cases and Applications ■
www.jbcaonline.org
■ 13 ■ Summer, 2008
hCase Narrative
The Comfy Company makes high quality,
hand-made, solid wood furniture. The
Comfy Company started out as the
woodworking hobby of eccentric real estate
developer, Charles Chare. Charles’ hobby
eventually budded into a small family-
owned business that made and sold hand-
made rocking chairs and gliders. Comfy
Company, set apart by a strong positive
rapport with its customers, a long-standing
reputation for quality and service, and the
company’s unique product offering, soon
found itself a very small company in an
intensely competitive market characterized
by high volume, low quality, low cost
manufacturers. In response such competitive
pressures and customer needs, the company
has grown and diversified its product
offering expanding into standard production
of hand-made writing desks, roll-top desks,
bookshelves, and media cabinets as well as
other custom ordered items to serve its small
but diverse customer base. Additionally, the
company has incorporated computer
technology into its design function and is
considering expansion into the area of
historic reproductions and antique
restoration.
As the company has grown and diversified
its product offerings, Mr. Chare has become
concerned with maintaining control over
operations central to the company’s
competitiveness and well-being; recently he
has expressed a desire to improve
performance measurement within the rocker
and glider division. The rocking chairs and
gliders were the first product offerings of the
company and remain a core aspect of Comfy
Company’s product offerings and business.
The Comfy Company’s rockers and gliders
are known for their superior durability,
quality, and attention to detail as well as for
their reasonable price.
All rockers and gliders are constructed,
assembled, detailed, and finished by hand
based on detailed specifications and
customer preferences. The furniture is made
from the highest quality wood (mostly ash,
cherry, teak, oak and mahogany) purchased
from a small group of suppliers that the
company has used for years. The company
maintains a minimal inventory policy and as
such, materials are generally purchased as
needed to fill standard and custom orders
and finished products are normally shipped
out as soon as they are completed. For each
rocker or glider, the desired wood is
selected, component pieces are hand-
measured and cut based on specifications,
and then components are inspected for
defects before assembly. Next, component
pieces are finished and assembled, with
workers making small adjustments as
needed to make sure all pieces fit together
neatly and firmly. Finally, a final finish is
put on assembled rockers and gliders and
each completed piece is inspected for quality
before it is shipped to the customer. Comfy
relies heavily on its workers to maintain its
quality image and regularly sends its
workers to training workshops so that they
may improve their skills and learn new
woodworking techniques. Moreover, Mr.
Chare wholeheartedly encourages workers
to make suggestions for redesigning existing
products, take creative liberties while
working on custom projects, and propose
imaginative new products.
The production manager for the rocker and
glider division, Ms. Cabenet, has historically
maintained a set of internal operating
measures that she uses as performance
indicators. She has argued that these non-
financial operating measures serve as good
indicators of production efficiency and
product quality and moreover, since they are
■ The Journal of Business Cases and Applications ■
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■ 14 ■ Summer, 2008
dynamic, they support the company’s focus
on continuous improvement and innovation.
Ms. Cabenet, has conceded however, that
these operating measures, while serving as
good indicators of internal process activities,
do not provide the firm with an indication of
the financial impact of these operations. On
the advice of the outside consulting firm
where Mr. Chare’s nephew works, the
rocker and glider division recently started
using a traditional standard cost variance
analysis system to evaluate the performance
of rocker and glider division. The consulting
group has argued that such measures are
more objective, will motivate cost efficient
behavior, and will accurately measure the
financial impact of operating performance.
Ms. Cabenet has expressed reservations
about the new standard cost variance
analysis system and is concerned that undue
emphasis on variance results will result in a
lack of attention to key operating concerns
such as inventory levels, product quality,
and customer satisfaction. Mr. Dehsk, the
company’s chief accountant, has likewise
expressed his doubts and has argued that
such standards may encourage behavior
inconsistent with Comfy Company’s core
values, ultimately resulting in negative
consequences for the company. The
performance results for the most recent
period appear below.
Results of Production Manager’s Operations Analysis
Operating Measure Change Operating Measure Change
Production Cycle Time
8
Increase Raw Materials Store Time Increase
Delivery Cycle Time
9
Increase Finished Goods Store Time Increase
Inspection Time Decrease Raw Material Inv Levels Increase
Rework Time
10
Increase Finished Goods Inv Levels Increase
Scheduled Downtime Decrease Customer Orders (Sales) Decrease
Unscheduled Downtime Increase Customer Complaints Increase
% Defective Products Increase Customer Returns Increase
% Scrap
11
Decrease Employee Absenteeism Increase
Average Unit Cost Increase Employee Turnover Increase
Raw Materials Processed Increase Employee Attitude Survey N/A
12
8
Production cycle time is measured as the amount of time required to turn raw materials into completed
products from the time raw materials are received to the time goods are transferred to finished goods
inventory. Since defective products are reworked before being transferred to finished goods, Comfy
Company includes rework time in cycle time.
9
Delivery cycle time is measured as the amount of time required to get the finished product to the
customer (from customer order receipt to the time the goods are shipped); it includes wait time between
order receipt and the start of production as well as production cycle time.
10
Rework time is measured as the amount of time necessary to correct for defects found in products by
inspectors. The consulting company accounted for rework time separately from original work time; and as
such, rework time was not incorporated into the direct labor time variance.
