P2 - C8 - Performance Measurement in Responsibility Centres Flashcards
Control Theory
- Setting performance standards
- Measuring actual performance
- Comparing actual performance with standards
- Analysing deviations
- Correcting deviations
Critical targets must be SMART
Specific
Measurable
Achievable
Relevant
Timebound
Feedback and performance appraisal
- Comparison between actual results and objectives
- Staff performance appraisals and review
- Review of strategic plans
- Variance analysis and review of budgets against actuals
- Performance measurement techniques such as the balanced scorecard
Centralisation
- Decisions made by senior management
- Coordination between divisions consistent with objectives
- Avoidance of duplicated tasks
Decentralisation
- Authority is delegated
- Divisional expertise applied to decisions
- Motivating for lower managers
- Quick decisions
- Staff development
- Frees up senior management for strategic issues
Cost Centres
Only costs attributed
Performance Measures:
1. Comparison between budget and actual results
2. Efficiency and productivity measures
3. Customer focused measures
4. Learning and innovation
Revenue Centres
Focused solely on generating revenue
Performance Measures:
1. Key measure is revenue
2. Measured against costs incurred vs budget
3. Brand awareness amongst key target groups
4. Percentage of sales calls resulting in a sale
5. Average sales per sales call
Profit Centres
Autonomy over both costs and revenue
Performance Measures:
1. Main measure is profit
2. Gross profit margin
3. Operating profit margin
4. Net profit margin
5. Customer focused
6. Internal focused (efficiency / productivity levels)
7. Learning and innovation
Investment Centres
Costs and revenues as well as the investment in assets used to support the division
Performance Measures:
1. Return on Investment (ROI)
2. Residual Income
Return on investment
Advantages:
1. Easy to understand
2. Percentage based measure
3. Relates profit to the level of investment
Disadvantages:
1. Based on net assets
2. Managers may reduce profits be preserving the current ROI
3. Can be short-termist in nature
Residual Income
Advantages:
1. Focused on maximising shareholder wealth by maximising profits
2. Cost of capital can be altered to reflect risk
Disadvantages:
1. Produces an absolute figure which reduces comparability between units
2. Based on net assets, which can fluctuate depending on which point the centre is in their asset life cycle
3. Can be short-termist in nature
Economic Value Added
Measure of performance based on adjusting profits
Step 1 – Add expenditure which adds long term value to profit
Step 2 – Add back non-cash accounting adjustments
Step 3 – Subtract cost of capital on assets
EVA is an estimate of the value created in excess of the return required to shareholders
Overall EVA provides a more meaningful, cash based measure of performance than the standard measures
