The Importance of measuring and evaluating company performance Essay

Introduction

Measurement and rating of an organisation ‘s public presentation can assist the direction to measure the effectivity and efficiency in different countries such as operations, selling and human resource direction and put the counsel respect for company end and the aim to the staff to accomplish the company ‘s ends and aims.

Fiscal accounting and Management accounting both were used for the intent of the public presentation measuring tools within an organisation.

Objective of Performance Measurement, Finance Accounting, Management Accounting

1.1 Objective of Performance Measurement

Performance measuring is really of import component in the entire quality direction plans. The organisation ‘s director and supervisors should set up the staffs to take a appropriate occupation harmonizing to their cognitions, ability and accomplishments. Therefore, it will be run efficiency of an organisation while the staffs handle the occupation decently. Most significantly, it will assist the staff to accomplish the company ends and aims easy.

Harmonizing to ( Nanni et al. , 1992 ) , Performance measuring can promote the accomplishment of company ends. Hence, public presentation measuring should be congruent with company scheme.

Harmonizing to ( Robert H. Chenhall ) the public presentation measuring systems can help the company to measure the effectivity and efficiency in different countries such as operation, selling and human resource direction has resulted in attempt from those in these maps to develop the measuring of public presentation of greater relevancy to their countries of direction.

Harmonizing to the theory of ‘Profit-maximization ‘ by economic expert of Adam Smith, it is assumed that when the company doing determination that are following a rational decision-making, and will bring forth at the profit-maximising end product. It means that the aims of an organisation guarantee that the maximal net income is made. Undeniable, there are other aims for an organisation. For an illustration, an endeavor privation to supply the high quality of goods to the clients and make the employment chance for the society. Therefore, an organisation need an effectual fiscal accounting system and effectual direction accounting system to accomplish its the aim. Management is treated as the tools to carry through organisational ends. Management should be guarantee the operations of the house are carried out expeditiously and efficaciously, ned to hold some criterions to mensurate public presentation of organisation. So, the intent of direction is try to guarantee that organisations achieve their aims. Furthermore, direction besides involved mensurating existent public presentation, comparing existent to standard of an organisation and taking action to set or rectify the public presentation if necessary. Hence, Financial accounting and Management accounting both were used for the intent of the public presentation measuring tools within an organisation.

Harmonizing to ( Kaplan and Norton, 1992 ) . In response to the traditional accent on short-run behaviour implied the factor of net income as a of import public presentation index, balanced scorecard in the usage of financess, such as net income and stockholder value, client service, invention, larning and public presentation of internal procedures to suggest a more comprehensive position of the company has been advocated.

1.2 Objective of Financial Accounting

The aim of fiscal accounting is to supply the information about the fiscal place, public presentation and adaptability of an organisation. It is utile to a broad scope of users in doing determinations. For illustration, the information of fiscal accounting is help the investors to measure the public presentation of the organisation whether they should put. For a listed company, the portion of auditor study of fiscal statement demo the public presentation and overall fiscal information of the organisation to the stockholders. Furthermore, the fiscal accounting is non merely focused on public presentation measuring, but besides provided the analysis of liquidness and profitableness through rations. The direction usage the accounting ratio to step and compare the public presentation within an organisation in the current twelvemonth and other old ages.

1.3 Objective of Management Accounting

The chief intents of direction accounting is calculate the production cost of different merchandises. The organisation will take to bring forth the higher profitableness goods among the all merchandises. For an organisation, the direction squad prefer to utilize the Absorption and Marginal costing to compare the unit cost of different merchandises. Absorption costing is the bing system dainty all the disbursals include the fixed and variable disbursals as merchandise cost. In contrast, Marginal costing is the bing system dainty variable disbursals as merchandise cost. Fixed cost is non included in the merchandise cost. The ground for that is the direction accounting ignore the past event and focal point on the current issues because fixed cost incurred in the yesteryear. For an illustration, the cost of machine was purchased in last twelvemonth is done for cost that is non relevant for determination marker. Therefore, direction accounting is likely to utilize the fringy costing to do a determination in the production. It serve as a usher for the determine of monetary value and bespeak to direction to avoid any inefficiencies and waste. The direction of an organisation may take action in regard of important fluctuation of the costs from the budgeted figures and therefore to command and take action to rectify them. It provide comparative analysis of costs for director to do the determination to bring forth the most profitable merchandises. Most significantly, it provide the criterion of measuring to command the activities of an organisation.

