Kaplan 9: Preparing Budgets - decision making phase Flashcards
Performance indicators may be categorised Financial or Physical measures.
.
Financial performance measures examples
- Average selling price
- Profit as percentage of Sales Revenue
- Material cost per unit of purchase
- Labour rate per hour
- Cost per unit of production.
- Sales & cost variances
Physical performance measure examples
Usually relate to
production outcomes,
productivity and
production efficiency
- Quality indicators
(Reject rates) - Efficiency indicators
(no. of products made p/lab.h or idle time ratios) - Capacity measures
(Machine utilisation (or asset utilisation) ratios)
Ratio analysis is one of the main tools used in appraising the performance of a company, main advantage being the magnitude of the individual figures is eliminated, allowing the appraiser to focus on relative movements.
Generally used in 2 ways…
- Comparison of performance year to year
2. Comparison with other companies.
Main types of ratios:
- Profitability
- Liquidity
- Gearing
- Investment
ROCE
Expresses profit as a percentage of the assets in use.
(The capital employed in the business)
It can be further subdivided into Profit Margin and Asset Turnover (Use of assets)
Profit margin x Asset turnover = ROCE
Profit / Turnover) x (Turnover / Assets) = (Profit / Assets
ROCE
(Profit / Sales) x (Sales / Assets) = ROCE
What does the equation help demonstrate to managers how they can influence the Rate of Return on Capital Employed?
- Increase profit margins
Increase sales prices
Reduce costs - Increase Asset turnover (capital employed)
Increase sales
Reduce assets
YE or average capital employed?
Ideally profits for YE 2020 should be related to assets in use throughout that year (The average capital employed)
In practice this ration is usually computed using the assets at YE (YE capital employed)
Bear in mind this can distort trends and inter-company comparison.
If new investment undertaken near YE and financed (for example) by the issue of new shares, the capital employed will have risen by the total finance raised whereas the profits will only have a month or two of the new investment’s contribution.
ROCE
Share Capital + all Equity Reserves + Long term debt*
*Debenture counts as a long term debt
Debenture
Basically a long term debt (loan) with a specified interest rate.
Asset turnover as a measure
‘Make the assets work’
May involve disposing of ‘underperforming’ assets which cannot be made to generate sales
Asset turnover - high is good or bad?
Good.
Service sector: Think about how to measure Activity Resource utilisation Unit costs Profitability Quality of service
Eg.
Bus line no good assessing journies per day as contribution to profit would depend on how many passengers at each stage.
More appropriate activity measure ‘Passenger miles’
Resource use measure ‘Driver hours’
TQM
A continuous improvement in
quality, efficiency & effectiveness
- Aims towards environment of zero defects at minimum cost. (RIGHT FIRST TIME)
- Requires EMPLOYEE AWARENESS of quality requirements to meet spec.
- Aims at ELIMINATION of WASTE
- It must EMBRACE ALL ASPECTS of operations from pre-production to post production stages in the Business cycle
TQM - Quality circles
Every employee involved & heard.
Group should have diff levels of seniority & diff skills
TQM - The cost of quality
Types
- Failure costs
Costs to evaluate, dispose of / rework or replace defects. - Appraisal costs
Costs of monitoring and inspecting products in terms of specific standards before release to customer. - Prevention costs
Investments in machinery, technology & education to reduce number of defects.
TQM - Examples of
1. Failure costs
Internal (before delivery)
- Rework costs
- Net cost of scrap
- Disposal of defective products
- Downtime due to quality probs
External (after delivery)
- Complaint prcessing
- Warranty claims
- Cost of lost sales
- Product recalls
TQM - Examples of
2. Appraisal costs
- Test & measurement equipment
- Inspections & Tests
- Process control monitoring
TQM - Examples of
3. Prevention costs
- Customer surveys
- Field trials
- Quality education/ quality circles
- Investment in improved production equipment
The balanced scorecard.
Recognises that performance shuld not be measured only financally.
Biz will only suceed long-term if it keeps cusomers happy.
Therefore combine financial measures with other measures:
Operational
Innovation
Customer satisfaction
Financial Perspective:
- Profitaility
- Revenue growth
- Shareholder value
Business Process (Ops):
- Time to market
- Cycle time
- Process yeild
Organisational learning:
- % sales from new products
- Continuous improvement programme sucess
Customer Perspective:
- Defect level
- On-time delivery
- Level of satisfaction
Cost reduction as opposed to cost control
Cost reduction is a process leading to achievement of real and permanent reductions in UNIT costs of goods manufactured or services rendered WITHOUT impairing their suitability for the use intended.
Cost control aims simply to achieve the target costs originally accepted
Important aspects of cost reduction techniques
Target costing
Value Engineering
Save costs by eliminating costs which don’t add value to the customer. (eg. a more expensive dye used to colour disposable razors when customers don’t care about the colour and a cheaper different colour would be fine)
Value enhancement
Goes with cost reduction.
Getting the best value from the resolurces that are used in the organisation.
Benchmarking
One example.
Split company into divisions, all operating more or less same industry and performance indicators are calculated and compared. Eg Receivables better in one sets a benchmark for the other to aim for by tightening CC procedures
