performance measurement and management Flashcards
why evaluate performance?
- monitor progress
- identify problems
- feedback control
- assess the efficiency of managers
- guide decision making
all this helps the organisation achiever whatever it set out to achieve
effective performance measures
SMART
S = specific (are they clear, specific and understandable?)
M = measurable (can it be measured?)
A = agreed (is it agreed/supported with everyone that is involved?)
R = realistic (are they fair and achievable?)
T = time-bound (do they allow timely feedback and review?)
explain decentralisation, responsibility centres and performance measurement
the entity’s performance measurement system aligns with its structure, evaluating each division, group, or segment based on its contribution to the overall goal
what is the proforma for measuring divisional profit?
- revenue from sales
- less: variable costs
= contribution margin - less: controllable fixed costs
= controllable contribution - less: non-controllable fixed costs
= divisional contribution - less allocated head office expenses
= divisional new profit before taxes
when do you consider the controllable fixed costs?
when you want to consider the performance of the MANAGER
- it gives the controllable contribution!
when do you consider the non-controllable fixed costs?
when you are considering the performance of the DIVISION as a separate entity
what do you look at in the proforma when evaluating a revenue centre’s performance?
both manager and division
- revenue from sales
what do you look at in the proforma when evaluating a cost centre’s performance?
both manager and division:
- variable costs
- controllable fixed costs
only division:
- non-controllable fixed costs
what do you look at in the proforma when evaluating a profit centre’s performance in the SHORT run?
both manager and division:
- revenue from sales
- variable costs
- controllable fixed costs
division:
- non-controllable fixed costs
what do you look at in the proforma when evaluating a profit centre’s performance in the LONG run?
both manager and division:
- revenue from sales
- variable costs
- controllable fixed costs
division:
- non-controllable fixed costs
- allocated head office expenses
what do you look at in the proforma when evaluating an investment centre’s performance?
both manager and division:
- revenue from sales
ROI formula
- ROI = (divisional profit / divisional investment) x 100
- ROI = investment turnover x profit margin
- ROI = profit/investment = (revenue/investment) x (profit/revenues)
- ROI = net operating profits / average operating assets
what does a higher ROI mean?
it means it is more profitable
how can you improve ROI?
- increase sales while maintaining the same margin and the same average operating assets
- decrease average operating assets while maintaining the same sales and the same average operating expenses
- decrease operating expenses while maintaining the same sales and the same average operating assets
what is residual income (RI)?
an increasingly popular alternative to ROI is the RI concept
- it measures the net income of an investment (or division) after deducting an amount representing the required rate of return on the capital invested in the business
- it encourages managers to accept projects that generate growth above the required rate of return
how do you calculate RI?
= divisional profit before tax - cost of capital charge
how do you calculate cost of capital charge?
= asset value x cost of capital
what is a budget?
a quantitative expression of a plan for a defined period of time
- it may include planned sales volumes and revenues; resource quantities; costs and expenses; assets, liabilities and cash flows
what do management use budgets for?
- plan annual operations
- coordinate activities
- communicating plans
- motivate managers
- control activities
- evaluate performance
what are annual budgets?
- budget prepared once per year
- indirect costs and support activities are prepared on an incremental basis (incremental budgeting)
- zero-based budgeting (aka priority based budgeting) attempts to overcome the limitations of incremental budgeting -> requirements for resources need to be justified each year
what are rolling budgets?
ensures that a 12-months budget is always available at any point of time
what can be used for budgeting for fixed costs?
activity-based budgeting (ABB)
what is activity-based budgeting?
- focuses on generating a budget from an activity-based model of the organisation
- combines ‘zero-based budgeting’ and ABC
what is zero-based budgeting?
calculates the projected expenditure for existing activities from scratch (instead of adjusting last years’ budget)
