The Importance of measuring and evaluating company performance

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Measurement and evaluation of an organization's performance can help the management to assess the effectiveness and efficiency in different areas such as operations, marketing and human resource management and set the guidance regard for company goal and the objective to the staff to achieve the company's goals and objectives.

Financial accounting and Management accounting both were used for the purpose of the performance measurement tools within an organization.

Objective of Performance Measurement, Finance Accounting, Management Accounting

1.1 Objective of Performance Measurement

Performance measurement is very important element in the total quality management programs. The organization's manager and supervisors should arrange the staffs to take a appropriate job according to their knowledges, ability and skills. Thus, it will be run efficiency of an organization while the staffs handle the job properly. Most importantly, it will help the staff to achieve the company goals and objectives easily.

According to (Nanni et al., 1992), Performance measurement can encourage the achievement of company goals. Hence, performance measurement should be congruent with company strategy.

According to (Robert H. Chenhall) the performance measurement systems can assist the company to assess the effectiveness and efficiency in different areas such as operation, marketing and human resource management has resulted in try from those in these functions to develop the measurement of performance of greater relevance to their areas of management.

According to the theory of 'Profit-maximization' by economist of Adam Smith, it is assumed that when the company making decision that are following a rational decision-making, and will produce at the profit-maximizing output. It means that the objectives of an organization ensure that the maximum profit is made. Undeniable, there are other objectives for an organization. For an example, an enterprise want to provide the high quality of goods to the customers and create the employment opportunity for the society. Therefore, an organization need an effective financial accounting system and effective management accounting system to achieve its the objective. Management is treated as the tools to accomplish organizational goals. Management should be ensure the operations of the firm are carried out efficiently and effectively, ned to have some standards to measure performance of organization. So, the purpose of management is try to ensure that organizations achieve their objectives. Moreover, management also involved measuring actual performance, comparing actual to standard of an organization and taking action to adjust or correct the performance if necessary. Hence, Financial accounting and Management accounting both were used for the purpose of the performance measurement tools within an organization.

According to (Kaplan and Norton, 1992). In response to the traditional emphasis on short-term behavior implied the factor of profit as a important performance indicator, balanced scorecard in the use of funds, such as profit and shareholder value, customer service, innovation, learning and performance of internal processes to propose a more comprehensive view of the company has been advocated.

1.2 Objective of Financial Accounting

The objective of financial accounting is to provide the information about the financial position, performance and adaptability of an organization. It is useful to a wide range of users in making decisions. For example, the information of financial accounting is help the investors to evaluate the performance of the organization whether they should invest. For a listed company, the part of auditor report of financial statement show the performance and overall financial information of the organization to the shareholders. Moreover, the financial accounting is not only focused on performance measurement, but also provided the analysis of liquidity and profitability through rations. The management use the accounting ratio to measure and compare the performance within an organization in the current year and other years.

1.3 Objective of Management Accounting

The main purposes of management accounting is calculate the production cost of different products. The organization will choose to produce the higher profitability goods among the all products. For an organization, the management team prefer to use the Absorption and Marginal costing to compare the unit cost of different products. Absorption costing is the costing system treat all the expenses include the fixed and variable expenses as product cost. In contrast, Marginal costing is the costing system treat variable expenses as product cost. Fixed cost is not included in the product cost. The reason for that is the management accounting ignore the past event and focus on the current issues because fixed cost incurred in the past. For an example, the cost of machine was purchased in last year is sunk cost that is not relevant for decision marking. Thus, management accounting is likely to use the marginal costing to make a decision in the production. It serve as a guide for the determine of price and indicate to management to avoid any inefficiencies and waste. The management of an organization may take action in respect of significant variation of the costs from the budgeted figures and thus to control and take action to correct them. It provide comparative analysis of costs for manager to make the decision to produce the most profitable products. Most importantly, it provide the standard of measurement to control the activities of an organization.

The Fundamental Role of Financial Accounting and Management Accounting in Performance Measurement.

2.1 The Fundamental Role of Financial Accounting in Performance Measurement

Financial Accounting mainly focused on the recording function of daily operation of the organization, often called bookkeeping. Moreover, bookkeeping refer to record all the transactions showing changes in assets, liabilities and capital in an organization. As a result, all the accounting entries are summarized in the financial statement. It show the profitability of an organization. Financial statement such as Profit and loss account and balance sheet represent the performance of financial position during a particular year. The objectives of financial accounting show the net profit earned by an organization. For a company, the financial statements reflect the accounts to shareholders by the directors of way they have run the company during a particular year. Financial accounting provide the financial information within an organization that assist the various users for decision making. These accounts are also given to other interested parties such as the firm's banker, trade payables, the Inland Revenue Department, Financial accounting reporting past performance and financial position.

