高级管理会计学课件：lesson 7 Performance measurement

1、1Performance measurement Lesson 72Introduction of lesson 7In this lesson, you consider how different performance measures can affect the analysis of corporate strategies and strategic business units. You also look at how financial and non-financial performance measures are used in evaluating managem

2、ent and operations.Several topics build on you introductory management accounting knowledge of return on investment, residual income, and the balanced scorecard.The case analysis in the final topic gives you an opportunity to evaluate the effectiveness of a companys performance measurement and incen

3、tive system3Lesson 7 Topics outlineFinancial and non-financial performance measuresBenchmarkingAccounting-based performance measuresThe balanced scorecard and key performance indicatorsIntegrating risk management and the balanced scorecardSelecting performance goals and timing of feedbackCase analys

4、is: Kranworth Chair Corporation4Topic 1: Financial and nonfinancialperformance measuresLearning ObjectivesOutline the need for financial and nonfinancial performance measures. (Level 1)Required readingNo required reading5Financial and nonfinancial performance measuresPerformance measurement is a sys

5、tem for determining if a set of objectives has been achieved.Performance measurement systems are a critical component of a companys MCS. 1. To allocate resources 2. To motivate agencies 3. To guide employees behaviors 4. To check the implementation of strategy 5. To aid to make decisions “what gets

6、measured gets done,” “if you cant measure it, you can neither manage it nor improve it, Performance measuresTypes of performance measurementPerformanceAccounting based financial measurementCollection of financial & non-financial measuresHybrid MeasurementFinancial measurementMarket based financial m

7、easurementBalanced ScorecardKPI scorecardStrategyscorecardStakeholder scorecardManagement information system / ERPSperformance measuresPerformance measures may be divided into two groups(a) Financial performance measures(b) Non-financial performance measuresTypes of financial performanceFinancial pe

8、rformance: Measuring the results of a firms policies and operations in monetary terms. Two typesMarket measuresReflect changes in stock prices or shareholder returnsAccounting measuresDefined in either residual terms (net income after taxes, operating profit, residual income, economic value added) o

9、r ratio terms (return on investment, return on equity, return on net assets)Market measuresTimely measured in short time periodsPrecise in well-functioning capital marketsObjective not (easily) manipulable by the managers whose performances are being evaluatedCongruent the most direct manifestation,

10、 or closest proxy, of the theoretical notion of firm valueCost effective do not require any company measurement expenseUnderstandable in terms of what the measures represent (changes in market value of the firm)Limitations of market measurementCongruenceMarket measures are heavily influenced by futu

11、re expectations, but these might not be realizedMarket valuations can be affected by carefully-timed or “managed disclosures” that are not always in the firms long-term interestMarket efficiency?Due to competitive sensitivities, markets are not always fully informed about a companys plans and prospe

12、cts, and hence, its future cash flows and risksOther “anomalies”Limitations of market measurementFeasibilityMarket measures are not available either for privately-held firms or wholly-owned subsidiaries or divisions, and they are not applicable to not-for-profit organizationsControllabilityMarket me

13、asures can generally be affected to a significant extent only by the top few managers in the organization, those who have the power to make decisions of major importanceAccounting measuresTimely measured in short time periodsPrecise subject to extensive accounting rulesObjective audited by independe

14、nt auditorsCongruentIn for-profit firms, accounting profits or returns are relatively congruent with the true firm goal of maximizing shareholder valuePositive correlations between accounting profits and changes in stock pricesCost effective already required for financial reportingUnderstandableLimi

15、tation of accounting measuresLimitation of traditional financial-based measuresManipulationIgnore Intellectual capitalIgnore riskFocus on the past.Not represent some important goals, such as customer satisfactioncan lead to motivational myopia.15 nonfinancial measuresWhy we need nonfinancial measure

16、s?Non-financial measures are leading indicators of future financial performance.Financial measures are lag indicators that summarize the results of past actions. The use of financial measures to evaluate an organization can lead to suboptimal decisionsNon-financial measures are more likely to be und

