Professional Documents
Culture Documents
They provide us with the information necessary to make intelligent decisions about what we
do.
A performance measure is composed of a number and a unit of measure. The number gives
us a magnitude (how much) and the unit gives the number a meaning (what). Performance
measures are always tied to a goal or an objective (the target). Performance measures can
be represented by single dimensional units like hours, meters, nanoseconds, dollars,
number of reports. Number of errors, number of CPR-certified employees, length of time to
design hardware, etc. They can show the variation in a process or deviation from design
specifications. Single-dimensional units of measure usually represent very basic and
fundamental measures of some process or product.
More often, multidimensional units of measure are used. These are performance measures
expressed as ratios or two or more fundamental units. These may be units like miles per
gallon (a performance measure of fuel economy), number of accidents per million hours
worked (a performance measure or the companies safety program), or number of on-time
vendor deliveries per total number of vendor deliveries. Performance measures expressed
this way almost always convey more information than the single-dimensional or single-unit
performance measures. Ideally, performance measures should be expressed in units of
measure that are the most meaningful to those who must use or make decisions based on
those measures.
Most performance measures can be grouped into one of the following six general
categories. However, certain organizations may develop their own categories as appropriate
depending on the organization's mission:
Effectiveness: A process characteristic indicating the degree to which the process output
(work product) conforms to requirements. (Are we doing the right things?)
Efficiency: A process characteristic indicating the degree to which the process produces the
required output at minimum resource cost. (Are we doing things right?)
Quality: The degree to which a product or service meets customer requirements and
expectations.
Timeliness: Measures whether a unit of work was done correctly and on time. Criteria must
be established to define what constitutes timeliness for a given unit of work. The criterion is
usually based on customer requirements.
Productivity: The value added by the process divided by the value of the labor and capital
consumed.
Safety: Measures the overall health of the organization and the working environment of its
employees.
Provides an agreed upon basis for decision Is compatible with existing sensors (a way
making to measure it exists)
Performance data must support the mission assignment(s) from the highest organizational
level downward to the performance level. Therefore, the measurements that are used must
reflect the assigned work at that level.
responsibility centres:
To determine the contribution that a division as a sub-unit makes to the total organization.
To provide a basis for evaluating the quality of the divisional managers performance.
Responsibility accounting is used to measure the performance of managers and it therefore,
influence the way the managers behave.
To motivate the divisional manager to operate his division in a manner consistent with the
basic goals of the organization as a whole.
While implementing the system of responsibility accounting, the following difficulties are
likely to be faced by the management:
3. Delay in Reporting: Responsibility reports may be delayed. Each responsibility centre can
take its own time in preparing reports.
Transfer price:
The price at which divisions of a company transact with each other. Transactions may
include the trade of supplies or labour between departments. Transfer prices are used when
individual entities of a larger multi-entity firm are treated and measured as separately run
entities.
In managerial accounting, when different divisions of a multi-entity company are in charge
of their own profits, they are also responsible for their own "Return on Invested Capital".
Therefore, when divisions are required to transact with each other, a transfer price is used
to determine costs. Transfer prices tend not to differ much from the price in the market
because one of the entities in such a transaction will lose out: they will either be buying for
more than the prevailing market price or selling below the market price, and this will affect
their performance.
Investment centre:
A business unit that can utilize capital to directly contribute to a company's profitability.
Companies evaluate the performance of an investment centre according to the revenues it
brings in through investments in capital assets compared to the overall expenses.
An investment centre is different than a cost centre, which indirectly adds profit and is
evaluated according to the money it takes to operate. Moreover, unlike a profit centre,
investment centres can utilize capital in order to purchase other assets. Because of this
complexity, companies have to use a variety of metrics, including return on investment
(ROI), residual income and economic value added (EVA) to evaluate performance.
An investment centre is a classification used for business units within an enterprise. The
essential element of an investment centre is that it is treated as a unit which is measured
against its use of capital, as opposed to a cost or profit centre, which are measured against
raw costs or profits.
The Investment Centre takes care of Revenues, Cost and Assets -while Profit Centre deal just
with revenues and costs and Cost Centre with cost only. This is a clear sign of how the span
of control and span of accountability grow from Cost Centres to Investment ones.
The advantage of this form of measurement is that it tends to be more encompassing, since
it accounts for all uses of capital.
Reporting systems:
A reporting system provides information that organizations require to manage themselves
efficiently and effectively. The term is commonly used to refer to the study of how
individuals, groups, and organizations evaluate, design, implement, manage, and utilize
systems to generate information and its reporting appropriate level of management to
improve efficiency and effectiveness of decision making, including systems termed decision
support systems, expert systems, and executive information systems.
