5. Performance Indicators Flashcards
We have analysed cost variances.. Cost variances are examples of performance measures which can be used for … (3)
- MONITOR the use of resources
- Help with CONTROL of the business
- Help with PLANNING for the future.
A Performance Indicator may be used for
- Identifying problems
- Controlling costs
- Measuring the utilisation of resources
- Measuring an individual’s performance
- Planning
Some examples of performance indicators
- The direct materials usage variance
which may IDENTIFY a PROBABLE relating to wastage of materials. - The administration cost as a percentage of sales
which may help with CONTROL of COSTS - Number of hours of machine down-time:
Relevant to HOW WELL resources are being utilised. - Profit as a percentage of sales revenue:
May indicate HOW WELL a company has been managed. - Number of prduct units rejected on inspection:
May help with PLANNING production levels
Various factors can impact performance indicators and need taking into accounts. Examples:
- The learning effect. (Doesn’r continue indefinitely)
- Economies of scale. (Bulk discounts; Fixed costs diluted)
- Mechanisation. (Type of cost will change eg reduced labour, increased non-current asset costs)
A key area most orgs want to focus on is performance in terms of productivity and efficiency … explain
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.
Comparing performance indicators with standards or targets includes benchmarking which are..
..Standards or Targets set for one or more areas of activity and should be related to what is important to the organsation.
Benchmarks may be
- Set internally and relate to a single aspect of the work eg. all correspondence to be answered within 3 working days.
- Set by external bodies eg. Government targets relating to pollution of the environment.
- Set (internaly or externally) with reference to similar organisations eg. expected level of profitability calculated as an average for the industry.
Comparisons
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.
Types of data for performance measurement ..
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)
- 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.
Ratio analysis
Generally refers to the calculation of a set of ratios or percentages using data from financial and management accounts of a business.
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:
- Comparing with budgets or targets
- Comparing with other periods of time
- 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.
Need to be able to analyse eg.
Told that:
Gross profit % is down.
Sales Rev & selling prices are in line with budget.
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.
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 performance indicator that compares the profit with the amount of long-term finance being used by management.
ROCE =
Operating Profit / NCAs + Net CAs
or
Operating Profit / Capital + Long-term liabilities
Capital Employed …
‘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
Operating Profit is…
Profit arising from operations before interest and tax.
‘Value added’ is a way of showing how the inputs to the organisation have been changed into valuable outputs (sales)
‘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
Value added calculation
VA = Sales - (Cost of materials and bought-in svs)
– 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).
.
‘Working Capital’ or Liquidity ratios relate to..
The very important aspect of management which is the control of current assets & liabilities such as payables inventory, receivables , cash
Limitations of Ratio Analysis
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
When doing calcs need to
Eg told biz holds 60 days of inventory valued at £75K and has GPM of 40%…
COS will be 365 days of inventory so:
75,000 / 60 * 365 = £456,250
Non -financial performance measures:
Suggest assessment for:
Automated production
Hours of machine down-time
Non -financial performance measures:
Suggest assessment for:
Absenteeism
Employee-days absence
Non -financial performance measures:
Suggest assessment for:
Telephone helpline
Average time in seconds to answer call
