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, provide support for the quality of their trip to organizations because they do not map the process performance 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 system is to improve the performance of your organization. However, if you can get right to your performance test, the result of data will show you where you are, how do you do. (Kafelnikov)
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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)
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 an important role in the valuation of the companies and corporate governance (Bushman and Smith, 2001). The financial accounting information and external reporting system measure that the disclosure of audited regularly, measures the financial condition and performance of publicly held company quantitative data. In addition, income statement, audited balance sheet 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. Such as, stocks and flows, assets and liabilities, and income. (Hopwood, Leuz, Pfaff, 2004). Financial accounting focuses on the company financial problems and provides the relevant information and financial concerns of people inside and outside. The main focus of financial accounting is to ensure that stakeholders have given positive and right financial information.
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 units and consistency as a whole, the focus on future results of operations, all departments, including financial and non-financial criteria, and provide means of communication between the accounting and operating. (Azhar, Abdul Rahman, 2009)
Management accounting provides realization of internal decision to makers who are charged with achieving the goals of profitability and liquidity with information about financing, investment business activities 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 services, and other value added products desire. Always understanding of existing customers and create value for them at all the time. However, our customers may not be aware of their own future needs and we must anticipate and innovation to create new value through innovative products and services and processes. 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)
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limitations of traditional financial accounting performance measures
Financial accounting is 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 managers try to balance the different of 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 economic data but they do not address any qualitative economic variables as well. Qualitative properties such as 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 the value of these methods. Therefore, even if the entity of human resources and information resources are its most valuable asset, they ignore the financial statements. As a result the same value of trademarks and brands are not recorded as an asset. Brand is to establish the value of a company over time and has great economic value. (Yadalam, 2010)
Financial statements of the most important limitation is that it is currently only one thing very clear description, it is an entity is how to effectively use the performance of existing assets. This is absolutely necessary and important but 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.
limitations 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 the traditional focus of financial management information in decision-making led to a very short time span decision-making. In order to maximize current profits and return on investment, the company has invested in short-term assets and 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 may be held at the good business reasons but the JIT philosophy should not be held to meet the organizations production and planning system defect state. But it is important to remember that because that are not possible in most organizations to hold no a stock at the all of (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 basis of the cost of the product or process, or service costs. In the service sector, where the labor costs as the main is fixed and it constantly increase in the percentage of the total cost, therefore, it will become part of the overhead and not easy to manage. (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. On the other hand, the modern value-based measures are promoted to the company actual profitability measures. As the value of concern for investors, value based measure claim that these measures are directly related to performance intrinsic value of stock. (Maditinos, Sevic and Theriou, 2006)
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As mentioned earlier, there has been growing recognition that traditional performance management and cost system does not provide accurate, timely and the relevant management information. Therefore, there are the number of different performance measurement system has been touted as to focus on the key levers of success such as Economic Value Added (EVA), Activity Based Costing (ABC), Theory of Constraints (TOC), Balanced Scorecard (BSC) (Rombough, 1996)
The new costing system such as activity based costing, it is operating on the premise and it is the activities and processes within the organization which comparing costs and value added products and services and in contrasts to the line of project budget in line accountability in the past. (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 of operating performance, funds the incentive credit, and also combined with customer perfect goal achievement, rewards of employee performance. Performance measures most directly related to the creation of shareholder wealth over time. (Worthington and West, 2001) Therefore, managers can decide to revoke value destruction activities and investment projects that the wealth of shareholders are critical. 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 also referred to as Economic Profit and it may be difficult to communicate with the divisional managers because they may only have control of certain element of the 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 main management control system including the budget system and balance Scorecard and the company is considering cost based activities management to further reduce costs. Balanced Scorecard system including financial performance measures, performance measures linked to strategy, measures and results of operations Process performance measures. Most of the measures are from the budget system. In general, the non-financial performance measures taken by the whole system. The balanced scorecard system includes financial performance measures, strategically linked performance measures, operational performance measures and Process performance measures. Most of the measures come from the budgetary system (Tang)
Enterprises need to understand their financial performance, access to what kind of things they are doing. As a business accounting methods used, know how they perform and see if the company gets what between what the companies out of balance. Financial accounting focuses on the companyâ€™s financial problems, and provides relevant information, and financial concerns of people inside and outside. As complement to financial accounting, management accounting firm to check its performance, which the company's business, they are not good at the part. There is a form of financial accounting and contact management. This link is also said to be a short-term, narrow focus, is not expressed support for effective action. Accounting between the two forms of contact does not create a short-term focus, and not to create a situation in which there is no effective operational support, it provides better decision-making to be done, for a more focused company.
Once all the data have been collected to determine the current performance, for the medium and long term goals must decide the level of performance. These performance levels must be to achieve and should be divided into discrete short intervals, for example, the target of the next three quarters. To implement the performance measurement framework, a timetable and responsibilities specified in the plan is necessary. Once the plan is implemented and data collection, you can set a new baseline to compare the new standards proposed. The indicator, targets and improvement activities must be cascaded down through the organization, involving people and teamwork in the development of new metrics, data collection and improvement activities. Improvement can start by checking at each level between the current and target performance gap between drivers. Minimum, to determine the set action plans, distribution, and the responsibility of owners.