Divisional Performance Evaluation

Topics: Marginal cost, Costs, Variable cost Pages: 17 (5044 words) Published: November 2, 2008
Divisional Performance Evaluation

Most large Organisations adopt divisionalised structures. The manner in which divisional performance is controlled and measured is, therefore, of particular importance. A central issue of performance reporting is whether divisional managers should be held accountable for items that they cannot influence by their actions. The conventional wisdom of management accounting, as reflected in textbooks, advocates that the evaluation of a manager’s performance should consist of only those factors under a manager’s control. Therefore, divisional managerial performance measures should include only the items controllable by divisional managers. Or, performance measurement should be based on the application of the controllability principle.

A manager is said to have a decision right if the enforcement and disciplinary powers of the top- level executive office will be used to enforce his ability to take an action. In large organizations, decision rights are more complex than the simple phrase suggests. For example, it is common in such organizations for no single individual to have all the decision rights necessary to undertake a major project. Instead, there is a complex process that brings many people into the decision-making function, a process that breaks the simple notion of a decision right into many components that are allocated to various decision agents. The following is a common breakdown:

1. Initiation right—the right to initiate resource allocation proposals. 2. Notification right—the right to be notified of the actions or proposed actions of others in the organization and the right to provide information or recommendations to the decision process regarding those proposals. 3. Ratification right—the right to review and ratify or veto the resource allocation recommendations of others.

4. Implementation right—the right to implement the ratified resource allocation proposals. 5. Monitoring right—the right to monitor the implementation of ratified proposals, including the rights to measure and evaluate performance and to determine rewards and punishments.

Benefits of Performance Measurement and Evaluation

√ Policy and Program Planning

Results may confirm policy and program direction, or identify

gaps that need to be addressed.

√ Decision Making about Funding Finding out what works well/not so well can be used to guide

future funding decisions/priorities.

√ Clarifying Goals At the outset, developing a “road map” clarifies goals, explains

the “big picture” and ensures everyone shares a common focus.

√ Tracking Progress

Enables monitoring and, if required, permits adjustments to be

made along the way.

√ Reporting Results

Promotes accountability and communicates what works well to

facilitate improvement and ongoing development.

There are various approaches to performance measurement and evaluation. The approach you take depends on a range of factors, such as the:

• type and nature of the policy, program or strategy,

• practicality of gathering and analyzing information,

• timing, and

• available capacity – including financial resources - to carry out performance measurement and evaluation tasks.

2. Specific and General Knowledge
The cost of acquiring and transferring knowledge among decision agents is important to the analysis of performance measurement systems. We define specific knowledge as that knowledge which is costly to transfer among agents and is not easily observable by other agents (in our discussion this means from higher levels in the organization’s hierarchy). General knowledge is knowledge that is transferable among agents at low cost or is easily observable by other agents. The terms specific and general knowledge are used to characterize the two ends of a continuum that measures...
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