Performance Measurement

Question 1

What measures can we use for the responsibilities of a cost centre manager?

Answer 1

Actual vs Budgeted cost via variance analysis

cost per unit (total costs/units made)

Question 2

Measurements for a revenue centre?

Answer 2

Revenue growth %
Market share
revenue variances vs budget

Question 3

Measurements for a profit centre?

Answer 3

Gross profit % (gross profit/sales)

net profit % (net profit/sales)

Question 4

Measurements for Investment centre?

Answer 4

same as for all the other centres but also Return on capital Investment (ROCE or ROI)
Residual Income (RI)

Question 5

What is ROCE?

Answer 5

Profit based on the capital employed so total assets of the business minus the current liabilities

divisional net profit/divisional net assets
divisional net assets are total assets minus current liabilities

Question 6

What about RI?

Answer 6

This gives us a figure for return rather than %
so capital employed x cost of capital (the result of this shows what the minimum return would have to be otherwise just put in the bank)
cost of capital is what the banks interest would be
RI= divisional net profit- (divisional net assets x cost of capital)
divisional net assets x cost of capital is imputed net interest

Question 7

what does a ratio do? what gives it meaning?

Answer 7

provides information about the relationship between different accounting figures
needs to be compared to something (ie previous years, other divisions)

Question 8

How do you calculate gross profit margin?

Answer 8

Gross profit (sales-cost of sales)/ revenue x 100%

Question 9

How to calculate Net Profit Margin?

Answer 9

Profit before interest and tax (Sales- cost of sales- other costs) / revenue x 100%

Question 10

How do you calculate asset turnover?

Answer 10

Revenue/ (total asset less current liabilities) = shows for each dollar of assets how much revenue do you generate

Question 11

What are the problems with financial performance measures?

Answer 11

lack flexibility
focus on short profitability rather than longer term
managers may try to manipulate measures (ie delaying training)

Question 12

What are Non-Financial Performance indicators?

Answer 12

(still quantifiable measures just not cash based)
Service quality
Production performance (how effective, ie output per employee)
Marketing effectiveness
Personnel

Question 13

What are the advantages of NFPIs?

Answer 13

measuring performance is lots of areas to indicate how may perform in the future
Very flexible, can tailor the measure based on what is important

Question 14

What are the disadvantages of NFPIs?

Answer 14

wide range of non financial measures can be costly
managers may find it difficult to understand what the measures indicate
quality for example can be subjective
hard to record responses and performance

Question 15

What are Kaplan and Nortons KPIs balanced scoreboard?

Answer 15

Financial
Customer (delivery performance, complaints, returns rate etc)
Internal Business processes (what businesses processes need to be strong/streamlines to deliver quality and value- ie turnaround/lead times, quality control reject rate)
Innovation and Learning (staff turnover, illness rate, development time for new products)

Question 16

What is a NFPO?

Answer 16

Not for profit organisation

organisations not focusses on profitability

Question 17

How can we asses NFPO performance?

Answer 17

Cost based- review performance against cost targets (as rely on funds)
The 3 E’s:
Economy- cost of resources used (are you spending more on resources than you should)
Efficiency- outputs vs input (more wastage than expected? did you get good value for money?)
Effectiveness- achieving targets- are you achieving overall goals)