Performance measurement

• explain the need for appropriate performance measures

• calculate appropriate financial and non-financial performance measures in a variety of contexts.

Performance measurement.

MA; setting targets, measuring actual performance against targets and providing info to mngmnt.

Can affect behaviour, so consider behaviour that wants to be encouraged. Poor performance targets
 dysfunctional behaviour i.e. not in the interests of the org as a whole.

Can be measured as an indv, dept or org.

Responsibility accounting (above)

1. CC assessing cost
2. PC assessing profitability
3. Inv C assessing return

Different types of orgs require different performance measurements, e.g. Business/business areas
commercial (maximise shareholders wealth) and NFP (best service at lowest cost). And within
organisations, objectives and goals in prdn centre (maximise volume and reduce wastage) vs call
centre (calls answers/not dropped).
LT (strategic) goals or objectives  broken down into tactical and ops targets which need to be
monitored, which requires critical success factors to be identified, and KPIs will help asses if they
have met KPIs.

Performance measures are particularly relevant if they are controllable.

Financial performance measures

Used to monitor inflows (revenue) and outflows (costs) and overall management of money in the
business. (info from SPL and SFP).

Finx performance measures (Cost based)

 Gross revenue (sales rev more meaningful as includes deductions for rtns etc)
 Contribution (sales rev – vc)
 gross profit/margin (Gp = sales rev – CO(G)S
This is a useful measure which shows how effective the company’s trading activity is.
It shows if the sales revenue is enough to cover the cost of the item sold.
o COS for retail = purchase cost of stock
o COS for manufacturing = total prdn cost of goods sold.
 Gross margin more usefull if shown as a %age:

Highlights the relationship between sales revenue and production/COS

High GP margin = sales/volumes are high or prdn cost are under control. %
enables comparison between different areas of the business or different
products.
 operating (net) profit/margin

Operating or Net profit (deducting all other expenses from the gross profit expenses will include
administration and sales and distribution overheads. For a manufacturing company, this will be
all non-production costs.

It shows if the sales revenue is enough to cover the cost of the item sold and all expenses.

 Return on capital (ROCE)

Capital Invested = capital employed = total assets less current liabilities.

This measure helps to highlight the productivity of the capital

employed. You can see from the above that the performance
measurements used will depend on the needs of the individual
manager. Not all of these measures are suitable for all types of
responsibility centres, for example ROCE is only suitable in
investment centres where managers are responsible for the level of
investment. Cost centre managers are only responsible for costs,
so are most likely to use variance analysis to measure
performance. This was covered in detail in the budgeting and
standard costing and variance analysis chapters. The following
table shows which measures would be suitable for each type of
centre: