EXERCISE 10-15 (CONTINUED) ALTERNATIVE SOLUTION

3. a. This evidence is inconsistent with two of the hypotheses underlying the balanced scorecard. The first of these hypotheses is “If customers express greater satisfaction with the accuracy of their charge account bills, then the average age of accounts receivable will improve.” The second of these hypotheses is “If customers express greater satisfac-tion with the accuracy of their charge account bills, then there will be improvement in bad debts.” There are a number of possible explana-tions. Two possibilities are that the company’s collection efforts are ineffective and that the company’s credit reviews are not working properly. In other words, the problem may not be incorrect charge account bills at all. The problem may be that the procedures for col-lecting overdue accounts are not working properly. Or, the problem may be that the procedures for reviewing credit card applications let through too many poor credit risks. If so, this would suggest that ef-forts should be shifted from reducing charge account billing errors to improving the internal business processes dealing with collections and credit screening. And in that case, the balanced scorecard should be modified. b. This evidence is inconsistent with three hypotheses. The first of these is “If the average age of receivables declines, then profits will in-crease.” The second hypothesis is “If the written-off accounts receiv-able decrease as a percentage of sales, then profits will increase.” The third hypothesis is “If unsold inventory at the end of the season as a percentage of cost of sales declines, then profits will increase.” Again, there are a number of possible explanations for the lack of re-sults consistent with the hypotheses. Managers may have decreased the average age of receivables by simply writing off old accounts ear-lier than was done previously. This would actually decrease reported profits in the short term. Bad debts as a percentage of sales could be decreased by drastically cutting back on extensions of credit to cus-tomers—perhaps even canceling some charge accounts. (Bad debts would be zero if there were no credit sales.) This would have the ef-fect of reducing bad debts, but might irritate otherwise loyal credit customers and reduce sales and profits. Case 10-33 (continued) The reduction in unsold inventories at the end of the season as a percentage of cost of sales could have occurred for a number of rea-sons that are not necessarily good for profits. For example, managers may have been too cautious about ordering goods to restock low in-ventories—creating stockouts and lost sales. Or, managers may have cut prices drastically on excess inventories in order to eliminate them before the end of the season. This may have reduced the willingness of customers to pay the store’s normal prices. Or, managers may have gotten rid of excess inventories by selling them to discounters before the end of the season. Case 10-34 (30 minutes) This case may be difficult for some students to grasp since it requires look-ing at standard costs from an entirely different perspective. In this case, standard costs have been inappropriately used as a means to manipulate reported earnings rather than as a way to control costs.