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4.2 Management Accounting: Decision & Control > 5. Performance Indicators > Flashcards

5. Performance Indicators Flashcards

1
Q

We have analysed cost variances.. Cost variances are examples of performance measures which can be used for … (3)

A
  1. MONITOR the use of resources
  2. Help with CONTROL of the business
  3. Help with PLANNING for the future.
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2
Q

A Performance Indicator may be used for

A
  1. Identifying problems
  2. Controlling costs
  3. Measuring the utilisation of resources
  4. Measuring an individual’s performance
  5. Planning
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3
Q

Some examples of performance indicators

A
  1. The direct materials usage variance
    which may IDENTIFY a PROBABLE relating to wastage of materials.
  2. The administration cost as a percentage of sales
    which may help with CONTROL of COSTS
  3. Number of hours of machine down-time:
    Relevant to HOW WELL resources are being utilised.
  4. Profit as a percentage of sales revenue:
    May indicate HOW WELL a company has been managed.
  5. Number of prduct units rejected on inspection:
    May help with PLANNING production levels
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4
Q

Various factors can impact performance indicators and need taking into accounts. Examples:

A
  1. The learning effect. (Doesn’r continue indefinitely)
  2. Economies of scale. (Bulk discounts; Fixed costs diluted)
  3. Mechanisation. (Type of cost will change eg reduced labour, increased non-current asset costs)
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5
Q

A key area most orgs want to focus on is performance in terms of productivity and efficiency … explain

A

Both concentrate on relationship betweek inputs and outputs.

PRODUCTIVITY measures quantity of output (eg units) and compares to some form of input (eg employees or value of NC assets)

EFFICIENCY takes inputs of a process and assesses how economically they are used to produce the output.
In this way efficiency takes account of the value of outputs in relation to the value of inputs.
Measures of efficiency therfore examine how well resources have been used to generate profits.

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6
Q

Comparing performance indicators with standards or targets includes benchmarking which are..

A

..Standards or Targets set for one or more areas of activity and should be related to what is important to the organsation.

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7
Q

Benchmarks may be

A
  1. Set internally and relate to a single aspect of the work eg. all correspondence to be answered within 3 working days.
  2. Set by external bodies eg. Government targets relating to pollution of the environment.
  3. Set (internaly or externally) with reference to similar organisations eg. expected level of profitability calculated as an average for the industry.
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8
Q

Comparisons

A

Time series.
If items measured in money terms eg sales revenue or profit are being compared over a number of years .. may need to adjust for inflation using index.

Consistency:
Need to be sure of consistency eg. Net profit figures.. If there is a change in policy for depreciation, this may affect the figures and they would not be comparable.

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9
Q

Types of data for performance measurement ..

A 
1. Quantitative data.
Can be stated in numbers.
Can be split into:
Financial or monetary data.
Non-financial which is in terms of units (eg no. of hours)
  1. Qualitative data.
    Cannot be put in numerical terms.
    Can consist of ppls opinions or judgements.
    Eg student views about a teacher… for types of work where there is no clearcut numberical measurement of performance.

A combination of Qualitative and Quantitative data is often used.

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10
Q

Ratio analysis
Generally refers to the calculation of a set of ratios or percentages using data from financial and management accounts of a business.

A

The income statement and the Balance sheet are used in the analysis which can then be used to evaluate the performance of the business by:

  1. Comparing with budgets or targets
  2. Comparing with other periods of time
  3. Comparing with other similar organisations

In case of ltd companies outsiders can look at the final accounts and calculate ratios for eg. deciding wheter to invest. This analysis will add to the available info but should not be used on its own.

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11
Q

Need to be able to analyse eg.
Told that:
Gross profit % is down.
Sales Rev & selling prices are in line with budget.

A

Can work out that:
Snce revenue and pricing are in line then Volume MUST also be in line.

Therefor the reduced profit % MUST be due to increased production costs.

