Question

TOPIC: Decentralization and modern performance management systems in accounting

Compare different Performance measures.

Which measures encourage managers to work harder?

Answer 1

Decentralization management systems;

Decentralization is a business structure in which the decision-making is made at various levels of the organization. Typically, decentralized businesses are divided into smaller segments or groups in order to make it easier to measure the performance of the company and the individuals within each of the sub-groups.

Modern performance management systems;

evaluation of performance of a particular division of business /paricular systm via modern tecniq. Modern performance management is a practical reflection of advancements in organizational culture and management. Just like the people it's designed to support, modern performance management never stops learning, growing, and developing.

Compare Different Performance measures...

A good performance measure should
▪ Provide incentive to the divisional manager to make decisions which are in the best interests
of the overall company (goal congruence).
▪ Only include factors for which the divisional manager can be held accountable.
▪ Recognise the long-term objectives as well as short-term objectives of the organisation.

1st.Return on Investment (ROI)

Instead of focusing purely on the absolute size of a division’s profits, most organizations focus on
the ROI of a division. ROI expresses divisional profit as a percentage of the assets employed in
the division. Assets employed can be defined as total divisional assets, assets controllable by the
divisional manager or net assets. ROI is a common measure and thus is ideal for comparison
across corporate divisions for companies of similar size and in similar sectors.

2nd Residual Income (RI)  

To overcome some of the dysfunctional consequences of ROI, the residual income approach can
be used. For the purpose of evaluating the performance of divisional managers, residual income is
defined as controllable contribution less a cost of capital charge on the investment controllable by
the divisional manager. For evaluating the economic performance of the division residual income
can be defined as divisional contribution less a cost of capital charge on the total investment in
assets employed by the division.

Economic Value Added (EVA)

.In practice, many organizations use profit-based measures as the primary measure of their
financial performance. Two problems relating to profit in this area are:
▪ Profit ignores the cost of equity capital. Companies only generate wealth when they generate
a return in excess of the return required by providers of capital – both equity and debt. In
financial statements, the calculation of profit does take into account the cost of debt finance,
but ignores the cost of equity finance.
▪ Profits calculated in accordance with accounting standards do not truly reflect the wealth that
has been created, and are subject to manipulation by accountants.
EVA is a performance measurement system that aims to overcome these two weaknesses.

Shareholder Value Added (SVA)
A variation along the same concept as EVA. The main aim of the organisation is to add value to
shareholder wealth.

Triple Bottom Line (TBL)
TBL expands traditional accountancy reporting systems, looking at social and environmental
performance, rather than simply financial performance. This can be used to help encourage each
division and manager within the organisation to act in a socially responsible manner.

Measures encourage managers to work harder

TBL expands traditional accountancy reporting systems, looking at social and environmental
performance, rather than simply financial performance. This can be used to help encourage each
division and manager within the organisation to act in a socially responsible manner.