Issues in managerial accounting

Management Accounting

Performance is measured in a number of ways. Financial performance is common, but there are other measures of performance as well that can be utilized. Internal performance measures are common to most businesses, and can vary in terms of their focus -- efficiency, productivity and managerial accounting measures are all common. Department measures focus on how well a department performs. Gjerde and Hughes (2007) note that the balanced scorecard is a common method of measuring the internal performance of a department. The balanced scorecard uses four different types of measures, of which financial is only one. Learning and growth is another, as is customers. The fourth component of the balanced scorecard is "internal business processes" (BSI, 2011). Thus, non-financial measures such as customer satisfaction, employee satisfaction and training measures, and efficiency measures that form the basis of the internal business processes measure are all of critical importance.

Personnel measures, as noted in the balanced scorecard, revolve around the principle that the higher the quality of the employees, the better the organization will perform. To that end, measures such as education level, training level, employee satisfaction and average tenure all cover areas that can be expected to contribute to overall corporate performance. Production measures are also important for most firms. The underlying theory of production measures it that as long as the production measures are aligned with strategy, excelling at these measures will translate to financial performance. As Mudde and Sopariwala (2008) note, Southwest Airlines uses several non-financial measures of internal performance in its internal evaluation process. These include revenue per passenger mile, fuel costs, market share and other volume and non-volume-based costs.

If we take FedEx as a company, it has as its motto "People, service, profit." This implies that the company should have a number of non-financial performance measures. The average tenure of the workers is important, because the company believes that this drives service, as there is a strong relationship between the company's front line workers and the customers. In addition, service measures like customer satisfaction are also gauged. Production measures -- especially those related to efficiency and airplane load factors -- are also critical in decision-making at the organization. But the PSP philosophy illustrates clearly that FedEx recognizes the link between non-financial measures and financial outcomes. Thus, the company explicitly measures performance in non-financial terms, specifically because it believes that its financial performance will benefit from focusing on non-financial measures.

Overall performance evaluation approaches should include a mix of non-financial and financial measures. This perspective recognizes that financial objectives are not achieved in a vacuum -- that they require work on a number of inputs in order to achieve financial objectives. The use of performance measures of all types will help to orient the activities of the organization towards actions that will have a positive impact on the company's ability to achieve its financial objectives. Good companies recognize the links between the different measures and ensure that when they evaluate their employees and managers on any measure, that this measure contributes to the organization achieving its strategic goals. This approach is highly effective, because of the fact that it recognizes the causal relationship between the different types of corporate activities and the different desired outcomes.