f5 performance management. the exam five compulsory questions: 20 marks each time allowed: 3hours...
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F5Performance Management
F5Performance Management
The examThe exam
• Five compulsory questions: 20 marks each
• Time allowed: 3hours plus 15 minutes reading time
• Balance typically 50:50 between calculations and discussion aspects
The examiner’s key concernsThe examiner’s key concerns
• Students need to be able to interpret any numbers they calculate and see the limitations of their financial analysis.
• In particular financial performance indicators may give a limited perspective and NFPIs are often needed to see the full picture.
• Questions will be practical and realistic, so will not dwell on unnecessary academic complications.
• Many questions will be designed so discussion aspects can be attempted even if students have struggled with calculation aspects.
1. Advanced costing methods1. Advanced costing methods
• ABC.
• Target costing.
• Lifecycle costing.
• Throughput accounting.
• Environmental Accounting
Activity Based Costing (ABC)Activity Based Costing (ABC)
Steps
1.Identify major activities.
2.Identify appropriate cost drivers (note: you may have to justify your choice here in the exam).
3.Collect costs into pools based upon the activities.
4.Charge costs to units of production based on cost driver volume.
Activity Based Costing (ABC)Activity Based Costing (ABC)
Cost driver rate = total driver pool cost
cost driver volume
Advantages of ABCAdvantages of ABC
• More realistic costs.• Better insight into cost drivers, resulting in
better cost control.• Particularly useful where overhead costs
are a significant proportion of total costs.• ABC recognises that overhead costs are
not all related to production and sales volume.
• ABC can be applied to all overhead costs, not just production overheads.
• ABC can be used just as easily in service costing as in product costing.
Criticisms of ABCCriticisms of ABC
• It is impossible to allocate all overhead costs to specific activities.
• The choice of both activities and cost drivers might be inappropriate.
• ABC can be more complex to explain to the stakeholders of the costing exercise.
• The benefits obtained from ABC might not justify the costs.
Implications of ABCImplications of ABC
• Pricing - more realistic costs improve cost-plus pricing.
• Sales strategy - more realistic margins can help focus sales strategy.
• Decision making – for example, research and development can be directed at products with better margins.
Target CostingTarget Costing
Steps
1.Estimate a market driven selling price for a new product. (E.g. to capture a required market share).
2.Reduce this figure by the firm’s required level of profit. (E.g. based on target ROI).
3.Produce a target cost figure for product designers to meet.
4.Reduce costs to provide a product that meets that target cost.
Closing the target cost gapClosing the target cost gap
• Value analysis
• Focus is on reducing cost without compromising perceived value.
• Can labour savings be made?
• Can productivity be improved?
• What production volume is needed to achieve economies of scale?
Closing the target cost gap – cont.
Closing the target cost gap – cont.
• Could cost savings be made by reviewing the supply chain?
• Can any materials be eliminated?
• Can a cheaper material be substituted without affecting quality?
• Can part-assembled components be bought in to save on assembly time?
• Can the incidence of the cost drivers be reduced?
Implications of target costing
Implications of target costing
• Pricing – might identify sufficient cost savings to reduce the target price.
• Cost control – target cost motivates managers to find new ways of saving costs.
Lifecycle costingLifecycle costing
Life cycle costing
• Is the profiling of cost over a product’s life, including the pre-production stage.
• Tracks and accumulates the actual costs and revenues attributable to each product from inception to abandonment.
• Enables a product’s true profitability to be determined at the end of its economic life.
Implications of lifecycle costingImplications of lifecycle costing
• Pricing decisions can be based on total lifecycle costs rather than simply the costs for the current period.
• Decision making - a timetable of life cycle costs helps show what costs need to be recovered.
• Control - Lifecycle costing reinforces the importance of tight control over locked-in costs, such as R&D.
• Performance reporting - Life cycle costing costs to products over their entire life cycles, to aid comparison with product revenues generated in later periods.
