11 Performance Measurement Flashcards
With responsibility centres what are the 3 things manager will need if they are controlling?
- Actual info to date
- Forecast information
- Comparison of forecast info with targets
What is a cost centre?
Part of a business accountable only for costs in the context of control. Managers need info on likely costs from future decisions so decisions can be made about which suppliers to use etc
What is a revenue centre?
this is part of a business responsible only for revenues - sales orientated => set targets
What is a profit centre?
Part of a business that is accountable for costs and revenues. - info for supporting impact of price changes on sales volume
What is an investment centre?
Part of the business accountable for costs, revenues & capital investment (purchase of non-current assets)
How would you measure performance of a cost centre?
- Actual v budgeted cost via variance analysis
2. Cost per unit
How would you measure performance of a revenue centre?
- Revenue growth %
- Market share
- Revenue variances v budget
How would you measure performance of a profit centre?
- Gross profit %
- Net profit %
- Revenue and cost variances
How would you measure performance of a investment centre?
- Return on capital employed (ROCE)
2. Residual Income (RI)
How you work out ROCE?
This is calculated as profit/ capital employed.
- Gives good measure as to how well the assets of a business are being used to generate profits
How do you work out RI?
Instead of % terms => £ terms
Divisional profit (same definition as for ROI) LESS notional interest (divisional capital employed x cost of capital)
= Residual Income
This compares profit actually made with the minimum acceptable profit to the investors.
If RI positive suggests that division has made profit that is over and above that which is required.
What is gross profit margin equation?
gross profit/ revenue x 100%
What is the net profit margin equation?
PBIT/Revenue x 100%
What is the asset turnover ratio?
Revenue/ total assets - current liabilities
What are the disads of financial performance measures?
- Lack flexibility
- Encourage focus on short term profitability
- Managers try to manipulate financial measures
What are examples of non-financial performance measures?
- Service quality - no. of complaints, on time deliveries
- Production performance - set up times, number of suppliers
- Marketing effectiveness - trends in market share, sales volume growth
- Personnel - staff turnover, training time per employee
What are the advantages of non-financial performance measures?
- Useful at measuring performance in areas that will indicate how a business is likely to perform
- Flexible in terms of what is measured. A business can tailor a set of performance measures, based on what it considers as important
What are the disadvantages of non-financial performance measures?
- Use wide range = costly
- Difficult to understand what they indicate
- Measures such as quality may be subjective
- Hard to record responses and performance
What were the 4 key areas that Kaplan & Norton noted as where large business managed to provide a comprehensive view to managers of business performance?
FINANCIAL
- ROCE
- Profit margin - Gross, Net
- Turnover growth
- Market share
- EPS
CUSTOMER
- Delivery performance in terms of time
- Complaints
- % on time deliveries
- Returns rate
INTERNAL BUSINESS PROCESSES
- Quality control reject rate
- Turnaround time
- Production set up time
INNOVATION & LEARNING
- Staff turnover
- Illness rate
- Development time for new products
What are examples of not for profit organisations?
- Charity
- State-run organisations
Profit is not a relevant factor for these entities
What methods are assed in NOFP’s?
Cost based - measure costs and variances
Other:
1. Economy - cost of resources used - did it overspend?
2. Efficiency - outputs vs inputs - good value for money?
3. Effectiveness - achieving targets - did it help the organisation achieve goals overall?