17、erstood and controlled by lower level managers.Top managers are ordinarily responsible for financial performance measures.16nonfinancial performance measuresFirms are increasingly presenting financial and nonfinancial performance measures for their subunits in a Balanced Scorecard, and its four pers

18、pectives:FinancialCustomerInternal Business ProcessLearning and GrowthKey issues of using non-financial performance measures* C.D. Ittner and D.F. Larcker, “coming up short on nonfinancial performance measurement,” Harvard business review (novermber, 2003)the points made in the paper regarding “doin

19、g it wrong” when using non-financial performance measures: 1. Not linking measures to strategy; 2. Not validating the links; 3. Setting the wrong performance targets; and 4. Measuring incorrectly.How to do it right1. Develop a causal model2. Gather data3. Turn data into information4. Continually ref

20、ine the modal5. Base actions on findings6. Assess outcomes1819Topic 2: BenchmarkingLearning ObjectiveExplain why and how an organization engages in benchmarking. (Level 1)Give examples of where benchmarking may be appropriate (Level 2)Required readingNo required readingBenchmarkingBenchmarking was o

21、riginally defined by D.T. Kearns, the CEO of Xerox Corporation, in 1981 as “ the continuous process of measuring products, services, and practices against the toughest competitors or non-competitors who is the leader in their industry.”Benchmarking is a continuous process of comparing products and o

22、perations with the strongest competitors or the best practices in similar operations of the best performing company. Benchmarking is a process that is in contrast to the traditional method of establishing current goals based upon past performance of the organization.Xerox corporation caseA 1994 book

23、 by Bogan and English, entitled Benchmarking for Best Practices: Winning Through Innovative Adoption, cited the case of Xerox Corporation.In the 1970s, Xerox experienced market erosion from its competitors, primarily the Japanese.By 1981, however, the companys market shrank to 35% as IBM and Kodak d

24、eveloped high-end machines and Canon, Ricoh, and Savin dominated the low-end segment of the market.Xerox discovered that the Japanese companies were selling their machines at what it cost Xerox to make theirs.Xerox corporation caseXerox was suffering from the “not invented here” syndrome, as manager

25、s did not want to admit that they were not the best.The company instituted a benchmarking process, but it met with resistance at first people did not believe that someone else could do it better.When faced with the facts, reaction went from denial to dismay to frustration and finally to action.Once

26、the process began, Xerox benchmarked virtually every function and task for productivity, cost, and quality.Comparisons were made for companies both in and outside the industry.By the companys own admission, it would probably not be in the copier business today if it were not for benchmarking.Xerox c

27、orporation caseThe end result? Suppliers were reduced from 5,000 to about 300. Commonality of parts increased from about 20% to 60% to 70%. Hierarchical organization structure was reduced, and use of cross-functional teams was established. Quality problems were reduced by two-thirds. Manufacturing c

28、osts were cut nearly in half. Development time was cut by about two-thirds Direct labour was cut by about 50% and corporate Staff cut by about 35% while increasing volume.BenchmarkingDefinition:Benchmarking is the process of comparing your business processes and performance metrics against best prac

29、tices from your industry or even other industries for the for the purpose of improving performance.BenchmarkingBenchmarking stagesDecide which key areas to benchmark for studyDevelop a long-term commitment to the benchmarking project since significant organizational change can take several years.Ide

30、ntify benchmarking partnerGather and share issues that relate to the type of information benchmarking organizations collect and the methods of collecting information.The organization takes action and begins to change in order to meet or exceed the benchmark.Type of BenchmarkingWorld-Class BestFuncti

31、onal InternalIndustryCompetitionBenchmarking caseBenchmarkingBenchmarking asks questions like: Why are others better? How are others better? What can we learn? How can we catch up? How can we become the best in our “fill in the blank”?Benefits of benchmarking1. helps organizations to set realistic g

