Management Accounting Performance Evaluation

Question: Discuss about the Management Accounting for Performance Evaluation. Answer: Introduction:- Performance evaluation is an important process for any type of organization. Performance evaluation helps the management to evaluate the efficiency level of different departments within the organization. The management can detect the flaws and drawbacks of the departments and also identify the strength and factors, responsible for the success of any departments. The overall business activities can be classified under two heads primary activity and secondary activity. Primary activities are related with production and selling directly. Secondary activities mainly provide support to the primary activities. Therefore, all the departments are interlinked with each other and individual performance of any department is greatly affected by other departments. For example, if advertisement department of any organization fails to implement proper advertisement plan, then the sales department cannot generate the sales volume as per the estimation or planning. For such inter connection between all the departments, it becomes very tough to measure the performance of the individual departments separately. However, there are many performance evaluation techniques, which can help the management to evaluate the performances with more ease. Budgetary control through standard costing method is one of the most popular methods of performance evaluation (Rolstadas, 2012). Reasons of Observed Variances:- The standard costing method use to determine whether the departments are over-performing or under-performing by comparing the actual expenses with the budgeted expenses. In reality, the budgetary amount does not match with the actual amounts. Such variances have been observed in the case of Teddy Bear Toy Company also. For most of the cost items, the budgeted amount has differed with the actual amount. There are two main reasons, which have caused such variances are discussed below: Difference in Standard and Actual Price:- For many cost items, it has been noticed that the actual rate per unit of many cost items has differed with the budgeted cost per unit. Such variances in the rate per unit has resulted into difference between the total amount of cost, actually borne for any item and the total amount of cost, allocated in the budget for the item. Such difference, caused by the discrepancy in the price is referred as price variance. Price variance may occur for several factors, such as: Change of Market Price due to inflation or deflation Price change due to change in market demand of the cost items Differences in the negotiation skill of the purchase managers Change in price, caused by new government policies Change in tax implication rates etc. (Kaplan and Atkinson, 2015) Differences in Standard and Actual Quantity:- Another main reason for the variances is the disparity between the budgeted quantity and actual quantity of consumption. If the actual price per unit remains same as per the budget and the actual quantity differs from the budget, then the total amount of actual cost for the cost item also differs accordingly with the budget. Such variance, created for the disparity in the quantity, is stated as efficiency variance. The efficiency variance may caused by several factors, which are mentioned below: Improper estimation of the consumable units of materials or labor hours Change in the efficiency level of labors Change in production process Introduction of advanced technology and equipments Quality of the material and machineries Unexpected fall in supply of labors and materials Change in the supply of skilled labors (DRURY, 2013) Advantages Disadvantages of Incentive Plan:- The company has introduced incentive plan for the departmental heads to boost up the departmental performances. As per the management, the plan has helped a lot to increase the sales revenue of the company. The advantages of such incentive plan are discussed below: Provide additional motivation amongst the employees Create better control over the departmental activities Help to have better control over cost Escalate the efficiency level of the respective departments Help to improve the quality of the output Introduce healthy competition amongst various departments However, the incentive plan may create negative impact on the operation of the business also. The disadvantages of the incentive plan are discussed below: Excessive control over cost factors Compromising with quality for cost control Rising of unhealthy competitions amongst various departments Implementation of strict policies by departmental heads Probability of reduction in output level Grievance amongst employees due to excessive control (Hope and Fraser, 2013) Role of Budget in Performance Evaluation:- Budget is considered as one of the important tools for performance evaluation. It helps the management in various aspects to evaluate the performance of the overall organization as well individual operation teams. By preparing proper budget and implementing it within various departments, the higher management can set the target for each department. At the end of the budgetary period, the management can check whether the departments have produced the budgeted output by incurring the budgeted the expenses or not. If any department provides higher volume of output than the budget by utilizing the budgeted amount or lower amount than the budget, then the performance will considered as excellent or outstanding. In opposite scenario, the performance will be stated as below average or poor. The performance will be treated as satisfactory if the budgeted output and expenses match with the actual output and expenses. Budget can be proved very beneficial if the management implement standard costing method. Then it can evaluate the performance through budget at any point of period (Whitecotton et al., 2013). Modification in Incentive Plan:- As discussed above, though the incentive plan has helped the organization to increase the sales volume, in long run it can affect the business operation negatively also. Therefore, the management should modify the plan so that the company can enjoy the advantages of the plan to the full extent while minimizing its disadvantages. The company should not rely only on the budgetary control but also evaluate the quality of job, provided by the departments. The plan may include some incentive schemes for overall performance of the company. It will motivate the department heads to work jointly instead of focusing on only on the respective departments. Apart from department heads, the employees of each department should also rewarded accordingly, as they are the real factors behind the success of the departments (Otley 2015). Balance Score Card Analysis:- Balance score-card analysis is an effective business tool that can be used by all kind of organizations to align the operational activities with the internal and external vision and goal of the organization (Grant, 2016). It helps to fulfill the perspectives of the organization through its general operations. The analysis process includes some performance dimensions, which are measured by some individual factors, related to the individual dimensions (Perkins et al., 2014). The effective balance score-card for Teddy Bear Toy Company is described in the following table:- Objective Objectives Measures Targets Initiatives Financial Optimization of returns Return on Capital Employed Disposition of Unutilized Assets Growth in the profitability Revenue Growth Leverage base of the asset Utilization rate of Asset Cost Leader Growth in Net Cash Flow Management of the operational Cost Improvement in Sales Volume Rise in Premium Ratio Operational Cost Internal Processes New Innovation in Products Revenue percentage from different products Development of infrastructure Increase in Team Effort Revenue % from news services Development in Inventory Management NPV of different pipeline products and services Development of innovative services % of promise delivery Alliance Programs Utilization of alliances % rate capacity utilization Leverage the research and development Productivity improvement of employee Preventive maintenance Persistent Public Support % of cost reduction Proactive management of associations Index of reliability Service Dispatch mechanization Ensuring reliable services Rating of customer satisfaction Communication with the customers RD for new product development Marketing program Customer Service Excellence Proper maintenance of Inventory Level Optimization of the asset utilization Standard Cost Vs. Actual Cost Budgetary Control Optimization of the return on allocation of the resources - Management of Cost - Enterprise wide management of risk (Lashley, 2015) Learning and Growth Market Driven Competency Strategic coverage ratio Profiling of competency Employee Satisfaction Hours in strategic training Training Program for improving Skills World Class Leadership Rating in satisfaction of employees (scale of 5 points) Compensation link of performance Effectiveness of leadership ratio (scale of 5 points) Training program for leadership Conclusion:- The process of performance evaluation, adopted by Teddy Bear Toy Co. is very effective. However, as discussed above it should amend the incentive plan to eliminate the probable disadvantages of the plan and correlate the business activities with the goal of the company through the balance score card analysis process. References:- DRURY, C.M., 2013.Management and cost accounting. 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