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8: Performance Management Flashcards

1
Q

The main functions that management are involved with?

A

Planning

Decision-making

Control

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2
Q

What does ‘planning’ involve?

A

One of the main duties of the management accountant

  • establishing the objectives
  • formulating relevant strategies to achieve those objectives
  • can be short term (tactical) or long term (strategic)
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3
Q

What does ‘decision-making’ involve?

A

Considering information and making an informed decisions

  • making a choice between two or more alternatives
  • first part: planning
  • second part: control
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4
Q

What does ‘control’ involve?

A

Second part of decision-making process. Info relating to the actual results is reported to managers

  • managers use information relating to results to take control measures
  • internally sourced information (feedback)
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5
Q

What is involved in the feedback loop?

A

Management prepare a plan which is put into action by managers with control over input resources

Output is measured and reported (fed back)

Managers take corrective action

Feedback used to revise plans or prepare the next plan

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6
Q

What are the features of effective feedback?

A

Clear and comprehensive

Exception basis

Based on controllable costs and revenue

Produced on a regular basis

Timely

Accurate

Communicated

Irrelevant data excluded

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7
Q

What are the behavioural aspects of performance management?

A

Ways in which behaviour can damage the budgeting process:

Problems include dysfunctional behaviour and budget slack

Dysfunctional: when managers seek their own objectives

Budget slack: deliberate over-estimation of expenditure or under-estimation of revenues

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8
Q

What are the three distinct styles of Hopwood’s research on using budgetary info?!

A

Budget-constained
- achieve budget in the short term
- manager is criticised for poor results
- job related pressure
- data manipulation

Profit-conscious stule
- ability to reduce costs and increase profits in the long term
- short term info needs to be used with care and in a flexible way
- less job related pressure
- better working reations
- less manipulation

Non-accounting style
- evaluated on non-accounting performance indicators
- like profit-conscious, but less concern for accounting info

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9
Q

What factors affect degrees of centralisation?

A

Management style

Size of orgs

Extent of diversification

Communication

Management’s ability

Technology

Geographical location

Extent of local knowledge needed

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10
Q

Ads and Dis of decentralisation?

A

Ads:
- senior managers freed up
- better decisions by local managers
- motivation of managers
- quicker decisions
- good training

Dis:
- co-ordinating the business
- lack of goal congruence
- loss of control at senior level
- difficult to evaluation managers
- duplication of costs

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11
Q

What is a key aspect of responsibility accounting?

A

Ensuring managers are only accountable for the costs (and/or revenues) for which they have responsibility.

These are CONTROLLABLE COSTS

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12
Q

What is a responsibility centre, and what are the six types?

A

Individual part of a business whose manager has personal responsibility for performance.

Cost centre
Revenue centre
Profit centre
Investment centre

ALSO:
shared service centre
cloud accounting

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13
Q

What is a cost centre?

A

Production or service location etc whose costs are identified and recorded for MI

Can be departments, functions, activities, geographical locations, etc

Measured by variance analysis

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14
Q

What is a revenue centre?

A

Part of org that earns sales revenue

Like cost centre, but only accountable for revenues

Generally associated with selling activities

Measured by variance analysis

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15
Q

What is a profit centre?

A

Part of the business for which both the costs incurred and the revenues earned are identified

Found in largs orgs with divisionalised structures, where each div is a profit centre

Within each, could be several cost centres and revenue centres

Measured by controllable profit

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16
Q

What is an investment centre?

A

Profit centre with additional responsibilities for investment and financing, whose performance is measured by return on capital

Managers responsible for investment decisions and performance of capital employed

Measured by:
- ROI
- RI

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17
Q

What is a shared service centre?

A

Common processes within a business, such as HR and IT

Aim is to significantly reduce costs and improve service levels. Fair transfer pricing policy also key

Ads:
- reduced headcount
- reduction of floor space
- knowledge sharing
- standardisation

Dis:
- loss of business and specific knowlegde
- removed from day to day, can lead to misinformed decisions
- weakened relationships
- cost inefficiencies

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18
Q

What is cloud accounting?

A

A type of cloud computing, where accounting software is provided by a service provider

Ads:
- flexibility
- cost efficient
- improved security systems
- automatic updates and backup

Dis:
- internet access required
- supplier reliance
- security and privacy breaches

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19
Q

3 advantages of performance measures?

A

Promote goal congruence

Controllable factors only

Long-term objectives considered

20
Q

5 disadvantages of bad performance measures?

A

Manipulation of data

Can be demotivating

Stress between staff

Short term v long term conflict

Division comes before company as a whole

21
Q

Measures for a cost centre?

