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Performance measurement can describe as a success of a work group. Performance is refers to output, the process of the results of available, products or services, evaluation and comparison a relatively to objective and other organizations. Performance also can be expressed in non-financial and financial aspects.
Traditional performance measures the cost of basis of accounting information, it has provided support for the quality of their trip to organizations because the process of performance does map and customer can see the improvement. Besides, the successful include of total quality management which is the improvement performance measurement by the client and the result of delivery to the stakeholders.
The purpose of the measurement does not know how to make your business performance but to enable it to perform even better. The implementation of the ultimate goal of performance measurement of system is to improving the performance of your company. However, if it can get right to your performance test, the result of the data will show you where you are and how you will do it. (Kafelnikov)
Performance evaluation of modern technology is more focused on the staff, so that employees may have the responsibility and the employee to participate directly in charge of their daily rarely welcome. Because modern evaluation methods draw on a variety of sources, they also created a more comprehensive employee performance perspective. In the turnover or the case of weight management may have conflicts between employees and managers of companies, these assessments can be a more objective method to determine an employee's performance. (Roberts)
Performance measurement is to improve the trigger performance and trends of contemporary performance measure. Besides, it is the emphasized that the scope of the different standards, mainly driven by the early consideration of the cost approach which to use. The performance of a contemporary range of measurement methods have been developing and the cross sectional,
Roles of Financial Accounting Performance Measures
Financial accounting in its present form was designed centuries ago to handle the needs of investors, protection from enthusiasm, and excess of management to whom they have entrusted their money. Second, the main purpose is to provide a record of past performance and it may not guide for the future. However, as transactions become more complex, even the reporting of the past is sufficient open enough to manipulation that various regulations require to the disclosure of standardized data to investors and also those others who have interest in corporate financial activities company. Therefore, there are many detailed rules have been developed by various accounting professional bodies. (Palmer, 2000)
Financial accounting information has plays a very important roles on the valuation of the companies and the corporate governance. (Bushman and Smith, 2001). The financial accounting information and external reporting system measure that the disclosure of audited regularly, measures the financial performance and condition of publicly held corporation quantitative data. In addition, the audited balance sheet, the income statement and cash flow statement, accompanying disclosures of the company and formed the basis of a specific set of information available to investors and regulators (Bushman and Smith, 2003).
In addition, Accounting provides the financial position of enterprise information on a regular basis. Accruals accounting provide the information about the transactions and events and also the information of cash flow. Accrual basis of accounting allocate cash flow to a specific period in specific transformation rules. For example, income flows and stocks, assets and liabilities. The Financial accounting has focuses on company financial problems and provides the relevant information and financial concerns of people inside and outside. Financial accounting are mainly focused which is to ensure that the stakeholders have given positive and the right financial information. . (Hopwood, Leuz, Pfaff, 2004)
Roles of Management Accounting Performance Measures
The traditional management accounting emphasizes such issues as the importance of traditional management plans and tracking costs, full use of resources, the organization control of tracking problems, the integration management accounting of the firm financial statements through the inventory valuation and the full cost of the absorption. Besides, optimization through the comparing of the effectiveness of real cost to predetermines standards and so on. (Brian. Et.al, 2001)
Management control included the completion of goals and successfully pursues strategies. Performance measures in management accounting should also be encouraged to target the relevant unit and consistency for the whole and also focus on the future results of operations, all departments. Besides, it also includes the financial and non-financial criteria and provides the means of the communication between the accounting and operating. (Azhar, Abdul Rahman, 2009)
Management accounting has provides the realization of the internal decision to the makers who are charge with achieving of goals of the profitability and liquidity with the information of about the financing, investment business activity. Management control system integrates, motivate, to assist decision, communicate objectives and provide feedback. (Cunningham) Manufacturers always focus on the customer needs and satisfy for the products or services, and the other value add products desire. Always understanding of existing customers and create value for them at all the time. However, we must anticipate and innovation to create new value through innovative products and services and processes and also our customers may not to be aware of their own future needs. It is essential that we must understand the value we provide to our customers at all the time. At the end of the day, our company will provide the high level of value to the growing market place (Brian. Et.al, 2001)
The limitations of the Traditional Financial Accounting Performance Measures
Financial accountings are just the only branch of accounting and that is not perfect. Therefore, there may have also many restrictions as opening up new ways to use other tools of accounting. Financial accounting to know what is the main limiting factor it is very necessary of accountant. Accountants tend to ignore these restrictions. They can be a frustrating pursuit of more and more as a manager is try to equal the different of the needs and weigh the cost of long-term benefits and short-term cost of the different stakeholder. There are reports that financial transparency is low when the controlling shareholder will have more incentive to expropriate minority shareholders (Fan and Wong, 2002)
However, there are some limitations in the current financial. Since they have communicated well about the details of the quantitative of economy data but they does address any of the qualitative economy variables as well. The qualitative properties such the employee morale or military quality management team with the relevant decisions and judgments, financial statement users to make important factors. The current accounting treatment of intangible assets did not measure all the value of this method. Therefore, even if the entity of the human resources and the information of resources are the most value asset, they will ignore the financial statements. As a result the same value of brands and trademark are not been recorded as an asset. Trademark is to establish the value of the enterprise over the time and has a great economy value in the market. (Yadalam, 2010)
The most important of financial statement limitation is that itâ€™s currently only the one such thing is very clears description, which it is an entity how it to be effectively use in the performance of existing assets. That is an absolutely necessary and very critical, thus, the real strength of the entity is performing with the available asset only. The historical cost financial accounting measurement dominated by large extent of the limitations of the dominant measure reflects only the past transactions or events information point, price changes can only wait until the related asset or liability settlement reached.
