M5:1 The Purpose of Performance Management Systems
Performance management
● Aims to establish how well something/somebody is doing in relation to a plan
Types of performance measures
● Financial performance indicators
● Non - financial performance indicators
‘Things’ that undergo performance measurements:
● A machine
● A factory
● A subsidiary company
● An organization as a whole
‘Bodies’ that undergo performance measurements:
● An individual employee
● A manager
● A group of people
Objectives of performance measurement
● Identify aspects of performance that may be a cause for concern
● Explain differences between actual performances and the
plan/expectation/deteriorating performance over time
● Consider ways of taking control measures to improve performance
, M5:2 Responsibility Centres, Materiality and Controllability 2.1 Cost centres
Cost centre
Responsibility accounting ● A cost/expense centre which is part of an organisation which incurs cost
● A system of accounting that segregates revenue and costs into areas of personal ● A responsibility centre where the manager has authority and influence over the
responsibility to monitor and assess the performance of each part of an costs but not over revenue
organisation ● Can be quite small (1 person/machine/expenditure item)
● An accounting system that measures the performance of managers against their ● Can be quite big (an entire department)
budgets
Cost code
Responsibility centre ● To charge actual costs to a cost centre
● A function/department of an organisation that is headed by a manager who has ● Items of expenditure will be recorded with the appropriate cost code
direct responsibility for its performance ● When costs are eventually analysed, there may be some apportionment of the
● Different bases for control: costs of one of the cost centre to other cost centres
○ Cost centre
■ Any unit of an organisation to which costs can be separately Information about the cost centres
attributed ● May be collected in terms of
○ Profit centre ○ Total actual costs
■ Any unit of an organisation to which both revenues and costs ○ Total budgeted costs
are assigned, so that the profitability of the unit may be ○ Total cost variances
measured ● Analysed in terms of ratios
○ Investment centre ○ Cost per unit produced (budgeted and actual)
■ A profit centre whose performance is measured by its return ○ Hours per unit produced (budget and actual)
on capital employed ○ Transport costs per tonne/kilometre (budget and actual)
● Materiality and controllability
○ Should be considered before investigating a variance
Budget
● Will be prepared for each responsibility centre
● The manager will be responsible for achieving the budget targets of that centre
● Performance of that centre
○ Will be monitored
○ The manager will be expected to take appropriate action if there are
significant variances/other targets are not met
, 2.2 Revenue centres 2.3 Profit centres
Revenue centre Profit centre
● A section of an organisation which raises revenue but has no responsibility for ● Any section of an organisation which earns revenue and incurs costs
production ● Eg, a division of a company
● Eg, a sales department ● The profitability of a section can be measured
● Often used in non-profit making organisations ● A responsibility centre where the manager has authority and influence over
● Similar to cost centres - but for recording revenues only costs and revenue of that centre
● Differs from cost centres - accounts for both costs and revenues
Information collected by revenue centres ● Likely to cover a large area of operations
● Based on a comparison of budgeted and actual revenues earned by that centre ○ An entire division within the organisation
○ A separate profit centre for each product/brand/service/each
geographical selling area
● There are likely to be several cost centres within a profit centre
Key performance measure of a profit centre
● Profit
Manager of the profit centre
● Must be able to influence both revenue and costs
● Have a say in both sales and production policies
● A fairly senior person within an organisation
Information requirements by profit centres
● Need to be similarly focused
Performance management
● Aims to establish how well something/somebody is doing in relation to a plan
Types of performance measures
● Financial performance indicators
● Non - financial performance indicators
‘Things’ that undergo performance measurements:
● A machine
● A factory
● A subsidiary company
● An organization as a whole
‘Bodies’ that undergo performance measurements:
● An individual employee
● A manager
● A group of people
Objectives of performance measurement
● Identify aspects of performance that may be a cause for concern
● Explain differences between actual performances and the
plan/expectation/deteriorating performance over time
● Consider ways of taking control measures to improve performance
, M5:2 Responsibility Centres, Materiality and Controllability 2.1 Cost centres
Cost centre
Responsibility accounting ● A cost/expense centre which is part of an organisation which incurs cost
● A system of accounting that segregates revenue and costs into areas of personal ● A responsibility centre where the manager has authority and influence over the
responsibility to monitor and assess the performance of each part of an costs but not over revenue
organisation ● Can be quite small (1 person/machine/expenditure item)
● An accounting system that measures the performance of managers against their ● Can be quite big (an entire department)
budgets
Cost code
Responsibility centre ● To charge actual costs to a cost centre
● A function/department of an organisation that is headed by a manager who has ● Items of expenditure will be recorded with the appropriate cost code
direct responsibility for its performance ● When costs are eventually analysed, there may be some apportionment of the
● Different bases for control: costs of one of the cost centre to other cost centres
○ Cost centre
■ Any unit of an organisation to which costs can be separately Information about the cost centres
attributed ● May be collected in terms of
○ Profit centre ○ Total actual costs
■ Any unit of an organisation to which both revenues and costs ○ Total budgeted costs
are assigned, so that the profitability of the unit may be ○ Total cost variances
measured ● Analysed in terms of ratios
○ Investment centre ○ Cost per unit produced (budgeted and actual)
■ A profit centre whose performance is measured by its return ○ Hours per unit produced (budget and actual)
on capital employed ○ Transport costs per tonne/kilometre (budget and actual)
● Materiality and controllability
○ Should be considered before investigating a variance
Budget
● Will be prepared for each responsibility centre
● The manager will be responsible for achieving the budget targets of that centre
● Performance of that centre
○ Will be monitored
○ The manager will be expected to take appropriate action if there are
significant variances/other targets are not met
, 2.2 Revenue centres 2.3 Profit centres
Revenue centre Profit centre
● A section of an organisation which raises revenue but has no responsibility for ● Any section of an organisation which earns revenue and incurs costs
production ● Eg, a division of a company
● Eg, a sales department ● The profitability of a section can be measured
● Often used in non-profit making organisations ● A responsibility centre where the manager has authority and influence over
● Similar to cost centres - but for recording revenues only costs and revenue of that centre
● Differs from cost centres - accounts for both costs and revenues
Information collected by revenue centres ● Likely to cover a large area of operations
● Based on a comparison of budgeted and actual revenues earned by that centre ○ An entire division within the organisation
○ A separate profit centre for each product/brand/service/each
geographical selling area
● There are likely to be several cost centres within a profit centre
Key performance measure of a profit centre
● Profit
Manager of the profit centre
● Must be able to influence both revenue and costs
● Have a say in both sales and production policies
● A fairly senior person within an organisation
Information requirements by profit centres
● Need to be similarly focused