The Fundamental Role of Financial Accounting and Management Accounting in Performance Measurement.

2.1 The Fundamental Role of Financial Accounting in Performance Measurement

Fiscal Accounting chiefly focused on the entering map of day-to-day operation of the organisation, frequently called clerking. Furthermore, bookkeeping refer to enter all the minutess demoing alterations in assets, liabilities and capital in an organisation. As a consequence, all the accounting entries are summarized in the fiscal statement. It show the profitableness of an organisation. Fiscal statement such as Net income and loss history and balance sheet represent the public presentation of fiscal place during a peculiar twelvemonth. The aims of fiscal accounting demo the net net income earned by an organisation. For a company, the fiscal statements reflect the histories to stockholders by the managers of manner they have run the company during a peculiar twelvemonth. Financial accounting provide the fiscal information within an organisation that assist the assorted users for determination devising. These histories are besides given to other interested parties such as the house ‘s banker, trade payables, the Inland Revenue Department, Financial accounting describing past public presentation and fiscal place.

The hearer fix the fiscal statement intended to show a true and just position. Financial accounting are followed by Hong Kong Statement of Standard Accounting Practice ( HKSSAP ) . Accounting bases are methods for using cardinal accounting constructs to fiscal minutess and points.

There are a figure of accounting ratios to mensurate and measure the public presentation in different classs such as 1 ) profitableness, ( 2 ) solvency, ( 3 ) efficiency, ( 4 ) the public presentation of stockholder and ( 5 ) capital construction of an organisation. Ratio analysis use the informations to cipher base on the fiscal information that it is show in the fiscal statement as Balance Sheet and Profit and loss history for the twelvemonth ended. Furthermore, ratio analysis can be used to reexamine and mensurate the public presentation between for the same organisation in different periods. Besides the information include in fiscal statement, accounting ratio provide the better apprehension and elaborate image of an organisation for the users.

The intent of ratio analysis is to mensurate the public presentation of an organisation, it represent the public presentation of an organisation in different facets and to find a company ‘s public presentation relation to its rivals. The undermentioned ratios is to mensurate the public presentation of an organisation such as ( 1 ) profitableness, ( 2 ) solvency, ( 3 ) efficiency, ( 4 ) the public presentation of stockholder and ( 5 ) capital construction. First, Net net income ratio is to mensurate the public presentation of profitableness of an organisation, it can demo to the assorted users how much money was earned by the organisation. An other of import ratio is Return on capital employed to mensurate the public presentation of people invested their money within an organisation. Second, Current ratio and Acid trial ratio focuses the public presentation of solvency of the organisation, the above two ratio can mensurate the public presentation of an organisation ‘s ability to pay its debts. Hence, Current ratio and Acid test ratio show the public presentation to external users such as Bankss or creditors whether there have sufficient money to refund their short term liabilities. Third, The ratio of plus turnover is used to mensurate the public presentation of the efficiency of the assets in bring forthing gross revenues within an organisation. Fourthly, the ratio such as Gaining per portion is to mensurate the public presentation of stockholder. It bespeak how much of an organisation ‘s net income can be attributed to each ordinary portion of the organisation. Finally, the ratio of Capital pitching ratio is to mensurate the public presentation of organisation ‘s ability to finances its activities. It provided the proportion of an organisation ‘s entire capital that has a anterior claim to net incomes over those of ordinary stockholder.

