590 Accounting: Business Reporting for Decision Making
Summary of learning objectives
14.1 Explain the importance of measuring organisational performance and outline common
frameworks and reports used to assess and report organisational performance.
Measuring the performance of entities helps to ascertain the achievement of the
entity’s objectives. The performance of the entity can be reported using general purpose finan-
cial statements, social and environmental reports and integrated reports. An entity can also
use a framework such as the balanced scorecard to help link its strategy to key performance
metrics.
14.2 Outline common organisational structures, responsibility centres and reasons for divisional
performance evaluation and generate divisional performance reports.
Common organisational structures include functional, geographical and enterprise-based
groups. Responsibility centres include cost centres, revenue centres, profit centres and invest-
ment centres. The preparation of divisional performance reports is designed to help evaluate
the division’s performance, to provide a guide for the pricing of products and services, and to
evaluate the level of investment in each division.
14.3 Apply investment-centre performance evaluation measures such as return on investment
(ROI), residual income (RI) and economic value added.
Common measures to evaluate investment centre performance include return on investment
(ROI), Du Pont ROI, residual income (RI) and economic value added (EVA).
ROI = Profit/Investment.
- Du Pont ROI = Return on sales × Investment turnover.
- Residual income (RI) = Profit before tax – (Required rate of return × Investment).
- EVA = Net operating profit after tax − (Cost of capital × Capital).
For the purposes of ROI and RI calculation, ‘investment’ can be defined as original cost,
written-down value or current cost.
14.4 Examine the use of environmental and social performance measurement.
The measurement of environmental and social performance is needed to promote business
sustainability.14.5 Discuss the issues surrounding individual performance measurement.
There is a need to incorporate individual performance measures that capture the performance
on multiple tasks, individual and team-based rewards, and short- and long-term rewards.14.6 Assess the use of non-financial performance measures.
Non-financial performance measures are measures that do not have a finance focus and are nor-
mally operational. Incorporating non-financial measures in the evaluation system can give more
information about performance.Key terms
Balanced scorecard Performance measurement that weighs performance in four perspectives:
financial, customer, internal business processes, and innovation and learning.
Business unit Division or segment of an entity.
Cost centre Division of an entity that is solely responsible for providing a service or product at
minimal cost.
Du Pont ROI Measure of performance based on economic return relative to invested resources,
calculated as ROI = Return on sales × Investment turnover.
Eco-efficiency A focus on the efficient use of resources to minimise their impact on the environment.