STRATEGIC

MANAGEMENT
ACCOUNTING

PERFORMANCE
MEASUREMENT AND
CONTROL
LECTURE DISCUSSION

WHAT IS
PERFORMANCE
MEASUREMENT?
LECTURE DISCUSSION

WHY IS
PERFORMANCE
MEASUREMENT
IMPORTANT?
LECTURE DISCUSSION

WHAT IS THE LINK

BETWEEN
PERFORMANCE
MEASUREMENT AND
CONTROL?
MANAGEMENT ACCOUNTING

COST DECISION PLANNING AND

ACCOUNTING MAKING CONTROL
TODAY’S LESSON

Financial
Non-financial
performance Short-termism
indicators
indicators

Balanced Porter’s Value

Sustainability
score card Chain Analysis
MAIN OBJECTIVE

Critically evaluate the significance of the behavioural aspects of management

accounting in the context of management control and performance management.
FINANCIAL INDICATORS
INTRODUCTION

• A key aspect of performance measurement is ratio analysis.

• Ratios are of little use in isolation.
• Firms can use ratio analysis to compare
• budgets, for control purposes
• last year’s figures to identify trends; and
• competitors’ results and/or industry averages to assess performance.
 WHAT RATIOS DO YOU KNOW
THAT CAN BE USED FOR
PERFORMANCE MEASUREMENT?
RATIO ANALYSIS - CLASSES

PROFITABILITY LIQUIDITY RISK

RATIO ANALYSIS

PROFITABILITY

Asset Net Profit

Sales growth ROCE GP Margin
Turnover Margin
RATIO ANALYSIS

LIQUIDITY
Current Quick Debtor Creditor Inventory
ratio ratio days days days
RATIO ANALYSIS

Gearing

RISK
Interest cover

Dividend cover
NON-FINANCIAL
INDICATORS
INTRODUCTION

• A broader view of performance demands covering both financial and non-

financial indicators when measuring performance.
• For example, the BALANCED SCORECARD proposed by Kaplan and
Norton.
• Areas to measure should relate to an organisation's critical success factors
(CSF) – fundamental to an organization’s success.
• Found in mission statement, objectives and strategy.
• Key performance indicators (KPIs) are measurements of achievement of the
chosen critical success factors
KPIs SHOULD BE…

• Specific
• measure profitability rather than 'financial performance’ (broad)
• measurable
• for example, a number of customer complaints rather than the 'level of
customer satisfaction'
• Relevant
• They must measure achievement of a critical success factor.
ACTIVITY

Critical success factors (CSFs) are performance requirements which are

fundamental to an organisation's success (for example innovation in a
consumer electronics company) and cannot be identified from an
organisation's mission statement, objectives and strategy.

TRUE OR FALSE?
SHORT-TERMISM
INTRODUCTION

• Short-termism is when there is a bias towards short-term rather than long-term performance.
• Managers may manipulate results especially if managers' performance is measured on short-
term result
LECTURE DISCUSSION

IS SHORT-TERMISM A
PROBLEM?
WHY OR WHY NOT?
EXAMPLES

• Postponing CAPEX projects in order to protect short term cash flow and
profits.
• Cutting R&D expenditure to save operating costs, and so reducing the
prospects for future product development.
• Reducing quality control, to save operating costs.
• Reducing the level of customer service, to save operating costs.
• Cutting training costs or recruitment of new employees.
• Postponing maintenance of machinery to later years.
Prioritising long-term sustainability over
short-term gains is crucial for preserving
value and mitigating potential risks.
HOW TO ENCOURAGE LONG-TERM VIEW

• Making short-term targets realistic.

• Providing sufficient management information to allow managers to see the
long-term aims as well as shorter-term (budget) targets.
• Evaluating managers' performance in terms of contribution to long-term as
well as shorter objectives.
• Link managers' rewards to share price.
• Set quality based targets as well as financial targets.
BALANCED SCORE CARD
INTRODUCTION

• Traditionally management accounting focused mainly on financial

performance measures.
• Greater emphasis now being given to incorporating non-financial measures
into the formal reporting system.
• To integrate financial and non-financial measures the Balanced Scorecard
(BSC) emerged.
• BSC seeks to link performance measures to an organization’s strategy.
The BSC consists of two types of performance measures:

LAGGING MEASURES LEADING MEASURES

Drivers of
Results from Usually Cause the Non-
future
past actions financial outcomes financial
performance
ACTIVITY

The following statements have been made about the balanced scorecard:
(1) It focuses solely on non-financial performance measures
(2) It looks at both internal and external matters concerning the organisation

Which of the above statements is/are true?

