ACCA Applied Skills · Performance Management

Specific performance analysis issues in not-for-profit organisations and the public sector: formula sheet

Full chapter guide

Key formulas

Economy: Economy = spending the minimum cost for the required quality and quantity of inputs; Concerned with inputs. Example: buying supplies at the lowest price that still meets the quality standard.
Efficiency: Efficiency = outputs ÷ inputs (or the output achieved for a given input); Concerned with how well inputs convert into outputs, such as patients treated per nurse hour.
Effectiveness: Effectiveness = outputs achieved compared with the objectives set; Concerned with whether the organisation achieved its aims, such as the improvement in patient health.
Value for money: Value for money = economy + efficiency + effectiveness; Often called the three Es. Cheap inputs are not good value if the service fails to meet its aims.
Economy: Economy = actual cost of inputs compared with budgeted or expected cost of the same quality inputs (e.g. cost per hour of nurse time, cost per kg of food); Spending less is only economical if quality is held constant. It is about the price paid for inputs.
Efficiency: Efficiency = outputs ÷ inputs (e.g. patients treated per nurse hour), or inputs ÷ outputs (e.g. cost per patient treated); Compare with a target, a prior period or a similar body. Higher outputs per input, or lower input per output, is better.
Effectiveness: Effectiveness = actual outcome or output achieved compared with the objective or target (e.g. pupils reaching pass grade ÷ pupils entered); Needs a clear objective. Judge against the objective, not against cost.
Chain of resources: Inputs → Outputs → Outcomes; Economy relates to inputs. Efficiency links inputs and outputs. Effectiveness links outputs or outcomes to objectives.
Value for money: VFM = economy + efficiency + effectiveness together; Each E alone can mislead. Assess all three.
Economy: Economy = spending less on inputs of the right quality (actual cost of inputs compared with planned or benchmark cost); Example indicator: cost per nurse hour or cost per textbook bought. Cheapest is not best if quality falls.
Efficiency: Efficiency = outputs ÷ inputs (or inputs ÷ outputs for a cost per unit); Example indicator: patients treated per bed, or cost per pupil. Compare with a target or a similar body.
Effectiveness: Effectiveness = degree to which outputs or outcomes achieve the stated objectives; Example indicator: percentage of pupils reaching a set grade, or the proportion of patients recovering.
Cost per unit of service: Cost per unit = total cost of the service ÷ number of units of service delivered; Units can be patient-days, pupils taught or meals served. Define the unit carefully.
Charity fundraising efficiency: Fundraising cost ratio = fundraising costs ÷ funds raised; Lower is generally better, but heavy early investment can raise the ratio in a growth year.
Value for money (the three Es): Economy = inputs bought at lowest cost for suitable quality; Efficiency = most output per unit of input; Effectiveness = outputs achieve the objectives; Effectiveness is the hardest to measure because it needs clear objectives and outcomes, not just outputs.
Efficiency measure (example): Efficiency = Output ÷ Input (or Cost ÷ Output); For example, cost per patient treated. A low figure is not automatically good if quality has fallen.
Problem groups to recall: No profit measure | Non-quantifiable outputs | Multiple stakeholders and objectives | Dysfunctional behaviour | Comparison difficulties | Fixed funding and weak market discipline; Use this list as a checklist when you plan an answer.

Quick revision

Not-for-profit bodies aim to deliver services or benefits, not to maximise profit.
Many have several objectives and stakeholders, such as donors, users, staff and government.
Value for money means getting the best use of resources to achieve objectives.
Economy means buying inputs at the lowest cost for the right quality.
Efficiency means getting the most output from the inputs used, or using the least input for a given output.
Effectiveness means achieving the objectives or intended outcomes.
Economy can conflict with effectiveness: cheap inputs may reduce quality or results.
Use both financial and non-financial measures, and compare with targets, past periods or similar bodies.
Outputs are often hard to measure and value, and outcomes may appear much later.
Measures can distort behaviour if staff focus only on what is measured.
Always link your answer to the organisation in the scenario.

Common mistakes

Saying NFP organisations have no financial objectives. Fix: Say that finances are a constraint, not the aim. They must live within funding and avoid losses, and surpluses are reinvested.
Treating efficiency and effectiveness as the same thing. Fix: Efficiency is output per unit of input. Effectiveness is achieving the objective. A body can be efficient but ineffective.
Treating economy as simply spending less. Fix: Economy means the lowest cost for the required quality. Cheaper inputs of lower quality are not true economy.
Mixing up efficiency and effectiveness. Fix: Efficiency is output per input (doing things right). Effectiveness is achieving objectives (doing the right things).
Suggesting profit or ROI as the main measure for a charity or public body. Fix: Start from the service objectives. Use cost and quality indicators, and mention financial constraints like staying within budget.
Mixing up economy, efficiency and effectiveness. Fix: Economy is input cost, efficiency is output per input, effectiveness is achieving objectives. Check which part of the process the indicator measures.
Treating profit as the main measure for an NFP body. Fix: Start from the organisation's service objectives. Use financial figures only for control of cost and funds.
Listing problems without applying them to the scenario. Fix: Quote a fact from the scenario for each problem and explain its effect there.

Exam tips

Always anchor your answer to the scenario. Use the organisation's own services, funders and users in each point.
For 'why is it difficult' questions, cover multiple objectives, non-financial outputs, attribution and stakeholders. Make each a separate point.
Show you know the three Es are different by giving a separate measure for each.
In Section B objective tests, watch for options that claim a single clear objective or an easy profit measure. These are usually wrong.
If a question asks for measures, include a limitation of each. Examiners reward balanced points.
Always define each E in one line before calculating. It earns marks and keeps you clear.
In calculation questions, state the benchmark you compare with. If none is given, say what you would use.
Match the E to the data. If no objective or outcome data is given, say effectiveness cannot be assessed.