Performance Measurement and the Balanced Scorecard

Responsibility accounting occurs when an entity is structured into strategic business units and the performance of these units is measured in terms of accounting results. Managers are then held accountable and rewarded on the basis of the results of their department. Assign responsibility; establish performance measures; evaluate performance; assign rewards. A cost centre is a business unit; it can be a function, activity or an item of equipment. When identified, a manager can be assigned responsibility for it. A profit centre is a business unit which is accountable for both costs and income. An investment centre is where the manager not only has control over the profits of a unit, but also some discretion as to the amount of investment that can be undertaken by the unit. In this case the performance is not only the basis of profit, but also relates to the size of the investment available to generate profits.

The use of budgets is common in the measurement of performance. Rewards can be cash-based or share-based. Financial measures (revenue, turnover, costs) is easy to calculate, efficient to calculate, and provide a standard measure. The major weakness are the numbers can be manipulated, inflation alters monetary value, and inappropriate targets can result in ineffective performance. Non-financial measures (customer satisfaction, suplier reliability, employee morale) can be more readily linked to the firm's strategy, more regularly available, less sussceptible to manipulation.

The Economic Value Added (R) method measures how effectively a company achieves the creation of shareholder value.
EVA = after tax profit + interest - (cost of capital * total capital employed)

A balanced scorecard is a set of measures that provides a comprehensive poicture of a business including financial and operational measures. The operational measures can be the drivers of future financial performance. The four perspectives are financial, customer, internal business processes and learning and growth. Financial perspective is an outcome measure; customer is an outcome measure aimed at assessing customer satisfaction. Internal business perspective is a driver measure. Learning and growth is a dirve measure aimed at improving work practioses.

Operating Key Performance Indicators measure day-to-day operations in a housekeeping meaure. Strategic KPIs measure how effectively an enetity is achieving its strategic objectives.

There is a difference between driver and outcome KPIs. The drive measures those which lead or cause change in outcome measures (e.g., profit margins, return on equity etc).