ThroughputThroughput
Background
• Application of key factor analysis to production bottlenecks.
• The only totally variable costs are the purchase cost of raw materials / components
• Direct labour costs are not wholly variable.
ThroughputThroughput
Multi-product decisions
• Rank products by looking at the throughput per hour of bottleneck resource time
• Throughput = Revenue – Raw Material Costs
ThroughputThroughput
Throughput accounting ratio (TPAR)
Throughput per hour of bottleneck resource
Operating expenses per hour of bottleneck resource
ThroughputThroughput
How to improve the TPAR
• Increase the sales price to increase the throughput per unit.
• Reduce total operating expenses, to reduce the cost per hour.
• Improve productivity, reducing the time required to make each unit of product.
ACCOUNTING FOR ENVIRONMENTAL COSTS
Management Accounting Techniques
Management Accounting Techniques
Break-even analysisBreak-even analysis
The Break-even chart
£
Output (units)
Fixed Costs
Breakeven
PointSales R
evenue
Total Costs
Breakeven point: The point where total costs = total
sales revenueand
Where there is neither a profit or
loss
B/E Point (units) = Fixed Costs
Contribution per Unit
Chapter 4
The Margin of SafetyThe Margin of Safety
£
Fixed Costs
Total Costs
Breakeven Output
Budgeted Output
Margin of safety
The Margin of Safety represents the level by which output can fall before the organisation makes a loss
Margin of Safety = Budgeted Output – Breakeven Output
Budgeted Output
X 100%
Chapter 4
Contribution to Sales ratioContribution to Sales ratio
Chapter 4
Contribution to Sales Ratio (C/S ratio)=
(Contribution per unit) / Unit Sales Price
Breakeven Point in Sales Value=
Fixed Costs / C/S ratio
Sales for a certain level of profit = Fixed Costs + Required Profit
Contribution per Unit
Basic Breakeven chartBasic Breakeven chart
Chapter 4
0
Sales Revenue
10
20
30
Fixed Costs
40
Breakeven point
Loss
Loss
Profit
Profit
20 30 40 50 60 70 Number of units
£’000
Total Costs
Contribution Breakeven chartContribution Breakeven chart
Sales Revenue
10
Total Costs
Variable Costs
Breakeven point
Loss
Loss
20 30 40 50 60 70 Number of units
£’000
Profit
Profit Fixed Costs
Contribution
Chapter 4
The Profit-Volume ChartThe Profit-Volume Chart
The profit-volume chart presents information in a way that clearly shows the change in the level of profit – using data from the previous data table:
0
+£5000
-£10000
1000 1500
Profit
Output
Page 30
Chapter 4
Contribution = Sales Value – All Variable Costs
Units 0 100 500 1000 1500
Contribution(£) 0 1000 5000 10000 15000
Fixed Costs(£) (10000) (10000) (10000) (10000) (10000)
Profit(£) (10000) (9000) (5000) 0 5000
Profit = (Contribution per unit x units) - Fixed Costs
A product has a sales price of £20 and a variable cost of £10 per unit
Contribution per unit 10 10 10 10
Profit per unit 0 (90) (10) 50
2. CVP Analysis2. CVP Analysis
C/S RatioBE Point (Revenue)
=Fixed Costs
Required Revenue
=Fixed Costs = Required profit
Weighted Average C/S Ratio
Weighted Average C/S Ratio
Multi-product breakeven analysis
Multi-product breakeven analysis
Limitations/Assumptions of CVP
Limitations/Assumptions of CVP
Costs behaviour is assumed to be linear Revenue is assumed to be linear Volume Produced = Volume Sold Ignores inflation Assumes a constant sales mix
Chapter 4
3. Planning with limited factors3. Planning with limited factors
• Key factor analysis – one resource in short supply
• Linear Programming – two or more scarce resources
Key factor analysisKey factor analysis
1. Calculate contribution per unit.
2. Calculate contribution per unit of the limiting factor.
3. Rank in order.
4. Allocate resources – make first up to max demand, then second,...
Linear programmingLinear programming
1. Define variables
2. Define the objective
3. Set out constraints
4. Draw graph showing constraints and identify the feasible region
5. Identify optimal point
6. Solve for optimal solution
7. Answer the question
Linear programmingLinear programming
Assumptions
• A single quantifiable objective.