Harmonizing to ( Bushman & A ; Smith, 2001 ) , the corporate accounting and external coverage system for the step and publically unwrap for the hearer to scrutinize the company ‘s fiscal study, quantitative informations can demo the company fiancial place and the company ‘s public presentation for the public held by houses.

Harmonizing to ( Barth & A ; Schipper, 2008 ) , the fiscal study can assist the company underlying economic in a manner that the readily apprehensible by utilizing fiscal studies.

2.2 The Fundamental Role of Management Accounting in Performance Measurement

Management accounting produces the fiscal prognosiss that usher planning to actuate the employee of an organisation to accomplish its budgeted and ideal public presentation. The direction squad use the budget to steer the activities of an organisation. It evaluates public presentation and uses the information that is produced in order to underpin the prognosiss that guide be aftering. It chief accent is on bring forthing information for control over current operations and in order to calculate and be after for the hereafter.

Harmonizing to ( Kim Langfield-Smith ) Management accounting for usage of public presentation steps to measure company divisional and managerial public presentation and utilize the criterion costing and discrepancy analysis to command production activities.

Management accounting prefer to fix the budget and how budgets are coordinated and used to supervise an individuality divergences between them and existent public presentation. Master budget is the overall drumhead budget embracing all the single budgets. A maestro budgets have to be linked with assorted budgets such as Gross saless budget, Purchase budget, Cash budget and Overhead budget, all the budgets are summarized up to a budgets set of fiscal statements. We have looked at the gross revenues, production and hard currency budgets. There are, nevertheless, many more budgets for parts of the organisation, including: a merchandising budget, an disposal disbursal budget, a fabricating overhead budget, a purchases budget. Therefore, the direction utilize their budget to compare with the existent public presentation in order to measure the efficiency of operation within an organisation.

Budgeting agencies that directors can no longer give general replies impacting the running of the house. They have to set figures to their thoughts, and they know that in the terminal their estimated figures are traveling to be compared with what the existent figures turn out to be. Management will measure the assorted possibilities to it come true, and will compare the options. This is a really of import portion of budgeting.

The strategic planning carried out by the board of managers or proprietors can be more easy linked to the determinations by directors as to bow the resources of the concern will be used to seek to accomplish the aims of the concern. The planning has turn to be an action to steer the employee of an organisation to accomplish its ends.

Budgets are drawn up for control intents. The direction fix the budgets in order to guarantee the operation of an organisation are running of properly and efficaciously.

3. Restriction of Financial Accounting and Management Accounting in Performance Measurement.

However, there are restriction or constrains for an organisation to accomplish the aims. It is hard for an organisation to calculate the gross revenues from the clients due to the market demand for the merchandises or services are unsteadily.

Fiscal accounting is regarded as clerking and the readying of fiscal statements including Balance sheet, Net income and loss history, Cash flow statement, published history and Notes to account. However, direction accounting is regarded as prediction and planning. Management accounting is to calculate future consequences about the public presentation of an organisation. When prognosis consequences are non achieved it becomes possible to foreground the grounds for the failure to accomplish the prognosis consequences.

