Download ppt - Copyright © by Houghton Miffin Company. All rights reserved.1 Financial & Managerial Accounting 2002e Belverd E. Needles, Jr. Marian Powers Susan Crosson

Copyright © by Houghton Miffin Company. All rights reserved. 1

Financial & Managerial Financial & Managerial Accounting 2002eAccounting 2002e

Belverd E. Needles, Jr.Belverd E. Needles, Jr.Marian PowersMarian PowersSusan CrossonSusan Crosson

- - - - - - - - - - -Multimedia Slides by:

Harry Hooper Santa Fe Community College


Chapter 23Chapter 23Performance Performance

Management and Management and EvaluationEvaluation


LEARNING OBJECTIVESLEARNING OBJECTIVES

1. Describe how the balanced scorecard aligns performance with organizational goals and explain the balanced scorecard’s role in the management cycle.

2. Discuss performance measurement and state the issues that affect management’s ability to measure performance.

3. Define responsibility accounting and describe the role responsibility centers play in performance management and evaluation.


LEARNING OBJECTIVESLEARNING OBJECTIVES

4. Prepare performance reports for the various types of responsibility centers, including reports based on the flexible budget for cost centers and variable costing for profit centers.

5. Use the traditional performance measures of return on investment and residual income to evaluate investment centers.

6. Use economic value added to evaluate investment centers.

7. Explain how properly linked performance incentives and measures add value for all stakeholders in performance management and evaluation.


Organizational Goals and the Organizational Goals and the Balanced ScorecardBalanced Scorecard

OBJECTIVE 1

Describe how the balanced scorecard aligns performance with organizational goals and explain the balanced scorecard’s role in the management cycle.


The Balanced ScorecardThe Balanced Scorecard

A framework that links the perspectives of an organization’s 4 stakeholder groups: Financial (investors) Learning and growth (employees) Internal business processes (management) Customers

with the organization’s: Mission and vision Performance measures Strategic plan Resources


The Balanced ScorecardThe Balanced Scorecard

To succeed, an organization must add value for all stakeholders.

Determine each group’s objectives. Translate their objectives into

performance measures that have specific, quantifiable performance targets.


The Balanced Scorecard and the The Balanced Scorecard and the Management CycleManagement Cycle

PlanningExample: Strategy is to achieve customer satisfaction

Perspective Objectives Performance Measures

Financial (investors) Revenue growth % growth in sales dollars

Learning and growth (employees)

Trained employees Number of trained employees, employee

turnover

Internal business processes

Reliable products, short delivery cycles

Number and cost of breakdowns, repair

costs, mean time between order and

delivery

Customers Customer loyalty Number of repeat customers, $ purchases

per customer



The Balanced Scorecard and the The Balanced Scorecard and the Management CycleManagement Cycle

Executing• Use agreed-upon strategic objectives as a basis for

decision-making.

Reviewing • Review financial and nonfinancial results frequently.• Compare objectives with actual results.• Determine if measures or objectives need revision.

Reporting• Prepare reports which show performance measures

for each stakeholder group.



DiscussionDiscussion

Q.Q. Who are the stakeholders in an organization?

1. Investors

2. Employees

3. Management (Internal business processes)

4. Customers

A.A.


Performance MeasurementPerformance Measurement

OBJECTIVE 2Discuss performance measurement and state the issues that affect management’s ability to measure performance.


What to Measure, How to MeasureWhat to Measure, How to Measure

Performance measurement is the use of quantitative tools to gauge an organization’s performance in relation to a specific goal or expected outcome.

Product or service quality is NOT a measure; it is what management wants to measure. Quantifiable measures must be developed to measure quality.


Other Measurement IssuesOther Measurement Issues What performance measures can be used? How can managers monitor the level of quality? How can managers monitor processes to identify

areas that need improvement? How can managers measure customer

satisfaction? How can managers monitor financial

performance? Are there other stakeholders? What performance measures do governments

impose? How can a manager measure the effect on the

environment?



Q.Q. How does a company measure the quality of its products and services?

It develops quantitative measures which indicate whether quality objectives are being achieved.

A.A.


Responsibility AccountingResponsibility Accounting

OBJECTIVE 3Define responsibility accounting and describe the role responsibility centers play in performance management and evaluation.


Responsibility AccountingResponsibility Accounting

Responsibility accounting classifies data by areas of responsibility and reports on only the revenues, costs and resources that the assigned manager can control.

A responsibility centerresponsibility center is an organizational unit whose manager is responsible for a portion of the organization’s resources and its activities.


Types of Responsibility CentersTypes of Responsibility Centers

Cost Centers – the manager is accountable only for controllable costs.

Discretionary Cost Centers – the manager is accountable only for costs; the relationship between resources and products or services

produced is not well defined. Administrative or support functions are often discretionary cost centers.

Revenue Centers – the manager is accountable primarily for controllable revenue generated.


Types of Responsibility CentersTypes of Responsibility Centers(continued…)(continued…)

Profit Centers – the manager is accountable for revenues, costs and the resulting operating income.

