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Evaluating Strategic Profit Performance - ch.6

8 Pages
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Department
Financial Accounting
Course Code
MGAD40H3
Professor
Prof.Jan Klakurka

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Chapter 6 Evaluating Strategic Performance
Diagnostic function: tracking the progress of organizational achievements against preset
performance goals and strategies
Two measures of profit performance:
1.Effectiveness: extent to which activity achieves desired outcome
2.Efficiency: level of resources consumed to achieve certain level of output
Three conditions to analyze profit performance:
1.Ability to measure outputs
2.Existence of predetermined standard of performance
3.Ability to use variance info as feedback to adjust inputs and/or process
Key to evaluating strategic profit performance is focus on certain accounting variables that
inform managers of success of strategy.
-Profit plan variance (absolute and relative)
- Market share variance
-Revenue variance
-Product efficiency and cost variance
-Variance for nonvariable costs
Computing Profit Plan Variances in Absolute and Relative Terms
Variance analysis: isolate significant deviations from expectations
www.notesolution.com
Favourable: actual profit higher than planned
Unfavourable: actual profit below planned profit
Reason for variances:
-Profit plan performance evaluation
-Corrective action
-Key insights into other aspects of business
Example analysis:
-Unexpected changes in revenue
-Cost of raw materials
-Efficient use of resources
-Increased demand for goods
-Changes in competitive marketplace
-Change in selling price
-Change in product mix
-Cost savings from experiment in production technology
Strategic profitability = profit (loss) from competitive effectivesness
+ profit (loss) from operating efficiencies
- drive sales and lower operating expenses on profit wheel
www.notesolution.com
Competitive effectiveness Operating efficiencies
-Business units that set and
implement product market strategy
-Include stand-alone businesses
-Profit centre or other unit whose
managers accountable for creating
profit through market transactions
-Resources consumed to achieve
actual outputs
-Applies to accountability units that
manage flow of Inputs->Process-
>Outputs
-Include entire businesses and profit
centres
-Narrower span of accountability,
such as functions or cost centres
Competitive Effectiveness: Market Share Variances
- attract customers, market products, differentiate from competitors
- profit from effectiveness focused on outputs
Two principal indicators to gauge how far vs. competitors:
1.Market share growth: how customers react to business proposition
2.Price premium: reveals success in extracting value based on differentiation of
goods/services; reflected in revenue on income statement
- revenue goals based on market potential, SWOT, intended strategies
Two key variables affect profitability attributable to market share:
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Description
Chapter 6 Evaluating Strategic Performance Diagnostic function: tracking the progress of organizational achievements against preset performance goals and strategies Two measures of profit performance: 1. Effectiveness: extent to which activity achieves desired outcome 2. Efficiency: level of resources consumed to achieve certain level of output Three conditions to analyze profit performance: 1. Ability to measure outputs 2. Existence of predetermined standard of performance 3. Ability to use variance info as feedback to adjust inputs andor process Key to evaluating strategic profit performance is focus on certain accounting variables that inform managers of successof strategy. - Profit plan variance (absolute and relative) - Market share variance - Revenue variance - Product efficiency and cost variance - Variance for nonvariable costs Computing Profit Plan Variances in Absolute and Relative Terms Variance analysis: isolate significant deviations from expectations www.notesolution.com
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