Académique Documents
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Evaluation
• Financial • Time
• Customer and Market • Flexibility
• Quality • Innovation and Learning
• Sustainability
Exhibit 3.1 The Scope of Business and Operations Performance Measurement
Financial Measures
• Often take top priority in for-profit organizations.
p 12
Step Identify direct costs i.e. Direct Materials, Direct Labor,
Direct expense
Cost
Objects
Product A Product B Product C
Activity Cost
Activity Cost Drivers
Pools
a) Number of units
Production b) Number of set-ups
c) Number electricity units consumed
a) Number of sales personnel
Marketing b) Number of sales orders
a) Number of research projects
Research & b) Personnel hours spend on projects
c) Technical complexities of the projects
Development
a) Number of service calls
Customer Service b) Number of products serviced
c) Hours spend on servicing products
Purchasing a) Number of purchase orders
Material Handling a) Number of material requisitions
I. Unit-level
activities
The costs of direct materials, direct labor, and machine maintenance
are examples of unit-level activities.
Description A B
Resources required/unit:
Direct material (AED.) 25 62.5
Direct labor (Hours) 10 10
Machine time (Hours) 5 5
1. ABC system provides accurate costing of products/services.
2. Management has better understanding overheads cost.
3. The system utilizes unit cost rather than total cost unlike
absorption costing system.
4. ABC system integrates well with Six Sigma and other
continuous improvement programs.
5. The in-depth study of overheads cost under ABC system
makes all wastages visible to management and all non-
value added activities known to them. Thus, better controls
can be exercised on them.
6. It supports performance management and scorecards.
7. The system enables costing of processes, supply chains,
and value streams.
8. ABC system helps in benchmarking other products.
1. Implementing ABC system requires a big budget initially.
2. After implementation, the maintenance of the system is costly. Data
concerning numerous activity measures must be collected , checked, and
entered into the system on regular basis.
3. ABC system produces numbers such as product margins that are different
from the profits produced by traditional costing system. Management may
be double minded as they are used to work with traditional costing system,
as a requirement for external reporting.
4. ABC system generated data can be misinterpreted and must be used
with care when used in making decisions. Costs assigned to products,
customers and other cost objects are only potentially relevant.
5. Reports generated by ABC system do not conform to Generally
Accepted Accounting Principles (GAAP). Consequently, an organization
involved in ABC should have two cost systems - one for internal use and
one for preparing external reports.
The initiative to implement ABC system must be
strongly supported by the management. The workings
involve a tremendous job of making inquiries from
employees.
ActivityBased Costing System 2
7
Flexibility
• Flexibility is the ability to adapt quickly and effectively to
changing requirements.
Quantity of Output
Productivity = [3.1]
Quantity of Input
Productivity measures include units produced/labor hour,
airline revenue per passenger mile, meals served/labor
dollar.
Linking Internal and External Performance
Measures
• Managers must understand the cause and
effect linkages between key measures of
performance. These relationships often explain
the impact of operational performance on
external results.
Therefore:
VLC (P)(RF)(CM)(BLC) =
($100)(0.25)(0.50)(1/0.4) = $31.25 over the buyer’s life cycle
Then:
VLC (P)(RF)(CM)(BLC) =
($100)(0.25)(0.50)(1/.2) = $62.50
Source: 2011-12 Baldrige Criteria for Performance Excellence, U.S. Depart. of Commerce
The Balanced Scorecard Model
Purpose is to translate strategy into measures that
uniquely communicate an organization’s vision.
Four perspectives:
1. Financial—value to shareholders
2. Customer—customer satisfaction and market
growth
3. Innovation and Learning—people and
infrastructure
4. Internal—processes that drive the business
Exhibit 3.4 The Balanced Scorecard Performance Categories and Linkages
Source: Kaplan R. S., and Norton, D. P., “The Balanced Scorecard—Measures That Drive Performance,” Harvard Business Review, January–February 1992, p. 72.
The Value Chain Model
• Evaluates performance throughout the value
chain by identifying measures associated
with suppliers, inputs, value creation
processes, goods and service outputs and
outcomes, customers and market segments,
and supporting management processes.
Exhibit 3.5 Examples of Value Chain Performance Measurements
Service-Profit Chain Model
• Most applicable to service environments.