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Chapter 14 After completing this chapter, you should be able to:

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C14.40 Review of Chapters 13 and 14; financial performance measures; behavioural issues:
manufacturing and service organisation

Chapter 14 LEARNING OBJECTIVES Contemporary approaches to measuring and managing performance After completing this chapter, you should be able to: 1 understand the various purposes of performance measurement systems and the role of these systems in enhancing customer value and shareholder value; 2 understand why conventional financial measures are not sufficient for managing an organisation; 3 describe the characteristics of contemporary approaches to performance measurement; 4 explain the advantages that non-financial performance measures offer over financial measures, as well as the problems; 5 describe the four perspectives of the Kaplan and Norton (1996) balanced scorecard; 6 understand the causal linkages within the balanced scorecard; 7 understand the relationships between lead and lag indicators; 8 formulate a balanced scorecard for an organisation, selecting objectives, and lead and lag measures for each of the four perspectives; 9 complete a Du Pont chart, to link non-financial measures to financial measures and performance; 10 describe the basic steps of benchmarking and understand how benchmarking can improve competitiveness; 11 outline the major warning signs of an inadequate performance measurement system; 12 describe the criteria for designing effective performance measurement systems; and 13 outline the issues that are relevant to selecting performance measures in service organisations.
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2P ART 3 I NFORMATION FOR M ANAGING R ESOURCES performance measurement system a system that measures performance by comparing actual results with some benchmark Performance measurement systems measure performance of areas of the business (or individuals) by comparing performance with benchmarks. These systems are an essential part of the planning and control process, and may help managers to assess the value added by the various operations and activities that they engage in. In this chapter, we explain that many organisations use performance measurement systems that go beyond the measurement of financial performance. These contemporary approaches to performance measurement may entail placing a greater emphasis on non-financial measures, implementing balanced scorecards and using benchmarking techniques to better manage resources, and hence, improve performance. The purposes of performance measurement In Chapter 12, we saw that responsibility accounting provides the foundation for planning and control, and that performance measurement is a key aspect of responsibility accounting. Let’s consider the many ways in which performance measures can be used within a planning and control system: n Performance measures can be used to communicate the strategy and plans of the business and align employees’ goals with those of the organisation. Thus, a wisely designed performance measurement system can encourage goal congruence. n Managers use performance measures to track their performance against targets . This feedback allows managers at all levels of the business to assess progress in achieving targets, and to take corrective actions if necessary. It may also indicate the need to amend plans and targets when there have been changes in the internal or external environment of the business. n Reporting performance allows managers to identify problem areas . This can occur at all levels of the business. This is of greater value if actual performance is compared with some benchmark, which may be a budgeted target or an external benchmark. n Senior managers may use performance measures to evaluate subordinates’ performance and as the basis for rewards . Enterprises need a range of performance measures that reflect their competitive environment and strategies, to ensure that managers are motivated and rewarded for achieving the ‘things that matter’. n Performance measures may be used by senior managers to guide them in developing future strategies and operations . Performance measures should not just inform managers of the outcomes of past decisions and operations; they should give an indication of the capability of the firm to compete effectively in the future and point to areas for future growth. Conventional performance measurement The financial performance measures used in typical conventional management accounting systems were described in Chapters 12 and 13 and are outlined in Exhibit 14.1. You will notice that the measures focus on profit and its components, revenues and costs. Performance measurement systems like these have been used since the 1920s. Profitability is the ultimate goal for most business owners. Profit performance is watched by owners, the financial markets and creditors, and therefore it must be important to managers too. However, over the past decade we have seen many companies change their performance measurement systems, often broadening the focus away from financial measures. Why has this happened? LO 1 LEARNING OBJECTIVE LO 2 LEARNING OBJECTIVE
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