Businesses use performance measurements to make strategic decisions about how the company should conduct business and to develop plans and budgets to help the company achieve its goals. Most businesses have a plan at the beginning of their year regarding how much they expect to spend on materials and labor. This expectation is guided by how much product they expect to produce and sell, which will generate an expected level of revenue and—ultimately—profit. An organization has to have a method and process for evaluation, throughout the year and at the end of the year, to see whether it met its targets in each area—and if not, why not.
At A Glance
Decentralizing performance measures can give greater decision-making accuracy, but it can also lead to contradictory decisions and the lack of a coherent vision for the company.
- In order to categorize cost centers, it is important to understand how responsibility centers, profit centers, and investment centers all work.
Cost accounting helps organizations make informed decisions about the return on the investment of resources.
- Businesses can use ROI to help determine how effective a manager of an investment center is.
- Some companies use minimum rate of return and residual income to judge an investment center's performance and help managers make better decisions than if they rely solely on return on investment calculations.
- Many organizations use three operating performance measures: throughput time, delivery cycle time, and manufacturing cycle efficiency.
- Organizations use the balanced scorecard to maximize key performances against resources.
- The balanced scorecard has four domains: financial, customer, internal business processes, and learning and growth.
- Companies can use the balanced scorecard departmentally, by process, or for the company as a whole.