Case Enager Industries

Topics: Investment, Rate of return, Generally Accepted Accounting Principles Pages: 6 (1732 words) Published: March 2, 2013
1.0 Performance Measurement
In today’s advanced and rapidly changing manufacturing environment, operational performance measures are taking on ever-greater importance. It is due to the influences of worldwide competition, just-in-time inventory management, and an emphasis on product quality and customer service. A multidimensional conceptualization of organizational performance related predominately to stakeholders, heterogeneous product market circumstances, and time. A review of the operationalization of performance highlights the limited effectiveness of commonly accepted measurement practices in tapping this multidimensionality. Market competition for customers, inputs, and capital make organizational performance essential to the survival and success of the modern business. Marketing, operations, human resources (HR), and strategy are all ultimately judged by their contribution to organizational performance. Organizations are heterogeneous in their resources and capabilities and how and where they choose to use them. Large organizations use both financial and nonfinancial performance measures but favor financial measures. 1.1 Financial Performance Measurement

Financial performance measures give little or no guidance to future performance since they do not include any measures relating to customers’ satisfaction and organizational learning. Furthermore, Eccles and Pyburn (1992) claim that financial performance measures are oriented internally rather than externally. A performance measurement and evaluation system involves comparing actual performance with targeted performance in terms of budgets or the past period’s performance. Both of them (target and measures) are developed internally and do not consider the performance of the competitors in the same industry or the average performance within the industry. According to Johnson and Kaplan (1987), companies tend to rely on accounting-based information that is appropriate for external financial reporting but is questionable for internal performance measurement and evaluation. In brief, the traditional financial measures do not provide a complete picture relating to managerial performance. 1.2 Non-Financial Performance Measurement

Management accounting literature also advocates the use of non-financial performance measures as a tool. The benefits that can be gain from this measurement are: * Overcome the deficiencies attributed to financial measures. * Identify the forces that determine financial performance. * Necessary for operational control purposes.

* Assist and motivate management in its goal of continuous process improvement. In the intervening years, the call for a broader set of performance measures has been continuing. These measures may include measures for productivity market effectiveness, product leadership, personnel development, employees’ attitudes, market share, social responsibility, product’s development, employee turnover, raw material and scrap, machinery, productivity, innovation and learning, product quality, inventory costs, manufacturing flexibility and delivery performance. The balanced scorecard, with its lead and lag measures of performance, is one tool that is more and more widely used as a means of introducing nonfinancial measures into performance evaluation. 1.3 Profit Center

Prior to 1992, each Enager Industries, Inc division had been treated as a profit center, with annual division profit budgets negotiated between the president and the respective division general managers. Profit center is a division or subunit of a company that is accounted for on a stand-alone basis for the purposes of profit calculation. A profit center is responsible for generating its own results and earnings as well as for controlling control, and as such, its managers generally have decision-making authority related to product pricing and operating expenses. Profit centers are crucial in determining which units...
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