8: Performance Management Flashcards
The main functions that management are involved with?
Planning
Decision-making
Control
What does ‘planning’ involve?
One of the main duties of the management accountant
- establishing the objectives
- formulating relevant strategies to achieve those objectives
- can be short term (tactical) or long term (strategic)
What does ‘decision-making’ involve?
Considering information and making an informed decisions
- making a choice between two or more alternatives
- first part: planning
- second part: control
What does ‘control’ involve?
Second part of decision-making process. Info relating to the actual results is reported to managers
- managers use information relating to results to take control measures
- internally sourced information (feedback)
What is involved in the feedback loop?
Management prepare a plan which is put into action by managers with control over input resources
Output is measured and reported (fed back)
Managers take corrective action
Feedback used to revise plans or prepare the next plan
What are the features of effective feedback?
Clear and comprehensive
Exception basis
Based on controllable costs and revenue
Produced on a regular basis
Timely
Accurate
Communicated
Irrelevant data excluded
What are the behavioural aspects of performance management?
Ways in which behaviour can damage the budgeting process:
Problems include dysfunctional behaviour and budget slack
Dysfunctional: when managers seek their own objectives
Budget slack: deliberate over-estimation of expenditure or under-estimation of revenues
What are the three distinct styles of Hopwood’s research on using budgetary info?!
Budget-constained
- achieve budget in the short term
- manager is criticised for poor results
- job related pressure
- data manipulation
Profit-conscious stule
- ability to reduce costs and increase profits in the long term
- short term info needs to be used with care and in a flexible way
- less job related pressure
- better working reations
- less manipulation
Non-accounting style
- evaluated on non-accounting performance indicators
- like profit-conscious, but less concern for accounting info
What factors affect degrees of centralisation?
Management style
Size of orgs
Extent of diversification
Communication
Management’s ability
Technology
Geographical location
Extent of local knowledge needed
Ads and Dis of decentralisation?
Ads:
- senior managers freed up
- better decisions by local managers
- motivation of managers
- quicker decisions
- good training
Dis:
- co-ordinating the business
- lack of goal congruence
- loss of control at senior level
- difficult to evaluation managers
- duplication of costs
What is a key aspect of responsibility accounting?
Ensuring managers are only accountable for the costs (and/or revenues) for which they have responsibility.
These are CONTROLLABLE COSTS
What is a responsibility centre, and what are the six types?
Individual part of a business whose manager has personal responsibility for performance.
Cost centre
Revenue centre
Profit centre
Investment centre
ALSO:
shared service centre
cloud accounting
What is a cost centre?
Production or service location etc whose costs are identified and recorded for MI
Can be departments, functions, activities, geographical locations, etc
Measured by variance analysis
What is a revenue centre?
Part of org that earns sales revenue
Like cost centre, but only accountable for revenues
Generally associated with selling activities
Measured by variance analysis
What is a profit centre?
Part of the business for which both the costs incurred and the revenues earned are identified
Found in largs orgs with divisionalised structures, where each div is a profit centre
Within each, could be several cost centres and revenue centres
Measured by controllable profit
What is an investment centre?
Profit centre with additional responsibilities for investment and financing, whose performance is measured by return on capital
Managers responsible for investment decisions and performance of capital employed
Measured by:
- ROI
- RI
What is a shared service centre?
Common processes within a business, such as HR and IT
Aim is to significantly reduce costs and improve service levels. Fair transfer pricing policy also key
Ads:
- reduced headcount
- reduction of floor space
- knowledge sharing
- standardisation
Dis:
- loss of business and specific knowlegde
- removed from day to day, can lead to misinformed decisions
- weakened relationships
- cost inefficiencies
What is cloud accounting?
A type of cloud computing, where accounting software is provided by a service provider
Ads:
- flexibility
- cost efficient
- improved security systems
- automatic updates and backup
Dis:
- internet access required
- supplier reliance
- security and privacy breaches
3 advantages of performance measures?
Promote goal congruence
Controllable factors only
Long-term objectives considered
5 disadvantages of bad performance measures?
Manipulation of data
Can be demotivating
Stress between staff
Short term v long term conflict
Division comes before company as a whole
Measures for a cost centre?
Cost variances
Cost per unit
Cost per employee
Non financial
- staff turnover
- staff absenteeism
Measures for a revenue centre?
