BPP LEARNING MEDIA CIMA P2 Advanced Management Accounting For exams in 2016 江西财经大学会计学院 吉伟莉

BPP LEARNING MEDIA Chapter 6 Performance measurement —Financial Performance Indicators —ROI & RI —EVA ® —Non-financial Performance Indicators (NFPIs) —Balanced scorecard —Benchmarking

BPP LEARNING MEDIA Why NFPIs arise a growing emphasis? —FPIs concertration on too few variables. —Lack of information on quality. —Changes in cost structures/competitive environment/manufacturing environment —future prospects Value of NFPIs —Can be provided quickly —Easy to understand —Tailored to circumstances 3

BPP LEARNING MEDIA Non-financial performance indicators (NFPIs) Quality Warranty returns No of defects Rework hours Absenteeism Delivery times Efficiency Throughput Set up times Productivity Excess capacity Innovation New products Suggestions New processes New Patents New customers NFPIs can usually be applied to employees and product/service quality. Customer Order fill time Product range Repeat customer orders sales referrals Scenario analysis 4

NFPIs for employees —Labour turnover —Absenteeism —Skills levels Non-financial performance indicators NFPIs for quality Quality of incoming supplies Quality of work done as it proceeds Measure of customer satisfaction

BPP LEARNING MEDIA FPIs Vs NFPIs -- Wide choice and difficulty to choose -- Trade offs -- Difficult to translate into financial terms -- Lack verification & integrity -- linked to strategy -- more actionable -- More understandable & easier to relate Advantages of NFPIs Disadvantages of NFPIs 6

BPP LEARNING MEDIA 7 Short-termism and manipulation —Short-termism is when there is a bias towards short-term rather than long- term performance. —Methods to encourage a long-term view 7

BPP LEARNING MEDIA Improving performance Three objectives of performance measurement: (1) What?--identify aspects of performance that may be a cause for concern (2) Why?--explain differences between actual performance and the plan or expectation (3) How?-- consider ways of taking control measures to improve performance 8

Balanced Scorecard Financial perspective To succeed financially, how should we appear to our shareholders? Customer perspective To achieve our vision, how should we appear to our customers? Internal business process perspective To satisfy our shareholders and customers, what business processes must we excel at? Learning and growth perspective To achieve our vision, how will we sustain our ability to change and improve? Vision and strategy

BPP LEARNING MEDIA 10 The balanced scorecard Four perspectives: 1. Financial--Measures that consider the organisation from the shareholder’s point of view —Internal focus —Historic measures Long Term Focus: emphasis on increasing the future earning potential of the organisation —External & Internal focus —Future measures ( discounted cash flows ) 10

BPP LEARNING MEDIA 11 2.Customer --Measures relating to what actually matters to customers Present & future orientation External Financial & Non-Financial Mid-Long term ( Depends on the life cycle of the product ) Future orientation The balanced scorecard 11

BPP LEARNING MEDIA 12 3.Internal Business--Measures relating to the business processes that have the greatest impact on customer satisfaction decreases in unit costs through a combination of increased productivity and efficiency. Largely short term but some long term focus. Financial & non-financial indicators Internal focus Historic measures The balanced scorecard 12

BPP LEARNING MEDIA 13 The balanced scorecard 4. Innovation &Learning-- Measures to assess the organisation’s capacity to maintain its competitive position through the acquisition of new skills/development of new products —Financial & Non-Financial measures —Long term, —Future focus —External & Internal source 13

Benchmarking Identification of best practice……. Internal Process Competitor Different company similar process Similar process direct competitor Same company different department

Benchmarking Types 1 —Internal- within the same organisation —Competitive- direct competitors —Functional- a similar function in other organisations —Strategic- aimed at gaining strategic change

Metric benchmarking —Comparing appropriate metrics to identify possible areas for improvement Process benchmarking —Comparing processes with a partner company as part of an improvement process Diagnostic benchmarking —Reviewing the processes of a business to identify those which indicate a problem and offer a potential for improvement Benchmarking Types 2

Benefits —Encourages continuous improvement —Can quantify improvements —Can be used in marketing —Commonly used/popular —More appropriate than standard costing in some industries —Internal benchmarks can identify best practice

Problems —Difficult to find suitable benchmark —Comparison may not be suitable —Doesn't explain how to close the gap —Targets can be arbitrary —Often not linked to rewards —Can be time consuming and expensive