Topic 5 Performance measurement

Question 1

How an organisation elects to measure performance will

be influenced by numerous factors, including:

Answer 1

• The products or services the organisation produces
• The mission or goals of the organisation
• The culture of the organisation
• Stakeholder expectations

Question 2

Performance measurement

Answer 2

There is NOT one set of performance measures that will fit all organisations in all locations and time. That is, ‘performance’ should not be considered as a single dimension measure. Performance measures can be financial, non-financial,
quantitative and qualitative.

Question 3

Things shareholders might find valuable

Answer 3

Maximisation of dividends, maximisation of share value.

Question 4

Things local employees might find valuable

Answer 4

Payment of wages, safe and healthy work environment, promotion and training opportunities, reputation of the organisation.

Question 5

Things employees in offshore supply factories might find valuable

Answer 5

A safe and healthy work environment, ‘liveable’ wages.

Question 6

Things customers might find valuable

Answer 6

Low price, high quality, positive social impact, positive environmental impact,
reliable after sales service.

Question 7

Things local communities might find valuable

Answer 7

Contribution to local community activities, safe place of work for local residents, low social and environmental impacts.

Question 8

Things suppliers might find valuable

Answer 8

Reliable payment, ongoing support for the products/services of the supplier.

Question 9

A manager needs to understand:

Answer 9

That the business in terms of the impacts created, the resources used, and the costs and benefits generated. To determine different aspects of performance measurement,
managers need to understand the production/service process. One approach here could be ‘life cycle analysis’ (LCA). Another approach to measuring overall performance is the balanced scorecard approach.

Question 10

Life cycle analysis

Answer 10

Evaluates a product or service across its entire life
(from ‘cradle to grave’). Addresses some of the social or environmental impacts generated across the lifecycle of the product or service. Identifies areas where improvements can be made. One form of LCA has been referred to as ‘Eco Balance’

Question 11

Life cycle costing analysis

Answer 11

What aspects are to be included and what not? For some Life-cycle cost analysis (LCCA) is a tool to determine the most cost-effective
option among different competing alternatives to purchase, own, operate,
maintain and, finally, dispose of an object or process, when each is equally appropriate to be implemented on technical grounds.

Question 12

The balanced scorecard

Answer 12

Originally developed by Kaplan and David Norton as a performance measurement framework that added strategic non-financial performance measures to the traditional financial measures essentially “Balancing” the performance measurement.

Question 13

The four perspectives of performance in regards to the balanced scorecard

Answer 13

Financial
Customer
Business processes
Innovation and learning

The view is that a focus on customer, business processes, and innovation and learning in turn leads to better financial performance outcomes.

Question 14

Considerations of costs and

revenues (benefits)

Answer 14

An important aspect of performance measurement is
the considerations of the costs being incurred and the
revenues or benefits being generated:
• the costs of the goods or services they supply – determines an
adequate price.
• An inaccurate pricing system can result in inappropriate prices.
• In terms of costs we can consider various cost concepts:

Question 15

Cost concepts

Answer 15

Relevant costs
Variable costs
Fixed costs

Question 16

Relevant costs

Answer 16

Relevant costs: are those that will change as a result of a particular decision. They can include both fixed and variable costs. They will occur in the future.They will differ between alternative course of action. They will be influenced by factors such as the mission of
the organisation, its culture, its stakeholders’ expectations, and so forth.

Question 17

Variable costs

Answer 17

These are the costs that change as a result of changing production or service volume. They will occur in the future. They relate to particular activities. What we include as variable costs will be influenced by what costs management believes are relevant. Variable costs do not need to be restricted to quantifiable/financial costs.

Question 18

Fixed costs

Answer 18

Generally considered to be
those costs that do not change in a particular period as the volume of production or services changes. They might be fixed only over a particular (relevant) range of activities. They do not have to be just financial.

Question 19

Contribution margin in financial terms

Answer 19

• The total contribution margin = total sales revenue - the total
variable costs
• The contribution margin per unit = the revenue per unit - the
variable costs per unit.

Question 20

Contribution margin

Answer 20

Calculating the contribution margin per unit allows us to
determine how much the sale of each item of product or
service contributes to the financial profit. All things being equal, items with a high turnover would be
expected to have a lower contribution margin per unit than items with a lower turnover.

Question 21

Break even point

Answer 21

The break even point occurs:
• When the total financial costs equal the total financial
revenues (profit is zero).
• It is calculated by dividing the total fixed costs by the
contribution margin per unit.