3.1 Restriction of Financial Accounting in Performance Measurement

The Financial accounting can be said a statement to show the fiscal place of an organisation for the twelvemonth ended of past twelvemonth. However, Management accounting is a accounting system to concentrate upon the exclusions to the criterions in current issue such as Standard accounting. First of wholly, Standard accounting set the ideal criterion and come-at-able criterion of an organisation to actuate employee to accomplish the aims. Standard bing set s great trade of predetermined public presentation when compared with the existent cost incurred within an organisation. A standard cost system provides a better agencies of look intoing on the efficiency with which production is carried on. The difference between budgets and existent is Variance. The discrepancy divided into inauspicious discrepancy and favorable discrepancy. Adverse discrepancy seems to be bad public presentation of an organisation. Favorable discrepancy indiciate the activity present the good public presentation of an organisation. For an illustration, monetary value discrepancy may be incurred in buying section. Therefore, The criterion costing step the public presentation of buying section and take action to rectify the public presentation of an organisation. If the monetary value discrepancy is favorable, it means the existent cost of stuff purchased is lower than the budgeted cost for stuff purchased. The ground for that may be the price reduction received from the provider. If the monetary value discrepancy is inauspicious, it means the existent cost of stuff purchased is higher than the budgeted cost for stuff purchased. The ground for that may be the monetary value of stuff is increase due to rising prices. As a consequence, the organisation usage discrepancy analysis to measure the difference between budgeted and existent sums in order to mensurate efficiency. It can happen out the job of an organisation, so to take action to better the operating efficiency of an organisation. The intent of Standard costing is find out the Discrepancy of assorted activity within an organisation, can look into the existent cost exceed the costs of ideal in the current issue.

The fiscal accounting and direction accounting is the lone portion accounting information of an organisation. They are both have their constrains and restriction to execute a cardinal function in the measuring of public presentation within an organisation.

First, fiscal accounting trades with the yesteryear, non the hereafter. The record of fiscal information are summarized in the fiscal study is the historic informations incurred the past twelvemonth. while it is occured, it is non possible for an organisation to command and rectify something incorrect. control can be arranged for something that is traveling to go on but, when it has already happened without being controlled, the activity has ended and it is excessively late to make anything about it. Therefore, fiscal accounting information incurred in the yesteryear is of small usage in step the public presentation of an organisation in the latest. Hence, it is non practical for an organisation to utilize the past fiscal information do a determination. These past fiscal information can said to be the mention for an organisation. However, direction accounting is non focus on the recording entries harmonizing to the Hong Kong by and large accept accounting criterion, It is the procedure of prediction and planning to steer the organisation what is traveling to make to accomplish the ends. For an illustration, the organisation usage break-even point to do a determination about how many of each merchandise to bring forth.

Harmonizing to ( McNair et al. , 1990 ) Financial steps are focused on the past event and informations, non for the hereafter.

Second, the accounting information in the fiscal statement will non be sufficient for investor and public to mensurate the public presentation and the intent of determination devising of an organisation. Fix the fiscal statement normally historic informations, the accounting records are reported in the fiscal statement is historic informations that incurred in the yesteryear. While fiscal accounting must from a legal point of position, it can non be said to be ideal for commanding the activities within an organisation.

Harmonizing to ( Johnson and Kaplan 1978 ) , fiscal steps had been undermined by engineering alterations, merchandise life rhythms and inventions in production operations.

3.2 Limitation of Management Accounting in Performance Measurement

Management accounting usage the ways of planning and budgets to predicate future events efficaciously. However, the concern environment is dynamic and nowadayss many challenges todays. It can be a challenge for the director of an organisation to do a determination. Manager in the organisation face of uncertainness environment. Therefore, Plans ca n’t be developed for a dynamic environment. As a consequence, unsure environment is the chief restriction that affect the types of programs to develop

In direction accounting, it is hard for standard costing to put the right criterion. Today, the concern environment is changed greatly, so the ideal criterion is non easy to put decently and go unsuitable for a dynamic environment.

Harmonizing to ( Stern and Shiely, 2001 ) , direction accounting may be impact the step on determination devising could be reduced by uniting profit-based and step with non fiscal steps.

Decision

Fiscal accounting looks the past public presentation of an organisation but direction accounting are used for planning and calculate the public presentation in the foreseeable hereafter. On one manus, the direction demand to roll up the past information of fiscal accounting to mensurate the public presentation of an organisation to find whether it is a possible concern. On the other manus, the direction demand to utilize the past information in the field of fiscal accounting to planning and calculate the practical program that is suited for that organisation. In order to guarantee the organisation to accomplish its aim, an accurate information for fiscal accounting system and effectual planning for direction accounting system is necessary for an organisation.