A. 1 only
B. 2 only
C. Neither 1 nor 2
D. Both 1 and 2
BSC PERSPECTIVES

• BSC advocates looking at the business from four different perspectives by

seeking to provide answers to the following four basic questions:
• How do customers see us? (customer perspective)
• What must we excel at? (internal business process perspective)
• Can we continue to improve and create value? (learning and growth
perspective)
• How do we look to shareholders? (financial perspective)
FINANCIAL CUSTOMER

BSC
PERSPECTIV
ES
INTERNAL LEARNING AND
PERSPECTIVE GROWING
FINANCIAL PERSPECTIVE

• How the firm appears to its shareholders and considers what the firm’s
financial objectives are.
• The measures typically include:
• Profit,
• Sales,
• ROI,
• Cash flow, or
• Economic Value Added (EVA).
FINANCIAL PERSPECTIVE OBJECTIVES

Revenue Increase
number of new
Change to a
more profitable
Develop new
customers and
growth products product markets

Cost Reduce cost

Reduce
selling/admin
reduction per unit
costs

Asset Improve use of

Utilisation assets
FINANCIAL PERSPECTIVE MEASURES

Percentage of
Revenue revenues from new
products and new
Percentage sales
growth for targeted
Gross margin

growth
percentage
customers and segments
markets

Cost Percentage cost

Percentage of selling
overheads and

reduction
reduction per unit admin overheads to
total revenue

Asset ROI
Economic Value

Utilisation
added
CUSTOMER PERSPECTIVE (1)

OBJECTIVES MEASURES

CORE • Increase market share • Percentage market share

• Increase customer retention, • Percentage growth from
acquisition, satisfaction, existing customers, total
profitability sales to new customers
• Customer satisfaction
surveys ratings
• Customer profitability
analysis
CUSTOMER PERSPECTIVE (2)

OBJECTIVES MEASURES

CUSTOMER • Improve product • Customer survey product

VALUE functionality functionality rating scores
• Decrease price compared to • Price relative to competitors
competitors • Percentage on time
• Improve delivery time deliveries
• Improve quality of product • Percentage returns from
or service customers
INTERNAL BUSINESS PERSPECTIVE

MEASURES OBJECTIVES
INNOVATIONS • Increase the number of new • % sales from new products
products • New product introductions vs
• Develop new markets and competitors
customers • % sales from new markets
• Decrease time to develop • Development cycle time
new products
OPERATIONS • Increase process efficiency • Input/output ratios
and quality • Total quality costs % of sales
• Decrease process cost and • % of defective output
time • Unit cost trends
• Manufacturing cycle efficiency
POST-SALES • Increase service quality and • % of customer requests handling
SERVICE efficiency with a single call
• Decrease service time & • Cycle time in resolving customer
cost queries
LEARNING AND GROWTH PERSPECTIVE OBJECTIVES

• Increase employee capability

• Develop process skill
• Increase information system capabilities
• Increase motivation, empowerment and alignment
• Empower workforce
• Align employee goals with organisation goals
LEARNING AND GROWTH PERSPECTIVE MEASURES (1)

• Increase employee capability

• Percentage of employees trained in process and quality management
• Survey of employee satisfaction
• Percentage labour turnover
• Sales revenue per employee

• Increase information system capabilities

• Percentage of processes with real time feedback
• Percentage of customer facing employees having online
• access to customer information and product information
LEARNING AND GROWTH PERSPECTIVE MEASURES (2)

• Increase motivation, empowerment and alignment

• Number of suggested improvements per employee, percentage
suggestions implemented
• Percentage of employees with personal goals aligned to the company
goals
• Percentage of employees who achieve their goals and percentage of
compensation based on individual and team goals
BENEFITS OF BSC

• Brings together in a single report four different perspectives on a company’s

performance that relate to a company’s competitive agenda.
• Provides a comprehensive framework for translating company’s strategic
goals into a coherent set of performance measures.
• Helps managers to consider all important operational measures together –
enables managers to see whether improvement in one area may have been at
the expense of the other.
• Promotes the active formulation of organizational strategy by making it highly
visible through the linkage of performance measures to business unit
strategy.
CRITICISM

• The cause-and-effect relationships are too ambiguous and lack theoretical

underpinning or empirical support.
• Omission of other important perspectives (e.g., environmental impact on
society and employee perspectives)
PORTER’S VALUE CHAIN
ANALYSIS
INTRODUCTION

• Looks at the activities of a firm to see those which form a competitive strength
• Creating value for customers ultimately leads to creating value for shareholders