A

Cost variances

Cost per unit

Cost per employee

Non financial
- staff turnover
- staff absenteeism

22
Q

Measures for a revenue centre?

A

Revenue variances

Revenue per employee

Market share

Growth in revenue

23
Q

Extra measures for a profit centre?

A

Gross profit margin

Operating profit margin

24
Q

Extra measures for an investment centre?

A

Liquidity ratios

Other working capital ratios

ROI

RI

25
What is ROI, how is it calculated?
profit / investment x 100 Shows how much profit has been earned in relation to amount of capital invested Only controllable and divisional Centrally controlled assets should not be included, as not controllable by investment centre manager If ROI > target cost of capital = accept!
26
Advantages of ROI?
Enables comparisons Widely used and accepted Primary ratios can split into secondary ratios Forces managers to make good of existing capital resources Encourages reduction in level of bad assets
27
Disadvantages of ROI?
Disincentive to invest - manager will not want to make investment if it reduces division’s current ROI Depreciation results in ROI improving with the age of an asset - divisions then hang onto old assets and deter them from investing in new ones - complex dep calculations should be used instead Corporate objective to maximise profit not achieved if focus is ROI, short focus
28
What is RI and how is it calculated?
Controllable divisional profit - Interest cost on investment Measure of divisions profits after deducing a notional interest of the cost of capital invested Decision: RI > 0, accept
29
Ads of RI?
Reduces the problems of ROI - does not encourage manager to hold onto old assets Easy decision rule Divisional managers become more aware of cost of finance Different cost of capitals can be applied to divisions with different risk profiles
30
Dis of RI?
Absolute figure so no comparison Difficult to determine cost of capital Different accounting policies can confuse comparison May still result in dysfunctional behaviour and manipulation of figures
31
How to deal with questions about investments over several years, and ROI and RI?
The investment will need to be split into years via depreciation, so you can figure out the ROI and RI for each year. You’ll then need to carry over the NBV of the investment for next year. See p.318
32
What are the four metrics of a balanced scorecard?
Financial - creating value for shareholders Customer - what customers value Internal business - how to achieve objectives Innovation and learning - improve and create future value
33
What two indicators need to go in into each scorecard objective?
Critical success factors - things that must be right for success Key performance indicators - ways in which we can measure the CSFs
34
Ads and Dis of balanced scorecard?
Ads: - provides external as well as internal information - focuses on factors that enable company success, including non-financial ones Dis: - selection of measures - obtaining information - info overload - conflict between measures
35
What is budgetary control?
Involves comparing the plan of the budget with the actual results Investigating any significant differences between the two
36
What is the budgetary control cycle
Budget agreed Expenditure incurred Differences between budget and actual analysed Reasons obtained, followed by management action Feedback
37
What is a fixed budget?
Prepared prior to the start of the budget period, contains info and costs and revenue for ONE level of activity When actual level of activity is different, created misleading results
38
What are variances?
Differences between actual results and the original budget at the same activity level Adverse - decrease profits Favourable - increase profits
39
What are flexible/flexed budgets and why should they be used?
Flexible - recognises different cost behaviour patterns - shows costs and revenues at different level of activity Flexed - prepared at the end of the budget period with actual level of activity Ads: - managers are better prepared for range of scenarios - variances based on most suitable budget
40
How are costs calculated in flexible budgets?
Fixed costs = the same Variable = budgeted cost / budgeted activity level x actual activity level Semi-variable = fixed element doesn’t change, variable element flexed as above. Use high-low
41
What is total budget variance?
Difference between the original budget (not flexed) and the actual results
42
What is the volume variance?
Difference in costs between fixed and flexed budgets. So, difference due to the different budgeted activity level
43
What is the expenditure variance?
Difference between the flexed budgeted and actual results So, difference in costs due to actual expenditure
44
What are the four types of bias specifically in performance management?
Omitted variable Cognitive Confirmation Survivorship
45
How is ESG performance measured?
KPIs Suitable as ESG is often difficult to quantify Data analytics needs to be in place to monitor and record the relevant data
46
What is the WEF Global Risks Report?
Annual report exploring most severe risks the world will face. World Economic Forum - underpinned by Global Risks Perception Survey WEF International Business Council also has four pillars: - principles of governance - planet - people - prosperity
47
What is TCFD?
Makes orgs identify climate-related risks and opportunities Disclosure around 4 elements - governance - strategy - risk management - metrics and targets UK government has made this mandatory on a ‘comply or explain’ basis for largest UK-registered companies

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