• Each product always uses the same quantity of the scarce resources per unit.
• The contribution per unit is constant.
• Products are independent – e.g. sell A not B.
• The scenario is short term.
Linear programmingLinear programming
Slack
• Slack is the amount by which a resource is under utilized. It will occur when the optimum point does not fall on the given resource line.
Linear programmingLinear programming
Shadow (or dual) prices• The extra contribution that results from
having one extra unit of a scarce resource.
• The max premium (i.e. over the normal cost) that the firm should be willing to pay for one extra unit of each constraint.
• Non-critical constraints will have zero shadow prices as slack exists already.
Linear programmingLinear programming
Calculating dual prices
1.Add one unit to the constraint concerned, while leaving the other critical constraint unchanged.
2.Solve the revised equations to derive a new optimal solution.
3.Calculate the revised optimal contribution. The increase is the shadow price
Linear programmingLinear programming
Range of applicability of dual prices
• The dual price only applies as long as extra resources improve the optimal solution
• i.e. the constraint line concerned moves out increasing the size of the feasible region and moving the optimal point.
• Eventually other constraints become critical.
4. Pricing4. Pricing
• Factors to consider when pricing.
• Calculation aspects.• Pricing approaches.
Factors to consider when pricingFactors to consider when pricing
• Costs
• Competitors
• Corporate objectives
• Customers
Calculation aspectsCalculation aspects
Price elasticity of demand (PED)
• PED = % change in demand / % change in price.
• PED >1 (elastic) revenue increases if the price is cut.
• PED <1 (inelastic) revenue increases if the price is raised.
Calculation aspectsCalculation aspects
Equation of a straight line demand curve
• P = a – bQ
• “a” = the price at which demand would fall to zero
• “b” = gradient = change in price/change in demand
• Calculate “b” first
Calculation aspectsCalculation aspects
Equation of a cost curve
• C = F + vQ
• Volume based discounts
Pricing approachesPricing approaches
• Cost plus pricing
• Price skimming
• Penetration pricing
• Linking pricing decisions for different products
• Volume discounts
• Price discrimination
• Relevant cost pricing
Cost plus pricingCost plus pricing
• Establish cost per unit – options include MC, TAC, prime cost
• Calculate price using target mark-up or margin
• Often used as a starting point even when using other methods
Cost plus pricingCost plus pricing
Advantages
• Widely used and accepted.
• Simple to calculate if costs are known.
• Selling price decision may be delegated to junior management.
• Justification for price increases.
• May encourage price stability.
Cost plus pricingCost plus pricing
Disadvantages
• Ignores link between price and demand.
• No attempt to establish optimum price.
• Which absorption method?
• Does not guarantee profit
• Which cost?
• Inflexibility in pricing.
• Circular reasoning.
Price skimmingPrice skimming
• Set a high initial price to ‘skim off’ customers who are willing to pay extra.
• Prices fall over time.
• Suitability?
Penetration pricingPenetration pricing
• Set a low initial price to gain market share
• If a high volume is achieved, the low price could be sustainable.
• Suitability?
Linking pricing decisions for different products
Linking pricing decisions for different products
• Basic idea: product A is cheap to attract customers who then also buy the higher margin product B.
• Key issue is the extent to which customer must buy the other products.
• Suitability?
Volume discountsVolume discounts
• Discount for individual large order.
• Cumulative quantity discounts.
• Suitability?