Question 22

Break even point graph

Answer 22

Photo in favourites 21/3/2018

You know that Sam is pretty incredible right?

Question 23

Target financial profit

Answer 23

Organisations will often have a target profit in mind when
performing their operations. this takes into account various factors including expectations of owners, the risks inherent in the operations and opportunity costs of alternative options.

Question 24

Target financial profit calculation

Answer 24

The business can determine the required units of products or service required to be sold,
to generate a required profit. To do this the following formula is used

Required units of products = (target financial profit + total
fixed costs) ÷ contribution margin per unit

Question 25

How the products or services the organisation produces affects performance measurement

Answer 25

The types of products or services the organisation produces will influence the
resources being consumed, the impacts being generated, and so forth. For example, a
taxi company would use petrol; create wear and tear to cars, have higher insurance
premiums, due to higher risks of accidents. The consumption of these resources
reflects the service provided.

Question 26

How the mission or goals of the organisation affects performance measurement

Answer 26

For example, if an organisation’s operation is to buy real estate, is the mission of the organisation to provide safe housing for the poor or to maximise profits through real
estate development? In both cases there would be different performance measurements.

Question 27

How the culture of the organisation affects performance measurement

Answer 27

Is the organisation one that embraces corporate social responsibilities, that entails
responsibility to a broad range of stakeholders? Or does it predominantly focus on
generating profits for the benefit of its shareholders? These are important
considerations as there would be different performance measurements for different
organisations.

Question 28

How Stakeholder expectations affects performance measurement

Answer 28

As stakeholders’ expectations change, so must the performance management process. As an example, BHP’s disclosure about its workings to remedy the Samarco Dam
disaster, found its way in the opening sections of its annual report. BHP seems fully
aware of the fact that an issue such as this comes along with significant expectations
from various stakeholder groups. In line with such expectations, BHP has put in place a dedicated and senior team to remedy the accident which no doubt is part of the
performance management process.

Question 29

How the environmental or social sensitivity of the environment in which the organisation operates affects performance measurement

Answer 29

For example, if an organisation is operating in a village with little water for local
residents, then it might be particularly careful about water consumption. As another
example, an organisation operating close to the Barrier Reef might be particularly
concerned with monitoring and measuring the release of various wastes to water.
These organisations will have their performance in water usage and waste reduction
measured against a higher standard than similar organisations in different locations.

Question 30

How the degree of competition affects performance measurement

Answer 30

The greater the degree of competition, the more an organisation might need to monitor various costs. If an organisation is competing on price, then it may need to reduce and monitor costs so it can reduce price.

Question 31

How the supply chains in place affects performance measurement

Answer 31

An organisation that sources products from developing countries might be more
concerned about monitoring worker health and safety within the supply chain given the
inherent risks involved. For example, after the tragic fire of the Bangladesh clothing
factory more people/consumers did not want to buy clothes from retailers whose suppliers did not meet appropriate working conditions for their employees. Suppliers were measured for their performance of health and safety for employees.

Question 32

How existing and projected regulation affects performance management

Answer 32

For example, your organisation sells confectionary, such as lollies and chocolate bars
when the government is planning to add a tax to sugar in the next year. The
performance measurements for next year would need to be revised.

Question 33

Performance within context

Answer 33

To place ‘performance’ within context there is a general need for the measured
performance to be assessed relative to a particular target, a desired trend, or some
benchmark all of which, in themselves, need to be justified against some criteria.

Question 34

KPIS’s

Answer 34

Particularly important aspects of performance might then be termed; Key Performance
Indicators (KPIs), which then might find their way into various arrangements, such as
bonuses negotiated with employees. Again, the KPIs can relate to various social, environmental, and financial performance measures.

Question 35

Accounting implications of shareholders perceptions of value

Answer 35

A need to measure financial performance which includes a

necessity to control various financial costs whilst attempting to maximise revenues

Question 36

Accounting implications of local employees perceptions of value

Answer 36

A need to provide an account of how safe and healthy the
work environment is and how this is changing over time; an account of training for
employees and how many are being retained and promoted; to provide an account/measure of the community’s perception of the organisation.

Question 37

Accounting implications of employees in offshore supply factories perceptions of value

Answer 37

Provide an (independent) account of the employee practices and outcomes within supply company factories.

