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Chapter 25: Reporting and Evaluation McGraw-Hill © 2004 The McGraw-Hill Companies, Inc. All rights reserved.
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25-2 Key Success Factors Key success factors = a small number of factors that are crucial to achieving objectives. Usually no more than 5.
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25-3 Key Indicators Quantitative measures related to the key indicators. Highlighted by reporting system.
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25-4 Characteristics of Key Success Factors: Important impact on performance. Volatile. If change occurs, prompt action should be taken. A related key indicator can measure change. E.g., occupancy rates in hotel industry, book- to-bill ratio in semiconductor industry. E.g., occupancy rates in hotel industry, book- to-bill ratio in semiconductor industry.
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25-5 Types of Management Reports Information reports. Performance reports. Economic performance reports. Economic performance reports. Managerial performance (control) reports. Managerial performance (control) reports.
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25-6 Information Reports Tells management what is going on. From a variety of sources including the accounting system. E.g., News summaries, economic data, industry association news.
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25-7 Economic Performance Report: E.G., conventional income statements for a profit center. Focuses on whether or not investment in an economic entity (e.g., a profit center) should continue, be increased, or decreased.
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25-8 Managerial Performance Report Control report = comparison of actual performance with some standard such as a budget. Differs from economic performance report because non-controllable items are excluded from the measurement. Focuses on how well the manager performed during the period.
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25-9 Period of Control Reports Control period = period covered by one report = shortest period of time in which management can usefully intervene. Flash report, could be real time, indicates change in a key success factor. E.g., Breakdown of key equipment. Daily reports, e.g., orders booked. Monthly reports, overall performance of responsibility centers.
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25-10 Timing of Reports Interval (i.e., time elapsed between end of period and issuance of report) should be short enough for report to be useful. For report to be timely, accuracy may be sacrificed and approximations used.
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25-11 Contents of Control Reports Compares actual with what performance should have been. Differences between actual and expected are identified and, if possible, quantified. Costs for responsibility center are classified as controllable and non-controllable.
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25-12 Types of Information in Control Reports Actual performance. What performance should have been. Reasons for differences.
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25-13 Essential Characteristics of Control Reports Related to personal responsibility. (Responsibility accounting.) Actual performance compared to best available standard. Significant information highlighted.
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25-14 Types of Standards Predetermined standards or budgets. Best formal standard. Historical standards.
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25-15 Potential Weaknesses of Standards: Conditions may have changed. Don’t know if prior period’s performance was acceptable in the first place.
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25-16 External Standards Benchmarks include standards of other responsibility centers inside or outside of company.
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25-17 Highlighting Significant Information Current problem: information overload. Reports should highlight significant items. Exception principle: focus attention where actual differs from standard. Typically control reports have 3 columns: Actual, standard (i.e., budget), variance.
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25-18 Use of Control Reports Encourages performance by letting managers know that their performance is measured and reported. Gives insight into conditions that require action to improve future performance by analyzing differences between actual and budget (or other benchmark).
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25-19 Feedback Loop Control reports identifying variances from standard. Management takes action as a result of analyzing differences identified in control reports.
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25-20 Terminology In This Chapter Terms standard and budget are used interchangeably. Production cost standards are just one type of standard.
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25-21 Steps in the Control Process Identification. Investigation. Action.
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25-22 Identification Identify areas that require investigation. Good managers are aware of differences between actual and standard before control reports are issued.
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25-23 General Rules Notify superiors of exceptions identified in control reports before control reports reach their superiors. Engineered costs, specifically production cost standards: The lower the better. For discretionary costs: good performance often consists of spending the amount agreed on.
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25-24 Variances and Standards Variance is meaningful only if it is derived from a valid standard. Standard may not be accurate for either or both of 2 reasons: Standard was not properly set. Standard was not properly set. Conditions are different than anticipated in the standard. Conditions are different than anticipated in the standard.
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25-25 Investigation Investigate significant variances to ascertain whether action is necessary. Starts with conversation between superior and manager of responsibility center.
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25-26 Action Act when investigation indicates need for action. If performance is good, a pat on the back is appropriate. Do not to over emphasize short-term performance at the expense of long-term performance.
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25-27 Major Characteristics of Quality Improvement A focus on serving customers. Systematic problem solving using teams of front line workers.
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25-28 Continuous Improvement Produces better results when there is an explicit attempt to measure and report results achieved. Usually focused on activities at lower levels in the organization. Key indicators are tracked; frequently using charts and graphs. These indicators are likely to be non-financial. These indicators are likely to be non-financial.
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25-29 Why Standard Costs Hamper Continuous Improvement Managers focus investigation on unfavorable variances from standard. Favorable variances may provide insight on how to improve performance. Favorable variances may provide insight on how to improve performance. People stop trying to improve once they reach standard. Otherwise standard may be tightened. Otherwise standard may be tightened.
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25-30 Incentive Compensation: 1 of 2 Many companies reward profit and investment center managers based on actual performance compared to budget. Typically based on annual performance. Managers at higher levels receive a higher percentage of compensation in bonuses.
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25-31 Incentive Compensation: 2 of 2 Most bonus plans have a quantitative aspect and a judgmental aspect. Few bonus plans are purely based on mechanical calculations. Time horizons for at least a portion of the performance bonus is longer at higher levels.
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