Accounting in Organisations and Society

Accounting in
Organisations and Society
Module 2 –Accounting and its role in managerial
decision making
Topic 2: Performance measurement
Accounting in Organisations and Society

Learning objectives
After completing this topic students should be able to:
1. Understand different approaches to performance measurement.
2. Explain different stakeholders’ perspective of “value” and how to
create value.
3. Describe the life cycle analysis, Eco balance, and balanced
scorecard.
4. Understand variable costs, fixed costs and contribution margin.
5. Calculate break even and quantity needed to generate a
required financial profit.
Accounting in Organisations and Society

Performance measurement

How an organisation elects to measure performance will

be influenced by numerous factors, including:
• The products or services the organisation produces
• The mission or goals of the organisation
• The culture of the organisation
• Stakeholder expectations
Accounting in Organisations and Society

Performance measurement (con’t)

• The environmental or social sensitivity of the field in

which the organisation operates
• The degree of competition
• The supply chains in place
• Existing and projected regulation
Accounting in Organisations and Society

Performance measurement
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.
• Particularly important aspects of performance might then be
termed key performance indicators (KPIs).
Accounting in Organisations and Society

Some different stakeholders’

perceptions of ‘value’
Whilst far from exhaustive, perceptions of ‘value’ might be tied to
some of the following factors for the respective stakeholder
classification.
• Shareholders
Maximisation of dividends, maximisation of share value.
• Employees (local)
Payment of wages, safe and healthy work environment, promotion and
training opportunities, reputation of the organisation.
• Employees (in offshore supply factories)
A safe and healthy work environment, ‘liveable’ wages.
Accounting in Organisations and Society

Some different stakeholders’

perceptions of ‘value’ (con’t)
• Customers
Low price, high quality, positive social impact, positive environmental impact,
reliable after sales service.
• Local communities
Contribution to local community activities, safe place of work for local
residents, low social and environmental impacts.
• Suppliers
Reliable payment, ongoing support for the products/services of the supplier.

What is the accounting implication for each of them ?

Accounting in Organisations and Society

A manager needs to understand:

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.
Accounting in Organisations and Society

Life cycle analysis

YouTube Video: The life cycle of a plastic water bottle- a short film
https://www.youtube.com/watch?v=UlG1Yd66_lI
Accounting in Organisations and Society

Life cycle analysis

• 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’
Accounting in Organisations and Society

Life cycle costing analysis (con’t)

• What aspects are to be included and what not?

• For some organisations the major costs will not
necessarily relate to the production of a particular
product.
• For other organisations, the major costs will relate to
the actual material, and labour.
Accounting in Organisations and Society

The balanced scorecard

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.
Looks at four perspectives of performance:
• 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.
Accounting in Organisations and Society

Example of BSC for a dental practice

Accounting in Organisations and Society

Considerations of costs and

revenues (benefits)
• 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 the
price.
• An inaccurate pricing system can result in wrongly set prices.
• In terms of costs we can consider various cost concepts:
Accounting in Organisations and Society

Considerations of costs and

revenues (con’t)
• 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.
Accounting in Organisations and Society

Cost Concepts (con’t)

• Variable costs – 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 that the management believes are relevant.

• Variable costs do not need to be restricted to

quantifiable/financial costs.
Accounting in Organisations and Society

In class activity: variable costs

Lambchops Ltd processes wool which is subsequently sold to
suit manufacturers for $1,000 per bale.
To process each bale of wool the following ‘costs’ and
consequences arise/are incurred:
• Cost of acquiring each bale of unprocessed wool (including
transportation costs): $450
• Costs of resources (used in) processing (in practice there would
be many more ‘costs’ than the ones shown, but we have limited
them here):
• Labour: 4 hours per bale at $30 per hour.
Accounting in Organisations and Society

In class activity: variable costs (con’t)

• 1,000 litres of water per bale. Presently this water is being extracted from a
bore on the property at no financial costs although there are concerns that the
amount of water being taken is impacting the quality and quantity of water
available to other local properties.
• Detergents used in each bale of wool: $10
• Electricity costs of about $30 per bale: (100 kilowatt hours).
• As a result of production, each bale of wool generates about 850 litres of
waste water which at the moment is being released directly into a local
waterway at no costs. It is unclear what the environmental impacts of this are.
• Costs of making sales:
• Packaging and transportation to buyer: $40 per bale.
Accounting in Organisations and Society

In class activity: variable costs (con’t)

Questions
1. What is the variable cost associated with the production and
sale of each processed bale of wool?

