Chapter 25: Reporting and Evaluation McGraw-Hill © 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 25:Chapter 25:

Reporting and Evaluation Reporting and Evaluation

McGraw-Hill © 2004 The McGraw-Hill Companies, Inc. All rights reserved.

25-25-22

Key Success FactorsKey Success Factors

Key success factors = a small number of Key success factors = a small number of factors that are crucial to achieving factors that are crucial to achieving objectives.objectives.

Usually no more than 5.Usually no more than 5.

25-25-33

Key IndicatorsKey Indicators

Quantitative measures related to the key Quantitative measures related to the key indicators.indicators.

Highlighted by reporting system.Highlighted by reporting system.

25-25-44

Characteristics of Key Characteristics of Key Success Factors:Success Factors:

Important impact on performance.Important impact on performance. Volatile.Volatile. If change occurs, prompt action should be If change occurs, prompt action should be

taken.taken. A related key indicator can measure A related key indicator can measure

change.change. E.g., occupancy rates in hotel industry, book-E.g., occupancy rates in hotel industry, book-

to-bill ratio in semiconductor industry.to-bill ratio in semiconductor industry.

25-25-55

Types of Management ReportsTypes of Management Reports

Information reports.Information reports.

Performance reports.Performance reports. Economic performance reports.Economic performance reports. Managerial performance (control) reports.Managerial performance (control) reports.

25-25-66

Information ReportsInformation Reports

Tells management what is going on.Tells management what is going on.

From a variety of sources including the From a variety of sources including the accounting system.accounting system.

E.g., News summaries, economic data, E.g., News summaries, economic data, industry association news.industry association news.

25-25-77

Economic Performance Report:Economic Performance Report:

E.G., conventional income statements for E.G., conventional income statements for a profit center.a profit center.

Focuses on whether or not investment in Focuses on whether or not investment in an economic entity (e.g., a profit center) an economic entity (e.g., a profit center) should continue, be increased, or should continue, be increased, or decreased.decreased.

25-25-88

Managerial Performance ReportManagerial Performance Report Control report = comparison of actual Control report = comparison of actual

performance with some standard such as a performance with some standard such as a budget.budget.

Differs from economic performance report Differs from economic performance report because non-controllable items are because non-controllable items are excluded from the measurement.excluded from the measurement.

Focuses on how well the manager Focuses on how well the manager performed during the period.performed during the period.

25-25-99

Period of Control ReportsPeriod of Control Reports

Control period = period covered by one report = Control period = period covered by one report = shortest period of time in which management shortest period of time in which management can usefully intervene.can usefully intervene.

Flash report, could be real time, indicates Flash report, could be real time, indicates change in a key success factor.change in a key success factor.

E.g., Breakdown of key equipment.E.g., Breakdown of key equipment.

Daily reports, e.g., orders booked.Daily reports, e.g., orders booked.

Monthly reports, overall performance of Monthly reports, overall performance of responsibility centers.responsibility centers.

25-25-1010

Timing of ReportsTiming of Reports

Interval (i.e., time elapsed between end of Interval (i.e., time elapsed between end of period and issuance of report) should be period and issuance of report) should be short enough for report to be useful.short enough for report to be useful.

For report to be timely, accuracy may be For report to be timely, accuracy may be sacrificed and approximations used.sacrificed and approximations used.

25-25-1111

Contents of Control ReportsContents of Control Reports

Compares actual with what performance should Compares actual with what performance should have been.have been.

Differences between actual and expected are Differences between actual and expected are identified and, if possible, quantified.identified and, if possible, quantified.

Costs for responsibility center are classified as Costs for responsibility center are classified as controllable and non-controllable.controllable and non-controllable.

25-25-1212

Types of Information in Control Types of Information in Control ReportsReports

Actual performance.Actual performance.

What performance should have been.What performance should have been.

Reasons for differences.Reasons for differences.

25-25-1313

Essential Characteristics of Essential Characteristics of Control ReportsControl Reports

Related to personal responsibility. Related to personal responsibility. (Responsibility accounting.)(Responsibility accounting.)

Actual performance compared to best Actual performance compared to best available standard.available standard.

Significant information highlighted.Significant information highlighted.

25-25-1414

Types of StandardsTypes of Standards

Predetermined standards or budgets.Predetermined standards or budgets.

Best formal standard.Best formal standard.

Historical standards.Historical standards.

25-25-1515

Potential Weaknesses of Potential Weaknesses of Standards:Standards:

Conditions may have changed.Conditions may have changed.

Don’t know if prior period’s performance Don’t know if prior period’s performance was acceptable in the first place.was acceptable in the first place.

25-25-1616

External StandardsExternal Standards

Benchmarks include standards of other Benchmarks include standards of other responsibility centers inside or outside of responsibility centers inside or outside of company.company.

25-25-1717

Highlighting Significant Highlighting Significant InformationInformation

Current problem: information overload.Current problem: information overload.

