ACCA Applied Knowledge · Management Accounting
Performance Measurement Overview for ACCA Management Accounting
Performance measurement checks whether a business is meeting its objectives, using financial ratios, non-financial indicators, value for money measures, divisional measures and frameworks like the balanced scorecard. To solve questions, link each measure to an objective, calculate it carefully, then interpret what it tells you.
What this chapter covers
This chapter is about how an organisation knows whether it is doing well. You start with objectives, because a measure only means something when it is linked to a goal. Then you move through financial indicators and ratios, non-financial indicators, value for money in not-for-profit bodies, responsibility centres and divisional performance, and finally frameworks such as the balanced scorecard.
The chapter mixes calculation with judgement. You may calculate a ratio such as return on capital employed, or a divisional measure such as residual income. You may also choose which indicator suits a situation, or explain what a result suggests. In the objective test, both types appear.
It connects closely to the rest of the paper. Budgeting and standard costing give you the targets and variances, and this chapter asks whether those results support the wider objectives. Section B of the MA exam has a ten-mark multi-task question on performance measurement, so this chapter is also tested in depth, not only in Section A.
Performance measurement is one of the three areas that Section B of the MA exam tests with a ten-mark multi-task question, and it can also appear in Section A. The chapter rewards effort because many questions follow repeatable patterns: calculate a ratio, identify the type of measure, or match a measure to a responsibility centre. Students who learn the formulas and the reasoning behind them pick up marks quickly. Those who only memorise definitions tend to lose marks on interpretation.
Performance measurement - overview: topics in the order to study them
- 1Performance Measurement and Organisational ObjectivesStart here, because every later measure only makes sense when tied to an objective such as profit, growth or service quality.
- 2Financial Performance Indicators and Ratio AnalysisThis is the most calculation-heavy topic, so learn it early and give yourself time to practise.
- 3Non-Financial Performance IndicatorsThese complement the financial ratios and show what drives results, such as quality, delivery and customer satisfaction.
- 4Value for Money and Not-for-Profit PerformanceIt reuses the idea of objectives but replaces profit with economy, efficiency and effectiveness.
- 5Responsibility Centres and Divisional PerformanceOnce you know the basic measures, you apply them to cost, revenue, profit and investment centres, and to divisions.
- 6Balanced Scorecard and Other Performance FrameworksStudy it last, as it pulls financial and non-financial measures together into one framework.
How to prepare Performance measurement - overview
Work through the chapter in layers: first understand the purpose of each measure, then calculate it, then interpret it. This suits short objective test questions.
- Read the objectives topic and write down how a measure links to a goal. Keep it short.
- Learn each ratio formula in plain text and write it out from memory until you stop making errors.
- Do small ratio calculations by hand, then say in one sentence what the result means.
- Make a list of non-financial indicators grouped by area, such as quality, customers, staff and operations.
- Practise the difference between economy, efficiency and effectiveness using simple examples.
- Compare return on investment and residual income on the same data, and note when they give different decisions.
- Finish with timed objective test questions, including multiple response and number entry, and review every wrong answer.
Common mistakes in Performance measurement - overview
Mixing up the ratio formulas, for example using revenue instead of capital employed.
Fix: Say what each ratio measures in words first, then write the formula. Practise until the structure is automatic.
Confusing economy, efficiency and effectiveness.
Fix: Link each to a simple example: economy is paying less for inputs, efficiency is getting more output per input, effectiveness is hitting the goal.
Judging a manager on items they cannot control.
Fix: Ask what the manager controls: costs, revenue, profit or investment. Choose a measure that matches.
Assuming return on investment and residual income always give the same decision.
Fix: Work an example with both. Note that a division can reject a project that raises residual income because it lowers its return on investment.
Calculating a ratio correctly but giving no interpretation.
Fix: Compare the result with a target, prior period or benchmark, and state what it suggests about the objective.
Rushing number entry and multiple response questions.
Fix: Read the instruction line first. Select exactly the stated number of options and use the rounding the question requires.
Last-day revision: Performance measurement - overview
- A performance measure must link to an organisational objective.
- Return on capital employed = profit before interest and tax ÷ capital employed.
- Gross profit margin = gross profit ÷ revenue; operating margin = operating profit ÷ revenue.
- Asset turnover = revenue ÷ capital employed.
- Non-financial indicators cover areas such as quality, customer satisfaction, delivery and staff.
- Value for money has three parts: economy, efficiency and effectiveness.
- Economy is about low input cost, efficiency is about output per input, effectiveness is about achieving objectives.
- Cost centres are judged on costs, profit centres on profit, and investment centres on profit relative to investment.
- Return on investment = divisional profit ÷ divisional capital employed.
- Residual income = divisional profit − (capital employed × required rate of return).
- The balanced scorecard has four perspectives: financial, customer, internal business process, and innovation and learning.
- Check units and rounding in number entry questions before you submit.
Performance measurement - overview practice questions
- A hotel group wants to measure customer satisfaction. Which of the following is a non-financial performance indicator?
- A delivery company wants a non-financial performance indicator (NFPI) that measures the quality of its service to customers. Which of the fo…
- Which of the following is a measure that would normally be classified under the customer perspective of the balanced scorecard?
- Division P has operating profit of $240,000 and capital employed of $1,200,000. Its cost of capital is 15%. What is its residual income (RI)…
- Division R reports the following: sales $2,000,000, operating profit $300,000, capital employed $1,500,000. Management wants to compare it w…
- Brightwater Ltd uses the balanced scorecard. Its objective is to lower the cost of poor quality. Which pairing of measure and perspective is…
- A company has current assets of $450,000, of which inventory is $150,000, and current liabilities of $300,000. What is its quick (acid test)…
- A charity spent $240,000 on a literacy programme. It ran 120 classes and 1,800 adults attended in total, of whom 900 reached the target read…
Performance measurement - overview in other exams
The same ground in other exams, if you are preparing for more than one or want another angle on it.
Performance measurement - overview: frequently asked questions
How is performance measurement tested in the MA exam?
It appears in the objective test questions in Section A and in the ten-mark multi-task question in Section B. Expect a mix of calculations, definitions and interpretation.
Do I need to memorise all the ratio formulas?
Yes, you should know the main ones well enough to write them from memory. Understanding what each ratio measures makes them much easier to remember.
What is the difference between ROI and residual income?
Return on investment is a percentage: divisional profit ÷ capital employed. Residual income is a money amount: profit less a required return on capital employed. They can lead to different decisions on the same project.
Which topic should I study first in this chapter?
Start with organisational objectives. Once you know the goal, the financial and non-financial measures that follow are easier to understand and choose between.