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Management Accounting > performance measurement and management > Flashcards

performance measurement and management Flashcards

1
Q

why evaluate performance?

A
  • monitor progress
  • identify problems
  • feedback control
  • assess the efficiency of managers
  • guide decision making

all this helps the organisation achiever whatever it set out to achieve

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2
Q

effective performance measures

A

SMART
S = specific (are they clear, specific and understandable?)
M = measurable (can it be measured?)
A = agreed (is it agreed/supported with everyone that is involved?)
R = realistic (are they fair and achievable?)
T = time-bound (do they allow timely feedback and review?)

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3
Q

explain decentralisation, responsibility centres and performance measurement

A

the entity’s performance measurement system aligns with its structure, evaluating each division, group, or segment based on its contribution to the overall goal

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4
Q

what is the proforma for measuring divisional profit?

A
  • revenue from sales
  • less: variable costs
    = contribution margin
  • less: controllable fixed costs
    = controllable contribution
  • less: non-controllable fixed costs
    = divisional contribution
  • less allocated head office expenses
    = divisional new profit before taxes
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5
Q

when do you consider the controllable fixed costs?

A

when you want to consider the performance of the MANAGER
- it gives the controllable contribution!

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6
Q

when do you consider the non-controllable fixed costs?

A

when you are considering the performance of the DIVISION as a separate entity

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7
Q

what do you look at in the proforma when evaluating a revenue centre’s performance?

A

both manager and division
- revenue from sales

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8
Q

what do you look at in the proforma when evaluating a cost centre’s performance?

A

both manager and division:
- variable costs
- controllable fixed costs

only division:
- non-controllable fixed costs

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9
Q

what do you look at in the proforma when evaluating a profit centre’s performance in the SHORT run?

A

both manager and division:
- revenue from sales
- variable costs
- controllable fixed costs

division:
- non-controllable fixed costs

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10
Q

what do you look at in the proforma when evaluating a profit centre’s performance in the LONG run?

A

both manager and division:
- revenue from sales
- variable costs
- controllable fixed costs

division:
- non-controllable fixed costs
- allocated head office expenses

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11
Q

what do you look at in the proforma when evaluating an investment centre’s performance?

A

both manager and division:
- revenue from sales

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12
Q

ROI formula

A
  • ROI = (divisional profit / divisional investment) x 100
  • ROI = investment turnover x profit margin
  • ROI = profit/investment = (revenue/investment) x (profit/revenues)
  • ROI = net operating profits / average operating assets
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13
Q

what does a higher ROI mean?

A

it means it is more profitable

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14
Q

how can you improve ROI?

A
  • increase sales while maintaining the same margin and the same average operating assets
  • decrease average operating assets while maintaining the same sales and the same average operating expenses
  • decrease operating expenses while maintaining the same sales and the same average operating assets
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15
Q

what is residual income (RI)?

A

an increasingly popular alternative to ROI is the RI concept
- it measures the net income of an investment (or division) after deducting an amount representing the required rate of return on the capital invested in the business
- it encourages managers to accept projects that generate growth above the required rate of return

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16
Q

how do you calculate RI?

A

= divisional profit before tax - cost of capital charge

17
Q

how do you calculate cost of capital charge?

A

= asset value x cost of capital

18
Q

what is a budget?

A

a quantitative expression of a plan for a defined period of time
- it may include planned sales volumes and revenues; resource quantities; costs and expenses; assets, liabilities and cash flows

19
Q

what do management use budgets for?

A
  • plan annual operations
  • coordinate activities
  • communicating plans
  • motivate managers
  • control activities
  • evaluate performance
20
Q

what are annual budgets?

A
  • budget prepared once per year
  • indirect costs and support activities are prepared on an incremental basis (incremental budgeting)
  • zero-based budgeting (aka priority based budgeting) attempts to overcome the limitations of incremental budgeting -> requirements for resources need to be justified each year
21
Q

what are rolling budgets?

A

ensures that a 12-months budget is always available at any point of time

22
Q

what can be used for budgeting for fixed costs?

A

activity-based budgeting (ABB)

23
Q

what is activity-based budgeting?

A
  • focuses on generating a budget from an activity-based model of the organisation
  • combines ‘zero-based budgeting’ and ABC
24
Q

what is zero-based budgeting?

A

calculates the projected expenditure for existing activities from scratch (instead of adjusting last years’ budget)

25
Q

what is ABC?

A

activity based costing
- allocates overhead costs to cost objects (products, services and customers) through activity cost centres

activity based budgeting is the reverse of ABC

26
Q

limitations of budgeting

A
  • expensive (cost and time consuming)
  • strategic concerns (disconnected from strategy, focuses too much on short term financial numbers)
  • behavioural concerns
26
Q

what is the balanced scorecard?

A

to integrate financial and non-financial measures the Balanced Scorecard (BSC) was developed by Norton and Kaplan
- BSC seeks to link performance measures to an organisation’s strategy - should be used to clarify, communicate and manage strategy

27
Q

what are the main assumptions for the BSC?

A
  • no one measure of performance is more important than the others
  • a balanced approach is required
  • to get where we want to go we must keep an eye on all key performance measures
  • each performance measure is part of a cause-and-effect relationship
28
Q

what are the four perspectives in the BSC?

A
  • how do customers see us? (customer perspective)
  • what must we excel at? ( internal business process perspective)
  • can we continue to improve and create value (learning and growth perspective)
  • how do we look to shareholders? (financial perspective)
29
Q

explain the financial perspective

A

looking back and how do we look to our shareholders
- typical measures include: ROI, RI, Earnings per share
- besides targets for the above, other objectives include revenue growth, cost reduction and asset utilisation

30
Q

explain the customer perspective

A

looking from the outside in - how do our customers see us?
typical measures include:
- market share
- customer retention and loyalty
- customer acquisition
- customer satisfaction
- customer profitability

31
Q

explain internal business process perspective

A

looking from inside out - what must we excel at?
- critical internal processes for which the organisations must excel: e.g. innovation, operational and post-sales service processes
- typical innovation measures include: % of sales from new products, new product introduction vs. competitors
- typical operation process measures: quality, activity and process cost rationalisation
- post-sales service processes: time, quality and process measurements

32
Q

explain the learning and growth perspective

A

looking ahead - can we continue to improve and create value?
- focuses on the infrastructure that the business must build to create long-term growth and improvement
- three principal categories under this perspective: employee capabilities, information system capabilities, motivation; empowerment; alignment of interests and satisfaction

33
Q

using the BSC as a strategic management system

A

4 new processes:
- translating the vision
- communicating and linking
- business planning
- feedback and learning

34
Q

what does translating the vision mean?

A

statements should be expressed as integrated set of objectives and measures

35
Q

what does communicating and linking mean?

A

long-term objectives are understood such that the departmental and individual objectives are aligned with it

36
Q

what is business planning?

A

basis for allocating resources and setting priorities

37
Q

what is feedback and learning?

A

can measure the short-term performance of all perspectives such that strategies can be modified if necessary

Management Accounting (10 decks)

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