Investment Centers – the manager is accountable for profit generation and can make decisions about resources used.


Organizational Structure and Organizational Structure and Performance ManagementPerformance Management

An organization chart shows the hierarchy of responsibility for the purpose of management control.

Performance reporting by responsibility level traces the source of a cost, revenue or resource to the manager who controls it enabling his or her performance to be evaluated.



DiscussionDiscussionQ.Q. Name the types of responsibility

centers?

1. Cost Centers

2. Discretionary Cost Centers

3. Revenue Centers

4. Profit Centers

5. Investment Centers

A.A.


Performance EvaluationPerformance Evaluation

OBJECTIVE 4Prepare performance reports for the various types of responsibility centers, including reports based on the flexible budget for cost centers and variable costing for profit centers.


Evaluating Cost Center Performance• Use flexible budgets to identify variances between

actual and expected costs.

Evaluating Profit Center Performance• Compare actual results to budgeted income

statement.• Use variable costing (contribution method) income

statements to focus on cost variability and the profit center’s contribution to operating income.

• Only show controllable costs.• Show other, nonfinancial performance measures.



Q.Q. What type of Income Statement should be used to evaluate profit centers?

Variable Costing Income StatementA.A.


Evaluating Investment Center Evaluating Investment Center PerformancePerformance

OBJECTIVE 5

Use the traditional performance measures of return on investment and residual income to evaluate investment centers.


Return on Investment (ROI)Traditionally the most common performance measure

ROI

= Operating Income

Average Assets Invested

= Operating Income x Sales

Sales Average Assets Invested

= Profit Margin x Asset Turnover



Other Measures used in conjunction with ROI include:

Revenues Costs Operating Income Revenue growth Market share % changes in ROI


Residual IncomeResidual Income

The operating income earned above a minimum desired return on invested assets.

Residual Income = Operating Income – (Desired ROI x Average Assets Invested)

Residual income eliminates the possibility of missed income opportunities that exist if ROI is used as a performance measure. BUT residual income does not provide a meaningful comparison between investment centers of a different size because residual income shows absolute dollars not a percentage.



Q.Q. What measure of investment center performance is best used to compare managers of different size investment centers?

ROI, because it provides a ratio. Residual income provides an absolute dollar amount.

A.A.


Economic Value Added (EVA)Economic Value Added (EVA)

OBJECTIVE 6

Use economic value added to evaluate investment centers.


Economic Value Added – the shareholder wealth created by an investment center.

Cost of Capital – the minimum desired rate of return on an investment.

EVA = After Tax Operating Income

– [Cost of Capital x (Total Assets – Current Liabilities)]


Economic Value AddedEconomic Value Added

Compare EVAs from previous periods, target EVAs, and EVAs from other investment centers.

Affected by decisions on pricing, sales volume, taxes, cost of capital, etc.



DiscussionDiscussionQ.Q. Why should multiple performance

measures be used to evaluate investment center performance?

Because any one performance measure tends to emphasize only one particular aspect of performance.

A.A.


Performance IncentivesPerformance Incentives

OBJECTIVE 7

Explain how properly linked performance incentives and measures add value for all stakeholders in performance management and evaluation.


Linking Goals, Objectives, Measures Linking Goals, Objectives, Measures and Performance Targetsand Performance Targets

The links should be causal:

Goal Objective Measure Performance Target

To be a friend

of the environment

To reduce the company’s

environmental risk

Number of products recycled

To recycle at least 10% of products sold


Performance-Based PayPerformance-Based Pay

Responsibility center managers are more likely to achieve their performance targets if their pay depends on it.

Cash bonuses, awards, profit-sharing and stock options are forms of incentive compensation.


The Coordination of GoalsThe Coordination of Goals Incentive plans to coordinate goals

must consider: When to give rewards? Who shall be rewarded? How should the reward be computed? Does the incentive plan address the interest of

all stakeholders? Performance Management and Evaluation

systems should balance and benefit all stakeholders.


DiscussionDiscussionQ.Q. What does “an organization will get what

it measures” mean?

If performance measures (and incentives) are based on specific objectives, managers will be motivated to achieve the objectives that are being measured.

A.A.


OK, LET’S REVIEW . . .OK, LET’S REVIEW . . .

1. Describe how the balanced scorecard aligns performance with organizational goals and explain the balanced scorecard’s role in the management cycle.

2. Discuss performance measurement and state the issues that affect management’s ability to measure performance.

3. Define responsibility accounting and describe the role responsibility centers play in performance management and evaluation.


CONTINUING OUR REVIEWCONTINUING OUR REVIEW . . . . . .

4. Prepare performance reports for the various types of responsibility centers, including reports based on the flexible budget for cost centers and variable costing for profit centers.

5. Use the traditional performance measures of return on investment and residual income to evaluate investment centers.


AND FINALLY . . .AND FINALLY . . .

6. Use economic value added to evaluate investment centers.

7. Explain how properly linked performance incentives and measures add value for all stakeholders in performance management and evaluation.