Question 38

Accounting implications of customers perceptions of value

Answer 38

Provide an account of the costs of products and what is being
done to keep these at low cost; provide an account of the monitoring of suppliers
throughout the supply chain; provide social and environmental accounts possibly in compliance with the GRI; engage a sample of customers to assess their satisfaction with after sales service and provide an account of their responses together with actions to address any concerns.

Question 39

Accounting implications of local communities perceptions of value

Answer 39

Provide an account that addresses the key economic, social and environmental costs and benefits being generated by the organisation.

Question 40

Accounting implications of suppliers perceptions of value

Answer 40

Undertake a (social) audit of supplier’s perceptions of the
performance of the organisation and provide a related account noting levels of
satisfaction and key areas for improvement.

Question 41

LCCA Example

Answer 41

For example, for a highway
pavement, in addition to the initial construction cost, LCCA takes into account all
the user costs, (e.g., reduced capacity at work zones), and agency costs related
to future activities, including future periodic maintenance and rehabilitation. All
the costs are usually discounted and total to a present-day value known as net
present value (NPV). This example can be generalised on any type of material,
product, or system.

Question 42

LCCA Scoping

Answer 42

In order to perform a LCCA, scoping is critical - what aspects are to be included and what not? If the scope becomes too large the tool may become impractical to use and of limited ability to help in decision-making and consideration of alternatives; if the scope is too small then the results may be skewed by the choice of factors considered such that the output becomes unreliable or partisan.
Usually the LCCA term implies that environmental costs are not included, whereas the similar Whole-Life Costing, or just Life Cycle Analysis (LCA),
generally has a broader scope, including environmental costs.

Question 43

Source of costs

Answer 43

Costs can arise throughout the entire life of a product/service. For some organisations the major costs will not necessarily relate to the production of a particular product. However, for other organisations, the major costs will relate to the actual material, and labour, that are specifically devoted to the development of a particular product. Management accounting, as often taught, has had a tendency to fixate on
accounting for the costs of manufacture when in reality; manufacturing organisations are possibly in the minority of all firms.

Question 44

BSC FINANCIAL EXAMPLES

Answer 44

sales, cost reduction, profits, return on assets

Question 45

BSC CUSTOMER EXAMPLES

Answer 45

customer satisfaction, customer retention, customer

percentage of the market, new export markets

Question 46

BSC BUSINESS PROCESSES EXAMPLES

Answer 46

productivity, fault rate, time to complete orders

Question 47

BSC INNOVATION AND LEARNING EXAMPLES

Answer 47

training expenditure, registrations of patents/copyrights, expenditure on research and development

Question 48

EXAMPLE OF HOW THE BSC CAN LEAD TO BETTER FINANCIAL PERFORMANCE

Answer 48

a focus on innovation and learning should lead to more efficient (less costly) processes which can lead to better (and less expensive) products and
happier customers which in turn will lead to improved financial performance.

Question 49

What the BSC attempts to do

Answer 49

translate a company’s broad vision/mission/goals

objectives into practical measures

Question 50

Performance measures and targets should be linked to

Answer 50

the goals and objectives of the

organisation.

Question 51

Eco balance example

Answer 51

Photo in favourites 21/3

Question 52

BSC example

Answer 52

Photo in favourites 21/3

Question 53

Relevant costs example

Answer 53

if an organisation
decides to increase its opening hours then extra wages will need to be paid. They
can include both fixed and variable costs

Question 54

Example of what is considered relevant

Answer 54

if an organisation is concerned about CO2 emissions then a relevant ‘cost’ would be the different CO2 emissions that might be generated from different production alternatives. Remember, ‘costs’ do not have to be measured in only financial terms. By contrast, if an organisation was only concerned about maximising financial profits
then it might only consider the direct financial costs of particular decisions

Question 55

Example of how fixed costs can change

Answer 55

an organisation might rent a factory at $50,000 per year. A range of production outputs could be achieved within that factory, but if production
increased greatly then an additional/different factory might be required.

Question 56

How many goods or services must an organisation provide to be financially sustainable?

Answer 56

As already indicated, an organisation will generally have a certain amount of financial costs that will be incurred regardless of the level of activity (we might refer to these as fixed costs). There will also be those costs that vary with the level of activity (variable costs). The total contribution margin (total sales revenue less total variable costs) will ideally exceed the total fixed costs (else the organisation will be running at a financial loss which would generally not be acceptable for a business entity).