Implementing strategies is not adequate if individuals who must execute them fall short.
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RESPONSIBILITY CENTERS
Service commitment to customers (on time, without damage) and Controlling costs
Let us suppose that each terminal is treated as a responsibility center. How should the company measure the performance of each terminal, its mangers, and its employees?
Measuring outputs
Measuring outputs is more difficult. This is because: Input may be extended this year but outputs (benefits) may be received over several years (e.g. employee training). It would be difficult to make the causal relationship e.g. marketing expenses, IT investments, accountants and generation of revenue and profits.
Efficiency
Efficiency is generally measured by comparing actual costs to standard costs. Issues:
Standard
costs do not remain stationery. Recorded costs are often different from actual resources (costs) consumption.
Lesson: Establishing a responsibility center is easy; Measuring its efficiency in a reasonable manner is difficult.
Effectiveness
Relationship between a responsibility centers output and its objectives (what it was intended to do or perform or deliver). If the output contributes to satisfying the objectives, the more effective it is. The new advertising and marketing efforts has increased awareness and recognition of our product. Advertising and marketing has been effective.
Role of Profit
The goal of every for-profit organization is earn profits (effectiveness). If the organization could use the least input to get the maximum earnings, profits will be high (efficiency). Therefore, profit is an indicator of both efficiency and effectiveness. However, not every unit within an organization earns profit and therefore, this measure cannot be used for all responsibility centers. Therefore, an organization must establish various types of responsibility centers.
Revenue Centers
Responsibility Centers whose members control revenues but, Not the manufacturing or acquisition cost of the products or service they sell, or The level of investment in the responsibility center. In other words, you cannot link the input to the output.
Expense/Cost Centers
Responsibility centers whose employees control costs, but Do not control their revenues or investment level. Examples: Production department in a manufacturing unit, a dry cleaning business Two types of costs:
Engineered: those costs that can be reasonably associated with a cost center direct labor, direct materials, telephone/electricity consumed, office supplies. Discretionary: where a direct relationship between a cost unit and expenses cannot be reasonably made; Management allocates them on a discretionary basis (e.g. depreciation expenses for machines utilized).
Engineered costs
Should be measurable in monetary terms, outputs in physical quantities. Works well in units such as production, distribution, accounting receivables, payables where repetitive tasks are performed. Developing standard costs for such activities is more reliable than in other cases. Multiply standard cost per unit x no. of units produced or processed = this is the ideal cost. Compare it to actual costs and the difference is indicative of efficiency or lack thereof.
Discretionary costs
Mostly administrative and support service costs More difficult to measure in physical quantities or precisely on monetary terms (e.g. customer relations or even R & D). Discretionary means, management allocates them based on established polices (not arbitrarily). More caution is required while using discretion cost numbers. Difference between budgeted expenses and actual expenses does not indicate efficiency. Suppose if the actual cost is less than budget, does it mean good or bad? Suppose if the actual cost is higher than budget, does it mean good or bad?
Variance Analysis Budge t Actual Unre late d costs Product 1 Product 2 Product 3 Product 4 Total Batch re late d costs Product 1 Product 2 Product 3 Product 4 Total Prod. sus. Costs Product 1 Product 2 Product 3 Product 4 Total Fac. Sus. Costs Total 1,323,000.00 1,232,000.00 2,703,000.00 1,812,500.00 7,070,500.00 159,250.00 104,720.00 169,600.00 33,750.00 467,320.00 125,000.00 168,000.00 256,000.00 355,000.00 904,000.00 1,450,000.00 9,891,820.00 1,601,850.00 1,097,100.00 2,922,750.00 1,330,000.00 6,951,700.00 164,820.00 100,500.00 145,125.00 22,896.00 433,341.00 133,000.00 163,000.00 259,000.00 362,000.00 917,000.00 1,650,000.00 9,952,041.00
Variance 278,850.00 -134,900.00 219,750.00 -482,500.00 -118,800.00 5,570.00 -4,220.00 -24,475.00 -10,854.00 -33,979.00 8,000.00 -5,000.00 3,000.00 7,000.00 13,000.00 200,000.00 60,221.00
Profit Centers
Managers of profit centers control both the revenues and costs of the product or service they deliver. It is like an independent business except it is part of a larger organization (e.g. departmental stores of larger chains Wal Mart, restaurants, corporate hotels such as Hilton, Holiday Inn). The store manager would have responsibility for pricing, product selection, and promotion.
Investment Centers
Responsibility centers whose managers and employees control revenues, costs, and the level of investment. It is also like an independent business (common when an organization acquires another organization e.g. Sears financial centers).
Expense/Cost Centers
Profit Centers
Investment Centers
An alternative to Controllability
Some argue that performance measures should be chosen to influence decision-making behavior. For example, if market prices for raw material is increasing, what can a manager do? Perhaps, enter into long term contract for fixed prices for raw materials. If electricity consumption cost is going up, find out how consumption can be economized (better machines, lighting, reduce waste).
MEASURES OF PERFORMANCE
Measures of performance
Financial measures Nonfinancial measures
Expenses incurred
Revenues earned
profit
ROI/ROCE
EVA
Environment
other
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Rate on capital employed=EBIT/cost of investment
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Economic value added =net operating after tax-economicvalue of assetsin place * weighted cost of capital
Suppliers
HR &safty
Customers
Measures of performance
Operations
Need .?
Helps in identifying the ,decision,actions for avoiding damages and losses Helps to find what actualy goes wrong,for better prevention Helps in determining the accountability for where goes wrong