11
% Scrap refers to discards and wasted materials measured as a percentage of total raw materials
processed.
12
The employee attitude survey was discontinued on the advice of the consulting firm; the consulting
firms questioned the usefulness of the survey as it did not provide objective, quantifiable information. The
■ The Journal of Business Cases and Applications ■
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■ 15 ■ Summer, 2008
Results of Consulting Firm’s Variance Analysis
Resource Standard Stated As Variance
Materials
Wood Materials Price Variance Price per board foot Favorable
Wood Materials Usage Variance board feet per chair Favorable
Finishing Materials Price Variance Price per gallon Favorable
Finishing Materials Usage Variance Quantity per chair Favorable
Direct Labor
Direct Labor Rate Variance Rate per wood working labor hour -0-
Direct Labor Time Variance Work time spent per chair Favorable
Wood Finishing Labor
Direct Labor Rate Variance Rate per finishing labor hour -0-
Direct Labor Time Variance Work time spent per chair Favorable
Indirect Inspection Labor
Inspection Spending Rate per hour -0-
Inspection Labor Efficiency Time per chair Favorable
Indirect Maintenance Labor
Equip. Maintenance Spending Cost per maintenance hour Favorable
Equip. Maintenance Efficiency Maintenance hours per run Favorable
Fixed Overhead
FOH Spending Variance (factory insurance & depreciation) -0-
employee attitude survey was used as a means of soliciting employee attitudes, comments, feedback, and
suggestions regarding process improvements and new product designs
.
■ The Journal of Business Cases and Applications ■
www.jbcaonline.org
■ 16 ■ Summer, 2008
The consulting firm was quite pleased with
the results of the variance analysis.
However, Mr. Chare and Ms. Cabenet were
very disturbed about the results of the
operating measures; and Mr. Chare is
particularly concerned with the operating
measures having to do with employee and
customer dimensions. Mr. Dehsk has
expressed the opinion that the standards
used as a basis for the variance analysis are
not entirely consistent with the
organization’s core values; he has been
researching the balanced scorecard
framework and has suggested that the
strategic performance management concepts
underlying the balanced scorecard might
prove helpful.
Case Requirements
1. Deduce likely cause(s) for the materials,
labor, and overhead variances. Note that
interpretations of individual variances
will most likely be interrelated.
Summarize your interpretations. In your
opinion, should the consulting firm be
pleased with the results of the variance
analysis? That is, are the favorable
variances really “favorable”? Explain.
2. Deduce likely cause(s) for the changes in
the operating measures. Note that
interpretations of individual operating
measure will most likely be interrelated.
Summarize your interpretations. In your
opinion, should the accountant, owner,
and production manager be disturbed
about the results of the operating
measures? Explain. Why do you suppose
the employee and customer dimensions
are of particular concern to the owner?
Explain.
3. In the narrative above, the company’s
accountant and the production manager
have both expressed reservations about
the company’s new standard cost
performance measurement system. Are
these concerns valid? Discuss the
accountant’s and production manager’s
concerns in turn and then summarize
your own assessment of the company’s
current performance management
system.
4. Categorize each of the company’s
current performance measures (variances
and operating measures) into the four
basic balanced scorecard perspectives;
note that some performance measures
may fall into more than one perspective.
Next, categorize each of the company’s
current performance measures as lead or
lag, financial or non-financial, internal
or external, and objective or subjective.
Based on your categorizations, respond
to the following: (a) Do the current
performance measures appear to be
derived from the company’s vision and
strategy? Explain. (b) Do you believe
that all four balanced scorecard
perspectives are adequately represented
in the company’s current performance
measurement? Discuss. (c) Is the
company’s current performance
measurement system balanced? Explain.
(d) Do you believe that the company
would benefit from the implementation
of a balanced scorecard framework?
Explain.
5. Design a balanced scorecard for the
company: (a) First, succinctly articulate
The Comfy Company’s vision and
strategy. That is, describe what you
believe to be Comfy Company’s key
■ The Journal of Business Cases and Applications ■
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■ 17 ■ Summer, 2008
values and/or strategic objectives and
explain why each value/objective would
be considered appropriate for the
company. (b) Second, consider the four
balanced scorecard perspectives and
explain how each perspective relates to
or supports the company’s vision and
strategy. (c) Third, translate the
company’s overall vision and strategy
into specific operational objectives (i.e.,
objectives that can be measured) for
each of the balanced scorecard
perspectives. (d) Finally, for each
operational objective you constructed,
list two or more performance measures
that you believe will support the
objective (you may choose measures
already being used by Comfy Company
or alternative measures you select).
Justify the relevance of each
performance measure selected. (e)
Develop initiatives for the objectives you
constructed for the customer perspective
only (i.e., describe how each of your
stated operational objectives for this
perspective might be accomplished).
6. In a professional memo (use proper
headings and formatting) directed to the
company owner, (a) Succinctly
summarize your assessment of the
effectiveness and suitability of the
company’s current performance
management system, and (b) Outline
your recommendations for improving the
performance measurement system from
the perspective of a balanced scorecard
framework. Be Explicit.
Teaching Note/Instructor Manual available from
the Journal of Business Cases and Applications.
