Performance Measurement Part2

ACCA F5 - Performance Management 

ACCA F2 - Management Accounting


Ratio do only provides limited information until compared with its equivalent from industry average, rivals or past period. Comparison provides benchmark. Comparison and benchmarking reveals your performance against benchmark partners. However, simply matching corresponding figures may not always reveal actual performance. Therefore, it is necessary to drill down, identify core activities and adjust corresponding figures to make data comparable.

Corresponding figures : Values assigned to same class and subclass for one or more period, industry average or rival industry. E.g. revenue for last year and present year are corresponding years. OR EPS of two periods.

Comparative figures : Corresponding values adjusted to reflect changes encountered during the period to makes them comparable. E.g. revenue adjusted for inflation. OR Diluted earnings per share.

What does RATIO say?

			E.g. ROCE
R	Reason	What is the Reason for calculating ratio?	Who want this information? Why? ..
A	Accident	Is the figure an Accidental outcome?	How is capital employed calculated?
T	Test	Test the value (i.e. compare)	What is the industry average ROCE?
I	Implications	What does this change mean?	Is the change justifiable? If not ….
O	Other info	Is this consistent with other information?	Other considerable points………

Limitation of ratio analysis:

Ø  Identification of similar industry and gathering data can be difficult in private sector

Ø  Based on financial statements which are subjected to distortion

Ø  Based on past performance which may not be best indicator of future

Ø  Standard, capacity and operational condition changes in different period and different companies are inherited by calculated ratios

Ø  Ratios can be manipulated by adjusting underlying activities (e.g. advance purchase to inflate inventory level , sales and buy back ……)

007 Responsibility centers:

Ratios, CSFs and KPIs for different responsibility centers

Center	CSFs	KPIs
		Ratios	Variances	Non - Financial
Cost	cost control	Payable period	cost variances	employees satisfaction
Profit	marketing policy	ROCE	cost variances and revenue variances	customer satisfaction
Investment	new product developed	ROI	cost variances and revenue variances	brand recognition

ACCA Article: RATIOS - The use of comparisons in