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What are the problems of only using financial performance indicators for measuring the performance of a company?

Chapter21Performancemeasurement

Short termism vs long term performance

Linking rewards to financial performance may tempt managers to make decisions that will improve short term financial performance but may have a negative impact on long term profitability. E.g. they may decide to cut investment or to purchase cheaper but poorer quality materials.

Manipulation of results

In order to achieve the target financial performance and hence their reward, managers may be tempted to manipulate results, for example delaying a provision or accrual to achieve better financial results

Do not convey the full picture

The use of only financial performance indicators has limited benefit to the company as it does not convey the full picture regarding the factors that will drive long term profitability, e.g. customer satisfaction, quality.

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What does an adverse variable overhead efficiency variance indicate and what might be the cause?

Explain briefly the possible causes of

(i) A favourable material usage variance

(ii) A favourable labour rate variance

(iii) An adverse sales volume contribution variance.

What is the relationship between the labour efficiency variance and the variable overhead efficiency variance? Why might the monetary value be different?

Explain the meaning and relevance of interdependence of variances when reporting to managers.

A balanced scorecard measures performance 什om four perspectives: customer satisfaction, growth, financial success and process efficiency. Briefly explain these processes.

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