Management Accounting · Performance measurement - application

Value for Money and Not-for-Profit Performance Measurement

Updated 11 October 2026 · Fact-checked

Value for money (VFM) means getting the best results from the resources used. It is judged by the three Es: economy (spending less on inputs), efficiency (getting more output per input) and effectiveness (achieving the objectives). To solve questions, match each measure to the E it tests.

Understand Value for Money and Not-for-Profit Performance

Not-for-profit (NFP) organisations, such as charities, hospitals, schools and government bodies, do not exist to make a profit. Their aim is to deliver a service or achieve a social goal. So profit and return on investment tell you little about how well they perform.

Instead, many are judged on value for money (VFM). VFM asks whether the organisation uses its limited funds well. It is usually broken into three parts, the three Es.

Economy: buying inputs of the right quality at the lowest cost. It looks at the cost of resources going in.
Efficiency: the relationship between inputs and outputs. You want the most output for a given input, or the least input for a given output.
Effectiveness: whether the outputs achieve the organisation's objectives. It links outputs to outcomes.

The three are linked. A hospital might buy cheap supplies (economy), treat many patients per nurse (efficiency) and yet fail to improve patient health (effectiveness). Good VFM needs all three together. Chasing one can harm another. Cutting costs may lower quality and hurt effectiveness.

Measuring NFP performance is hard. Objectives are often many and hard to quantify. Outcomes may appear years later. Stakeholders such as donors, government, users and staff want different things. Results may depend on factors outside the organisation's control. Because of this, NFPs use a mix of financial and non-financial measures, often with targets, comparisons with other bodies and over time, and user feedback.

Key formulas to remember

Economy: Economy = actual cost of inputs compared with budgeted or benchmark cost of the same quality of inputs; Spending less is only economical if quality is held constant. Example measure: cost per hour of agency nurse.
Efficiency: Efficiency = outputs ÷ inputs (or inputs ÷ outputs); Example: patients treated per doctor, or cost per patient treated. State clearly which way round you use.
Effectiveness: Effectiveness = actual outcome or output achieved compared with the objective or target; Example: percentage of students passing, or waiting time target met.
Link between the 3 Es: Inputs → (economy) → process → (efficiency) → outputs → (effectiveness) → outcomes; Use this chain to decide which E a measure tests.

How to solve Value for Money and Not-for-Profit Performance questions

Use this method for any question on VFM or NFP performance, whether it asks you to classify a measure, calculate one or comment on results.

1Read the question and identify the organisation and its main objective, for example reduce waiting times or educate pupils.
2Pick out what counts as an input (money, staff, supplies), an output (activity done) and an outcome (the result achieved).
3Classify each measure. Input cost or price points to economy. Output per input points to efficiency. Result against objective points to effectiveness.
4Do any calculation carefully, using the same units for both periods or organisations being compared.
5Compare with a target, a prior period or another similar body, and note the direction of change.
6Comment on links between the Es. Say if gains in one came at the expense of another.
7For multiple response items, check each statement against its definition before choosing.

Quickest way: Three-question test

When to use it: Use for objective test questions asking which E a measure or statement relates to.

Ask: is it about the price paid for inputs? If yes, economy.
Ask: is it about output compared with input, like cost per unit or output per hour? If yes, efficiency.
Ask: is it about meeting an objective or the quality of the result? If yes, effectiveness.
If two seem to fit, choose the one the wording stresses: price, rate of output, or goal achieved.

Common mistakes in Value for Money and Not-for-Profit Performance

Treating economy as meaning cheapest at any quality.
Students link economy with low cost and forget the quality condition.
Fix: Define economy as the lowest cost for the required quality. Poor-quality cheap inputs are not economical.
Mixing up efficiency and effectiveness.
Both sound like doing well, so students treat them as the same.
Fix: Efficiency is doing things right (output per input). Effectiveness is doing the right things (achieving objectives).
Calling a cost saving effective.
Students judge success by lower spend alone.
Fix: A saving is economy or efficiency. It is only effective if the objective is still met.
Using profit to judge an NFP.
Profit is the usual measure in commercial questions.
Fix: Use VFM measures and non-financial indicators linked to the organisation's mission.
Ignoring that Es can conflict.
Students treat each E in isolation.
Fix: Comment on trade-offs, such as faster throughput harming quality, and say all three should be balanced.
Comparing figures with different bases.
Rushing through number entry questions.
Fix: Check periods, units and what is included before dividing, and compare like with like.

Worked examples

Example 1

A charity ran a helpline. Last year it spent $120,000 and handled 40,000 calls. This year it spent $132,000 and handled 48,000 calls. Calculate the cost per call for each year and state which E the measure relates to and whether it has improved.

Show the solution

Last year cost per call = $120,000 ÷ 40,000 = $3.00.
This year cost per call = $132,000 ÷ 48,000 = $2.75.
Cost per call links an input (cost) to an output (calls handled), so it measures efficiency.
The cost per call fell by $0.25, so efficiency improved.
This says nothing about whether callers were helped, so effectiveness needs separate measures.

Answer: Cost per call fell from $3.00 to $2.75. This is an efficiency measure and efficiency improved.

Example 2

A public hospital reports: (1) it cut the price paid per surgical kit from $50 to $45 for the same quality; (2) each surgeon performed 5 more operations per month; (3) 90% of patients met the target of recovering within 6 weeks, against a target of 95%. Classify each result by E and comment.

Show the solution

Item 1 is a lower price for the same quality of input, so economy has improved.
Item 2 is more output from the same input of surgeon time, so efficiency has improved.
Item 3 compares the outcome with the objective. 90% is below the 95% target, so effectiveness is not met.
Link them: gains in economy and efficiency do not guarantee the goal is reached. The hospital should check whether faster throughput or cheaper kits reduced quality.

Answer: Item 1 is economy (improved), item 2 is efficiency (improved), item 3 is effectiveness (target missed). VFM is not fully achieved because the key objective is not met.

Exam tips

In objective tests, classify by asking whether the measure is about input price, output per input or goal achieved.
In multiple response questions, check each option against the definitions and select exactly the number stated.
Number entry questions often ask for cost per unit. Check the units and round as instructed.
When commenting, mention that NFP objectives are hard to quantify and that stakeholders have different aims.
Remember the quality condition in economy and the trade-offs between the Es.

Practice questions from Performance measurement - application

Value for Money and Not-for-Profit Performance in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Value for Money and Not-for-Profit Performance: frequently asked questions

What are the 3 Es in value for money?

They are economy, efficiency and effectiveness. Economy is low cost for the right quality of inputs. Efficiency is output per unit of input. Effectiveness is achieving the objectives.

What is the difference between efficiency and effectiveness?

Efficiency is about using resources well to produce outputs, such as patients treated per nurse. Effectiveness is about whether the outputs achieve the goal, such as better patient health. An organisation can be efficient but not effective.

Why is profit not a good measure for not-for-profit organisations?

Their purpose is to provide a service or social benefit, not to make money. Profit would not show whether the mission is met. They use VFM and non-financial indicators instead.

Why is performance hard to measure in the public sector?

Objectives are often many, vague and hard to quantify. Outcomes can take years to show, and stakeholders want different things. Results can also depend on factors outside the organisation's control.