Price discriminationPrice discrimination
• Have different prices in different markets for the same product.
• Suitability?
Relevant cost pricingRelevant cost pricing
• Price = net incremental cash flow.
• Suitability?
5. Make v buy and other shortterm decisions
5. Make v buy and other shortterm decisions
• Relevant costing principles.
• Make v buy decisions.
• Shut down decisions.
• Joint products – the further processing decision.
Relevant costing principlesRelevant costing principles
• Include – Future incremental cash flows.– Opportunity costs
• Exclude– Depreciation.– Sunk costs.– Unavoidable costs.– Apportioned fixed overheads.– Financing cash flows (e.g. interest).
Make v buyMake v buy
Decision
• Look at future incremental cash flows.
• Watch out for opportunity costs –especially whether or not spare capacity exists and alternative uses for capacity.
• Practical factors?
Shut down decisionsShut down decisions
Decision
• Look at future incremental cash flows.– Apportioned overheads not relevant – Closure costs – e.g. redundancies.– Alternative uses for resources?
• Practical factors?
Joint productsJoint products
The further processing decision
• Look at future incremental cash flows:– sell at split off v process further and then
sell.
• Pre-separation (“joint”) costs not relevant– only include post split-off aspects.
6. Risk and uncertainty6. Risk and uncertainty
• Basic concepts.
• Research techniques.
• Scenario planning.
• Simulation.
• Expected values.
• Sensitivity.
• Payoff tables.
Basic conceptsBasic concepts
• Risk = variability in future returns.
• Investors’ risk aversion
• Upside v downside
• Risk v uncertainty
• Risk = probability x impact
Research techniquesResearch techniques
• Desk research– Company records.– General economic intelligence.– Specific market data.
• Field research– Opinion v motivation v measurement– Questionnaires, experiments, observation.– Group interviews, triad testing, focus
groups.
Scenario planningScenario planning
1 Identify high-impact, high-uncertainty factors.
2 Identify different possible futures.
3 Identify consistent future scenarios.
4 “Write the scenario”.
5 For each scenario identify and assess possible courses of action for the firm.
6 Monitor reality.
7 Revise scenarios and strategic options
SimulationSimulation
1 Apply probabilities to key factors in scenario analysis.
2 Use random numbers to select a particular scenario and calculate outcome.
3 Repeat until build up a picture of possible outcomes
4 Make decision based on risk aversion.
Expected valuesExpected values
• EV = Σ outcome × probability.
• Make decision based on best EV.
Expected valuesExpected values
Advantages
• Recognises that there are several possible outcomes.
• Enables the probability of the different outcomes to be taken into account.
• Leads directly to a simple optimising decision rule.
• Calculations are relatively simple.
Expected valuesExpected values
Disadvantages
• probabilities used are subjective.
• EV is the average payoff. Not useful for one-off decisions.
• EV gives no indication of risk
• Ignores the investor’s attitude to risk.
SensitivitySensitivity
• Identify key variables by calculating how much an estimate can change before the decision reverses.
• Can only vary one estimate at a time.
Payoff tablesPayoff tables
• Prepare table of profits based on different decision choices and different possible scenarios.
• Four different ways of making a decision.– 1 Expected values– 2 Maximax– 3 Maximin– 4 Minimax regret
Decision TreesDecision Trees
A diagrammatic representation of a multi-decision problem, where all possible courses of action are represented, and every possible outcome of each course of action is shown.
Decision trees should be used where a problem involves a series of decisions being made and several outcomes arise during the decision-making process.
Decision trees force the decision maker to consider the logical sequence of events. A complex problem is broken down into smaller, easier to handle sections.
The financial outcomes and probabilities are shown separately, and the decision tree is ‘rolled back’ by calculating expected values and making decisions.
7. Budgeting I7. Budgeting I
• The purposes of budgeting.
• Budgets and performance management.
• The behavioural aspects of budgeting.
• Conflicting objectives.