Revenue variances
Revenue per employee
Market share
Growth in revenue
Extra measures for a profit centre?
Gross profit margin
Operating profit margin
Extra measures for an investment centre?
Liquidity ratios
Other working capital ratios
ROI
RI
What is ROI, how is it calculated?
profit / investment x 100
Shows how much profit has been earned in relation to amount of capital invested
Only controllable and divisional
Centrally controlled assets should not be included, as not controllable by investment centre manager
If ROI > target cost of capital = accept!
Advantages of ROI?
Enables comparisons
Widely used and accepted
Primary ratios can split into secondary ratios
Forces managers to make good of existing capital resources
Encourages reduction in level of bad assets
Disadvantages of ROI?
Disincentive to invest
- manager will not want to make investment if it reduces division’s current ROI
Depreciation results in ROI improving with the age of an asset
- divisions then hang onto old assets and deter them from investing in new ones
- complex dep calculations should be used instead
Corporate objective to maximise profit not achieved if focus is ROI, short focus
What is RI and how is it calculated?
Controllable divisional profit -
Interest cost on investment
Measure of divisions profits after deducing a notional interest of the cost of capital invested
Decision: RI > 0, accept
Ads of RI?
Reduces the problems of ROI
- does not encourage manager to hold onto old assets
Easy decision rule
Divisional managers become more aware of cost of finance
Different cost of capitals can be applied to divisions with different risk profiles
Dis of RI?
Absolute figure so no comparison
Difficult to determine cost of capital
Different accounting policies can confuse comparison
May still result in dysfunctional behaviour and manipulation of figures
How to deal with questions about investments over several years, and ROI and RI?
The investment will need to be split into years via depreciation, so you can figure out the ROI and RI for each year.
You’ll then need to carry over the NBV of the investment for next year. See p.318
What are the four metrics of a balanced scorecard?
Financial - creating value for shareholders
Customer - what customers value
Internal business - how to achieve objectives
Innovation and learning - improve and create future value
What two indicators need to go in into each scorecard objective?
Critical success factors - things that must be right for success
Key performance indicators - ways in which we can measure the CSFs
Ads and Dis of balanced scorecard?
Ads:
- provides external as well as internal information
- focuses on factors that enable company success, including non-financial ones
Dis:
- selection of measures
- obtaining information
- info overload
- conflict between measures
What is budgetary control?
Involves comparing the plan of the budget with the actual results
Investigating any significant differences between the two
What is the budgetary control cycle
Budget agreed
Expenditure incurred
Differences between budget and actual analysed
Reasons obtained, followed by management action
Feedback
What is a fixed budget?
Prepared prior to the start of the budget period, contains info and costs and revenue for ONE level of activity
When actual level of activity is different, created misleading results
What are variances?
Differences between actual results and the original budget at the same activity level
Adverse - decrease profits
Favourable - increase profits
What are flexible/flexed budgets and why should they be used?
Flexible - recognises different cost behaviour patterns
- shows costs and revenues at different level of activity
Flexed - prepared at the end of the budget period with actual level of activity
Ads:
- managers are better prepared for range of scenarios
- variances based on most suitable budget
How are costs calculated in flexible budgets?
Fixed costs = the same
Variable = budgeted cost / budgeted activity level x actual activity level
Semi-variable = fixed element doesn’t change, variable element flexed as above. Use high-low
What is total budget variance?
Difference between the original budget (not flexed) and the actual results
What is the volume variance?
Difference in costs between fixed and flexed budgets.
So, difference due to the different budgeted activity level
What is the expenditure variance?
Difference between the flexed budgeted and actual results
So, difference in costs due to actual expenditure
What are the four types of bias specifically in performance management?
Omitted variable
Cognitive
Confirmation
Survivorship
How is ESG performance measured?
KPIs
Suitable as ESG is often difficult to quantify
Data analytics needs to be in place to monitor and record the relevant data
What is the WEF Global Risks Report?
Annual report exploring most severe risks the world will face. World Economic Forum
- underpinned by Global Risks Perception Survey
WEF International Business Council also has four pillars:
- principles of governance
- planet
- people
- prosperity
What is TCFD?
Makes orgs identify climate-related risks and opportunities
Disclosure around 4 elements
- governance
- strategy
- risk management
- metrics and targets
UK government has made this mandatory on a ‘comply or explain’ basis for largest UK-registered companies
