Performance Management and control
3.1 Task
Management accounting applies principles of accounting and financial management to create, protect, preserve, and increase shareholder value in for–profit and not–for–profit organisations in manufacturing and service industries. Performance measurement is a management accounting tool that helps organisations improve their competitive advantage through the provision and use of appropriate measures of business performance. It is argued that service managers require or need to adopt a range of measures to evaluate the performance of their business, monitoring the more intangible aspects which contribute to competitive success, as well as the more quantifiable financial results.
Case Study
We Build Ltd. is a private limited company set up in early 2020. We Build Ltd. operates in the construction industry, specialising in loft conversions. Due to the nature of the business and the COVID– 19 pandemic striking right after its establishment, the turnover has been low, with revenue in the first year of operation totalling a meagre £1.35 million, although revenue projections were estimated at £2.4 million.
Steve Wilson, the owner–manager of We Build Ltd., is significantly involved in the daily operations of the business. Within the construction industry, a job budget is as important as tactical operational
1 The grade is provisional until confirmed by the relevant assessment board(s). Your work will be marked in grades rather than percentages. This is considered to deliver the most accurate and fair outcomes for students. Each assessment that you undertake will be assessed using the common grading system. Information about the grading system can be found in your Student Handbook, Section 10.
The Grade Criteria can be found in Appendix C of your Student Handbook. budgets. Fundamental to the successful implementation of a given project is the ability to meet goals based on quality levels, schedule, and functional levels. Cost estimation of time materials, schedules,
and incidentals is extremely important to the overall successful completion of each project. The risk involved within the construction industry is great – anything can go wrong at any time – and often does. Budget overruns can occur, and proficient cost control over materials, labour, and equipment is essential to an operation’s success. For We Build Ltd., the risks and budget overrun problems are exacerbated due to the pandemic. Project and operational budgeting, therefore, is an important method to ensure continued operation and success. We Build Ltd. also utilises this method of budgeting analysis and control.
A job budget is used to track each project and provides both decision management and management control. Job budgets are prepared for each project consistently. Steve works closely with an estimator to establish a budget for each new project. This budget communicates project expectations to the Project Manager and authorises the Manager to use company resources up to the budgeted amount. Control is maintained as Steve and the Project Manager review the Job Budget Report on a bi–weekly basis. This process serves several purposes: the review provides a formal method of communication that is necessary in a company with multiple projects occurring at the same time. The knowledge gained during these reviews allows Steve to re–allocate company resources where they are best utilised. He can also investigate the causes of behind–schedule projects and shift resources to ensure the customer is satisfied and the company builds its reputation. This in turn will assist in maximising the company’s overall value. Each Project Manager is responsible for several jobs and is evaluated and rewarded on performance based on his ability to provide quality service and workmanship and stay within set budgetary guidelines.
Task
Working on the premise that performance measurement is central to management control, you are required to read the above scenario and, assuming a role of a financial controller, prepare a report for Steve Wilson which deals with the following requirements:
1) Critically evaluate the current systems of performance measurement, management reporting and budgeting at We Build Ltd. and highlight what you consider to be the problems of the system. (40 marks)
2) Using the operational budget given in Exhibit 2 of the case study, create a flexible budget using actual activity levels and analyse the variances. (20 marks)
3) Describe in detail how you consider the systems might be improved considering the challenges the company is facing. (30 marks)
