MANAGERS

&
ACCOUNTANTS
MEETING
Performance Measurement

The process of assessing the proficiency

with which a reporting entity succeeds, by
the economic acquisition of resources and
their efficient and effective deployment, in
achieving its objectives. (CIMA Official
Terminology, 2005)
 Performance Measures

Financial Non-Financial
Performance Performance
Measures Measures
 Non-Financial Measures
Identify key business drivers of business
performance and success rather than relying on
standardized financial data driven by financial
standards
Link our performance with corporate strategy and
goals and comparing actual performance with
those goals
Compare performance trends over time and
benchmark with competitors or industry averages
Provide leading indicators of business
performance financial reports that provide lagging
information about financial performance
 Financial Measures
Manufacturing Contribution Margin Return on Investment (ROI)

Contribution Margin Residual Income

Short-Run Performance Margin Economic Value Added (EVA)

Segment Margin Delivery Cycle Time

Operating Income Manufacturing Cycle Time

Manufacturing Cycle Efficiency (MCE)

 Manufacturing Contribution
Margin
Sales
Less: Variable manufacturing costs
Manufacturing contribution margin
 Contribution Margin
Manufacturing margin
Less: Variable non-manufacturing costs
Contribution margin
or
Sales
Less: All variable costs
Contribution margin
Short-Run Performance Margin
Contribution margin
Less: Controllable/Discretionary fixed costs
Short-run performance margin
 Segment Margin
Short-run performance margin
Less: Direct (traceable),
committed,
non-controllable fixed costs
Segment margin
 Operating Income
Segment margin
Less: Allocated common costs
Operating income
Pro-forma Statement
Sales
Less: Variable Manufacturing Costs
Manufacturing Contribution Margin
Less: Variable Non-manufacturing Costs
Contribution Margin
Less: Controllable Fixed Costs
Short Run Performance Margin
Less: Non-controllable Fixed Costs
Segment Margin
Less: Common Costs allocated to segment
Operating Income
Return on Investment (ROI)

Income
ROI
Investment
 Residual Income
Income earned by, or expected income
of an investment center
Less: Desired Income*
Residual Income

* DesiredIncome Investment
DesiredRateof Re turn
Economic Value Added (EVA)
After-tex operating income1
Less: Desired income2
Economic Value Added (EVA)

1After-Tax OI EBIT 1 TaxRate

2Desired Income = After-tax WACC*

x (Total Assets-Current Liabilities)

*WACC or Weighted average cost of capital

 Delivery Cycle Time

Receipt of Order Completion of Order

Manufacturing Cycle Time
Process Time + Inspection Time + Move Time + Queue Time
 Manufacturing Cycle
Efficiency (MCE)

Processing Time
Manufacturing Cycle Efficiency
Processing Time Inspection Time
Waiting Time Move Time
Illustrative Example
The following information pertains to the product produced by the Men's Belt Division
of Leather Goods Corporation:
Per Unit
Selling Price P 150
Manufacturing Costs:
Prime Costs 75
Variable FOH 15
Fixed FOH (Total is P80,000) 8
Selling and Administrative Costs:
Variable 18
Fixed (Total is P60,000) 6
During the period, the Division produced 10,000 units and sold 9,000 units, both as
budgeted. There was no beginning and ending work-in-process inventories, and there
was no beginning finished goods inventory during the period.
There was no difference between the total budgeted and actual fixed costs. Variable
manufacturing costs vary with production while variable selling costs vary with sales.
Central administration costs are allocated to the different divisions of the company. For
this period, central administration cost allocated to Men's Belt Division amounted to
P150,000.
Illustrative Example
1) How much is the Men's Belt Division's manufacturing
margin?
2) How much is the Men's Belt Division's contribution
margin?
3) Assume the 40% of the Division's total fixed costs if
controllable by the Division Manager. How much was
the division's short run performance margin?
4) Assume that 40% of the Division's totale fixed costs id
controllable by the Division manager. How much was
the Division's segment margin?
5) How much was the division's operating income during
the period?
Illustrative Example
Answers:
1) D Sales (9,000 units x P150) P1,350,000
- Variable Manufacturing Costs 810,000*
Manufacturing margin P 540,000
*(9,000x[P75+P15])
1) A Manufacturing Margin P 540,000
- Variable Non-Manufacturing Costs 162,000*
Contribution Margin P 378,000
*(9,000xP18)
1) B Contribution Margin P 378,000
- Controllable Fixed Costs 56,000*
Short-run Performance Margin P 322,000
*(40%x[P80,000+P60,000])
Illustrative Example
4) A Short-run Performance Margin P 322,000
- Direct, non-controllable FC 84,000*
Segment Margin P 238,000
*(60%x[P80,000+P60,000])
5) B Segment Margin P 238,000
- Allocated Central Administration Costs 150,000
Operating Income P 88,000
 MEETING
ADJOURNED
SOURCES
Roque, R. S. (1990). Management advisory services (2013 ed.). Malabon,
Metro Manila: Printed and distributed by Roque Press.
http://www.cimaglobal.com/Documents/ImportedDocuments/9_Performa
nce_Measurement.pdf
https://www.wiziq.com/tutorial/67287-Chapter-7-Management-
Accounting-and-Performance-Measurement
http://www.accountingcoach.com/blog/what-is-contribution-margin