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12
Q

Return on Capital Employed (ROCE)

a key ratio which shows how well the management has used the assets (or resources shown on the SFP) to generate profits.

A

A performance indicator that compares the profit with the amount of long-term finance being used by management.

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13
Q

ROCE =

A

Operating Profit / NCAs + Net CAs

or

Operating Profit / Capital + Long-term liabilities

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14
Q

Capital Employed …

A

‘Capital Employed’ normally means owners’ capital and any long-term liabilities such as loans.

another way of looking at it (SFP) ..
The value of NCAs and CAs less Current Liabilities

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15
Q

Operating Profit is…

A

Profit arising from operations before interest and tax.

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16
Q

‘Value added’ is a way of showing how the inputs to the organisation have been changed into valuable outputs (sales)

A

‘Value added’ as a financial measure refers to the difference between the value of outputs and the value of inputs.

It shows the increase in monetary value which has resulted from the work done and the use of assets within the organisation.

For the calculation:
The inputs are defined as ‘materials and bought in services’ (ie brought in FROM OUTSIDE)
The monetary value of outputs is sales revenue which is their value as they go to OUTSIDE CUSTOMERS

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17
Q

Value added calculation

A

VA = Sales - (Cost of materials and bought-in svs)

18
Q

– Return on capital employed (ROCE) is calculated as net profit/TALCL x 100. In this case TALCL stands for Total Assets Less Current Liabilities.

– Return on net assets (RONA) is calculated as net profit/net assets x 100. Net assets will be Total Assets Less Total Liabilities (a slightly different way of valuing the balance sheet to TALCL).

A

.

19
Q

‘Working Capital’ or Liquidity ratios relate to..

A

The very important aspect of management which is the control of current assets & liabilities such as payables inventory, receivables , cash

20
Q

Limitations of Ratio Analysis

A

The principle of like for like should be applied but is not always straightforward.

Some of the ratios can be defined in diff ways so the particular definition used should be made clear. Even so detailed info may not be given eg. to split sales into cash and credit sales.

When using published accounts, not poss to guarantee LFL as different policies affect results (depreciation; inventory valuation and goodwill)

For any org its possible the SFP does not show a typical position, intentionally or otherwise. A single transaction next day might make it look quite different. NB Seasonal variations, can make a big difference to ratios.

Discussion of a specific case may include looking for ways the ratios could have been distorted. EG high level of spending on research, training, or marketing may reduce profit temporarily as the benefit is delayed.

When making comparisons over diff time periods the ratios are based on histric costs as shown in the account. If there has been inflation a better comparison could be made by adjusting for this before calcing the ratios.

When drawing conclusions, limitations should be borne in mind. However analysis can give useful info particularly in Showing how items in the FSs relate to each other and in Identifying trends

21
Q

When doing calcs need to

Eg told biz holds 60 days of inventory valued at £75K and has GPM of 40%…

A

COS will be 365 days of inventory so:

75,000 / 60 * 365 = £456,250

22
Q

Non -financial performance measures:
Suggest assessment for:
Automated production

A

Hours of machine down-time

23
Q

Non -financial performance measures:
Suggest assessment for:
Absenteeism

A

Employee-days absence

24
Q

Non -financial performance measures:
Suggest assessment for:
Telephone helpline

A

Average time in seconds to answer call

25
Q

Non -financial performance measures:
Suggest assessment for:
Quality of service

A

Number of customer complaints

26
Q

Non -financial performance measures:
Suggest assessment for:
Input of data to computer

A

Number of errors fper 1000 inputs

27
Q

Non -financial performance measures:
Suggest assessment for:
Customer satisfaction

A

Number of repeat orders

28
Q

Non -financial performance measures:
Suggest assessment for:
Quality of output

A

Number of units rejected per 1000

29
Q

Qualitative (Non-numerical) measures.

For things difficult to measure in numbers eg.
Motivating others
Teamwork
Helpfulness to customers

How to measure?

