Financial measures of performance
- Profit
- Return on investment
- Variance analysis
- Balanced scorecard
Nonfinancial measures
- External benchmarking - Productivity measures
a. Total productivity ratios = all output / all input
b. Partial productivity ratios = all outputs / major categories of inputs - Internal benchmarking - techniques to find and analyze the problem
a. Control charts - acceptable range
b. Pareto diagrams - most frequent issues
c. Cause and effect (Fishbone) diagram
Effective performance measures
- relate to goals of the organization
- balance long and short term issues
- reflect management of key activities
- under control of employees
- understood by employees
- used to reward the employee
- objective and easily measured
- used consistently
Marketing methods
- Transaction marketing
- Interaction based relationship marketing
- Database relationship
- E- marketing
- Network marketing
Performance
- Marketing methods are aligned with products
2. Performance incentives
Incentive compensation
- Fixed salary
- Bonuses
- Other perks
Choices for management compensation
- Time horizon
- Fixed vs variable bonuses
- Stock vs accounting based performance evaluation
- Local vs company-wide performance
- Cooperative vs competitive incentive plans
Components of product cost
Direct materials DM
Direct labor DL
Manufacturing overhead MO
Prime costs
Direct materials
Direct labor
Conversion costs
Direct labor
Manufacturing overhead
Product costs
inventoriable
become cost of goods sold when sold
Period costs
expensed in the period incurred
Traditional overhead rate
Budgeted manufacturing overhead costs / Estimated cost driver
Relevant range
The relevant range is the range of volume for which the assumptions of the cost driver are valid and in which the actual value of the cost driver exists
Treatment of costs incurred before the split off point for joint products
Costs incurred before the split off point are sunk costs, not relevant to further processing decisions
Joint costs are allocated using one of the following methods
Use % of product to total based on a ratio of:
- relative sales value
- net realizable value
- physical units
Cost of goods manufactured
Work in progress beginning Add: Direct materials Direct labor Manufacturing overhead Less: Work in progress ending
Cost of goods sold
Finished goods beginning
Add cost of goods manufactured or Purchased
Less finished goods ending
Job costing
Each unit/batch is unique and easily identifiable costs are determined by each job
Example: We print your resume in our print shop
Process costing
Continuous mass produced identical units are manufactured, and costs are determined by activity/process/department
Example: We process crude oil into gasoline
Equivalent unit
- used in process costing, equivalent units are fully completed and partially completed units during the period
- in applying costs, determine the units, then costs, then apply the cost flow assumption for cost per unit and allocation of cost
FIFO method - equivalent units
Equivalent units = (Beginning WIP x % to be completed) + Units started and completed + (Ending WIP x % completed)
FIFO method - total cost calculation
Total cost = Cost incurred during the current period
Weighted average method - equivalent units
Equivalent units = Units completed + (Ending WIP x % completed)
Weighted average method = total cost calculation
Total cost = Costs in beginning WIP + Costs incurred during the current period
Types of spoilage
- Abnormal - charge to income of the current period
2. Normal - increase the cost of the product produced (inventory)
Activity based costing
ABC is a costing theory that assumes that resource consuming activities cause costs and that costs should be assigned to benefiting products based on the activities performed and the resources consumed.
ABC divide costs into multiple activity into multiple activity centers and identify the activities that drive the costs in each cost center. Costs are then assigned based on the volume of cost drivers at the determined rate per cost driver.
Characteristics of effective performance measures
Effective performance measures:
- Relate to the goals of the organization
- Balance long and short term issues
- Reflect management of key activities sometimes referred to as critical success factors in the balanced scorecard.
- Are under the control or influence of the employee
- Are understood by the employee
- Are used to both evaluate and reward the employee or otherwise constructively influence behavior.
- Are objective and are easily measured.
- Are used consistently
Transaction marketing
Customers are attracted for the sake of a single sale
Interaction-based relationship marketing
When customers are attached for the purpose of a sale that serves as the basis for an ongoing relationship
Database marketing
Information is gathered on customers and the information from that database is used to segment customers into target markets for a more effective selling effort.
Types of compensation
- Fixed salary
- Bonuses
- Perks
Incentive compensation
- Time horizon
- Fixed vs variable bonuses
- Stock vs accounting based performance evaluation
- Local vs company wide performance
- Cooperative vs competitive plans
