Summary Performance management in its simplest form
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Course
Management accounting (MAC3761)
Institution
University Of South Africa (Unisa)
Provides a clear and simple explanation of Performance management, as covered in learning unit 10 of the 2024 curriculum. This is based on the textbook "Principles of Management Accounting - Third Edition."
- Organizations, whether they're retail chains like Woolworths or state facilities
like Tygerberg Hospital, operate with specific purposes. Woolworths aims for
high-quality products, while Tygerberg Hospital aims for aIordable, quality
healthcare. To gauge how well they're fulfilling their purpose, organizations
assess their performance. Shareholders of companies like Woolworths look at
indicators such as share price, earnings per share, and dividends to evaluate
overall performance. Meanwhile, entities like the Department of Health
scrutinize patient care statistics at hospitals like Tygerberg to assess
performance. To ensure overall success, senior managers evaluate the
performance of various units within the organization, such as accounting
departments, as well as the staI within those units.
Performance management and objectives
- Performance evaluation is often retrospective, focusing on assessing past
events. Yet, managers must not only evaluate past performance but also steer
future performance. Analysing past performance can yield insights for managing
future endeavours. For instance, if a retail store's low profits are traced back to
rampant shoplifting, managers may opt to install a better security system to
mitigate losses and boost future profits.
Beyond leveraging backward-looking performance evaluations, managers can
employ forward-looking strategies to enhance future performance. By clearly
communicating performance expectations and rewards for upcoming periods,
managers set a standard for units and individuals. Thoughtfully crafting
performance evaluation criteria for future periods is an eIective method for
ensuring organizational units and individuals align their eIorts with the
organization's objectives.
- Performance management aims to discourage undesirable behaviours while
promoting desirable ones among both units and individuals within an
organization. Determining what actions are desirable hinges on the
organization's nature and purpose. For instance, at Woolworths, customers
often prefer browsing without staI assistance, whereas at Tygerberg Hospital's
trauma centre, prompt personal attention to patients is crucial.
Organizations typically establish a vision or mission statement to outline their
overarching goals. For example, Woolworths aims to become one of the world's
most responsible retailers, while Tygerberg Hospital strives to provide aIordable,
world-class healthcare. These statements guide the formulation of specific
objectives.
Performance evaluation criteria are then developed to measure progress toward
these objectives. Well-crafted criteria enable managers to steer organizational
performance eIectively, ensuring that all prioritized objectives receive attention.
, Performance Management – LU 10
By aligning performance management with these objectives, organizations can
focus on critical aspects that contribute to their mission and vision.
Information for performance evaluation
In performance management, past performance is assessed by forming an opinion on
how well a unit or individual has performed. This opinion is based on measuring
performance using metrics like return on investment and comparing the results to
benchmarks. Comparing performance without benchmarks can lead to unfair
evaluations. Benchmarks could be similar units, industry averages, specific targets, or
past performance.
When comparing units or individuals, it's essential to consider their unique
characteristics and circumstances. Ideally, adjustments should be made to neutralize
diIerences or diIerent benchmarks should be applied. When comparing a unit within
an organization to an independent organization, caution is needed, as the unit may
benefit from resources provided by the larger organization, which might not be fully
accounted for at the unit level.
Additionally, when units operate in diIerent sectors or geographical locations,
economic conditions can significantly impact their results. Therefore, it's crucial to
consider these factors when evaluating performance across diIerent sectors or
regions.
In an organization such as an airline, while striving to serve tasty meals is important,
maintaining a good safety record takes precedence. Areas where an organization must
excel to succeed are termed critical success factors (CSFs). Similarly, not all
performance measures carry equal weight. The most important performance measures
are known as key performance indicators (KPIs). While performance measures gauge
the achievement of objectives, KPIs specifically assess the attainment of CSFs.
Management accounting information
Accounting students are aware that organizations maintain financial records for various
purposes, such as preparing financial statements, calculating taxes, and fulfilling legal
obligations. However, for eIective performance management, relying solely on financial
accounting information may not suIice. Internal information within the organization,
which may not be disclosed externally or may not be financial in nature, is also essential
for managing the performance of units and individuals. This type of information is
known as management accounting information. It constitutes a vital component of the
information managers require to carry out their tasks eIectively.
Responsibility accounting
A responsibility centre is accountable for specific activities, with its performance
overseen by a designated manager. For instance, Nedbank's Helderberg Business Bank
branch serves as a responsibility centre within Nedbank. This branch comprises smaller
, Performance Management – LU 10
responsibility centres, like the sales and credit teams, and is part of a larger
responsibility centre, Nedbank Business Bank, Wine lands Region.
Responsibility accounting is employed to manage the performance of responsibility
centres. It involves determining the revenue and costs to be recorded in the
management accounts of a unit to assess its performance. There are four primary types
of responsibility centres in organizations:
1. Cost Centre: Accountable solely for its costs, with performance management
focused on cost minimization. Cost centres can be categorized into standard cost
centres, with a clear input/output relationship like production departments, and
discretionary cost centres, like research and development, where this relationship
(input/output) is less clear, making performance measurement challenging.
2. Revenue Centre: Responsible only for generating revenues. Sales departments are
typical examples, with performance management primarily aimed at maximizing
revenues. Sometimes, revenue centres also handle marketing-related costs.
3. Profit Centre: Accountable for both costs and revenues. Local branches often fall
under this category, tasked with maximizing profits through eIicient management of
both revenue generation and cost control.
4. Investment Centre: Responsible for costs, revenues, and investments within the
centre. Like profit centres, local branches can be designated as investment centres,
focusing on maximizing profit per unit of investment.
Each type of responsibility centre has its unique focus in terms of performance
management, tailored to its specific responsibilities within the organization.
Performance of units and managers
There is a distinction between the performance of a unit within an organization and the
performance of the manager overseeing that unit. A highly competent manager might
be tasked with leading a struggling unit, while a poor manager could hinder the
performance of an otherwise well-performing unit. Evaluating unit performance helps
senior management allocate resources eIectively among units. Ideally, the evaluation
of a manager's performance should focus on aspects that are under the manager's
control. Here's an example to illustrate this concept:
Let's consider a retail chain with multiple branches. Branch A consistently outperforms
other branches in terms of sales and customer satisfaction. However, despite the
excellent performance of Branch A, its manager, Manager X, is not meeting expectations
in terms of controlling costs and employee turnover.
In this scenario, while Branch A excels, Manager X's performance is lacking in certain
areas that are within their control, such as cost management and employee retention.
Therefore, when evaluating Manager X's performance, senior management should focus
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