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

25-2 Key Success Factors  Key success factors = a small number of factors that are crucial to achieving objectives.  Usually no more than 5.

25-3 Key Indicators  Quantitative measures related to the key indicators.  Highlighted by reporting system.

25-4 Characteristics of Key Success Factors:  Important impact on performance.  Volatile.  If change occurs, prompt action should be taken.  A related key indicator can measure change. E.g., occupancy rates in hotel industry, book- to-bill ratio in semiconductor industry. E.g., occupancy rates in hotel industry, book- to-bill ratio in semiconductor industry.

25-5 Types of Management Reports  Information reports.  Performance reports. Economic performance reports. Economic performance reports. Managerial performance (control) reports. Managerial performance (control) reports.

25-6 Information Reports  Tells management what is going on.  From a variety of sources including the accounting system.  E.g., News summaries, economic data, industry association news.

25-7 Economic Performance Report:  E.G., conventional income statements for a profit center.  Focuses on whether or not investment in an economic entity (e.g., a profit center) should continue, be increased, or decreased.

25-8 Managerial Performance Report  Control report = comparison of actual performance with some standard such as a budget.  Differs from economic performance report because non-controllable items are excluded from the measurement.  Focuses on how well the manager performed during the period.

25-9 Period of Control Reports  Control period = period covered by one report = shortest period of time in which management can usefully intervene.  Flash report, could be real time, indicates change in a key success factor.  E.g., Breakdown of key equipment.  Daily reports, e.g., orders booked.  Monthly reports, overall performance of responsibility centers.

25-10 Timing of Reports  Interval (i.e., time elapsed between end of period and issuance of report) should be short enough for report to be useful.  For report to be timely, accuracy may be sacrificed and approximations used.

25-11 Contents of Control Reports  Compares actual with what performance should have been.  Differences between actual and expected are identified and, if possible, quantified.  Costs for responsibility center are classified as controllable and non-controllable.

25-12 Types of Information in Control Reports  Actual performance.  What performance should have been.  Reasons for differences.

25-13 Essential Characteristics of Control Reports  Related to personal responsibility. (Responsibility accounting.)  Actual performance compared to best available standard.  Significant information highlighted.

25-14 Types of Standards  Predetermined standards or budgets.  Best formal standard.  Historical standards.

25-15 Potential Weaknesses of Standards:  Conditions may have changed.  Don’t know if prior period’s performance was acceptable in the first place.

25-16 External Standards  Benchmarks include standards of other responsibility centers inside or outside of company.

25-17 Highlighting Significant Information  Current problem: information overload.  Reports should highlight significant items.  Exception principle: focus attention where actual differs from standard.  Typically control reports have 3 columns: Actual, standard (i.e., budget), variance.

25-18 Use of Control Reports  Encourages performance by letting managers know that their performance is measured and reported.  Gives insight into conditions that require action to improve future performance by analyzing differences between actual and budget (or other benchmark).

25-19 Feedback Loop  Control reports identifying variances from standard.  Management takes action as a result of analyzing differences identified in control reports.

25-20 Terminology In This Chapter  Terms standard and budget are used interchangeably.  Production cost standards are just one type of standard.

25-21 Steps in the Control Process  Identification.  Investigation.  Action.

25-22 Identification  Identify areas that require investigation.  Good managers are aware of differences between actual and standard before control reports are issued.

25-23 General Rules  Notify superiors of exceptions identified in control reports before control reports reach their superiors.  Engineered costs, specifically production cost standards: The lower the better.  For discretionary costs: good performance often consists of spending the amount agreed on.

25-24 Variances and Standards  Variance is meaningful only if it is derived from a valid standard.  Standard may not be accurate for either or both of 2 reasons: Standard was not properly set. Standard was not properly set. Conditions are different than anticipated in the standard. Conditions are different than anticipated in the standard.

25-25 Investigation  Investigate significant variances to ascertain whether action is necessary.  Starts with conversation between superior and manager of responsibility center.

25-26 Action  Act when investigation indicates need for action.  If performance is good, a pat on the back is appropriate.  Do not to over emphasize short-term performance at the expense of long-term performance.

25-27 Major Characteristics of Quality Improvement  A focus on serving customers.  Systematic problem solving using teams of front line workers.

25-28 Continuous Improvement  Produces better results when there is an explicit attempt to measure and report results achieved.  Usually focused on activities at lower levels in the organization.  Key indicators are tracked; frequently using charts and graphs. These indicators are likely to be non-financial. These indicators are likely to be non-financial.

25-29 Why Standard Costs Hamper Continuous Improvement  Managers focus investigation on unfavorable variances from standard. Favorable variances may provide insight on how to improve performance. Favorable variances may provide insight on how to improve performance.  People stop trying to improve once they reach standard. Otherwise standard may be tightened. Otherwise standard may be tightened.

25-30 Incentive Compensation: 1 of 2  Many companies reward profit and investment center managers based on actual performance compared to budget.  Typically based on annual performance.  Managers at higher levels receive a higher percentage of compensation in bonuses.

25-31 Incentive Compensation: 2 of 2  Most bonus plans have a quantitative aspect and a judgmental aspect.  Few bonus plans are purely based on mechanical calculations.  Time horizons for at least a portion of the performance bonus is longer at higher levels.