Question

Financial versus non-financial performance measures: manufacturer Your best friend, Jason Bell, has just graduated from university and started his first job as a trainee accountant in a medium-sized manufacturing company. One of the first things that he notices is that the monthly manufacturing performance reports focus only on costs and profits. One of his major tasks is to produce this report and provide a written commentary for management that explains the causes of high or low monthly performance. Key issues that he has been asked to focus on include the reasons for any increase or decrease in monthly costs or profits by product line, and recommendations for any actions or changes needed to improve future performance. After struggling with this task for two months he meets with his manager, Arthur Ford. Jason is interested in making changes to the content of the performance report and, in particular, he suggests that the company start to collect and report data on non-financial performance. Ford is not very enthusiastic about Jason's ideas and responds: Why should we waste our time collecting the new data and reporting on non-financial performance when our senior managers are only interested in profits and ways to improve those profits? Even if we did go down this path, how would we choose which particular non-financial measures to report, and how could we justify the cost of the extra data collection? And how would you relate non-financial performance to financial performance? Our senior management do not like change, particularly changes that cost us time and money and they have never hinted at any dissatisfaction with the current monthly reports Jason has asked you to help him put together a paper that provides the case supporting his suggested changes Required: Write a report that outlines the proposed changes and includes arguments to support Jason's case for change, making sure that you address each of the concerns of Arthur Ford.

Answer 1

To:        Management

From:   Jason Bell

Re:        The Monthly Manufacturing Performance Report

I have been have been reporting and analysing manufacturing performance data and feel that I can add value to these reports by introducing some explanatory measures that are currently being taught in universities.

Some disadvantages in only presenting data on costs and profits are that these measures do not provide managers with explanation about why poor results were not as favourable as anticipated, feedback on which actions led to superior results nor guidance on how to improve the results of operations over coming periods. Since the financial data are not actionable, operations managers are not assisted in decision making by the formal reports and usually prepare their own operating reports.

I suggest that, in the monthly manufacturing performance report that I prepare each month, I incorporate relevant non-financial data and link them to the financial data. In this way senior managers will receive the financial data that they expect, operations managers will understand the impact of operating decisions on the financial results and will have data to guide their decisions. We will also save the expense incurred when operating departments need to prepare their own reports on operations.

The non-financial measures that I plan to report will be useful for senior management to evaluate their strategies. The measures would be chosen on the basis of their relevance to financial success, their ease of understanding and guidance to managers with regard to what action to take, and their relevance to the strategic direction of the organisation.

For example:

·A strategy of the organisation is to manufacture high quality innovative products. In addition a large percentage of manufacturing costs are for the high quality materials used in production. I therefore propose that the monthly report includes measures of scrap, material volumes and number of products in design.

·We have high staff training costs and part of the mission of the organisation is to be a caring organisation. I propose that the monthly report provides staff turnover measures as this affects training costs and also provides feedback on employee morale.