Reporting involves collection of authentic data which is relevant to the given objectives. It
also includes analysis of data in such a way that it will help taking appropriate decisions.it is
a feedback system that keeps doers on the track leading to the goals. It is a presentation
style that communicates without pollution or noise. Drafting of appropriate format of report
containing appropriate information catering the needs of various levels of management is
an art. Reporting system is a control tool. Reporting system normally includes upward ward,
downward and lateral communication channels. Success of the organisation depends among
many things on vibrant and effective reporting system.
Management by objectives (MBO):
Management by objectives (MBO) is a process of defining objectives within an organization
so that management and employees agree to the objectives and understand what they
need to do in the organization in order to achieve them. The term "management by
objectives" was first popularized by Peter Drucker in his book The Practice of Management
in 1954.
The essence of MBO is participative goal setting, choosing course of actions and decision
making. An important part of the MBO is the measurement and the comparison of the
employees actual performance with the standards set. Ideally, when employees themselves
have been involved with the goal setting and choosing the course of action to be followed
by them, they are more likely to fulfil their responsibilities.
Management by objectives can also be described as a process whereby the superior and
subordinate jointly identify its common goals, define each individual's major areas of
responsibility in terms of the results expected of him, and use these measures as guides for
operating the unit and assessing the contribution of each of its members.
Features of Management by Objectives MBO:-
Joint goal-setting: MBO emphasizes joint goal-setting that are tangible, verifiable and
measurable. The subordinate in consultation with his superior sets his own short-term goals.
However, it is examined both by the superior and the subordinate that goals are realistic
and attainable. In brief, the goals are to be decided jointly through the participation of all.
Joint decision on methodology: The superior and the subordinate mutually devise
methodology to be followed in the attainment of objectives. They also mutually set
standards and establish norms for evaluating performance.
Makes way to attain maximum result: MBO is a systematic and rational technique that
allows management to attain maximum results from available resources by focussing on
attainable goals. It permits lot of freedom to subordinate to make creative decisions on his
own. This motivates subordinates and ensures good performance from them.
Support from superior: When the subordinate makes efforts to achieve his goals, superior's
helping hand is always available. The superior acts as a coach and provides his valuable
advice and guidance to the subordinate. This is how MBO facilitates effective
communication between superior and subordinates for achieving the objectives/targets set.
a) Budget:
A formal statement of the financial resources set aside for carrying out specific activities in
a given period of time.
b) Budgetary control:
Any differences (variances) are made the responsibility of key individuals who can either
exercise control action or revise the original budgets.
Compels management to think about the future, which is probably the most important
feature of a budgetary planning and control system. Forces management to look ahead, to
set out detailed plans for achieving the targets for each department, operation and (ideally)
each manager, to anticipate and give the organisation purpose and direction.
In organising and administering a budget system the following characteristics may apply:
a) Budget centres: Units responsible for the preparation of budgets. A budget centre may
encompass several cost centres.
b) Budget committee: This may consist of senior members of the organisation, e.g.
departmental heads and executives (with the managing director as chairman). Every part of
the organisation should be represented on the committee, so there should be a
representative from sales, production, marketing and so on. Functions of the budget
committee include:
liaising between the budget committee and managers responsible for budget preparation
dealing with budgetary control problems
ensuring that deadlines are met
educating people about budgetary control.
d) Budget manual:
This document:
Types of budget
Fixed budget
Flexible budget
Functional budget production budget, purchase budget, materials budget, sales
budget, cash budget, research and development budget.
Master budget
Quantitative budgets.
Capital investment budget.
Whilst budgets may be an essential part of any marketing activity they do have a number of
disadvantages, particularly in perception terms.
Budgets can be seen as pressure devices imposed by management, thus resulting in:
a) Bad labour relations
b) inaccurate record-keeping.
Departmental conflict arises due to:
Waste may arise as managers adopt the view, "we had better spend it or we will lose it".
This is often coupled with "empire building" in order to enhance the prestige of a
department.
Responsibility versus controlling, i.e. some costs are under the influence of more than one
person, e.g. power costs.
Managers may overestimate costs so that they will not be blamed in the future should they
overspend.
Strategic planning, however, assumes that your organization must be quick to respond to a
dynamic, changing environment, which may require changes in the future. Strategic
planning, then, points out the importance of making decisions that will ensure your
organization's ability to successfully respond to changes in the environment and the threats
created by the changes.
Long range planning indicates stability in objectives and goals. Strategic planning indicates
flexibility in decision making. Both the concepts help the organisation to strike a balance
between stability and flexibility.