32、oals;2. promotes a thorough understanding of a companys own processes;3. helps in identifying non value-added activities;4. enables comparison of performance measures in different dimensions;5. enables organization to identify specific gaps in performance;6. Involves adaptation of superior practices

33、;7. focuses on performance measures, and not on products;8. provides a basis for training human resources.The fail reason of benchmarking1. Employees fail to get involved.2. Process improvement is not related to competitive positioning.3. Data is gathered before clearly understanding the firms proce

34、ss.4. Benchmarking is treated as a one time process.5. The scope of companys studied is (too) narrow.6. The set goals do not bridge the gap between what is and what can be.7.Employees are not empowered to achieve improvements.32Topic 3: Accounting-based performance measuresLearning ObjectiveExplain

35、how accounting-based performance measures are designed, as well as their benefits and drawbacks. (Level 1)Required readingChapter 10, pages 413-428; Chapter 11, pages 445-45133Accounting-Based Performance MeasuresRequires a six-step design process:Choose Performance Measures that align with top mana

36、gements financial goalsChoose the time horizon of each Performance MeasureDefine the items included in the variablesIdentify measures for the items included in the variablesChoose a target level of performanceChoose the timing of feedback34performance measures & ControllabilityControllability is the

37、 degree of influence that a manager has over costs, revenues, or related items for which he is being held responsibleManagers should be held responsible for only those decisions for which they have authority.Variable costsFixed costControllable and uncontrollable fixed costsCommon costscommon wide f

38、irm costs35Common firm wide costsThese costs are incurred for the firm as a whole and do not relate specifically to any segment. These costs are to be allocated to the segments on some appropriate basis, so as to reflect the correct profitability of the segment.1. One argument against this allocatio

39、n: they are not controllable by profit center managers2. The argument supporting the allocation: Profit center performance can be comparable to competitors; Reduce the tendency of corporate service units to “empire build”; profit centre managers would be motivated to make optimum long-term marketing

40、 decisions 3637Three common measure Return on Investment _ROIResidual Income _RIEconomic Value Added _EVA381. Return on Investment (ROI)ROI is an accounting measure of income divided by an accounting measure of investment39ROIMost popular metric for two reasons:Blends all the ingredients of profitab

41、ility (revenues, costs, and investment) into a single percentageMay be compared to other ROIs both inside and outside the firm40ROIROI may be decomposed into its two components as follows:ROI = Return on Sales X Investment TurnoverThis is known as the DuPont Method of Profitability AnalysisROIReturn

42、 on Sales Investment Turnover41Du Pont 财务指标分析净资产收益率总资产收益率权益乘数销 售利润率资 产周转率净利润销售收入销售收入全部成本销售成本期间费用利息费用其他支出所得税销售收入资产总额资产总额所有者权益长期资产流动资产现金&证券应收账款存 货其他流动-+42NorthernCentralSouthernDivisionDivisionDivision Profit MarginIncome from operations $ 70,000$ 84,000 $ 75,000Revenues (Sales) $560,000$672,000$750,0

43、00 Profit margin12.5%12.5%10.0% Investment TurnoverRevenues (Sales) $560,000$672,000$750,000Invested assets$350,000$700,000$500,000 Investment turnover1.6 .96 1.5 Return on Investment (ROI)Income from operations $ 70,000$ 84,000$ 75,000Invested assets$350,000$700,000$500,000 Rate of return on invest

44、ment 20% 12% 15% 43It encourages managers to focus on the relationship among sales, expenses, and investments.It encourages managers to focus on cost efficiency.It encourages managers to focus on operating asset efficiency.Can be compared to external benchmarksAdvantages of ROIProblems caused by ROI

45、-measuresNumeratorIncome can be defined as net income or operating income :Accounting profitsROI contains all problems associated with these profit measuresDenominatorInvestment can be defined as total assets or net assetsHow to measure the fixed assets portion?SuboptimizationROI measures can lead d