1. Should we also consider the social and environmental

implications associated with the sheep from which the wool was
taken?

Solution is available in Topic Notes.

Accounting in Organisations and Society

Cost concepts (con’t)

• Fixed costs: are 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.

Accounting in Organisations and Society

In class activity: fixed costs

Following on from the previous illustration, apart from the
variable costs already discussed, Lambchops Ltd has the
following costs (all of which are expected to remain fixed for
the levels of production being contemplated):

• Factory rent of $60,000 per year

• Administrative staff salaries of $150,000 per year

• Other administrative costs $57,500 per year

• Administrative related utility costs $30,000 per year

Accounting in Organisations and Society

In class activity: fixed costs (con’t)

Question
1. What are the total fixed costs?

Solution is available in Topic Notes.

Accounting in Organisations and Society

Contribution margin
• In financial terms:
• 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.
• 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.
Accounting in Organisations and Society

In class activity: contribution margin

Question:
Calculate the contribution margin per unit of each bale of wool
processed by Lambchops Ltd.

Further question
So what does it mean to say that each Bale of wool has a
contribution margin of the above amount?

The solution is available in Topic Notes.

Accounting in Organisations and Society

Break even point

• 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.
Accounting in Organisations and Society

YouTube Video: Break Even Point- easily explained

https://www.youtube.com/watch?v=ZihWEVWCJYk
Accounting in Organisations and Society

Break even point

Accounting in Organisations and Society

In class activity: break even point

Question
So what is the break even point for Lambchops Ltd?

Further question
What does it actually mean when we say that the organisation
has reached a ‘break even’, point that is, has neither made a
profit or loss?

The solution is available in Topic Notes.

Accounting in Organisations and Society

Target financial profit

Organisations will often have a target profit in mind when
performing their operations:

• Take into account various factors including expectations of

owners, the risks inherent in the operations, opportunity costs
of alternative options.

• The required units of products or service required to be sold,

to generate a required profit.

• Calculated by adding the desired profit to the total fixed costs

and then dividing this by the contribution margin per unit.
Accounting in Organisations and Society

In class activity: target financial profit

Question
If Lambchops Ltd wants to make a financial profit of
$140,000 then how many bales of wool will it need to
process and sell?

The solution is available in Topic Notes.

Accounting in Organisations and Society

Multiple Choice questions

1. The ‘Balanced Scorecard’ was originally developed as a performance
measurement framework that added strategic non-financial
performance measures to traditional financial measures to give
managers and executives a more 'balanced' perspective of
organisational performance. The ‘Balanced Scorecard looks at which
four perspectives of performance:
a. Cashflow, sales, profit and assets
b. Financial, customer, business processes and innovation and
learning
c. Financial, social, environmental and sustainability
d. Relevant costs, fixed costs, variable costs and contribution margin
Accounting in Organisations and Society

Multiple Choice questions

2. A local bakery makes and sells cupcakes using a special
recipe that includes flour, eggs and milk among a couple
of other secret ingredients. The ingredients used to
manufacture the cupcakes would be classified as:
a. Fixed costs
b. Variable costs
c. Both a and b
d. Neither a or b
Accounting in Organisations and Society

Multiple Choice questions

3. A local florist sells bouquets of flowers. The variable costs
associated with each bouquet (flowers, paper, twine etc.) total
$12 and the selling price per bouquet is $30. The fixed costs per
week are $1,800. How many bouquets of flowers must the
florist sell per week in order to break even?
a. 50
b. 75
c. 100
d. 125
Accounting in Organisations and Society

Conclusion and overview

Good Performance Management System are key to

success of an organisation.
Their incorporation of the appropriate financial and non-
financial indicators provide a “balanced” view of the
performance, which ensures the longer terms success
and sustainability of an organisation.