A

Opinions and attitudes

eg.
customer surveys. (These often include score but that’s subjective so not an accurate measurment just an aid)

appraisal schemes - collect feedback from colleagues. Work relationships can affect judgements given (and vice versa) so the usefulness may be limited.

30
Q

Performance management in service orgs

A

Services cannot be checked bufore issue.

The usual financial measures and ratios can be used for profit-making service organisations.

Non-financial and qualitative measures are often applicable eg.
average waiting time.
Number of complaints

The appropriate PIs depend on the service being provided and its aims. From the org’s point of view financial PIs are likely to be important.. If you then consider which features of the service would be important to customers, you can see what items of data are available to easure these features.

31
Q

PIs need designed to measure how well an rg achieved its aims.

Profit-making - main financial aim is usually profit.

Non-profit - main financial aim is ‘value for money’
How is this defined?

A

Economy
Controlling expenditure on costs.
(Measure same as in business, compare with budget and calculate variances)

Efficiency
relating outputs to inputs
- meaning that obtaining more from the money spent shows greater efficiency.
Possible measure - cost per unit - where units of output can be defined. Eg cost of a resident day cound be calculated in a nursing home

Effectiveness:
Relating outputs to aims
Achieving more of what it sets out to do shows greated effectiveness.
Measure by comparison with targets or with other similar organisations.

32
Q

The general principles of Performance management are?

applying to all orgs

A
  • Comparabiity - like for like.
  • Comparison with standards, budgets or targets.
  • Comparison with similar organisations.
  • Comparison over time to look for trends.
33
Q

Ethical considerations

A

If the measure can be manipulated by workers it may encourage behaviour that does not benefit the org overall.

Eg. cutting training costs to improve profitability may affect long-term profits.

Looking at ways a PI could be manipulated is part of its evauation.

34
Q

Ethical considerations - targets should be

A
  • Achievable, but encouraging improvement
  • Within the area of responsibility of the person.
  • Comparing like for like
  • Seen to be fair and meaningful
35
Q

Ethical considerations - PIs causing unethical behaviour

A

EG. Manager responsible for paying suppliers being assessed on ‘payable days’

Might delay payment to suppliers particularly ones with little commercial leverage. Unethical and could also be detrimental eg difficulty negotiating new supply contracts, rumours of mony problems in the industry

36
Q

Ethical considerations - PIs causing unethical behaviour

A
  1. Manager responsible for paying suppliers being assessed on ‘payable days’

Might delay payment to suppliers particularly ones with little commercial leverage. Unethical and could also be detrimental eg difficulty negotiating new supply contracts, rumours of mony problems in the industry

  1. Judjung a CC mgr purely on ‘receivable’ days.
    Unacceptably aggressive collection tactics. (Ethical) and could result in losing customers (Detrimental)
37
Q

The ‘Balanced Scorecard’

A way of viewing performance of a profit-making organisation from 4 perspectives which are ?

A
  1. The financial perspective
  2. The customer perspective
  3. The internal perspective
  4. The innovation and learning perspective
38
Q

Balanced scorecard

1. The financial perspective

A

Concerned with satisfying the shareholders or owners of a business and relates to profits.

Suitable indicators:
ROCE
Profit Margin

39
Q

Balanced scorecard

2. The customer perspective

A

Cooncerned with customer satisfaction and loyalty. Relates to customers’ views of the business

Suitable indicators:
Delivery times
Repeat custom
Average delay (Unfulfilled orders / Turnover * 365)

40
Q

Balanced scorecard

3. The internal perspective

A

Concerned with technical excellence & consumer needs, which relate to quality.

Suitable indicators:
Those which assess quality and value

41
Q

Balanced scorecard

4. The innovation and learning perspective

A

Concerned with the need for continual improvement of existing and ability to develop new products to meet customers’ changing needs, so it is related to development.

Suitable indicators:
% sales attributable to new products
A measure of R&D expenditure

4.2 Management Accounting: Decision & Control (15 decks)

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