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- W2994560921 abstract "Here's a way to combine performance evaluations with quantifiable measurements. Management accountants sometimes are asked to do the impossible. For example, how can a 10% reduction in operating cycle time be compared with a 12% reduction in repair costs? How is it possible to compare a 5% improvement in on-time deliveries with a 7% decrease in the amount of returned merchandise from customers? How can these data be dovetailed into a report on an enterprise's overall business results? Obviously apples cannot be compared adequately with oranges. Or can they? The data-incompatibility issue surfaces repeatedly among management accountants. And although few agree on a solution, they do agree that no effective business assessment is complete without the proper recognition and evaluation of both nonfinancial and financial performance measurements. This article suggests a way to turn incompatible data into information available for quantitative management decisions. The solution involves creating an index that weighs the financial impact of nonfinancial performance. The index can include a number of areas (lead time, production cycle times, productivity, product quality, on-time delivery, market penetration, employee relations, etc.), and once established, it can be combined with conventional financial data such as profit contribution, cost reduction and variance to produce an overall performance gauge. The indexing idea originally was outlined by J.L. Riggs and G.H. Felix in Productivity by Objectives (Englewood Cliffs, New Jersey: Prentice-Hall, 1983). The nonfinancial performance index proposed in this article derives its mechanism from a technique the authors called the objectives matrix approach. SETTING UP THE INDEX Setting up a nonfinancial performance index is very intuitive; as such, a description of the concept sounds more complex than it really is. The easiest way to describe the concept is to set out an example of how a management accountant would create such an index. The management accountant begins by selecting the nonfinancial areas to be included in the index. While a nonfinancial performance index can measure many factors, tracking three to seven areas in any one study produces the most accurate, consistent results. Fewer than three and more than seven tend to produce results that are less reliable. This example evaluates three performance areas: a product's production cycle, its quality and its delivery. In exhibit 1, at right, these three areas head the appropriate columns. Another column, to the left of the others, is the performance index, with a scale of 0 to 10 (10 represents the best performance; O, the worst). Actually, any convenient scale can be used. Some index makers prefer to use a scale of 1 to 5. They find it easier and say it's as accurate as a lto-10 scale. In special circumstances, when gains become more difficult, or easier, as performance improves, a nonlinear scale may be more appropriate. The index maker now selects measurable gauges for each area. In this example, production cycle (raw material to finished product) time is measured in hours; product quality is quantified by determining the percentage of items rejected by quality control; and delivery is measured by the percentage of deliveries made on time, which is highly correlated with how well customers are satisfied. In addition, management establishes three performance levels for each area: the current performance level, the absolutely best level and the worst. Management must decide what overall index level is considered normal for the entire production process. While management can select any level between 0 and 10, the index maker should be aware the normal level will reflect how ambitious management wants to be in motivating staff. For example, if level 3 is used as normal, there are 7 steps to ascend before the top is reached--quite a stretch. …" @default.
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- W2994560921 date "1992-09-01" @default.
- W2994560921 modified "2023-09-24" @default.
- W2994560921 title "How to Make Financial and Nonfinancial Data Add Up" @default.
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