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Qualification - OTHM Level 6 Diploma in Accounting and Business
Unit Name - Business Performance Measurement
Unit Level - Level 6
Unit code - R/617/4376
Unit Credit - 20
Assignment Title - Business Performance Measurement
Learning outcome 1: Understand the principles of performance measurement.
Answer: The principles of performance measurement revolve around establishing clear, relevant, and measurable objectives to effectively track progress and evaluate outcomes. Key among these is alignment, ensuring that measurements directly support the organization's strategic goals. Reliability and validity are crucial, meaning the data collected is consistent and accurately reflects what it intends to measure. Measurements should also be timely, providing information when it's most useful for decision-making, and actionable, offering insights that can lead to improvements. Furthermore, transparency in the measurement process and results fosters trust, while cost-effectiveness dictates that the benefits of measurement outweigh the resources expended. Finally, a focus on continuous improvement means performance measurement is an iterative process, regularly reviewed and refined to maintain its effectiveness.
Learning outcome 2: Understand performance analysis in for profit and not- for-profit organisations
Answer: Performance analysis in for-profit and not-for-profit organizations differs primarily due to their fundamental objectives. For-profit organizations prioritize financial gain and shareholder value, thus their performance analysis heavily relies on metrics like revenue growth, profit margins (gross, net, operating), return on investment (ROI), earnings per share, customer acquisition cost, and customer lifetime value. They focus on efficiency, productivity, and profitability to ensure sustainable growth and maximize returns for owners and investors. In contrast, not-for-profit organizations are driven by a social mission or public good, making their performance analysis more complex and focused on impact and effectiveness. Key metrics for them include program efficiency ratios (how much of the budget goes directly to mission-related activities), donor retention rates, cost per dollar raised, beneficiary satisfaction, volunteer engagement and retention, and overall impact on the community or cause they serve. While financial health is still important for sustainability (e.g., managing expenses, securing funding), the ultimate measure of success for non-profits lies in achieving their mission and demonstrating tangible social value.
Learning outcome 3: Understand specialist cost and management accounting techniques.
Answer: Specialist cost and management accounting techniques offer advanced frameworks beyond basic cost allocation, providing deeper insights for strategic decision-making. Activity-Based Costing (ABC) is a prime example, allocating overheads to products or services based on the activities that drive those costs, rather than arbitrary measures like direct labor hours. This provides a more accurate product cost, especially in complex manufacturing or service environments. Target Costing sets a desired selling price and then works backward to determine the maximum allowable cost for a product, driving innovation and cost reduction throughout the design and production phases. Life-Cycle Costing considers all costs associated with a product from its inception to its disposal, including research and development, production, marketing, and even end-of-life costs, offering a holistic view of profitability. Throughput Accounting, a technique rooted in the Theory of Constraints, focuses on maximizing "throughput" (sales revenue minus direct material costs) by identifying and managing bottlenecks in the production process. Finally, Environmental Management Accounting (EMA) integrates environmental costs and benefits into traditional accounting, helping organizations track and manage their environmental impact, often leading to cost savings and improved sustainability. These techniques empower managers with more granular and relevant financial data to make informed choices about pricing, product mix, investment, and operational efficiency.
Learning outcome 4: Understand performance measurement reporting.
Answer: Performance measurement reporting involves the systematic collection, analysis, and communication of an organization's performance data to relevant stakeholders. The core purpose is to provide clear, relevant, and credible insights that facilitate informed decision-making and drive continuous improvement. Effective reporting goes beyond simply presenting numbers; it should offer context, highlight trends, and provide actionable recommendations. Key elements typically include financial metrics (e.g., revenue, profit, cash flow), operational metrics (e.g., efficiency, productivity), customer metrics (e.g., satisfaction, retention), and employee metrics (e.g., engagement, turnover). Best practices emphasize tailoring reports to the specific audience, ensuring data accuracy and integrity, utilizing clear visuals and data storytelling to convey complex information, and linking performance to strategic objectives. The frequency of reporting varies based on the metric and audience needs, ranging from daily operational dashboards to annual strategic performance reviews, all with the goal of fostering accountability and enabling proactive adjustments.
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Aim: The aim of this unit is to develop learners' understanding of performance management techniques. Learners will compare the systems used in profit making and non-profit making organisations. The learners will gain a working knowledge of performance measurement reporting and specialist cost and management accounting techniques.
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LO 1
Importance of performance measurement: allows comparison to standards that have been set to identify deviations; helps in identifying cost reductions; helps to align activities to strategic plans; identifies best practice; supports reduction of risk; provides accountability and incentives; allows benchmarking to outside organisations; past data can help future forecasting; can support borrowing requirements; management of cash flow and working capital.
Functions of performance measurement systems: records accounting information; records transactions; analyses information for reporting purposes; management of information; resources planning; management and operational control.
Sources of information: internal and external sources; information required for control purposes; costs of direct and indirect data collection; limitations of data.
External factors: factors (stakeholders, market conditions, competition); making allowance for external factors in performance measurement and interpreting performance; identify impact of external factors.
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LO2
For-profit organisations: private sector organisations (manufacturing, service retail etc.); calculate and interpret performance indicators (profitability, liquidity, risk); non-financial performance indicators; ways to improve measurement; analysing past performance; short and long-term views; balanced scorecard; building block model (Fitzgerald and Moon); qualitative targets.
Not-for-profit organisations: public sector and not-for profit organisations; objectives and targets of not-for-profit organisations; issues in measurement (non-quantifiable, multiple objectives, qualitative target setting); how performance can be measured; Value for Money objective; non-financial performance indicators; analysing past performance; long and short- term views.
Divisional performance measurement: reasons for measurement of divisional performance; impact of transfer pricing; issues in divisional performance measurement.
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LO3
Activity-based costing: definition and use; cost drivers; calculation of costs; comparison with absorption-based costing; benefits and limitations.
Target costing: definition; determining target cost in manufacturing and service industries; issues in service industries; benefits and limitations.
Life-cycle costing: definition; determining costs (stages and total); benefits and limitations.
Throughput accounting: definition and purpose; theory of constraints; calculating ratios; multi-product decision-making; benefits and limitations.
Environmental accounting: definition and purpose; methods of managing environmental costs; issues, benefits and limitations.
Transfer pricing: definition and use; issues for organisational performance measurement.
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LO4
Reasons for reporting: management decision making; information for stakeholders; confidentiality and security when reporting.
Needs of different audiences: identifying and meeting needs of different audiences.
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Learning Outcomes- The learner will:
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Assessment Criteria- The learner can:
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1. Understand the principles of performance measurement.
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Analyse the importance of performance measurement to organisations.
Explain the main functions of performance measurement systems.
Determine appropriate sources of information and data to carry out performance measurement.
Analyse external factors that impact on performance
measurement.
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2. Understand performance analysis in for profit and not- for-profit organisations
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Outline the systems and processes involved in performance analysis in for-profit organisations.
Outline the systems and processes involved in performance analysis in not-for-profit and the public sector.
Explain why divisional performance is measured in organisations.
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3. Understand specialist cost and management accounting techniques.
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Evaluate the usefulness of activity-based costing.
Assess how target costing and life-cycle costing are used by business organisations.
Evaluate the relationship between throughput and environmental accounting.
Explain the rationale for transfer pricing.
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4. Understand performance measurement reporting.
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Explain why performance measurement is measured reported in organisations.
Evaluate the needs of different audiences when reporting performance.
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