MODULE 5 - L.1

Purpose of Performance Measurement Systems

• Performance measurement assesses how well an entity meets its plan, applicable to machines, factories, subsidiaries, or entire organizations.
• Classification of performance measures into:
  • Financial performance indicators
  • Non-financial performance indicators
• Objectives of performance measurement include:
  • Identifying concerning performance aspects
  • Explaining discrepancies between actual and expected outcomes
  • Implementing control measures for performance improvement
• Integral to effective planning and control processes.

Responsibility Centres, Materiality, and Controllability

• Responsibility accounting segments revenue and costs by managerial responsibility to evaluate performance.
• Types of responsibility centres:
  • Cost Centre: Focuses solely on costs, with no revenue responsibilities.
  • Revenue Centre: Generates revenue without production responsibilities.
  • Profit Centre: Manages both revenues and costs, measuring profitability.
  • Investment Centre: Oversees costs, revenues, and investments, focusing on return on capital employed.
• Managers are tasked with achieving budget targets; variances indicate potential issues needing attention.
• Materiality: Focuses on significant variances impacting management decisions, advocating for tolerance limits on variances.
• Controllability: Managers are accountable only for controllable costs; uncontrollable items necessitate standard adjustments over past investigations.

Financial Performance Measures

• Performance measurement tracks organizational success against strategic objectives at various levels.
• Financial performance assessed through ratios and percentages.
• Performance indicators provide diverse insights for:
  • Resource monitoring
  • Organizational control
  • Future planning.

Performance Indicators

• Variance analyses act as performance indicators, offering valuable insights for:
  • Identifying labor productivity issues via efficiency variances.
  • Controlling distribution costs related to turnover.
  • Reviewing labor idle hours to assess resource use.
  • Measuring profit percentage of turnover for organization management evaluation.
• Comparisons against benchmarks such as:
  • Standards, budgets, or historical trends
  • Performance across similar organizational sectors
  • Industry averages.

Qualitative and Quantitative Measures

• Distinction between:
  • Quantitative Measures: Easily expressed in numerical terms (e.g., timeliness).
  • Qualitative Measures: Often subjective and challenging to quantify (e.g., customer satisfaction).
• Combination of both types provides a comprehensive performance assessment.

Productivity, Efficiency, and Effectiveness

• Performance evaluation aims to determine:
  • Effectiveness: Achievement of goals and targets.
  • Productivity: Output relative to input resources.

Performance Measures for Cost Centres

• Productivity: Assesses the volume of products/services produced per input resource.
• Cost per Unit: Total production costs divided by the number of units produced, crucial for controlling production efficiency.
• Indices: Tracks changes in specific variables relative to a base date for impactful insights.

Performance Measures for Revenue Centres

• Sales metrics focus on price and volume, including revenue and market share targets for analysis.
• Additional performance indicators for revenue tracking include:
  • Customer returns relative to total sales.
  • Flexibility measures indicate how well able a company is to respond to customers' requirements. Measures could be devised to measure how quickly and efficiently new products are launched, and how well procedures meet customer needs.
  • Delivery schedules.
  • Service efficiency indicators.

Performance Measures for Profit Centres

• Profit Margin: Calculated as (profit/sales revenue) x 100%, indicates profitability status.
• Gross Profit Margin: More focused analysis using gross profit against revenue.
• Cost/Sales Ratios: Facilitate deeper examination of cost structure when profit targets fail.
• Subordinate cost ratios explore specific production cost components relative to sales value.

Resources

• Conventional measures compare actual costs to expected costs spotlighting price variances and material usage.
• Modern environments include metrics like material reject rates and delivery reliability, correlating to labor costs evaluations based on efficiency standards.### Qualitative Measures of Labour Performance
• Qualitative performance measures encompass communication ability, interpersonal relationships, customer impressions, and skill levels attained.
• Managerial performance is influenced by staff performance; high profitability is not the sole indicator of managerial success.
• Traditional measures for variable overheads include variances between actual and budgeted costs.

Time-Based Performance Measures

• Machine downtime reflects total machine hours; this ratio indicates machine usage and efficiency.
• Value-added time represents the production cycle time used directly in creating a product, excluding non-value-added times (e.g., set-up, downtime).
• A 'perfect' value-added time ratio is 100%, which is rarely achievable; high ratios signify minimal non-value-added activities.

Efficiency, Activity, and Capacity Ratios

• Standard hours are critical for assessing efficiency, activity, and capacity.
• Management accounting reports should integrate control ratios involving budgeting and variance analysis.
• The capacity ratio assesses actual vs. budgeted hours worked to gauge planned utilization.
• The activity ratio compares standard hours for actual work produced against budgeted hours.
• The efficiency ratio evaluates labor efficiency by comparing standard hours of work produced to actual hours worked.

Performance Measures for Investment Centres

• Return on Investment (ROI) measures profit relative to capital employed: (profit before interest and tax/capital employed) x 100%.
• Residual Income (RI) measures performance by accounting for an imputed interest cost and depreciation: pre-tax profits - notional interest charge for invested capital.

Balanced Scorecard Approach

• The balanced scorecard includes four perspectives: financial, customer, internal processes, and learning and growth.
• Focuses on a comprehensive set of performance indicators, blending financial and non-financial aspects.
• Each perspective addresses key questions about value creation, customer needs, process excellence, and future capability improvement.

Balanced Scorecard Measures

• Financial: ROI, cash flow, revenue growth, earnings per share.
• Customer: new customers acquired, customer complaints, on-time deliveries, returns.
• Internal: quality control rejects, production speed, labor turnover rate, new product revenue percentage.
• Learning and Growth: time taken for new product development, management information systems.

Challenges with the Balanced Scorecard

• Conflicting measures may arise, complicating target setting and interpretation.
• Measures must not overcrowd reporting; clarity in understanding results is essential.

Reward Systems Overview

• Employment is an economic relationship; rewards are exchanged for labor.
• Extrinsic rewards stem from job context (remuneration, benefits), while intrinsic rewards derive from job content (self-esteem, development).

Effective Reward System

• Aligns with organizational strategic goals and individual employee aspirations.
• Key decisions in monetary rewards include remuneration levels, individual vs. group basis, and overall emphasis on monetary rewards.

Strategic Perspective on Rewards

• Contingency theory posits that reward systems should reflect the organization's strategy.
• Different strategies (cost leadership vs. differentiation) necessitate distinct reward frameworks.

Reward Objectives

• Support recruitment and retention initiatives.
• Motivate performance levels and foster commitment.
• Ensure compliance with workplace standards.

Types of Rewards

• Base remuneration: fixed salary/wage compensation for work.
• Performance-related remuneration: incentives based on individual or team performance.
• Indirect remuneration: employee benefits (e.g., health insurance, vacation days) augmenting base or performance-related pay.

Reward Levels and Influencing Factors

• Remuneration levels are subject to local and national labor market conditions, industry cost efficiency pressures, and legislative influences.
• Government policies can affect wage rates indirectly through fiscal and monetary mechanisms.

This quiz covers the purpose of performance measurement systems, focusing on how well entities are doing compared to their plans. You will explore the two types of performance measures: financial and non-financial indicators, relevant for various settings such as machines, factories, and entire organizations.