PERFORMANCE MEASUREMENT & CONTROL
 PRICE TRANSFER
 A good Price Transfer should have the following characteristic:
1. Preserve Divisional Autonomy (the extent to which divisional managers, rather than the top management of the
firm, determine the final transfer prices for internal transactions between divisions).
2. Be perceived as being fair for the purposes of performance evaluation and investment decisions
3. Permit each division to make a profit (Profits are motivating)
4. Encourage divisions to make decisions which maximise group profits (The transfer price will achieve this if the
decisions which maximise divisional profit also happen to maximise group profit – this is known as goal
congruence).
General rules : The limits within which transfer prices should fall are as follows.
1. The minimum. The sum of the supplying division's marginal cost and opportunity cost of the item transferred.
2. The maximum. The lowest market price at which the receiving division could purchase the goods or services
externally, less any internal cost savings in packaging and delivery.(Fixed by the Receiving Department)
Transfer Price in a perfect competitive Markets = Market Price
Not perfect/Spare Capacity = STD variable cost of production (Minimum Price)
Not Perfect/Scarce Resources = STD Variable Production Cost + Opportunity Cost
Dual Pricing = Both Division record their own price
 Transfer price determine how total profit should shared between division.
 Actual cost should never be used, as it provide no incentive for transferring items.
 Profit before interest & tax is used as a performance measurement for a divisional . (tax & interest is for the company
as a whole)
 The economic transfer pricing rule for what the maximum transfer price should be the lower of the net marginal
revenue for the transfer
 Responsibility Accounting is the term used to describe decentralization of authority ,with the performance of the
decentralized units measures in terms of accounting result.
Responsibility Centre
Control Over
Principal Performance Measure
Cost Centre
Controllable Cost
Variance Analysis, Efficiency
Measure
Revenue Centre
Revenue only
Revenues
Profit Centre
Controllable Cost, Sales Price (Inc. transfer price)
Profit
Contribution Centre
Same as Profit Centre except that expenditure is
Contribution
reported on a marginal basis
Investment Centre
Controllable Cost, Sales Prices (Inc. Transfer prices,
Return on investment
Output Volume, investment on non-current assets &
Residual income
working Capital
Other financial ratios
 NOT-FOR-PROFIT-ORG
 Providing VALUE FOR MONEY means providing a service that is economical, efficient & effective. Economical means
getting the best price, but this does not necessarily means cheap.
 Quantitative performance measures are something that can be actually measured & a value assigned.
 Qualitative performance measures are based on assumptions. It is only possible to gain an opinion as to a value.

FITZGERALD & MOON MODEL suggested that a performance mgmt. systems in a service organization can be
analysed I a combination of 3 building block
1. DIMENSION OF PERFORMANCE
Past Results Achievement
Financial Performance
Competitiveness (Growth Sales, Retention Rate of Customers)
Determinant of Future Performance
Flexibility (employee, speed of respond to customer)
Innovation
Quality (No. of complaints, Customer satisfaction)
Resource Utilisation (Efficiency/productivity/capacity rate
These are attempt to address the short-termism.
2. SETTING STANDARDS
i. Ownership’ individual need to feel that they ‘own’ the standards & targets that they are responsible
ii. Achievability ‘ target should be realistic & achievable
iii. Equity ‘ target shoulb be seen as ‘fair’ & equitable for all mangers
3. REWARDS
i. Clarity (target & rewarding should be clear)
ii. Motivation (it must be suitably rewarded)
iii. Controllability ( they responsible only for aspects of performance which they in a position to control)
Characteristic of Service
NON-FINANCIAL PERFORMANCE INDICATORS
Areas to measures should relates to an org’s critical success Factors is by Key Performance (KPIs). It should be:
1. Specific (i.e. measure profitability rather than financial performance)
2. Measurable (capable of having a measure placed upon it. E.g. no. of customer complaint rather than level of customer satisfaction)
3. Relevant, in that they measure achievement of a critical success factor
BALANCE SCORECARD (Objectives & targets are set into 4 Perspectives) it provides mgmt. with info that covers all
relevant area of performance in an objectives & unbiased fashion. It Inc. both Financial & non-financial.
1. Innovation & Learning Perspective (i.e. can we continue to improve & create value)
2. Internal Business Perspective. (i.e. what must we excel at)
3. Customer Satisfaction Perspective (what do existing & new customers value from us)
4. Financial Perspective (How do we create value for our shareholders)
Steps to be taken to encourage mgr.’s take long term View
o Making short term target realistic
o Providing sufficient mgmt. info. To allow MRG to see what trade-off they are making
o Evaluating Mgr.’s performance in terms of contribution to long & short term objectives
o Link Mgr.’ rewards to share price
o Set both quality & financial target
Advantage
1. It measures performance in variety of ways, rather than relying on1 figures
2. Mgr.’s will be unable to distort the performance measure as there are multiple measured used.
3. It takes long-term perspective of business performance
4. Success in the 4 key areas should lead to long term success
5. It is flexible
6. What get measure get done. If mgr. know they are being appraised on various aspects they will pay more attention.
The main difficulty is setting STD for Each of KPIs
 CHARACTERISTIC OF SERIVES
i. Inseparability/Simultaneously (Production. & Consumption Coinciding) service cannot be separated
ii. Perishability (inability to store)
iii. Heterogeneity (Lack of consistency)
iv. Intangibility
v. Ownership (the purchase of a service only gives the customers access to or the right to use a facility)
A Network system allow the transmission of info .both to & from an organization, as such performance indicators,
financial statistic & similar information could be rapidly gathered, processed & disseminated. An upgraded system will
improve communication within, leading to rapid reaction to change both within the org. & outside it. Which will help to
get rid of the current situation.
Cost of providing a fully network, changeover cost & future maintenance & training cost must be evaluated & budgeted
for. Development & implementation of security measures to prevent mis-use of corporate data & prevent fraud by
authorized users have to be considered and costed. In addition possible recruitment for specialized staff will be needed.
Changes may result in unforeseen changes to the culture of the organization. Leading to de-motivation (as they fear can
could be repaced).
Closed System does not react to external stimul or allow communicationfrom internalprocesses to interact with the
 Management information is often produces as summary data from transaction processing system.
 Management Accounting Information (summary of info which will incorporate some risk & uncertainty analysis) e.g.
sensitivity analysis
 Management Accountant will be involved:

Project evaluation

Managing Cash & Operational Matters

Reviewing the outcome of project
Challenge of management accountant regarding traditional accounting systems:
 Focused mainly on financial reporting
 Misleading Information (overhead absorption)
 Neatness rather than usefulness(no solution is provided)
 Internal Focus
Inflexibility (with modern business environment)
 Accessing the System
1. Password
2. Logical Access : preventing those that that have access but will be subject with limited access
 FINANCIAL MEASURE
 Ratio Analysis is used to compare:
1. Budgets (Control Purposes)
2. Last year ‘s figures (Identify Trends)
3. Competitor’s results * Identify Average (to Asses Performance)
MEASURE OF UTILISATION
 Inventory turnover period = (inventory/C.O.S) x 365 days
 Accounts Payable Payment period = Average Trade Payables
x 365 days
Credit Purchase or C.O.S
 Accounts Receivable Days = Trade Receivables x 365 Days
Credit Sales Turnover
 Current Ratio (LIQUIDITY) = Current Assets
(<1) C. asset exceed C. liabilities ,indicate business have
Current Liabilities
sufficient c. assets to cover demand from creditors
 Quick Ratio or Acid Test Ratio = Current Assets less Inventory (less than 1: 1 we need to analyses the structure )
Current Liabilities
c. liabilities to those failing due immediately/at later
FINANCIAL RISK
 Gearing (if a company has enough profit to cover its interest charges before anything is available for equity)
A company which lowered geared is considered less risky)
 Operating Gearing or Leverage = F. Cost (Refers to proportion of company’s operation cost that are fixed as opposed
T. Cost to variables)
Higher the proportion of fixed costs, the higher the operating gear. Companies with high operating gear tend to have
volatile operating profits. Because F. Cost remain the same, no matter the volume of sale. High Operating gearing is
common in many services industries, where many operating cost are fixed.
 Financial Leverage/Gearing is the use of debt finance to increase the return on equity by using borrowed funds .
Gearing measures the relationship between shareholders capital plus reserves, & debt. Debt is any loan which pay fixed
interest & are secured. Note: overdraft is excluding in the ratio.
GEARING =
Debt
Debt + equity
Interest Cover =
or
Debt (excessive debt, the need to pay interest before dividend Risks faced
Equity by Shareholders if profit fall
PBIT = No. of Times (A company could be paid out of profit before interest & Tax)
Interest Paid
Dividend Cover = Earnings after tax & Preference Dividend = No. of Times (Indication of Dividend Policy – Whether profits
Ordinary Dividend
will be distributed or re-invested
PROFITABILITY & RETURN
 ROCE (the profit as a % of the amount of capital employed)
PBIT x 100
Capital Employed (Shareholder’s Funds + Payables Falling due after more than 1 year + long term liabilities)
Or Total Assets less Current Liabilities)
 ROCE = Profit Margin X Asset Turnover
 Asset Turnover /Capital Employed (it measure utilization & mgmt. efficiency. It indicates how well the assets of a
business are being used to generates sales or how effectively mgmt. have utilised the total investment)
ROI can be manipulated (Increasing payables or delaying payment)
ROI use only controllable cost (i.e. F.Cost excluded)
ROI lead to short-terism
Ways to increase ROI (keep old machinery, increase payable)
 EARNING PER SHARE (relates profitability to the shareholder), It is profit after tax & any Preference Dividend) divided
by the no. of share issued.
 RESIDUAL INCOME (RI) measure the Centre’s profit after deducting a notional or imputed interest cost.
Division Profit (capital employed x ROI) – Imputed interest (% on capital employed)
Advantage: for flexibility : Disadvantage: do not differentiate the size of the income to the size of investment not give
comparison between investment centres.