Transcript PERFORMANCE MEASUREMENT SYSTEMS Responsibility Budgeting & Accounting The Rise of Bureaucracy Perfected by Prussians during 19th Century – detailed centralized materials requirements and logistical planning (input.

PERFORMANCE MEASUREMENT
SYSTEMS
Responsibility Budgeting &
Accounting
The Rise of Bureaucracy
Perfected 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 line
– decomposition of tasks to their simplest
components,
– Sequential processing.
Bureaucracy
• made large, complex organizations possible;
also made them inevitable
• POSDCORB 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 Marketing
Information System
Marketing
managers
Marketing Information System
Developing information
Analysis
Planning
Assessing
information
needs
Internal
records
Marketing
intelligence
Implementation
Marketing
environment
Test
markets
Marketing
channels
Competitors
Control
Distributing
information
Marketing
decision
support
analysis
Marketing
research
Marketing decisions and communication
Publics
Macroenvironment
forces
Managing at Arms Length
• Multi-product, or M-form, organizational
structure
– each major operating division serves a distinct
product market
• Decentralized control
– by the numbers, using the DuPont system of
financial controls, return-on-assets target
• Coordination
– short run via transfer prices
– Long run via modern capital budgeting system
Responsibility Budgeting
The 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 Centers
Discretionary & Engineered expense
centers
Revenue centers
Cost centers
Standard cost centers
Quasi-profit centers
Profit centers
Investment Centers
EXPENSE CENTERS
Managers are
OE & Program Budgets
responsible for
are Discretionary
executing the budget
Expense Budgets
(Spending as planned)
(given recipe]
Little discretion to
Performance Budgets
acquire assets; no
are Engineered
discretion to exceed
Expense Budgets
authorized spending
levels
[recipe varies with
volume]
Revenue centers
• In 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 centers
• Cost 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 centers
• In 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 centers
• In 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 department’s costs are $18,000, it earns a
quasi-profit of $4,500 ($22,500 - $18,000).
Profit centers
• In 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 longlived assets costing less than some specified
amount.
Investment Centers
• In 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 plan
– For discretionary expense centers, fixed
spending targets
– For 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 goal
– For cost centers, the target is a unit-cost
standard
– For 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 II
IN 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 Methods
New developments in management
control technique
Recognized 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 Critique
• Narrow rather than comprehensive
• Uses wrong cost drivers
• Unwillingness to rely on statistical
cost measures and estimates
• Poor averaging, especially temporal
averaging
• Failure to distinguish between needs
of financial reporting and
management control
Investment Centers
(Charging for Assets Used] I
The charge for invested capital = [working
capital + fixed capita] * discount rate
This 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] II
The 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 I
• Importance of inventories and
overheads, insignificance of labor
hours
• Quality
– Solution: 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 service
• For 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 Reengineering
Jobs 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
accuracy;
Information should be captured once and at the source;
Parallel activities should be coordinated during their
performance, not after they are completed;
The people who do the work should be responsible for
decision making and control built into job designs
Reflects Assumptions of Flexible
Production
• Nobody but the front-line worker adds value,
• Front-line workers can perform most functions
better than specialists (lean manufacturing),
• Every step of the service delivery process
should be done perfectly (TQM)
• This reduces the need for buffer stocks (JIT) and
produces a higher quality end-product.
Modern IT: reduced economies of
scale and scope
– Multidisciplinary teams, members work
together from start of job to completion
– push exercise of judgment down to teams that
do an organization's work
– more equal distribution of knowledge,
authority, and responsibility
– average firm size falling for the last twenty
years
The Balanced Scorecard
Four perspectives ………………………………….
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•
•
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Financial
Customer
Internal Business Processes
Learning and Growth Perspective