Chapter 23 - Chapter 26 Performance Management and Evaluation

1、Financial & Managerial Accounting 2002eBelverd E. Needles, Jr.Marian PowersSusan Crosson- - - - - - - - - - -Multimedia Slides by:Harry Hooper Santa Fe Community College 1Chapter 23Performance Management and Evaluation2LEARNING OBJECTIVES1.Describe how the balanced scorecard aligns performance with

2、organizational goals and explain the balanced scorecards role in the management cycle.2.Discuss performance measurement and state the issues that affect managements ability to measure performance.3.Define responsibility accounting and describe the role responsibility centers play in performance mana

3、gement and evaluation.3LEARNING OBJECTIVES4.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 resi

4、dual 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.4Organizational Goals and the Balanced ScorecardOBJECTIVE 1De

5、scribe how the balanced scorecard aligns performance with organizational goals and explain the balanced scorecards role in the management cycle.5The Balanced ScorecardA framework that links the perspectives of an organizations 4 stakeholder groups:Financial (investors)Learning and growth (employees)

6、Internal business processes (management)Customerswith the organizations:Mission and visionPerformance measuresStrategic planResources6The Balanced ScorecardTo succeed, an organization must add value for all stakeholders.Determine each groups objectives.Translate their objectives into performance mea

7、sures that have specific, quantifiable performance targets. 7The Balanced Scorecard and the Management CyclePlanningExample: Strategy is to achieve customer satisfactionPerspective ObjectivesPerformance MeasuresFinancial (investors)Revenue growth% growth in sales dollarsLearning and growth (employee

8、s)Trained employeesNumber of trained employees, employee turnoverInternal business processesReliable products, short delivery cyclesNumber and cost of breakdowns, repair costs, mean time between order and deliveryCustomersCustomer loyaltyNumber of repeat customers, $ purchases per customer89The Bala

9、nced Scorecard and the Management CycleExecutingUse 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.ReportingPrepare reports which s

10、how performance measures for each stakeholder group.1011DiscussionQ. Who are the stakeholders in an organization?InvestorsEmployeesManagement (Internal business processes)CustomersA. 12Performance MeasurementOBJECTIVE 2Discuss performance measurement and state the issues that affect managements abil

11、ity to measure performance.13What to Measure, How to MeasurePerformance measurement is the use of quantitative tools to gauge an organizations 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. Quantifia

12、ble measures must be developed to measure quality.14Other Measurement IssuesWhat 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 m

13、onitor financial performance?Are there other stakeholders?What performance measures do governments impose?How can a manager measure the effect on the environment?15DiscussionQ. How does a company measure the quality of its products and services?It develops quantitative measures which indicate whethe

14、r quality objectives are being achieved.A. 16Responsibility AccountingOBJECTIVE 3Define responsibility accounting and describe the role responsibility centers play in performance management and evaluation.17Responsibility AccountingResponsibility accounting classifies data by areas of responsibility

15、 and reports on only the revenues, costs and resources that the assigned manager can control.A responsibility center is an organizational unit whose manager is responsible for a portion of the organizations resources and its activities.18Types of Responsibility CentersCost Centers the manager is acc

16、ountable 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 i

17、s accountable primarily for controllable revenue generated.19Types of Responsibility Centers(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 re

18、sources used.20Organizational Structure and Performance ManagementAn 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 h

19、is or her performance to be evaluated.2122DiscussionQ. Name the types of responsibility centers?1.Cost Centers2.Discretionary Cost Centers3.Revenue Centers4.Profit Centers5.Investment CentersA. 23Performance EvaluationOBJECTIVE 4Prepare performance reports for the various types of responsibility cen

20、ters, including reports based on the flexible budget for cost centers and variable costing for profit centers.24Evaluating Cost Center PerformanceUse flexible budgets to identify variances between actual and expected costs.Evaluating Profit Center PerformanceCompare actual results to budgeted income

21、 statement.Use variable costing (contribution method) income statements to focus on cost variability and the profit centers contribution to operating income.Only show controllable costs.Show other, nonfinancial performance measures. 25DiscussionQ. What type of Income Statement should be used to eval

22、uate profit centers?Variable Costing Income StatementA. 26Evaluating Investment Center PerformanceOBJECTIVE 5Use the traditional performance measures of return on investment and residual income to evaluate investment centers.27Return on Investment (ROI)Traditionally the most common performance measu

23、re ROI = Operating Income Average Assets Invested= Operating Income x Sales Sales Average Assets Invested= Profit Margin xAsset Turnover2829Other Measures used in conjunction with ROI include:Revenues CostsOperating IncomeRevenue growthMarket share% changes in ROI30Residual IncomeThe operating incom

24、e 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 me

25、aningful comparison between investment centers of a different size because residual income shows absolute dollars not a percentage. 31DiscussionQ. What measure of investment center performance is best used to compare managers of different size investment centers?ROI, because it provides a ratio. Res

26、idual income provides an absolute dollar amount. A. 32Economic Value Added (EVA)OBJECTIVE 6Use economic value added to evaluate investment centers.33Economic Value Added the shareholder wealth created by an investment center.Cost of Capital the minimum desired rate of return on an investment.EVA = A

27、fter Tax Operating Income Cost of Capital x (Total Assets Current Liabilities)34Economic Value AddedCompare EVAs from previous periods, target EVAs, and EVAs from other investment centers.Affected by decisions on pricing, sales volume, taxes, cost of capital, etc. 3536DiscussionQ. Why should multipl

28、e performance measures be used to evaluate investment center performance?Because any one performance measure tends to emphasize only one particular aspect of performance. A. 37Performance IncentivesOBJECTIVE 7Explain how properly linked performance incentives and measures add value for all stakehold

29、ers in performance management and evaluation.38Linking Goals, Objectives, Measures and Performance TargetsThe links should be causal:Goal Objective Measure Performance TargetTo be a friend of the environmentTo reduce the companys environmental riskNumber of products recycledTo recycle at least 10% o

30、f products sold39Performance-Based PayResponsibility 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. 40The Coordination of GoalsIncentive plans to coordinate go

31、als 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.41DiscussionQ. What does “an organization will get what it measures mean?If performance measures (and incentives) are based on specific obje