performance measurement systems


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The Rise of Bureaucracy


  • PERFORMANCE MEASUREMENT SYSTEMSResponsibility Budgeting & Accounting

  • The Rise of BureaucracyPerfected by Prussians during 19th Century detailed centralized materials requirements and logistical planning (input budgets), control by rules, standard operating procedures, and the merit principle, functional administrative design, distinction between staff and linedecomposition of tasks to their simplest components,Sequential processing.

  • Bureaucracymade large, complex organizations possible; also made them inevitablePOSDCORB functions were all treated as separate concerns, performed by staff specialists and coordinated by top mgmt.substantial staff resources needed to gather and process data for top mgmt. to coordinate activities and allocate resources

  • The MarketingInformation SystemMarketingmanagers




    ControlAssessinginformationneedsDistributinginformationInternalrecordsMarketing decisions and communicationMarketingenvironment





    Macro-environmentforcesMarketing Information SystemDeveloping informationMarketingintelligenceMarketingresearchMarketingdecision supportanalysis

  • Managing at Arms LengthMulti-product, or M-form, organizational structure each major operating division serves a distinct product marketDecentralized control by the numbers, using the DuPont system of financial controls, return-on-assets targetCoordination short run via transfer pricesLong run via modern capital budgeting system

  • Responsibility BudgetingThe most common decentralized control system used by large-scale organizations (a) units and managers are evaluated relative to the targets they accept, (b) only financial measures are used to measure and reward accomplishment or punish failure, and (c) financial success or failure is attributed entirely to managerial decisions and/or employee performance.

  • Types of Responsibility CentersDiscretionary & Engineered expense centersRevenue centers Cost centersStandard cost centersQuasi-profit centersProfit centersInvestment Centers

  • EXPENSE CENTERSManagers are responsible for executing the budget (Spending as planned)Little discretion to acquire assets; no discretion to exceed authorized spending levels

    OE & Program Budgets are Discretionary Expense Budgets(given recipe]Performance Budgets are Engineered Expense Budgets[recipe varies with volume]

  • Revenue centersIn some cases, expense center managers are evaluated in terms of the number and type of activities performed by their center. Revenue centers are expense centers that earn revenue or are assigned notational revenue (transfer price) by the organization's controller as a direct result of the activities they perform.

  • Cost centersCost center managers are responsible for producing a stated quantity and/or quality of output at the lowest feasible cost. Someone else within the organization usually determines the output of a cost center.Cost center managers are usually free to acquire short-term assets (those that are wholly consumed within a performance measurement cycle), to hire temporary or contract personnel, and to manage inventories.

  • Standard cost centersIn a standard cost center, output levels are determined by requests from other responsibility centers The manager's budget for each performance measurement cycle is determined by multiplying actual output by standard cost per unit. Performance is measured against this figure -- the difference between actual costs and standard costs.

  • Quasi-profit centersIn a quasi-profit center, performance is measured by the difference between the notational revenue earned and costs For example, a VA hospital radiology department performs 500 chest X-rays and 200 skull X-rays.The notational revenue earned is $25 per chest X-ray (500) = $12,500 and $50 per skull X-ray (200) = $10,000, or $22,500 total. If the departments costs are $18,000, it earns a quasi-profit of $4,500 ($22,500 - $18,000).

  • Profit centersIn profit centers, managers are responsible for both revenues and costs. Profit is the difference between revenue and cost (or expense). In addition to the authority to acquire short-term assets, to hire temporary or contract personnel, and to manage inventories, profit center managers are usually given the authority to make long-term hires, set salary and promotion schedules (subject to organization wide standards), organize their units, and acquire long-lived assets costing less than some specified amount.

  • Investment CentersIn investment centers, managers are responsible for both profit and the assets used in generating the profit. Investment center managers are typically evaluated in terms of return on assets (ROA) -- the ratio of profit to assets employed.In recent years many have turned to economic value added (EVA), net operating "profit" less an appropriate capital charge.

  • Responsibility budgets I For expense centers the budget is a spending planFor discretionary expense centers, fixed spending targetsFor engineered expense centers, flexible spending targets (i.e., the budget has two components, a discretionary component and a component that varies directly with volume)

  • Responsibility budgets II For a cost or profit centers the budget is a performance target or goalFor cost centers, the target is a unit-cost standardFor quasi-profit centers, the target is a quasi-profit measure: (Standard Cost [units delivered] Actual Unit Cost [units delivered]).

  • Responsibility budgets III For profit centers, the budget is a profit target [revenue cost of goods sold.]The budget of an investment center is also a target or goal usually return on assets [ROA or ROI] or residual income [EVA or RI]The main difference between investment centers and all other responsibility centers is that the former approve their own capital budgets

  • Capital budgeting I is concerned with changes that have multi-period consequences for the responsibility center in question e.g. investment in new plant or equipment, a new program, a major process enhancement, etc. Where cost and profit centers are concerned, some higher authority must approve these kinds of projects. And, each time a project is approved, the targets for the current period should be adjusted accordingly, as should future year targets.

  • Capital budgeting IIIN CONTRAST, investment center mangers make these kinds of decisions without the approval of a higher authority. Their budgets are expressed in terms that reflect their skill in managing assets: ROA, EVA.

  • Formerly, individual production units were typically standard cost centers; staff units were typically discretionary expense centers. Mission centers were investment centers. Mission centers in private sector organizations produce final products that are easily priced and that are expensed following generally accepted accounting practice. In contrast, support centers produce intermediate products and these were, until recently, hard to cost, let alone price, with accuracy. Attempts to do so were often either excessively arbitrary or prohibitively costly.

  • Modern Control MethodsNew developments in management control techniqueRecognized that firms in Japan and Germany were producing higher quality goods and services at a lower cost: JIT, Cycle-time analysis, Cost of Quality Analysis, Balanced Scorecards, and the Rules of BPR

  • The German CritiqueNarrow rather than comprehensiveUses wrong cost driversUnwillingness to rely on statistical cost measures and estimatesPoor averaging, especially temporal averagingFailure to distinguish between needs of financial reporting and management control

  • Investment Centers (Charging for Assets Used] IThe charge for invested capital = [working capital + fixed capita] * discount rateThis approach contains three errors [assumed to be self-correcting] HC is used rather than replacement cost; A nominal rather than a real rate is used (not adjusted for inflation), and An average rate is used rather than a marginal rate.

  • Investment Centers (Charging for Assets Used] IIThe proper way to measure the use of invested capital would = the market rent that could be earned on each item The rental rate per asset = interest foregone, plus depreciation, minus any price appreciation or decline[Replacement Cost * (r+d-a)]

  • The Japanese Critique IImportance of inventories and overheads, insignificance of labor hoursQualitySolution: manage process through product design and process value management so as to minimize the discrepancy between Process time and Cycle time [inefficiency = 1 (PT/CT)]

  • Process value analysis (PVA)Chart the flow of activities needed to design, create, and deliver a serviceFor each activity and step within the activity determine its associated cost and its cause Determine how the step adds value or, if it is non-value adding, identify ways to eliminate it and its associated cost; Determine the cycle time of each activity and calculate its cycle efficiency (value-added time/total time); and Seek ways to improve cycle efficiency and reduce associated costs due to delays, excesses, and unevenness in activities.

  • Business Process ReengineeringJobs should be designed around an objective or outcome instead of a single function;Functional specialization and sequential execution are inherently inimical to expeditious processing; Those who use the output of activity should perform the activity and the people who produce information should process it, since they have the greatest need for information and the greatest interest in its accur


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