Reports should highlight significant items.Reports should highlight significant items.

Exception principle: focus attention where actual Exception principle: focus attention where actual differs from standard.differs from standard.

Typically control reports have 3 columns: Actual, Typically control reports have 3 columns: Actual, standard (i.e., budget), variance.standard (i.e., budget), variance.

25-25-1818

Use of Control ReportsUse of Control Reports

Encourages performance by letting Encourages performance by letting managers know that their performance is managers know that their performance is measured and reported.measured and reported.

Gives insight into conditions that require Gives insight into conditions that require action to improve future performance by action to improve future performance by analyzing differences between actual and analyzing differences between actual and budget (or other benchmark).budget (or other benchmark).

25-25-1919

Feedback LoopFeedback Loop

Control reports identifying variances from Control reports identifying variances from standard.standard.

Management takes action as a result of Management takes action as a result of analyzing differences identified in control analyzing differences identified in control reports.reports.

25-25-2020

Terminology In This ChapterTerminology In This Chapter

Terms standard and budget are used Terms standard and budget are used interchangeably. interchangeably.

Production cost standards are just one Production cost standards are just one type of standard.type of standard.

25-25-2121

Steps in the Control ProcessSteps in the Control Process

Identification.Identification.

Investigation.Investigation.

Action.Action.

25-25-2222

IdentificationIdentification

Identify areas that require investigation.Identify areas that require investigation.

Good managers are aware of differences Good managers are aware of differences between actual and standard before between actual and standard before control reports are issued.control reports are issued.

25-25-2323

General RulesGeneral Rules Notify superiors of exceptions identified in Notify superiors of exceptions identified in

control reports before control reports reach control reports before control reports reach their superiors.their superiors.

Engineered costs, specifically production Engineered costs, specifically production cost standards: The lower the better.cost standards: The lower the better.

For discretionary costs: good performance For discretionary costs: good performance often consists of spending the amount often consists of spending the amount agreed on.agreed on.

25-25-2424

Variances and StandardsVariances and Standards

Variance is meaningful only if it is derived Variance is meaningful only if it is derived from a valid standard.from a valid standard.

Standard may not be accurate for either or Standard may not be accurate for either or both of 2 reasons:both of 2 reasons: Standard was not properly set.Standard was not properly set. Conditions are different than anticipated in the Conditions are different than anticipated in the

standard. standard.

25-25-2525

InvestigationInvestigation

Investigate significant variances to Investigate significant variances to ascertain whether action is necessary.ascertain whether action is necessary.

Starts with conversation between superior Starts with conversation between superior and manager of responsibility center.and manager of responsibility center.

25-25-2626

ActionAction

Act when investigation indicates need for action.Act when investigation indicates need for action.

If performance is good, a pat on the back is If performance is good, a pat on the back is appropriate.appropriate.

Do not to over emphasize short-term Do not to over emphasize short-term performance at the expense of long-term performance at the expense of long-term performance.performance.

25-25-2727

Major Characteristics of Quality Major Characteristics of Quality ImprovementImprovement

A focus on serving customers.A focus on serving customers.

Systematic problem solving using teams of Systematic problem solving using teams of front line workers.front line workers.

25-25-2828

Continuous ImprovementContinuous Improvement

Produces better results when there is an Produces better results when there is an explicit attempt to measure and report explicit attempt to measure and report results achieved.results achieved.

Usually focused on activities at lower Usually focused on activities at lower levels in the organization.levels in the organization.

Key indicators are tracked; frequently Key indicators are tracked; frequently using charts and graphs.using charts and graphs. These indicators are likely to be non-financial.These indicators are likely to be non-financial.

25-25-2929

Why Standard Costs Hamper Why Standard Costs Hamper Continuous ImprovementContinuous Improvement

Managers focus investigation on Managers focus investigation on unfavorable variances from standard.unfavorable variances from standard. Favorable variances may provide insight on Favorable variances may provide insight on

how to improve performance.how to improve performance.

People stop trying to improve once they People stop trying to improve once they reach standard.reach standard. Otherwise standard may be tightened.Otherwise standard may be tightened.

25-25-3030

Incentive Compensation:Incentive Compensation: 1 of 2 1 of 2

Many companies reward profit and Many companies reward profit and investment center managers based on investment center managers based on actual performance compared to budget.actual performance compared to budget.

Typically based on annual performance.Typically based on annual performance.

Managers at higher levels receive a higher Managers at higher levels receive a higher percentage of compensation in bonuses.percentage of compensation in bonuses.

25-25-3131

Incentive Compensation:Incentive Compensation: 2 of 2 2 of 2

Most bonus plans have a quantitative aspect Most bonus plans have a quantitative aspect and a judgmental aspect.and a judgmental aspect.

Few bonus plans are purely based on Few bonus plans are purely based on mechanical calculations. mechanical calculations.

Time horizons for at least a portion of the Time horizons for at least a portion of the performance bonus is longer at higher levels.performance bonus is longer at higher levels.