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Designing Performance Measurement Systems Notes

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This is an extract of our Designing Performance Measurement Systems document, which we sell as part of our Managerial Accounting Notes collection written by the top tier of LSE students.

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Lecture 2: Designing Performance Measurement Systems Topics

* How to measure performance?

* Accounting based measures of performance

* Non-financial measures

* Performance measurement frameworks

* Measuring performance in knowledge-based organizations

* Measuring performance in non-government organizations

How to Measure Performance?

* A single measure:
* Only one quantity is measured and observed

* Multiple measures:
* Several quantities are measured and observed

* Composite measures:
* Separate quantities are weighted and aggregated Accounting-based Measures of Performance

* Many organisations use accounting-based measures of performance to assess how well they have performed
* Examples:
? Profit
? Return on investment
? Residual income
? Economic-value added

* They provide a consistent, comparable and reliable way of measuring performance
* Rules and procedures
* Single unit of measurement

* What are the potential problems with accounting-based measures of performance?
* Are accounting measures of performance the same as shareholder returns?Why is there so little correlation?
Accounting profits and asset values can be distorted Accounting profits are conservatively valued Many intangible assets are excluded
# These may be the greatest source of future value
? i.e. Google:
* Total Assets = $25bn
* Market Capitalization = $166bn Financial numbers do not capture all relevant dimensions of performance Potential for manipulation Focus on outcomes, not processes Short-term Historical Too aggregated Focus on functions and responsibility centres, not activities??

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* So why are accounting-based measures of performance so prevalent?
* Available
* Well understood by managers, superiors, investors, customers, suppliers, etc...
* Objective, reliable and comparable
* Used for a long-time
* A key issue:
? Although technical considerations are important, institutional and behavioural factors often have a very strong effect on the use of accounting information Non-financial measures

* The need for 'better' measures of performance:
* Changes in competition in 1970s and 1980s
* Changes in strategy Johnson & Kaplan, Relevance Lost: The Rise and Fall of Management Accounting, 1987

Course Notes Page 3

Key Points

* Single vs. multiple vs. composite measures

* Accounting measures of performance

* Problems with accounting measures of performance

* Why are accounting measures so prevalent?

* Non-financial measures

* Potential benefits of non-financial measures

* Limitations of non-financial measures

* Performance measurement frameworks

* Cause and effect relationships

* Performance measurement in knowledge-based organizations

* Performance measurement in non-government organizations

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