Performance Management Flashcards
Measures the cost of quality, return on investment, return on assets, return on equity, and economic value of performance (in dollars) and looks to make a profit:
Financial measures
Measures of the ratio of outputs achieved to the inputs of production:
Productivit
Measures external (increasing output/efficiency) and internal (decreasing defects):
Non-financial measures
The quantity of all outputs produced relative to the costs of all inputs used
Outputs / Total Costs = Hope to be high
Total Factor Productivity Ratios (TFP)
The quantity of output produced relative to the quantity of individual outputs used
Output / Specific Quantity of Material or Labor = Hope to be high
Partial Productivity Ratios (PPR)
Used to plot comparison of actual results to an acceptable range. This shows whether there is a trend toward improved quality conformance or deteriorating quality conformance. Determines “zero” defects within an acceptable range (goal post).
Control charts
Used to determine the quality control issues that are most frequent and often demand the greatest attention. Demonstrates the frequency of defects from highest to lowest frequency.
Pareto diagrams
Used to identify the sources of problems in the production process by resource and take corrective action.
Cause-and-effect Diagram (Fishbone)
What are the four strategic business units within the financial scorecard for which managers may be held accountable:
Cost SBU
Revenue SBU
Profit SBU
Investment SBU
The effectiveness of each Strategic Business Unit is often subdivided into additional areas of accountability such as:
Product lines
Geographical areas
Customer
The three steps for contribution reporting include:
- Calculating the contribution margin (selling price - variable costs)
- Calculating the controllable margin (contribution margin - controllable fixed costs)
- Allocating the common costs that are not controllable
Critical success factors necessary to accomplish a firms strategy that make up a balanced scorecard are:
Financial (profit up)
Internal business processes (efficient production and defects down)
Customer satisfaction (customer surveys)
Advancement of innovation and human resource development (learning and growth) (retention of key employees)
All factors (financial and non-financial) are critical in accomplishment of business objectives and creating a:
Balanced scorecard
Products ability to meet or exceed customer expectations:
Quality
Conformation costs include
Appraisal costs
Prevention costs
Examples of prevention costs:
Employee trainings Inspection expenses Preventative maintenance Redesign of product or process Search for high quality suppliers
Examples of appraisal costs:
Quality checks
Testing
Inspection
Maintenance of the laboratory
Non-conformance costs include:
Internal failure
External failure
Internal failure examples include:
Rework costs Scrap Tooling changes Costs to dispose Cost of the lost unit Downtime
External failure examples include:
Warranty costs Costs of returning the good Liability claims Lost customers Reengineering an external failure
Increased investment in conformed costs should result in:
Decreases in non-conformance costs
They have an inverse relationship
The assessment of a company’s percentage of return relative to its capital investment risk.
Return on investment (ROI)
Sales = 1,000,000
Net Income = 40,000
Invested Capital = 250,000
Required rate of return = 12%
What is the Return on Investment (ROI)?
(40 / 1000) X (1000 / 250) = 40 / 250 = 16%
Basic formula for calculating ROI:
Profit margin X investment turnover
Net income / sales) X (sales / average assets
Basic formula for calculating Return on Assets:
Net income / average assets
Basic formula to calculate return on equity (ROE):
Net income / equity
What are the three components that go into the Three Step DuPont Model:
Net profit margin X asset turnover X financial leverage
Formula to calculate the net profit margin:
Net income / sales
Formula to calculate the asset turnover:
Sales / assets
Formula to calculate financial leverage:
Assets / equity
The extended DuPont Model breaks out the net profit margin portion into three more components:
Tax burden X interest burden X EBIT margin X asset turnover X financial leverage
Formula to calculate the tax burden:
Net income / pretax income
Formula to calculate the interest burden:
Pretax income / EBIT
Formula to calculate the EBIT margin:
EBIT / sales
Measures the excess of actual income earned by an investment over the return required by the company:
Residual income
Basic formula to calculate residua income:
Net Income - (NBV X Hurdle Rate)
NBV = 200,000
Net income = 30,000
Hurdle Rate = 10%
What is the Residual Income?
30,000 - (200,000 X 10%) = 10,000
Measures the excess of income after taxes earned by an investment over the return rate defined by the company’s overall cost of capital:
Economic Value Added
Formula to calculate EVA:
EBIT X (1 - Tax Rate) - (Investment X WACC)
Investment = 300,000
Cost of capital = 12%
Net operating profit after taxes = 50,000
What is the economic value added?
300,000 X 12% = 36,000
50,000 - 36,000 = 14,000