The auditor prepare the financial statement intended to present a true and fair view. Financial accounting are followed by Hong Kong Statement of Standard Accounting Practice (HKSSAP). Accounting bases are methods for applying fundamental accounting concepts to financial transactions and items.

There are a number of accounting ratios to measure and evaluate the performance in different categories such as 1)profitability, (2)solvency, (3)efficiency, (4)the performance of shareholder and (5)capital structure of an organization. Ratio analysis use the data to calculate base on the financial information that it is show in the financial statement as Balance Sheet and Profit and loss account for the year ended. Moreover, ratio analysis can be used to review and measure the performance between for the same organization in different periods. Besides the information include in financial statement, accounting ratio provide the better understanding and detailed picture of an organization for the users.

The purpose of ratio analysis is to measure the performance of an organization, it represent the performance of an organization in different aspects and to determine a company's performance relative to its competitors. The following ratios is to measure the performance of an organization such as (1)profitability, (2)solvency, (3)efficiency, (4)the performance of shareholder and (5)capital structure. Firstly, Net profit ratio is to measure the performance of profitability of an organization, it can show to the various users how much money was earned by the organization. An other important ratio is Return on capital employed to measure the performance of people invested their money within an organization. Secondly, Current ratio and Acid test ratio focuses the performance of solvency of the organization, the above two ratio can measure the performance of an organization's ability to pay its debts. Hence, Current ratio and Acid test ratio show the performance to external users such as banks or creditors whether there have sufficient money to repay their short term liabilities. Thirdly, The ratio of asset turnover is used to measure the performance of the efficiency of the assets in generating sales within an organization. Fourthly, the ratio such as Earning per share is to measure the performance of shareholder. It indicate how much of an organization's profit can be attributed to each ordinary share of the organization. Finally, the ratio of Capital gearing ratio is to measure the performance of organization's ability to finances its activities. It provided the proportion of an organization's total capital that has a prior claim to profits over those of ordinary shareholder.

According to (Bushman & Smith, 2001), the corporate accounting and external reporting system for the measure and publicly disclose for the auditor to audit the company's financial report, quantitative data can show the company fiancial position and the company's performance for the public held by firms.

According to (Barth & Schipper, 2008), the financial report can help the company underlying economic in a way that the readily understandable by using financial reports.

2.2 The Fundamental Role of Management Accounting in Performance Measurement

Management accounting produces the financial forecasts that guide planning to motivate the employee of an organization to achieve its budgeted and ideal performance. The management team use the budget to guide the activities of an organization. It evaluates performance and uses the information that is produced in order to underpin the forecasts that guide planning. It main emphasis is on producing information for control over current operations and in order to forecast and plan for the future.

According to (Kim Langfield-Smith) Management accounting for use of performance measures to evaluate company divisional and managerial performance and use the standard costing and variance analysis to control production activities.

Management accounting prefer to prepare the budget and how budgets are co-ordinated and used to monitor an identity deviations between them and actual performance. Master budget is the overall summary budget encompassing all the individual budgets. A master budgets have to be linked with various budgets such as Sales budget, Purchase budget, Cash budget and Overhead budget, all the budgets are summarized up to a budgets set of financial statements. We have looked at the sales, production and cash budgets. There are, however, many more budgets for parts of the organization, including: a selling budget, an administration expense budget, a manufacturing overhead budget, a purchases budget. Therefore, the management use their budget to compare with the actual performance in order to evaluate the efficiency of operation within an organization.

Budgeting means that managers can no longer give general answers affecting the running of the firm. They have to put figures to their ideas, and they know that in the end their estimated figures are going to be compared with what the actual figures turn out to be. Management will evaluate the various possibilities to it come true, and will compare the alternatives. This is a very important part of budgeting.

The strategic planning carried out by the board of directors or owners can be more easily linked to the decisions by managers as to bow the resources of the business will be used to try to achieve the objectives of the business. The planning has turn to be an action to guide the employee of an organization to achieve its goals.

Budgets are drawn up for control purposes. The management prepare the budgets in order to ensure the operation of an organization are running of properly and effectively.

