Performance Management Introduction.

It is the application of management accounting techniques in business environment.

Management accounting is concerned with the provision and interpretation of information required by management
of all levels for the following purposes:
(i) Formulating the policies of the organization in the long, medium and short term.
(ii) Controlling the activities of the organization
(iii) Decision making process of choosing between alternatives.
(iv) Performance appraisal at strategic, departmental and operational levels.
Management accounting therefore is primarily concerned with data gathering either from internal or external
sources, analyzing, processing, interpreting and communicating the resulting information for use within the
organization so that management can more effectively make decision and control operations.
Characteristics of Management Accounting Information.
i. The information must be concise.
ii. The information must be relevant to the need of the management
iii. The information must be prepared on time to meet what is required currently because late information
is irrelevant.
iv. The information must be objective – (free from bias)
v. The information must be clear and unambiguous to the users.
vi. The information must be comparable from time to time with past information or alternative
information so that management can make choice between alternatives.
vii. The information must be capable of being easily stored and retrievable
Definition of some terms
Sunk cost: Sunk costs are the costs of resources that have already been incurred whose total will not be affected by
any decision made now or in the future. They represent past or historical costs.
Full Cost: Full cost is also called absorption cost and uses conventional cost accounting principles to establish the
total cost for a product or service.
Marginal Cost: Marginal cost is a measure of the variable cost attributable to a cost unit on the ground that they are
within a normal range of output volumes. It is the variable cost, which will change with value. In summary, marginal
cost is the addition of all the variable costs.
Opportunity Cost: Opportunity cost is the value of a benefit sacrificed in favour of an alternative cost of action or
the net revenue forgone.
Differential Cost: Differential cost is a cost that differs for each decision option and is therefore a relevant cost.
Conversion Cost: It is the cost of converting material into part finished or finished product. It consists of direct
labour, direct expenses and production overhead.
Value added: it is the difference between the selling price of a company’s own goods and services and the purchase
of costs of external material and services. It is a measure of the wealth created by the organization. The difference
between conversion cost and value added is that the latter includes the profit element.
Committed cost: it is a future cash outflow which will be incurred because decisions have already been taken which
makes the cost unavoidable. An example would be office rents. Costs where the decision to rent the office premises
has already been taken and rented cost are therefore committed.
Discretionary costs: These are costs that manager can increase or lower at their discretion. Examples are
advertising expenditure or research and development cost.