11. Performance Measurement Flashcards
What performance measure would a cost centre manager use?
Actual vs Budgeted costs via variance analysis
Cost per unit
What performance measure would a revenue centre manager use?
Revenue growth %
Market share
Revenue variances vs budget
What performance measure would a profit centre manager use?
Gross profit %
Net profit %
Revenue and cost variances
What performance measure would an investment centre manager use?
The same measures as profit centres, as well as Return on Capital Employed (ROCE/ROI) and Residual Income
What is the equation for ROCE/ROI?
Net Profit/Capital Employed
What is the equation for Residual Income (RI)?
Divisional Net Profit (Before Interest and Tax) - Notional Interest
Where notional interest is Divisional Capital Employed x Cost of Capital
What does the Residual Income measure do?
It compares the profit actually made with the minimum acceptable profit to investors - it identifies the net profit of a division after having deducted a notional charge for interest based on the amount of capital tied up in the division
What do financial ratios do?
Provide information about the relationship between difference accounting figures
What should financial ratios be compared to?
- Previous years
- Other companies
- Other divisions within this company
- Industry standards
What does Return on Capital employed show?
How efficient the organisation is at generating profits from its capital
What is the equation for gross profit margin?
Gross Profit/Revenue x 100%
What does gross profit margin show?
The ability of the business to sell goods for more than they cost to make
What is the equation for net profit margin?
Net Profit/Revenue x 100%
What does net profit margin show?
The ability of the business to make an overall profit on the goods it sells
What is the equation for asset turnover?
Revenue/Total Assets Less Current Liabilities
What does asset turnover show?
How well your assets are being used to generate sales
What are 3 disadvantages of financial performance measures?
- They lack flexibility
- They encourage focus on the short term
- Managers may try to manipulate them e.g. delaying expenditure
What are the advantages of non financial performance measures?
Useful in indicating how a business is likely to perform in the future
Very flexible in terms of what is measured
What are the disadvantages of non financial performance measures?
Can be costly to use a wide range
Managers may find it difficult to understand
Can be subjective
Can be hard to record responses and performance
What is the balanced scorecard?
An approach to appraising performance by giving managers a comprehensive view of business performance
What is the aim of the balanced scorecard?
To not only focus on financial performance but to also consider human factors that ultimately drive the financial performance, which are underlying critical factors for the success of the business over the long term
What are the four elements of the balanced scorecard?
Financial, Customer, Internal business processes and innovation & learning
What are the 5 core measures in the finance section of the balanced scorecard?
ROCE Profit Margin Turnover Growth Market Share EPS
What are the 6 core measures in the customer section of the balanced scorecard?
Delivery performance Complaints % of on time deliveries Returns rate Retention rate Warranty claims %
