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Lecture Notes 7

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Queensland University of Technology

AYB321 – STRATEGIC MANAGEMENT ACCOUNTING Lecture 7: The Balanced Scorecard  Financial measures on their own are insufficient to guide companies to success. o They are measures of past strategies – don’t look at future performance  Key factors of future financial success: o Customer relationships, o Process improvement and innovation and o Employee capabilities and motivation  Where financial performance is linked to employees and feedback  Should be systematically measured  Should be included in strategic planning  Financial measures: direct and aggregate. o Important and useful o Direct measure of performance  But relying too heavily on financial performance measures can encourage a focus on short-term gains at the expense of long-term value-creation. o Fundamental value = NPV of all future cash flows low discretionary spending (R&D, staff training) lost market leads to poor share and a customer need to service and further reduce lack of new spending products reduced porfitability sustained discretionary spending (R&D, staff training) gained market share and funds enhanced available for customer service further and flow new discretionary products spending improved long term profitability  Too much of a focus on long-term value creation can cause short-term liquidity and profitability issues  The traditional financial accounting model, on its own, does not achieve a balance between short- and long- term imperatives. o What we want for a good – price, service and new products o Can’t just focus on cos  Shifted from industrial age to information age competition. o Customers demand more  Traditional balance sheets do not put a reliable value on: o Process capabilities o Employee skills & motivation o Customer loyalty.  Even if we could – AASB does not allow it  BSC attempts to address these issues by using a balanced set of performance measures that o Link long-term strategy with its short-term actions o Communicates the long-term strategy to all levels of the firm  Result = 1 page BS with strategic and desired goals to achieve strategy can be easily communicated  Specifically, the BSC: o Introduces non-financial indicators o Shows the links among the indicators; and o Shows the link between the indicators and the firm’s strategy.  Further, the BSC puts it all together on one page o Convenient  And provides ‘instrumentation for a single strategy’ o Disvisionalised firm – overall strategy e.g. umbrella BSC o Need BSC for each division per goal – need to support overall strategy What is the Balanced Scorecard?  BSC translates mission and strategy into objectives and measures, organised into four perspectives: o Financial o Customer o Internal business process o Learning and growth. Terminology  Perspective: o One of the focus areas on the BSC. o K & N BSC in
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