3. Limitation of Financial Accounting and Management Accounting in Performance Measurement.

However, there are limitation or constrains for an organization to achieve the objectives. It is difficult for an organization to forecast the sales from the customers due to the market demand for the products or services are uncertainly.

Financial accounting is regarded as bookkeeping and the preparation of financial statements including Balance sheet, Profit and loss account, Cash flow statement, published account and Notes to account. However, management accounting is regarded as forecasting and planning. Management accounting is to forecast future results about the performance of an organization. When forecast results are not achieved it becomes possible to highlight the reasons for the failure to achieve the forecast results.

3.1 Limitation of Financial Accounting in Performance Measurement

The Financial accounting can be said a statement to present the financial position of an organization for the year ended of past year. However, Management accounting is a accounting system to focuses upon the exceptions to the standards in current issue such as Standard accounting. First of all, Standard accounting set the ideal standard and attainable standard of an organization to motivate employee to achieve the objectives. Standard costing set s great deal of predetermined performance when compared with the actual cost incurred within an organization. A standard cost system provides a better means of checking on the efficiency with which production is carried on. The difference between budgets and actual is Variance. The variance divided into adverse variance and favourable variance. Adverse variance seems to be bad performance of an organization. Favourable variance indiciate the activity present the good performance of an organization. For an example, price variance may be incurred in purchasing department. Therefore, The standard costing measure the performance of purchasing department and take action to correct the performance of an organization. If the price variance is favourable, it means the actual cost of material purchased is lower than the budgeted cost for material purchased. The reason for that may be the discount received from the supplier. If the price variance is adverse, it means the actual cost of material purchased is higher than the budgeted cost for material purchased. The reason for that may be the price of material is increase due to inflation. As a result, the organization use variance analysis to assess the difference between budgeted and actual amounts in order to measure efficiency. It can find out the problem of an organization, then to take action to improve the operating efficiency of an organization. The purpose of Standard costing is find out the Variance of various activity within an organization, can check the actual cost exceed the costs of ideal in the current issue.

The financial accounting and management accounting is the only part accounting information of an organization. They are both have their constrains and limitation to perform a fundamental role in the measurement of performance within an organization.

Firstly, financial accounting deals with the past, not the future. The record of financial information are summarized in the financial report is the historic data incurred the past year. while it is occured, it is not possible for an organization to control and correct something wrong. control can be arranged for something that is going to happen but, when it has already happened without being controlled, the activity has ended and it is too late to do anything about it. Therefore, financial accounting information incurred in the past is of little use in measure the performance of an organization in the latest. Hence, it is not practical for an organization to use the past financial information make a decision. These past financial information can said to be the reference for an organization. However, management accounting is not focus on the recording entries according to the Hong Kong generally accept accounting standard, It is the process of forecasting and planning to guide the organization what is going to do to achieve the goals. For an example, the organization use break-even point to make a decision about how many of each product to produce.

According to (McNair et al., 1990) Financial measures are focused on the past event and data, not for the future.

Secondly, the accounting information in the financial statement will not be sufficient for investor and public to measure the performance and the purpose of decision making of an organization. Prepare the financial statement usually historic data, the accounting records are reported in the financial statement is historic data that incurred in the past. While financial accounting must from a legal point of view, it cannot be said to be ideal for controlling the activities within an organization.

According to (Johnson and Kaplan 1978), financial measures had been undermined by technology changes, product life cycles and innovations in production operations.

3.2 Limitation of Management Accounting in Performance Measurement

Management accounting use the ways of planning and budgets to predicate future events effectively. However, the business environment is dynamic and presents many challenges todays. It can be a challenge for the manager of an organization to make a decision. Manager in the organization face of uncertainty environment. Therefore, Plans can't be developed for a dynamic environment. As a result, uncertain environment is the main limitation that affect the types of plans to develop

In management accounting, it is difficult for standard costing to set the right standard. Today, the business environment is changed greatly, so the ideal standard is not easy to set properly and become unsuitable for a dynamic environment.

According to (Stern and Shiely, 2001), management accounting may be impact the measure on decision making could be reduced by combining profit-based and measure with non financial measures.


Financial accounting looks the past performance of an organization but management accounting are used for planning and forecast the performance in the foreseeable future. On one hand, the management need to collect the past data of financial accounting to measure the performance of an organization to determine whether it is a potential business. On the other hand, the management need to use the past data in the field of financial accounting to planning and forecast the practical plan that is suitable for that organization. In order to ensure the organization to achieve its objective, an accurate information for financial accounting system and effective planning for management accounting system is necessary for an organization.