46、ivision managers to make decisions that improve division ROI even though the decisions are not in the corporations best interest45 Limitations of ROIDoes not measure economic returns due to the use of accrual accounting rules and proceduresCauses risk and horizon problems can produce a narrow focus

47、on divisional profitability at the expense of profitability for the overall firm.encourages managers to focus on the short run at the expense of the long run. Managers will reject proposals with a positive ROI that reduce the units current ROISubject to accounting manipulationEasier to manipulate a

48、single statistic than multiple statisticsAn exampleDivision- Assume corporate cost of capital = 15%- Division investment of $25,000 that generates 5,000 annual profit (=20%)ProfitAssetsROI25,000100,00025%WITHOUTWITH30,000125,00024%New Asset Alone5,00025,00020%The fixed assets portionNet Book Value B

49、oth ROI and RI get better merely through passage of time Both ROI and RI are usually overstated if the division includes a relatively large number of older assets ExampleInvest $100; Cash flow $27 per year; Depreciation $20 (5 years)Yr12345NBV100 80 60 40 20IncrementalIncome77777Capital Charge10 8 6

50、 4 2RI31 1 3 5ROI7%9%12%18%35%(=2720)10 %Division managers are encouraged to retain assets beyond their optimal life and not to invest in new assetsCorporate managers may be induced to over-allocate resources to divisions with older assetsCombined with the sub optimization issue, managers of entitie

51、s with older assets, and hence a higher ROI, are likely to be more reluctant to invest in desirable projects with an IRR higher than the corporate cost of capitalMisleading performance signals492. Residual incomeRI is tied to economic profits through calculation of an opportunity cost, called a capi

52、tal charge.Conceptual versions:RI = Actual income Opportunity costRI = Actual income Capital charge Calculation version:RI = Actual income Capital charge = Actual income (Cost of capital Invested capital)Minimum Acceptable Rate of Return on AssetsAverage operating assets50 Residual income This formu

53、lation attempts to convert an accounting income into an economic profit. by investing in the firm, the shareholders incur an opportunity cost: profit forgone related to the next best investment in another firm. also called the imputed costThe capital charge precisely measures this shareholders oppor

54、tunity cost and uses invested required rate of return as a surrogate for the opportunity cost.51NorthernCentralSouthernDivisionDivisionDivisionBaldwin CompanyDivisional Income StatementsFor the Year Ended December 31, 2006Income from operations$70,000$84,000$75,000Minimum acceptable incomefrom opera

55、tions as a percent of invested assets:$350,000 x 10%35,000$700,000 x 10%70,000$500,000 x 10%50,000Residual income$35,000$14,000$25,000Compare with ROI52Advantage of RIResidual income encourages managers to make profitable investments that would be rejected by managers using ROI.53Limitations of RISi

56、ngle statistic. It is easier to manipulate single statistic than multiple measures.RI is also subject to accounting manipulations.Similar to ROIResults are not comparable between different size unitsCalculates an absolute amount, not a percentageExacerbates the horizon problem by stressing short-ter

57、m performance measures.543. Economic value addedEVA is a technique for both planning (identify high-return projects and redirect resources into them) and control (incentive compensation plans that promote long-term gain).55EVAEVA = NOPAT (WACC Total capital)NOPAT: net operating profit after taxes= P

58、rofit before interest and taxes ( 1 tax rate)Adjusted accounting earnings WACC Total capital employedWhat Causes EVA to Increase1. The rate of return on existing capital increases because of improvement in operating performance. This means operating profit increases without infusion of additional ca

59、pital in the business.2. Additional capital is invested in projects that earn a rate of return greater than the cost of capital.3. Capital is withdrawn from activities which earn inadequate returns.4. The cost of capital is lowered by altering the financial strategy.5657EVAEVA is a type of RI calcul

60、ation.RI = Actual income (Cost of capital x Invested capital)EVA = Adjusted accounting earnings (Weighted average cost of capital x Total capital)The amount deducted from actual or adjusted income is a capital charge in both EVA and RI; The difference is that more care is taken in adjusting income u