Variance Analysis and Balanced Scorecards

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ACC 560 Week 7

DQ: “Variance Analysis and Balanced Scorecards” 

Use the Internet to research a company that has implemented a balanced scorecard system for evaluating performance. Suggest at least two (2) variance measures the identified company can employ in a balanced scorecard performance evaluation system, and examine how the company can use these variances to improve performance.

A large number of firms are using balanced scorecard (BSC) to evaluate their performances. One of the company who is using BSC is Tolko Industrial Ltd (Balanced Scorecard Institutes, 2015). Tolko Industrial Ltd has launched a new strategic plan but the company is searching for the assistance in determining the ways to measure the strategic performance of the firm. The management of the company has realized that simply aligning the strategic plan with the incentives will not work effectively to energize the company. There is a need to realize employees about the big picture strategy of the firm. So they would be excited and enthusiastic for the execution of the plan.

Variance analysis use variance measures to evaluate the difference between planned performance and actual performance. Two variance measures which can be used by Tolko Industrial Ltd in its system of balanced scorecard performance evaluation includes sales margin growth variance and return on investment variance. Company can use these variance to improve the individual as well as organizational performance. Sales margin growth variance will be very effective for the firm to evaluate employees’ performance through comparing their actual sales with standard sales target in order to measure and evaluate their performance. Similarly, return on investment variance is an effective approach to measure the overall growth of investment in current year as compare to previous year return on investment. Increasing return will show the high productivity of employees. Company can assess these variance in order to assess employees performance and use to take initiatives to improve their performance, if required.

Examine the main reasons service companies are more sensitive to labor and price variances, as compared to material price variances, and determine the importance of companies managing these variances in relation to sustaining profitability.

Service industry provides services to the customers and employees are the main sources of generating services to the customers this is why, labor force is the most important element of the service industry. Service companies are more sensitive to labor and price variances as compared to material variance due to certain reasons. The service industry is core dealing with labor in order to manage their operations of providing customers satisfaction. So the service industry major expenditure is spend on labor cost as compared to material cost. The most of the service industry dealings are based on employees performance. So the service industry is highly depend on labor force. In this way, the variance related to labor cost is more important as compare to material cost variance. In service industry, the organizations need to focus on labor variance in order to attain the profitability goal. However, material cost is a definite element of service industry but it composes a small portion of total costing as compare to labor costing.

To sustain profitability in service industry, the companies need to manage the labor cost variance and material cost variance in efficient way in order to generate positive return. However, the most important variance for the firms in service industry is labor cost variance. Still, material cost variant is of key importance. To attain the profitability of the company, it need to invest in the labor force which would have less cost of hiring, training and retention and produce high productivity. On the other hand, material costing can be minimized by buying the material which is costing low. But is important to maintain the quality of material.

 Reference

Balanced Scorecard Institutes, (2015). Resources: Example of success stories. Retrieved from https://balancedscorecard.org/Resources/Examples-Success-Stories