Question

In this discussion, we will examine how firms use budget and other information to evaluate the performance of individuals and of the firm. Students should be able to exhibit a familiarity with these concepts and how they are used. Explain the concepts of responsibility accounting and performance evaluation in your own words. How can these be used by a firm to improve their performance? Describe a balanced scorecard and explain how it differs from a traditional evaluation approach.

Answer 1

1. Firms use budget and other information to evaluate the performance of individuals and of the firm in following ways

a. an indicator of the costs and revenues linked to each of your activities

b. a way of providing information and supporting management decisions throughout the year

c. a means of monitoring and controlling your business, particularly if you analyse the differences between your actual and budgeted income

2. concepts of responsibility accounting and performance evaluation

Responsibility accounting : It is a system of dividing an organization into similar units, each of which is to be assigned particular responsibilities. These units may be in the form of divisions, segments, departments, branches, product lines and so on. Each department is comprised of individuals who are responsible for particular tasks or managerial functions. The managers of various departments should ensure that the people in their department are doing well to achieve the goal. Responsibility accounting refers to the various concepts and tools used by managerial accountants to measure the performance of people and departments in order to ensure that the achievement of the goals set by the top management.

Performance Evaluation : Performance Evaluation is defined as a formal and productive procedure to measure an employee’s work and results based on their job responsibilities. It is used to gauge the amount of value added by an employee in terms of increased business revenue, in comparison to industry standards and overall employee return on investment (ROI).

These both methods can be used as a Benchmarking tool to measure productivity

3.balanced scorecard(BSC)

BSC is an integrated strategic management system that aligns business activities to the strategy of the organization by linking performance measurement with the company’s strategic objectives. It provides a framework to translate the organization's strategy into specific quantifiable performance objectives that can be measured. The performance objectives are measured using the four inter-connected perspectives, i.e., the financial perspective, customer perspective, learning and growth perspective and internal business processes perspective.

BSC analyzes the company performance from the above four perspectives where performance metrics are designed, collected and analyzed relative to each of these four perspectives. The measurements of the four perspectives have inter-dependent relationship between them

It differ from Traditional approach in following way:

Traditional Performance measurement system tracks only the financial performance of the organization relating to profit earned from selling to the capital required. They focus solely on financial measures based on internal accounting reports such as profitability, revenue, cash flows, earnings per share (EPS), return on assets (ROA),economic value added, etc. These measures are known as lag indicators as they only reflect the past data and represent historical performance. Even-though such quantitative performance metrics can control and improve the internal performance of the organization, they can result in incorrect decision-making in the long-term.