The limitation of Traditional Management Accounting Performance Measures
Traditional management accounting techniques such as standard costing traditional budgeting and variance analysis and cost accounting methods say that there are less useful in the current manufacturing environment. Management accounting purposes is to explain the actions and organizations in financial decision making. There are many commentators argue that traditional are focus on financial management of information in the decision making led to a very short time span decision making. To maximum of the current profits and the investment of return, the company has invested in the short term assets with less than the long term assets and technology investments. As a result, these decisions will lead to hurt the company's long-term viability (Rombough, 1996)
Accounting measures in the form of control by the results of the foundation, but both professionals and scholars have pointed that there are restrictions on the use of traditional accounting measures for performance evaluation (Cheffi, Rao and Beldi, 2010) JIT is based on providing customers with the principles they need when they want. Such as, the product only is produce when they receive an order. This approach also recognizes that only the value in the manufacturing process increases, therefore, it dedicated to non value added storage of raw materials, such as the removal activities. Although the stock could be held at the good business reasons but the concept of the JIT should not be bear the organizations to meet the production and planning system defect state. But they is important to take notes that because they are not possible in most organizations to no a stock at the all of the time (Steven, 2006)
The traditional of accounting defines the adding direct materials and direct labor and distribution activities, the amount of direct labor or machine hours with all other products on the based on the cost of the product or processes, or service costs. In the service sector, where the labor costs as the main is fixed and it constantly increase in the total cost, therefore, its may will become the part of the overhead and not easy to handle. (Evan and Bellamy, 1995)
Modern Performance measures used in an organization
However, in the traditional accounting performance measures on a popular measure of financial performance measures, they tend to be severely criticized because they do not consider the cost of capital and they are accrual accounting practices by the impact. Besides that, the modern performance measures are promoted based to the company actual profitability measurements. As the value to the concern for investors, value based measure claim that these measures are directly related to performance intrinsic value of stock. (Maditinos, Sevic and Theriou, 2006)
As mentioned, we can see that there are the growing recognition that the traditional management performance and the cost of system does not provide accurate and the relevant management information not clearly. Therefore, there are many of the different of performance measures system has been flatter to focus on the leverage the key to success such as Activity Based Costing (ABC), Balanced Scorecard (BSC), Theory of Constraints (TOC) and the Economic Value Added (EVA), (Rombough, 1996)
Activity Cased Costing, it is the operating of premise and its activity and the process within the corporation such comparing the costing and the values added product or serviceâ€™s and in contrasts on the project of budgeting in line of accountable in the pasted (Evan and Bellamy, 1995) Most organizations are using the ABC system such as cost calculation system, which the official external financial reporting and the preparation of costing systems for decision making and management activities within the activities. As a result, using for ABC system are providing more insight into the fastest growing and least visible element of the cost overhead compare to the traditional method.
Economic Value Added (EVA) is measures the performances of operation, award of credit funds, also the perfect combination of goals achievement with clients, and the awards based on staff perform. Performance measures most directly related to the creation of shareholder wealth over time. (Worthington and West, 2001) As a result, manager may decided to cancel the valuable of the destruction and project of investment.. This will result in the company market value increases. However, these activities do not increase shareholder value may be the key to customer satisfaction or social responsibility. On other hand, EVA also has its limitation as well. Such as, EVA has also link to the economy profit and it will be very difficult to communication with the manager of divisional. It is because they may be only having the certain of control element of equation. Besides, EVA is not related to stock returns, strong as its supporters claim. While EVA provides important information value, profits and other accounting measures also provide important information and should not be discarded only in favor of EVA. (Sharma, 2006)
The control system of management includes the system of budgeting and the balance scorecard. The companies are considering the management cost based activities to further reducing the cost. BSC which includes also the financial performance measurements, performance measures refer to strategy, measurement and results of operations processes performance measurements. Basically measurements are refer to the budget systems. In general, the non financial performance measurement is taken by the whole system. The BSC has includes also the performance of financial measurement, operational of performance measurement, strategy linked performance measures and process of performance measures. The most of the measurement are from the budgets system (Tang)
In addition, If a company need to understand their company financial performance are how going on whether healthy or not. As a business modern accounting performance methods may help them to understand how their company performs and also sees what the affected will lead to company gets out of balance. A financial accounting is focuses on the company financial problems and provides the accurate information and also concern on the internal and external financial problems. On other hand, management accounting is to check on its performance, the company business operation. The two forms of modern financial accounting and management accounting, this can to say on a short-term, narrow, and take effective action in support and it provides a best decision to be a more focused on the company.
Under investigation show that contributes to the corporate governance of the financial accounting information change the decision of senior management role, the existing literature. They have believe that the state control of enterprises are not in their corporate governance and also controlling of the shareholders of non-financial information and some important information processing ability of the financial accounting information is dependent on the replacement of top management decision are unfamiliarity. State owned holding companies in corporate governance, the financial accounting information is the future role of research can be provide more insight if these can be consider into account.
Accounting earnings performance measures have provide much benefit to managers in such specific of areas on focus to improve the financial operations of the company. The cost of economic resources, production management, staff salaries or other operating costs of the enterprises are all influence the accounting earnings of the company. Besides, non essential expenses such like, office supplies or office facilities, marketing cost may also the reason of the performance of accounting income be shaken. These lower of the operating costs are often improved the company accounting revenue. Therefore, good performance measurements under the company are very important because this will affect the company future run.
A performance measurement for any company in the worlds is conducive to all employees to get better understand of the organization goals. However, access to development opportunities for individuals rather than their immediate span of control of the point of view to more limited role in the organization expanded its horizons. On other hand, if measure in the wrong area or measurement error in the organization, the wrong things can prompt an appropriate response and will affect the ability to achieve on the organizational goals in future.