Performance Management Flashcards
Purpose of management accounting
- Planning
- Decision Making
- Control
Planning
- Establishing objectives of an organisation and formulating relevant strategies that can be used to achieve those objectives
- Can either be short term or long term
Decision Making
- Considering information that has been provided and making an informed decision
- First part of decision making is planning and second part is control
Control
- Use information relating to actual results to take control measures and to re-assess and amenet their original budget and plans
- Internally sourced information
- Budget vs actual = variance
what is feedback control
Feedback control is the comparison of actual results against expected results
negative feedback
control action is intended to bring actual performance back into line with the budget
positive feedback
control action would be intended to increase the differences between the budget and actual results
budget constrained style
- Manager is evaluated on ability to achieve budget in the short term and criticised for poor results
- Can result in data manipulation
profit conscious style
- Manager is evaluated on ability to reduce costs and increase profits in the long term, rather than meeting short term targets
- Less manipulation of data and better relation with colleagues
non-accounting style
manager is evaluated mainly on non-accounting performance indicators, such as quality and customer satisfaction
divisional managers
- given the authority to make decisions regarding their division
- the more decisions they are free to make, the more decentralised they are
factors affecting decentralisation
- management style
- size of organisation
- extent of diversification
- communication
- managements ability
- technology
- geographical location
- extent of local knowledge needed
advantages of decentralisation
- senior managers freed up for strategic issues
- better decisions made by local managers
- motivation of managers
- quicker decisions
- good training
disadvantages of decentralisation
- co-ordinating the business
- lack of goal congruence
- loss of control at senior level
- difficult to evaluate managers
- duplication of costs
what is a division structure?
A divisional structure occurs when an organisation is structured in accordance with product lines or divisions or departments.
responsibility accounting
- managers are accountable for the costs/revenues for which they have responsibility. These are controllable costs
- a specific manager takes responsibility for a particular aspect of the budget. Within the budgetary control system, he or she is then accountable for actual performance.
responsibility centres
responsibility centres is an individual part of a business whose manager has personal responsibility for its performance. The main centres are:
- Cost centres
- Revenue centres
- Profit centres
- Investment centres
what is a cost centre
production or service location, activity for which costs are accumulated
profit centres
manager is responsible for revenues as well as costs, the responsibility centre is a profit centre, manager held accountable for the profitability of operations
- there could be several cost centres within a profit centre
revenue centre
part of the organisation that earns sales revenue. Eg sales
investment centres
manager is responsible for investment decisions as well as revenue and costs
- held accountable not only for profits, but also return on investment
- measured by return on capital employed (ROCE)/return on investment
shared service centres
Shared service centres are found in businesses where administrative functions that were once performed in separate divisions (and often in separate locations) are united into a single, centralised location and overseen by a specialised shared service management function. This is typically the case for functions such as such as IT, Finance and human resources.
Often, shared services manager will oversee and manage teams across the shared service centre using cloud computing: this means using a network of remote servers hosted on the Internet to store, manage, and process data.
Advantages of shared service centres
- reduced headcount
- reduction of floorspace
- improvement in quality
- standardisation of approaches
Disadvantages of shared service centres
- loss of specific knowledge
- possibly removed from day to day running of the business, which could lead to misinformed decisions
- weakened relationships
- cost inefficiencies
requirements for effective performance measures
- promote goal congruence
- controllable factors only
- long term objectives considered
problems with inappropriate performance measures
- manipulation of data
- can be demotivating
- stress between staff
- short-term versus long term conflict
- division comes before company as a whole
how investment centres can be measured
- liquidity ratios
- other working capital ratios ROI/RI
return on investment
controllable divisional profit / controllable divisional investment x100
- shows how much profit has been earned in relation to the amount of capital invested in the centre
- centrally controlled assets should be excluded as not controllable by investment centre manager
- decision rule: if ROI > target cost of capital. then accept
advantages of ROI
- widely used and accepted
- enables measures and comparisons to be made with other companies and divisions of other sizes
- can be broken down into secondary ratios for more detailed analysis
disadvantages of ROI
- depreciation will lead to ROI appearing to increase
- profits can be manipulated
- artificial results may lead to dysfunctional decision making
residual income=
controllable divisional profit - imputed interest cost on controllable divisional investment
- measures divisions profits after deducting a notional interest of the cost of capital invested
- if RI > 0, then accept
advantages of residual income
- reduces dysfunctional behaviour
- easy decision rule
- makes divisional managers more aware
- different cost of capitals for different divisions
disadvantages of residual income
- still may result in some dysfunctional behaviour
- absolute figures difficult for comparison
- difficult to determine cost of capital
- different accounting policies confuse comparisons
- may encourage manipulation of ROCE
4 main areas of balance scorecard
- Financial
- Customer
- Internal business
- Innovation and learning
critical success factors
things we must absolutely must ger right to succeed in relation to a given perspective
key performance indicators
the ways in which we measure critical success factors
advantages of balance score card
- provides external and internal information
- focuses on factors which will enable company to succeed including non-financial factors
problems with balance scorecard
- selection of measures
- obtaining information
- information overload
- conflict between measures
what is a fixed budget?
is prepared prior to the start of the budget period and contains information on costs and revenues for one level of activity
Variances
Comparing actual results with original budgets
- Adverse (decrease profits)
- Favourable (increase profits)
Flexed budget
prepared at the end of the budget period and is based on the actual level of activity
Flexible budget
a budget which recognises different cost behaviour patterns and is designed to change as the volume of activity changes
Flexed budget cost=
budgeted cost/ budgeted activity level x actual activity level
volume variance
difference between fixed and flexed budget
expenditure variance
difference between flexed budget and actual results
omitted variable bias
variable is excluded from the data and the cause of a change in one variable is incorrectly attributed to another variable
cognitive bias
presenting results in a biased way
confirmation bias
only looking at performance measures that confirm existing beliefs
survivorship bias
only using the performance results from those divisions that have done well to draw conclusions
monitoring sustainability includes:
- identify key sustainability issues
- set targets
- monitor progress
- report progress
The WEF International Business Council metrics 4 p’s
- Principle of governance
- Planet
- People
- Prosperity
Climate related risks can be classified as follows:
Transaction risks - shifts in social and economic issues due to changes in policy, regulation, technology and market
Physical risks - risks that arise due to the physical nature of climate change, for example floods and wildfires.
Impacts - how an organisation positively or negatively affects the environmental, societal and governance issues. For example how the organisation impacts communities positively via job creation or negatively through emissions or pollution.
Dependencies - how the environmental, societal and governance issue affect an organisations ability to create and maintain value. For example how regulatory controls or climate risks impact the finances of the organisation.
exeption reporting
reporting only of variances which exceed a certain value
