Performance Evaluation

Question 1

What is the six step process for the feedback loop system?

Answer 1

1. Plans and targets are set of the future
2. Plans are put into operation.
3. Actual results are recorded and analysed.
4. Information about actual results is fed back to the management concerned. This reported information is feedback.
5. Feedback is used to compare actual results with the plan or targets.
6. Do one of three things: take control action, do nothing or alter the plan or target.

Question 2

What are the features of effective feedback?

Answer 2

The exception principle should be applied to highlight significant differences.

Controllable costs and revenues should be separately identified z

Reports should be made available in a timely fashion.

Information should be concise and sufficiently accurate.

Reports should be communicated to the manager who has responsibility and authority to act.

Question 3

What are the three styles of budget evaluation ?

Answer 3

Budget constrained.
Profit conscious.
Non-accounting.

Question 4

What should effective performance measures do?

Answer 4

1. Promote goal congruence.
2. Incorporate only those factors over which the responsibility centre manager has control.
3. Encourage the pursuit of long term objectives.

Question 5

How is return on investment calculated?

Answer 5

Controllable divisional profit/
Divisional capital employed x100

Question 6

How is residual income calculated?

Answer 6

Controllable profit - imputed interest charge in controllable investments

Question 7

What are the advantages and disadvantages of using RI?

Answer 7

Advantages:
- acceptable protects increase the RI of a division giving a simpler decision rule.
- RI can be more flexible as different costs of capital can be applied to investments with different risk characteristics.

Disadvantages:
- comparisons are more difficult.
- RI does not relate the size of a centres income to the size of the investment.