Week 10 - Financial and Non-Financial Measures

Question 1

What is a Management Control System (MCS)?

Answer 1

A means of gathering and using information that help an organisation to:

• evaluate performance
• plan and control decisions
• guide the behaviour of managers and other employees

Question 2

A good management control system uses information from where?

Answer 2

From both within the company and outside the company.

Question 3

What are the three elements of management control systems?

Answer 3

1. Financial responsibility centres: delegating responsibility
2. Planning and budgeting systems: setting the criteria for performance
3. Incentive contracts: rewarding (punishing) those who contribute to profits (losses)

Question 4

What are 4 types of responsibility centres?

Answer 4

• Revenue centre
• Cost centres
• Profit centres
• Investment centres

Question 5

Managers in charge of revenue centres are responsible for what?

Answer 5

Revenue

e.g. sales managers

Question 6

Managers in charge of cost centres are responsible for what?

Answer 6

Some costs (inputs, resources consumed)
e.g. purchasing managers, manufacturing managers

Question 7

Managers in charge of profit centres are responsible for what?

Answer 7

Profit (revenue & costs)

e.g. branch managers

Question 8

Managers in charge of investment centres are responsible for what?

Answer 8

Investing into new assets

e.g. CEO, CFO, Manager of subsidy

Question 9

What are three ways you can evaluate performance in responsibility centres?

Answer 9

• How have the responsibility centres performed?
• Have they met the targets in terms of:
  
  • sales
  • production
  • purchasing
  • marketing
• variance analysis (what have they not met the targets?)

Question 10

What does residual income do?

Answer 10

Aligns the interest of the managers with that of the copmany

Question 11

What is a balanced scorecard?

Answer 11

An organisation’s mission and strategy into a set of performance measures that provide the framework for implementing its strategy.

Question 12

Does the balanced scorecard only focus on achieving financial objectives?

Answer 12

No, it also highlights the non-financial objectives that an organisation must achieve to meet and sustain its financial objectives.

Question 13

What are the 4 perspectives the balanced scorecard measures?

Answer 13

1. Financial
2. Customer
3. Internal business processes
4. Learning and growth

Question 14

Does the balance scorecard focus on short term or long term performance?

Answer 14

Both. It reduces managers’ emphasis on short-run financial performance, such as quarterly earnings. that’s because key non-financial indicators, such as product quality and customer satisfaction, measures changes that a company is making for the long run. If the strategy is correct, these investments in quality and customer satisfaction will lead to improved financial performances in the future.

Question 15

What does the financial perspective of the balanced scorecard evaluate?

Answer 15

This perspective evaluates the profitability of the strategy.

e.g. is shareholder value increasing?

Question 16

What does the customer perspective of the balanced scorecard identify?

Answer 16

This perspective identifies targeted customer and market segments and measures the company’s success in these segments.

e.g. increase market share, increase customer satisfaction

Question 17

What does the internal-business-process perspective of the balanced scorecard focus on?

Answer 17

This perspective focuses on internal operations that create value for customers that, in turn, furthers the financial perspective by increasing shareholder value.

e.g. improve manufacturing quality and productivity, reduce delivery time to customers

Question 18

What does the learning-and-growth perspective of the balanced scorecard identify?

Answer 18

This perspective identifies the capabilities the organisation must excel at to achieve superior internal processes that create value for customers and shareholders.

e.g. empower workforce, develop process skill

Question 19

What are the 5 features of a good balanced scorecard?

Answer 19

1. It tells the story of a company’s strategy, articulating a sequence of cause-and-effect relationships.
2. Communicates the strategy to all members of the organisation by translating the strategy into coherent and linked set of understandable and measurable operational targets.
3. Motivates managers to take actions that eventually result in improvements in financial performance.
4. Limits the number of measures, identifying only the most critical ones.
5. Highlights less than optimal trade-offs that mangers may make when they fail to consider operational and financial measures together.

Question 20

What are 4 pitfalls in implementing a balanced scorecard?

Answer 20

1. Managers should not assume that the cause-and-effect linkages are precise. They are only hypotheses.
2. Managers should not seek improvements across all the measures all of the time.
3. Managers should not use only objective measures in the balanced scorecard. Use subjective measures as well but be careful because they can be inaccurate or easily manipulated.
4. Top management should not ignore non-financial measures when evaluating managers and other employees.