Performance Management

Lecture 1An overview

Semester B

Dr. Haider ShahDr. George H. Papadopoulos

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Reading sources

Management & Cost Accounting Bhimani et al

Module Guide

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Learning Objectives?

o Have an overview of the module

o Review basic concepts relating to performance

o Understand how budgeting is used as an instrument of performance management

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Assessment

Coursework 40% Exam 60%

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Performance Management

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Defining Performance

“Performance is the record of outcomes achieved in carrying out a specified job aspect during a specified period” Kane (1996: 125)

outcomes

specified job aspect

specified period

(Management by Results, MBR) 6

Results & Behaviour Framework

Behaviour

Results

AchievedDid not Achieve

Positive PositiveSuccess

Positive Failure

Negative NegativeSuccess

NegativeFailure

Two dimensional typology of success and failure to view the notion of performance. Performance can be a ‘positive success’ if both results and behaviour were positive. It will be a ‘negative failure’ if both behaviour and results are negative. Performance can be a ‘negative success’ if results are positive but behaviour was negative.

(Brumbach, 1988: p 388)

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Budgeting!

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Planning to Budgeting

What’s common in having a gadget, throwing a party or buying a book?

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Strategic Planning and Budgeting

B u d g etsS tan d ard s

Targ e ts

P lan s

G oa ls

S tra teg yF orm u la tion

Measure

Outcomes

Fitzgerald et al, 1991Fitzgerald et al, 199110

Definition

“The budget for an organization is essentially a model of the expected physical, financial and (to a limited extent) non-financial consequences of all its activities for a certain period in the future.” (Wilson & Chua 1993)

“A Budget is a quantitative statement, for a defined period of time, prepared and agreed in advance, showing planned revenues, costs, assets, liabilities and cash flows”. (CIMA)

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Planning and Control

Identify Objectives Search for alternative

Courses of action Gather information about

alternatives Select alternative courses

of action

Implement decision

planning

Control Compare actual and planned outcome Respond to divergences

Long termPlanning process

Short termBudgeting process

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Why do we need budgets?

They are generally essential for CONTROL CO-ORDINATION COMMUNICATION

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Functions -1

Quantification of plans Ensuring plans are financed Controlling resources and

performance

Otley (1996): p 290

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Forecasting Planning Communication Co-ordination Authorisation Motivation Evaluation

Functions - 2

Few People can carry a male elephant EQL (UMA)

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Budget Terminology

Establishment of objectives, and the formulation, evaluation and selection of the policies, strategies, tactics and action required to achieve them.

CIMA Official terminology

Planning

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The Budget period

A segment of time for which budget is prepared and used

Can be sub-divided into 12 or 13 control periods.

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Budget manual

Instruction manual governing the creation of the budgets within an enterprise.

Contents: Objectives of process explained Organisational structures Principal budgets Administrative details Procedural issues

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Budget committee

Functions of: Co-ordination Issuing of timetables Allocation of responsibilities Provision of information Communication of final budgets Continuous assessment

Assisted by a budget officer; reps from all parts of business

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The budget – where do we start?

The principal budget factor – that which limits the activities of the organisation.

Potential ones are:-

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The budget process

The process will differ from one organisation to another

Preparation may take weeks or months

Budget committee may meet several times

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Steps in preparation

1. Identify limiting budget factor2. Preparation on sales budget3. Preparation of finished goods

budget4. Preparation of production budget5. Preparation of budgets for

production processes6. Prepare raw materials inventory

budget

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Steps in preparation

7. Prepare raw materials purchases budget

8. Prepare overhead cost budgets9. Prepare overhead absorption rates10. Prepare Cash budget11. Prepare Master budget

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Private study

What are different types of budgeting methods? In what way Zero base budgeting and Rolling budgets improve upon traditional method of incremental budgeting?

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