The purpose of budgetsThe purpose of budgets
• Forecasting
• Planning
• Control
• Communication
• Co-ordination
• Evaluation
• Motivation
• Authorisation and delegation
Budgets and performancemanagement
Budgets and performancemanagement
Responsibility accounting
• Responsibility accounting divides the organisation into budget centres, each of which has a manager who is responsible for its performance.
• The budget is the target against which the performance of the budget centre or the manager is measured.
Management by exceptionManagement by exception
1 Set up standard costs, prepare budgets and set targets.
2 Measure actual.
3 Compare actual to budget (e.g. via variances).
4 Investigate reasons for differences and take action.
Behavioural aspects of budgetingBehavioural aspects of budgeting
Key issues– Dysfunctional behaviour – want goal
congruence.– Budgetary slack.
Management styles (Hopwood)– Budget constrained– Profit conscious – Non-accounting
Target setting and motivationTarget setting and motivation
• Expectations v aspirations
• Ideal target?
• Targets should be:– communicated in advance– dependent on controllable factors – based on quantifiable factors– linked to appropriate rewards – chosen to ensure goal congruence.
Participation Participation
Advantages of participative budgets
• Increased motivation
• Should contain better information,
• Increases managers’ understanding and commitment
• Better communication
• Senior managers can concentrate on strategy.
ParticipationParticipation
Disadvantages of participative budgets
• Loss of control
• Inexperienced managers
• Budgets not in line with objectives
• Budget preparation slower and disputes can arise
• Budgetary slack
• Certain environments may preclude participation
Conflicting objectivesConflicting objectives
• Company v division
• Division v division
• Short-termism
• Individualism
8. Budgeting II8. Budgeting II
• Rolling v periodic.
• Incremental budgeting.
• Zero based budgeting (ZBB).
• Activity based budgeting (ABB).
• Feedforward control.
• Flexible budgeting.
• Selecting a budgetary system.
• Dealing with uncertainty.
• Use of spreadsheets.
Rolling v periodic budgetingRolling v periodic budgeting
Periodic budgets
• The budget is prepared for typically one year at a time. No alterations once the budget has been set.
• Suitable for stable businesses where forecasting is easy and where tight control is not necessary.
Rolling v periodic budgetingRolling v periodic budgeting
Rolling (continuous) budgets
• A budget kept continuously up to date by adding another accounting period when the earliest period has expired.
• Aim: to keep tight control and always have an accurate budget for the next 12 months.
• Suitable if accurate forecasts cannot be made, or if need tight control.
Incremental budgetingIncremental budgeting
• Start with the previous period’s budget or actual results and add (or subtract) an incremental amount to cover inflation and other known changes.
• Suitable for stable businesses where costs are not expected to change significantly. There should be good cost control and limited discretionary costs.
Zero based budgetingZero based budgeting
Preparing a budget from a zero base, justifying all expenditure.
1 Identify all possible services and then cost each service (decision packages)
2 Rank the decision packages
3 Identify the level of funding that will be allocated to the department.
4 Use up the funds in order of the ranking until exhausted.
Activity based budgetingActivity based budgeting
• Use ABC for budgeting purposes:1 Identify cost pools and cost drivers.
2 Calculate a budgeted cost driver rate
3 Produce a budget for each department or product by multiplying the budgeted cost driver rate by the expected usage.
Feed forward controlFeed forward control
• Feed-forward control is defined as the ‘forecasting of differences between actual and planned outcomes and the implementation of actions before the event, to avoid such differences.
• E.g. using a cash-flow budget to forecast a funding problem and as a result arranging a higher overdraft well in advance of the problem.
Flexible budgetingFlexible budgeting
• Fixed Budgets
• Flexible Budgets
• Flexed Budgets
Selecting a budgetary systemSelecting a budgetary system
Determinants
• Type of organisation.
• Type of industry.
• Type of product and product range.
