Performance management Flashcards
How is ROI calculated ?
ROI = controllable divisional profit / divisional capital employed x 100
How is residual income calculated ?
RI = controllable divisional profit - (required return x capital employed)
What are some features of effective feedback ?
(9)
Information provided to managers to assist with planning, controlling operations and making decisions.
Clear and comprehensive.
Exception basis.
Based on controllable costs and revenue.
Produced on regular basis.
Timely.
Accurate.
Communicated.
Irrelevant data excluded.
How can Behavioral aspects affect performance measurement ?
Behavioral problems include dysfunctional behavior and budget slack.
What is dysfunctional behavior ?
Dysfunctional behavior is when individual managers seek to achieve their own objectives rather the objectives of the organization.
What is Budget Slack (or bias) ?
Budget slack is a deliberate over-estimation of expenditure and/or under-estimation of revenues in the budgeting process.
What are the 3 distinct styles of using budgetary information to evaluate management performance identified by Hopwood’s research ?
- Budget-constrained style.
- Profit-conscious style.
- Non-accounting style.
What are the performance evaluations of a Budget-constrained style ?
(2)
- Manager is evaluated on ability to achieve budget in short-term.
- Manager will be criticized for poor results. E.g. spending > limit set
What are the Behavioral effects of a Budget-constrained style ?
(3)
Job-related pressures.
May result in short-term decision making at the expense of long-term goals.
May result in data manipulation.
What are the performance evaluations of a Profit-conscious style ?
Manager evaluated on ability to reduce costs and increase profits in the long-tern, rather than meeting ST cost targets.
ST budgetary information needs to be used with care and flexibility.
What are the Behavioral effects of a Profit-conscious style ?
- Less job-related pressure.
- Better working relations with colleagues.
- Less manipulation of data.
What are the performance evaluations of a Non-accounting style ?
Manager evaluated on non-accounting performance indicators, e.g. quality and customer satisfaction.
What are the Behavioral effects of a Non-accounting style ?
Same as profit conscious but less concern for accounting information.
What is Exception reporting ?
Reporting only of variances which exceed a certain value.
What are the levels for Budget constrained, Profit conscious and Non-accounting under these headings for Hopwood’s research.
Involvement with costs:
Job-related tension:
Bias:
Relations with supervisor:
Relations with colleagues:
What are the 5 types of Responsibility Centre:
- Cost
- Revenue
- Profit
- Investment
- SSC
What are the 4 different perspectives to consider under The Balanced Scorecard ?
Financial.
Customer.
Internal.
Innovation and learning.
Finish this sentence in relation to The Balanced Scorecard:
Critical success factors are what we must get right to …
… succeed in relation to a given perspective.
How do we measure the critical success factors ?
KPIs
What kind of activity level is a fixed budget set for?
Single activity level.
What is the purpose of a Flexible Budget ?
A flexible budget recognizes different cost behaviors and is designed to change as the volume of activity changes.
What does budgetary control do ?
Budgetary control compares actual results to a flexed budget.
Differences = budget variances.
What is Omitted variable bias ?
Data bias in PM
E.g. a variable is excluded from data and the cause of a change in one variable is incorrectly attributed to another variable.
What is Cognitive bias ?
Data bias in PM
Presenting results in a biased way.
What is Confirmation bias ?
Data bias in PM
Only looking at performance measures that confirm existing beliefs.
What is Survivorship bias ?
Data bias in PM
Only using the performance results from those divisions that have done well to draw conclusions.
What are the decision rules for ROI on accepting a new project?
Current ROI < Project ROI ACCEPT
Current ROI > Project ROI REJECT
What are the decision rules for RI on accepting a new project?
RI > 0 ACCEPT
RI < 0 REJECT
What are the factors affecting degrees of decentralization ?
Management style
Size of organization
Extent of diversification
Communication
Managements ability
Technology
Geographical location
Extent of local knowledge needed
What are the advantages of decentralization ?
Senior management freed up for strategic issues.
Better decisions made by local managers.
Motivation of managers.
Quicker decisions.
Good training.
What are the disadvantages of decentralization ?
Co-ordinating the business.
Lack of goal congruence.
Loss of control at senior level.
Difficult to evaluate managers.
Duplication of costs.
What is Responsibility accounting ?
Providing financial information to management, based on individual parts of a business which are the responsibility of a single manager.
What is a key aspect of responsibility accounting ?
Ensures managers are only accountable for the costs they have responsibility for. (controllable costs)
For a Cost center, what does management have control over and what are its performance measures ?
Controllable costs only
Variance analysis (extent which cost targets are achieved)
For a Revenue center, what does management have control over and what are its performance measures ?
Revenues only
Variance analysis (target vs actual)
For a Profit center, what does management have control over and what are its performance measures ?
Controllable costs and sales prices
Controllable profit
For a Investment center, what does management have control over and what are its performance measures ?
Controllable costs, Sales prices and investment in NCA and WC.
ROI and RI.
