Difficulty: Intermediate | Prerequisites: Familiarity with basic financial statements and divisional organisation (Chapters 20–22 recommended).
Source: Cost Accounting textbook, Chapter 23 | The Ohio State University
Tags: balanced scorecard, BSC, ROI, return on investment, DuPont analysis, residual income, EVA, economic value added, current cost, performance measurement, investment centres
Chapter 23 sits at the intersection of management control and performance evaluation. Once an organisation is divided into responsibility centres (cost centres, profit centres, investment centres), senior management needs a way to judge whether each division is pulling its weight. This chapter introduces the balanced scorecard as a framework for looking beyond pure financial results, then drills into the financial metrics themselves: return on investment, DuPont decomposition, and the choice of asset valuation method. If you have not yet covered responsibility accounting and transfer pricing (Chapters 21–22), review those first.
The balanced scorecard measures divisional performance across four perspectives (financial, customer, internal process, learning and growth) so managers do not fixate on profit alone. Return on investment (ROI) is the headline financial metric, broken down via DuPont analysis into profit margin and asset turnover. The asset base you choose for the denominator (historical cost vs. current cost) changes the story the numbers tell.
Balanced scorecard (BSC)
A performance measurement framework that combines financial and non-financial measures across four perspectives: financial, customer, internal business process, and learning and growth. In simple terms, it stops managers from chasing short-term profit at the expense of everything else.
Investment
The resources or assets a division uses to generate income. Think of it as the capital the company has tied up in a division, which that division is expected to put to productive use.
Return on investment (ROI)
Income divided by an accounting measure of investment. It blends revenue, cost, and asset efficiency into a single ratio, making it easy to compare divisions of different sizes or to benchmark against external returns.
DuPont analysis (DuPont decomposition)
A method that splits ROI into two levers: income as a percentage of revenue (profit margin) and revenue as a percentage of investment (asset turnover). In simple terms, it tells you whether a division earns well on each sale, uses its assets efficiently, or both.
Current cost
The cost of purchasing an asset today that is identical to the one currently held, or, if an identical asset is not available, the cost of purchasing one that provides equivalent services. Think of it as the replacement price rather than the price originally paid.
Economic value added (EVA)
A financial measure (referenced in the financial perspective of the BSC) that calculates the value a division creates above its cost of capital. It is closely related to residual income.
The balanced scorecard translates a company's strategy into measurable objectives across four linked perspectives. No single perspective is sufficient on its own.
Financial perspective: stock price, net income, return on sales, ROI, and economic value added (EVA). These are the outcomes shareholders care about.
Customer perspective: market share by geographic location, customer satisfaction scores, brand image, and average number of repeat visits. These are leading indicators: if customers leave, financial results follow.
Internal business process perspective: the operational activities (cycle time, defect rates, throughput) that drive customer and financial results.
Learning and growth perspective: employee skills, information systems, and organisational culture that underpin process improvement over time.
The logic runs bottom-up: learning and growth enables better internal processes, which improve customer outcomes, which deliver financial results.
An investment centre is a division whose manager controls revenues, costs, and the asset base. The central question is whether a division generates sufficient operating income relative to the investment made to earn it.
ROI is calculated as:
ROI = Operating income / Investment (total assets)
Three properties make ROI useful:
It blends all ingredients of profitability into one number.
It can be compared with rates of return available elsewhere (other divisions, external investments).
It can be improved by increasing revenues, decreasing costs, or decreasing the asset base.
DuPont analysis decomposes ROI so managers can see where improvement is possible:
ROI = (Operating income / Revenue) x (Revenue / Investment)
ROI = Profit margin x Asset turnover
The first term asks: how much income does each pound (or dollar) of revenue produce? The second asks: how efficiently do assets generate revenue? A division can improve ROI by raising either lever, or both.
The denominator of ROI depends on how assets are valued. Historical cost uses the original purchase price (less accumulated depreciation). Current cost uses today's replacement price for an identical or equivalent asset.
Current cost is more relevant for comparing divisions that acquired assets at different times, because it removes the distortion caused by inflation and differing purchase dates. However, current cost figures can be harder to obtain and involve estimation.
Students often assume a high ROI always means good management. It does not: a division with old, fully depreciated assets will show inflated ROI on historical cost, even if performance is mediocre.
The balanced scorecard is sometimes mistaken for a dashboard of random KPIs. Each perspective is deliberately linked in a cause-and-effect chain running from learning and growth up to financial results.
DuPont analysis is not just an algebraic trick. It tells managers whether to focus on margins (pricing, cost control) or on asset utilisation (inventory turnover, capacity use), which are quite different operational levers.
Current cost and fair value are not the same thing. Current cost is a replacement price; fair value is an exit (selling) price.
⚠️ Be ready to compute ROI and decompose it via DuPont analysis. Expect a question that gives operating income, revenue, and total assets, and asks you to identify which lever (margin or turnover) is the problem.
⚠️ Know the four BSC perspectives and be able to classify a given metric into the correct one. A question that lists "employee training hours" or "defect rate" is testing whether you can place it under learning and growth or internal process.
⚠️ Understand why current cost can change the ranking of divisions compared with historical cost, and be prepared to explain the trade-off (relevance vs. reliability).
True or false: ROI can be improved only by increasing revenue. (False: also by decreasing costs or decreasing the investment base.)
Fill in the blank: DuPont analysis splits ROI into ______ and ______. (Profit margin and asset turnover.)
True or false: The customer perspective of the BSC includes employee training metrics. (False: that falls under learning and growth.)
Fill in the blank: Current cost measures the ______ price of an identical or equivalent asset. (Replacement.)
Q: A division reports operating income of $90,000, revenue of $600,000, and average total assets of $500,000. What is its ROI, and what are its profit margin and asset turnover under DuPont analysis?
A: ROI = $90,000 / $500,000 = 18%. Profit margin = $90,000 / $600,000 = 15%. Asset turnover = $600,000 / $500,000 = 1.2. Check: 15% x 1.2 = 18%.
Q: Division A bought its plant five years ago for $2 million. Division B bought an identical plant last year for $3 million. Both earn the same operating income. Which division shows a higher ROI on historical cost, and why might this be misleading?
A: Division A, because its denominator is lower (older, more depreciated asset). This is misleading because Division A is not necessarily better managed; its asset base is simply cheaper in nominal terms. Using current cost for both divisions would remove this distortion.
Q: Name one metric that falls under each of the four balanced scorecard perspectives.
A: Financial: return on investment. Customer: customer satisfaction score. Internal business process: defect rate. Learning and growth: employee training hours completed.
Q: Why does the balanced scorecard include non-financial measures alongside financial ones?
A: Financial measures are lagging indicators: they report what has already happened. Non-financial measures (customer loyalty, process quality, employee capability) are leading indicators that signal future financial performance. Relying on financials alone encourages short-term decision-making.
This chapter builds directly on responsibility accounting (Chapter 22), where divisions are classified as cost, revenue, profit, or investment centres. The ROI and EVA concepts here also connect to capital budgeting (Chapter 21): the required rate of return used in EVA is the same cost of capital used to discount future cash flows in NPV analysis. Transfer pricing (Chapter 22) affects divisional income and therefore divisional ROI, so disputes over transfer prices are often really disputes about performance measurement.
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