• Culture of the organisation.
Changing a budgetary systemChanging a budgetary system
Factors to consider
• Time consuming
• Are suitably trained staff are available to implement the change successfully?
• Management time
• Training needs.
• Cost v benefits for the new system:
Incorporating risk and uncertaintyIncorporating risk and uncertainty
• Flexible budgeting.
• Rolling budgets.
• Scenario planning.
• Sensitivity analysis.
• “What if” analysis using spreadsheets
9. Quantitative analysis9. Quantitative analysis
• High-low.
• Regression and correlation.
• Time series analysis.
• Learning curves.
High-lowHigh-low
1: Select the highest and lowest activity levels, and their costs.
2: Find the variable cost/unit.
3: Find the fixed cost, using either level.Fixed cost = Total cost at activity level – total
variable cost.
Regression and correlationRegression and correlation
y = a + bx
22 x)(-xn
yx-xyn
n
xb
n
y
)y)(-y(n )x)(-xn
yx-xyn2222
r =
Time series analysisTime series analysis
• Four components:1 the trend
2 cyclical variations
3 seasonal variations
4 residual variations.
• Additive modelActual = Trend + Seasonal Variation
• Multiplicative modelActual = Trend x Seasonal Variation
Learning curvesLearning curves
• As cumulative output doubles, the cumulative average time per unit falls to a fixed % (the learning rate) of the previous average.
• Y = axb
y = average cost per batch
a = cost of first batch
x = total number of batches produced
b = learning factor (log LR/log 2)
10. Standard costing and basic variances
10. Standard costing and basic variances
• Standard costing.
• Recap of basic variances from F2.
• Labour variances with idle time.
• Variance investigation.
Standard costingStandard costing
• A pre-determination of what a product is expected to cost under specific working conditions.
Standard costingStandard costing
Advantages– Annual detailed examination– Performance appraisal– Management by exception– Simplifies bookkeeping
• Disadvantages / problems– Standards not updated– Cost– Unrealistic standards can demotivate staff
Types of standardTypes of standard
• Attainable
• Ideal
• Basic
• Current
Sales variancesSales variances
Material variancesMaterial variances
Labour variances (basic)Labour variances (basic)
Variable overhead variancesVariable overhead variances
Fixed overhead variancesFixed overhead variances
Labour variances with idle timeLabour variances with idle timeNo idle time budgeted for
Idle time budgeted forIdle time budgeted for
Variance investigationVariance investigation
11. Advanced variances11. Advanced variances
• Materials mix and yield variances.
• Other targets for controlling production.
• Planning and operational variances.
• Modern manufacturing environments.
Materials mix and yield variancesMaterials mix and yield variances
• Only use where materials can be substituted for each other.
Other targets for controlling production processes
Other targets for controlling production processes
• Detailed timesheets, % idle time.
• Productivity, % yield, % waste.
• Quality measures e.g. reject rate.
• Average cost of inputs, output.
• Average margins.
• % on-time deliveries.
• Customer satisfaction ratings.
Planning and operationalvariances
Planning and operationalvariances
Market size and market shares variances
Market size and market shares variances
Planning and operating cost variances
Planning and operating cost variances
Modern manufacturingenvironments
Modern manufacturingenvironments
Total Quality Management (TQM)
• TQM is the continuous improvement in quality, productivity and effectiveness through a management approach focusing on both process and the product.
Modern manufacturingenvironments
Modern manufacturingenvironments
Just-in–time (JiT)
• JIT is a pull-based system of planning and control.
• Pulling work through the system in response to customer demand.
• Goods are only produced when they are needed.
• This eliminates large inventories of materials and finished goods.
12. Performance measurement and control
12. Performance measurement and control
• Ratio analysis.
• NFPIs.
• Behavioural considerations.
Ratio analysisRatio analysis
Preliminaries
• Ratios may not be representative of the position throughout a period.
• Need a basis for comparison.
