Performance Measurement

Performance measurement:

Is aims to establish how well something or somebody is doing in relation yo a plan.The body may be an individual,a manager,or a team.The thing may be a machine,a factory,a subsidiary as a company or an organiztion as a whole.

It is a vital part of the control process.

Performance measures:

1:Measurement need resources (people,equipment and time to collect and analyse information).

2:Measures must be relevant.

3:Performance must be measured in relation to something,otherwise measurement is meaningless.

4:Measures should be fair.

5:Realistic estimates may be required for measures to be employed.

6:A variety of measures should be use.

7:Short term and long term achievement should be measured.

8:Measures need response.Managers will only response to those measures that which they find best or usefull for an organization.

Once best and suitable performance measures have been selected they must be monitored on a regular basis to verify or ensure that they are providing best or usefull information.

Absorption Costing

It is a traditional approach to deal with overheads,including three stages:

Allocation,Apportionment and Absorption.Apportionment has two stages,General overheads apportionment and service department cost apportionment.After apportionment,overheads are absorbed into products using an appropriate absorption rate based on budgeted cost and budgeted activity level.After this steps Under/Over-absorbed overheads will occurs due to the in equality between overheads incurred and overheads absorbed.

Reasons for using Absorption costing:

1:All products overheads are incurred in the production of the organization's output and so each unit of the product recieves some benefit from the cost.Each unit of the output therefore be charged with some overhead cost.

2:Absorption costing follows the matching concept by carrying forward a proportion of the production cost in the inventory valuation to be matched against the sales value when the items are sold.

3:Many companies are attemp to set selling prices by calculating the full production cost and then adding the margin of profit.

4:If the compan sells more than one product,it will be difficult to judge how profitable each individual product is unless overheads cost are shared on a fair basis and charged to the cost of sales of each product.

Drawbacks of Absorption costing:

1: Absorption costing carries some of the production overheads in unit inventory values thus higher inventory levels means that more overheads are carried forward rather than being charged to the income statement.

2: It may lead to poor control of overheads.

3: Profit per unit can be a misleading figure as overheads allocations are arbitrary.

4: The overhead absorption rate is predetermined from budget estimates of overheads cost and activity level.