• Ratios can be manipulated
• Ratios indicate areas for further investigation rather than giving answers.
Profitability ratiosProfitability ratios
• ROCE = Operating Profit x 100%
Capital Employed• Gross margin = Gross profit x 100%
Sales• Net margin = Net profit x 100%
Sales• Asset turnover = Sales / capital employed
• ROCE = asset turnover x net margin
Liquidity / working capital ratiosLiquidity / working capital ratios
• Current ratio = current assets / current liabilities
• Quick ratio = quick assets/ current liabilities
Quick assets = current assets – inventory
• Receivables days = receivables / sales x 365• Payables days = payables / purchases x 365• Inventory days = inventory / cost of sales x 365
Ratios to measure riskRatios to measure risk
• Financial gearing = debt/equity• Financial gearing = debt / (debt + equity)
• Dividend cover = PAT / total dividend• Interest cover = PBIT / interest
• Operating gearing = fixed costs / variable costs• Operating gearing = contribution / PBIT
Non-financial performanceindicators
Non-financial performanceindicators
• Financial performance appraisal often reveals the ultimate effects of operational factors and decisions but non-financial indicators are needed to monitor causes.
• Critical success factors often non-financial
• Stakeholder objectives may also be non-financial
The balanced scorecard(Kaplan and Norton)
The balanced scorecard(Kaplan and Norton)
The building block model (Fitzgerald et al)
The building block model (Fitzgerald et al)
Behavioural aspectsBehavioural aspects
• Measures designed to assess performance should:– provide incentives to promote goal
congruence.– only incorporate factors for which the
manager can be held responsible.– recognise both financial and non financial
aspects of performance.– recognise longer-term, as well as short
term, objectives.
Behavioural aspectsBehavioural aspects
• Potential problems with inappropriate measures– manipulation of information provided by
managers– demotivation and stress-related conflict– excessive concern for control of short term
costs, possibly at the expense of longer-term profitability.
• Transfer pricing.
• Divisional performance measurement.
13. Transfer pricing and 13. Transfer pricing and divisional divisional
Performance measurementPerformance measurement
Transfer pricingTransfer pricing
Objectives
• Goal congruence
• Performance measurement.
• Autonomy.
• Minimising global tax liability.
• To record the movement of goods and services.
• Fair split of profit between divisions.
Transfer pricing - Exam questionsTransfer pricing
- Exam questionsWill often be given a TP and asked to
comment. Look at the following.
• Implications for divisional performance – e.g. is a target ROI achieved?
• Resulting manager behaviour - does it give dysfunctional decision making – e.g. will a manager reject a new product that is acceptable to the company as a whole?
Transfer pricing - General rule
Transfer pricing - General rule
• TP = marginal cost + opportunity cost
• In a perfectly competitive market, TP = market price.
• If spare capacity exists,TP = marginal cost.
• With production constraints,TP = marginal cost + opportunity cost of not
using those resources elsewhere.
Practical transfer pricing systems
Practical transfer pricing systems
• Market price• Production cost + mark-up • Negotiation
Divisional performancemeasurement
Divisional performancemeasurement
Key considerations
• Manager or division?
• Type of division.– Cost centre– Profit centre– Investment centre
Return on Investment (ROI)Return on Investment (ROI)
Residual Income (RI)Residual Income (RI)
RI = Pre tax controllable profits – imputed charge for controllable invested capital
14. Performance measurement in not-for-profit organisations
14. Performance measurement in not-for-profit organisations
• Objectives.
• Performance Measurement.
ObjectivesObjectives
Planning for NFPs usually more complex.
• Multiple objectives
• Difficult to quantify objectives
• Conflicts between stakeholders
• Difficult to measure performance
• Different ways to achieve the same objective
• Objectives may be politically driven
Performance measurementPerformance measurement
Value for money (VFM)
• Effectiveness
• Efficiency
• Economy